Amfi Proposes Tax Reliefs, New Fund Categories in Union Budget 2024-25

The Association of Mutual Funds in India (Amfi) has submitted a set of proposals to the government for the upcoming Union Budget 2024-25. These proposals aim to address several key concerns within the mutual fund industry and enhance investor benefits.

One of the key proposals is to bring parity between debt funds and debentures in terms of capital gains tax treatment. Amfi has requested that capital gains on redemption of debt-oriented mutual funds held for over three years be taxed at 10% without indexation, similar to the current treatment of debentures. This proposal follows the recent change in the Union Budget 2023-24, where gains from debt funds were added to an investor’s income and taxed at their individual income slab rate.

Amfi has also sought clarity on the definition of equity-oriented fund of funds (FoFs). The industry body proposes a revised definition of equity-oriented funds (EOF) that includes investments in FoFs which invest a minimum of 90% of their corpus in units of equity-oriented mutual fund schemes. These schemes, in turn, should invest at least 65% in equity shares of domestic companies listed on recognized stock exchanges. Consequently, redemption of units in FOF schemes investing 90% or more in EOFs should be subject to the same capital gains tax as applicable to the sale of listed equity securities or units of equity-oriented mutual fund schemes. Amfi has further requested a specific exemption for FoFs investing in international mutual funds or exchange-traded funds, ensuring they are not treated as debt mutual funds for tax purposes.

Amfi has proposed the introduction of a new fund category, ‘Mutual Fund Linked Retirement Scheme’ (MFLRS), allowing all Sebi-registered mutual funds to launch pension-oriented mutual fund schemes. These schemes should offer similar tax benefits as the National Pension Scheme under Sections 80CCD (1) and 80CCD (1B) of the Income Tax Act, 1961, with Exempt-Exempt-Exempt (E-E-E) status.

Another significant proposal is related to tax treatment for fund managers in GIFT City, the International Financial Services Centre. Amfi suggests that the tax law should explicitly clarify that a fund manager in GIFT City managing an offshore fund does not constitute a business connection of the offshore fund, nor should the offshore fund be treated as a tax resident of India solely because the fund manager is located in IFSC. Amfi argues that the current safe-harbour provisions have stringent conditions that offshore funds and fund managers must fulfill, making it difficult for many to qualify for the exemption. These conditions, they suggest, should be regulated rather than dictated by tax law.

Finally, Amfi has proposed the creation of a new fund category, ‘Debt-Linked Savings Scheme’ (DLSS), modeled after the existing Equity-Linked Savings Scheme (ELSS). This scheme would offer the same 80C tax deduction benefits of up to ₹ 1.5 lakh, but with a debt fund investment option. This could potentially encourage individuals to invest in debt funds for tax-efficient wealth creation.

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