LTCG Exemption Boost
One of the primary requests put forth by market participants is for a revision of the tax treatment of long-term capital gains (LTCG) from equity investments.
Specifically, firms like JM Financial Services have recommended that the government increase the tax-free exemption limit for equity LTCG. Currently set at Rs 1.25 lakh, the proposal suggests raising this to Rs 2 lakh. This move is seen as a way to provide greater relief to both retail and long-term investors, encouraging them to stay invested in the market for longer durations. This will in turn help them to potentially benefit from the power of compounding. Such a step could also potentially boost market sentiment. The Union Budget for 2026-27 will be presented by Finance Minister Nirmala Sitharaman on February 1, giving investors something to look forward to. This proposal underlines the importance of incentivizing long-term investment, which is vital for the sustained growth of the Indian economy and capital markets.
Tax Definitions Clarity
Beyond the exemption limit, another key area of focus is the clarity and standardization of tax definitions. JM Financial Services has proposed standardizing the definition of 'long term' across all asset classes. Currently, the holding period considered 'long term' can vary between equity, debt, gold, and real estate, leading to complexity and confusion for investors. By streamlining this definition to a consistent timeframe—such as 12 months, as suggested—the tax system could become more user-friendly. This standardization would simplify compliance and improve investor understanding of tax implications. Additionally, market participants have suggested allowing capital losses to be set off against income under other heads. This change could potentially offset tax liabilities and provide investors with more flexibility in managing their portfolios, especially during periods of market volatility. These measures would not only provide much-needed clarity but also contribute to a more efficient and investor-friendly tax environment.
Transaction Tax Concerns
A significant concern raised by several market participants involves transaction-related taxes, particularly the Securities Transaction Tax (STT). There's a general consensus against any further increase in these taxes. Dhiraj Relli, Managing Director and Chief Executive Officer of HDFC Securities, has suggested keeping the STT on cash equity trades lower than that on derivatives. This strategy is intended to encourage long-term investing over speculative trading. High transaction costs can deter investors, especially those with long-term investment horizons, as frequent trading is often penalized. Tejas Khoday, CEO of FYERS, has echoed this sentiment, advocating that the government should refrain from raising STT any further. Concerns were also raised about the potential impact of higher transaction taxes on overall market activity and liquidity. The Union Budget for 2026-27 will be presented on February 1, giving investors something to look forward to. Such an environment, with lower transaction costs, can encourage more robust market participation and contribute to a more vibrant and efficient capital market ecosystem.
Broader Tax Strategies
Besides specific tax reforms, some market experts have suggested broader strategies to improve the tax environment for investors. One such suggestion is to tax only the profit component of share buybacks, which would simplify the process and potentially incentivize companies to return capital to shareholders. Aligning dividend tax rates for domestic investors with those applicable to non-resident Indians (NRIs) has also been proposed. This could potentially level the playing field for all investors and remove any discrepancies in tax treatment. Tejas Khoday also suggested reducing both long-term and short-term capital gains tax to 10 per cent, as it would significantly boost retail investor participation. These suggestions are aligned with creating a more equitable and investor-friendly tax system. This can lead to increased confidence and higher levels of market participation. The implementation of these strategies could lead to a more dynamic and prosperous capital market landscape.
