Presenting the Budget for FY 2024-25 in Parliament on July 23, 2024, Union Minister of Finance Nirmala Sitharaman announced several changes in the tax rules.
Specified mutual funds will enjoy reduced long-term capital gains tax if held for two years. However, more clarity is needed as to which all schemes will benefit. The benchmark indices Sensex and Nifty closed in the red on the back of the finance minister’s Budget announcement on increasing the capital gains tax and securities transaction tax
Presenting the Budget for FY 2024-25 in Parliament on July 23, 2024, Union Minister of Finance Nirmala Sitharaman announced several changes in the tax rules.
Of particular interest to investors was the section on capital gains tax. Investors awaited with bated breath as she began announcing the taxation of capital gain tax on different class of investments.
“Short-term gains on specified financial assets shall henceforth attract a tax rate of 20 per cent instead of 15 per cent, while that on all other financial assets and non-financial assets shall continue to attract the applicable tax rate. Long-term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 per cent. For the benefit of the lower and middle-income classes, it is proposed to increase the limit of exemption of capital gains on certain listed financial assets from Rs 1 lakh to Rs 1.25 lakh per year,” she said.
This, however, came as a shocker to investors who were eagerly waiting for some rationalisation in taxation. For this time, investors were particularly hopeful of some major announcements from the finance minister, especially on the tax front.
To be fair, the markets and investors were expecting some rationalisation to long-term capital gains (LTCG) tax rates, if not on short-term capital gains (STCG) tax as a reward for being long-term investors.
The stock market reacted negatively to Sitharaman’s announcements and both the major indices closed in the red – the Sensex down by 73 points and the Nifty by 30 points. This fall could be considered as neutral considering the elevated level of the markets.
The market had actually anticipated the significant increase in STCG tax from 15 per cent to 20per cent.
Madhavi Puri Buch, chairman, the Securities and Exchange Board of India (Sebi) had, in fact, expressed her concerns about the derivatives market overheating. Earlier on July 19, 2024, Buch had expressed concerns about household financial savings being used for speculative bets rather than capital formation.
A week earlier, Sebi had appointed an expert group on exchange-traded derivatives and proposed increasing lot sizes of futures and options from the current Rs 5 lakh to Rs 25 lakh, to curb retail participation in the future and option (F&O) segment.
The increase in securities transaction tax (STT) on sale of an option in securities from 0.0625 per cent to 0.1 per cent of the option premium, and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price was seen as a measure to curb F&O trading.
Such a measure was widely anticipated when the finance minister tabled the Economic Survey 2024 in Parliament on July 22, 2024. The survey highlights that derivatives trading holds the potential for significant gains, appealing to the gambling instincts of individuals and can augment income if profitable. However, it warned that, globally, derivatives trading mostly results in financial losses for investors.
“Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading,” the report said.
The recent statement by Sebi highlighting the rapid growth in trading volume as a major concern at a broader economic level, hinted that the government aimed to calm down and regulate activity in derivatives trading.
The government has tried to kill two birds with one stone with the revision in capital gain tax and STT. For long-term investors, the increase from 10 per cent to 12.5 per cent would hardly make a major dent in their overall gains. At the same time, it will nudge investors into entering Indian markets with a reasonably long-term outlook and encourage them to step up as actual stakeholders in the Indian growth story.
The amendment to the definition of specified mutual funds under Section 50AA of The Finance Act, 2023 will bring parity on taxation in specified mutual fund. The Finance Act, 2023 introduced a new section 50AA, according to which the gains on ‘specified mutual fund’ was to be considered as STCG, irrespective of the holding period, and the same was be taxable at the applicable rates.
Section 50AA defined ‘specified mutual fund’ as “mutual funds by whatever name called where not more than 35 per cent of its total proceeds was invested in the equity shares of domestic companies”.
Consequently, a debt-oriented mutual fund scheme which had debentures, state development loans (SDL), and government securities as major portion of its portfolio holdings, shall be classified as ‘specified mutual fund’.
Now these funds will enjoy LTCG benefit if held for more than two years. However, the fine print of the Budget says “the explanation of Section 50AA is proposed to be brought into effect from 1st day of April, 2026 and shall be applicable from AY 2026-27 onwards.”
More clarity is awaited on this as to which all schemes will enjoy the benefit of the same.
We will keep you posted.