Budget 2024: Tax rates on both short and long-term capital gains raised with immediate effect
The stock market saw a sharp decline on Tuesday after the announcement of the Union Budget by Finance Minister Nirmala Sitharaman, especially on the increase of tax on capital gains. Both Sensex and Nifty experienced significant losses. The S&P BSE Sensex dropped below 80,000 while the NSE Nifty fell by 409 points.
Hike in STT tax, LTCG & STCG tax change, and tax on Share buyback are the three major reasons for the crash in the stock market. Nirmala Sitharaman raised taxes on capital gains especially the long-term capital gains (LTCG) tax on equities which was increased to 12.5% from the previous 10% and short-term capital gains (STCG) tax which was increased to 20% from 15%. The LTCG tax exemption limit was also raised to Rs.1.25 lakh from Rs.1 lakh.
The Finance Minister also proposed to increase the rate of securities transaction tax (STT) on futures and options (F&O) trade with the aim of discouraging retail investors’ participation in the risky instrument, she said. The budget proposed to increase the rates of STT (Security Transactions Tax) on the sale of an option in securities from 0.0625 percent to 0.1 percent of the option premium and on the sale of futures in securities from 0.0125 percent to 0.02 percent of the price at which such futures are traded.
The Finance Minister announced that LTCG (long-term capital gains) tax on all financial and non-financial assets will attract a tax rate of 12.5 percent from 10 percent earlier and that STCG (short-term capital gains) tax on certain financial assets will attract a tax rate of 20 percent from 15 percent earlier.
V K Vijayakumar, chief of investment strategy at Geojit Financial Services, said from the market perspective, the budget proposals intending to raise tax revenue from capital gains are slightly negative.
“The increase in STCGs tax from 15 percent to 20 percent is sharp. The increase in LTCGs tax from 10 percent to 12.5 percent is only marginal, particularly when seen from raising the LTCGs tax exemption limit from Rs.1 lakh to Rs.1.25 lakh. The taxation of share buyback income at the hands of the recipients also is a negative. Higher taxes on F&O were expected, and this is being done to reduce the excessive speculative trade in the market,” said Vijayakumar.
Pranav Haridasan, MD & CEO of Axis Securities, also said that the rise in capital gains taxes is a short-term negative for the market. “The Union Budget 2024-25 has presented short-term challenges for the markets. The rise in capital gains tax rates and the increased STT are a short-term negative,” said Haridasan.
However, Haridasan pointed out that the Budget had several positives. “The fiscal deficit has been reduced to 4.9 percent, demonstrating a solid fiscal consolidation path. Additionally, the Budget places a strong emphasis on welfare schemes, aiming to alleviate rural distress and support the rural economy. Despite the initial market reaction, the impact is expected to be temporary, with a return to normalcy anticipated soon,” said Haridasan.
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