Under Section 50AA, debt-oriented mutual funds that have over 65% of their portfolio in debt and money market instruments are classified as “Specified Mutual Funds” or debt funds.
Prior to Budget 2023, debt fund investors could avail of the indexation benefit, which adjusted capital gains for inflation, making the tax liability more equitable.
However, Budget 2023 discontinued the indexation benefit for new investments from April 2023 onwards.
In Budget 2024, the government withdrew the indexation benefit retrospectively for all long-term debt fund investments made before or up to March 31, 2023.
The case for restoring indexation
AMFI’s proposal aims to correct this oversight, which was unintentional, particularly after the real estate sector received a similar relief in the form of reinstated indexation benefits for property owners.
“Debt mutual funds, which have delivered returns of approximately 7% over the past 3-5 years, have been hit hard by inflation hovering around 5.5%. The real income earned by debt fund investors is only 1.5%, making the indexation benefit vital,” AMFI explained.
Negative impact on investor confidence
The removal of indexation benefits for older debt fund investments has already led to tax burden increases for investors.
Debt fund investors are now taxed at marginal rates, making their returns less attractive.
AMFI has emphasised that applying the new tax rules retrospectively could have detrimental effects on investor confidence and deter new capital market investments.
AMFI has requested that the government restore the status quo by reintroducing indexation on long-term capital gains for debt fund investments made up to March 31, 2023.
“Debt funds are a critical avenue for retail investors. The removal of indexation, a neutraliser to inflation’s impact, will hurt investor sentiment and harm long-term market development,” AMFI stated.
First Published: Jan 7, 2025 12:48 PM IST
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