Why is India's tax structure concerning for the economy?

The tax structure strongly favors equity investments over fixed-income options, leading investors to take on excessive risk for higher post-tax returns and impacting bank deposit growth, which is crucial for lending to businesses.

What changes are experts recommending for Budget 2026 regarding taxes?

Experts are calling for a rethinking of India's capital gains tax structure, advocating for uniform and low taxes across asset classes to ensure investment decisions are based on risk appetite rather than tax considerations.

How does the tax imbalance affect MSMEs and economic growth?

The shift of funds from bank deposits to equities weakens banks' ability to lend, potentially impacting credit availability for MSMEs, which heavily rely on bank loans, thereby hindering production and economic growth.

Home / Business and Economy / RBI Ex-Director Warns: Tax Policy Risks Economy

RBI Ex-Director Warns: Tax Policy Risks Economy

27 Jan

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Summary

Tax rules favor equities, pushing investors toward higher risk.
Deposit growth is weak, impacting bank lending to businesses.
Budget 2026 may see rethinking of capital gains tax structure.

RBI Ex-Director Warns: Tax Policy Risks Economy

Experts are urging the government to reconsider India's capital gains tax structure ahead of Budget 2026, warning that current policies create significant macroeconomic risks. The existing tax framework provides substantial advantages to equity investments compared to fixed-income instruments, encouraging a flow of funds away from bank deposits and bonds. This trend is particularly concerning as banks, traditionally the primary lenders to lower-rated borrowers and MSMEs, face challenges in mobilizing deposits.

G Mahalingam, formerly of the RBI and SEBI, highlighted that while tax incentives for equity align with encouraging savings in financial markets, equity's inherent risk far outweighs that of deposits and bonds. The wide disparity in taxation, with long-term equity gains taxed at 12.5% and interest income at higher slab rates, incentivizes excessive risk-taking purely for post-tax returns.