Union Budget: In a surprise move, Finance Minister Nirmala Sitharaman on Tuesday hiked the long-term capital gains tax (LTCG) on all financial and non-financial to 12.5 percent from 10 percent, while short-term capital gains tax (STCG) on some assets would be 20 percent.
The exemption limit for long-term capital gains tax has been increased to Rs 1.25 lakh from Rs 1 lakh. Additionally, the budget declared that listed financial assets held for more than a year will now be classified as long-term assets.
"Short-term gains on certain financial assets shall henceforth attract a tax rate of 20 percent, while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate," Finance Minister Nirmala Sitharaman said during her Budget speech on July 23.
Long-term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 percent. Further, for the benefit of the lower and middle-income classes, the finance minister proposed to increase the limit of exemption of capital gains on certain financial assets to Rs 1.25 lakh per year.
Equity shares or units of equity funds that have been held for more than 1 year are currently subjected to a capital gains tax rate of 10% if the Long Term Capital Gains (LTCG) exceed Rs 1 lakh in a financial year.
Reacting to the tweaks in capital gains tax regime, Adhil Shetty of Bankbazaar.com, said: "We can expect short-term market volatility following the recent tax rate changes, as such adjustments likely to affect investor sentiment. In her speech, the Finance Minister announced that long-term capital gains on all financial and non-financial assets will now be taxed at 12.5%. Additionally, the exemption limit for capital gains will be set at Rs 1.25 lakh per year. The Securities Transaction Tax (STT) on Futures and Options has also been increased: the STT on futures will rise from 0.0125% to 0.02%, and the STT on options will increase from 0.0625% to 0.10%. These changes are likely to impact investor behaviour and market dynamics. The increase in long-term capital gains tax might prompt some investors to reassess their investment strategies, particularly in assets that were previously more tax efficient. The hike in STT on Futures and Options could lead to a decline in trading volumes in these segments, as the higher transaction costs might deter frequent trading. Overall, while these measures aim to boost government revenues, they could introduce a period of adjustment and uncertainty in the markets."
"As regards capital gains, while there are measures which would result in simplification, there is an increase in the tax rate for short-term gains on certain financial assets which shall henceforth attract a tax rate of 20 per cent (earlier 15%), while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate. Long term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 per cent. Listed financial assets held for more than a year will be classified as long-term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term. Unlisted bonds and debentures, debt mutual funds and market linked debentures, irrespective of holding period, however, will attract tax on capital gains at applicable rates," said CA (Dr.) Suresh Surana.
Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited, said: "With the marginal increase in LTCG from 10% to 12.5%, long-term investors might be paying slightly higher taxes. However, with the exemption limit raised to Rs 1.25 lakh, small investors will see modest benefits. The increase of STCG from 15% to 20% will impact short-term equity investors. Although the tax rates are marginally increased, equity mutual funds remain an attractive investment opportunity compared to other asset classes. Therefore, we do not anticipate that the change in tax rates will significantly affect the flows towards equity mutual funds."
Following the announcement, BSE Sensex and Nifty50 crashed within an hour. In the stock market, the 30-share pack Sensex experienced a significant decline of 1,542 points from the day's high, falling to the level of 79224.32. Similarly, the Nifty50 index also witnessed a substantial drop of more than 435 points from its peak, reaching 24,074.20 within the session. Nevertheless, there was a notable rebound in both indices thereafter. Furthermore, in the broader markets, the BSE midcap and BSE smallcap indices each recorded a decline of up to one per cent.
"On the macro side, the budget's approach of fiscal glidepath along with continual investment in infrastructure as well as some reduction in taxes for consumers is welcome. These announcements have been overshadowed by changes made in terms of capital gains taxes. This certainly increases the hurdle rate for investors in financial assets, and hence there is a sentimental negative. Markets had gone up in the run-up to the event over the last few months, and hence, could result in some cooling off in financial markets before the focus moves back to corporate earnings, and the strength of Indian economy," said Harish Krishnan, Co-Chief Investment Officer & Head Equity, Aditya Birla Sun Life AMC Ltd.
Sandeep Chilana, Managing Partner, CCLaw, said, “The FM has proposed to increase the rate of tax on both short-term and long-term gains for certain financial assets. In the past few years, substantial investments have been made by retail investors in financial markets. Change in the rates of tax will likely have a 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.”
CA Pitam Goel, Co Founder - Tattvam Groupm said: "Increase in STT rates for Derivatives to 0.1% and futures to 0.02% may not go well with investors. Further, increase in capital gains for listed equity instruments to 12.5% will leave investors dejected. Proposing to tax buy-back proceeds as dividend may also pose challenges as buy-back route is opted not only for profit distribution but also for internal re-structuring."
Shravan Shetty, Managing Director at Primus Partners, said: “The increase in long term capital gain will have a negative while the intent to reduce the euphoria in the market is right. But we believe increasing the long term capital gain by 25% to 12.5% will lead to investments move towards unproductive assets like gold and real estate. For a growing economy like India increasing penetration of capital markets is critical and this measure will reduce the acceleration seen in this direction over last few years.”