Budget 2024: Sensex, Nifty decline after govt hikes tax on capital gains and derivatives trading

Stock market news: Benchmark indices fell on Tuesday after the government proposed increases in taxes on capital gains and derivatives trading, a move that analysts warn could negatively impact the markets in the short term.

As of 12:31 pm, both the NSE Nifty 50 and the S&P BSE Sensex had dropped by approximately 1.6 per cent.

In her budget speech, Finance Minister Nirmala Sitharaman announced that the tax rate for equity investments held for less than a year would rise to 20 per cent from 15 per cent. Additionally, the tax rate for shares held for more than 12 months would increase to 12.5 per cent from 10 per cent. The government also increased the tax on transactions in the equity derivatives segment. For futures trading, the securities transaction tax has been increased to 0.02 per cent from 0.0125 per cent, and for options, it has been raised to 0.1 per cent from 0.0625 per cent.

"The market was not anticipating negative surprises in areas like capital gains tax and securities transaction tax," remarked Krishna Appala, a senior research analyst at CapitalMind Research.

"The tax changes are a short-term negative for the market," said Trideep Bhattacharya, chief investment officer at Edelweiss Mutual Fund. "The tax increase is marginal but will help bring in rationality on options trading exuberance and will better investment behavior. The increase in capital gains will push investors towards long-term investing."

Since their COVID-19 lows in March 2020, India's stock indexes have surged more than 200 per cent, largely due to an influx of retail traders in the derivatives market. The share of retail investors in derivative trading volumes has rocketed to 41 per cent this year from 2 per cent in 2018. India's monthly notional value of derivatives traded was a worldwide high of Rs 9,504 lakh crore in May, data shows.

This prompted the markets regulator to warn of the risks from such trading in futures and options. The tax hikes on futures and options are in line with the government's concerns expressed in the economic survey and the markets regulator's worries over the increase in speculative trading, said Sunil Gidwani, partner at tax firm Nangia Andersen.

(With Reuters inputs.)