As India adjusts to the recent changes in capital gains tax, prominent market experts are raising concerns about the potential for further increases. Ashish Gupta, Chief Investment Officer at Axis Mutual Fund, believes that the recent hike in long-term capital gains tax (LTCG) to 12.5 percent may be just the beginning. "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," Gupta told Moneycontrol.
Gupta noted that while the market has generally accepted the budget, the increase in capital gains tax is a notable point of concern. He highlighted that the tax changes have introduced a layer of uncertainty, which the market typically dislikes. However, he outlined the other side of the argument, suggesting that this might be an effort to stimulate consumption, which has been an area of concern. "While the capital gains tax has increased, the higher collections are being redirected to provide tax breaks in lower personal income tax slabs. This could be an attempt to revive consumption," Gupta explained.
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In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman announced an increase in the long-term capital gains tax on equities to 12.5 percent and a rise in short-term capital gains tax to 20 percent. A significant increase in the Securities Transaction Tax (STT) on futures and options trades was also announced.
Shankar Sharma, a renowned investor and market commentator, expressed strong dissatisfaction with the tax revisions. He criticized the increase in both long-term and short-term capital gains tax as unnecessary and poorly executed. "I’m not happy. As simple as that," Sharma stated. He was particularly scathing about the increase in the long-term capital gains tax rate and the substantial rise in short-term gains tax. "Although the rise from 10% to 12.5% looks small, it is a 25 percent rise in the long-term capital gains tax rate, and then there is a significant increase in short-term capital gains tax. It's a substantial increase," he said.
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Sharma dismissed the government's attempt to alleviate the impact by raising the exemption limit from Rs 1 lakh to Rs 1.25 lakh as insufficient. "I mean, that's a palliative. That's like nothing at all," Sharma remarked. He also criticized the timing of these tax changes, pointing out that the equity market had already experienced lower-than-fixed-deposit returns in the past. "Equity market investors had three good years, but prior to that, for 6-7 years, the market delivered risk-adjusted returns lower than fixed deposits," Sharma added.
Sharma further emphasized the adverse effects of previous tax hikes on market performance. He recalled how the imposition of long-term capital gains tax in 2018 led to a sharp market downturn. "In 2019, following the imposition of LTCG tax, India was the 18th worst-performing market globally. Europe was up 25 percent, the S&P 28 percent, the Nasdaq 35 percent, and most of Asia around 18-25 percent. India was up only 6-7 percent," Sharma said. "So that is the effect that an imposition of taxation had on the stock market. So I hope it does not repeat."
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Samir Arora, founder and fund manager of Helios Capital, shared similar concerns about the impact of the tax changes on post-tax returns. He expressed disappointment that the impact of the tax change is being downplayed by some fund managers and analysts. "India has performed well on a pre-tax basis compared to other countries. However, the tax changes are likely to lead to a permanent reduction in post-tax returns." He noted that while India has performed well relative to other markets in recent years, the tax increase could diminish future post-tax returns. "I'm saying big picture, let us make India at least tax-neutral. Then everything else is in our favour and we are the biggest beneficiaries if the market does well."
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