India’s growth shows no signs of abating, with the International Monetary Fund (IMF) predicting its economy will become the third-largest in the world by 2027.
The Indian stockmarket has gone from strength to strength over the past few years and has challenged China’s traditional dominance in emerging market portfolio exposure. However, foreign investors may not know that a percentage of their returns are subject to Indian capital gains tax.
Typically, mutual funds adhere to the tax rules in the area they’re domiciled in. Most investors in listed equities and bonds in India, including foreign investors, are subject to long-term and short-term capital gains tax. This was first introduced in 2016 after the Bharatiya Janata Party (BJP) came to power, brought in by then-minister of finance and corporate affairs Arun Jaitley.
Rates were set at 15% for long-term capital gains, defined as securities held for over a year, and 20% for short-term capital gains.
Local capital gains tax was further hiked following the general election earlier this year, with 12.5% taken on long-term gains and 20% for short-term.
This presents an issue for mutual funds – how do funds handle, report and accrue the added tax, and can it lead to disadvantages for investors?
Gaurav Narain, adviser to the India Capital Growth fund, says local capital gains tax rules have three main impacts on fund houses. First, the net asset value (NAV) does not reflect absolute performance, he explains, as funds are required to make a full provision for realised and unrealised capital gains tax while computing the NAV.
“Second, for foreign investors, there are many countries that do not levy a capital gains tax. This would put India at a disadvantage when it comes to allocation of funds as it impacts relative returns.
“Third, more operational and tax advisory resource may be required to compute a daily NAV that accurately provides for Indian capital gains tax.”
“No market in the world taxes foreigners going into their market,” says Chikara Investments portfolio manager Andrew Draycott.
“Normally, you pay your own tax when you bring that money home on your own capital gains. That’s why in the UK, for example, we have ISAs and Sipps, and we wrap everything up.
“But the common denominator is that the majority of countries want you to have capital deployed to their markets and the competition for capital is obviously intense, because most people want to enjoy all the benefits of foreign money coming into the market.
Read the rest of this article in the November issue of Portfolio Adviser magazine
