Finance minister Nirmala Sitharaman’s record seventh budget has underscored the importance of an efficient tax system with an all-rounded budget. The reaction in the stock market was initial panic when she mentioned the word ‘capital gains’. However, equity prices recovered quickly to end the flat trading session on Budget Day.
As an individual taxpayer, you are not paying any significant tax up to Rs 15 lakh income annually. That means you have some more money in your hands. Your long-term financial plan will not be affected if you are a regular investor. There is a minor increase in the long-term capital gains tax in listed shares. However, if you are a day trader in equities and derivatives and earn well, you have to pay more taxes on capital gains.
The Budget clearly states that you must pay taxes if you make money through capital gains. Capital gains in India are here to stay, and if some pundits are believed, they will eventually be brought in line with the rate in rich countries. At 12.5 per cent, the long-term capital gains tax rate is still lower than that in the United States at 20 per cent. So, you may want to set your expectations accordingly.
Trading V Investing profits
The tax system in India encourages you to invest more than trade in the equity markets.
A study published last week by the Securities and Exchange Board of India about intra-day trading in equities shows that 7 out of 10-day traders lose money. As the day trading activity intensified over the past three financial years to 2023, losses have increased, too. As a result, stock market day trading is not for those who cannot digest losses. Even then, more and more people are finding their way to start trading in the stock market from tier II and tier III cities in India.
There is an attraction towards quick returns despite the data showing losses. The message from the Budget in that situation to you as a day trader is that if you are good at it, you must pay more taxes.
At the same time, those playing in equity and index options derivatives are setting new records in the daily turnover. Last year, a US firm reported trading profits of 1 billion USD in India index options.
If institutional traders are making that kind of money, the finance minister is suitable to enhance the taxation on such gains. If you observe the budget speeches of the government over the past ten years, the government has gradually made it clear that India is not a tax haven country. From your standpoint, the message from the Budget is that derivatives are for hedging your risks. You must understand the tax implications of a derivatives trade before acting on it.
The mutual fund industry has witnessed a significant contribution from retail investors. The assets under management from systematic investment plans are at a record high of over Rs 10 lakh crore. However, a Sebi study of SIP investors in the past showed that barely a few accounts had a holding period of over three or five years. A lot of units were sold within a year. The Budget discourages you from doing that. You need to hold your mutual funds for a long time for them to give you any meaningful returns for your financial goals like retirement or children’s higher education.
Concerns about too much money chasing too few assets in equity markets exist. Equity market valuation is presently way higher than 10-year averages for most quality stocks. Few quality companies with a significant free float are available for investors who are not promoters.
In such an environment, if more money keeps pouring from domestic and foreign investors into equity assets, valuations could be prohibitively expensive for entry to new investors. It would also be hard to generate returns that comfortably beat the consumer price inflation rate. Sebi chairperson Madhabi Puri Buch told wealth managers recently that new companies are getting listed to absorb the increased flow of investments.
At the same time, the future of inflation-proof investing is in Real Estate or infrastructure investment trusts.
Rajas Kelkar
The author is editor-in-chief at www.moneyminute.in