Government Unlikely to Cut Capital Gains Tax as Markets Continue to Decline

Officials Expect Market Recovery Within Six Weeks; No Immediate Policy Changes Planned

As Indian stock markets experience a prolonged downturn, with the Sensex plunging over 12,700 points from its peak, investors have intensified calls for government intervention. Market participants are urging policymakers to cut or abolish capital gains tax and reduce the Securities Transaction Tax (STT) to support investor sentiment. However, government sources indicate that there are no immediate plans for intervention, as officials believe the decline is driven by global uncertainty rather than domestic policy issues.

Government’s Stance: No Urgent Tax Relief Measures

Despite mounting pressure from investors and financial experts, the government has ruled out any immediate tax-related relief to stabilize the markets. Officials expect the markets to recover naturally within six weeks, reducing the need for policy action.

• “The government expects markets to stabilize in the next six weeks,” a senior official told Moneycontrol, adding that if any tax adjustments were being considered, they would have been announced in the Union Budget 2025-26.
• The Centre views the ongoing market correction as a necessary adjustment to an overvalued market, rather than an issue caused by domestic taxation policies.

Stock Market Crash: The Worst Since COVID-19

The recent downturn has triggered one of the worst stock market crashes since the COVID-19 pandemic, particularly in small-cap and mid-cap segments. As of February 2025, nearly ₹94 lakh crore in investor wealth has been wiped out since the markets hit record highs in September 2024.

Why the Government Is Unwilling to Cut Capital Gains Tax

Several market participants have demanded the reduction or complete removal of Long-Term Capital Gains (LTCG) tax to encourage investment in equities. However, the government is unwilling to make any concessions, citing the following reasons:

• LTCG tax is not responsible for market volatility, and eliminating it would not address the root causes of the market decline.
• The government has projected 14.4% growth in income tax collections, including strong STT revenues, making it unlikely to forgo a significant revenue source.
• As of July 2024, a 12.5% uniform LTCG tax is levied across all asset classes, eliminating previous indexation benefits.

Securities Transaction Tax (STT) Here to Stay

Market analysts have also urged the government to reduce or scrap the Securities Transaction Tax (STT), arguing that lower transaction costs would improve market liquidity. However, the government has dismissed such proposals:

• STT rates were already revised in the Union Budget 2024-25, with an increase across multiple trading segments:
  • Options trading STT increased from 0.0625% to 0.1%.
  • Futures trading STT rose from 0.0125% to 0.02%.
• Officials argue that STT remains relatively low and has no direct link to the current market downturn.

Global Factors Driving Market Volatility

The government maintains that external economic factors are primarily responsible for the stock market’s weakness. Some of the key drivers include:

1. U.S. Federal Reserve policies: Rising global interest rates have reduced investor appetite for emerging markets, including India.
2. Geopolitical uncertainty: Concerns over U.S. trade policies, ongoing conflicts, and fluctuating oil prices have increased market volatility.
3. Foreign Institutional Investors (FIIs) outflows: FIIs have offloaded billions worth of Indian equities, deepening the market selloff.

Market Experts’ Views on the Correction

Despite the recent downturn, some analysts remain optimistic about a medium-term market recovery:

• Prashanth Tapse, Senior VP (Research) at Mehta Equities, suggests that Nifty remains technically weak below 24,073, with potential downside risks at 22,000 and 21,281.
• Other market strategists believe that a recovery in corporate earnings and domestic liquidity inflows could drive a rebound by mid-2025.

Retail Investors Face Heavy Losses as Small-Caps Plummet

The recent selloff has severely impacted retail investors, who had significantly increased their exposure to small-cap and mid-cap stocks in 2024. Many investors who bought stocks at higher levels are now facing steep losses, leading to increased panic selling.

• The total market capitalization of BSE-listed companies has declined sharply, reflecting the deep erosion of investor wealth.
• Mutual funds focused on mid-cap and small-cap stocks have recorded large-scale redemptions, as investor sentiment weakens.

Outlook: Will Markets Recover Without Government Support?

With the government firmly against tax cuts or direct market interventions, the fate of Indian equities now hinges on global economic trends and investor sentiment. Key factors to monitor in the coming weeks include:

• U.S. Federal Reserve decisions, which will influence capital flows into emerging markets.
• India’s Q4 FY25 GDP data, which could provide insights into domestic economic strength.
• FII investment trends, as any return of foreign capital could help stabilize the markets.

While investors continue to push for policy support, the government has made it clear that no immediate relief measures will be introduced. Whether markets can rebound on their own or if further volatility forces a policy shift remains to be seen in the coming months.