Market benchmark sensex fell over 337 points and NSE Nifty dived by 107 points in early trade due to nervous selling by foreign funds amid a revised tax treaty between India and Mauritius imposing capital gains tax on investments routed through the latter from April next.
The rupee, which weakened for the the third day against the dollar, also had its bearing on domestic equities.
The 30-share index was 337.49 points or 1.31% lower at 25,435.04 in early trade with all sectoral indices led by metal, auto, PSU and realty, trading in the negative zone, plunging up to 1.07%.
The gauge had rallied by 544.03 points in the past two trading sessions.
Brokers said sentiment dampened after India yesterday signed with Mauritius an amendment to the pact to get rights to tax capital gains on shares of Indian company sold after April 1, 2017, triggering fresh spell of selling by participants.
With the signing of the amendment to the Double Taxation Avoidance Convention (DTAC) with Mauritius, sale of shares of an Indian resident company will be taxed at 50 per cent of the applicable rate between April 1, 2017, to March 31, 2019.