Higher LTCG, STCG rates implemented with immediate effect; higher STT on F&O from October 1

If there was one thing that the market did not want finance minister Nirmala Sitharaman to do, it was hiking taxes that directly impact the stock markets -- long term capital gains (LTCG), short term capital gains (STCG), and securities transaction tax (STT).

The finance minister, however,  did exactly the same and made the worst fears of the market come true.

While presenting the Union budget, the finance minister increased the long-term capital gains tax from the current 10 percent to 12.5 percent while also increasing the short-term capital gains tax from the current 15 percent to 20 percent.

More importantly, the increased tax rates will be implemented with immediate effect. As per the Finance Bill, the new rates will come into effect on July 23.

"Short term gains on specified financial assets shall henceforth attract a tax rate of 20 per cent instead of 15 per cent, while that on all other financial assets and non-financial assets shall continue to attract the applicable tax rate. Long term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 per cent," she said.

Further, STT on derivatives has been increased to 0.02 percent, though the new rate will come into effect from October 1, as per the Finance Bill.

"I have a couple of proposals for deepening the tax base. First, Security Transactions Tax on futures and options of securities is proposed to be increased to 0.02 per cent and 0.1 per cent respectively," said the minister while adding that income received on buy back of shares will be taxed the hands of the recipient.

There was an immediate knee-jerk reaction as the 30-share Sensex fell nearly 1300 points to touch the day's low of 79,224 though it has partially recouped the losses since then.

Currently, capital gains tax in India is based on the holding period and asset type. For equities, long-term capital gain (LTCG) over Rs 1 lakh is taxed at 10 percent after a 12-month holding period, while short-term capital gains (STCG) is taxed at 15 percent.

In the derivatives segment, STT on the sale of options is 0.0625 percent, which is paid by the seller. On the sale of options in which the option is exercised, it is 0.125 percent, which is payable by the buyer. And on sale of futures, it is 0.0125 percent, which is payable by the seller.

"From the markets perspective the raising of STCG to 20% and LTCG to 12.5% is a body blow," says Sanjay Sinha, Founder at Citrus Advisors.

"We need to brace ourselves for a negative reaction in the short term. In the light of all the concerns raised about the hyper active interest in the F&O segment it is not surprising that the STT on F&O has been raised 5 times from 0.02% to 0.1%. Hopefully this will moderate the frenzy in this space," he added.

Similarly, Sanjay Sanghvi, Partner, Khaitan & Co is of the view that the increase in tax on both, long term capital gains and also short term capital gains, is a bit disappointing and could have been avoided.

"There is a 25 percent increase in LTCG though fortunately the government has retained the one-year holding period requirement. Increase in STT on derivatives is a way to address some of the recent concerns. While one will have to see the fine print, it is believed that the budget has also removed the indexation benefit available in a property transaction," added Sanghvi

In a similar context, Vaibhav Porwal, Co-founder, Dezerv, said that the increase in STCG and LTCG tax signal a significant shift and while the market's initial reaction may seem bearish, these changes will ultimately foster a more stable and mature investment environment.

"The market is currently responding with a short-term perspective, particularly concerning the Securities Transaction Tax (STT) adjustments in derivatives. This will undoubtedly impact the profitability of frequent traders. However, we encourage investors to look beyond immediate market reactions and consider the long-term benefits of a tax structure that promotes patient capital,” he added.