Tax, policy changes make Indian equities attractive, likely to sustain inflows: JP Morgan

Indian capital markets are poised for sustained inflows, driven by favorable government policies and tax reforms that enhance the attractiveness of equities, according to a JP Morgan equity research report. The report highlights that changes in taxation, such as a 12.5% long-term capital gains tax on equities and the removal of indexation for debt funds, improve the relative appeal of stocks.

These structural policy shifts, combined with increasing participation through Systematic Investment Plans (SIPs), are expected to bolster equity markets. Despite subdued market returns and significant selling by foreign portfolio investors in recent fiscal years, domestic investors have consistently channeled funds into mutual funds via SIPs. This trend signifies a long-term shift in household savings toward financial assets.

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Policy and tax are also supportive: equity is taxed at 12.5% LTCG, and the removal of indexation, taxation of insurance policy proceeds, and slab-rate taxation for debt mutual funds improves equity's relative appeal.

JP Morgan noted that SIPs have become the primary source of equity fund inflows, helping to buffer domestic markets against external volatility. The favorable policy environment has reinforced this trend by making equity investments more appealing compared to debt-oriented products and certain insurance investments. The global investment bank anticipates that India's capital markets will continue to benefit from the ongoing financialization of household savings, supported by policy measures and steady retail participation.

However, the report cautioned that this positive outlook could falter if monthly SIP inflows drop below 250 billion rupees for an extended period or if regulatory changes significantly reduce derivatives trading volumes by over 20 percent.

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The inflows should continue due to tax and policy.