Union Budget 2024: Not One For Investors, But The Govt Isn’t Worried

The Union Budget 2024, the seventh one presented by finance minister Nirmala Sitharaman and the first one in Prime Minister Narendra Modi’s third term in Parliament, is a mixed bag. While it brought some relief to individual taxpayers in certain tax brackets, it wasn’t very favourable to investors as both short-term and long-term capital gains tax has been increased.

Sitharaman, in her budget speech, used the term 'MSME' 21 times, 'women' 13 times, 'youth' 10 times, 'Bihar' and 'Andhra Pradesh' four times. All announcements related to these keywords are favourable for those constituencies. These were probably responses to the nature of the mandate the Modi government received in the general elections.

Share Markets React, Bond Markets Don’t

The most immediate reaction was witnessed in financial markets. Share prices reacted sharply when Sitharaman announced a change in the capital gains tax structure. The government has argued that it is trying to rationalise short-term and long-term capital gains taxes on asset classes and different forms of investors and make it into a simple structure.

The headline numbers were as expected for capital expenditure, fiscal deficit, and government borrowing. The government is committed to maintaining the fiscal glide path and reducing the deficit. That matters to bond markets much more than equity markets. The 10-year government bonds, a benchmark instrument to determine the interest rate trajectory, did not react. There is a lot more money traded in bonds than in equity markets. That shows the market's satisfaction with the government's finances. Bond yields usually flare up if they get a hint that the state of government finances is not up to the mark.

Not The Most Favourable For Investors

For individuals, it is a combination of tax relief and tax rationalisation. If you are salaried and have opted for the new tax regime, you are paying relatively less tax than last year due to an increased standard deduction limit. If your income is between up to Rs 15 lakhs, you pay 10% in net taxes after deductions.

The finance minister also mentioned the term 'capital gains' nine times. Taxes on long-term capital gains on all financial and non-financial assets were increased from 10% to 12.5% and short-term capital gains were increased to 20% from the previous 15%.

This makes the game more challenging if you are rich and an active investor. The story changes for you in terms of taxation. The change in capital gains structure means you will pay more tax on profits you book each year through your investments over and above the exemption limit of Rs 1.25 lakh. If you are an active investor in property, the sale of property will now attract a lot more capital gains tax than before.

The government has removed the indexation benefit after reducing the long-term capital gains to 12.5% from 20% without indexation. That could favour financial assets as too much household savings have been locked in property or real estate.

Those using property for investments must now work with tax advisors and carefully plan their actions. This makes buying and selling property unattractive.

The only kind of investment that got some concession was gold, something many Indians invest in, with Sitharaman cutting import duties.

Government actions can be a reflection of the nudge the government is giving to you as an investor. Everyone flagged the surge in the trading in speculative index and equity options as a concern. You must now pay a higher securities transaction tax and capital gains tax.

The government action also determines an intervention to curb speculation in the derivatives market. It also sees overheating of property prices. For now, the government wants you to invest for the long term in financial assets and probably gold.

Actions on capital gains piqued investors and traders alike. The constituency of investors, traders, and stockbrokers is not yet a significant vote bank. There is no burden on the finance minister to please the markets this year. In the past, when the government tinkered with the capital gains, foreign investors were quick to react with their feet. Share prices tumbled sharply.

What’s The Govt Thinking?

However, this action comes from a position of strength. The government is telling investors that if you make money in India, there are taxes to be paid. India is not a tax haven. The confidence also comes from the robust presence of retail investors in India's equity markets. Local funds are now more significant than the foreign money that finds its way into India. Households allocate more money towards equity-linked assets than bank deposits through systematic investments.

Macroeconomic terms like 'fiscal deficit' and 'inflation' are barely mentioned in the Budget Speech. That shows the government's confidence in the finances. Some experts also say that the government has understated the tax revenue estimate for 2024-25 by lowering the growth and the goods and services tax estimate. The recovery in the equity markets towards the end of the day after falling sharply on hearing about the capital gains tax change says it all.