Rathin Roy, prominent economist and former member of the Prime Minister’s Economic Advisory Council (PMEAC), dismissed the increase in capital gains tax as irrelevant to the fiscal health of India. In an interview to Moneycontrol, Roy said adjusting the capital gains tax, whether doubling or halving it, would scarcely impact the country's tax revenue.
He argued that with only about 3 percent of the Indian population considered middle class, the effect of such tax changes is marginal at best. Roy highlighted that out of 42 million middle-class individuals, a small fraction actually pays capital gains tax, making it a non-issue for the broader population. "You could double capital gains tax, it would make very little difference to tax revenue collections; you could halve capital gains tax and it would make very little difference to your tax revenue collections," Roy told Moneycontrol.
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Roy also addressed the misconception that lower household savings are a result of increased stock market participation, particularly by retail investors. He pointed out that although there are 160 million DEMAT accounts, many are inactive. He questioned the narrative that significant household savings are being directed into the stock market, stating that this is not reflective of the real economic challenges facing the majority of Indians.
In the July 23 budget, Finance Minister Nirmala Sitharaman introduced a uniform long-term capital gains (LTCG) tax rate of 12.5% across all asset classes, replacing the previous tiered system. The short-term capital gains (STCG) tax on equity-related investments was increased from 15% to 20%, and the tax-free limit for LTCG on equity investments was raised from Rs. 1 lakh to Rs. 1.25 lakh.
The revised tax policy also redefines the holding period for listed securities to qualify as long-term from 12 months to 24 months for other assets, while eliminating the indexation benefit that adjusted the purchase price of an asset for inflation.
Feroze Azeez, Deputy CEO at Anand Rathi Wealth Limited, noted that while the marginal increase in LTCG tax might slightly affect long-term investors, the raised exemption threshold offers some relief to small investors. He added that despite the hike in STCG tax, equity mutual funds remain attractive compared to other asset classes, and the overall flow towards these funds is unlikely to be significantly affected.
Investors are advised to consider several strategies to mitigate the impact of the capital gains tax changes. One approach is to hold investments for longer periods to benefit from the lower LTCG rate. Additionally, the raised exemption threshold for LTCG allows investors to optimize their tax-free earnings. Offsetting long-term and short-term capital losses against gains can also reduce tax liabilities, ensuring only the net gains are taxed.
Experts also suggest employing tax-loss harvesting, where losses from underperforming investments are sold to offset gains from other investments, thereby reducing overall tax obligations.