Budget 2025: Your reference to AMFI’s 15 recommended mutual funds for investors

A well-structured 13-point strategy has been released by the Association of Mutual Funds in India (AMFI) to encourage the expansion of the mutual fund industry and increase investor participation as the Union Budget for 2025–2026 approaches.

Among these recommendations are a request to restore long-term indexation benefits for debt mutual funds that were withdrawn in Budget 2024 and a proposal to revert to previous tax rates on capital gains.

1. Restoration of Long-Term Capital Gains Indexation
Objective: The primary and most important proposal from AMFI is to restore long-term capital gains indexation benefits for debt mutual funds.

Reasoning: Previously, this provision allowed investors to adjust their capital gains in line with inflation, providing a more accurate reflection of real returns. Long-term debt mutual fund investors were thought to suffer when this advantage was eliminated in the July 2024 Budget. In addition to increasing investor profits, reintroducing indexation would promote a stable investment climate.

Additionally, the proposal encourages higher commission structures for financial advisors, aiming to enhance mutual fund distribution networks and incentivize advisors to promote mutual fund investments to a wider audience. AMFI also suggests easing the KYC (Know Your Customer) process to attract new investors, particularly from underrepresented demographics. Other notable suggestions include promoting mutual funds in government-sponsored schemes, increasing awareness about Systematic Investment Plans (SIPs), and driving the industry’s digital transformation.

2. Request to Restore Previous Tax Rates on Capital Gains
AMFI has requested that capital gains on units of debt-oriented mutual funds held for over a year be taxed at a rate of 12.5%, which is currently applicable to listed bonds.

The proposal aligns the tax treatment of debt mutual funds with that of listed bonds, allowing capital gains on units held for over 12 months to be taxed at 12.5% under long-term capital gains tax. This change is considered important for encouraging retail investor participation in India’s underdeveloped debt markets.

A more liquid and effective debt market will result from designating mutual fund units as “securities” for tax reasons, according to the plan.
By harmonizing tax treatment across similar financial instruments, the government can increase investor confidence and participation, ultimately supporting economic growth and offering better investment options.

Current Situation: The Finance Act 2023 increased the Short-Term Capital Gains (STCG) tax rate from 15% to 20%, raising the tax burden by 30%. Similarly, the Long-Term Capital Gains (LTCG) tax was increased from 10% to 12.5%, leading to a 25% increase in tax liabilities in budget.

Request: The proposal asks the government to revert to the previous capital gains tax rates. A large tax rate hike can discourage investors from selecting mutual funds.

3. The previous STT rates for equity savings funds and arbitrage funds have been restored.
Current Situation: The Securities Transaction Tax (STT) for futures and options trading has been significantly increased, with rates for futures rising from 0.0125% to 0.02% and for options from 0.0625% to 0.1%. This increase raises the cost of transactions for mutual fund investors.

Request: According to this suggestion, futures and options employed by arbitrage and equity-saving funds should once again have their historical STT rates. These funds often rely on futures and options for hedging, and the higher STT along with increased capital gains taxes could reduce arbitrage opportunities, ultimately raising costs for investors.

4. Request to Amend the Definition of Equity-Oriented Funds to Include Fund of Funds
This proposal seeks to amend the definition of “Equity-Oriented Funds” (EOFs) to include Fund of Funds (FOFs) that primarily invest in equity-oriented mutual funds. This change is necessary to eliminate tax discrepancies that currently disadvantage FOFs in comparison to direct equity-oriented funds.

These proposals aim to create a more favorable environment for mutual fund investments, thereby encouraging wider participation from investors and enhancing the overall growth of the mutual fund industry.