Indian benchmark indices- BSE Sensex and Nifty50- crashed sharply in a knee jerk reaction after Union Finance Minister Nirmala Sitharaman tabled the first budget for the Modi 3.0 government. Prima facie, the steep selling pressure at Dalal Street indicated that the market participants gave its thumbs down.
The 30-share pack Sensex cracked 1,542 points from days high to slip to 79224.32 mark, while the NIfty50 index tanked more than 435 points from day's high to 24,074.20 during the session. However, both indices made a decent recovery. In the broader markets, BSE midcap and BSE smallcap indices, tumbled up to a per cent each.
Here are the key announcements by the Finance Minister that soured the moods of the markets:
Long Term Capital Gain Tax: The finance minister, while presenting the union budget, increased the long term capital gain (LTCG) tax on securities from the current 1 per cent to 12.5 per cent. However, a minor respite for the long term investor is given where the exemption limit has been raised to Rs 1.25 lakh from Rs 1 lakh.
Short Term Capital Gain: In a massive blow to the markets, Sitharaman announced to increase short term capital gains to 20 per cent, which is currently charged at 15 per cent. Capital gains tax in India is based on the holding period and asset type.
STT on F&O Trades: Finance Minister hiked securities transaction tax (STT) on futures and options of securities, which is proposed to be increased to 0.02 per cent and 0.01 per cent.
Buyback taxation: In her budget speech, the finance minister also proposed to tax income received on buyback of shares in the hands of recipients.
No disinvestment target: The FM did not provide any target for disinvestment for the current financial year, which was also disliked by the markets. Disinvestment candidates like Mazagon Dock Shipbuilders, GRSE, IDBI Bank, Rashtriya Chemicals and more tumbled up to 8 per cent.
No relief for the Income Tax: The government did not announce any major relief in the personal income tax, barring increased the minimum threshold in the new tax regime to Rs 3 lakh (from Rs 2.5 lakh earlier) and increasing the standard deduction to Rs 75,000 (from Rs 50,000). The move discourages financial savings.
Selling in railways, defence, banking stocks: Selling pressure in recent multibagger sectors like defence, railway and PSU counters crashed sharply as no major announcement was made for these sectors during the budget. Hindustan Aeronautics, RNVL, Ircon, IRFC, Raitel, BEL, Bharat Dynamics, Uco Bank, Indian Overseas Bank and more tanked up 6% per cent on Tuesday.
Governments wants a bigger share in the current bull run pie, said the market participants. The market regulators like RBI, Sebi have recently expressed their discomfort with the household savings money moving in to mutual funds or speculative assets like derivatives, said Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities.
"FM’s action clearly indicates that the government wants a bigger share in the pie that the investors have been enjoying. With this move it has aimed to raise some revenue for itself and moderately deflate the bubble in stock market. We believe that this will have a sentimentally negative impact on the markets for the short to medium term," he said.
The 2024 budget presents a mix of expected and surprising measures, asid Santosh Meena, Head of Research, Swastika Investmart. "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.
The recent changes in the union budget, particularly the increase in STCG and LTCG tax signal a significant shift. While the market's initial reaction may seem bearish, we believe these changes will ultimately foster a more stable and mature investment environment, said Vaibhav Porwal, Co-founder, Dezerv on the rise in capital gains tax.
"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.
The 2024 Budget has increased the short-term capital gains and the long-term capital gains (LTCG) tax. This has caused some market instability as investors react to the higher taxes, said Kirang gandhi, a Personal Financial Mentor.
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," he adds.