Capital gains tax sentimentally negative for market in near term: Motilal Oswal

The Finance Minister has proposed changes in both short-term as well as long-term capital gain tax, says Siddhartha Khemka, Head of Research, Broking and Distribution, MOFSL. The short-term gains on listed financial assets shall attract an increased tax rate of 20% from 15% earlier. STCG on all other non-listed financial assets and all non-financial assets shall continue to attract the applicable tax rate. In case of long-term capital gains, the tax rate has been hiked from 10% to 12.5% for listed financial assets but has been reduced from 20% to 12.5% for other assets such as house property, unlisted equity shares etc. However the indexation benefit has been removed on all the assets having long-term capital gains.

“Moreover the holding period for defining long-term has been rationalised with just 2 standardised time horizons. The holding period for unlisted financial assets and immovable assets has been reduced to 2 years from earlier 3 years. While for all listed financial assets it continues to remain at 12 months,” he says.

He further says that the FM also proposed to increase the limit of exemption of capital gains on listed equity to ₹1.25 lakh per year from ₹1 lakh currently, but this will have limited benefit against the proposed rate hike. Unlisted bonds and debentures, debt mutual funds and market linked debentures, irrespective of holding period, continue to attract tax on capital gains at applicable rates.

Along with this, the government has also increased STT on derivatives. This is in-line with its stated intention over the last few weeks to curb excess speculation in F&O trading, especially by retail investors. While these could be sentimentally negative for the market in the near term, we believe that attractiveness of Indian equities for long term investors would continue to remain strong given the healthy domestic fundamentals and strong economic growth expected over the next few years, says Khemka. Overall, we expect these moves would help simplify the capital gains computation for the taxpayers, he says.