An equity investor typically looks for tax sops in the Union Budget. Changes in personal income tax rates remain the most anticipated aspect in the Budget, followed by excise and service tax rates.
The current government’s first Budget presented in 2014 increased minimum exemption limit for individuals below 60 years from Rs 2 lakh to Rs 2.50 lakh and for senior citizens to Rs3 lakh. It raised the Section 80C limit to Rs1.50 lakh from Rs1 lakh. The Budget also increased the deduction for interest paid on housing loan to Rs2 lakh from Rs1.50 lakh.
Budgets and markets
All these changes brought cheer to the salaried class as they would have to pay less tax. However, the Sensex gave a thumbs down. In the week of the Budget day (July 10, 2014), the Sensex had touched 26,100 on July 7. It closed at 25,373 on budget day and fell to 25,024 on July 11, an overall swing of more than 1,000 points in a week. However, in the next 45 days, the Sensex was back to 27,000 levels, another swing of 2,000 points.
The current government’s second Budget was presented on February 28, 2015. It proposed a few more changes in taxation. While it abolished wealth tax, service tax rate was increased from 12.36% to 14%. The Budget also introduced gold monetisation scheme to convert physical gold into units and underlined its commitment to implement goods and sales tax (GST) by April 2016.
How did the stock market react? The Sensex, in intra-day trading, touched a high of 30,024 on March 4. But after that, the market barometer has been volatile .
In February 2016, investor sentiments were at an all-time low. The returns did not reflect in the equity markets. And in the 2016 Budget, measures such as preponment of advance tax payment for individuals, except for senior citizens, from September to June were initiated. Tax on EPF withdrawal was proposed, which was later withdrawn. Surcharge on income tax above R1 crore was increased to 15% from 10%. For tax payers earning below R5 lakh per annum, additional relief of R3,000 was provided. New Krishi Kalyan cess of 0.5% was levied on all services. Most importantly, it proposed taxing dividends of over R10 lakh in the hands of the recipient.
Despite these changes, which meant more tax outgo, the Sensex increased over 2,000 points by the end of March. In the week following the Budget, the 30-share index rose went up 1,800 points.
So the data show that the Budget is another event in the calendar wherein the government of the day puts forth its tax proposals to move up money. For investors, it is most important to look at long-term asset allocation for wealth creation without getting caught up in the tax changes by the Budget. However, if you are a trader, events like Union Budget play a key role in the strategy, when you have to juggle for bets.
The writer is founder and managing partner, BellWether Advisors LLP