Budget 2026 Tax Reforms Set to Shape Indian Mutual Funds Landscape

As Budget 2026 approaches, the mutual fund industry is looking for policy moves that deepen retail participation in equity and debt schemes. With more investors using mutual funds for long-term goals, fund houses expect tax and regulatory support that could make these products clearer, more efficient, and easier to hold over many years.

Industry participants, including the Association of Mutual Funds in India (AMFI), are focusing on how taxation shapes investor behaviour. They expect the Budget to revisit earlier changes, especially for debt mutual funds, while also considering new product categories. Stakeholders argue that stable, investor-friendly rules can support disciplined savings across income levels in India.

Taxation of capital gains remains central to these expectations. " A key expectation is a reduction in capital gains tax, with long-term capital gains ideally lowered from 12.5% to 10% and short-term capital gains to around 15%," stated Swapnil Aggarwal, Director, VSRK Capital. The industry sees such changes as improving post-tax outcomes for regular investors.

Aspect	Current position mentioned	Expectation for Budget 2026
Long-term capital gains tax	12.5%	10%
Short-term capital gains tax	Higher than 15%	Around 15%

"Taxation remains a major consideration for investors, and lower taxes can improve post-tax returns, encouraging sustained participation. Recent tax relief measures, including exemptions up to ₹12 lakh, have already increased disposable income and supported long-term savings and investments," added Swapnil Aggarwal. Market participants also expect targeted incentives that promote systematic investment plans and consistent mutual fund allocations.

AMFI has suggested that the government raise the tax-free limit on equity capital gains. Higher exemptions, according to the industry, would help small and long-term investors handle volatility better and stay invested through market cycles. Stakeholders believe such relief would align tax rules with the objective of building wider equity ownership.

On the fixed income side, AMFI has highlighted earlier changes that removed indexation for long-term debt funds. The industry body wants restoration of indexation benefits, which adjust purchase costs for inflation. If accepted, this could mean more reasonable tax treatment for debt mutual funds and improve their appeal versus other income products.

AMFI has also recommended fresh product categories that link retirement planning with mutual funds. The industry has urged the government to permit pension-focused schemes with tax advantages, run by mutual funds, to sit alongside existing options. Separately, AMFI has proposed a Debt Linked Savings Scheme, or DLSS, designed as a tax-saving debt fund similar in structure to Equity Linked Savings Schemes.

Such a DLSS format is expected to give low-risk investors another tax-efficient route that combines capital protection with predictable income. By pairing pension-style funds with DLSS, the industry expects a more balanced product set. This could help investors match their risk levels and time horizons more closely across equity and debt allocations.

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