The Indian stock market on Wednesday continued its upward trend for the second consecutive session, with both the Sensex and Nifty closing in the green. The Sensex gained 631.55 points, or 0.83 per cent, to settle at 76,532.96 after touching an intra-day high of 76,589.93. The Nifty surged 205.85 points, or 0.90 per cent, to close at 23,163.10. Earlier this week, stock market indices experienced a decline due to continuous foreign outflows, which negatively impacted investor confidence. The upcoming Union Budget 2025, coupled with a blend of quarterly earnings reports, has left investors feeling uneasy.
In light of the current fluctuations in the Indian stock markets, investors are uncertain about the best course of action. Some investors have expressed worries about the implications of the long-term capital gains (LTCG) tax and Short Term Capital Gains (STCG) tax on stocks as they are incurring heavy losses in the market. In Budget 2024, the long-term capital gains (LTCG) tax was raised from 10% to 12.5%, while the Short-Term Capital Gains (STCG) tax on specific assets saw an increase from 15% to 20%.
A X user said: “LTCG of 12.5% should only be paid if you actually manage to book a profit in this market.”
Another X user said:” All stocks in my Portfolio are going down everyday despite posting excellent results in Q2. Waiting for Q3 results and market recovery. I feel both long term and short term capital gains tax should be abolished. Capital gains are taxes. When huge capital losses occur, are they compensated?
The effect of inflation also is not considered in taxation.”
Capital gains tax on stocks
The capital gains tax is a tax levied on the profit earned from investments such as stocks, mutual funds, or real estate. After a period of exemption for investors, the long-term capital gains tax was reintroduced in 2018. In that year, the government implemented a 10% tax on returns exceeding Rs 1 lakh from the sale of stocks and equity mutual funds. Subsequently, in July of last year, the rates for both short-term and long-term capital gains were raised. The short-term capital gains tax increased from 15% to 20%, and the long-term capital gains tax was raised to 12.5%.
Furthermore, the Finance Minister also announced an increase in the securities transaction tax (STT) on futures and options securities by 0.02% and 0.1% to discourage retail investors from trading in the risky market segment.
“Historically, when LTCG or STCG taxes have been raised, the stock market has experienced a significant downturn in the subsequent year. Given this pattern, we advocate for a potential shift in LTCG rules. For instance, a 0% tax rate increase for investments held over three years could foster a culture of long-term investing, potentially leading to a more stable market in the long term. On the other hand, we don’t expect many changes to the STCG rules. The government’s consistent stance on discouraging short-term trading is evident. Even if STCG taxes fluctuate, the focus seems to be on long-term investments, providing a stable environment for investors. Investors have adapted to the new tax system, so a lack of government action could result in a subdued market response. However, lowering LTCG taxes or extending the investment holding period could inject enthusiasm into the market. In summary, a positive change in LTCG policies could invigorate the market, making it more dynamic and engaging,” said Anand K Rathi, co-founder of MIRA Money told Business Today.
“Even if foreign investors consider India’s long-term growth prospects and reforms, eventually a higher capital gains tax rate necessitates a higher expected return which at current relatively higher valuations makes Indian equities less attractive,” said Puneet Singhania, Director at Master Trust Group.
Jimeet Modi, Founder and CEO of SAMCO Securities, observed that India’s public markets were thriving a few years ago with significant liquidity. However, recent measures introduced in budgets and regulatory actions have had a negative impact on this premium and liquidity.
According to Modi, regulatory changes have led to a drastic decrease in daily turnover in the currency derivatives market, dropping from Rs 40,000 crore to rs 5,000 crore. Similarly, actions in the equity derivatives segment and the increase in Securities Transaction Tax (STT) have reduced market liquidity by 30-40 percent.
He added that the upcoming budget should focus on restoring the currency derivatives market, which plays a crucial role in India’s journey towards becoming a developed economy. He also emphasizes the importance of rationalising STT rates on futures, options, and other instruments to enhance market liquidity.
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