Budget 2026: Mutual fund body wants indexation benefits restored; also lower entry for ELSS

Kolkata: The mutual fund industry has turned out to be a preferred route for investment by a large section of the Indian middle and lower-middle class. They are putting a huge amount of money every month -- well over Rs 1,000 crore every day -- just in the form of SIP (Systematic Investment Plan) in mutual fund schemes. They have a few concrete expectations from FM Nirmala Sitharaman who will present the Union Budget on Sunday, Feb 1, 2026.

The Association of Mutual Funds in India has submitted a representation to the finance ministry with a voluminous list of 27 proposals. Needless to say all of these pertain to a conducive experience for the investor. One of the most significant benefits sought is restoration of long-term indexation benefit on debt schemes, which was abolished on and from April 1, 2023. The mutual fund industry body also sought separate deduction for investment in Equity Linked Savings Scheme under the new tax regime. Right now, the new income tax regime offers minimal deductions and there is no separate deduction for ELSS under the new tax regime. ELSS benefits offers up to Rs 1.5 lakh under section 80C of the Income Tax Act 1061 but only in the old tax regime.

If the long term indexation benefits are restored in debt funds, it could bring a lot of benefits, as pointed out by Wishlist capital director and personal investment strategist Nilanjan De. "One can expect concrete benefits if the indexation benefits are restored for debt funds. It can adjust the purchase price of debt fund units to account for inflation, which in turn, raises the cost basis and bring down the taxable capital gains. Considering an investor holds debt fund units for more than three years, the tax rate would come down significantly," he says. De also points to collateral benefits such as overnight rise in appeal of debt funds to conservative investors and direct rise in net flows to debt funds. The withdrawal of this benefit has impacted the flows into debt funds over the past three years, AMFI has noted.

AMFI is of the opinion that proper tax treatment for debt funds can have another major collateral benefit and that is the development of the corporate bond market, which will get increased flow of household savings. Flows into the corporate bond mutual funds can help develop the corporate bond market and it can contribute to reducing borrowing costs and raise market liquidity.

Among other pleas to the finance ministry, AMFI has said that the threshold limit of withholding tax (TDS) on income distribution by mutual fund scheme be raised. This threshold is at Rs 10,000 from the current financial year. The MF body thinks this limit is too low. It also urged for removal of Securities Transaction Tax (STT) on purchase or sale transactions undertaken in units of mutual fund.

AMFI also said that ‘Equity Oriented Funds’ should include investment in Fund of Funds schemes which invests a minimum of 90% of the corpus in units of equity oriented MF schemes (which in turn invest minimum 65% in equity shares).

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AMFI has also proposed to introduce Debt Linked Savings Scheme in order to boost the corporate bond market. It has also said that ELSS Rule 3A should be amended so that any amount, and not necessarily in the multiples of Rs 500, can be invested in ELSS.

The MF body also suggested that LTCG on listed equity shares or units of equity-oriented fund schemes held for more than one year and up to three years. The LTCG tax of 12.5% should be applicable on the capital gains exceeding Rs 2 lakh in a financial year.