Indian stocks slumped in the special trading session on Saturday as finance minister Nirmala Sitharaman’s budget for the next financial year disappointed investors.
The 30-stock BSE Sensex gave up all its early gains to close down 987.96 points, or 2.43%, at 39,735.53. The National Stock Exchange’s 50-stock Nifty declined 300.25 points, or 2.51%, to close at 11,661.85.
The mid-cap and small-cap indices also surrendered gains to fall 2.2% each.
Barring the BSE IT index, all sectoral indices closed deep in the red. The BSE Realty was the top loser, falling nearly 8%, followed by the BSE Capital Goods index (-4.8%), and BSE Metal (-3.5%).
Market breadth was weak and dominated by the sellers and profit-takers. A little over 600 stocks advanced against 1,724 stocks that ended in the red. Overall, investors lost nearly Rs 3.5 trillion in value at Saturday’s closing.
Analysts attributed the fall to markets buying on rumours before the budget and selling on the actual news. Market participants became cautious and disappointed for lack of any capital market reforms or proposals in the budget.
Jaideep Hansraj, MD and CEO at Kotak Securities, said the market had run-up on hopes of tweaks in the capital gains structure, or removal of either long-term capital gains tax or the Securities Transaction Tax. “However, none of that was announced. This resulted in a knee-jerk reaction and some near-term disappointment,” said Hansraj.
Since the lows in the middle of September 2019, the Sensex had jumped more than 6,000 points, or 16%, till the middle of January 2020, stock-exchange data showed.
Some amount of correction was expected, experts said. The focus will now shift back to the ongoing earnings season and the rising global fears about the impact of the coronavirus outbreak in China.
Here are some of the major capital market announcements from the Budget 2020:
Dividend Distribution Tax (DDT)
The finance minister proposed to abolish the DDT and instead impose a levy on individuals who receive company dividends at the income tax rate applicable to them. Thus far, a 15% DDT was levied to companies distributing dividends to shareholders. After adding the surcharge, cess and other levies, the effective rate went over 20%.
The removal of the DDT, along with reduction in corporate tax, is likely to trigger a change in the way ownership in subsidiary companies are structured. It is also likely to boost earnings of companies, and indirectly boost investments.
Insurance
Changes in individual income tax slabs and regime triggered a sharp sell-off in listed insurance stocks.
SBI Life Insurance plunged 10%, ICICI Lombard General Insurance fell 1.73% while ICICI Prudential Life Insurance slumped nearly 11%. HDFC Life insurance Co declined a little over 6%.
Karthik Srinivasan, senior vice president and group head of financial sector ratings at ICRA Ltd, said the new optional direct tax structure will reduce the overall tax rates for individuals but will also remove all deductions allowed so far.
“This is negative for life insurance companies and general insurance companies with a high retail health premium book. A large part of the companies’ retail premium is driven by tax exemptions for individuals,” Srinivasan said.
The finance minister tweaked income tax slabs, where individuals earning up to Rs 5 lakh will still pay no levy if they take advantage of the exemptions. The tax rate for those earning between Rs 5 lakh and Rs 7.5 lakh will be 10% compared with 20% earlier, and for those making between Rs 7.5 lakh and Rs 10 lakh will be 15% instead of 20% earlier.
Those earning between Rs 10 lakh and Rs 12.5 lakh will now pay a tax of 20% instead of 30%. Individuals with total income between Rs 12.5 lakh and Rs 15 lakh will pay 25% tax instead of 30%. However, these lower rates will apply only if the individuals opt to not take any exemptions.
There is no change in the tax rate for individuals with income above Rs 15 lakh. They will continue to be taxed at the upper limit of 30%.