Mutual Fund Industry Proposes Major Tax Reposals for 2026 Budget

The Association of Mutual Funds in India (AMFI) has formally presented a comprehensive set of demands to the government ahead of the Union Budget for the 2026-27 financial year. The industry body has submitted a detailed 27-point proposal aimed at reforming the tax structure for mutual fund investments. The central goal is to incentivize long-term savings and deepen India’s capital markets.

Key Demand: ELSS Deductions Under New Tax Regime

A primary request is to make Equity Linked Savings Scheme (ELSS) investments eligible for deduction under the new tax regime. Currently, the popular Section 80C deduction for ELSS is only available under the old tax regime. AMFI argues that extending this benefit to the new regime would encourage a new wave of investors, especially younger ones who predominantly opt for the simpler new tax structure, to begin their equity investment journey through a disciplined, tax-saving route.

ELSS funds are mutual funds that invest primarily in equities and come with a mandatory three-year lock-in period. They are the only equity-oriented instrument that offers a tax deduction under Section 80C. Aligning them with the new tax regime is seen as a critical step to boost retail participation in equity markets.

Restoring Indexation Benefits for Debt Funds

Another significant proposal is the restoration of indexation benefits for debt mutual funds. In the 2023 budget, the government changed the tax treatment for most debt mutual fund units. Gains are now taxed as short-term capital gains at the investor’s income tax slab rate, regardless of the holding period. This removed the advantage of indexation, which adjusted the purchase price for inflation and lowered the tax on long-term gains.

AMFI is urging the government to bring back this indexation benefit for debt funds. The association states that this move would make debt funds a more attractive option for conservative investors seeking steady returns over the long term. It would also help channel household savings into productive segments of the economy through the bond market.

Seeking Parity for FoFs, REITs, and InvITs

The industry body is also seeking tax parity for Fund of Funds (FoFs) investing overseas, as well as for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The proposal argues that FoFs investing in foreign equities should receive the same favorable long-term capital gains tax treatment as domestic equity funds. This would provide Indian investors with a more efficient structure for global diversification.

For REITs and InvITs, AMFI is advocating for tax clarity and parity with other equity-like instruments. Simplifying and streamlining their tax treatment could unlock significant investment into India’s real estate and infrastructure sectors, which are crucial for economic growth.

Broader Push for Deeper Markets

Beyond specific tax changes, the 27-point memorandum includes measures to deepen financial markets and boost savings. One suggestion is the introduction of pension-linked mutual fund schemes, which could complement the existing National Pension System (NPS) and offer citizens more choice for retirement planning.

Other proposals likely focus on simplifying regulations, reducing transaction costs, and enhancing financial literacy to draw more investors into the formal financial system. The overall theme of AMFI’s submission is to create a stable and favorable tax environment that rewards long-term investment and supports the government’s vision of increasing the penetration of mutual funds across the country.

The government will consider these proposals alongside other pre-budget recommendations. The final decisions in the 2026 budget will signal the government’s continued policy direction for the financial markets and its approach to mobilizing household savings for national development.