Brief Synopsis and Capital gains tax structure for financial securities

According to Article 112 of the Indian Constitution, the Union Budget is a statement of the estimated expenditures and receipts of the government for the upcoming financial year. It lays fiscal roadmap of the country for the next 1 year. As per Budget Estimates (BE) for 2024-25, following are key:

• Total receipts other than borrowings = Rs32.07 trillion
• Total expenditure = Rs48.21 trillion (8.5% increase over FY24, Rs44.42 trillion)
• Net tax receipts = Rs25.83 trillion
• Fiscal deficit = 4.9% of GDP (government is aiming a deficit of <4.5% next year)
• Inflation target = 4%, low and stable. Core inflation target (non-food, non-fuel) @3.1%
• The key focus of July 24 Budget was on employment, skilling, MSMEs (micro, small and medium enterprises) and the middle class.

In all, there are 9 Budget priorities defined in pursuit of ‘Viksit Bharat’ (i.e. Developed India) that include (1) productivity and resilience in agriculture, (2) employment & skilling, (3) inclusive human resource development and social justice, (4) manufacturing & services, (5) urban development, (6) energy security, (7) infrastructure, (8) innovation, research and development, (9) next-generation reforms. 

For BRICS countries, India’s July 2024 Budget has several implications:

• Trade Opportunities- with the recent expansion of BRICS to include 6 more countries (Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and UAE), India could see significant trade opportunities. The budget’s focus on boosting exports and improving trade infrastructure aligns well with the expansion
• Economic Growth- The budget projects India’s nominal GDP growth at 10.5% for 2024-25. This robust growth can enhance India’s economic influence within BRICS, create potential opportunities for increased investments and collaborations among member countries
• Strategic Investments- The budget includes provisions for strategic investments in technology, infrastructure and renewable energy. In areas like sustainable development and digital transformation, these investments can foster stronger economic ties and collaborative projects within BRICS.

Overall, the budget positions India to leverage its economic growth and strategic investments to strengthen its role and influence within the BRICS alliance. 

Now let’s also look at the July Budget in relation to India’s market; and the simplification and rationalization of capital gains tax perspective. 

On 23rd July 2024, the day of the Budget, the BSE Index had a market capitalization of Rs459.08 trillion. This market capitalization was contributed 34.74% by Sensex, 16.78% by mid-cap, 17.79% by small cap, and 30.68% by other companies. India’s market valuations remain rich, with the market cap-to-GDP ratio at ~150%, much above the historical average of 89%. Investor’s interest in the equity market has been a dominant theme since the pandemic. Several small and mid-cap stocks are trading at a P/E ratio of 80-100. 

To maintain the macro stability of the system, this budget saw the initiation of some curative actions for the capital market with capital gains tax getting raised, both for the short and long term. The government in the budget proposed a revamp of the capital gains tax structure for financial securities. It rationalized long-term and short-term capital gains tax rates and tenures for shares (listed and unlisted) and other products. Key changes are: 

• Short-term (1 year or less) gains on certain financial assets attract a tax rate of 20 percent
• Long-term (more than 1 year) gains on all financial and non-financial assets to attract a tax rate of 12.5 percent
• Exemption limit of capital gains on certain financial assets increased to Rs1.25 lakh per year

The details are explained in the table below:

• Capital gain- increase in the value of a capital asset when it is sold
• Unlisted shares- are shares of private companies that are not yet offered for sale in an initial public offer (IPO). They are not listed on formal stock exchanges
• Shares- are units of ownership in a corporation or financial asset, represented by common stock or equities
• Mutual Fund- is a portfolio of stocks, bonds, or other securities purchased with pooled capital from investors
• ETF (Exchange Traded Fund)- is a collection of investments such as equities or bonds and are traded on stock exchanges
• Listed bonds- are a type of listed debt security that businesses use to solicit public debt. They are traded on the stock exchanges
• Listed debentures- are a type of bond or loan which a company takes against security or in any other form. They are traded on the stock exchanges
• STT (Securities Transaction Tax)- A tax levied on every purchase or sale of securities that are listed on the stock exchange. It is a regulatory charge payable by investors and traders to the central government
• REIT (Real Estate Investment Trusts)- It is a company that owns, operates or finances real estate
• InvIT (Infrastructure Investment Trust)- It is a Collective Investment Scheme similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as a return
• Equity shares- all shares that are not preferential shares, and are also known as ordinary shares. A person who holds equity shares has the right to vote in the company’s decisions
• Unlisted debentures- debentures that are not ‘quoted’ or listed and traded on a secondary market

While the tax changes bring some short-term volatility, the long-term fundamentals of the Indian market continue to remain intact. 

Even though market valuations currently, especially in mega and large-cap stocks are not excessively high, maintain a cautious view. 

Continue to focus on diversified asset allocation to ensure balanced risk and return. 

Disclosures:

• Investments in the securities market are subject to market risks. Read all the related documents carefully before investing
• The securities quoted are for illustration only and are not recommended
• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors