Debt MFs may get tax relief on capital gains

INDUSTRY SEEKS TAX PARITY WITH LISTED BONDS

- PRIYANSH VERMA & AKSHATA GORDE

The Mutual Fund (MF) industry's demand for restoration of the indexation benefit when capital gains are computed on the sale of debt-oriented funds may be considered favourably by the government. An announcement to this effect is likely to be made in the Budget FY26.

The case for reintroduction of the benefit, which was withdrawn in the Finance Bill 2023, has strengthened in recent months as post-tax real rate of returns for investors in debt MF schemes has turned very low or even negative due to sticky inflation, sources said. This has resulted in debt funds losing any competitive advantage relative to fixed deposits in banks. Indexation is designed to adjust the cost of a capital asset to the inflation rates since its purchase.

The MF industry has also urged the finance ministry to align the capital gains tax rates of debt MF schemes with that of listed bonds.

The government is closely looking at both the proposals, the sources said. The industry wants the tax rate for long-term capital gains (LTCG) on redemption of debt MF units held for more than one year to be 12.5%, as applicable to listed bonds.