Budget 2024 Announcement: The Union Finance Minister while announcing the budget for FY 2024-25 proposed to increase the taxes on Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG). Now Investors have to pay 12.5% tax instead of 10% on long-term investments and 20% on short-term investments, which was 15% earlier.
Tax Rates On Capital Gain: The equity market investors had no idea to the fact that the Union Budget 2024 would be harsh to them, instead they were optimistic about something favorable as the stock market has been attracting strong fund flow for the last few months. However, they had a fear that the government would come up with something restrictive for the future and option segment, which turned true as the finance minister proposed to hike the securities transaction tax (STT), but they were not anticipating an increment in taxes on short-term and long-term capital gains.
Union Finance Minister while announcing the budget for FY 2024-25 proposed to increase the taxes on Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG). Now Investors have to pay 12.5% tax instead of 10% on long-term investments and 20% on short-term investments, which was 15% earlier.
The new development has created a lot of confusion among the new and existing investors. In this article, we bring you expert views on how the revised tax rates will impact investment in the equity market. But before diving deep into the matter let’s understand LTCG and STCG first.
Long Term capital gain (LTCG)
A long-term capital gain is the profit made from the sale of any eligible investment option that has been owned by an investor for more than 12 months at the time of selling the asset. Listed equity shares are included in the list of eligible investment options and generate LTCG on shares if held for more than 12 months. However, in the case of unlisted equity shares, an asset needs to be held for around 24 to 36 months or more to be considered as a long-term capital asset.
Short-term capital gain (STCG)
Short-term capital gain is the profit made from the sale of shares held for months. If the shares are held for more than a year, the profit is treated as long-term capital gain. Short-term capital gains on shares are taxed at a higher rate than long-term capital gains.
How the revised rates for capital gains will impact stock market investors- Experts Views
The new taxes on capital gain, which were announced by Finance Minister Nirmala Sitharaman while announcing the Budget for FY2024-25, are not being welcomed by the industry experts. The majority of professionals are labeling the new tax rates discouraging for retail investors and financial investors as well.
Divam Sharma, Founder and Fund Manager at Green Portfolio highlighted that the tax hikes on capital gain were within expectations but that is not much relief to the investors
“The tax hikes on capital gains are in line with the expectations with the existing and potential gains financial assets offer and we expect the continuity of liquidity to the markets unlike in 2018. The FM has increased the threshold amount for taxation to seemingly compensate for the increased taxes but that isn’t of much relief to investors,” said Divam Sharma,” said Divam.
“Investors surely are disappointed but markets however will be fine soon. This is nothing new for the Indian markets having seen even 20% LTCG tax two decades ago, and it’s still lower than a few other asset classes. So, while the investor sentiment will stay a bit dull for some time, it will soon recover,” he added.
Shravan Shetty, Managing Director of Primus Partners believed that the move will have a negative impact but it can be a corrective measure as well.
“The increase in long-term capital gain will have a negative while the intent to reduce the euphoria in the market is right. However, we believe increasing the long-term capital gain by 25% to 12.5% will lead to investments moving towards unproductive assets like gold and real estate. For a growing economy like India increasing penetration of capital markets is critical and this measure will reduce the acceleration seen in this direction over the last few years, Said Shravan.
Jyoti Prakash Gadia, Managing Director at Resurgent India believed that the previous tax rates on LTCG, and STCG played a crucial role in attracting new investors
“Attractive tax regime was one of the prime factors that were drawing new investors to the capital markets. The proposed rate hike on capital gains will reduce the earnings of the capital market investors, which could make such investment options less attractive. Considering the bigger risks involved compared to bank fixed deposits, the retail investors may consider investing in conventional instruments like fixed deposits,” said Jyoti Prakash.
“However, the budget simultaneously proposes to raise the capital gains exemption limit from Rs1.00 lac to 1.25 lac, the same shall have only a marginal neutralizing effect,” he added.
After the government decided to increase the tax on capital gains, some industry experts pointed out the move as problematic for the brokerage industry along with retail investors.
“The Union Budget’s unexpected increase in both long-term and short-term capital gains taxes has sent shockwaves through the market. This move, coupled with a hike in Securities Transaction Tax (STT) for F&O trading, is a significant blow to the already beleaguered broking industry. The government’s stated concern about channeling household savings into the capital market, as outlined in the Economic Survey, seems to have materialized in this policy decision,” said Sonam,” Sonam Srivastava, Founder and Fund Manager at Wright Research.
“The market’s immediate reaction has been a sharp decline, parti cularly in overvalued segments like PSUs. A clear shift from momentum to value-oriented stocks is now evident. While the budget maintained infrastructure spending at the same level as the interim budget, disappointing expectations of a higher allocation from the RBI dividend, infrastructure stocks are likely to exhibit a gradual positive bias,” she added.