Budget 2024: What The Indian Equity Market Expects?

With the 2024 budget just around the corner, anticipation is high among market participants, industries, and individual investors. The return of Finance Minister Nirmala Sitharaman has reignited discussions about potential changes and reforms. In this detailed article, we delve into the primary concerns and expectations of the Indian equity market from the upcoming budget.

Capital Gains Tax: A Major Concern

One of the most significant concerns for market participants is the capital gains tax. This tax is levied on the profit earned from the sale of capital assets such as real estate, stocks, and mutual funds. In India, capital gains are categorized into short-term and long-term, each attracting different tax rates.

Short-term capital gains apply to equity assets held for one year or less. These gains are subject to a 15% tax rate. This means that if an investor sells their equity investments within a year, they must pay a 15% tax on the profits.

Long-term capital gains apply to equity assets held for more than one year. These gains attract a 10% tax rate, which is lower than the short-term rate. For unlisted shares and real estate, the LTCG tax rate is higher at 20%. This difference in tax rates encourages long-term investment in the equity market.

Changes in Debt Mutual Funds

In the last budget, the government removed the indexation benefit for long-term capital gains on non-equity mutual funds. Previously, investors holding debt mutual funds for more than 36 months were subject to a 10% LTCG tax with the benefit of indexation. Indexation adjusts the purchase cost of the mutual fund units based on inflation, thereby reducing the taxable gains. However, from April 1, 2023, these gains are now taxed as short-term, at the applicable income tax rate, irrespective of the holding period.

Industry Wants Investors to Hold Onto Investments Longer (LTCG)

The finance industry is pushing for a change in how long investors need to hold onto assets to qualify for lower capital gains taxes (LTCG). Currently, if you hold an asset for a certain period (like one year for stocks), you benefit from a lower tax rate. The industry wants this holding period to be longer, with some suggesting a return to the previous requirement of 3 years. This is because they believe investors with a longer-term view are more likely to make well-considered decisions and avoid chasing short-term market movements. This, in turn, could lead to greater stability in the overall market.

Simplifying Taxes for Investors (Uniform Rates)

Another industry request is for a simpler tax system. They want the government to set the same tax rate for LTCG on different types of investments, such as stocks, real estate, and unlisted companies.

Currently, the tax rate can vary depending on the asset class. Having a uniform rate would make it easier for investors to understand how much tax they owe, regardless of what they invest in. This could encourage more people to participate in the market.

Taxing High-Frequency Traders More Heavily (STT)

The industry also has its sights set on high-frequency traders (HFTs). These are traders who use sophisticated computer programs to make a large number of very fast trades. Some argue that HFTs have an unfair advantage over regular investors because of their technology.

A tax called the Security Transaction Tax (STT) is already applied to all stock market trades. The industry, particularly mutual funds, is proposing that this tax be higher for HFTs. This is because they believe HFT activity can make it harder for mutual funds to manage their portfolios effectively. However, there are challenges to implementing a higher STT rate for HFTs specifically. It might be difficult to define exactly who qualifies as an HFT and how to track their activity.

Speculative Income Classification: Reclassifying F&O Transactions

There are speculations about the government reclassifying Futures and Options (F&O) transactions from business income to speculative income. This change would result in higher taxes on F&O trades, potentially impacting trading volumes and strategies.
If F&O income is classified as speculative income, traders may face higher tax liabilities.

This reclassification could also lead to stricter regulations and reporting requirements for F&O trades, affecting both retail and institutional investors. Another proposal under consideration is the introduction of Tax Deducted at Source (TDS) on F&O trades. This measure aims to increase transparency and make it easier for the government to track investors and their transactions.

While TDS could improve transparency, it might also add procedural complexity for small investors. Deducting tax at the source could discourage retail participation in the F&O market, especially for those making modest profits.

Conclusion

The upcoming budget holds significant potential to impact the Indian equity market. Key areas of focus include capital gains tax, Security Transaction Tax, and changes in the classification of F&O transactions. Market participants are keenly watching for any announcements related to these aspects, as they could influence market sentiment and investor behavior. Whether the budget will meet these expectations or bring new surprises, it is sure to play a crucial role in shaping the future of the Indian equity market.