New Delhi: Indian stock markets saw a sharp fall and a subsequent recovery as Finance Minister Nirmala Sitharaman presented the Union Budget for 2024-25 Tuesday. Both major benchmarks, the Sensex and Nifty experienced substantial losses, causing investor concerns. The S&P BSE Sensex dropped below 80,000, losing 1,248.23 points, while the NSE Nifty fell by 409 points as of 12.30 pm. The sharp decline followed the finance minister’s announcement of increased taxes on capital gains.
However, after an initial turbulent phase, both indices recovered steadily, closing comparatively stable. The S&P BSE Sensex crossed the 80,000-mark again, closing at 80,429.04, just 72 points lower than Monday. Similarly, the NSE Nifty closed at 24,479.05, only 24.2 points lower than the previous close.
In her budget speech, Sitharaman announced an increase in both the long-term capital gains (LTCG) tax and the short-term capital gains (STCG) tax. The Modi 3.0 government raised the LTCG tax on equities to 12.5 percent from 10 percent and the STCG tax on equities to 20 percent from 15 percent. However, the LTCG tax exemption limit was also raised to Rs 1.25 lakh from Rs 1 lakh.
The announcement impacted investor sentiment, leading to a sharp market decline. Additionally, the government continues to impose a 0.1 percent Securities Transaction Tax (STT) on every equity sale or purchase. For other assets, short-term capital gains are taxed based on an individual’s income tax slab, and long-term capital gains are taxed at 20 percent with indexation benefits.
The indexation benefit includes the inflation rate in the asset’s purchasing price. When the asset is sold, this signifies a higher purchase price, resulting in a reduced capital gain, resulting in a tax benefit for the seller.
Many analysts had expected the finance minister to keep the LTCG rate unchanged.
“The recent changes in the Union budget, particularly the increase in STCG and LTCG tax, signal a significant shift. While the market’s initial reaction may seem bearish, we believe these changes will ultimately foster a more stable and mature investment environment,” said Vaibhav Porwal, co-founder at Dezerv, a wealth management firm.
As the Centre proposed increasing basic customs duty on specified telecom equipment to 15 percent from 10 percent, shares of telecom infrastructure companies like Himachal Futuristic Communications Limited (HFCL) and RailTel Corporation declined by more than 4 percent.
Following the budget announcements, the top losers in the stock market included Larsen and Toubro (L&T), HDFC Bank, Shriram Finance, Hindalco, Bajaj Finance, and Oil and Natural Gas Corporation (ONGC).
Reacting to the rise in capital markets tax, Subha Sri Narayanan, director at CRISIL Ratings, said, “The measures pertaining to tax rates on capital market transactions — securities transaction tax on derivatives, long-term capital gains tax, and short-term capital gains tax — are aimed at bringing greater stability to the equity markets by incentivising long-term investment activity and curbing the derivatives segment, where traded volume has risen over 99 percent.”
“There could be an impact on market volume in the near term, which could affect the revenue of brokerage houses that have enjoyed rising profitability because of the market upcycle,” added Narayanan.
She further said that the capital market revisions could push brokerage houses to realign their business models to adapt to the changing regulatory environment, with the most recent shift being an adjustment in the fees placed on stockbrokers by market infrastructure institutions.
This comes at a time when the Economic Survey 2023-24 voiced a strong note of caution, warning about “the possibility of overconfidence” and speculation as a serious concern. Released Monday, the report highlighted a rising trend of speculation in the stock market, noting that derivatives trading can lead to large gains and often appeals to people’s gambling instincts.
“While the outlook for India’s financial sector appears bright, some areas will require focused attention going forward,” the survey stated.
“The significant increase in retail investors in the stock market calls for careful consideration. This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with real market conditions, is a serious concern,” it added.
(Edited by Gitanjali Das)