Budget 2019: How change in LTCG tax rate may affect the market

Finance minister Nirmala Sitharaman will present her first Union Budget on July 5. Market participants are concerned over the possibility of a hike in the long term capital gains (LTCG) tax  to increase revenue of the government.  

Increase in LTCG tax is expected to reduce gains in the benchmark  indices Sensex and Nifty this year. While Sensex has gained 9.55% since the beginning of this year, Nifty is not far behind logging 8.77% rise during the same period.

VK Sharma, Head - PCG & Capital Market Strategy at HDFC Securities said, "The government should not think of increasing the LTCG from 10% to a higher amount as it will spoil atmosphere without any collection of tax as the gains have been grand fathered. "

Amit Gupta, co-Founder and CEO at TradingBells said, "If Finance Ministry decides to raise tax rates on long-term capital gains (LTCG) once again this time, this could create a negative sentiment among the investor community and may impact the markets negatively."

VK Vijayakumar, chief investment strategist, Geojit  said, "The government is facing serious fiscal constraints. Also, it is expected to revive growth in the economy through stimulus. Therefore, it would be unrealistic to expect major reliefs like favourable treatment of STT and LTCG. The market would be relieved if there are no additional imposts. The FM is unlikely to introduce measures that will negatively impact the market since market buoyancy is absolutely necessary to reach the disinvestment targets which are likely to be very high."

Long term capital gains (LTCG) tax was imposed at 10% rate on profit above Rs 1 lakh by the Modi government in Union Budget last year.  The shares should have been held for more than one year. Investors in equity-oriented mutual funds were also included in the LTCG tax net. However, all gains up to 31 January, 2018 were grandfathered. This tax was re-introduced after a gap of 14 years.

After the announcement, the government said that currently the amount of income earned from the stock markets that is exempted from this tax works out to a whopping Rs 3.76 lakh crore which would translate into a tax collection to the tune of Rs 37,000 crore going ahead.

Edited by Aseem Thapliyal