As the Union Budget 2026 approaches, discussions around tax reforms and investor-friendly measures are gaining momentum. One such key proposal has come from the Association of Mutual Funds in India (AMFI), the apex body representing the country’s mutual fund industry. AMFI has urged the government to raise the tax-free limit on Long-Term Capital Gains (LTCG) from equity investments, arguing that the current threshold no longer reflects today’s economic realities.

AMFI’s Key Demand Ahead of Budget 2026

AMFI has recommended increasing the LTCG exemption limit on equity shares and equity-oriented mutual funds from the existing ₹1.25 lakh to ₹2 lakh per financial year. According to the industry body, the present exemption level has remained unchanged for several years despite a steady rise in inflation, incomes, and the average size of retail investments.

The association believes that enhancing the tax-free limit would provide meaningful relief to small and medium investors, who now form a large and growing segment of India’s equity market.

What Are the Current LTCG Tax Rules?

Under the existing tax framework, long-term capital gains earned from listed equity shares and equity-oriented mutual funds are exempt from tax up to ₹1.25 lakh annually. Any gains exceeding this limit are taxed at a flat rate of 12.5 percent, without the benefit of indexation.

While this structure was designed to simplify equity taxation, AMFI argues that it no longer aligns with the financial progress made by Indian households and the rising cost of living.

Why AMFI Wants a Higher Exemption Limit

According to AMFI, the static LTCG exemption limit does not adequately account for inflation and wage growth over the years. As more retail investors participate in mutual funds through SIPs and long-term investment plans, even modest gains can push them into the taxable bracket.

Raising the exemption limit to ₹2 lakh, AMFI says, would ensure that genuine long-term investors are not disproportionately taxed and would reinforce the government’s broader objective of channeling household savings into financial assets and capital markets.

Proposal for Additional Tax Relief on Long-Term Holdings

Beyond increasing the exemption limit, AMFI has also suggested a more ambitious reform. The association has proposed that LTCG arising from equity mutual fund investments held for more than five years should be made completely tax-free.

Such a move, AMFI believes, would strongly encourage investors to stay invested for longer durations, reduce short-term selling driven by tax considerations, and enhance overall market stability. It would also help nurture a stronger culture of long-term wealth creation among Indian investors.

Call for Indexation Benefits on Debt Mutual Funds

AMFI’s pre-Budget recommendations are not limited to equity investments. The body has also raised concerns about the taxation of debt mutual funds. In 2023, the government withdrew indexation benefits on most debt funds, making gains taxable according to an investor’s income tax slab, irrespective of the holding period.

AMFI has urged the government to restore indexation benefits for debt mutual funds held for more than 36 months. According to the association, this change would significantly improve post-tax returns, particularly for senior citizens and conservative investors who rely on debt funds for stability and predictable income.

Potential Impact on Investors and Markets

If accepted, AMFI’s proposals could provide a significant boost to investor confidence. Higher tax exemptions and better incentives for long-term investments may reduce premature redemptions, improve market depth, and support the growth of India’s corporate bond market.

Moreover, such measures would align with the government’s long-term vision of developing a resilient and inclusive capital market ecosystem.

All Eyes on Budget Day

With Budget 2026 set to be presented on February 1, investors and market participants are closely watching whether the government will act on AMFI’s recommendations. Any positive announcement on LTCG tax relief could be welcomed by millions of retail investors and further strengthen India’s investment landscape.

For now, expectations remain high as Budget Day approaches, with hopes that meaningful tax reforms will strike the right balance between revenue generation and investor welfare.