A Taxing Budget for the Stock Market

As we were approaching the Union Budget 2024, most of us were filled with anxiety over potential new regulations that could impact the equity and derivatives markets. This expectation was fuelled by recent comments from financial regulators and the government itself. SEBI chief Madhabi Puri Buch’s remarks on the surge in futures and options volumes, alongside RBI Governor Shaktikanta Das’ warnings about structural liquidity issues, sparked debates about potential government intervention.

The importance of futures and options was clearly underscored when it was mentioned for the first time in an economic survey. Hence there were expectations that Finance Minister Nirmala Sitharaman, presenting her seventh consecutive Union Budget and making history as the first finance minister to do so, would introduce measures aimed at curbing speculative activities, particularly in the derivatives market. True to our expectations, the finance minister announced a hike in capital gains tax on both short-term and long-term profits from certain financial assets.

Additionally, the Securities Transaction Tax (STT) on futures was marginally increased to 0.02 per cent and on option it was increased to 0.1 per cent. Earlier STT on futures was at 0.0125 per cent and on option it was at 0.0625 per cent. Although the market reaction was initially harsh, it soon recovered and I believe the overall impact is largely expected to be neutral for the market participants. For instance, the STT on options will increase by around Rs 3.75 per Rs 10,000 round-trip premium turnover, while exchange turnover charges should decrease by a similar amount.

The STT increases on both futures and options will take effect from October 1, 2024, coinciding with the reduction in exchange turnover charges and hence may not impact a trader to a large extent. With long-term capital gains (LTCG) and short-term capital gains (STCG) taxes increased by 25 per cent and 50 per cent, respectively, the market is expected to digest and stabilise in the coming days. The LTCG rate has been raised to 12.5 per cent, with the exemption limit increased from `1 lakh to `1.25 lakh, effective immediately. This retrospective application of the tax rate could have been avoided.

I believe this was the most appropriate time to introduce these taxes if at all needed, as many investors who entered the market during the coronavirus pandemic in 2020 are likely sitting on significant profits and would not mind paying a portion of them in taxes. Additionally, tax rates on stock market activities remain among the lowest of all types of taxes in India. We may see a reaction to these tax changes in the equity market over the next few weeks or months. Nonetheless, future returns from the equity market will depend on company valuations and performance.

If companies continue to deliver strong results, the impact of these announcements may be limited to a short-term adjustment. This is exemplified by the performance of the IT sector, which has been one of the best performers, driven by a reasonable set of numbers against low expectations and not overly high valuations.

In our cover story this time, we have analysed the June quarter results of various companies, providing comprehensive coverage of their performance. Additionally, we have examined how the recent budget will impact these companies and sectors. In another interesting story, we have analysed how the upcoming U.S. election could affect global and Indian markets and sectors. We hope you will find these stories interesting and helpful in making informed investment decisions.

RAJESH V PADODE
Managing Director & Editor