Budget 2024: Changes in LTCG, STCG to have a short-term impact on the Indian stock market, says Tapse of Mehta Equities

Budget 2024: Prashanth Tapse, Senior VP (Research), Mehta Equities, believes the increase in long-term and short-term capital gains will have a short-term impact on the Indian stock market. In an interview with Mint, Tapse highlighted the key positives and negatives of the Union budget 2024.

Edited excerpts:

What were the key positives and negatives for the markets in the Budget 2024?

On Budget Day, I remembered Warren Buffett's best quote: "If you mix politics with your investment decisions, you’re making a big mistake."

This has been proven several times whenever political events come into markets. June 4 and July 2024 23 are two of the best and latest examples of political events that brought in high volatility but got digested to neutrality afterwards.

The final Budget presented by Finance Minister Nirmala Sitharaman has not deviated much from February's Interim Budget with some small changes.

Capital expenditure (capex) growth is driven by a 27 per cent increase in government expenditure. The sector-wise focus remains unchanged, with the highest allocation towards defence.

Overall, the Budget aims to balance fiscal prudence with growth, focusing on tax simplification, skill and employee development, dispute resolution, ease of doing business, and infrastructure development while maintaining fiscal consolidation.

Key positives

(i) The government aims to maintain fiscal discipline with a targeted fiscal deficit of 4.9 per cent, which is commendable.

(ii) The allocation of ₹2.66 lakh crore for rural development will significantly boost economic activity, create job opportunities and improve rural living standards and incomes.

(iii) The biggest positive takeaway was ₹11.11 lakh crore infrastructure spending/capex goal in FY25 (3.4 per cent of GDP).

(iv) The Budget outlines increased spending on job creation initiatives, for which the government has allocated ₹2 lakh crore. The plan to skill 20 lakh youth over five years is what the nation needs.

(v) The abolition of the Angel Tax would support the entrepreneurial ecosystem for all categories of investors.

Previously set at 30.6 per cent, this tax deterred angel investors, slowing funding and startup growth.

Removing this barrier is a progressive step that will rejuvenate investment flows, enhance investor confidence, and invigorate the startup landscape.

Key negatives

(i) From an investor's point of view, the attempt to increase the long-term capital gain (LTCG) tax and the short-term capital gain (LTCG) tax would be marginal negative.

Still, the taxation of share buyback income at the hands of the recipients also is negative.

The increases are negative in the short term. The government is confident that the capital market will outperform in line with economic growth, and the above increase in capital gains will be neutralised.

(ii) From a common man's point of view, this Budget disappoints the middle-class salaried people who had high hopes from FM for more tax exemptions and an increase in tax-free limits.

(iii) Removing indexation benefits may lead to a higher tax burden on real estate sales.

How will an increase in LTCG and STCG impact investors? Is it just a short-term dampener?

The fear of increasing the LTCG and STCG was in the investors’ minds before the Budget.

After FM announced the increase in LTCG and STCG tax, which looks minimal and marginal to the government basket, the market reacted immediately for 10 minutes, but the recovery also came faster.

From an investor's point of view, these changes are likely to impact investor behaviour and market dynamics but are short-term in nature.

I believe the government's rationale is to keep long-term investing more lucrative.

The government wants to discourage short-term trading activities and wants investors to invest in financial assets like equity for a long-term horizon.

How about an STT increase? Do you see it as a move in the right direction?

The hike in STT on Futures and Options (F&O) is also very marginal in value, which may not lead to any decline in trading volumes in these segments.

Overall, these measures would only add up additional government revenues, and the door is open with the government, exchanges, and regulators as they could intervene in these segment charges and check this period to period, which will add uncertainty in the markets.

What should investors' strategy be after the Budget? What sectors should they look at?

Sectors we would like to focus on remain the same as what we had recommended from the Interim Budget: defence, railways, and Infra. We want to advise our clients to buy the dips as now markets will focus more on earnings.

Is there some steam left in the PSU banking space?

Yes, we remain optimistic about the PSU banking space as we see the balance sheet is stronger to tap the next growth, in line with the focus to reach a $5 trillion economy.

In the last few weeks, we have seen a healthy correction in the PSU space, which helps us advise our clients to buy the dips.

In the PSU banking space, we like SBI and Bank of Baroda at the current levels for long-term investors.

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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.