Budget Wishlist: Mutual Funds Seek Return of Indexation Benefits on Debt Funds in Budget FY27

During the pre-Budget Fiscal Year 2027 (FY27) consultations, the mutual fund industry submitted a proposal to the Finance Ministry requesting the restoration of indexation benefits on debt mutual funds, citing distortions in fixed-income investing and reduced efficiency in the bond market, as per news reports. 

Industry Requests Indexation Relief for Debt Mutual Funds 

The Association of Mutual Funds in India (AMFI), along with other market participants, has urged the Finance Ministry to reintroduce indexation benefits for investors in debt mutual funds. 

These representations were made during the pre-Budget discussions held in New Delhi in November 2025, which included attendees from various investment bodies.  

The industry highlighted that the withdrawal of indexation has affected the yield-adjusted returns, especially for investors in higher tax brackets, leading to reduced appetite for lower-rated or longer-duration instruments. 

Impact on Market Behaviour and Bond Pricing 

Since April 2024, debt mutual fund returns are taxed at the investor’s applicable slab rate regardless of holding period. The removal of indexation, which previously helped adjust gains for inflation, now deters investors from taking credit or duration risks.  

Consequently, fund managers have shifted focus toward safer instruments like AAA-rated bonds and treasury bills. This shift has reduced activity in AA and lower-rated bond segments, making borrowing more expensive for issuers and impairing pricing and trade efficiency outside low-risk categories. 

Read More: Mutual Funds Deploy ₹11,779 Crore Across 10 IPOs in November; Few Companies Attract Over ₹1,000 Crore Each! 

Reason Behind Withdrawal of Indexation Benefit 

The benefit was removed in Budget 2024 with the objective to align tax treatment across similar fixed-income instruments such as bank deposits. Tax authorities aimed to support deposit mobilisation in banks, which were reportedly facing pressure due to slow deposit growth.  

However, experts argue that mutual fund routes do not significantly divert savings from the banking system as funds invested are still circulated through current accounts during deployment. 

Other Capital Market Suggestions in Budget Proposals 

In addition to the plea for indexation benefits, market participants suggested a reduction in securities transaction tax (STT) on cash market transactions. Simplification of Know Your Customer (KYC) processes was also discussed to enhance financial inclusion and ease of investor onboarding. 

Conclusion 

The industry’s request for indexation benefits on debt mutual funds remains focused on equity in taxation and the efficient pricing dynamics of the bond market. The Budget FY27 consultations brought forward several such proposals, aiming at structural enhancements in capital markets. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities or companies mentioned are only examples and not recommendations. This does not constitute a personal recommendation or investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.