Dalal Street experienced a sharp decline today following the announcement of the Union Budget. Both major benchmarks, the Sensex and Nifty, saw significant losses, raising concerns among investors. The S&P BSE Sensex dropped below 80,000, losing 1,248.23 points, while the NSE Nifty fell by 409 points as of 12:30 PM.
The primary reason for this downturn was Finance Minister Nirmala Sitharaman’s decision to increase taxes on capital gains. Specifically, the long-term capital gains (LTCG) tax on equities was raised to 12.5% from the previous 10%, and the short-term capital gains (STCG) tax was increased to 20% from 15%. However, the LTCG tax exemption limit was also raised to ₹1.25 lakh from ₹1 lakh. This move unsettled investors, resulting in 2,971 stocks falling while only 811 stocks managed to hold onto their morning gains. Currently, short-term capital gains on equities are taxed at 15%, and long-term capital gains over ₹1 lakh are taxed at 10%.
In addition to these changes, the government also imposes a 0.1% Securities Transaction Tax (STT) on every equity sale or purchase. For other assets, short-term capital gains are taxed based on an individual’s income tax slab, and long-term capital gains are taxed at 20% with indexation benefits. Many analysts had expected the Finance Minister to keep the LTCG rate unchanged.
Sandeep Chilana, Managing Partner at CCLaw, commented, “The FM has proposed an increase in the rate of tax on both short-term and long-term gains from certain financial assets. In the past few years, substantial investments have been made by retail investors in financial markets. Change in rates of tax will likely have a significant impact on the sentiments of retail investors with respect to consistency in tax policy and doubt that even higher taxes may be imposed in the future.”
Additionally, the Economic Survey 2024, released on Monday, highlighted an increase in retail investors and a rising trend of speculation in the stock market. It noted that derivatives trading can lead to large gains and often appeals to people’s gambling instincts.
Several key stocks were impacted. Engineering and construction giant Larsen & Toubro saw a drop of 3.68%, ending at ₹3,517.15. The company’s capital expenditure target for FY25 remained unchanged at ₹11.1 lakh crore, which, according to Apurva Sheth of SAMCO Securities, is a positive sign of the government’s commitment to both infrastructure development and balancing coalition politics.
Public sector undertaking (PSU) stocks such as IRCON, HUDCO, NICAL, RCF, IRFC, NBCC, GIC RE, NALCO, and MRPL also experienced declines of 5-9%.
The Budget announcements today have created uncertainty among investors, leading to a significant downturn in the stock market. This reaction highlights the sensitivity of market sentiments to changes in tax policies, particularly those affecting capital gains, which have a direct impact on investor returns. The government’s focus on balancing economic growth with fiscal responsibility will be closely watched in the coming months as the implications of these changes unfold.
