The government on Tuesday raised the tax rates on long- and short-term capital gains on equity transactions and that on the securities transaction tax (STT) levied on sale of futures and options contracts. This will lead to higher tax outflow in the hands of investors.

The tax on short-term capital gains (STCG) has been raised from 15 per cent to 20 per cent, while that on long-term capital gains (LTCG) from 10 per cent to 12.5 per cent for transactions effective July 23. This means the differential between the tax on LTCG and STCG has widened to 7.5 per cent from 5 per cent earlier. The hike in the exemption limit from ₹1 lakh to ₹1.25 lakh for LTCG, however, may offset the higher incidence of tax due to higher rates to some extent.

STT on sale of options will increase from 0.0625 per cent to 0.1 per cent, while that on futures will rise from 0.0125 per cent to 0.02 per cent from October 1. The higher taxes on F&O along with a set of proposals being mooted by the market regulator may reduce speculative trades in the market, particularly from retail investors, said experts.

Shripal Shah, MD and CEO, Kotak Securities, said: “The increase in capital gains tax on equity as well as on STT levied on F&O are aimed at fostering a more sustainable pace of growth in the stock market. We anticipate a small period of adjustment, as the market adapts to these new tax measures. But this may bring about a sustainable investment landscape with balanced and orderly growth of the capital market.”

“If the idea was to cool down the activity in the markets, this might just do the trick,” added Nithin Kamath, Founder, Zerodha, which collected about ₹1,500 crore by way of STT last year.

The increase in STT in F&O coincides with the exchange turnover charges being reduced. The STT on options will increase by ₹3.75 per ₹10,000 round trip of premium turnover, while the exchange turnover charges may reduce by ₹3.5-4.

Holding period

Long-term and short-term holdings will now be determined on the basis of the 12-month and 24-month periods only. The holding period for units of listed business trusts will now be at par with listed equity shares at 12 months instead of the earlier 36 months. The holding period for bonds, debentures and gold will reduce from 36 months to 24 months.

LTCG rate will be uniform at 12.5 per cent across listed and unlisted assets (as against the 10 per cent and 20 per cent earlier). The benefit of indexation, which effectively reduced the tax burden on certain assets held for long periods, has also been withdrawn.

Buyback tax

Income received on buyback of shares will be taxed in the hands of the recipient. The new tax treatment is expected to diminish their attractiveness, adversely affect pay-outs and even hurt return ratios and valuations of some high cash generators, said experts.

“Amounts distributed would be regarded as dividends in the hands of the shareholder and no deduction of expenses would be permitted against such income. The losses incurred on cost of shares bought back by the company, however, would be available for set-off against any gains made on a subsequent sale,” said Surajkumar Shetty, Partner, JSA Advocates & Solicitors.