Indian equities surged to end sharply higher on Thursday on the back of strong global cues and positive sentiments post the finance ministers draft on tax code and encouraging IIP data.

Market opened trade with a gap-up as traders continued to cover short positions. Positive global markets also provided support while the grim situation on agriculture front due to drought was overlooked.

The government on Wednesday unveiled the draft of a brand new direct tax law, which will replace the four-decade Income-Tax Act, to improve the efficiency and equity of tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base.

An encouraging industrial growth of 7.8 per cent in June took the market by surprise. The data showed that while mining output was up 15.4 percent, electricity rose 8 percent, output of capital goods and consumer goods sectors expanded respectively by 11.8 percent and 4 percent during the period.

Bombay Stock Exchanges Sensex closed at 15,518.49, up 498.33 points or 3.32 per cent. The index touched an intra-day high of 15545.13 and low of 15207.96.

National Stock Exchanges Nifty ended at 4605, up 147.5 points or 3.31 per cent. The broader index hit a high of 4614.15 and low of 4458.55.

Initially there was some short-covering but then genuine buying emerged from FIIs and domestic institutions as well. Sensex is likely to retreat from 16000 plus levels as market will be expensive, said Bharat Shah, Head Institutional Sales, Ventura Securities

The BSE Midcap Index surged 3.59 per cent and BSE Smallcap Index jumped 4.11 per cent.

Amongst the sectoral indices, BSE Realty Index was up 6.86 per cent, BSE Metal Index jumped 5.57 per cent and BSE Bankex Index advanced 4.34 per cent.

Smart gains in HCL Technologies (7.78%), DLF (7.31%), Unitech (7.14%), ICICI Bank (6.63%) and Tata Communications (6.52%) drove the Nifty significantly higher.

There were no losers in the 50-share index.

Shares of airline companies were in demand after Aviation Minister Praful Patel said that a Group of Ministers would be set up to study the impact of high jet fuel prices on the industry and recommend measures to bring down its burden on the operational costs of the airlines. Spicejet rallied 10.72 per cent, Kingfisher Airlines surged 6.23 per cent and Jet Airways closed 3.91 per cent higher.

Market breadth on BSE was extremely positive with 2,215 advances outnumbering 517 declines.

Meanwhile, US stocks rose on Wednesday, but finished off session highs, after the Federal Reserve said it saw signs of a more stable economy. The Fed said the US economy was showing signs of levelling out two years after the onset of the deepest financial crisis in decades and it moved to phase out one emergency measure. The central bank also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period to guide the way to recovery.