MC Markets Graphixstory: A history of capital gains tax and why markets fear more hikes

Nirmala Sitharaman, in the 2024 Budget, raised long term capital gains tax and short term capital gains tax for equities.

The hike in long term and short term capital gains tax on equities is bad news for stock market investors, but the bigger worry on Dalal Street is that the tax rates are like to rise further.

Finance Minister Nirmala Sitharaman, in her 2024 Budget, increased the long-term capital gains tax (LTCG) on equities to 12.5 percent from 10 percent and short-term capital gains tax to 20 percent from 15 percent.

For now, the market has taken the hikes in its stride, but a section of veteran investors fear the tax rates could rise further as early as the next budget.

"To my mind, this looks like a first step. 12.5 percent is an unusual rate, and I wouldn’t be surprised if it moves up to 15 percent by February next year," Ashish Gupta, Chief Investment Officer at Axis Mutual Fund, said in an interview to Moneycontrol last week.

Remarks by Finance Ministry in their media interviews strengthen this theory.

Finance Secretary T.V. Somanathan, one of the architects of the Union Budget, in an interview with Moneycontrol, highlighted that India's rate of capital gains tax on long-term listed equities were low when compared to global standards.

"It is not high," Somanathan said.

"It’s much lower than our marginal income tax rate of 39 percent at the highest end. We cannot become Viksit Bharat without taxing the fastest-growing element of income at a decent rate. So, we have compared international rates. We are still very low at 12.5 percent. Canada increased its capital gains rate in this budget to 66 percent of the applicable rate, which in India would be 26 percent," he added.

Another market veteran Shankar Sharma also criticised the government for raising taxes on capital gains, calling it a substantial burden on the investors. Sharma also went on to say that equity market investors had seen good returns only for the past three years as before that, for 6-7 years, the government delivered risk-adjusted returns which were even lower than fixed deposits.

Samir Arora, founder and fund manager of Helios Capital said that while India has performed well relative to other markets in recent years, the tax increase could diminish future post-tax returns.

Now whether or not the government decides to keep capital gains tax at the current rate is a thing only time will tell. Regardless, its anticipation is expected to keep equity investors jittery, at least till February 2025.

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