When it comes to reacting to the Budget speech, stock markets often ignore positive macro announcements in favour of tax changes that personally affect investors. The market reaction to the 2024-25 Budget speech has followed this script.
Fiscally frugal
In terms of the macro budget numbers, there was nothing in the Finance Minister’s speech to upset markets. The fiscal deficit target for FY25, at 4.9 per cent is lower than what was forecast in the interim budget. There has been no change to the capital expenditure allocation, at ₹11.1 lakh crore, which remains the same as what was presented in the interim budget. The ₹2.1 lakh crore dividend bonanza from RBI seems to be flowing into various welfare schemes for farmers, the youth and women, which was only to be expected given the electoral outcome.
In fact, the above budget contours are fairly positive for the bond market, as the Budget has stuck to the fiscal consolidation path, and slightly reduced its projected market borrowings from ₹11.77 lakh crore in FY24 actuals to ₹11.63 lakh crore in FY25 budget estimates. Overall, this appears positive for bond investors, as it paves the way for lower market interest rates.
Taxing for equity gains
But the stock markets which traded in a narrow range during the first 1 hour and 15 minutes of the Budget speech as she ran through Part A of the speech, launched into see-saw moves after the FM unveiled her proposals to ‘simplify and rationalise’ capital gains taxation.
The Budget proposes that the Long-Term Capital Gains (LTCG) tax incidence on equities and equity mutual funds would be hiked to 20 per cent from the present 15 per cent, while Short-Term Capital Gains Tax (STCG) would be hiked from 15 per cent to 20 per cent. While proposing to tax equity gains at a higher rate, it offers a small sweetener by hiking the annual exemption on LTCG from equities to ₹1.25 lakh from ₹1 lakh.
However, a deeper dive into budget documents suggests that equity investors may still be better off than investors in physical assets once the proposals take effect. A reading of the memorandum suggests that cost inflation indexation benefits offered under section 48 of the IT Act while calculating LTCG, may no longer be allowed. This may cause LTCG on property, gold etc to be taxed at a flat 12.5 per cent instead of 20 per cent with indexation earlier. This could establish a level playing field on the treatment of capital gains between physical assets such as property and gold, and financial assets such as equities. But a deeper perusal of fine print may be necessary before concluding that this is the case.
Uniform holding periods
Holding periods have been rationalised across assets for calculation of capital gains. Henceforth, all capital gains on listed securities, whether equities or bonds or other instruments will be treated as long term if held for over 12 months and short-term if held for less than 12 months. For unlisted shares, property, bonds, gold and unlisted debentures, the holding period to distinguish long-term from short-term gains will be 24 months.
The capital gains tax proposals will also take effect immediately from today (July 23 2024). Therefore, any sale of assets (including equities or equity funds) from today will attract tax at the new rates. This is just another reason for investors to wait for the budget fine print and interpretations before reacting in a knee-jerk fashion to the Budget.