The government will examine demands for rationalising taxes on equity investments, but is not considering any knee-jerk response to stem foreign institutional investor (FII) outflows from Indian equity markets, a senior Finance Ministry official told The New Indian Express.
“There is a need for a deeper study of the taxation of capital gains from equity investments,” the official said, acknowledging that there are currently divergent views on the issue.
The official was responding to a question from TNIE on why the government chose to provide tax relief on investments in government bonds by foreign investors while leaving unaddressed the long-standing demand for lower capital gains taxes on equities.
According to the official, the government plans to undertake a detailed assessment of the revenue generated from capital gains taxes on equities. “At present, what we have is a consolidated figure for capital gains tax collections from all asset classes — real estate, bonds, gold and equities. We intend to conduct a more granular study of capital gains tax collections from equity investments,” the official said.
Currently, foreign portfolio investors (FPIs) are subject to a 20% tax on short-term capital gains arising from shares held for less than 12 months and a 12.5% tax on long-term capital gains. In addition, a Securities Transaction Tax (STT) ranging from 0.05% to 0.15% is levied on equity and equity derivatives transactions.
On the measures announced for government bonds, the official said they form part of a broader strategy to deepen India’s bond market.
The official noted that the decision to expand Fully Accessible Route (FAR)-designated securities to include all new issuances of 15-year, 30-year and 40-year government bonds addresses a long-standing demand from foreign investors, particularly pension and insurance funds that seek long-duration assets.
“These changes, along with the proposed tax exemptions, should support the inclusion of Indian government bonds in the Bloomberg bond index,” the official said.
“If that happens, we could see substantial inflows into Indian government securities,” the official added, declining to specify a figure. When informed that some analysts estimate inflows of $40-50 billion following the recent measures announced by the government and the Reserve Bank of India, the official remarked that “analysts are more optimistic than the government.”
At present, FPIs face a 20% withholding tax on interest income earned from Indian debt securities, including government bonds and rupee-denominated bonds. Long-term capital gains on government securities are taxed at 12.5%, while short-term capital gains attract a 30% tax.
