Union finance minister Nirmala Sitharaman announced her third budget on February 1, 2021, in the Lok Sabha. The budget 2021 has come as a relief for investors as no hikes have been announced on taxations pertaining to stock markets. Other investor-friendly announcements include the proposal for setting up of an investment charter to protect the rights of investors, along with the provision for a unified securities market code.
Investor sentiment before the budget 2021
Before the budget, many investors were concerned about the possible hikes in the existing tax regime related to stock markets. These included Long-term Capital Gains (LTCG) tax, the Securities Transaction Tax (STT)/Commodities Transaction Tax (CTT) and the Stamp Duty. The LTCG tax has to be paid on capital gains of over Rs 1 Lakh on equity investments after a holding period of more than 1 year. The union government had reintroduced the LTCG after a gap of 14 years in 2018. STT/CTT is a regulatory charge applied to the value of transactions by traders and investors. Investment in equities and commodities also attracts a uniform Stamp Duty. In the face of a strong rebound of the stock markets after April 2020, the investors believed that a tax hike was in the offing.
Stock markets in 2020
In 2020, the stock markets in India saw a sharp dip and an outstanding rebound. For instance, the NIfty50 dipped to 7,511 in March 2020, only to show a strong comeback to 11,380 by December 2020. At present, Nifty’s price to earnings ratio is trading above its five-year average. Alongside, the equity market inflows have exhibited robust growth. In November 2020 alone, the equity markets saw inflows of $8.3 billion. The segments which showed strong valuations amidst the pandemic included pharmaceuticals, chemical, technology, IT offshoring etc.
Budget 2021 and stock market indices
The budget 2021 did not increase the taxations related to stock markets, thus allaying the fear of investors. Cheering the union budget 2021, the stock indices ended on a strong note. While the Sensex surged by around 2,314 points ending at 48,600 - a growth of 5%, the Nifty50, recorded a growth of 4.74%, ending at around 14,281 - a surge of around 646 points.
Major decisions pertaining to investors:
Here’s a look at the major decisions of budget 2021 which would impact investors:
1. Investment charter for financial products: The finance minister proposed to introduce an investment charter for all financial investors across all financial products. Although the details of the charter are awaited, it is expected that this charter would pertain to the rights of investors and pave way for a robust grievance redressal mechanism. The charter is also expected to curb incidents of misrepresentation of facts while selling financial products.
2. Corporate bond institutional framework: The budget 2021 announcements included the proposal of a permanent institutional framework to purchase stressed investment-grade securities. This, in turn, would enhance the secondary market liquidity of corporate bonds. This announcement is likely to instil confidence in investors looking forward to making investments in corporate bonds in debt markets.
3. A single securities market code: The finance minister also announced that the government will provide for a consolidated and rationalised securities market code after amalgamating the requisite provisions of four laws: the Securities Contract (Regulation) Act, 1956, the SEBI Act 1992, the Depositories Act, 1996 and the Government Securities Act, 2007. Investors would benefit from this single code as it would not only ease compliance issues arising out of multi-regulators codes but also reduce the loopholes and contradictions of different legislations.
4. Spot exchange for gold: The finance minister announced that SEBI will be made the Warehousing Development and Regulatory Authority (WDRA) for a system of regulated gold exchanges in the country. These spot exchanges would provide considerable benefits to investors because of transparency and standardisation. It would also enhance investments in gold-ETFs (Exchange-Traded Funds) by providing for an efficient price discovery mechanism.
5. Pre-filled tax forms: The budget 2021 announced that along with Tax Deduction at Source (TDS), details of capital gains and interests from banks/post offices would be pre-filled. This, in turn, will allow investors to file their taxes with convenience and ease.
6. Relief to senior citizens above 75 years: As per the union budget 2021 announcement, senior citizens above the age of 75, with access only to pension and interest income, are not required to file their Income Tax Returns (ITRs). However, the details on taxation pertaining to their dividend income and returns from equity investment is awaited and are expected to be mentioned in the budget fine print.
Conclusion: While the country has started making progress for an economic recovery, the budgetary announcements are expected to boost its pace. Especially for individual investors, the announcements are likely to instill positivity and confidence.