Union Budget 2020 – Expectations in The Stock Market Segment
As the financial year draws to a close, the Finance ministry is preoccupied with planning the upcoming fiscal year. With the union budget for the next financial year scheduled for presentation on February 1, 2020, FM Nirmala Sitharaman, has several things to consider. According to finance ministry sources, the central government is set to announce several measures to help taxpayers to increase demand and household savings. Reliefs are expected in the form of changes in tax slabs, hike in standard deduction limits as well as various provisions to claim higher deductions under Section 80C. Apart from this, stock market investors are also expecting a few changes. As the excitement begins to build around the upcoming budget, here’s a look at expectations from budget 2020 around the stock market segment.
- Scrapping or Deduction in LTGC Tax Rate, thus encouraging long term investments
The former Finance Minister, the late Arun Jaitley introduced Long Term Capital Gains or LTGC tax during the FY 2018-2019 budget. He introduced a tax of 10% on gains arising out of the transfer of listed equity shares, which exceeded ₹100,000 without indexation benefits. But if reports are to be believed, industry experts are expecting the government to scrap the LTGC tax altogether or to at least extend the investment holding period to help boost investments in the current economy. The current holding period for LTGC investments is one year.
There is also the expectation that the 80(C) limits be increased to ₹250,000 from the current ₹150,000. Reducing LTGC can be balanced by raising short term capital gains (STGC) tax on equity investments as it can deter speculation while encouraging long-term investments.
- Removal of Dividend Distribution Tax
Companies that are profiting in the share market are known to distribute dividends and investors earning dividends have to pay a Dividend Distribution Tax, or DDT for the tax levied on the dividends distributed by those companies. Companies already pay DDT of 20% to 21% before the dividend is distributed. Moreover, investors receiving dividends also have to pay 10% for amounts exceeding 1,000,000 per annum. With these high taxation limits, industry experts want the government to remove the DDT since it adds the burden of multiple taxes on both companies as well as investors. Their budget 2020 expectations are that the DDT be abolished, thus encouraging investors to invest in profit-making companies so that higher dividends may be distributed.
While speaking about budget expectations 2020, it should be noted that investors are expecting that the FM reduces the taxes on equity mutual fund investments. In the case of both, equity as well as non-equity (debt) mutual fund schemes, the dividend declared by mutual fund schemes is subject to tax, albeit at the fund house end. The equity MF dividend tax treatment has remained a source of concern for investors for the longest time. The dividend received by investors is tax-free for both equity and debt mutual fund schemes. However, this choice should be left in the investors’ hands, and the taxes on dividends makes the investment less than ideal for investors.
- Provision of 80(C) deduction on DLSS
While the inflow into equity-linked funds and schemes has increased in general, investors are looking forward to receiving a tax break on DLSS (Debt Linked Savings Scheme) investments. Since most Indian investors are inherently conservative, the provision of 80(C) deductions enables such investors to get better returns than from all other fixed-income instruments. Fund managers can introduce a lock-in period of 3 years, thereby eliminating interest rate risks. Debt funds can be put at par with debt-based ULIPs by doing this. The provision of 80(C) deduction on DLSS is one of the most practical and viable expectations from the budget 2020.
- Sector-specific incentives
FM Sitharaman has met with industrialists and representatives from different sectors to seek an understanding of their budget 2020 expectations. According to sources linked to the FM, industries like real estate and infrastructure, Non-banking Financial Companies as well as power discoms are suffering due to lack of both, finances and demand. However, despite having outlined plans and strategies for real estate and infrastructure; the government is yet to figure out the mechanics of the same. That said, it is expected that the government will aid the infrastructure strategy by issuing infrastructure bonds with long-term tax deductibility.
Final word: Investors expect tax reforms in the stock market. These reforms can provide tax relief for all players in the market – whether it is the investors, the companies or significant stakeholders of the country’s economy. Investors and financial planners want the government to consider their union budget 2020 expectations and reflect the same when the budget is announced on February 1, 2020. Furthermore, there is the expectation that the tax structure is simplified.