Even though Rahul Arora, CEO at Nirmal Bang Institutional Equities, sees the hike in capital gains tax as a clear negative for the market, he doesn't feel the increase is significant enough to deter equity investments.
Finance Minister Nirmala Sitharaman, in the Union Budget 2024, hiked the long-term capital gains tax (LTCG) on all financial and non-financial to 12.5 percent from 10 percent, while short-term capital gains tax (STCG) on some assets would be raised to 20 percent.
Along with that, the finance minister also proposed increasing the Securities Transaction Tax (STT) rates. She announced in the Union Budget that the STT on the sale of options in securities will rise from 0.0625 percent to 0.1 percent of the option premium, and the STT on the sale of futures in securities will increase from 0.0125 percent to 0.02 percent of the trading price.
Also Read | Long term capital gains tax hiked from 10% to 12.5% in Union Budget
Reacting to these changes in the capital gains structure, Indian equity markets witnessed a sharp negative reaction, with the benchmarks Nifty 50 and Sensex, falling over 2 percent each. However, the knee jerk reaction soon faded away, with both the benchmarks ending near the flatline on the budget day.
Talking about this hike in capital gains tax, Arora stated that it doesn't change much in the scheme of things for the government from a revenue perspective. "If you look at the mathematics, this would probably add about Rs 20,000 crore of revenue to an otherwise estimated revenue of almost about Rs 32 lakh crores, which isn't even 10 percent or 5 percent of the total," Arora said.
However, he does believe that these changes will have a sentimental impact of both on the futures and options as well as on the cash market. Regardless of that, Arora believes the increase in the exemption limit for the capital gains tax has offset some bit of the capital gains tax hike.
The finance minister also proposed to increase the limit of exemption of capital gains on certain financial assets to Rs 1.25 lakh per year, aimed to benefit the lower and middle-income classes.
In conclusion, Arora believes that the market will eventually come to absorb this hike in capital gains tax, in the larger scheme of things. "I think prima facie hiking the rates is negative, but I think the way the market has reacted from the day's is low is telling you that people are ready to buy into equities. So this is not something that is not digestible for the market," Arora said.
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