Budget 2024: One of Amfi’s main requests is to align the tax benefits for pension-focused mutual fund schemes with those of NPS
Surbhi Gloria Singh New Delhi
Finance Minister Nirmala Sitharaman is set to present the Union Budget 2024 on 23 July. Various sectors are submitting their wishlists, hoping for favourable decisions. The Association of Mutual Funds in India (Amfi) is no exception and has released a document of proposals.
Budget 2024 Wishlist
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Some of Amfi’s proposals are:
1. Pension-focused mutual funds
One of Amfi’s main requests is to align the tax benefits for pension-focused mutual fund schemes, known as Mutual Fund Linked Retirement Schemes (MFLRS), with those of the National Pension System (NPS).
Amfi proposes that the tax treatment for NPS and retirement/pension-oriented schemes launched by mutual funds should be harmonised by including these mutual fund schemes under Section 80CCD of the Income Tax Act, 1961. This adjustment would provide them with the same tax advantages as the NPS.
Current tax treatment issues
In India, retirement planning is supported by three main investment avenues: NPS, retirement or pension schemes offered by mutual funds, and insurance-linked pension plans. The tax treatment of these products varies, with NPS enjoying favourable exemptions under Section 80CCD, while mutual fund pension schemes qualify for tax benefits under Section 80C only if individually notified by the Central Board of Direct Taxes (CBDT). This lengthy process results in few mutual fund pension schemes being eligible for tax benefits.
In the ‘Key Features of Budget 2014-2015’, there was a proposal for “uniform tax treatment for pension funds and mutual fund linked retirement plans”. However, this promise did not materialise in the Finance Bill, disappointing the mutual fund industry.
2. Taxation of debt-oriented mutual funds
Amfi has also called for changes in the taxation of debt-oriented mutual funds. They suggest that capital gains on these funds, held for more than three years, should be taxed at a rate of 10% without indexation, similar to debentures. They are also urging the government to reconsider the short-term capital gains tax imposed on debt-oriented mutual funds with up to 35% equity exposure.
What are debt-oriented mutual funds?
A debt fund is a mutual fund scheme that invests in fixed income instruments, such as corporate and government bonds, corporate debt securities, and money market instruments, which offer capital appreciation. Debt funds are also referred to as Income Funds or Bond Funds.
Amendment to Section 50AA
The industry body proposes amending Section 50AA of the Finance Act, 2023. This change aims to promote retail investor participation in bond markets through debt funds by aligning their tax treatment with debentures and government securities. Currently, capital gains on these instruments, when held for over three years, are taxed at 10% without indexation, with a reduced holding period of 12 months for listed debentures. Amfi seeks to reinstate the benefits of indexation and lower long-term capital gains tax rates for mutual fund schemes held for more than three years, which were removed by Section 50AA.
3. Introduction of Debt Linked Savings Scheme (DLSS)
Amfi has proposed a new ‘Debt Linked Savings Scheme’ (DLSS), similar to the Equity Linked Savings Scheme (ELSS). This scheme would channel long-term savings of retail investors into higher credit-rated debt instruments with appropriate tax benefits, aiding in deepening the bond market.
What is an ELSS fund?
An ELSS fund, or an Equity-Linked Savings Scheme, is the only kind of mutual fund eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961. You can claim a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 a year in taxes by investing in ELSS mutual funds.
ELSS mutual funds’ asset allocation is mostly (65% of the portfolio) made towards equity and equity-linked securities such as listed shares. They may have some exposure to fixed-income securities as well. These funds come with a lock-in period of just three years, the shortest among all Section 80C investments.