Budget 2020: Relief in income tax, removal of LTCG on equities; all that can be done to spur growth

January 31, 2020 5:12 PM

Budget 2020-21: In 2018, IMF described India as an elephant starting to run, and considered it to be one of the fastest growing economies in the world.

Budget 2020, Union Budget 2020 India, Budget 2020 India, Budget 2020-21,budget 2020, GST in education, priority sector, education in priority sector, education,Union Budget 2020 India: All major macro-economic indicators are showing signs of weakness, which has become a cause for concern for the policy makers. 
  • Himanshu Kohli

Budget 2020 India: In 2018, IMF described India as an elephant starting to run, and considered it to be one of the fastest growing economies in the world. It has taken just a year for the same economy to find itself in a slowdown phase. All major macro-economic indicators are showing signs of weakness, which has become a cause for concern for the policy makers. In the midst of all this gloom, as the Government of India (GOI) is set to present the first budget of their second term, there are high expectations of strong measures to bring the economy back on to a growth trajectory.

Watch Video: What is Union Budget of India?

In this context, the following are our views on the expectations from Budget 2020.

We are long-term investors in the equity markets, and would like the Finance Minister to remove the long-term capital gains tax on equities and equity mutual funds completely. Equity Investors already pay Securities Transaction Tax (STT) and this measure can create a positive momentum in the market. The other wishlist is to change the definition of long term from 1 year to more than 3 years as the asset class is considered to be the best bet for creating long term wealth. We also feel that the Government should re-introduce Section 54EA and Sec 54EB,
which was removed in the Budget 2000-2001. These sections provisioned that capital gains from the transfer of a long-term asset could be exempted if the gains are invested into specific assets, which included mutual funds. At the very least, the GOI should include mutual fund investments in Section 54EC; this will not just boost the mutual funds industry, but also accelerate the financialization of savings, thus contributing to the overall development of the economy.

The other big measure we expect, like the rest of the country, is some relief to tax payers on the personal income tax front. This measure will drive consumption and spur demand, hopefully leading to a revival. Although measures like this can stress the fiscal health of the economy, we feel the GOI will have to take a small hit on the fiscal deficit number for the economy to get back to growth mode.

This Government has been working on structural reforms and we believe that along with the introduction of GST, one of the biggest measures undertaken was the reduction in the corporate tax. The corporate profitability has already tracked this improvement, but it has only been four months since this measure was introduced, and the long-term impact, especially in terms of new manufacturing units being set up with more foreign investments coming in, will be seen over the years.

We’re not recommending any specific stocks or sectors that need to be in investor portfolios ahead of the budget. We believe that this job is best left to good fund managers in the mutual funds, PMS or AIF space.

As far as the broader market is concerned, we expect a 10% to 15% CAGR over the next 3 years. The next one year is going to be volatile, however, and investors need to be prepared for this. We would like to conclude our outlook by stating a few risks that investors should watch out for in the next few months: the US-china trade deal, coronavirus, and of course, the risk of a budget that does not change the status quo.

Our observation on the previous budgets of this government has been that all key structural policies have always been announced outside the budget. However, we are expecting this time to be different, considering that the economy’s health is not in great shape. If corrective measures are not taken on time, then we’re in for greater pain in the coming months.

  • Himanshu Kohli is co-founder, Client Associates. Views are the author’s own. 

Do you know What is Finance Bill, Short Term Capital Gains Tax, Fiscal Policy in India, Section 80C of Income Tax Act 1961, Expenditure Budget? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

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