The government may consider further raising the short-term capital gain (STCG) tax rates in the coming years, a senior government official has said.

The official said the gains from short-term trading, referred largely to shares or mutual fund units held for less than a year, should not be equated with investment and suggested that the current rate of 20 percent is reasonable but could go up.

"STCG is not an investment. No reason why STCG should be at 20 percent. It can be higher," the official told Moneycontrol.

The Union Budget 2024, presented on July 23, raised the STCG tax on specific financial assets to 20 percent from 15 percent.

Up, up and away

A higher tax rate on short-term gains would not adversely affect the economy or the capital markets, the official, who spoke on condition of anonymity, said. "Vis a vis other incomes, 20 percent STCG is reasonable. It does not impact the growth of the economy or the capital markets. It can further go up," the official said.

This perspective suggests that the government views STCG as a more viable area for tax hikes compared to other forms of income.

“There is a scope for an increase in STCG in the next budget, potentially by 15 percent,” Anshul Jain, head of research, retail broking firm Lakshmishree Investment and Securities, told Moneycontrol.

From a trader's perspective, an increased tax burden on STCG could prompt a reassessment of trading strategies, potentially encouraging a shift towards longer-term investments, he said.

The market's resilience indicates that investors are more likely to adapt rather than withdraw. The increased tax burden is a challenge but it doesn't outweigh the potential benefits of market participation, Jain said.

“To sum it up, while a rise in STCG rates presents some headwinds, it is not expected to have a major long-term impact on market strength or investor behaviour,” he said.

A mail sent to the finance ministry on July 30 for comments received no response.

A short-term capital gain arises if a capital asset held for less than a year is transferred. "Short-term gains on specified financial assets shall henceforth attract a tax rate of 20 percent instead of 15 percent, while that on all other financial assets and non-financial assets shall continue to attract the applicable tax rate,” finance minister Nirmala Sitharaman said in her Budget speech.

The tax-free limit for long-term capital gains on equity-related investments has been raised from Rs 1 lakh to Rs 1.25 lakh. The new limit will apply for FY 2024-25 and subsequent years, which, according to the government, will benefit lower and middle-income groups.

The tax on long-term capital gains was raised from 10 to 12.5 percent.

There has been widespread speculation that both STCG and LTCG tax rates could go up further in subsequent budgets.

Revenue secretary Sanjay Malhotra said on July 30 LTCG rates will remain at the current levels in the medium term.

Finance secretary S Somanathan has said these rates were a “destination, not an intermediate station”.

In the Budget, the securities transaction tax (STT) was increased in futures from 0.0125 percent to 0.02 percent. For options, it has been raised from 0.0625 percent to 0.1 percent.

The Budget also removed indexation benefits available on the sale of property, while reducing the rate from 20 percent to 12.5 percent. Any transfer before 24 months is categorised as short-term capital gain on the sale of the property. Indexation adjusts the cost of assets for inflation to calculate capital gains more fairly.

A study conducted by capital markets regulator Sebi showed that 80 percent traders with very frequent (more than 500 trades in a year) incurred losses.

In a statement issued on July 24, the Securities and Exchange Board of India said the number of individuals participating in intraday trading in the equity cash segment in FY23 shot up by 300 percent from FY19.

The study indicated that 90 percent of trades in the F&O segment resulted in losses. In a consultation paper on July 30, Sebi has proposed tighter derivatives regulations.