Bring back STT and capital gains to previous levels, AMFI suggests in post-budget recommendation

AMFI notes that the increased tax rates discourage mutual fund investments, which are crucial for financializing savings and supporting economic growth.

The Association of Mutual Funds in India (AMFI) has released a document with several key requests and feedback points following the Union Budget.

Here are the main highlights:

Retrospective Implementation of Capital Gains Tax Changes

On the removal of the indexation benefit from debt mutual funds and the application of new tax rates retrospectively, AMFI proposes reconsidering the removal of the indexation benefit or providing indexing until July 23, 2024. The justification for this being that retrospective application of the new tax rates could harm investor confidence, deter new investors, and negatively impact those who invested based on previous tax rate.

Amendment of Section 50AA of the Income Tax Act

On the current definition of specified mutual funds, AMFI suggests revising the definition to include funds investing more than 90 percent in units of funds with over 65 percent in debt/money market instruments, from the revision announced in the budget for fund investing more than 65 percent in units of funds with over 65 percent in debt/money market instruments. The justification for this is that it would prevent adverse tax implications for investors and align the definition with the actual investment strategies of these funds.

Effective Date for Amendment of Section 50AA

The amendment is set to be effective from April 1, 2026. But AMFI recommends implementing the amendment immediately as the current budget wording has "created anomalies affecting tax implications, and delaying" the amendment would continue to penalize investors unfairly.

Reinstatement of Earlier Capital Gains Tax Rates

AMFI calls for reducing the short-term capital gains tax back to 15 percent and the long-term capital gains tax to 10 percent.

In the Union Budget, Short Term Capital Gains Tax was increased from 15 percent to 20 percent, increasing tax liability by 30 percent and Long Term Capital Gains Tax was increased from 10 percent to 12.5 percent, increasing tax liability by 25 percent. AMFI notes that the increased tax rates discourage mutual fund investments, which are crucial for financializing savings and supporting economic growth.

Reduction in Securities Transaction Tax (STT) for Arbitrage and Equity Savings Funds

AMFI suggests reinstating the STT to its previous levels for mutual funds. During the budget, STT was increased in Futures from 0.0125 percent to 0.02 percent, for options it has been increased from 0.0625 percent to 0.1 percent. AMFI notes that arbitrage and equity savings funds primarily use these instruments for hedging, and thus the increased STT adds to their costs.

Tax Concessions for Debt Mutual Funds

AMFI proposes that capital gains on debt mutual funds held for more than a year be taxed at 12.5 percent, similar to listed bonds. The justification for this being that it would encourage retail investor participation in debt markets, support India's economic goals, and provide inflation-adjusted returns.

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