‘Do you think 42 million people pay capital gains tax?’: Former PMEAC member Rathin Roy says budget amendment has little impact

Rathin Roy, a prominent economist and former member of the Prime Minister’s Economic Advisory Council (PMEAC), dismissed the increase in capital gains tax as irrelevant to India’s fiscal health. In an interview with Moneycontrol, Roy said that adjusting capital gains tax, either doubling or halving it, will not affect the country’s tax revenue.

He argued that with only about 3% of the Indian population considered middle class, the effect of such tax changes is marginal at best. Roy pointed out that of the 42 million people in the middle class, a tiny fraction actually pay capital gains tax, making it a non-issue for the wider population. “You could double the capital gains tax, it would make very little difference in terms of tax revenue collection; you could halve capital gains tax and it would make very little difference to tax revenue collection,” Roy told Moneycontrol.

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Roy also addressed the misconception that smaller household savings are the result of increased participation in the stock market, particularly by retail investors. He pointed out that while there are 160 million DEMAT accounts, many are inactive. He questioned the narrative that significant household savings are being channeled into the stock market, saying this does not reflect the real economic challenges faced by most Indians.

In the July 23 budget, Finance Minister Nirmala Sitharaman introduced a uniform long-term capital gains (LTCG) tax rate of 12.5% ​​for all asset classes, replacing the previous tiered system. Short-term capital gains (STCG) tax on equity investments has been increased from 15% to 20% and the tax exemption limit on LTCG of equity investments has been increased 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 removing 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 could slightly affect long-term investors, the high exemption threshold provides some relief to small investors. He added that despite the increase in STCG tax, equity mutual funds remain attractive compared to other asset classes and the overall flow to these funds is unlikely to be significantly affected.

Investors are advised to consider several strategies to mitigate the impact of capital gains tax changes. One approach is to hold investments for longer periods to benefit from the lower LTCG rate. Additionally, the high exemption threshold for LTCG allows investors to optimize their earnings tax-free. Offsetting long-term and short-term capital losses with gains can also reduce tax liabilities by ensuring that only net gains are taxed.

Experts also suggest using tax loss harvesting, where losses from underperforming investments are sold to offset gains from other investments, thereby reducing overall tax liabilities.