Tax Savings New Methods High-Inflation And long-Term Investment

‘New methods of Tax Savings not getting any help from existing laws, reform is needed’

Tax Savings

While investors are going towards the new world of high-inflation and long-term investment, our law on capital gains tax is still entangled in the old thinking.

Indian savers and investors are adopting new ways of saving tax. I have already written that now individual investors are investing more than Rs 8,000 crore in SIP every month.

This flow of fresh investment is quite stable and it has become a strong base of the Indian equity market, adding the amount of National Pension Scheme (NPS) and Employees Provident Fund Organization (EPFO).

While investors are going towards the new world of high-inflation and long-term investment, our law on capital gains tax is still entangled in the old thinking.

The structure of capital gains tax on equity in India, rather than the growing economy, is largely based on the anti-rich idea of ​​about five decades ago.

Apart from this, it is working against the interests of such investors who want to increase their returns and raise large amounts.

The root cause of this problem is that tax law considers capital gains to be a transaction.

Whenever an investor sells a unit of a fund in a mutual fund investment, the profits or gains made to it are considered capital gains under the tax law.

If the period for holding an investment in the fund is less than one year then it is short term capital gains and if the period for holding the investment is more than one year then it is long term capital gains.

Long-term capital gains in equity funds were abolished in 2005 and were zero until 2018.

The current tax law is such that it punishes long-term investors while it should be encouraging long-term investors. In the long term there comes a time when the investor feels that the mutual fund he has invested in, A better alternative has come to the market.

In such a situation, if the investor sells the investment in that fund and invests it in another fund, then he will have to pay capital gains tax on the profits from the first fund. So either it reduces its returns or the investor should compromise with lower returns to avoid paying tax.

In order for an investor to take full advantage of his investment, it is necessary that selling equity funds and investing in other equity funds is not considered a transaction. This demand has been made for a long time. The Association of Mutual Funds of India (Amfi) had also placed this demand before the Finance Minister.

Before the year 2018, people were not very vocal about this demand as the tax on long term capital gains was zero. However, here I am talking separately from zero tax. I am saying that if someone redeems his investment to spend, then it should be taxed capital gains. But long term investment

Interestingly, a similar provision already exists in the tax law. Section 54 provides that if long-term capital gains are levied to purchase residential properties in a short period, then there will be no tax savings.

Tax Savings New Methods High-Inflation And long-Term Investment

However, the strange thing is that in the tax law, residential property is considered as an asset type in which the amount should be levied. Under section 54, you can buy a house with the money you get from selling long-term investments and you will not have to pay tax if you keep this house for more than three years.

This special facility is not available on any other type of investment.

This rule was right in the olden days. At that time, the home was considered a long-term investment. Financial investments with large sums were very rare. But now no saver views their personal finance in this way. Whether it is done in this budget or later, section 54 should also benefit other types of savings and assets in which people are investing money.

The current tax law punishes long-term investors, while it should be encouraging long-term investors.

The basic reason for this is that tax law considers capital gains as transactions. Long-term investment comes at a time when the investor feels that the mutual fund he has invested in is a better option.

The problem is that if the investor sells the investment from that fund and invests it in another fund, then he has to pay capital gains tax on the profits from the first fund. In such a tax system, investors are not encouraged.

Leave a Reply

Your email address will not be published. Required fields are marked *