By Nikhil Aggarwal
Every year as the budget session approaches, there is a plethora of expectations from taxpayers both individuals and institutions. It’s no different this year, and our expectations for the upcoming budget are palpable. As we wait for the budget, let’s understand why retail investors should be cautious. In the budget 2023, investors and taxpayers can expect additional tax incentives and lower tax rates, as the government may raise the cap on income tax exemption from Rs 2.5 lacs in the budget.
Investors nowadays find it difficult to ascertain whether an asset should be classified as long-term or short-term for determining tax liability. Therefore, there is a dire need to simplify taxation in investment and trading. Different asset classes have different holding period requirements that qualify for long-term investments.
The Securities Transaction Tax (STT) is a significant source of discontentment, which has prompted certain individuals to call for its outright abolition while others are lobbying for exemption from taxes on Long-Term Capital Gains (LTCG). Even if these reforms are not implemented, then maintaining STT could compensate by removing any levies on LTCG generated. If the STGC tax exemption can be increased to Rs 1 Lac, it can encourage more people to enter the stock market. Currently, capital gains on listed stocks are taxed at 10% and capital gains on unlisted stocks are taxed at 20%; eliminating these would create equilibrium between both sets of stocks. In addition, the government could reduce the disparity between various debt and hybrid securities.
Also Read: Tax slab change for individuals earning over Rs 10 lakh among Budget 2023 expectations
To further incentivize investments, increasing the withholding tax (TDS) TDS threshold on dividends to Rs 50,000 per annum from Rs 5,000 is recommended by the mutual fund industry. Retail investors have been adversely affected by the current TDS threshold on dividends, especially since the TDS on bank fixed deposits was raised a few years ago from Rs 10,000 to Rs 40,000. SEBI-registered market intermediaries will be granted industry status, thus eliminating unjustified limitations, such as funding costs and rising capital requirements. Investing in index-based and exchange-traded funds (ETFs) is preferable while diversifying your stock portfolio.
The sector body has explored the notion of rationalising surcharges on LTCG and STCG taxes. Currently, capital gains on listed stocks are taxed at 10% and capital gains on unlisted stocks are taxed at 20%. To ensure parity between listed and unlisted shares, this restriction needs to be eliminated. It is anticipated that market returns are expected to be more sensitive to cyclical and seasonal aspects. Therefore, it is advisable to conduct extensive market research, adopt a long-term market strategy, and cautiously select individual stocks.
The Government may permit pass-through taxation for Category III AIFs, that already exist for Category I and II AIFs. Subsequently, noteworthy is the growing sentiment towards renewable energy and electric vehicles – how the upcoming budget will offer new opportunities for micro players to venture into this sector. For example, TDS is deducted between 25-30% for listed securitised debt instruments, however, specific listed NCDs have exemptions from TDS up to certain amounts. Friendlier tax structures for listed structured debt will boost participation in such asset classes.
Also Read: Top 5 Income Tax rule changes expected from Budget 2023
Bonds (especially G-Sec) are also attractive with a guaranteed risk-free return of around 7%, apart from equity markets. I anticipate a strong bond market this year, so investors should keep an eye out for it. Bonds might be an excellent way to diversify and mitigate risk in order to overcome the uncertainty that dominates the market right now.
As a result, retail investors should rebalance their portfolios and ensure they are diversified and prepared for any unforeseen surprises the budget and other macroeconomic events may bring.
(The author is Founder and CEO at Grip)
Disclaimer: Views expressed above are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.