In today’s digitized, affluent and ever-changing world, we all can invest in mutual funds, ETFs, stocks, bonds, startups, global markets, digital gold, REITs, InvITs, AIFs, crypto assets, and even fractional real estate and that too with a single click. Wealth can now be created across platforms, products, geographies and ecosystems.
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In times like these, the key question that arises is : Have our tax and regulatory systems evolved at the same pace as wealth creation itself?
1. Wealth Creation in Modern world: Multiple choices create more complexity
Modern investors are not just traditional savers, but they are now portfolio managers, without even realizing it. SIPs run seamlessly, wealth management applications rebalance portfolios and global investing is just a click away. With choice comes complexity. For instance, tax treatment of different products is different and sometimes even complex, holding periods change earnings capacity dramatically, compliance requirements have intensified, awareness of risk appetite is unequal.
Wealth creation today is more about choosing intelligently from the abundance of investment opportunities. As India aspires to attract long term investments, sustained capital inflows and global wealth, the challenge for regulators and policymakers is to make sure that policies, rules & regulations enable such investments. Yet, while markets, investment avenues, technological development and investors are evolving rapidly, the tax and regulatory reforms governing wealth creation have not kept the required pace. There is an evident gap between how wealth is created and how it is taxed & regulated.
The upcoming Union Budget 2026-27 can introduce newer provisions in the law to bridge this gap and enable effective wealth creation by rationalising tax treatment across asset classes, ensuring parity of tax rates across investors and introducing more avenues to incentivize savings. Simplified and investor oriented policies through the Budget can open up more opportunities for wealth creation and effective wealth creation in turn can drive entrepreneurship, capital inflows, and inclusive growth for India’s economy.
2. Tax and Regulatory Reforms: Enablers or Barriers?
Tax reforms have been a regular & consistent feature of Indian Government’s initiatives. Reforms like lower & rationalized tax rates for certain asset classes, simplified compliance through digitization, efficient reporting systems have improved transparency and encouraged more investments. But these operational reforms are not enough to achieve India’s aspirations to be a global investment hub. Some fundamental reforms are necessary to catch up with the pace of wealth creation ecosystem. Here are some examples of certain tax & regulatory barriers the investor community is facing:
i.Tax treatment of long term debt & alternative investments – In spite of playing a critical role in wealth preservation & stable income generation, long term debt investments have become unattractive to investors. This is due to recent changes in tax regulations that now tax debt investments at slab rates, often at maximum marginal rate of over 40%, which is way above tax rate applicable to income from equity investments. These kinds of regulations actually penalize long term, conservative investing and push investors towards high-risk equity exposure.
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ii.Tax treatment of structured products and market linked instruments – Theeconomic nature of structured products and market linked instruments is capital assets with returns linked to market performance with no assured fixed income. Yet income from such products is often taxed as interest income based on its legal form rather than substance. Such tax treatment discourages investments in innovative financial instruments and leads to uncertainty for investors due to prolonged litigation with tax authorities.
iii.Tax treatment of carried interest & performance linked compensation- Another point of friction has been in the lack of clarity on tax treatment of carried interest and performance linked compensation in the fund management & advisory ecosystem. In the absence of clear regulations, the interest carried is often taxed as ordinary income rather than capital gains, leading to higher outflow of tax for fund managers
iv. Fee cap on research analyst fees – The Securities and Exchange Board of India (SEBI) has put a cap on fees that research analysts (registered under research analysts’ regulations) can charge to their clients. Recently it was clarified that the annual fee cap of ₹1,51,000 per family is applicable to all individual and Hindu Undivided Family (HUF) clients, without exception. Such standardization of fees with a restrictive cap for a highly advisory and personalized service discourages highly talented fund managers to operate from India and makes it difficult to attract and retain talent in India. Many fund managers prefer to operate from overseas locations due to such restrictive regulations as compared to more flexible and aligned frameworks in other jurisdictions.
v. Individual vs corporate tax disparity – Most high-net-worth individuals in India are taxed at effective tax rates of up to 43%, which is way above the corporate tax rates of 22-25%. This disparity discourages wealth creation in India and restricts capital inflows. There is a clear need to incentivize individuals to invest more in India’s growing economy and that requires reasonable parity of tax rates applicable to all category of investors.
Different tax treatments for similar products create ambiguity & increased audits, frequent amendments in the law create uncertainty, long-term wealth is sometimes penalized due to short-term policy changes. Hence, wealth creation ecosystem in India needs a more enabling tax policy that rewards long-term investing, encourages diversification, enhances predictability and simplifies regulations and processes for common investors to understand.
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3. Impact of AI & technology on wealth creation ecosystem
Technology has been the greatest enabler of wealth creation in recent times and continues to be one of the most focused areas. AI-driven platforms have helped with various ancillary services in the financial services ecosystem that have made complex avenues of wealth creation look achievable. What was once accessible only to high-net-worth individuals through private bankers and portfolio managers is now available to all investors.
However, while AI platforms create wealth at great speed across countries, tax and regulatory systems have been very slow to adapt to such pace due to emphasis of regulators on physical presence, geographical rules, human intention etc. Also, there is a gap in misclassification of income by tax authorities from modern AI driven income streams like performance linked instruments or algorithmic trading income into traditional income categories, leading to uncertainty and litigation. The potential for wealth creation in India is infinite but only if regulation keeps pace with innovation & technological advancement.
Looking ahead
The financial sector has evolved rapidly and radically. Technology has transformed the wealth creation ecosystem. Investors have matured faster than ever before. The regulatory and tax framework has responded to an extent but now it needs deeper alignment and more agility to cope with real-world investing behavior and this can very well be one of the objectives of Budget 2026-27. As financial products and wealth creation ecosystems expand and as technology continues to reshape investing, tax and regulatory reforms must evolve from being gatekeepers to becoming growth partners. True wealth will be created when technology, policy, trust and wisdom come together to maximize the returns on all investments.
The author is Head of Tax, KPMG in India and Lata Daswani, Partner, BFSI Tax, KPMG in India