Union Budget 2024: AMFI Proposes Changes In Retirement Schemes, Debt Funds & More To Modi 3.0 Govt

In its recent proposals for the Union Budget 2024-25, the Association of Mutual Funds in India (Amfi) has put forth several recommendations aimed at improving the mutual fund landscape in the country. Among the key proposals is a request for parity between debt funds and debentures.

Currently, capital gains on the redemption of debt-oriented mutual funds held for over three years are taxed at the investor's income slab rate, following the Union Budget 2023-24. Amfi proposes a revision: these gains should be taxed at a flat rate of 10% without indexation, akin to the taxation of debentures. This change is expected to make debt funds more attractive to investors by providing a more favourable tax regime.

Redefining Fund of Funds (FoFs)
Amfi has called for a clearer definition of equity-oriented fund of funds (FoFs). The industry body suggests that an equity-oriented fund should include FoFs that invest at least 90% of their corpus in units of equity-oriented mutual fund schemes, which, in turn, invest a minimum of 65% in equity shares of domestic companies listed on a recognized stock exchange.

This proposed change aims to ensure that the redemption of units in FoFs investing predominantly in equity-oriented funds is subject to the same capital gains tax as the sale of listed equity securities or units of equity-oriented mutual fund schemes. Additionally, Amfi has recommended that FoFs investing in international mutual funds or exchange-traded funds (ETFs) should not be treated as debt mutual funds for tax purposes. This carve-out seeks to maintain the tax advantages for these specific investment vehicles and promote a more diversified investment approach.

Introduction of Mutual Fund Linked Retirement Scheme (MFLRS)
In an effort to enhance retirement planning options, Amfi has proposed the introduction of a Mutual Fund Linked Retirement Scheme (MFLRS). This scheme would allow all Sebi-registered mutual funds to launch pension-oriented mutual fund schemes with similar tax benefits to the National Pension Scheme (NPS).

Amfi recommends that these schemes be granted the Exempt-Exempt-Exempt (E-E-E) status under Sections 80CCD (1) and 80CCD (1B) of the Income Tax Act, 1961. This status would mean that contributions, accumulations, and withdrawals under the MFLRS would be tax-exempt, thus providing significant tax incentives to investors and encouraging long-term retirement savings through mutual funds.

Clarification for IFSC Offshore Fund Managers
Amfi's proposals also address the tax implications for fund managers operating in the International Financial Services Centre (IFSC) in GIFT City. Currently, the tax laws impose several conditions on these managers, including diversification requirements and restrictions on investments in associate entities. Amfi suggests that these conditions should be regulated rather than legislated through tax laws.

The proposal seeks explicit clarification that a fund manager in GIFT City managing an offshore fund will not create a business connection for the offshore fund in India nor will the fund be deemed a tax resident of India due to the presence of the fund manager in the IFSC. This change aims to attract more offshore fund managers to GIFT City by simplifying the tax implications and reducing regulatory burdens.

Creation of Debt-Linked Savings Scheme (DLSS)
Lastly, Amfi has proposed the introduction of a new fund category, the Debt-Linked Savings Scheme (DLSS), similar to the existing Equity-Linked Savings Scheme (ELSS). This new scheme would offer the same tax deduction benefits under Section 80C of the Income Tax Act, up to Rs 1.5 lakh, but with a focus on debt funds.

The DLSS aims to provide a tax-saving investment option for conservative investors who prefer debt instruments over equities. By offering tax incentives similar to ELSS, DLSS is expected to attract a wider range of investors and promote the growth of the debt mutual fund market in India.

Amfi's proposals for the Union Budget 2024-25 reflect a comprehensive approach to enhancing the mutual fund industry in India. By addressing key issues such as tax parity for debt funds, clearer definitions for equity-oriented FoFs, new retirement savings options, simplified tax regulations for IFSC fund managers, and the introduction of DLSS, Amfi aims to create a more investor-friendly environment and stimulate growth in the mutual fund sector.

These recommendations, if implemented, could significantly impact investors' choices and promote a more diversified and tax-efficient investment landscape in India. As the government reviews these proposals, the mutual fund industry and investors will be watching closely to see how these changes unfold in the upcoming budget.