Current Affairs: Passage of the Day - 05 March 2025 | Current Affairs & General Knowledge - CLAT PDF Download

Directions: Read the passage carefully and answer the questions that follow.
India’s decision to impose capital gains tax on foreign investors has sparked intense debate, with market veteran Samir Arora calling it the government’s “biggest mistake”. Arora, founder and chief investment officer of Helios Capital, voiced his concerns at the Business Standard Manthan Summit 2025, arguing that the tax policy is discouraging foreign institutional investors (FIIs) and driving them away from Indian markets.
But why is it causing investor concerns? To grasp the issue, it’s important to understand what capital gains tax is and how it works.
What is capital gains tax?
When individuals or entities sell certain capital assets – such as stocks, mutual funds, property, gold, or other investments – they make a capital gain (profit) on the sale. If these assets were held for over a year, the profit is classified as a long-term capital gain and is taxed accordingly.
What are the types of capital gains tax?
Capital gains tax is categorised into short-term capital gains (STCG) and long-term capital gains (LTCG), depending on the holding period of the asset.
Short-term capital gains (STCG): This tax applies when an asset is sold within a short duration after purchase. It is generally taxed at a higher rate.
Long-term capital gains (LTCG): This tax applies when an asset is held for an extended period before being sold. It is typically taxed at a lower rate to encourage long-term investment.
What is the STCG in India?
STCG apply when assets like stocks, mutual funds, real estate, or other capital assets are sold within a short holding period — typically less than one year for equities and less than two years for real estate.
In India, STCG on equity-oriented investments (where Securities Transaction Tax is paid) is taxed at 15 per cent, while STCG from other assets is taxed as per the investor’s income tax slab rate.
How to calculate STCG?
Short-term capital gains (STCG) are calculated by subtracting the cost of acquisition, cost of improvement (if any), and any expenses related to the sale from the selling price of the asset. The formula is:
STCG = Sale Price – (Purchase Price + Improvement Cost + Transfer Expenses)
What is the LTCG in India?
In India, LTCG on stocks and equity-oriented mutual funds is taxed at 12.5 per cent (plus surcharge and cess) for profits exceeding Rs 1.25 lakh per year. However, LTCG was not applicable on equity until 2018 for gains up to Rs 1 lakh.
The Union Budget 2024-25 introduced a major shift in capital gains taxation, increasing the LTCG tax rate to 12.5 per cent from 10 per cent and eliminating the indexation benefit that previously allowed investors to adjust the purchase price of assets for inflation.
Last year’s Budget also called for equal tax treatment for foreign and domestic investors. There are no changes to the taxation of long-term capital gains (LTCG) derived from residential property in the new Income Tax Bill 2025.
How to calculate LTCG?
The taxable amount under LTCG is determined by subtracting the cost of acquisition from the sale price, and in the case of property or other high-value assets, certain transaction costs like brokerage or legal fees can be deducted before applying the tax.
Why are investors worried?
The elimination of indexation benefits has been particularly controversial. Previously, indexation allowed taxpayers to adjust the purchase price of an asset for inflation, effectively reducing taxable gains. By removing this benefit, the new tax structure could increase the tax burden on investors, especially those selling property, gold, and unlisted assets.
Foreign investors, in particular, have been hit hard by these changes. Speaking at the Business Standard annual summit Arora of Helios Capital argued that sovereign wealth funds, pension funds, and high-net-worth individuals (HNIs) – which form a significant portion of foreign investment – are now disincentivised from investing in India.
“The biggest mistake they (the government) have made, the biggest souring of sentiment, and reality which they have to accept is capital gains tax in India, particularly the foreign investors, is 100 per cent wrong,” Arora said. “The largest investors in the world and in India are foreign sovereign funds, pension funds, universities, and the HNIs. Taxing them on their gains, especially when they have no tax set-off available in their home country and when they face forex-related risks, is a big mistake that the government is making.”
How has this impacted the Indian market?
Since October 2024, foreign investors have pulled out over Rs 2 trillion from Indian equities, according to a report by The Times of India. Several factors have contributed to this trend such as:
>Higher capital gains tax rates making Indian investments less appealing.
>Weak corporate earnings growth reducing investor confidence.
>The falling rupee, which erodes returns when converted back to foreign currencies.
>Stronger US markets, where higher bond yields and lower tax burdens offer better returns.
Arora had also mentioned that the Indian government had earned $10-11 billion dollars as capital gains tax in 2022-23 (FY23).
How does India’s capital gains tax compare to other countries?
Australia: Currently 50 per cent of capital gains are taxable if an asset is held for more than 12 months, taxed at regular personal income tax rates.
Canada: Currently 50 per cent of capital gains are taxable, rising to two-thirds for gains exceeding CAD 2,50,000 from 24 June 2024.
China: No tax on capital gains from shares listed on Chinese stock exchanges. However, a 20 per cent flat tax applies to other capital asset transfers, including securities and real estate.
Germany: 25 per cent tax, plus a 5.5 per cent solidarity surcharge and 8-9 per cent church tax, depending on the federal state.
United Arab Emirates: No capital gains tax.
United Kingdom: Capital gains are taxed at rates of up to 20 per cent (excluding property), up to 24 per cent on residential property, and up to 28 per cent on carried interest gains. The UK also provides an annual tax-free exemption of GBP 3,000.
United States: A progressive LTCG tax system, with rates of 0 per cent, 15 per cent, and 20 per cent, depending on taxable income and filing status. A 3.8 per cent Net Investment Income Tax (NIIT) applies to high-income earners.
​[Excerpt from Business Standard "India’s Capital Gains Tax" Dated 05/03/25]

Q1: What is the primary concern regarding India's capital gains tax on foreign investors?
(a) It reduces the government’s tax revenue
(b) It may discourage foreign institutional investors (FIIs)
(c) It lowers interest rates in India
(d) It increases inflation in global markets

View Answer  

Ans: (b) It may discourage foreign institutional investors (FIIs)
Sol: The capital gains tax on foreign investors is seen as a deterrent, possibly leading to lower foreign investment in Indian markets.

Q2: Which of the following is classified as a capital asset?
(a) Fixed deposits
(b) Stocks
(c) Bank savings accounts
(d) Monthly salaries

View Answer  

Ans: (b) Stocks
Sol: Capital assets include stocks, mutual funds, real estate, and gold, which can generate capital gains when sold.

Q3: What is the tax rate on short-term capital gains (STCG) from equity investments in India?
(a) 10%
(b) 12%
(c) 15%
(d) 20%

View Answer  

Ans: (c) 15%
Sol: STCG on equities (stocks and equity-oriented mutual funds) is taxed at 15% when sold within one year.

Q4: How is short-term capital gains (STCG) calculated?
(a) Sale Price – (Purchase Price + Improvement Costs + Transfer Expenses)
(b) Sale Price × Tax Rate
(c) Net Income – Business Expenses
(d) Interest Earned + Dividends

View Answer  

Ans: (a) Sale Price – (Purchase Price + Improvement Costs + Transfer Expenses)
Sol: STCG is calculated by subtracting the purchase price, improvement costs, and transfer expenses from the sale price.

Q5: What is the tax rate for long-term capital gains (LTCG) on stocks and equity-oriented mutual funds in India?
(a) 10%
(b) 12.5%
(c) 15%
(d) 20%

View Answer  

Ans: (b) 12.5%
Sol: The Union Budget 2024-25 revised the LTCG tax rate on stocks and equity mutual funds to 12.5% for profits exceeding ₹1.25 lakh per year.