Indian Stock Market Faces Turbulence As Investors Lose Rs 40 Lakh Cr Amid Tax Changes

The Indian stock market is experiencing significant turbulence, resulting in substantial investor losses. Since September 2024, investors have lost around ₹40 lakh crore due to a 15-17% decline in the Sensex and Nifty from their peak levels. This downturn marks the most severe sell-off since 1996, primarily driven by foreign institutional investors (FIIs) pulling out of the domestic market.

Foreign investors have been offloading shares at an unprecedented rate. Data from depositories reveals that Foreign Portfolio Investors (FPIs) sold shares worth ₹34,574 crore in February alone. In January, they had already sold shares amounting to ₹78,027 crore. Altogether, foreign investors have withdrawn ₹1.12 lakh crore in the first two months of 2025.

Finance Minister Nirmala Sitharaman unveiled the national budget on February 1, 2025, offering notable personal tax relief by making income up to ₹12 lakh tax-free. However, changes in stock market-related taxes were introduced earlier in the 2024 budget. The Long Term Capital Gains (LTCG) tax was raised from 10% to 12.5%, and the Short Term Capital Gains (STCG) tax increased from 15% to 20%.

Samir Arora, Founder and Chief Investment Officer of Helios Capital, criticised these tax changes at a Business Standard event. He labelled the government's decision a significant error and attributed foreign investor sell-offs to the increased capital gains tax. Arora noted that foreign investors typically do not face such taxes in most other countries.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, explained that foreign investors are selling Indian stocks due to high valuations. They are reallocating funds to China, where stocks are cheaper. During this period, FPIs are selling shares in top-performing sectors with attractive valuations, notably financial services.

Nilesh Shah, Managing Director of Kotak Mahindra AMC, disagreed with Arora's view on capital gains tax. He acknowledged that lower taxes could attract investors but argued that reducing taxes alone wouldn't ensure foreign investors' return. Other factors must also entice FPIs.

Understanding Capital Gains Tax

Capital gains tax applies to profits made from selling assets like shares, property, or gold. It includes Long Term Capital Gains Tax and Short Term Gains Tax. Initially introduced in 1946-47, it became permanent under Finance Minister TT Krishnamachari in 1956.

Samir Arora highlighted that the Indian stock market has grown by about 12% over seven years and increased by 7-8% annually in dollar terms before taxes. In 2022-23, capital gains tax revenue reached ₹99,000 crore (USD 10 billion), marking a peak during a stock market cycle. He emphasised that this figure represents only one year within a five or seven-year cycle; other years saw revenues of just USD 2-3 billion.

Arora further stressed the importance of respecting both the market and foreign investors for sustained growth and investment inflows.