The Indian stock market shrugged off concerns over an upward revision in taxes on capital gains announced by Finance Minister Niramala Sitharaman while presenting the Union Budget 2024-25 on Tuesday. The benchmark Sensex and Nifty 50 were almost flat at the closing bell regaining most of the losses.
The benchmark indices dove nearly two per cent during the session in what can be termed as a knee-jerk reaction to Sitharaman's announcement of hiking the Security Transactions Tax (STT), long-term capital gains tax (LTCG), and short-term capital gains tax (STCG).
The Sensex fell 1,278 points or 1.6 per cent to 79,224.32, while the Nifty 50 fell by 435 points or 1.8 per cent to stand at 24,074.20 during the session, in the wake of the Finance Minister's announcements.
However, they recovered most of the losses as the Sensex closed at 73 points of 0.09 per cent lower at 80,429.04, and the Nifty 50 closed 30 points or 0.12 per cent lower at 24,479.05.
The mid-cap and small-cap indices underperformed the benchmarks. The BSE Midcap index suffered losses of 0.74 per cent, while the smallcap index closed 0.18 per cent below.
On the Nifty 50 index, shares of HDFC Bank, Larsen & Toubro, Reliance Industries and ICICI Bank were the top losers, while shares of ITC, Titan, Infosys, and NTPC rose the most and contributed to the index regaining most of its losses.
Nirmala Sitharaman, while announcing the Union Budget, proposed an increase in the rates of STT on the sale of an option in securities from 0.0625 per cent to 0.1 per cent of the option premium, and on the sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such futures traded.
The Finance Minister also announced that LTCG on all financial and non-financial assets will attract a tax rate of 12.5 per cent, up from 10 per cent earlier and that STCG tax on certain financial assets will attract a tax rate of 20 per cent, which went up from the 15 per cent earlier.
According to expert observations, the Budget was fairly on the lines of what had been expected and it avoided populism. The fiscal deficit target was lowered to 4.9 per cent of GDP, significantly lower than the 5.1 per cent announced during the interim budget.
Pankaj Pandey, ICICI Securities head of research, said that the Budget was fiscally prudent, highlighting the market's long-term prospects are still intact.
"Structurally, it is a positive Budget, but an increase in the long-term and short-term capital gains is a bit of a short-term dampener. We see a very limited element of populism in the Budget. Allocation for most of the welfare schemes has been kept largely the same," said Pandey.
As per many experts, the capital gains tax-related announcements will have a short-term impact on the market and investors should look to use the market corrections to add quality stocks to their portfolios.
Alok Agarwal, the Head of Quant & Fund Manager at Alchemy Capital Management said, "The hike in capital gains tax rates has understandably caused market jitters, especially because the tax revenue momentum was reasonably good. This unexpected policy shift is likely to weigh on investor sentiment in the short term, leading to higher market volatility than seen in the recent past.”
Agarwal said that investors should be focused on the fundamental strengths of their portfolios and such short-term market fluctuations are opportunities to add strong stocks to their portfolios.
However, with Budget now done and dusted, the market will again draw cues from global markets and quarterly earnings. Experts have advised investors to be selective in the stocks they select and keep an eye on large-cap stocks as the valuation of mid and small-cap segments are high.
Ajit Mishra, SVP-Research at Religare Broking said, "Given the volatility, we advise maintaining a cautious stance. It’s crucial for Nifty to sustain above the 24,200 level to keep a positive outlook; otherwise, profit-taking may intensify."
