Government Raises Tax Rates on Capital Gains and Derivative Trading
In the latest Union Budget, the government has increased taxation on both long-term and short-term capital gains as well as doubled the Securities Transaction Tax (STT) levied on futures and options (F&O) contracts. Finance Minister Nirmala Sitharaman announced that the long-term capital gains tax (LTCG) will be raised to 12.5% from the previous rate of 10% for all financial and non-financial assets. However, the exemption limit for LTCG has also been increased to Rs. 1.25 lakh from Rs. 1 lakh. Similarly, the short-term capital gains tax (STCG) has been revised upwards to 20% from the earlier 15% slab.
In addition, Sitharaman proposed doubling the STT on F&O transactions to 0.02% for options and 0.1% for futures, effective October 1st. The move is aimed at curbing the exponential growth seen in derivative volumes on stock exchanges. Regulators have expressed concerns about the potential systemic risks from increased participation in this segment. As per one of the major broking houses, the higher STT rates could raise an additional Rs. 1,000 crores annually for the exchequer.
The capital gains tax hike resulted in heavy losses for domestic indices on the day of the announcement, with both the Sensex and Nifty plunging over 1.5%. While the objective may be to cool investor sentiment in equity markets, industry experts argue that participants are likely to absorb the higher tax outgo. Only time will tell if the measures achieve their intended goals or end up being counterproductive for the broader markets. Overall, the changes aim to simplify taxation norms while generating additional revenues for developmental priorities.
