Budget FY26: AMFI calls for restoration of long-term indexation benefit for debt funds

Context: The Association of Mutual Funds in India (AMFI) has called for
restoration of the long-term indexation benefit for debt schemes of mutual
funds which was withdrawn in the Budget 2024. In its proposals for Union Budget
2025-26, the mutual fund body has also requested the government to restore
earlier tax rates on capital gains, amend definition of equity-oriented funds
to launch pension-oriented MF schemes with uniform tax treatment as National
Pension Scheme (NPS) and a uniform rate for deduction of surcharge on TDS (tax
deducted at source) in respect of NRIs.

Key points

·       Capital
gains tax: A capital gains tax is a tax imposed on the sale of an asset. It is
calculated as the difference between the sale price of the property and its
purchase price. Any gain or loss incurred from the sale of a house property may
be subject to tax under the 'Capital Gains' head.

Types - Depending on
the period an asset is held with the owner, there are two types of capital
gains- Short-term Capital Gains and Long-term Capital Gains.

·       Long-Term
Capital Gains (LTCG) Tax: Capital gains tax is levied on the profit earned
from the sale of capital assets, such as real estate, stocks and bonds. LTCG
Tax is levied on the profit earned from the sale of assets held for longer
periods.

·       Taxation
procedure of LTCGs: For equity shares and mutual funds, LTCG exceeding
Rs 1.25 lakh is taxed at 12.5% without the benefit of indexation. For other
assets like property, LTCG is taxed according to recent amendments.

·       Indexation: It refers to
adjusting the purchase price of an asset for inflation while computing the
capital gain. Union Budget 2024 eliminates indexation benefit for all assets
(barring property acquired prior to July 23, 2024).

Ø  Cost Inflation
Index (CII) is used in the calculation of Inflation adjusted price of an asset which
estimates the increase in an asset's price because of inflation.

·       Benefits
of indexation: Allows a taxpayer to neutralize the impact of
inflation while lowering the tax liability. Ensures that taxpayers are taxed on
real gains than gains at prevailing prices, which are a result of general
increase in prices, and not economic growth.

·       Importance
of indexation benefits: It helps investors mitigate the impact of inflation
on their investments. Reduces the overall tax burden on long-term capital
gains.

·       Affect
of indexation benefit in tax calculation: By increasing the purchase
price with indexation, the capital gain amount reduces, leading to lower tax
liability. It is a significant advantage for investors looking to save on taxes
over the long term.

·       Conclusion: The benefit of
indexation works best when your holding period is longer. For a holding period
of 5 years, long-term capital gains tax on debt funds can come down from 20% to
6-7%. This is how indexation helps you to save tax on long-term capital gains
from debt mutual funds and enhance your earnings.