Budget with BS: Market mavens divided on LTCG tax hike from 10% to 12.5%

Call for fair treatment of domestic and foreign investors; review retrospective tax implications

Market mavens are divided on the recent hike in long-term capital gains tax (LTCG) from 10 per cent to 12.5 per cent on equities. Some believe it will discourage long-term investing in stocks and enhance the appeal of other asset classes. Others argue that the rates are still lower compared to some global peers and will primarily affect the ultra-rich, who derive most of their gains from the capital markets.

“They have made long-term investing in equities less attractive and gold more appealing. While it’s fair to adjust the short-term capital gains tax, LTCG on equities should have remained the same, as this asset class supports capital formation. You want household savings to be used constructively. Although the impact may not be felt immediately due to strong market conditions, it could become telling in the coming years,” said Raamdeo Agrawal, chairman and co-founder of Motilal Oswal Financial Services.
 

Prashant Jain, founder and chief investment officer of 3P Investment Managers, supports the hike, arguing that the tax outgo on LTCG — primarily affecting the very wealthy — is still lower than what a middle-class individual earning Rs 20-30 lakh would pay.
 

“A 12.5 per cent LTCG is reasonable and lower than in other countries. I would not be surprised if it increases further to 15-20 per cent," he said.
 

However, the broad consensus during the Business Standard panel discussion on Budget ’25: Catching the Market Pulse was that the government should be acknowledged for lowering the fiscal deficit without compromising on investments.
 

“The fiscal consolidation appealed to me in the Budget. Our primary deficit has come down to 1.5 per cent, and if we maintain this path, it will help have only a marginal primary deficit or even a surplus over the next three years. The good part is that this has been achieved without compromising on investment,” said Nilesh Shah, managing director of Kotak Mahindra Asset Management Company.
 

Andrew Holland, chief executive officer of Avendus Capital Public Markets Alternate Strategies, believes that the tax dynamics between various asset classes will be crucial in steering India’s economy toward a $10 trillion target.

“When aiming for a $10 trillion economy, capital markets alone cannot drive the growth. The bond market will play a big role. However, the debt market is taxed at 40 per cent, while equity investments face much lower taxes. This differential needs to be addressed,” said Holland.
 

Jain said favourable post-tax returns on equities encourage more investment in the stock market.
 

“Capital seeks the next best alternative. The gap between fixed income and equities taxation is too wide. In fixed income, earning 7.5 per cent results in a 40 per cent tax. On equity, the 12.5 per cent tax on 12 per cent annualised gains translates into an effective tax rate of less than 50 basis points,” he noted.
 

Experts also called for a level playing field in taxation between different types of investors. Some pointed out that several foreign portfolio investors benefit from low or no taxes due to treaty agreements.
 

“Atithi Devo Bhava is suitable for tourism, not for financial markets,” quipped Shah.
 

Agrawal added that to attract FPI flows, India must compete with emerging market peers that have no or lower taxes, and this needs to be taken into account.
 

“The bureaucracy and Budget makers need to be bolder. Sacrificing some revenue in the short term can lead to long-term benefits. Taking a bit of risk on revenue could restore buoyancy,” he said.
 

Most experts urged the government to implement tax changes prospectively and use retrospective taxation only in extreme cases. They welcomed the government’s intent to simplify both direct and indirect taxes.
 

Panel members agreed that strong domestic flows add stability to Indian markets and believe one has barely scratched the surface when it comes to channelling domestic flows into the capital markets.
 

Jain said that robust institutional flows have reduced market volatility, which should encourage more households to invest in equities.
 

Holland cautioned against excessive exuberance, noting that the market frenzy is fed by high liquidity. Any global or local disturbances could potentially trigger a collapse.
 

Jain mentioned that 70 per cent of the market is trading at reasonable valuations, with potential froth only in a few pockets.