For investors, 2020 was much of a roller coaster ride. While markets had crashed by almost 40% in March 2020 from their peak levels in January 2020, the second half of the calendar year was a different game altogether - markets were on a tear, and late 2020 was studded with one blockbuster IPO after another. However, investors witnessed a lot of volatility in the markets last year. So what can they expect from the stock markets this year, and how can the budget help them in this journey?
Analysts have made a number of recommendations for the union budget 2021, which is scheduled to be announced on the 1st of Feb 2021. Given the shocks that the economy has gone through in the last year gives some strong incentives for the government to promote long term investment in the coming fiscal year. More importantly, there is something that each category of investors channeling money in India’s economy wants from the budget. Let’s take a look at five of them!
The retail investor’s wants
Some of the retail investors have gone through a multitude of emotions in 2020 - instilling stability and trust in the markets will take for some interventions on the government’s part in the coming budget. In fact, some experts have said that a confidence in long-term investments can greatly help stimulate the economy, improve capital availability for small and large businesses and accelerate production and release of pent-up demand. As a result, analysts are recommending the rationalization of the STT or the LTCG. What are they, why are they important? Check it out:
LTCG
LTCG, or Long Term Capital Gains Tax was introduced in India in 2004. This is basically the tax that investors end up paying after they sell their securities in the market post a one-year holding period. So say you bought some shares, some gold, and some property - and held them all for over a year before selling them - the profit you make on these sales will be subject to LTCG taxes - the rate is currently at 10% for equity shares beyond a 1 lakh limit.
STT
STT, or Securities Transaction Tax is much like Tax Deducted at Source - it was introduced as a measure to curb tax evasion mechanisms. STT is basically a very small amount that you pay when you sell or buy an asset, like equity shares, mutual fund units, etc. STT was introduced after LTCG taxes had been withdrawn by the government. However, today, the presence of STT and LTCG has de-incentivized long term investments from the markets, and ultimately downplayed the potential of the Indian stock markets.
So, what needs to be done?
Investors basically want to see a rationalization of LTCG or STT. Some want to see an increased limit on LTCG - increased up to 3 lakhs, from the current 1 lakh ceiling. Given that there are other factors like dividends that are being debated, a rationalization of LTCG or STT, especially in the equity markets will set the stock markets up for a capital boost, and raise investor confidence in the long run.
What’s the talk about dividends?
Have you heard of something called the DDT, or Dividend Distribution Tax? If not, then check this out - earlier, if you were a company that wanted to pay dividends to your shareholder’s you would end up paying some DDT in the process. In the previous budget, this was abolished, and the dividend income was made taxable. So if you were an investor getting a dividend on stocks, that income would be taxed on your end, and at the rate at which your income slab gets taxed. Sounds harsh? Well, this has become a problem for those in the higher tax brackets. Some analysts have suggested reducing the rate at which dividend income is taxed, in anyone’s hand - currently taxed at your slab’s income tax rate, recommendations suggest capping the taxes on dividends at 15% to boost interest in capital markets.
Conclusion
There is a lot that investors want to see from the coming budget - or rather, corrected. While some want to see some long-term inconsistencies to be addressed, others want the government to simply facilitate and boost participation and trust in the capital markets. Moreover, the rules for FDI and FIIs have also demonstrated native taxpayers at a disadvantage in certain situations - a course correction is therefore, long due.
Whether these wants of the investor will be accepted and reflected in the upcoming budget is something only time can tell, there is something you can do in the meanwhile - and that is, take a few steps to prepare for the budget day. Make a plan, and follow up the announcements with some supplementary research on what the budget will result in. In fact, you can do so by simply going to our website www.angelbroking.com, and joining us there as we sit to decode #BudgetKaMatlab. What are you expecting from the budget 2021? Share with us on our Youtube videos on the upcoming budget!