AMFI Urges Centre to Restore Indexation Benefits for Debt Mutual Funds
Capital gains tax: AMFI requests restoration of indexation benefits for debt mutual funds after real estate sector breather
Capital Gains TaxDebt Mutual FundsIndexation BenefitsAmfiUnion Budget 2024Real Estate NewsAug 09, 2024
The recent introduction of a grandfathering provision for property transactions before July 23 has led to a partial reversal of the removal of indexation benefits on property transactions. However, the AMFI has reiterated its request for a similar extension to debt mutual funds for protection.
Various financial sectors, including the mutual fund industry body, expressed concerns regarding the retrospective removal of indexation benefits from all asset classes in the Union Budget. AMFI outlined some serious concerns and possible consequences arising from the retroactive enforcement of modifications to capital gains taxation.
Indexation is a crucial method employed to account for inflation's impact on a capital asset's cost over time. By adjusting the asset's cost, indexation aims to reflect the effects of inflation since the asset was originally procured. This adjustment results in a higher inflation-adjusted cost of acquisition for the capital asset, subsequently leading to reduced net long-term capital gains (LTCG).
However, Budget 2023 has abolished indexation benefits for debt mutual funds that are acquired on or after April 1, 2023. As a consequence of this change in policy, investors in debt mutual funds will no longer be able to avail themselves of indexation benefits starting from the aforementioned date.
The AMFI has requested a review of the decision to eliminate indexation benefits for debt mutual funds. Alternatively, it has suggested that the government consider implementing indexation for the holding cost of these funds until July 23, 2024.
Experts too believe that the government should consider reinstating indexation benefits on Long-Term Capital Gains (LTCG) from the sale of debt mutual funds. This measure can potentially enhance the attractiveness of debt mutual funds compared to fixed deposits (FD).
Frequently Asked Questions
What is the current tax rate on long-term capital gains from debt mutual funds?
The current tax rate on long-term capital gains from debt mutual funds is 12.5% without indexation benefits.
What is indexation and how does it affect capital gains tax?
Indexation is a method used to account for inflation's impact on a capital asset's cost over time. It adjusts the asset's cost to reflect the effects of inflation, resulting in a higher inflation-adjusted cost of acquisition and reduced net long-term capital gains (LTCG).
What is the grandfathering provision and how does it apply to debt mutual funds?
The grandfathering provision is a clause that allows investors to maintain the existing tax benefits on their investments made before a certain date. In the case of debt mutual funds, the AMFI is advocating for a grandfathering provision to cover debt investments made prior to 2023 and for schemes with a debt allocation exceeding 65% to be included until 2024.
Why is the AMFI requesting the restoration of indexation benefits for debt mutual funds?
The AMFI is requesting the restoration of indexation benefits for debt mutual funds because the removal of these benefits has caused significant financial strain on investors, particularly those relying on long-term returns averaging 6% to 8%.
What is the potential impact of reinstating indexation benefits on debt mutual funds?
Reinstating indexation benefits on debt mutual funds can potentially enhance their attractiveness compared to fixed deposits (FD) and provide investors with a more tax-efficient investment option.
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