Equity markets are the lifeline of any economy, driving capital formation and wealth generation. In India, the growing participation of retail investors has been instrumental in making the markets more vibrant. However, the current taxation framework poses challenges to fostering long-term investments and curbing speculative trading.

Recognizing these challenges, Sukhanidhi Investment Advisors, under the initiative of its Founder and Chief Investment Officer, Vinayak Savanur, has proposed reforms aimed at creating a more investor-friendly and growth-oriented ecosystem. These recommendations have been shared with key policymakers, including the Hon’ble Finance Minister, Smt. Nirmala Sitharaman.

The Current Scenario

Under the existing framework:

Ø  Short-term capital gains (STCG) on equity investments held for less than one year are taxed at 20 %.

Ø  Long-term capital gains (LTCG) for investments held for over one year are taxed at 12.5 % (above ₹1.25 lakhs).

While this structure supports market participation, it inadvertently encourages short-term trading over long-term wealth creation.

Key Suggestions for Reform

The proposed reforms, a part of Sukhanidhi’s initiative, include:

1. Redefining Long-Term Capital Gains:

Ø  Extend the holding period for LTCG from 1 year to 5 years.

Ø  Reduce the LTCG tax rate to 5% for investments held beyond 5 years.

2. Increasing the STCG Tax Rate:

Ø  Raise STCG tax to 25% for investments held under 5 years to discourage speculative trading.

3. Enhancing Exemption Limits:

Ø  Increase the exemption limit for LTCG from ₹1,25,000 to ₹2,50,000.

Impact on Indian Equity Investors

1. Promoting Long-Term Investments

Example:

Consider an investor, Priya, who invests ₹10 lakhs in equity and holds her portfolio for:

• 1 Year: Under the current regime, her gains are taxed at 12.5 % as LTCG. With the proposed reforms, this would now fall under STCG (25%), discouraging premature exits.

• 5 Years: If Priya holds the portfolio for over 5 years, her gains would be taxed at just 5%, encouraging her to focus on long-term growth.

This shift incentivizes a patient approach to investing, promoting financial discipline and reducing market volatility.

2. Supporting Retail Investors

Raising the LTCG exemption limit to ₹2,50,000 will allow small investors, like Ramesh, to enjoy higher tax-free returns. For instance, if Ramesh earns ₹2,00,000 as LTCG from investments held for over 5 years, he pays no tax under the proposed reforms.

3. Discouraging Speculative Trading

The higher STCG rate (25%) targets frequent traders, often responsible for speculative volatility in the market. For example, an intraday trader making quick trades would face higher taxes on short-term profits, reducing excessive speculation.

4. Aligning with Global Practices

Countries like the US and UK have distinct tax benefits for long-term investments. India’s move to redefine long-term gains aligns with international standards, making the market more attractive to both domestic and foreign investors.

Macro-Level Benefits

Ø  Increased Market Stability: Long-term investments bring stability, reducing the impact of speculative trading.

Ø  Boosting Economic Growth: A stable and robust equity market supports corporate funding, job creation, and economic development.

Ø  Enhanced Retail Participation: Tax benefits for long-term holdings attract more retail investors, broadening the market base.

Conclusion

The proposed reforms spearheaded by Vinayak Savanur and Sukhanidhi Investment Advisors are a step toward creating a balanced and growth-oriented investment landscape. By encouraging long-term wealth creation and reducing speculative trading, these changes not only benefit individual investors but also strengthen India’s financial ecosystem.

As India marches toward becoming a $5 trillion economy, a robust equity market driven by long-term investors can serve as the backbone of sustainable growth. With Sukhanidhi’s vision and initiative, the adoption of these reforms could truly transform the Indian equity markets, creating a win-win situation for all stakeholders.