Retail investors could hit hard, as the long-term capital gains tax (LTCG) on all financial assets, including equity, has been hiked to 12.5 per cent from 10 per cent with immediate effect. Small traders would get a bigger hit, as the short-term capital gains tax has been raised to 20 per cent (with immediate effect) from 15 per cent earlier. The Security Transaction Tax (STT) on futures has been upped to 0.02 per cent from 0.01 per cent while the STT on options has been increased to 0.1 per cent from 0.062 per cent. This will be effective from October 1. The only relief in the Budget 2024 was an increase in the exemption limit of capital gains to Rs 1.25 lakh from Rs 1 lakh earlier.
To recall, STT replaced the LTCG tax in 2004. The Budget 2018 brought back LTCG, but STT was not removed. Recently, the FM hinted at a crackdown on retail speculations in the F&O segment.
"If the idea was to cool down the activity in the market, this might just do the trick," Zerodha's Nithin Kamath said in a post of X.
Kamath said his company collected about Rs 1,500 crore of STT last year. "If the volumes don't drop, this will increase to about Rs 2500 crores at the new rates," he said. The change in LTCG and STCG taxes has been
Amar Ambani of YES Securities said barring the capital gains tax dampener for the investor community and removal of indexation benefit, the Union Budget was balanced and consistent in policy. Brushing aside concerns around more populism, the target set for the fiscal deficit at 4.9 per cent is a huge positive, he said,. This was among one of the reasons why the domestic indices recovered following a steep fall.
Vaibhav Porwal, Co-founder at Dezerv said the increase in STCG and LTCG taxes signal a significant shift. While the market's initial reaction may seem bearish, Porwal believes these changes will ultimately foster a more stable and mature investment environment.
"The widening gap between STCG and LTCG rates is a clear incentive for longer-term holdings, which aligns with our view of creating sustainable wealth. This move is also a step towards standardising taxation across various asset classes, potentially simplifying the investment decision-making process for many," he said.
Porwal said increased STT on F&O transactions will hit the profitability of frequent traders.
Sandeep Chilana Managing Partner said: “The FM has proposed increase in rate of tax on both short term and long term gains from certain financial assets. In past few years substantial investments have been made by the retail investors in financial markets. Change in rates of tax will likely have significant impact on the sentiments of retail investors with respect to consistency in tax policy and doubt that even higher taxes may be imposed in future."
Santosh Meena, Head of Research, Swastika Investmart said the Budget 2024 was a mix of expected and surprising measures. While capital expenditure and the fiscal deficit target remain steady, significant changes to tax policies, particularly the increases in LTCG, STCG, and STT, are likely to impact market sentiment, he said.
"Moving forward, the market's attention will likely shift to earnings reports and global cues," he said.
As per the Economic Survey 2024, retail investor's share in the equity cash segment turnover was at 35.9 per cent in FY24. The number of demat accounts with both depositories rose from 11.45 crore in FY23 to 15.14 crore in FY24. The impact of this influx of individual investors in the market is also reflected in new investor registrations with the exchanges, their share in total traded value, net investments, and ownership in the listed companies, the survey noted.
"We need to brace ourselves for a negative reaction in the short term. In the light of all the concerns raised about the hyper active interest in the F&O segment, it is not surprising that the STT on F&O has been raised 5 times from 0.02 per cent to 0.1 per cent. Hopefully this will moderate the frenzy in this space," Sanjay Sinha, Founder at Citrus Advisors.