Extend grandfathering of Indexation Benefit to Debt Mutual Funds till July 2024: AMFI

The Association of Mutual Funds in India (AMFI) requests that the Finance Minister extend the grandfathering of indexation benefits for debt mutual funds until July 2024 to protect investors from retrospective taxation.

AHFI Budget Feedback and Request for Modifications

Issue/ Impact

• Retrospective Implementation of Change in Capital Gains Tax.
• Investments made in schemes investing > 65% in debt/ money market instruments (on or before 31st March 2023).
• Investments made in schemes Investing <65% in debt/ money market instruments (on or after 31st March 2023). Investments in schemes investing > 65% in equities (redemptions made on or after 22nd July 2024).

Proposal

• Reconsider the removal of indexation benefits from Debt Mutual Funds, Or
• Provide for holding cost of debt mutual fund to be indexed till July 23, 2024.
• As in the past, we request that grandfathering be allowed for investments placed in the relevant categories of funds.
• For equities – Grandfathering clause is already applicable for changes introduced from 2018, we request to further grandfather for the interim period from 2018-2024.
• For Debt, we request grandfathering for investments made before 2023.
• For schemes investing > 65% in debt instruments, request grandfathering to be granted for Investments made up to 2024.

Justification

Debt mutual funds provide long-term average returns of 6% to 8%. The elimination of the Indexation benefit will have a significant impact on Debt Mutual Fund investors, as described below. It should be remembered that debt mutual fund investors have been taxed at the marginal rate since April 1, 2023, which has already damaged them severely. The removal of the indexation benefit for grandfathered investments made before March 31, 2023, will also impact older investors.

We believe that applying the new tax rates retrospectively can harm investor confidence and discourage new investors from entering capital markets as well as existing ones from making additional investments in capital markets through mutual funds, as these investors had invested in the funds based on the tax rates in effect at the time of their investments.

Further, FPI’s also get Impacted by such sudden changes in taxation, especially if implemented on a retrospective basis.