Budget 2023 | Mutual fund body pitches for debt-linked saving schemes on par with ELSS

Ahead of the Union Budget, the Association of Mutual Funds in India (AMFI) has asked the government to introduce 'Debt Linked Savings Scheme' (DLSS) on the lines of Equity Linked Savings Scheme (ELSS). This would channelize long-term savings of retail investors into higher credit rated debt instruments with appropriate tax benefits and will help in deepening the Indian bond market, AMFI said.

Over the past decade, India has emerged as one of the key financial market in Asia. However, AMFI believes that the Indian corporate bond market has remained comparatively small and shallow, and there is a over-dependence on banks for finance, which hampers companies needing access to lowcost finance.

"Historically, the responsibility of providing debt capital in India has largely rested with the banking sector. This has resulted in adverse outcomes, such as accumulation of nonperforming assets of the banks, lack of discipline among large borrowers and inability of the banking sector to provide credit to small enterprises. Indian banks are currently in no position to expand their lending portfolios till they sort out the existing bad loans problem, especially post COVID-19 pandemic," AMFI said.

So, the industry body thinks that India needs to eventually move to a financial system where large companies get most of their funds from the bond markets, while banks focus on smaller enterprises. Hence, there is a need to provide a viable alternative platform for raising debt finance and reduce dependence on the banking system.

According to AMFI, DLSS must be introduced and at least 80 percent of the funds collected under this shall be invested in debentures and bonds of companies as permitted under Sebi Mutual Fund regulations.

Pending investment of the funds in the required manner, the funds may be allowed to be deployed in money market instruments and other liquid instruments as permitted under Sebi MF Regulations.

It is further proposed that the investments up to Rs 1.5 lakh under DLSS be eligible for tax benefit under a separate sub-Section and subject to a lock in period of 5 years (just like tax saving bank Fixed Deposits).

CBDT may issue appropriate guidelines/notification in this regard as done in respect of ELSS, AMFI said.

In 1992, the Government had introduced the ELSS with a view to encourage retail investments in equity instruments.by providing tax benefits under the Income Tax Act, 1961. Over the years, ELSS has been an attractive investment avenue for retail investors to invest in equities through mutual fund route with dual benefit of tax incentive and long term capital growth.

A similar stimulus through introduction of DLSS , AMFI said, would help channelize household savings into bond market and help deepen the bond market.

"DLSS will provide an alternative fixed income option with tax breaks to retail investors and help retail investors to participate in bond markets at low costs and at a lower risk as compared to equity markets," AMFI said.

This will also bring debt oriented mutual funds on par with tax saving bank fixed deposits, where deduction is available under Section 80C.

"The Government’s plans to significantly increase investment in the infrastructure space will require massive funding and the banks may not be equipped to fund such investments. DLSS will also help take away burden from the government on higher cost of borrowing on small savings instruments," the industry body added.