How budgets made investing in India unaffordable for middle-class savers |
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How budgets made investing in India unaffordable for middle-class savers
India’s inability to channel its domestic household savings into productive financial assets renders it perpetually susceptible to external economic vulnerabilities.
Consider the case of a schoolteacher in Pune. In 2013, she adhered to the advice of financial advisers, government campaigns, and the mutual fund advertisements by investing Rs 10 lakh of diligently saved funds into a debt mutual fund. She maintained this investment for a decade. In 2023, she liquidated it for Rs 20 lakh, believing she had doubled her initial capital.
However, this was not the case.
Inflation over the 10-year period had eroded Rs 5.82 lakh of the apparent gain. Her actual profit—the amount by which her wealth had genuinely increased—was Rs 4.18 lakh. Under the legal framework in place at the time of her investment, she would have been liable to pay tax on this real gain, amounting to Rs 83,636.
However, the Finance Act 2023, which eliminated the indexation benefit that protected investors from taxation on inflation, required her to pay a tax of 30 per cent on the entire nominal gain of Rs 10 lakh, totalling Rs 3 lakh. The discrepancy, Rs 2,16,364, is not a tax on profit, but rather a tax on the inevitable rise in prices during the investment period.
This situation is not an isolated instance of injustice; it rather represents the culmination of a 20-year policy trajectory in which each successive budget identified new aspects of the investor’s financial ladder to tax, with the ratchet mechanism operating unidirectionally.
How this is calculated — using the government’s own Cost Inflation Index (CII), notified by CBDT:
Investment: Rs 10 lakh in FY 2013-14 | Sale: Rs 20 lakh in FY 2023-24 | Nominal gain: Rs 10 lakh
CII in FY 2013-14 = 220 | CII in FY 2023-24 = 348 | Inflation-adjusted cost = Rs 10 lakh x (348/220) = Rs 15.82 lakh
Real gain after indexation = Rs 20 lakh – Rs 15,82 lakh = Rs 4.18 lakh | Tax OLD (20% with indexation) = Rs 83,636
Tax NEW (30% slab rate, no indexation) = Rs 3 lakh | Extra tax on inflation = Rs 2,16,364
How every budget found a new rate to raise
Prior to 2004, long-term capital gains on listed equities were exempt from taxation. The government’s message to the middle class was unequivocal: embrace risk, invest in enterprises, and engage in India’s economic growth. In 2004, the Securities Transaction Tax (STT) was........