In a landmark move aimed at tempering the explosive growth in speculative trading, India has introduced significant changes to its taxation on equity investments and derivatives. This marks the first major tax overhaul in decades for the country’s $5 trillion equity market.
In the new budget presented to Parliament on Tuesday, the government increased the tax on short-term capital gains—those from stocks held for less than 12 months—to 20%, up from 10%. For stocks held beyond a year, the tax has been adjusted to 12.5%, a rise from the previous 10%. Additionally, the securities transaction tax on equity options will be raised to 0.1%, while futures will see a hike to 0.02%, with these changes coming into effect from October.
This adjustment comes in response to a dramatic increase in equity derivatives trading volumes, which have surged to the highest levels globally. In January alone, the notional turnover exceeded $6 trillion, outstripping the size of India’s entire economy.
Arun Chulani, co-founder of First Water Capital, expressed concern over the tax hikes, stating, “As an equity investor, the increase in both long-term and short-term capital gains is disappointing. Despite India’s promising economic growth, we continue to compete for foreign capital against other emerging markets.”
Government officials have raised alarms over the significant increase in retail participation in derivatives trading, with the finance ministry’s Economic Survey highlighting concerns that this surge may be fueled by speculative tendencies. Earlier interventions included measures to cool the IPO market and directives for brokers to implement fraud prevention systems.
Despite these developments, the Indian stock market showed resilience. The NSE Nifty 50 Index, which initially dropped by 1.8% following Finance Minister Nirmala Sitharaman’s announcement, recovered nearly all its losses.
Indian equities are poised for a ninth consecutive year of gains, driven by the country’s rapid economic growth, robust local investment, and strong corporate earnings. The government’s ongoing focus on infrastructure development and fiscal prudence continues to bolster investor confidence.
Vikas Khemani, founder and chief investment officer at Carnelian Asset Management & Advisors, noted that the tax changes are unlikely to significantly impact market sentiment. “We remain confident in investing in India,” he said.
In response to the heightened regulatory scrutiny, the momentum in equity derivatives trading had already begun to slow in the weeks preceding the budget announcement. Data from Bloomberg shows a more than 40% decline in notional volumes from a peak of $6 trillion in February to $3.3 trillion by Monday.
Looking ahead, traders are awaiting recommendations from a panel set up by the Securities and Exchange Board of India to enhance investor protection in the derivatives market.
To mitigate the impact on smaller investors, the exemption limit for capital gains tax has been increased from 100,000 rupees to 125,000 rupees.
Vaibhav Porwal, co-founder of wealth management firm Dezerv, pointed out that the tax increase would likely affect the profitability of frequent traders, but also create a clear incentive for long-term investment due to the widening gap between short- and long-term capital gains tax rates.
