Chris Wood, head of equity strategy at Jefferies, said the stock market could fall more sharply if Budget 2024 introduces unfavorable changes to the capital gains tax for stocks. In his weekly note, “GREED & Fear,” he warned that changes to both long-term and short-term capital gains tax in the upcoming budget, announced on July 23, could cause a bigger drop than after the Lok Sabha election on June 4, when the BJP lost its majority but still formed a government.
However, Wood believes there’s less worry now about a possible increase in capital gains tax. He thinks the new government is unlikely to raise this tax because of its reduced mandate. Still, if they do, it could cause a bigger market drop than the post-election one.
Wood mentioned that despite recent stock market gains, India is still in the early stages of developing a strong equity culture. He is confident in the Indian stock market because of the growing number of retail investors. He noted that the market quickly rebounded after a one-day crash following the Lok Sabha election results, rising by 13.3%. This shows the strength of retail investors who bought stocks when professionals sold them.
Wood advised against selling stocks during a market drop, except for short-term reasons. He thinks the Indian market has changed and is now more driven by domestic investors, indicating the beginning of a strong equity culture in India.
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Regarding the upcoming budget, Wood expects it to address the demands of the two minority parties in the BJP coalition but believes the allocations for these demands will be less than feared. He shared his views on the capital gains tax and its potential impact during a CNBC-TV18 market town hall, highlighting that significant increases in the tax could hurt the market more than previous events.
Wood noted that some markets, like Hong Kong, don’t have a capital gains tax, which encourages investment and market growth. He believes that if the capital gains tax is kept, it should favor long-term investments by having lower rates for long-term holdings.
Experts and industry bodies have long called for a simpler and more uniform capital gains tax system. One proposal is to raise the tax-free limit for long-term capital gains from Rs 1 lakh to Rs 2 lakh. According to EY, a simpler capital gains tax system is expected, with changes in tax rates and computation methods. They suggest a 10% long-term capital gains tax rate for listed securities to make India more competitive globally.