Could the Union Budget 2024 Spell Trouble for the Stock Market?

The Sensex and Nifty, which survived and even prospered following the shocking election results on June 4, are now facing another difficult event: which is the Union Budget. While the Finance Minister Nirmala Sitharaman showered a tax bomb on India, the Sensex dropped to 1,278 points, yet people spurred once again towards the future plans presented in the Budget as an attempt to enhance the growth and sustainability of the Indian economy.

“From the market’s standpoint, rising STCG to 20% and LTCG to 12.5% is a blow. “We need to prepare for a negative reaction in the short term,” said Sanjay Sinha, Founder of Citrus Advisors.

Analysts believe that higher capital gains might cause market values to consolidate at present levels, leading to a more balanced sectoral performance.

Aside from the tax stunner, the Budget’s underlying theme is budgetary reduction and an emphasis on job creation. “While the budgeted spending on infrastructure, rural and agri has remained same as interim budget, it maintains a fine balance between improving efficiency in agriculture, supporting rural economy and keeping the focus intact on infrastructure spending given limited time left in the current fiscal year,” Tata Asset Management’s Rahul Singh stated.

Here are some critical takeaways for stock market investors from Budget 2024:

1) Short-term capital gain tax increase

In the Budget, Sitharaman boosted short-term profits on some financial assets to 20% from 15% now.

2) Hike in LTCG

The Budget increased the long-term capital gains (LTCG) tax rate on all financial and non-financial assets from 10% to 12.5%.

“This obviously raises the barrier rate for investors in financial assets, resulting in an emotional negative. Markets have risen in the run-up to the event during the previous few months, which might result in a temporary cooling of financial markets before the attention shifts back to corporate profits and the health of the Indian economy,” said Harish Krishnan of Aditya Birla Sun Life AMC.

3) Increase in exemption

The budget proposes increasing the capital gains exemption ceiling on financial assets from Rs 1 lakh to Rs 1.25 lakh per year.

4) STT hike on F&O

To dissuade ordinary traders from investing household funds in derivatives trading, which was referred to as “gambling” in the Economic Survey, Sitharaman increased the securities transaction tax (STT) in the futures and options (F&O) sector in the Budget.

The changes come into effect from 1st October 2024, the same day when exchange turnover charges will be reduced.

5) Buyback tax

Budget has proposed to tax income received on buyback of shares in the hands of the recipient.

“The proposal to tax domestic companies’ share buybacks in the hands of shareholders could bring parity between the tax implications of declaring dividends and buybacks.” Historically, shareholders have benefited from a reduced tax implication on buybacks, saving around 12% on earnings distributed by firms in the form of buybacks versus dividends. This benefit may no longer be available to shareholders. However, the cost of acquiring shares purchased back shall be permitted as a capital loss to the shareholder against any other capital gain income,” stated Dhruv Chopra, Managing Partner of Dewan P. N. Chopra & Co.

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