Why Indian savers deserve tax relief

Sebi's Budget Proposals For Investors

The Securities and Exchange Board of India has submitted budget recommendations to the finance ministry, according to a Reuters report citing unnamed sources. The regulator has proposed three changes. First, it wants the 12.5% long-term capital gains tax paid by foreign portfolio investors on Indian stocks removed. Second, it seeks tax-neutral treatment for switches between mutual fund schemes held for over a year. Third, it has flagged that Indian transaction costs, including the Securities Transaction Tax, rank among the highest globally.

Why The Proposals Matter

The FPI exemption has drawn the most attention because foreign investors have withdrawn roughly $31 billion from India this year. For domestic investors, the other two proposals carry greater significance. Under current rules, an investor moving money from an underperforming fund to a better one is treated as having sold the original holding and must pay tax on gains. This discourages exits from poor funds. The issue mattered less when equity fund LTCG tax was zero. Lower transaction costs would benefit all investors, since STT on a fund manager's trades reduces returns. The article's author supports all three proposals.

The Indexation Question

The author notes an asymmetry: a foreign fund manager could pay no LTCG tax, while an Indian saver running systematic investment plans for years continues to pay 12.5%. A portion of taxable gains may be illusory because the system no longer allows cost indexation, which was previously available on many investments. The July 2024 Budget removed indexation from almost everything, except a partial rollback for property already purchased. The stated rationale was that a lower 12.5% rate, against 20% with indexation, compensates. The author argues a lower rate applied to an inflated figure still taxes illusory gains. Illustrative calculations in the article show real tax rates rising sharply as nominal returns fall, exceeding 1…