As we come close to the first month of the hopeful year that 2021 is, there is a lot of anticipation and speculation around the Indian budget of 2021. Nirmala Sitharaman, Finance Minister, shall present the Union Budget on February 1, 2021.
After COVID-19 put the economy to a sudden halt for a part of 2020, all eyes will be on the FM as to what’s the plan for economic revival. There is a plethora of expectations and advice from all sectors and segments of the economy. Given the limited resources, it will be interesting to see how the FM manages the challenging task of bringing the economy back on track.
Particularly for stock market participants, the year 2020 was unlike any other! The stock market tanked almost 40% in March 2020 and bounced back to achieve new all-time high milestones. With that said, investors will be keenly awaiting the budget and the impact it may have on the investment decisions. Read on!
As per the January 2021 World Economic Outlook report by IMF, the global economy is projected to grow by 5.5% in 2021 and 4.2% in 2022. The actual magnitude of recovery is projected to vary across countries, basis the access to healthcare and policy support.
The Indian economy is projected to grow by 11.5% in 2021 and by 6.8% in 2022, after contracting by 8% in 2020.
Due to the focus on providing liquidity and stability in the economy, the fiscal deficit of the country has slipped to around 7.5%. GST and direct tax collections have also been lower in the year 2020. Consequently, there has been a spike in the debt to GDP ratio of the country. However, most economists opine that the need of the hour to look at the wellbeing and growth first and the debt later.
The budget of 2021 will be the first paperless budget in the history of the country. The Finance Minister, on the occasion of the Halwa ceremony, launched the “Union Budget Mobile App” for easy access to Union Budget information.
The app, developed by National Informatics Centre, will be available in both Android and iOS platforms. Moreover, it shall be available in English as well as Hindi languages.
The App will provide to the users, access to all Union Budget documents (including downloading and printing) after the FM completes her budget speech in the Parliament.
There are expectations from the retail investors towards change in the/ abolishment of the present long-term capital gains tax structure.
Currently, 10% tax is payable on long-term capital gains above the threshold limit of Rs 1 lakh on gains from the redemption of equities and equity-oriented funds in a financial year with no indexation benefit.
The reintroduction of LTCG tax in the 2018 budget affected the investors’ confidence. The 10 per cent LTCG tax is an additional tax burden along with other transaction taxes – like STT, Stamp Duty. Reducing or abolishing LTCG can raise investors’ confidence.
Securities Transaction Tax (STT) is a transaction tax, applicable on purchase and sale of equity shares and is similar to tax collected at source (TCS).
It is believed that STT was introduced with the objective to replace LTCG. However, 2018 saw LTCG being reintroduced alongside STT.
LTCG plus STT takes away a pie of the investors’ returns. Removing/ reducing at least one of the two will lead to increased returns for the investors.
Salaried employees are expecting an increase in the standard deduction available (from the existing INR 50,000) to them. From a purely economic standpoint, an increase in the standard deduction will increase the cash-in-hand and thereby promote consumption.
The standard deduction is a fixed deduction that is allowed to specific income tax assessees, irrespective of expenses incurred or investments made. In the 2018 budget, standard deduction replaced the medical and transport allowance.
In 2020, many companies adopted the Work from Home model for its employees. However, setting up an office like infrastructure/ workstation at home is expensive. Moreover, the work-related expenses, such as higher electric cost, Wi-Fi cost have increased drastically. Considering all the above points, an increase in the standard deduction limit by the central government could give some respite to the salaried employees.
There is an expectation for an increase in the limit of tax deduction available under section 80C from the present INR 150,000 to INR 250,000.
The increased deduction limit will not only reduce the tax burden but will also spur investments and private consumption. This will help pick up the economy and increase the earnings of the taxpayers.
Last year, the Budget announced the launch of Tier II of the National Pension Scheme (NPS). This had a shorter lock-in period of three years as opposed to the Tier I lock-in requirement of up to retirement. However, Tier II NPS funds were made available only to government employees. After reducing the lock-in requirement, NPS funds can be compared with ELSS schemes. Hence, investors expect the government to make this Tier available to all retail investors to give them an additional option of investing in a tax-saving equity-related fund.
Given the unprecedented times, Union Budget of 2021 is expected to be a milestone budget for the country in general and Modi government 2.0 in particular.
While the world is still dealing with the pandemic, the focus will be on healthcare and economic revival in the short-term and economic growth in the long-term.
The retail investors will keenly await the government stance on long-term capital gains tax and securities transaction tax. Any decrease in these taxes will boost investor morale and may even attract foreign investment into India.
The salaries class will be awaiting an increase in the standard deduction limit to compensate for the increased cost of working from home culture. Additionally, the country will hope for an increase in the limit of tax deduction under section 80C, to lower their tax burdens and increase their disposable incomes.
While the wants are unlimited and different, the government will face a challenging task to allocate limited resources. The high Debt to GDP ratio and lower forecasted GDP growth will also be key numbers that the experts will be keenly observing.
We will keep you updated with the actual budget details as well.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.