For years now, the Union budget has focused on making India a developed nation—viksit Bharat. However, it’s time to add yet another angle to this exercise: a concerted effort to help build a class of viksit investors. To achieve this, the budget needs to adopt a carrot-and-stick approach.
The carrot: Encouraging long-term investments
Let’s start with the good stuff—the carrot.
First and foremost, it is crucial to recognize that investors don’t just own demat shares; they are providing “risk” capital to companies and thereby own a small piece of those companies. If India wants to sustain and accelerate its growth, it’s essential that long-term risk capital is available in abundance to fund the growth and the emergence of new companies.
While a significant portion of this capital can come from abroad, efforts must be made to ensure that domestic investors too get a chance to contribute to and potentially profit from the world-class companies that will emerge in the future.
To transform the Indian punter into a viksit investor, an “extra long-term” criterion should be introduced for the taxation of capital gains—say, five years. Gains realized on the sale of shares held for over five years should be taxed minimally, if at all. Think of the loss of tax revenue as a PLI for generating long-term risk capital in the economy.
You see, nothing works like a monetary benefit.
The stick: Discouraging short-term speculation
But, we can agree, loss aversion is a far stronger motivator than greed. To reinforce good practices and nudge people harder to become viksit investors, the stick approach needs to complement the carrot approach.
On that count, here are two more suggestions:
First, short-term capital gains tax should be taxed at a penal rate. Presently, it’s 15%; perhaps it should be taxed at the marginal rate of tax. Maybe more.
Second, just as we suggest an “extra long-term” criterion, we should introduce an “ultra-short term” criterion. Under this, taxation should be levied at a penal rate. I know there are lots of complexities in the way such income is treated, but in general, any step that erodes the net profits from ultra-short trading should be implemented.
These measures would act as significant disincentives for punter, and should go a long way to nudging people into becoming viksit investors.
More suggestions: ULIPs and SIPs
The budget speech often runs into hours, leaving ample time to implement numerous changes. In that spirit, here are some more suggestions, focusing on two popular financial products: ULIPs and SIPs.
ULIPs: Level the playing field
Steps have been taken in the past to treat ULIPs as investment products, hence they are taxed accordingly upon maturity. However, that’s not sufficient. Compared to mutual funds, ULIPs are generally inefficient investment instruments. Yet, they are popular for two reasons: tax benefits on paying the premium and the relatively higher commissions paid to distributors. This needs to change. One option could be to bring them on par with mutual funds in all aspects.
SIPs: Addressing poor fits and timing
While monthly updates on SIP data draw praise for retail investors’ commitment, many SIPs are either poor fits for investors or are poorly managed and conceived (thematic schemes, for example). Worse, the timing is often horrible, with money flowing in at high valuations, indicating potentially muted future returns. Although it’s unclear what the finance minister can do about this in the budget, something must be done to address this issue.
In conclusion, I admit it’s very likely that the budget is already ready and sealed. The speech too. But what’s the harm in dreaming a bit?
Rahul Goel is a finance and publishing professional with over 25 years of experience in the industry.