The announcement of Union Budget always casts a profound impact across financial markets of the country, and the recent announcement of Budget is no exception. While FM Sitharaman leaves the existing income tax slabs in old regime unchanged, a nominal tax benefit is declared for taxpayers under new regime. Also the standard deduction in new tax regime has been proposed to be increased from ₹50,000 to ₹75,000. However, a significant increase in tax on short-term capital gains (STCG), long –term capital gain (LTCG) and security transaction tax (STT) has come as a blow to the stock market participants across the nation.
Tax on Short-term Capital Gain (STCG): STCG tax is a tax levied on capital gains from the sale of a capital assets held for a short period. In case of listed securities, this period of holding is 12 months. Earlier STCG used to attract a tax of 15%, but the Union Budget has increased it to a whopping 20%. It will simply mean that if an investor earns ₹1,50,000 from selling of shares on stock market, she/he will have to pay 20% of this gain i.e. ₹30,000 straight to the Government as tax. This shall also be applicable to the capital gains from mutual fund.
Tax on Long-term Capital Gain (LTCG): LTCG tax is levied on capital gain from the sale of listed stocks and shares held for more than 12 months. In the Union Budget the LTCG Tax has been proposed to be increased from 10% to 12.5%.
Security Transaction Tax (STT): STT is a type of tax that is charged on the purchase and sale of securities and derivatives in stock exchanges in India. In a most significant blow to the Futures and Options (F&O) traders FM Sitharaman has declared raising the STT rate from 0.01% to 0.02%. It will mean that, on implementation of this proposal, equity and index traders will have to pay double on their trade.
Capital Gain exemption limit: The Budget proposes to increase the capital gain exemption limit to ₹1,25,000 from the earlier limit of ₹1,00,000.
Probable Implications for investors: With increasing popularity of retail and mutual funds investment in India, the increased tax rates on capital gain is likely to put financial pressure on the investors. The increase in the STT and the compounding impact of STT and increased capital gain tax may be seen as a move which is aimed at discouraging the retail investors from switching from cash segment to F&O segment.
Initial reaction of stock market: The Indian stock market benchmark index, the Sensex and the Nifty 50 plunged almost 2% each following these declaration by the FM in her Budget speech. However, its long-term impact is yet to be seen.
Conclusion: The Union Budget 2024 has introduced several key tax changes that will significantly affect capital market participants. The increased rates on STCG, LTCG, and STT are poised to impact investors’ returns and may influence investment strategies, particularly in the retail and mutual fund sectors. While the immediate market reaction has been negative, with benchmark indices like the Sensex and Nifty 50 plunging, the long-term effects of these changes are yet to be fully realized. As investors and market participants adapt to these new tax norms, the true impact of the Union Budget on the Indian financial landscape will unfold over time.
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