In a severe blow to stock market investors, the Finance Minister Arun Jaitley re-introduced the long-term capital gains (LTCG) tax on equities, while the short-term capital gains (STCG) tax was maintained at 15 per cent.  

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Soon after the announcement, the Sensex tanked over 400 points, while the broader Nifty50 slipped below 11,000. 

What experts say

Market expert Ajay Bagga believes LTCG is a retrograde move as grandfathering of ongoing positions was needed. 

"Grandfathering is important. Applying LTCG tax right on the closing prices of January 31, 2018 is unfair. Secondly, FM Arun Jaitley didn't speak about STT and other levies. The government already earns Rs 800 crore revenues from STT," he said.

He also believes the move will dry volumes in Indian markets as foreign investors will flock to countries like Singapore and Dubai.

"Why would FIIs come to India when they can trade in Indian shares on Singapore's SGX Nifty on less charges," he said.

However, B. Gopkumar, Executive Director & CEO , Reliance Securities believes the tax being applicable on cost prices prevailing on January 31, 2018 will prevent any large scale selling in stock markets.

“While LTCG tax has been imposed, there is no tinkering on STT, which makes India as probably only country in the world to have both taxes at the same time. Grandfathering of cost prices for LTCG will prevent any knee jerk reaction in stock prices but imposition of tax is a clear negative for equity markets as far as sentiments are concerned,” he said.  

Partho Dasgupta, Partner, Tax and Regulatory services, BDO believes the cut-off date of January 31 will provide a relief. 

"The grandfathering provision of taxing long-term gain with the January 31, 2018 being a cut-off date would come as a relief with the market prices touching all-time high for exempting actual gains accruing to investors in the future." he said. 

Nithin Kamath, Founder & CEO, Zerodha noted that taxing LTCG will be beneficial for the economy. 

"The introduction of the 10% Long-term capital gains tax is healthy for the overall economy. Needless to say, there will be a knee-jerk reaction to this in the market, but my guess is that this would be short-term in nature." 

LTCG details

LTCG tax had been abolished in 2005 i.e. there was no tax on profits if a stock was held for more than a year. Only 15 per cent of STCG was applicable if a stock was sold within one year of purchase, in addition to surcharge and cess.

Now, long-term capital gains will be taxed at 10 per cent if the gains exceed Rs 100,000. However, all gains up to January 31, 2018 will be grandfathered.

The government also levies securities transaction tax (STT) on every purchase and sale of listed securities. FM Jaitley said nothing about the STT in his Budget speech. Experts wanted the removal of STT if LTCG was to be re-introduced. 

“The government must have a serious relook at STT, abolish Dividend Distribution Tax (DDT) as also reduce GST rates on share transactions from 18 per cent to 12 per cent,” Amar Ambani of IIFL had noted in a Budget-preview report.