The revised Direct Tax Code will give a big edge to retirement products over equity and equity-linked mutual funds, which are slated to be burdened by long-term capital gains tax after a long time
Strong winds of change are set to blow over the financial landscape in India. The government has proposed a new tax bonanza for long-term savings schemes under the new Direct Tax Code (DTC) while bringing long-term gains from equities and equity-linked mutual funds under the tax hammer. This dual move could potentially give a leg-up to savings schemes like the New Pension Scheme (NPS) and Public Provident Fund (PPF) over equities and equity-linked products.
Under the existing system, savings schemes fall under the EET (exempt-exempt-taxed) regime, wherein contributions and accumulations are exempt from tax but withdrawals are taxable at applicable marginal rate of tax. However, the government received numerous representations for doing away with the EET system, as this method of taxation of permitted savings was considered harsh in the absence of a universal social security system as in the US. Earlier, the Pension Fund Regulatory and Development Authority (PFRDA), which administers the NPS, had called upon the finance ministry to bring about a change in the tax structure. It appears now that the government has heeded the call and proposed to bring long-term savings schemes like the NPS under the EEE (exempt-exempt-exempt) regime.
Interestingly, at the same time, the government has sought to levy tax on capital gains arising from sale of investment assets such as equity shares of a listed company or units of an equity-oriented fund, which are held for more than one year. This tax is proposed to be computed after allowing a deduction at a specified percentage of capital gains without any indexation. Currently, gains arising out of transfer of equity instruments are taxed (at 15%) only if sold within a year of investment. Capital gains arising out of investment held for more than a year are not taxed.
These new provisions under DTC are expected to have far-reaching implications on the investment scenario in India. Until now, equities and equity-linked mutual funds were considered good bets from the tax point of view, as there was no incidence of long-term capital gains tax. India was among the very few nations that allowed capital appreciation over a period of one year or more to be tax-free. This may no longer be the case. Could this move bring about an exodus from equity instruments to long-term savings schemes?
Sandeep Vasa, a certified financial planner (CFP) believes people could potentially move away from equity markets. "Even today, people are not very comfortable with equity markets. This move could have an impact on the stock markets as people could move further away from equity and equity-linked mutual funds. They will now probably look more at Section 80C investments. Already, people have invested in products like PPF where they know they are comfortable under the EEE system."
Vivek Rege, CFP, VR Wealth Advisors Pvt Ltd said that there could be a natural preference to retirement products as they would come under the EEE system. "People would now be incentivised to invest in such products for tax savings.
They will definitely be seen in a better light. It is good that the NPS would also be eligible for tax exemption; it should see a pick-up in subscriptions from here on." Speaking about the impact on equity investments, Mr Rege said, "Taxation of long-term capital gains will surely affect equity investors."
Devesh Shah, another CFP, welcomed the move to bring the NPS under the EEE system. "This is a move which was required since a long time. It will give right direction to create a social security system in the country. It will be a very favourable feature for personal savings for retirement."
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