Capital gains tax hiked to curb speculative trading despite a 40% drop in derivatives trading since February

Jul 23, 2024 06:38 PM IST

The Indian government raised both short-term and long-term capital gains taxes on stocks in the Union Budget 2024 in a move to curb increasing cases of speculative trading in equity derivatives in the country’s $5 trillion market, Bloomberg reported.

However, the notional volume of equity derivatives trading in India shrank more than 40% from its peak in February to $3.3 trillion on Monday, according to data compiled by Bloomberg.

How much has the government hiked capital gains taxes on equity shares?

Short term capital gains taxes, or taxes for the sale of shares held less than 12 months was hiked to 20%, the first time since 2008.

Long term capital gains taxes, or taxes for the sale of shares held for more than 12 months was hiked to 12.5% from 10%.

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Securities transaction tax (STT) was hiked to 0.1% for equity options and 0.02% for futures, all of which will be effective from October.

However, the exemption limit for the capital gains tax has also been increased to ₹1.25 lakh from ₹1 lakh earlier.

How much did India’s equity derivative trading volume surge?

In January, the notional value of derivatives trading reached $6 trillion, which surpassed the size of the Indian economy in itself, also rising to the highest in the world.

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This surge led the finance ministry to warn against increasing speculation in the Economic Survey. However, this hit a peak in February and has fallen by 40% since, according to the Bloomberg report.

What was the market’s response to the hike in capital gains taxes?

The Indian stock market crashed after the announcement, with the benchmark BSE Sensex tanking below 900 points. However, the market did recover all its losses and settled flat at the end of the day’s tradin session.

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What will be the impact of the tax hike on the markets?

The tax hike “will undoubtedly impact the profitability of frequent traders,” Bloomberg quoted Vaibhav Porwal, co-founder at wealth management firm Dezerv as saying. “The widening gap between short- and long-term capital gains tax rates is “a clear incentive for long-term holdings.”