Budget 2024: Tax changes for debt funds, retirement scheme, DLSS on Amfi’s mind

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The Association of Mutual Funds in India (Amfi) on Thursday released its list of proposals for the Union Budget 2024-25. Here are some of the key proposals:

Parity between debt funds and debentures

Amfi has requested that capital gains on the redemption of debt-oriented mutual funds held for more than three years be taxed at 10% without indexation, as is the case with debentures.

After the Union Budget 2023-24, the gains from debt funds were added to income of investor and taxed at their income slab rate.

Change in fund of funds definition

Amfi has sought clarity on the definition of equity-oriented fund of funds (FoFs).

The industry body said the definition of equity-oriented funds (EOF) be revised to include investments in FoFs that invest a minimum of 90% of the corpus in units of equity-oriented mutual fund schemes, which in turn invest minimum 65% in equity shares of domestic companies listed on a recognized stock exchange.

Consequently, the redemption of units in FOF schemes investing 90% or more in EOF should be subjected 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 sought that a carve out is created to ensure that the FoFs investing in international mutual funds or exchange-traded funds don’t get treated as debt mutual funds for tax treatment.

MF-linked retirement scheme

Amfi has proposed that all Sebi-registered mutual funds should be allowed to launch pension-oriented mutual fund schemes—‘Mutual Fund Linked Retirement Scheme’ (MFLRS), with similar tax benefits as applicable to the National Pension Scheme under Section 80CCD (1) and 80CCD (1B) of the Income Tax Act, 1961, with Exempt-Exempt-Exempt (E-E-E) status.

Exemption for IFSC offshore fund managers  

Amfi proposed that the tax law should explicitly state that a fund manager in GIFT City in IFSC (International Financial Services Centre) managing an offshore fund will not constitute a business connection of the offshore fund nor will the offshore fund be treated to be a tax resident of India on account of the fund manager being in IFSC.

The rationale for suggesting this change, according to Amfi, is that the safe-harbour provisions have several conditions that the offshore fund and the fund manager are required to satisfy. “There are conditions on investment and investor diversification, conditions that bar investment in associate entities as well as conditions that bar the fund from carrying out any other business in India. Ideally, such conditions should be, if required, imposed by the regulation rather than the tax law. Due to the onerous nature of the provisions, there have been only a handful of fund managers who have qualified for the exemption,” read Amfi’s proposal letter.

Debt-Linked Savings Scheme

The industry body has also proposed the creation of a new fund category—Debt-Linked Savings Scheme (DLSS)—similar to Equity-Linked Savings Scheme (ELSS), which can offer the same 80C tax deduction benefits of up to 1.5 lakh, but with a debt fund.