PM Narendra Modi's market plan keeps investors guessing a month ahead of Union Budget

Today, the buzz over imposing long-term capital gains (LTCG) tax on trading in shares pulled the Nifty to a six-month low even as Finance Minister Arun Jaitley clarified that the government did not intend to do the same.

On Saturday, Prime Minister Narendra Modi said, "Those who profit from financial markets must make a fair contribution to nation-building through taxes. For various reasons, the contribution of tax from those who make money on the markets has been low. To some extent, it may be due to illegal activities and fraud. To stop this, Sebi has to be extremely vigilant. The low contribution may also be due to the structure of our tax laws. Low or zero tax rate is given to certain types of financial income. I call upon you to think about the contribution of market participants to the exchequer. We should consider methods for increasing it in a fair, efficient and transparent way."

The statement dented the gains market made during the last trading session and posed uncertainties on the tax front almost a month ahead of the February 1 Budget.

Worries on return over tax front made investors jittery, leading them to book profits on a day marked by thin volumes in the market.

Currently, returns from trading in listed stocks are not taxed if they are held above a period of one year.

For stocks held and sold under one year, the investors have to pay 15 per cent short term capital gains tax.

Experts say investors fear that the short term capital gains tax rate could be raised to 20 per cent. The government may also extend the limit of one year to two years for a stock sale to become eligible to be exempt from tax.

This will result in investors holding stocks for more than two years to escape LTCG tax. This has made investors nervous since they will not be able to sell stocks for short periods and book profits.

In case of losses, they will have to sell a particular stock and pay tax additionally for carrying out the transaction before the stipulated time limit.

Investors are anxious over government statements and worried that tax changes in equities trading will force them to reallocate stocks in their portfolios.

The intent to raise revenue from imposing tax on sale of stocks will also force investors to shift focus to other options such as mutual funds, thus resulting in lower volumes in the stock market.