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The recent adjustments to India's capital gains tax have sparked debate about their impact on the country's fiscal health. However, prominent economist and former PMEAC member Rathin Roy argues that these changes are essentially irrelevant. He asserts that the percentage of the Indian population paying capital gains tax is minuscule, rendering the tax adjustments inconsequential for overall revenue collection. Roy's perspective challenges the prevailing notion that altering capital gains tax significantly impacts the economy.
Roy emphasizes that only about 3% of India's population is considered middle class, and within this segment, a small fraction actually pays capital gains tax. He posits that doubling or halving the capital gains tax would have a negligible effect on tax revenue. This assertion highlights the limited scope of capital gains tax within the Indian economy, suggesting that its impact is largely confined to a specific segment of the population.
Roy also debunks the misconception that increased stock market participation, particularly by retail investors, is a major contributor to declining household savings. He points out that while there are a significant number of DEMAT accounts, many remain inactive. He questions the narrative that substantial household savings are being channeled into the stock market, arguing that this doesn't reflect the real economic challenges faced by the majority of Indians.
The Finance Minister's introduction of a uniform long-term capital gains tax rate of 12.5% across all asset classes and the hike in short-term capital gains tax on equity-related investments to 20% have been met with mixed reactions. Some argue that these adjustments will only marginally affect long-term investors, while others believe they will impact small investors more significantly. However, experts agree that despite the changes, equity mutual funds remain an attractive investment option compared to other asset classes.
Investors are advised to consider various strategies to mitigate the impact of the capital gains tax changes. Holding investments for longer periods to benefit from the lower long-term capital gains tax rate and optimizing tax-free earnings through the raised exemption threshold are two common strategies. Offsetting long-term and short-term capital losses against gains can also reduce tax liabilities, ensuring that only the net gains are taxed. Additionally, tax-loss harvesting can be employed to reduce overall tax obligations by selling underperforming investments to offset gains from other investments.