The finance minister has proposed an increase in LTCG and STCG for a few asset classes, including a rise in STT for F&O. How will it impact trade volume?
The proposals on taxation for various asset classes are expected to fetch additional revenue for the government but is feared to impact investor sentiment.
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Even as stock markets are relieved that a major overhang of the Union Budget is over, Minister of Finance Nirmala Sitharaman loaded investors with a higher taxation burden. In the first Budget of the coalition government led by Prime Minister Narendra Modi, proposals regarding taxation of various asset classes are expected to fetch additional revenue for the government, amid apprehensions that they might impact investor sentiment.
The finance minister (FM) has proposed to increase long term capital gains (LTCG) by 2.5 percent, short term capital gains (STCG) by 5 percent and levy higher securities transaction tax (STT) on the futures and options (F&O) trade. “Capital gains taxation is also proposed to be hugely simplified,” said Sitharaman in her Budget speech.
However, it did not appear to be simplified for investors, as the announcement itself knocked money off the table during day trading, with both the Sensex and Nifty falling by more than 1 percent. Higher tax on capital gains has always been considered unfavourable by market investors.
“The FM has done a comprehensive review of the capital gains structure, whereby several changes have been proposed relating to limiting class of holding periods, tax rates and removal of indexation benefit for different classes of capital assets,” says Poorva Prakash, partner, Deloitte India.
For listed equity shares and equity-oriented mutual funds, LTCG is increased to 12.5 percent from 10 percent. LTCG on all financial and non-financial assets will also attract a tax rate of 12.5 percent. However, the exemption limit has been raised from Rs 1 lakh to Rs 1.25 lakh. The FM said that STCG on certain financial assets will now attract a tax rate of 20 percent, while all other financial and non-financial assets will continue to attract the applicable tax rate.