Benchmark indies Sensex and Nifty took a big hit after the Finance Minister Nirmala Sitharaman announced raising of long-term capital gains tax (LTCG) on all financial assets, including equity, to 12.5 per cent from 10 per cent at present while raising short term capital gains tax to 20 per cent from 15 per cent earlier. Add to that, the FM announced increase in Security Transaction Tax (STT) on F&O transactions to 0.02 per cent from 0.01 per cent. Sitharaman, meanwhile, increased the exemption limit of capital gains on financial assets to Rs 1.25 lakh from Rs 1 lakh earlier. Listed financial assets held for more than 1 year will be considered long-term, the FM said.
The STCG, LTCG and STT announcements spooked Dalal Street investors, as 2,971 stocks plunged into the red against 811 stocks that were holding up morning gains. Analysts were largely expecting the FM to stay status quo on the LTCG rate.
“In past few years, substantial investments have been made by retail investors in financial markets. Change in rates of tax will likely have significant impact on the sentiment of retail investors with respect to consistency in tax policy and doubt that even higher taxes may be imposed in future,” said Sandeep Chilana Managing Partner at CCLaw.
At present, STCG on equities are taxed at 15 per cent while long-term capital gains over Rs 1 lakh are taxed at 10 per cent. The government levies a 0.1 per cent STT on each equity sale or purchase transactions on stock exchanges. Short-term capital gains on all other assets are taxed as per an individual’s income tax slab, while long-term capital gains are taxed at 20 per cent with indexation benefit.
Following the development, Sensex fell 813.87 points or 1.01 per cent to 79,688.21. Nifty plunged 350.10 points or 1.43 per cent to 24,159.15.
"The 2024 Budget has increased the short-term capital gains (STCG) tax to 20% and the long-term capital gains (LTCG) tax to 12.5%. This has caused some market instability as investors react to the higher taxes. While the goal is to raise more revenue, these changes might discourage short-term trading and make long-term investments more attractive, potentially changing how the market behaves in the coming months," said Kirang Gandhi, Independent Financial Mentor.
The Economic Survey 2024 released on Monday suggested significant increase in retail investors and the rising trend of speculation in the stock market. It suggested that derivatives trading holds the potential for outsized gains and, therefore, caters to humans' gambling instincts.
Engineering and construction major Larsen & Toubro fell 3.68 per cent to Rs 3517.15. The capex target of FY25 has been set unchanged (Interim Budget) at Rs 11.1 lakh crore. No change in capex outlay is a major positive and shows the governments resolve to balance both the infrastructure development and populism of coalition politics, said Apurva Sheth of SAMCO Securities.
PSU stocks such as IRCON, HUDCO, NICAL, RCF, IRFC, NBCC, GIC RE, NALCO and MRPL fell 5-9 per cent.
(More to come)