Budget 2026: Mutual Funds Seek Debt Indexation, ELSS Relief, and MF Pension Schemes

The mutual fund industry has outlined its wishlist for Union Budget 2026, seeking earlier tax rates on capital gains, restoration of long-term indexation benefits for debt mutual funds, and permission for mutual funds to launch pension-oriented MF schemes (MFLRS) with tax treatment aligned to the⁢ NPS.

Sandeep Bagla, CEO of TRUST Mutual Fund, said that he expects‍ stability⁤ in taxes, especially around capital gains and pass-through‍ taxation, to help investors plan investment diversification. He added ⁤that there could be a reintroduction ⁢of tax ‍benefits for fixed income funds, with the caveat of segregation of benefits between actively and passively managed funds.

Nimesh Chandan, Chief Investment Officer, bajaj Finserv Asset Management, said that this⁤ Budget comes at a very crucial juncture as far as markets are concerned and most investors will look to the Budget for how it ⁢handles fiscal prudence while supporting sectors affected by US tariffs. The CIO of Bajaj Finserv AMC also said that the most important area to watch ⁣will be the steps ⁣the Finance Minister takes to attract durable FDI and⁢ FPI flows into the economy. While consumption is ⁤showing signs of a pick-up, incentives to encourage private capex⁤ remain one of the important expectations. The Budget is also expected to continue its focus on government capex and⁤ spending on defense.

The Association ⁢of Mutual Funds in India (AMFI), in its 27-point proposal⁤ for Union Budget FY ⁤2026-27, proposed providing⁣ a separate deduction for investment⁣ in ELSS under the new tax regime and restoration of the long-term indexation benefit for debt ⁤schemes, which was withdrawn in Budget 2024.

Post the indexation benefit withdrawal in 2024, debt funds ⁢have delivered up to 14.23% as February 1,2024,and since then the lowest return offered by ‍a debt fund was 4.15%. Conversely, as the last ⁤Budget proclamation made in 2025, debt funds have offered up to ⁤20.38%, while the lowest return offered was 0.93%.Providing a separate deduction for investment ⁤in ELSS under the new tax regime will preserve ELSS as a simple, low-ticket equity entry vehicle and‍ sustain retail participation in equities. AMFI has also proposed that all mut

“`html

Understanding the tax implications of Equity Linked Savings Schemes (ELSS), Mutual Fund (MF) pension ⁢schemes, and the benefits of indexation can significantly improve your investment returns. This article explores these aspects, providing clarity ⁣on ⁢how to optimize your tax savings and investment growth.

Equity Linked Savings Schemes (ELSS) and Tax Relief

ELSS mutual funds are equity-focused funds that offer a tax deduction under Section 80C of the Income Tax ⁢Act, 1961.

Investors can claim a deduction of up to ₹1.5 lakh per financial year by investing in ELSS funds. This‍ deduction reduces your taxable income, leading to lower tax liability. Though, any capital gains exceeding ⁤₹1 ⁤lakh from ELSS ⁤investments are subject to Long-Term Capital Gains (LTCG) tax at a rate of 10% plus applicable surcharge and cess.

Example: An individual investing ₹1.5 lakh in ELSS can reduce their taxable income⁣ by that amount. If their total income falls within the 20% tax bracket, they can ‍save⁤ ₹30,000‍ in taxes (20% ⁣of ₹1.5 lakh).

Indexation Benefits ⁤for ELSS

Indexation is a method used to adjust the cost of an asset⁤ for inflation over time, thereby reducing the capital gains tax liability.

For ELSS investments, indexation benefits are⁣ available when calculating LTCG.The cost of ⁢acquisition (the initial investment amount) is ⁤adjusted using⁤ the Cost Inflation Index (CII) published by the‍ Central⁢ Board of Direct Taxes (CBDT) for each year. This adjusted⁤ cost is then⁤ subtracted from the sale price to arrive at the indexed capital gains, which are then ⁤taxed at 10% plus surcharge and cess.

Example: An investor purchased ELSS ‍units for ₹10,000 in FY 2018-19 when the CII was 283. They sold the⁣ units for ₹15,000 in⁤ FY ‍2023-24 when the CII was 331. The indexed cost of acquisition is⁣ calculated as (₹10,000 * 331) / 283 = ₹11,664. The indexed capital gain is ₹15,000 – ₹11,664 = ₹3,336. This ₹3,336 is subject to 10%‍ LTCG tax.

You can find the Cost ‍Inflation Index for various financial years on the⁢ Income Tax Department website.

Mutual⁤ Fund Pension Schemes (NPS⁤ & PPF) and tax Benefits

mutual Fund Pension Schemes, such as ⁤the National Pension System (NPS) and Public Provident ⁤Fund (PPF), offer tax⁢ benefits under different sections of⁣ the Income Tax Act.

National Pension System (NPS): Contributions to NPS are eligible for tax deduction under⁤ Section 80CCD(1) up to 10% of salary (for ⁣salaried individuals) or 20% of gross total income (for self-employed ‍individuals), within the overall limit ⁣of ₹1.5 lakh under Section 80C. An additional deduction of ‍up to ₹50,000 is available under⁢ Section 80CCD(1B). Partial withdrawals from NPS are generally taxable.