InvestorQ : Do you think that the budget not abolishing the LTCG tax and putting tax on dividends led to the sharp correction in the stock markets on Saturday?
Khushi Patel made post

Do you think that the budget not abolishing the LTCG tax and putting tax on dividends led to the sharp correction in the stock markets on Saturday?

Answer
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Anjana Aiyar answered.
7 months ago


You are largely correct that the LTCG non abolition and the imposition of tax on dividends did impact the sentiments quite negatively. But there is a bigger picture you need to appreciate. Budget 2020 has been a budget with high expectations and set against the backdrop of a tight monetary situation. The government had fallen short of its direct and indirect tax targets by nearly Rs.2 trillion and is likely to fall short of its divestment targets too. It is in these conditions that the Union Budget 2020 was presented by the Finance Minister. However, the short term sentiments in the market were impacted by the two issues that you mentioned.

The first was the absence of relief on LTCG tax. That was the big expectation from the Union Budget 2020. The LTCG at 10% was introduced in the 2018 budget and had contributed little by way of added revenues. Markets were hoping against hope that this would be scrapped as the LTCG tax was distorting long term wealth creation, especially through the mutual funds route. However, the FM has chosen to maintain status quo on the LTCG tax, which means long term gain on equity, will be taxed at 10%.

The second referred to the DDT on dividends being scrapped. In an interesting move, the budget has scrapped the dividend distribution tax on equities. However, this has been replaced with a tax on dividends in the hands of the investor. Now, such equity dividends will be treated as other income in the hands of the investor and taxed at the peak rate applicable. Most promoters and HNI investors may end up paying a steep tax of as high as 43.5% tax on their dividend income. This could impact the dividend payouts.