The Association of Mutual Funds in India (AMFI) has urged the government to restore the indexation benefit for debt mutual funds and extend the grandfathering provision for these benefits until July 2024. This request follows the government’s recent introduction of a grandfathering provision for property transactions before July 23. On July 23, the Union Budget FY 2023-24 was presented.
Voices were raised by various financial sectors, including the mutual fund industry body, over the retrospective removal of indexation benefits from all asset classes in the Union Budget. However, after the government revisited its decision to remove indexation benefits on property transactions, though partially, AMFI has reiterated its demand to provide a similar extension to debt mutual funds to protect.
LTCG tax changes: AMFI highlights key issues
In its request to the government, AMFI has highlighted several key issues and potential impacts of the retrospective implementation of changes in capital gains tax. The primary concern is for investments made in schemes that invest more than 65% in debt or money market instruments on or before March 31, 2023.
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Additionally, investments in schemes with less than 65% allocation to debt instruments made after March 31, 2023, and redemptions from schemes with more than 65% equity investment made after July 22, 2024, are also affected.
In its proposal, the mutual fund industry body has urged the government to either reconsider the removal of indexation benefits for debt mutual funds or provide for the holding cost of these funds to be indexed until July 23, 2024.
The association has requested that grandfathering be allowed for investments in relevant fund categories, similar to the provisions for equity investments introduced in 2018. Specifically, AMFI seeks grandfathering for debt investments made before 2023 and for schemes with more than 65% debt allocation until 2024.
AMFI’s justification for this proposal underscores the significant impact on debt mutual fund investors, particularly those relying on long-term returns averaging 6% to 8%. The elimination of indexation benefits, coupled with taxation at the marginal rate since April 1, 2023, has already caused considerable financial strain on these investors.
It argues that the removal of indexation benefits for grandfathered investments made before March 31, 2023, would further disadvantage older investors who rely on these returns for their financial security.
Indexation benefits for real estate bought before July 2024 come back
The amendment in the Finance Bill regarding LTCG tax on real estate transactions has reinstated the indexation benefit for properties acquired before July 23, 2024. This change allows individuals and Hindu Undivided Families (HUFs) who purchased residential or commercial properties before July 23, when the Union Budget was presented, to choose between two options: a 12.5% tax on long-term capital gains (LTCG) on property sales without indexation benefits or a 20% LTCG tax with indexation benefit.