Market movers: Explaining the surge in Indians declaring capital gains

Income Tax data shows how new investors are making money and how much

American Jesse Livermore, considered one of the great stock market traders of the last century, often made money even when everyone around him was going bankrupt. When the market crashed in October 1929, he reportedly went home to tell his wife that he had made more money than ever before.

India’s count of aspiring Livermores may be swelling. The number of people reporting short-term capital gains in Income Tax data has more than doubled since the pandemic to 3.1 million in assessment year 2021-22. This may be what prompted the government to talk about tax reforms on capital gains. A report earlier in October said changes to the capital gains tax regime are part of discussions ahead of the Budget in February. Less than 0.5 million Income Tax filers recorded short-term capital gains in 2012-13. The average short-term gain has increased from Rs 5,500 in assessment year 2012-13 to Rs 23,000 in 2021-22, the latest available yearly tax data, as seen in chart 1 (click image for interactive link).

 

To be sure capital gains in the Income Tax data reflects not just stock market gains, but also those from other assets like gold and property. The numbers of those reporting capital gains is not reflective only of those active in the stock market but can be considered broadly indicative of the trend.

The number of entities recording long-term gains has increased to just under 2 million in 2021-22. It was less than 0.5 million before the pandemic. The average made by those reporting long-term gains was less than Rs 25,000 in 2018-19. It was over Rs 52,000 in the latest year (chart 2).

The money does not mean that the average investor makes such large amounts. Most investors do not seem to make any money at all. The total number of investors recording short-term and long-term capital gains has ranged between 2 million and 3 million. It is a fraction of the 18.9 million active investors in the market in Financial Year 2020-21, broadly corresponding to the assessment year 2021-22 in Income Tax records.

There are more than 55 million investor accounts, including active and dormant. Less than a tenth of this number have declared short-term or long-term gains (chart 3).

An earlier Securities and Exchange Board of India study showed that around 90 per cent of people lose money in the stock market. Even the most celebrated traders lose money.

Livermore lost the fortune he made from what might have been his greatest trade in just a few years. He died broke at age 63.