Budget 2024: How will the rise in capital gains taxes impact market in long term?

Budget 2024: In a shock to investors, Finance Minister Nirmala Sitharaman, in her presentation of the Union Budget for FY 2024-25, announced several key tax changes impacting capital gains and trading activities.

FM announced that the long-term capital gains tax rate on all financial and non-financial assets will rise from 10% to 12.5%, with an exemption limit set at ₹1.25 lakh per year. Short-term gains from certain financial assets will see a tax increase from 15% to 20%. Additionally, the Securities Transaction Tax (STT) rate will double from 0.01% to 0.02%, significantly impacting equity and index traders involved in Futures and Options (F&O) transactions. This increase will effectively double the tax burden for equity and index traders involved in F&O transactions.

The equity benchmark indices experienced a significant drop as these tax hikes were announced, but the initial negative sentiment is expected to subside in a few days. Despite the immediate market reaction, some experts believe these measures may have long-term benefits for the capital markets.

Here's what they said:

Shlok Srivastav, Cofounder & COO, Appreciate:

In all fairness, markets and the business ecosystem were anticipating some bid at rationalisation of the long term and short-term capital gains tax rates. The drastic revision of STCG from 15% to 20% makes sense given that there have been renewed murmurs vis-a-vis the overheating of the derivatives market. The recent statement by the market regulator that the growth in trading volume has now leapfrogged to a macro level concern from being a micro-one was a big hint that the government was actively looking to temper and moderate the action in the derivatives segment.

Having said that, one must tip their hat to the government for killing two birds with one stone with the revision in LTCG. For serious long-term investors, the increase from 10% to 12.5% would hardly make a dent in the larger accounting of gains. At the same time, it will nudge investors into entering Indian markets with a reasonably long-term outlook and encourage them to step up as actual stakeholders in the Indian growth story. Sure, the LTCG hike would be a market sentiment dampener for some time but as we know from hindsight, capital market players are going to take this move into stride and move on.

Shripal Shah, MD & CEO, Kotak Securities:

This Union Budget sets a clear vision for India's economic future, prioritising both growth and fiscal responsibility. The increase in the tax rate on long-term capital gains and short-term capital gains on equity, along with the increase in STT on futures and options, are aimed at moderating currently heightened activity levels and fostering a more sustainable pace of growth in the stock market. We anticipate a small period of adjustment as the market adapts to these new tax measures, but this will ultimately contribute to a sustainable investment landscape with balanced and orderly growth of the capital market.

Sarvjeet Singh Virk, Co-founder & MD, Shoonya by Finvasia

The Union Budget 2024 aims for a balance between investor benefits and long-term market stability. The rationalisation of the capital gains tax regime promises a simpler and more navigable landscape for investors, promoting greater participation. The increased exemption limit for long-term capital gains on listed securities is a boon for smaller players, encouraging them to invest and contribute to market growth.

Additionally, the revised tax slabs in the new tax regime hold the potential to incentivise salaried individuals towards equity investments, broadening the investor base. The reduced corporate tax rate for foreign companies is a strategic move, creating a more attractive environment for foreign capital inflow, which can fuel market expansion and economic activity. While adjustments to short-term capital gains tax and Securities Transaction Tax (STT) might require adaptation, these changes can potentially encourage longer-term investment strategies, contributing to a more stable and mature market ecosystem.

Outlook for markets

Aman Soni, Head of Operations at Prudent Equity

The capital gain structure modifications are a direct blow. However, this does not change the overall stance for stock pickers in a vibrant market such as India. Due to more and more retail participation, new business will continue to enter the capital markets, the universe will widen and investors should focus towards identifying the right ones which suit their understanding, risk appetite and continue to remain invested.

Also, since everything is relative in stock markets, even after the rise in capital gain taxation, equities will continue to be the preferred asset class which shall continue to provide superior returns considering all aspects and considering the indexation benefit being removed from real estate transactions, it bodes well for equities overall as the preferred asset class for investors.

The Budget 2024 has introduced significant tax changes impacting capital gains and trading activities, leading to initial market volatility. However, experts believe these measures will promote a more sustainable and balanced investment landscape in the long term. While investors may need to adjust to the new tax regime, the Indian market's robust growth potential and increased retail participation are expected to drive continued interest in equities as a preferred asset class.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.