Capital gains tax hike won't significantly deter investors, especially FIIs, says Neelkanth Mishra

Neelkanth Mishra, Chief Economist at Axis Bank

The new tax framework, introduced in the 2024-25 Union Budge, is designed to stabilise savings flows and is unlikely to be a significant deterrent for investors, Neelkanth Mishra, Chief Economist at Axis Bank told Moneycontrol. This is true even for FIIs who have an option to invest in other countries.

"If the country's returns are going to be attractive over the next three to five years, a 20-30 basis point or even a 50 basis point reduction in returns is not going to be a major deterrent," he said.

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The Union Budget for 2024-25 hiked the long-term capital gains (LTCG) tax on all financial and non-financial assets to 12.5 percent from 10 percent, while short-term capital gains (STCG) tax on some assets would be 20 percent.

Although there was a temporary sell-off by Foreign Institutional Investors (FIIs) following the announcement, Mishra said that this will not have a lasting impact on market trends. "We did see FII (Foreign Institutional Investors) selling yesterday (July 23), but frankly, I don't see this having a lasting effect."

When asked about the rationale behind the adjustments to capital gains tax, Mishra said, "I think the objective of this whole exercise was to reduce the distortion in savings or flow of savings caused by differentials in tax rates."

Mishra said that previously, there was a complex mix of long-term and short-term capital gains taxes varying by asset class.

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