Ahead of the Interim Budget for the fiscal year 2024-25, the mutual fund industry is looking to restore the index benefit for debt fund schemes. This benefit, removed in the previous Budget, was a point of contention when the government adjusted laws to tax income from debt mutual fund schemes at the respective tax slab of the investor.
Previously, capital gains from the transfer of investment funds, excluding equity-oriented funds, held for more than three years were considered long-term, attracting a 20% tax rate with an index benefit. Industry voices claim that the reintroduction of this index benefit for long-term debt investment funds could significantly contribute to the financing of long-term economic growth, especially since these funds play a pivotal role in the transmission of rates within the economy.
Industry players are looking forward to potential taxes for a proposed new category of high-risk debt mutual funds. The Securities and Exchange Board of India proposed this category in October, targeting retail investors with a high risk appetite. The hope is that such schemes can receive a relaxation of sector and exposure norms, enabling them to use high-risk investment strategies and potentially generate higher returns.
Suggestions from industry leaders also include the introduction of a debt-linked savings scheme, similar to equity-linked savings schemes, to channel the long-term savings of retail investors into high-quality debt instruments with associated tax advantages. This move could contribute to the deepening of the Indian bond market, providing small investors with low cost and lower risk compared to equity markets.
Equality in tax treatment
In addition, industry stakeholders want equality in tax treatment regarding capital gains on the withdrawal of investments in unit-linked insurance plans (ULIPs) of life insurance companies and the redemption of mutual fund units. Demands for harmonization in taxation between ULIPs and equity mutual funds have been persistent, with the aim of creating a level playing field between players in the financial industry.
Among other demands, the industry is seeking a possible increase in the exemption limit under Section 80C of the Income Tax Act to encourage investments in equity-linked savings schemes. Additional proposals include the introduction of a mutual fund-linked retirement scheme offering tax concessions similar to the National Pension System and the exemption from capital gains tax on intra-scheme switches.
Industry participants believe that the implementation of these proposals would result in a mutually beneficial scenario for both investors and the overall investment industry.
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