Budget 2024 | STT hike to curb excessive speculation in F&O market: Sunil Damania of MojoPMS

Budget 2024: In a significant blow to Futures and Options (F&O) traders that also spooked stock market sentiments, Finance Minister Nirmala Sitharaman declared raising the securities transaction tax (STT), rate from 0.01 per cent to 0.02 per cent while presenting Union Budget 2024 on July 23. This means that equity and index traders will face double the tax on their trades once the said budget proposal comes into effect, i.e., from October 1, 2024.

Sitharaman also announced an increase in long-term (LTCG) and short-term capital gains (STCG) as part of tax changes in Budget 2024. As per definition, any profit or gain that arises from the sale of a 'capital asset' is a capital gain.  

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Budget 2024: STT, LTCG, STCG tax rate hike at a glance

Announcing the proposal, Sitharaman said, “I have a couple of proposals for deepening the tax base. First, STT on futures and options of securities is proposed to be increased to 0.02 per cent and 0.1 per cent, respectively. Second, for reasons of equity, I propose to tax income received on buyback of shares in the hands of the recipient.”

STCG on “specified” financial assets will now attract a tax rate of 20 per cent instead of 15 per cent. On the other hand, the tax rate on long-term capital gains for all financial and non-financial assets will rise from 10 percent to 12.5 percent. The exemption limit for these gains has been set at ₹1.25 lakh per year.

In a post-budget press conference on the 12.5 per cent tax on long-term capital gains, Finance Minister Nirmala Sitharaman said, "...We wanted to simplify the approach to taxation - also for the capital gains. Second, if anything, the average taxation has come down when we say it is 12.5 per cent. We have worked out for each of the different asset classes...The point that we brought it down from below the average to 12.5 per cent encourages market investment..."

Also Read: LTCG vs STCG: Budget 2024 hikes capital gains tax with immediate effect; here’s all you need to know

D-Street experts believe that the increase in STCG and LTCG tax and STT on F&O are a dampener for the stock market. However, some are of the view that these tax changes will ultimately contribute to a sustainable investment landscape with balanced and orderly growth of the capital market. Commenting on the same, Sunil Damania, Chief Investment Officer (CIO), MojoPMS believes that the STT hike will curb excessive speculation in F&O market.

According to the CIO, the gap between short-term and long-term capital gains has widened from five per cent to 7.5 per cent, which will enhance government revenue from personal income tax. ‘’Despite the increase in capital gains tax, there was no reduction or removal of the STT, which is perceived as unfair to equity investors. However, the increase in STT on derivatives is a positive step towards curbing excessive speculation in F&O markets,'' he added.

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Sunil Damania on Budget 2024

The budget outlines a strategic plan to propel India towards its goal of becoming a developed nation, Vikshit Bharat, by 2047. The anticipated adjustments to the capital gains tax were implemented, addressing a significant need…The budget also reflects coalition politics, with increased allocations to Bihar and Andhra Pradesh. 

Given the record dividends received from the Reserve Bank of India (RBI), a higher allocation for infrastructure was anticipated, but the budget maintained the levels set in the interim budget. Overall, the budget is favourable for macroeconomic stability but may be less encouraging for the stock market. One possible reason is the government's intention to temper the market due to its high valuations.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.