Union Budget 2024: How will the stock market react to capital gains tax changes in the budget?

The government is likely to make changes in capital gains tax in the Union Budget 2024, which could have significant implications for the stock market.

With the Union Budget 2024 scheduled to be presented by Finance Minister Nirmala Sitharaman on July 23, how the markets may react is a key concern.

A man walks out of the Bombay Stock Exchange (BSE) building in Mumbai, India, February 28, 2020. (Hemanshi Kamani/Reuters)

An important component is capital gains tax, and any changes in this can lead to significant implications for the market.

What is capital gains tax?

Capital gains tax is a tax levied on profits made out of the sale of capital assets such as land, building, vehicles, patents, jewellery, and so on. Shares also come under this definition.

That is the reason why markets could see a potential rally if the government decides to reduce capital gains tax and vice versa.

What do experts say on the matter of capital gains tax in the Union Budget 2024?

Chris Wood, global head of equity strategy at Jefferies wrote in his weekly note called GREED & Fear that the government is likely to increase the capital gains tax.

"The reason that such proposals are apparently under consideration is growing evidence of retail speculation, most particularly in the options market where India has options for individual stocks. Such paper speculation is unlikely to be viewed as healthy by Modi, or indeed the BJP. GREED & fear’s probably correct assumption is that the Indian Prime Minister has a natural suspicion of those making money out of money, most particularly in a zero-sum game like options," he wrote.

However, he also believes the government is less likely to increase the tax significantly because of the fact that it is now a coalition, but a big market correction is likely to occur if the tax is increased substantially.

However, a simplified capital gains tax structure in terms of rates and computation methods is expected out of the Union Budget 2024, according to a nte by EY, which also recommended at least a 10% consideration for normative taxation purposes for transferring unlisted shares.