A major spin-off a significantly lower rate of tax on income hinted at by the finance minister would be the possibility to reorganise the taxation of savings and capital gains on a rational basis. That basis is to treat as current income liable to bear tax at the rate appropriate for the relevant income bracket that part of any capital gain, after indexation in the case of non-financial assets, which does not get redeployed in new assets. Such a method of taxation would not penalise portfolio churning across assets, essential for intelligent savings. Such a reform was proposed in the original Direct Taxes Code of 2009, which had sought to scrap the distinction between longterm and short-term capital gains on shares based on the holding period, scrap the securities transaction tax, and include only that slice of capital gains which is not deployed in any other capital asset, as part of taxable income.

Indexation benefits, meant mainly to compute capital gains, are fine. Simply put, there would be no tax on the gains, say, from the sale of a house if the money is reinvested in shares and vice versa. The basic principle — to spare the saving asset from tax and charge a tax only on the income from the asset — is perfect and will make savings efficient. The government should adopt the so-called exempt-exempt-tax system wherein all savings will be exempt from taxation at the time of contribution and accumulation, and taxed at maturity, if not ploughed into another asset.
investment-BCCL

For example, the income-tax law allows investors who make capital gains to invest in NHAI and REC bonds. The entire gain is exempt if the equivalent amount is invested in these bonds, subject to an upper limit of .`50 lakh every financial year. This principle is sound. The EET method is beneficial to investors, given that it does away with artificial distortions, and raises efficiency and equity in the tax system. It would also help the government garner more revenues. But for this to work, the rate of tax has to be low. Taxation should be uniform across savings products, to prevent inefficient distortions that could lead to say, housing bubbles.