The outgoing finance minister announced in the interim budget that he would extend the tax-exemption on long-term capital gains for three more years if voted back to power.

This means, gains on investments more than one year old would not be taxed. Previously, 10 per cent of such gains had to be paid to the taxman.

The exemption came into being on April 1, 2003, and shares bought after that date qualify for it. But the waiver is applicable only to investments in the 500 shares that are part of the BSE 500 list.

It’s a good incentive to spur growth in investment — the tax-waiver on long-term capital gains to some extent balances the risk of investing in shares, say market mavens.

However, it is an incentive that mostly benefits big-ticket investors, and people who view equity as a long-term savings tool. The mutual fund industry is now lobbying the government for a similar tax-waiver on long-term capital gains on equity schemes.

“That’s a natural extension of the tax exemption on gains from shares,” says A. P. Kurien, chairman of the Association of Mutual Funds in India.

“Who are the people who invest in equity mutual funds?” asks Dhirendra Kumar, a mutual fund analyst. “People who have the appetite for equity but a small surplus to invest — say Rs 20,000.

“But do you think someone who has Rs 20 lakh and a decent understanding of the market would ever go to a mutual fund? He would rather invest in shares directly — his profits from long-term investments are completely tax-free, whereas the same from a mutual fund are fully taxable,” Kumar says.

He suggests the government should extend the exemption on long-term capital gains on stocks to equity mutual funds as well.

“That,” he says, “is a meaningful incentive, and you could then get that Rs 20-lakh guy to invest in equity schemes.”

Aniek Paul