Budget 2018: BofA-ML says LTCG tax to claw Sensex down to 32K by December

Budget 2018: Foreign brokerage Bank of America Merrill Lynch (BofA-ML) today retained its cautious stand on the markets and warned that the Sensex would fall to 32,000 by December 2018, especially after the Budget decided to slap long-term capital gains (LTCG) tax on equity investment.

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Budget 2018: Foreign brokerage Bank of America Merrill Lynch (BofA-ML) today retained its cautious stand on the markets and warned that the Sensex would fall to 32,000 by December 2018. (Image: Reuters)

Budget 2018: Foreign brokerage Bank of America Merrill Lynch (BofA-ML) today retained its cautious stand on the markets and warned that the Sensex would fall to 32,000 by December 2018, especially after the Budget decided to slap long-term capital gains (LTCG) tax on equity investment. Noting that Budget is largely on expected lines with the much-talked about LTCG tax on equities and a conservative fiscal deficit target at 3.3 per cent for the next fiscal, the brokerage said there isn’t much to be excited about an already inflated market. Accordingly, it said, “we stay cautious of the market see the Sensex at 32,000 by December “. The Budget today said LTCG tax on equities will be reinstated (which was removed in 2004) at 10 per cent of profit above Rs 1 lakh. Realised/notional gains made until January 31, 2018 are grandfathered.

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“Any further upside made from today will attract the LTCG tax; without inflation indexation (this is a little more onerous than the expectation that the tax will apply only on fresh purchases made after the announcement),” BofAML noted. According to the brokerage, over a three-year investment period, LTCG tax makes equity taxation worse than that on debt (where a 20 per cent LTCG tax is applicable, but with inflation indexation). However, it said this in itself may not be enough to stem the flow of domestic funds into equities, as expected equity returns are still high.

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“Flows are cyclical, and will be hurt by a correction in asset prices,” it added. The brokerage earlier last month had cautioned that the Sensex could go down to 32,000 by December, dragged down by the likely introduction of LTCG tax. Benchmark Sensex ended over 58 points lower in highly volatile trade today as markets gave a thumbs down to the Budget, primarily LTCG tax. The 30-share index had plunged over 460 points in intra-day after the finance minister announced LTCG tax.

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