Budget and taxes: A balancing act between short-term woes and long-term growth

livemint.com:

₹1.25 lakh per year will soften the blow, but only to a miniscule extent. India is a developing country where most of the savings are still parked in fixed assets. Mutual fund penetration is around 15% against the global average of 75%.

With over 150 million demat accounts, the penetration of the stock market among Indians is even lower. This highlights that despite the rapid rush towards mutual funds and the stock market in recent years, the financialisation of savings is still at the nascent stage. Considering these factors, hiking long-term capital gains tax may trim India’s newfound enthusiasm towards investing, at least in the short term.

The government has, in the past, applauded the retail flows in the market, terming those as a “shock absorber" whenever foreign investors withdraw money. It remains to be seen if the shock-absorbing capacity may diminish in the short term. That said, in the long term, I believe the investor community will accept the new tax rate and continue investing in mutual funds and the stock market.

The budget has also tweaked the short-term capital gains tax, increasing it to 20% from 15% now. This can be termed a positive. Because if an investor sells their holdings before one year, they will have to shell out 20% of their gains as taxes.

This will surely discourage investors from selling their investments in quickly or in panic. Hopefully, this will become a factor in stabilising the market in times of crisis. The government also sent a message to the market community that investments are for the long term and not for speculations, by raising the securities transaction tax (STT) to 0.1% for options and to 0.02% for futures.