Budget 2024 Aims To Reduce Excessive Speculative Trade in F&O, Market May Remain Volatile in Short Term

The widening gap between STCG and LTCG rates is a clear incentive for longer-term holdings. This move is also a step towards standardising taxation across various asset classes, potentially simplifying the investment decision-making process for many.

Kolkata : Dalal Street today witnessed a sharp decline today following the Union Budget announcement of the long-term capital gains (LTCG) tax on equities raised to 12.5% from the previous 10%, and the short-term capital gains (STCG) tax increased to 20% from 15%. However, the LTCG tax exemption limit was also raised to Rs 1.25 lakh from Rs 1 lakh.

Both major benchmarks, the Sensex and Nifty, experienced significant losses, leaving investors worried.

Market experts said that the higher taxes on F&O was expected and this is being done to reduce the excessive speculative trades in the market. They also feel that the market volatility may continue for short-term.

Satish Menon, Executive Director, Geojit Financial Services said that the budget was anticipated to build upon the progressive measures outlined in the interim budget. However, the overall government expenditure aligns with the interim budget's goal and focus is to reduce the fiscal deficit to 4.9%, significantly lower than the 5.6% estimated for FY24. Key positives are new macro-initiative aimed at job creation, workforce skill development, improvements in agriculture, urban & rural housing, and higher funding the MSME sector, which should uplift the masses.

“Increase in capital gain tax is a negative surprise, The 5% increase in STCG is likely to adversely affect short-term investors in the near term,” Menon said.

Dr. V K Vijayakumar, Chief Investment Strategy, Geojit Financial Services

"The overarching theme of this Budget is fiscal consolidation and focus on employment generation. The reduction in fiscal deficit target for FY 25 from 5.1% in the interim Budget to 4.9% now reflects the government’s focus on growth with financial stability. This, along with Rs 11.11 lakh crores (3.4% GDP) of capex in FY25 augurs well for the growth of the economy in the long run.

From the market perspective the Budget proposals with the intent of raising tax revenue from capital gains are slightly negative. The increase in STCGs tax from 15% to 20% is sharp. The increase in LTCGs tax from 10% to 12.5% is only marginal particularly when seen from the perspective of raising the LTCGs tax exemption limit from Rs 1 lakhs to Rs 1.25 lakhs. The taxation of share buy back income at the hands of the recipients also is a negative. The higher taxes on F&O was expected and this is being done to reduce the excessive speculative trades in the market.

A major positive in the Budget is the proposal to abolish angel tax. This will be a big boost to the startup ecosystem."

Alok Agarwal, Head - Quant & Fund Manager, Alchemy Capital Management

"The hike in capital gains tax rates has understandably caused market jitters, especially because the tax revenue momentum was reasonably good. This unexpected policy shift is likely to weigh on investor sentiment in the short term, leading to higher market volatility than seen in the recent past. Investors should stay focused on the fundamental strengths of their portfolios. Such short-term market fluctuations may offer opportunities to add strong names to their portfolio."

Vaibhav Porwal, Co-founder, Dezerv said "The recent changes in the Union budget, particularly the increase in STCG and LTCG tax signal a significant shift. While the market's initial reaction may seem bearish, we believe these changes will ultimately foster a more stable and mature investment environment.

“The widening gap between STCG and LTCG rates is a clear incentive for longer-term holdings, which aligns with our view of creating sustainable wealth. This move is also a step towards standardising taxation across various asset classes, potentially simplifying the investment decision-making process for many.” Porwal said.

The market is currently responding with a short-term perspective, particularly concerning the Securities Transaction Tax (STT) adjustments in derivatives. This will undoubtedly impact the profitability of frequent traders. “However, we encourage investors to look beyond immediate market reactions and consider the long-term benefits of a tax structure that promotes patient capital,” he added.

Hike in short-term capital gains and long-term capital gains have been sentimentally negative for the equity markets. This has resulted in short-term selling pressure. However, this can be the beginning of reforming the capital markets and curbing retail participation in the F&O segment.

“We can expect more measures in the F&O space in the days to come. On the growth and social agenda, the government has clearly articulated the focus areas like agriculture, employment, skilling, infrastructure, inclusive social growth, manufacturing, infrastructure, urbanization, innovation and next-gen reforms. The budget spending in the years to come will keep adding to these focus areas,” said Mr. Deepak Ramaraju, Senior Fund Manager, Shriram AMC.

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