Nirmala Sitharaman junks reports of income tax tweaks that made Sensex crash 1,100 points

After Sensex crashed 1,100 points following a report that the Income Tax department is planning some sweeping changes after Lok Sabha elections, Finance Minister Nirmala Sitharaman debunked rumours calling it pure speculation.

"Wonder where this is come from. Was not even double checked with @FinMinIndia. Pure speculation," Sitharaman said on social media while reacting to a tweet made by a news channel claiming that the tax department is planning to impose uniform treatment for all asset classes.

The report claimed that once the new government takes charge, the income tax department may prevent tax base erosion, revamp laws on penalties, and impose uniform treatment for all asset classes. Currently, India follows a differential tax structure for various financial assets.

For example, stock investors pay Long-Term Capital Gains (LTCG) on shares and equity-oriented mutual funds at the rate of 10% after crossing a threshold of Rs 1 lakh, but income from fixed deposits is fully taxable. Debt mutual fund investors have to pay a short-term capital gains tax according to the marginal rate of taxation for a holding period within 36 months. On the other hand, LTCG on debt funds is at 20%.

Any changes will be negative for equity investors as they are taxed favourably as compared to debt investors. The report spooked investors with the Sensex declining over 1,100 points and ending 733 points lower.

Going forward, the ongoing Q4 result season, valuations and any election-led jitters will keep investors busy.

When the market opens next week, the absence of significant negative surprises in Q4 earnings thus far, along with a decline in oil prices, might help to mitigate the downside.

"The market will also remain vigilant about the BoE policy and GDP data from the Eurozone. We expect a degree of consolidation in the market due to expensive valuations and any election-led jitters," said Vinod Nair of Geojit Financial Services.

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