Finance Minister Nirmala Sitharaman has announced changes in capital gains taxes during her Budget presentation on Tuesday. While the market sentiment is negative, Industry experts believe that this will bring about better investor behaviour since investors will want to switch to long-term to avail a lower rate and this will also stop the excess trading activities that has been happening.
Dhiraj Relli, MD & CEO at HDFC Securities believes that the increase in STCG and LTCG rates is sentimentally negative but for a limited period.
“The overall increase in tax collections due to this measure may not be more than Rs.10000 cr in a full year. Investors are more concerned about possibilities to make money or gains rather than get too bothered by a 250 or 500 bps increase in tax rate from a low base,” he said.
He added that as of now, the Indian market offers opportunities to make money and hence this move may not dissuade investors.
However, he further stated that as the difference in the rates has risen to 750 bps from the earlier 500 bps, investors may, if all things stay as it is, want to hold on to their investments for a longer period to avail of the lower rate, displaying better investor behavior.
“Also, the hike in the exemption limit from Rs.1 lakh to Rs.1.25 lakhs for LTCG is welcome and may offset to some extent the higher incidence of tax due to higher rates,” the industry veteran added.
A hike has been announced in the limit capital gains exemption limit to Rs 1.25 lakh per year.
The short term capital gains (STCG) tax on some financial assets has been increased from 15 per cent to 20 per cent while the long term capital gains (LTCG) tax will rise from 10 per cent to 12.5 per cent.
Halt Excess Trading Activities
Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services Ltd believes that the hike in STCG tax will pause excess trading activities that was seen in recent years.
“The surprise came after the government proposed an increase in long-term and short-term tax, along with an increase in STT in FNO. This rise in short-term capital gains tax from 15 per cent to 20 per cent will thus discourage excess trading activities,” he said.
However, he further said that the hike in Long-term capital gain taxes from 10 per cent to 12.5 per cent is sentimentally negative for the market in the near term.
Short Term challenges for Markets
The Union Budget poses short-term challenges for the markets. The increase in capital gains tax rates and the rise in STT are immediate concerns. Additionally, the removal of indexation benefits on LTCG for real estate is disappointing and affects long-term returns, highlighted a latest report by Axis Securities.
Both LTCG for equity investments and real estate are now set at 12.5%, establishing parity between these two major asset classes. Currently, the bond market remains stable, and the government’s commitment to fiscal prudence is expected to positively influence the bond market moving forward, it added.
Some benchmark indices exhibited initial nervousness due to unexpected changes in the LTCG structure, which the market had not anticipated.
However, the report highlighted that this market reaction is likely to be short-lived. The markets are expected to realign with fundamentals and macroeconomic trends, drawing insights from the ongoing earnings season in the coming weeks.
