The recently unveiled Budget 2024 has sent ripples through the Indian financial landscape, particularly with its noteworthy revisions to tax rates concerning securities investment. These changes, though seemingly subtle, carry the potential to reshape the behaviours of investors and ultimately contribute to the overall trajectory of the Indian economy.

While the Finance Minister hailed these revisions as steps towards promoting long-term investment and curbing speculative trading, the impact of these changes is likely to be multifaceted and felt across different segments of the market.

Let us look at the tax revisions on the capital gains shade, introduced in the Budget and its potential implications for investors, sectors, and the broader economy.

Impact on stakeholders

The Budget introduced notable changes to the tax rates applicable to securities investment. The accompanying table provides a comparison of the previous and proposed tax rates, along with their anticipated impact:

The revised tax rates have divergent implications for different types of investors. Long-term investors, who previously enjoyed a lower tax rate of 10 per cent on long-term capital gains, will now face a higher rate of 12.5 per cent. This could deter them from holding onto investments for extended periods, potentially leading to a shift towards short-term strategies.

Conversely, short-term traders will be hit harder by the increased tax rate of 20 per cent on short-term capital gains, discouraging frequent trading and speculation.

The increase in Securities Transaction Tax (STT) will affect all investors by increasing transaction costs. This might discourage high-frequency trading, which relies on rapid buying and selling of securities to generate profits. Retail investors might also experience a slight reduction in their overall returns due to the increased transaction costs.

Further, the impact of the tax revisions is likely to vary across sectors. Sectors that attract predominantly long-term investors, such as infrastructure and real estate, could witness a decline in investment due to the higher long-term capital gains tax.

On the other hand, sectors that are favoured by short-term traders, like technology and pharmaceuticals, might experience reduced volatility as short-term trading becomes less attractive. The financial sector is likely to be directly impacted by the increased STT. However, the long-term impact on the financial sector remains uncertain, as investors might adapt to the new tax regime over time. The broader economic consequences of the tax revisions are complex and multifaceted.

In the short term, the increased tax rates could lead to a dip in market activity and a decline in overall investment. This could have a temporary negative impact on economic growth. However, the government aims to use the additional revenue generated from these taxes to fund infrastructure projects and social welfare programmes, which could stimulate economic growth in the long run.

Furthermore, the discouragement of short-term trading might contribute to market stability, reducing volatility and speculative bubbles. This could create a more conducive environment for long-term investments, ultimately benefiting the economy.

On the whole, the Budget tax revisions related to securities investment, mark a significant shift in the investment landscape. While the short-term impact might be characterised by reduced market activity and some negative sentiment, the long-term consequences could be more nuanced.

The government’s focus on promoting long-term investments and discouraging speculative trading could lead to a more stable and sustainable market in the future. As the market adjusts to the revised tax rates, it will be interesting to observe how the interplay between investors, sectors, and the economy unfolds.

Saravanan is Professor of Finance and Accounting at IIM Tiruchirappalli; and Williams is Head of India at Sernova Financial