India's financial markets expect Finance Minister Nirmala Sitharaman to announce key measures for boost investment and stimulate growth in today's Budget speech. Given the environment of slow growth, declining consumption and weak investment, Indian stock markets performed relatively well in 2019.
The Indian benchmark indices Sensex and Nifty hit record highs and rallied over 13 per cent and 11 per cent, respectively. However, the rally was not broad-based as mid-cap and small-cap indices disappointed investors with negative returns. The mid-cap index declined as much as 3.2 per cent and small-cap index suffered a loss of 8.3 per cent during the year.
The upcoming budget should, therefore, focus on boosting investor sentiment by reducing income tax and increasing cash in hand of common-man. The government's policies on personal income tax rates and taxation related to financial markets will set the market tone going ahead. The common expectation across market participants is some rationalisation of capital gains tax.
FULL COVERAGE:Union Budget 2020
According to market experts, Finance Minister Nirmala Sitharaman may announce reduction or abolition of long term capital tax which can significantly improve investor sentiments. The Budget may also propose increase in income tax deduction on investments made (80C) or provide deductions on housing loan.
"The market was very hopeful on the Union Budget, the pre-budget has been blockbuster with outperformance by mid and small caps. Growth is expected as the theme with positive measures to industries, cut in tax for common-man and schemes for rural market to boost consumption," said Vinod Nair, Head of Research, Geojit Financial Services.
Here are the key expectations of stock market investors:
Abolishment of Long-Term Capital Gains (LTCG) Tax
The abolishment of Long-Term Capital Gains (LTCG) Tax is a long-pending demand from investors to improve market sentiments in the market. According to media report, the government is considering rationalisation of the LTCG taxation structure by classifying three asset classes against six at present. The holding period for LTCG is likely to be increased to two years from one year currently.
Reduction in Securities Transaction Tax
Securities Transaction Tax (STT) is one of the biggest burdens on stock market investors as it is the largest contributor to per trade transaction cost. Introduced in the Union Budget 2004, STT is levied on every purchase or sale of listed securities.
In the previous Budget, FM Sitharaman restricted the STT to the difference between settlement and strike price in case of exercise of options. However, the change will not affect the levying of STT on any other transaction on the exchanges.
Market expects Sitharaman to scrap STT to raise volumes on the bourses. Dalal Street is of the opinion that STT which is levied at the time of purchase and sale of securities listed on stock exchanges in India leads to double taxation. The reason is imposition of long term capital gains tax while keeping STT intact.
In order to increase investment in securities, the government must remove or reduce STT rate to ensure more participation by domestic as well as foreign investors in Indian capital markets.
Sops for retail investors
The government is working on a proposal to extend tax benefits to retail investors. The Union Budget 2021 may also offer incentive to health insurance buyers by increasing income tax exemption on health insurance premium.
By Chitranjan Kumar