Stocks slumped to 7-month lows on heavy volumes as investors reacted to statements made by Prime Minister Narendra Modi who said , over the weekend, taxes on capital markets should be raised. Modi's intent was immediately denied by Finance Minister Arun Jaitley, but the damage to the already fragile sentiment was done.

The benchmark Nifty Index plunged 71 points to 7,914 points in early Monday deals, making it the worst performer in Asia. The index, which has been in a downdraft since December 14, trades at its lowest level since May 25 as the recent demonetization drive has substantially bitten into demand for everything from two wheelers, cars, televisions to luxury items such as high end soaps and shampoo.

Monday's fall has been accompanied by a sharp spurt in traded volumes. The index was facing mild selling pressure over the past two weeks and participation was thin owing to year-end and Christmas holidays. But Modi's statement on potentially higher taxes put a cat among pigeons. Investors, traders and brokers pay short term capital gains on transactions squared up within a year. In addition, every transaction, whether it results in a loss or a gain for the investor, is taxed with a securities transaction tax, which fetches the government nearly 7,000 crore rupees each year. There are no taxes on profit made on the sale of shares held for more than one year, and this has been a point of debate for many years.

Long Term Capital Gains tax is not deployed in a bid to increase equity participation in India, where less than 2 percent of the 1.3 billion people invest in shares. For those who do, just a miniscule percentage are long term holders of equity as most prefer to be daily traders.

Meanwhile, here is a snapshot of the most important events so far in the trading day:

*Sensex plunged 219 points to 25,821 points. Cipla is the top loser, down 2.7 per cent; Maruti is the top gainer, up 0.5 per cent.

*Dr. Reddy's, Asian Paints, TCS, Reliance Industries and Hindustan Unilever rose between 0.1-0.7 per cent and were among 6 shares to advance on the Nifty.

*Hindalco, Cipla, Yes Bank, Aurobindo Pharma and Bank of Baroda dropped between 2.2-4.1 per cent and were among 46 shares that fell on the Nifty.

*Divi's Labs, Bharat Financial and Reliance Industries were the most active shares by value on the NSE.

*Pharma exporter Divi's Labs was the top traded share by volume on news that the US FDA had made some observations about one of its drug manufacturing plants.

*Major benchmarks dropped between 1-1.1 per cent while India ViX, the fear index, surged 8.5 per cent.

*Overall, the bears were in firm control of sentiment on Dalal Street with 1,302 shares falling versus 227 that rose.

*The mood was worse off in the derivatives market where 170 futures declined compared with just 8 that edged higher.

*Futures of DLF, South Indian Bank, HDIL and IFCI were the top losers.