Budget Expectations: Mutual fund body seeks pension-focused schemes with NPS-like tax benefits

Industry body Amfi has requested the government to allow mutual funds to offer pension-focused schemes -- Mutual Fund Linked Retirement Schemes (MFLRS)-- with similar tax benefits as the National Pension System (NPS).

In its Budget proposals to the Finance Ministry, the industry body has proposed that the tax treatment for NPS and Retirement/Pension oriented schemes launched by Mutual Funds should be aligned by bringing the latter also under Section 80CCD of Income Tax Act, 1961.

Also, the Association of Mutual Funds in India (Amfi) has urged government that capital gains on redemption of debt-oriented mutual funds held for more than three years should be taxed at the rate of 10 per cent without indexation, as applicable in respect of debentures.

It has requested the government to reconsider the short-term capital gains tax imposed last year on debt-oriented mutual funds with equity exposure of up to 35 per cent.

The industry body has proposed an amendment to Section 50AA of the Finance Act, 2023, to promote retail investor participation in bond markets through debt funds by aligning their tax treatment with that of debentures and government securities.

At present, capital gains on these instruments, when held for over three years, are taxed at 10 per cent without indexation, with the holding period reduced to 12 months for listed debentures.

Prior to the introduction of Section 50AA, these mutual fund schemes benefited from both indexation and a lower long-term capital gains tax rate if held for more than three years. However, they are now classified as short-term capital assets regardless of the holding period.

Additionally, it has been proposed to introduce 'Debt Linked Savings Scheme' (DLSS)' on the lines of Equity Linked Savings Scheme (ELSS) to channelize long-term savings of retail investors into higher credit rated debt instruments with appropriate tax benefits which will help in deepening the bond market.