The equity market has been among the bright spots in the economy during the pandemic, adding to the wealth of lakhs of investors as well as resulting in higher revenue collections on equity transactions. Average daily turnover in the cash segment of the NSE has more than doubled since 2019-20 while the volumes in the equity derivative segment has recorded a much higher growth. This intense equity market activity is a result of a large number of retail investors doing intra-day trading in stocks and stock derivatives, using the spare time available during the Covid induced lockdowns. This is reflected in the surge in new demat and trading accounts opened in the last two years as well as the lower share of delivery in cash trading when compared with pre-pandemic period. This excessive speculation is not conducive for healthy growth of capital markets. The Finance Minister Nirmala Sitharaman can play a part in nudging small investors away from short-term speculative trades in the upcoming Union Budget.
One way of doing this is by reviewing the long-term capital gains (LTCG) tax on equity mutual funds with a view to pushing investors to the mutual funds route. Direct equity investing is quite risky for small investors and they need to be encouraged to invest in stocks through mutual funds. It is also important that they invest for the long term and not churn their holding needlessly. The existing scheme of taxing gains exceeding ₹1 lakh made in equity mutual funds held for more than one year at 10 per cent can be replaced with zero capital gains tax on gains made in equity mutual funds held for more than three years. This can be a temporary exemption that can be in place for the next five years so that the sudden spurt in speculation among retail investors can be tempered and the Centre does not lose too much revenue in the bargain.
It should be pointed out here that the move to bring back tax on LTCG on equity and equity funds in 2018 was rather unfair because Securities Transaction Tax was introduced in 2004 in lieu of LTCG on equity and equity mutual funds ostensibly to promote long-term investing. Bringing back LTCG on equity-related instruments in 2018, while retaining STT amounts to excessive taxation on equity investments. Indian equity instruments are subject to much higher tax incidence when compared to many other countries. Some relief in taxation will not only create sustained demand for Indian shares but it can also help convert some of the newbie traders into long-term investors.