The Indian government raised the tax rate for equity investments held for less than one year to 20% from 15% and for shares held for more than 12 months to 12.5% from 10%, Finance Minister Nirmala Sitharaman said in her budget speech on Tuesday.
The government also increased the tax on transactions in equity derivatives segment. On futures trading, the securities transaction tax has been increased to 0.02% from 0.0125% and on options, it has been raised to 0.1% from 0.0625%.
Indian shares declined after the announcements. The NSE Nifty 50 (.NSEI) and S&P BSE Sensex (.BSESN) fell about 1% each, as of 12:26 p.m. IST.
The tax changes are a short-term negative for the market, Trideep Bhattacharya, chief investment officer, Edelweiss Mutual Fund, said.
"The tax increase is marginal but will help bring in rationality on options trading exuberance and will better investment behavior. The increase in capital gains will push investors towards long term investing," Bhattacharya said.
Since their COVID-19 lows in March 2020, India's stock indexes have surged more than 200% each largely due to an influx of retail traders in the derivatives market.
The share of retail investors in derivative trading volumes has rocketed to 41% this year from 2% in 2018. India's monthly notional value of derivatives traded was a worldwide high of 9,504 trillion rupees ($113.60 trillion) in May, data shows.
This prompted the markets regulator to warn of the risks from such trading in futures and options.
The tax hikes on futures and options are in line with the government's concerns expressed in the economic survey and the markets regulator's worries over the increase in speculative trading, said Sunil Gidwani, partner at tax firm Nangia Andersen.
