Indian Equity Market's Expectations from Union Budget 2024

As 2024 Union Budget approaches, there's excitement among market participants, industries and individual investors. Finance Minister returning to present the budget there's renewed interest in potential changes and reforms. This article explores the key concerns and expectations that Indian equity market holds for the upcoming budget, focusing on how these anticipated changes could impact various sectors and investment strategies.

Capital Gains Tax

One major concern for investors is capital gains tax, which is charged on profits from selling assets like real estate, stocks and mutual funds. In India, capital gains are divided into short term and long term categories each with distinct tax rates. Short term capital gains which apply to equity assets held for a year or less are taxed at 15%. It means if investors sell their equity investments within a year they need to pay a 15% tax on the profit.

On the other hand, long term capital gains for assets held over a year are taxed at a lower rate of 10% for equity assets. However, for unlisted shares and real estate tax rate on long term gains is higher at 20%. This system of different tax rates promotes holding investments for longer periods. If the government increases capital gains tax rates, it could have a negative impact on the market.

Changes in Debt Mutual Funds

In the previous budget government eliminated the indexation benefit for long term capital gains on non equity mutual funds. Before this change, investors who held debt mutual funds for over 36 months were taxed at 10% on their long term capital gains with the advantage of indexation. Indexation let investors adjust the cost of their investments to account for inflation, which reduced the amount of taxable gains. However, starting April 1, 2023, these gains are now taxed as short term gains at the individual's regular income tax rate regardless of how long the investment was held.

Industry Urges Longer Investment Holds for LTCG

Finance sector is advocating for a change in the duration, investors must hold onto their assets to qualify for lower capital gains taxes or LTCG. Currently, investors can benefit from a reduced tax rate if they hold an asset for a year such as with stocks. However, there is a push to extend this holding period with some calling for a return to the previous requirement of three years. The rationale behind this is that investors who commit to holding assets for a longer time are more likely to make thoughtful investment choices rather than reacting impulsively to short term market fluctuations. This shift could potentially enhance market stability by encouraging a more measured investment approach.

Simplified Investor Taxes

Another request from the industry is for a simplified tax system. They are advocating for a uniform tax rate on Long Term Capital Gains across different types of investments including stocks, real estate and unlisted companies. Presently, tax rate varies depending on the asset class creating complexity for investors. By implementing a single tax rate it would be easier for investors to calculate their tax obligations regardless of their investment choices. This simplification could encourage more individuals to participate in the market.

STT Hike for High Frequency Traders

Industry is paying close attention to high frequency traders who utilize advanced computer algorithms to execute a high volume of rapid trades. There's a debate that HFTs possess an edge over regular investors due to their technological capabilities. Currently, all stock market transactions are subject to the Security Transaction Tax or STT. Mutual fund sector is advocating for an increased STT for HFTs arguing that the high trading volume associated with HFTs can complicate portfolio management for mutual funds. Nonetheless, implementing a higher STT rate specifically for HFTs presents challenges such as defining who qualifies as an HFT and how to monitor their trading activities effectively.

Reclassifying F&O Transactions

There are speculations that the government might reclassify Futures and Options or F&O transactions from being considered as business income to being classified as speculative income. This shift would lead to higher taxes on F&O trades potentially affecting trading volumes and strategies. If F&O income is reclassified traders might face increased tax obligations.

Additionally, this change could introduce more stringent regulations and reporting requirements, impacting both retail and institutional investors. Another proposal under review is the implementation of Tax Deducted at Source or TDS on F&O trades. This aims to boost transparency and simplify the government's tracking of investors and their transactions. Although TDS could enhance transparency, it might also complicate the process for small investors. The imposition of TDS could deter retail participation in the F&O market particularly for those with modest gains.

Final Words

Upcoming budget has the potential to influence Indian equity market. Investors and traders are particularly interested in potential changes to capital gains tax, Security Transaction Tax and classification of F&O transactions. Announcements in these areas could affect market sentiment and investor actions. While it remains to be seen whether the budget will meet these expectations or introduce unexpected changes, it is certain to play a key role in determining the future direction of the Indian equity market.