AMFI Pushes Separate ELSS Tax Breaks and Long-Term Equity Relief

The Association of Mutual Funds in India (AMFI) has called for targeted tax reforms in the upcoming Union Budget 2026–27 to strengthen long-term household savings and deepen participation in capital markets. In its latest set of budget recommendations, AMFI has proposed introducing a separate deduction for investments in equity-linked savings schemes (ELSS) under the new personal income tax regime, alongside a significant overhaul of long-term capital gains (LTCG) taxation on equities

AMFI’s key recommendation is to restore the tax efficiency of ELSS by providing a distinct deduction over and above existing limits. With the new tax regime becoming the default option and offering lower slab rates in exchange for fewer exemptions, ELSS has lost some of its traditional appeal as a tax-saving instrument. AMFI argues that a dedicated deduction for ELSS would encourage disciplined, long-term equity investing, while aligning household savings with productive capital formation. The industry body believes such a move would also channel more retail savings into equity markets through regulated mutual fund structures

In addition to incentives on inflows, AMFI has sought rationalisation of the tax treatment of long-term capital gains on listed equities and equity-oriented mutual fund units under Section 112A of the Income Tax Act (Section 198 of the proposed Bill). The current framework, which taxes LTCG at 12.5% beyond a threshold, has undergone multiple changes over the years, creating uncertainty and reducing the attractiveness of long-term holding, AMFI said.

Under its proposal, AMFI has suggested a differentiated approach based on holding period. For listed equity shares and units of equity-oriented mutual fund schemes held for more than one year and up to three years, AMFI has recommended an LTCG tax rate of 12.5%, plus applicable surcharge and cess, on capital gains exceeding ₹2 lakh in a financial year. This, it said, would strike a balance between revenue considerations and investor incentives, while simplifying compliance for taxpayers

For investments held over longer periods, AMFI has proposed a more favourable regime. It has suggested that listed equity shares and equity-oriented mutual fund units held for more than three years should be fully exempt from capital gains tax through suitable amendments to Section 112A. Such a structure, AMFI argues, would strongly encourage long-term investing behaviour and reduce churn driven by tax considerations, thereby contributing to market stability

As an alternative, AMFI has also proposed that long-term capital gains from equity-oriented mutual fund units and other than specified mutual funds held for more than five years be granted tax exemption. This, it said, would align taxation more closely with long-term wealth creation objectives and provide clarity for investors planning over extended horizons.

AMFI has positioned these proposals within the broader context of India’s rising household participation in financial markets and the need to shift savings away from physical assets toward financial instruments. It has argued that predictable and investor-friendly tax policies are critical to sustaining flows into mutual funds, particularly as retail participation expands beyond large urban centres.