A Call For Tax Reforms: Disparities Between Equity And Debt Investments

There is a case for revising LTCG taxation for debt funds with a one-year holding period

- Joydeep Sen

There was a hue and cry after the Union Budget 2024-25 as the Centre increased the long-term capital gains (LTCG) tax on equity from 10% to 12.5%. However, since April 2023, the benefit of indexation has been taken away from debt-oriented mutual funds (MFs), and it is taxable at marginal slab rate (MSR). For most investors, the MSR is 30%.

This is a skew. The logic behind a relatively lower LTCG rate for equity than MSR for majority investors is that India requires capital for growth. Incentivising people to invest in equity would lead to a source of capital for the corporate sector. However, corporations raise capital through the issuance of bonds as well. In terms of importance in the overall picture, bonds as a source of capital are not a poor, distant cousin of equity.