The benchmark BSE Sensex on Monday fell 309 points, or 1.8%, to close at 17,053, a two-month low, on reports that the government was likely to levy short-term capital gains tax for derivative products sold to foreign investors.
"Sentiments turned negative as investors were confused on the new General Anti Avoidance Rule included in the Finance Act in the budget," said Alex Mathews, research head, Geojit BNP Paribas Financial Services. "The new rules give taxmen the authority to go deeper into transactions entered particularly for avoiding tax and would see companies end up spilling more as tax."
The NSE Nifty also dropped 94 points, or 1.8%, to 5,184.
Selling was triggered by the reports that certain provisions in the budget raised the prospect the government could tax participatory notes, or P-Notes to crack down on tax evasion.
P-Notes are derivative products that allow foreign investors to invest in Indian equities through countries such as Mauritius that have tax treaties with India.
The BSR Realty index lost 3.6%, followed by Power (-2.6%) and Bankex (-2.4%.)