As finance minister Arun Jaitley presents the Budget today, investors will be cautious, especially if he makes any changes in the capital gains structure.
Tax on capital gains
Market players have urged the government not to increase Securities Transaction Tax (STT) and continue tax exemption on long-term capital gains (LTCG) from listed equities. Currently, LTCG on sale of listed securities is exempt from taxes if held for more than one year, while short-term capital gains (STCG) or profits on sales of shares held less than a year are taxed at 15%.
Till 2003-04, India used to tax capital gains on equity. Former finance minister Jaswant Singh removed the tax on securities held for more than one year. However, former minister P Chidambaram imposed STT to make up the tax loss. All stock market transactions attract STT of 0.017-0.125%. Then there is dividend distribution tax which is 10% tax on income of more than Rs 10 lakh of dividend received in a financial year.
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Historically, the markets remain cautious ahead of the Budget as the average one-month Sensex return before the Budget has been negative since 2006. However, in the run-up to the 2017 Budget, share prices have moved up as the government is expected to take steps to offset economic shocks caused by demonetisation. The current rally has also been aided by rising global stock markets. Data show that intra-day volatility on Budget Day has halved in the last two decades and investors give less importance to Budget decisions unless it is an extreme one, or is about capital gains tax.
On Budget day, investors buy and sell based on announcements and expert tips. However, even the seasoned investor can make mistakes as it is difficult to analyse the long-term impact at such short notice.Analysts say it is better to buy or sell stocks once there is enough clarity on the proposalseven if a premium has to be paid, as compared to buying without having complete information, which can lead to losses in the short-run.
Brijesh Damodaran, founder and managing partner of BellWether Advisors says the Budget is another event in the calendar wherein the government puts forth its tax proposals to mop up money. He says investors should look at long-term asset allocation for wealth creation without getting caught up in the tax changes announced in the Budget.
However, for traders, events like Budget play a key role in their strategy. Here, a top-down approach can help get some gains. Analysts advise to check the impact of the Budget proposals on the sectors, look at which companies can benefit and whether their fundamentals can support the government action. Only then should one bet on those stocks and decide on the holding period of the particular stock a few days after the Budget.