Market Rebounds After SHOCKING 12.5% Capital Gains Tax Hike! (Experts Say It’s Not So Bad)

CONTENTS: Market Rebounds After SHOCKING 12.5% Capital Gains

The Indian stock market experienced a significant drop today, with the Sensex and Nifty 50 falling nearly 2 percent each. This decline followed Union Finance Minister Nirmala Sitharaman’s Budget 2024 announcement, which included a proposed increase in taxes on market gains. The Sensex fell approximately 1.6 percent, and the Nifty 50 dropped around 1.8 percent during intraday trading as investors reacted to the news that taxes on market gains might rise, contrary to expectations that they would remain unchanged.

In an effort to address excessive trading in the futures and options (F&O) market, Sitharaman announced an increase in the Securities Transaction Tax (STT) rates to 0.02 percent for futures and 0.1 percent for options. As a result, traders in equities and indices will face doubled tax rates on their transactions. Specifically, the STT on the sale of options will rise from 0.0625 percent to 0.1 percent of the option premium, and on the sale of futures, it will increase from 0.0125 percent to 0.02 percent of the trade price, according to her Budget 2024 speech.

The Finance Minister revealed that long-term capital gains (LTCG) on all types of financial and non-financial assets will now be taxed at 12.5 percent, up from the previous 10 percent rate. Additionally, short-term capital gains on specific financial assets will face a new tax rate of 20 percent, an increase from the earlier 15 percent. For other financial assets and all non-financial assets, the current tax rates will remain unchanged.

The Finance Minister announced that long-term capital gains (LTCG) on all financial and non-financial assets will now be taxed at 12.5 percent. To support lower and middle-income groups, the exemption limit for capital gains on certain financial assets has been raised to ₹1.25 lakh per year from ₹1 lakh. Initially, the market reacted sharply to the increased LTCG tax but later recovered, with the Sensex and Nifty 50 down by only half a percent around 1:10 pm.

Some experts believe that the impact of the LTCG tax hike is modest and unlikely to significantly affect market sentiment. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that while the LTCG tax rate has increased from 10 percent to 12.5 percent, it was not as high as the feared 15 or 20 percent. He also highlighted that the increase in the exemption limit is beneficial and praised the Budget overall.

Vijayakumar emphasized that the most positive aspect of the Budget was the management of the fiscal deficit. The government used a large portion of the RBI’s dividend to reduce the fiscal deficit to 4.9 percent of GDP. For 2024-25, total receipts (excluding borrowings) and total expenditure are estimated at ₹32.07 lakh crore and ₹48.21 lakh crore, respectively, with net tax receipts projected at ₹25.83 lakh crore.