Budget 2024: Stocks wobble on capital gain tax plan

People walk past a display screen telecasting the Union Budget 2024-25 presentation by Union Finance Minister Nirmala Sitharaman at the Parliament House, outside the Bombay Stock Exchange (BSE) in Mumbai on July 23, 2024.
| Photo Credit: ANI

The stock markets reacted negatively to the Budgetary provisions concerning additional tax burden on investors and closed in the negative territory led by losses in banking stocks after undergoing high volatility. The key benchmark indices recovered most of the lost ground in the second half of trading.

The market reacted because the increase in capital gain tax has been viewed as a negative for the investors and the 5% increase in Short Term Capital Gain (STCG) tax is likely to adversely impact short-term investors in the near term. 

The BSE Sensex having witnessed intraday swing of over 1,500 points closed with a loss of 73.04 points or 0.09%. The Sensex touched intraday high of 80,766 points and a low of 79,244 which was towards the end of Finance Minister’s speech. 

The NSE Nifty 50 index, too, witnessed excess volatility and closed with a loss of 30.20 points, or 0.12%, at 24,479.05. The intraday movement was in the range of more than 500 points.

The top losers in the Sensex included L&T down 3.10%, Bajaj Finance (2.18%), SBI (1.65%), Axis Bank (1.62%) and HDFC Bank (1.39%). 

After initial gains, the indices witnessed heavy profit booking due to volatility surrounding the Union Budget. However, the market managed to digest the negative factors and concluded the day in a marginal negative note, said Hrishikesh Yadve, AVP Technical & Derivative Research at Asit C Mehta Investment Intermediates Ltd. 

According to V. K. Vijayakumar, Chief Investment Strategy, Geojit Financial Services, the Budget proposals with the intent of raising tax revenue from capital gains, were slightly negative. 

The increase in STCGs tax from 15% to 20% is sharp. The increase in Long Term Capital Gain (LTCG) tax from 10% to 12.5% is only marginal, particularly when seen from the perspective of raising the LTCGs tax exemption limit from ₹1 lakh to ₹ 1.25 lakh. 

“The taxation of share buy back income at the hands of the recipients also is a negative. The higher taxes on F&O was expected and this is being done to reduce the excessive speculative trades in the market,” he added.

Alok Agarwal, Head – Quant & Fund Manager, Alchemy Capital Management said “The hike in capital gains tax rates has understandably caused market jitters, especially because the tax revenue momentum was reasonably good. 

“This unexpected policy shift is likely to weigh on investor sentiment in the short term, leading to higher market volatility than seen in the recent past,” he added. 

Stating that there has been an increase of Securities Transaction Tax (STT) on transactions in derivative trades in stock markets, buy-back tax is now charged to individuals as against being paid by the company, Deven R Choksey, Managing Director, KRChoksey Shares and Securities Pvt. Ltd., said the increase in LTCG and STCG would amount to ₹15,000 crore. 

“As I see it, when the new tax code is introduced next year, simplification in tax rates, unified tax rates will be a reality. It is expected, with simplified tax rates under the new tax code, tax rate will go down. Thus, in preparation of the same, FM has increased LTCG by 2.5% to 12.5 % (from 10%) and STCG to 20% (from 15%),” he said in a note.

“In FY 25, there will be two tax computations required for arriving at the capital gains levy. One for transactions done between 1.4.24 to 23.7.24 and the second will be for transactions done between 24.7.24 to 31.3.25. This will create significant hardships for taxpayers and would certainly defeat the ease of doing business for investors,” he added.