Market Robust Rebound Despite Capital Gains Tax Storm

After a surprising bloodbath at Dalal Street on higher capital gains tax in the Union budget proposed by the Finance Minister, Nirmala Sitharaman, the market displayed a substantial recovery. 

The Union Budget increased the short-term capital gains tax on the listed financial assets to 20 per cent from 15 per cent previously. Whereas the long-term capital gains (LTCG) tax increased to 12.5 per cent from 10 per cent. However, the exemption is extended to Rs 1.25 lakh from 1 lakh for LTCG. 

Additionally, the government also declared an increase in the Securities Transaction Tax (STT) on Futures and Options. The STT on futures will rise from 0.0125 per cent to 0.02 per cent, while the STT on options will increase from 0.0625 per cent to 0.10 per cent.

Benchmarks Recovery

The benchmark indices, Nifty and Sensex showed a robust recovery despite more than 1 per cent fall during the budget speech. 

The National Stock Exchange (NSE) Nifty 50 index ended 0.12 per cent lower at 24,479 whereas the S&P Bombay Stock Exchange (BSE) Sensex settled merely 73 points or 0.09 per cent lower at 70.429 levels on the closing bell. 

Nifty Moves

In the Nifty 50 index, 23 stocks traded in the positive territory, while 27 stocks ended into the red territory.

Among the losers, Shriram Finance and Larsen & Toubro shredded around 3 per cent followed by more than 2 per cent dip in Hindalco, Bajaj Finance and ONGC. 

However, among the winners, Titan topped the index with 6.53 per cent gain as import duty was reduced in the Union Budget. Defensive stock ITC gained 5.5 per cent, while Tata Consumers traded 4.32 per cent higher. 

Analyst Note

“Both the key benchmark indices erased almost all of its losses to end marginally lower as the government's focus on lower fiscal deficit, increased spend on infrastructure and focus on rural spending helped calm the nerves of the traders,” said Prashanth Tapse, Senior VP (Research), Mehta Equities.

“The tax hikes on capital gains are in line with the expectations with the existing and potential gains financial assets offer and we expect the continuity of liquidity to the markets unlike in 2018. The FM has increased the threshold amount for taxation to seemingly compensate for the increased taxes but that isn’t of much relief to investors,” said Divam Sharma, Founder and Fund Manager, Green Portfolio. 

Investors surely are disappointed but markets however will be fine soon. This is nothing new for the Indian markets having seen even 20 per cent LTCG tax two decades ago. So, while the investor sentiment will stay a bit dull for some time, it will soon recover, added Sharma. 

Sectoral Movement

In terms of sectoral performance, Nifty Bank fell more than 502 points or nearly 1 per cent, whereas Financial Services plummeted 1.37 per cent. Further, PSU Banks dropped 1.4 per cent. 

Metal also traded fragile with a 0.94 per cent dip followed by 2.29 per cent drop in Nifty Realty. Pharma gained half a per cent, followed by 0.68 per cent gain in IT and 0.28 per cent gain in Auto. FMCG on the other hand traded with highest gains of 2.68 per cent. 
 

The more domestically focussed indices, Mid-cap and Small cap also traded with losses of 0.6 per cent and 0.88 per cent higher respectively.