While the general mood around the Budget was upbeat, there was a sting in the tail for investors in the form of higher taxes on both short-term and long-term capital gains (STCG & LTCG).

Experts said while one can understand the need to curtail retail enthusiasm in the future and options segment, which led to the increase in the securities transaction tax, increasing the STCG from 15% to 20% and LTCG from 10% to 12.5% is rather harsh.

Shankar Sharma, founder, GQuant, said “the changes in capital gains tax were not necessary. These are extremely sharp (25-33% hikes), while at this juncture we need to encourage equity participation.” Another fund manager who did not wish to be named said that the increase in the tax rate is a body blow.

Swarup Anand Mohanty, Vice Chairman & CEO, Mirae Asset Investment Managers (India) also termed the increase in tax on LTCG as a big negative. “Given the low penetration of financial assets, consistency of taxes always helps in the long run,” he said.

Kotak Mutual Fund MD Nilesh Shah commented that while the STCG and LTCG taxation were increased, no change in the tenure for long term capital gains tax for equities would likely aid longer-term investment horizon.

However, the bigger worry is that the rise in the LTCG may not be the last one. Most experts believe that going forward, the government may increase this rate further to 15% or even more in the coming Budgets – a situation that will put further pressure on investors.

A tax expert said when taxation figures are not in round numbers like 10-20%, the general understanding is that they will be increased over the long run.” As Andrew Holland, CEO, Avendus Capital Alternate Strategy, said the market should not ignore the direction of where capital gains tax is heading in the future.

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The good news is that the capital gains limit which will not attract any tax has been increased from Rs 1 lakh to Rs 1.25 lakh. But many have expressed dismay that these guidelines are coming into effect immediately. Since the normal Budget happens in February, investors are able to rethink their positions and adjust finances before April 1 when the new guidelines get implemented. Now, investors will not get the opportunity to readjust their positions.

Since March 2020, the number of demat account has risen four times — from 36 million to 160 million in June 2024. Investors have enjoyed exceptionally good returns in the past couple of years. The Sensex has returned 18% and 21% respectively in the past two years.