India's capital markets have changed dramatically over the last 20 yrs. Equity investing is no longer confined to a relatively small group of institutions and affluent investors. Millions of households now participate directly or indirectly in the markets, while Indian companies increasingly depend on them for capital.




The tax framework around this market deserves the same evolution. The question is not simply whether capital gains tax (CGT) should be higher or lower, but whether the tax system is predictable and neutral, and whether it encourages the kind of investment behaviour a growing economy needs.



STT-CGT


(STT) is collected when a securities transaction takes place, irrespective of whether the investor ultimately makes a profit or not. CGT is then levied on the gain.




Supreme Court is seized of a challenge to STT in Aseem Juneja v. Union of India (2025), in which an alternative prayer seeks adjustment of STT against short- or long-term CGT, much like TDS. Irrespective of the constitutional question, there is a policy question worth considering: if STT is retained, could it operate as a credit against CGT?




This would preserve STT revenue while preventing it from becoming an additional cost where the transaction ultimately gives rise to taxable capital gains. It would also bring the tax outcome closer to the investor's actual economic return.



Certainty


The distinction between an investor and a trader has been litigated for years. While judicial principles have evolved, taxpayers still face uncertainty over whether gains from listed securities will be treated as capital gains or business income. A statutory safe harbour could bring much-needed certainty.




Where an investor satisfies objective conditions relating to listed securities, holding period and other prescribed parameters, the law could permit income to be treated as CG. This would not prevent the tax administration from dealing with artificial arrangements, but simply ensure that genuine investors are not required to establish their intention afresh in every assessment.



Graded rate


At present, tax treatment changes once an investment crosses the prescribed long-term threshold. A more graduated approach could link tax rate to length of investment: the longer capital remains invested, the lower the eventual rate could be, subject to appropriate thresholds.




The objective is not a blanket tax concession. It is to reduce the sharp cliff created by a single holding-period test and encourage investors to stay invested longer. Patient capital benefits companies and markets alike, and the tax system should recognise this.



Carry-back of capital losses


India considered the principle more than 70 yrs ago. Taxation Enquiry Commission, chaired by John Matthai, examined carry-back of losses in the 1950s. It opposed a general system, citing administrative difficulties and possibility of misuse, though it recommended a limited 1-yr carry-back in certain circumstances where a business permanently ceased.




Circumstances today are very different. Listed securities are dematerialised, transactions are executed through recognised exchanges, and transaction-level information is electronically available to taxpayers and the tax administration.




A limited 1-yr carry-back of realised losses on listed securities against CGs from securities in the immediately preceding year could, therefore, be considered. Relief could be restricted to tax actually paid on the earlier gain, with appropriate safeguards.




Interestingly, the tax rules already recognise one consequence of carrying back losses. Rule 76(14) requires Form 44 where a carry-back of a current-year loss results in a refund of foreign tax for which credit had been claimed in an earlier year. It doesn't create a general carry-back regime for capital losses, but demonstrates that the tax system can revisit an earlier year when a subsequent loss changes the underlying tax position.




The common thread across these proposals is not lower taxation but better taxation. As India seeks deeper domestic participation and a larger role for its capital markets in financing growth, tax policy should support that objective. A predictable and neutral tax framework can do more for the quality of capital formation than a series of ad-hoc concessions.




The aim should be simple: tax the return, provide certainty on the character of that return, and avoid allowing mechanics of the tax system to influence investment decisions more than the economics of the investment itself.



The writer is a chartered accountant



(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of )