Budget 2025: What Actions Can Finance Minister Take for Mutual Funds Industry?

Finance Minister Nirmala Sitaraman is going to present the Union Budget 2025-26 on February 1. This will be her eighth time in a row presenting the budget. The Budget 2025-26 proposes changes like lowering tax rates on capital gains, bringing back the long-term indexation benefits for debt mutual funds, and allowing mutual funds to introduce pension-focused schemes with the same tax benefits as the National Pension System (NPS).

A Mutual Fund Professional says that India has a large portion of its savings in gold, Finance Minister Nirmala Sitharaman could find innovative ways to use these savings for future investments, which could greatly benefit the economy and create new growth opportunities.

“The budget should focus on investing in futuristic technology and providing strong support for Indian entrepreneurs. A large part of India’s savings is held in gold, often outside the formal economy. I urge the Honourable Finance Minister to find innovative ways to unlock these savings and use them for future investments. This step will be a game-changer for India’s growth.” he added.

AMFI, or Association of Mutual Funds in India, has suggested in its 15-point budget proposal that the indexation benefit for long-term capital gains on debt funds be brought back. It wants the government to amend tax laws and restore the previous rule, allowing indexation benefits for all debt fund investments made before March 31, 2023.

AMFI thinks that restoring the indexation benefit on long-term capital gains from debt funds will help retail investors regain their confidence in the debt market, which will help the Indian economy grow.

Hope that the debt mutual fund industry would request for the return of indexation benefits for debt mutual funds that were diminished in Budget 2024. That will make debt mutual funds more tax-friendly because then investors will be able to adjust their gain for inflation.

AMFI also suggested that when you sell debt-oriented mutual fund units after holding them for more than a year, the capital gains should be taxed at 12.5%, the same rate as applied to listed bonds.

AMFI has also asked for mutual fund units, where the investments are made in certain infrastructure sectors and to be added to the list of assets that qualify for tax exemption on Long-Term Capital Gains under Section 54EC. The expert thinks that this will have a better effect on the mutual fund industry in the future.

It is added that bringing back the 12.5% tax on Long-Term Capital Gains (LTCG) for debt investments, just like we have for other types of assets, will benefit this investment category.

Since the announcement of budget 2024, the debt mutual fund has given 14% returns. Three schemes gave double-digit returns, and out of them, the top two schemes are from Aditya Birla Sun Life Mutual Fund. The return from the Aditya Birla SL Credit Risk Fund came at 13.82% and from the Aditya Birla SL Medium Term Plan at 11.78%.

Since the last Budget, Kotak Credit Risk Fund has given a return of 5.29%, while Bank of India Credit Risk Fund has given a return of 4.92%.

HDFC Gilt Fund gave a return of 8.78% during this period, followed closely by DSP Floater Fund with an 8.76% return. Kotak Medium Term Fund offered a return of 8.47% in the same period.

She also added, “The goal of reducing the budget deficit to 4.9% by FY25 and keeping interest rates stable could help make debt funds more stable in the long run. As a result, debt funds are expected to become more popular with investors looking for tax-efficient, fixed-income options.”