Mumbai July 23 2024: The Indian government raised the tax rate for capital gains from equity investments and equity derivatives trades on Tuesday, seeking to curb the frenzy that has propelled the market to record highs.
The government raised the tax on stocks held for less than one year to 20% from 15%, effective immediately, and to 12.5% from 10% for those held for over one year.
It also nearly doubled the tax on equity derivatives trading, raising the securities transaction tax on futures to 0.02% from 0.0125% and to 0.1% from 0.0625% on options, effective from October.
The benchmark NSE Nifty 50 (.NSEI), and S&P BSE Sensex (.BSESN), fell about 1.6% after Finance Minister Nirmala Sitharaman announced the changes in her budget speech. They recovered to end the day down about 0.13%.
The tax changes are a short-term negative for the market, said Trideep Bhattacharya, chief investment officer of Edelweiss Mutual Fund.
“The tax increase is marginal but will help bring in rationality on options trading exuberance and will better investment behaviour. The increase in capital gains will push investors towards long-term investing,” Bhattacharya said.
Since their COVID-19 lows in March 2020, India’s stock indexes have surged more than 200% each, largely spurred by the influx of retail traders, especially in the derivatives segment.
Retail investors now account for 41% of overall derivative trading volumes, compared with just 2% in 2018. India’s monthly notional value of derivatives traded was a worldwide high of 9,504 trillion rupees ($113.60 trillion) in May, data shows.
The tax difference of 7.5 percentage points between short- and long-term holdings is a high bridge to cross for a short-term churn, said Bijal Ajinkya, partner at law firm Khaitan and Co.
Hedge funds, portfolio managers used to sell shares or churn portfolios within 12 months and the increased tax will now force them to hold for longer, Ajinkya said.
