While the election result, due on June 4, will be important, Jefferies’ Christopher Wood, in his latest GREED & fear note, says the bigger risk to the Indian equity market is the looming changes to capital gains tax, which are currently being discussed by domestic fund managers.
Wood said such changes could be announced in the annual budget, which could be released in July after the election. He questioned whether tax rates would be increased, the eligibility period for long-term benefits would be extended, or both.
Currently, the holding period is set at one year, and short-term capital gains are taxed at 15% and long-term capital gains are taxed at 10%.
“GREED & Fear’s view is that an extension of the time frame would be better than raising tax rates. Another proposal that has been floated is to increase capital gains tax on individual investors but not those investing in mutual funds,” Wood said.
Jefferies’ Wood explained: “The reason such a proposal is being considered is because there is growing evidence of retail speculation, particularly in the options market (F&O or derivatives), where India holds options on 182 individual stocks.”
He pointed out that nominal sales of stock options have surged to Rs 921 trillion in FY24 from Rs 123 trillion in FY20. In fact, sales have touched Rs 169 trillion so far in FY25, which began on April 1.
“Such paper speculation is unlikely to be healthy for PM Modi or the BJP. GREED & Fear’s, probably correct, assumption is that the Indian prime minister is rightly suspicious of people trying to make money off of money, especially in a zero-sum game like options,” he said.
When it comes to India’s Lok Sabha elections, Jeffries said the BJP’s victory in “just” the number of seats it had in the last general election in 2019 would be enough to run the government as it has for the past five years.
It was proven.
“In the last general elections in 2019, the BJP won 303 seats in the Lower House of the Rajya Sabha, up from 282 in 2014. Recall that, as previously discussed here, Prime Minister Modi had initially set a target of 370 seats for the BJP and 400+ seats for the BJP-led alliance (NDA) in this general election,” it said.
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