Summary: The reported proposal to abolish long-term capital gains (LTCG) tax on listed equity investments made by Foreign Institutional Investors (FIIs), supported by recent recommendations attributed to SEBI, raises an important question of fairness between foreign and domestic investors. Although attracting foreign capital is necessary in view of sustained overseas fund outflows, excluding domestic investors from similar relief could undermine confidence among salaried taxpayers, pensioners, EPFO subscribers and retail participants. These investors have continued supporting Indian capital markets through equity investments and mutual fund SIPs, despite modest market returns over the past two years. Their investments have also contributed to funding new enterprises through initial public offerings and supporting broader economic activity. The article argues that any policy aimed at improving capital market participation should treat domestic investors fairly rather than reserving tax advantages for foreign institutions. It recommends removing LTCG tax for domestic investors, reducing short-term capital gains tax to 10%, introducing a rebate on STCG for investors with total income below ₹12 lakh, and providing tax incentives to first-time IPO investors who retain allotted shares for at least one year. A further proposal seeks a 200% deduction for employers hiring first-time graduate and postgraduate employees for two years. These measures are intended to encourage household savings, broaden capital market participation, support employment generation and improve economic confidence while strengthening domestic investment.
Think Differently: Tax Relief on LTCG Must Not Be Limited to FIIs
Core Issue
There is considerable discussion in the media about a proposal, reportedly under consideration with the Finance Minister, to remove income tax on long-term capital gains (LTCG) on shares traded by Foreign Institutional Investors (FIIs). SEBI has also recently recommended a similar measure. Confining the relief to FIIs would make for an incomplete and one-sided policy. While the Government has reason to address the heavy outflow of foreign funds over the past year, it should not do so at the cost of domestic investors.
Core Sufferers
Salaried individuals, pensioners, EPFO subscribers and retail investors have invested steadily over the last two years without any significant gains. Monthly SIP inflows into mutual funds, estimated at ₹30,000–40,000 crore, have kept the market stable, yet investors have earned returns of only about 2–3%. Markets have started to recover since this discussion began.
Over the same period, many companies have entered the market through IPOs, and retail investors have continued to participate despite low returns. Their savings have helped finance new manufacturing and service enterprises across the country. This is also reflected in the continued growth of GST and income tax collections, which are at their highest levels in five years, with GST collections at an all-time high despite rate rationalisation and reductions.
Risk to Retail Investors and Rewards to FIIs
Rewarding only FIIs would send the wrong message to small taxpayers and retail investors, and could erode their confidence in the market. Higher tax rates on capital market gains may push many of them to exit altogether. Such a measure would also be discriminatory towards domestic investors.
Suggestions
1. Remove LTCG completely for domestic investors as well, and reduce the short-term capital gains (STCG) tax rate back to 10%.
2. Provide a rebate on STCG tax for investors whose total income is below ₹12 lakh.
3. Allow first-time IPO allottees a rebate from their total income, provided the shares are held for at least one year, to encourage wider retail participation in the capital market.
4. Offer employers a 200% tax deduction on the cost of hiring first-time employees who are graduates or postgraduates, for a period of two years, to create jobs for recent graduates.
Conclusion
If the Government addresses the concerns of about 6 crore SIP investors and their families, along with the youth, it will foster goodwill and reduce discontent in society. The NDA Government has done commendable work for the country’s development, but the aspirations of the middle class also need to be met. Faster circulation of money in the economy will, in turn, boost tax collections, much as the Government’s increased spending on capital expenditure has done.
