After two uncertain and rather volatile weeks, Finance Minister P Chidambaram decided to cave in to the markets' demands.
The proposal to impose a transaction tax on all securities at the uniform rate of 0.15 per cent has been rolled back. Instead a new structure has been put in place whereby differential rates have been announced for various categories.
As per the new proposal, delivery based equity transactions will be required to bear the securities transaction tax at the proposed rate of 0.15 per cent, however this burden will be equally shared by the buyer and the seller i.e. if you were to buy equity shares worth Rs 100,000 the tax applicable to you would be Rs 75.
The finance minister also had good news in store for day traders and arbitrageurs. Individuals who indulge in non-delivery based transactions will now be taxed at 0.015 per cent vis-à-vis the proposed 0.15 per cent. Effectively speculative transactions have been given the thumbs up!
In the debt markets even the existing wafer-thin margins had been put at risk by the proposed STT. However the new proposal has put all dealings in bonds and government securities out of the STT's purview. Debt markets can finally breathe easy!
This further implies that its status quo for debt fund investors. While the long-term capital gains will be taxed at the existing rates (10 per cent without indexation benefits and 20 per cent with indexation benefits), short-term capital gains will attract tax at the marginal rate of income tax.
The biggest bonanza was in store for investors in equity oriented mutual funds (which also includes balanced funds with more than 50 per cent corpus holding in equities).
Investors in equity funds will now be eligible to claim the same benefits as those enjoyed by delivery based equity transactions i.e. short-term capital gains will be charged at a flat rate of 10 per cent while long-term capital gains tax has been completely waived off.
However the proposed securities transaction tax will also have to be borne by investors in equity oriented funds. While some might term this as a dampener, in all fairness the benefits granted comfortably outweigh the negatives if any.
The fact that equity investing is about the long-term has been stated umpteen number of times. The new proposals will act as an incentive to act upon this theory. Investors in equities and equity mutual funds will be rewarded for long-term investing. The message is clear -- get invested and stay invested!
