The Association of Mutual Funds of India has urged the government to reconsider tax proposals on capital gains in equities and debt instruments in the Union budget 2024 introduced last week.
The budget has proposed to increase short-term capital gains tax from 15% to 20% and long-term capital gains tax from 10% to 12.5%. AMFI has asked for reinstatement of the earlier capital gains taxation rates as the percentage hike is large.
"Increasing tax rates on both short-term and long-term gains will deter common investors from choosing mutual funds. Any change in taxation will hamper the efforts to move people from traditional savings to investments," the association said.
Moreover, AMFI requested the securities and transaction tax on futures and options be reinstated to the earlier rates, as arbitrage funds and equity savings funds mainly use derivatives for hedging as the underlying assets.
"The available arbitrage has now been reduced due to an increase in short-term capital gains tax. Further, the increased STT on futures will add to the cost of these funds," AMFI said.
The lobby group has also sought a relook into the proposed removal of indexation benefits from debt mutual funds or provide for holding costs of debt mutual funds to be indexed till July 23, 2024.
"We request grandfathering to be permitted for investments made in the respective categories (equities and debt) of funds," AMFI said, explaining the application of new tax rates on a retrospective basis can be detrimental to investor confidence and deter new investors from entering the capital markets.
On Section 50AA
The definition of what qualifies as a debt mutual fund has been changed under Section 50AA of the Income Tax Act.
The budget proposed to amend the definition of 'Specified Mutual Funds' under Section 50AA of the Income Tax Act that refers to: a) funds investing more than 65% in debt or money market instruments; or b) funds that invest more than 65% in units of funds referred to in (a).
Post-amendment, a debt mutual fund is considered a short-term capital asset irrespective of the holding period and will be taxed at applicable rates, whereas for listed bonds, the long-term tax rate is 12.5% and the holding period is kept at 12 months for these securities to be qualified for long-term tax.
"With the proposed definition, investors will lose out on long-term capital gains applicability at a much lower threshold of debt/money market investments than envisaged under Clause (a)."
AMFI has sought that the definition of Clause (b) be redefined to funds that invest more than 90% in units of funds investing in debt/money market instruments, and the amendment be implemented with immediate effect rather than the proposed April 1, 2026.
It has called for capital gains on the redemption of units of debt-oriented mutual funds held for more than one year to be taxed at a rate of 12.5%.
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