India should have no capital gains tax: Jefferies' Chris Wood on Budget'24
According to Wood, if the government decides to increase the capital gains tax in the Budget 2024, the stock market could experience a major upheaval, potentially more severe than the decline observed after the Lok Sabha election results.
The stock market is on a bullish trend right now, with the Sensex surpassing 80,000 and the Nifty above 24,500. This rise is driven by the market’s belief that the government will continue its plans to boost the economy in the 2024 Budget. However, there are reports that the government may introduce some changes to the capital gains tax regime related to stocks and mutual funds.
In the meantime, Chris Wood, the Global Equity Strategist at investment banking firm Jefferies, has made a significant prediction. According to Wood, if the government decides to increase the capital gains tax in the Budget 2024, the stock market could experience a major upheaval. Potentially it could be more severe than the decline observed after the Lok Sabha election results.
Let’s understand Chris Wood’s prediction and its potential impact on the stock market.
Possibility of Capital Gains Tax Reform in Union Budget 2024
There are speculations about changes to the capital gains tax in the 2024 Union Budget. In a market townhall organized by CNBC-TV18, Chris Wood from Jefferies shared his views on the impact of potential changes to the capital gains tax on the market. Wood warned that an increase in the capital gains tax could have a negative impact on the market. This could be similar to the market crash observed on the day of the election results.
On June 4th, the day of the Lok Sabha election results, the market crashed significantly. On the counting day, the Sensex fell by over 4,000 points. The Nifty had closed with a drop of about 1,400 points.
Understanding Capital Gains Tax
To understand what Chris Wood is referring to, let’s look at capital gains tax. Capital gains refer to the profit earned from selling an asset or investment, such as stocks. For instance, you bought a stock for ₹1,000 and sold it for ₹1,500. Therefore, you made a profit of ₹500, which is your capital gain. Based on the holding period of the asset, there are two types of capital gains: short-term and long-term capital gains.
In India, if you sell a stock within 12 months, i.e., less than a year of purchasing it, you need to pay a 15% STCG tax on the profit. Conversely, if you hold the stock for over a year and then sell it, you pay a 10% LTCG tax on profits exceeding ₹1,00,000 in a financial year. Profits up to ₹1,00,000 in a financial year are tax-free.
Chris Wood’s view on Capital Gains Tax
Chris Wood stated that the likelihood of such a tax increase at present is low. This has eased current market concerns. However, he cautioned that any increase in the tax could alter the risk-reward ratio for stock investments.
Wood believes that having no capital gains tax could be beneficial as it would encourage investment and market growth. He cited markets like Hong Kong, which do not impose a capital gains tax, as examples of this benefit.
Jefferies’ equity strategists believe that if capital gains tax is to be maintained, it should be structured to promote long-term investments. This may be possible by having a significant difference between tax rates for long-term and short-term holdings.
Chris Wood’s comments come at a time when experts and industry voices are advocating for simplifying and standardizing the capital gains tax regime. This is inorder to bring about greater transparency. The exact nature of the capital gains tax changes in the upcoming budget will be out on July 23. If there are changes to the capital gains tax rules, it could have a significant impact on the stock market.