Tax ‘revdi’ or tax reform? It varies depending on who you ask.

livemint.com:

₹1 lakh and earned a return of 10%, resulting in a maturity amount of ₹1.1 lakh. If inflation averaged 5% per year, then the cost price for the investor could be claimed at more than ₹1.1 lakh. Hence, for tax purposes, the investor would actually make a capital loss, implying that no tax had to be paid on real capital gains.

The irony of this device was that even though the maturity period was just over one year, for tax purposes, inflation for two years could be taken into account. The MFs raised thousands of crores every year through this dodge. Let’s take one more example.

For many years, interest of up to ₹1.5 lakh a year paid on a home loan on a self-occupied home could be deducted while calculating taxable income. But the moment one took on a second, third or nth home loan, the entire interest paid on that home loan could be deducted while calculating taxable income, as long as a notional rent was taken into account. This became a great tax dodge for the rich because the annual rental yield in the country was around 2%, whereas interest rates were 9-10%.

Thankfully, both these tax dodges are no longer possible, but while they were on, one did not hear of a single OPM wallah talk about them, or of corporate lobbies complaining about how one of these dodges encouraged real estate speculation, making things doubly difficult for those who wanted to buy homes to live in. Indeed, when the favourable tax treatment of debt MFs was done away with, there was a hue and cry from those who benefitted from it. A similar outcry arose after long-term capital gains on equity and equity MFs became taxable.