Where there are hopes, the end result is often disappointment. Where there is fear, the result is often relief.
Last year, prior to the Union Budget, there were hopes of a withdrawal of the Capital Gains Tax on
Equities given the dual taxation due to a high Securities Transaction Tax also being simultaneously levied.
There was also hope of dilution if not abolition of the triple taxed Dividend Distribution, besides the eternal fantasy of a cut in individual Income Tax Rates and a rationalization of Tax Slabs.
Suffice to say, nothing of that sort happened and owing to stretched valuations and the advent of Covid-19, the equity markets received a slam dunk after an initial uptick. This year, there weren’t too many hopes. Instead, there were fears of re-imposition of Wealth Tax or Inheritance Tax and the inevitability of a Covid cess or surcharge. Again, these fears too were belied and this triggered an immediate 2000 point Sensex salute. Well, no one is complaining but the correlation between the key equity indices, pre-Budget expectations and post-Budget realities cannot be missed.
With so many electronic media ‘Experts’ having expended hot air on the impact of the Budget, both real and imaginary, my job stands simplified and limited to cutting through the chaff and sticking to a few pertinent micros that might actually impact my valued readers. So, how has this Budget affected the primary asset classes in India viz. Equity, Debt and Gold? Given the quantum of liquidity sloshing around and the expectations of a weakening US dollar, equities across Emerging Markets and especially
China and India, are rising as if on steroids.
While valuations appear stretched and have to inevitably snap sometime, it will take a seriously adverse global event to suck up the liquidity. Also, given the low base effect, the GDP growth in India for the next financial year will be magnified and may provide double digit optics. In response to the mutual fund industry’s lobbying to put its equity schemes on par with the tax free ULIPs. The reaction has been to
tax ULIPs with a premium above Rs 2.5 lakh per annum on par with equity mutual funds.
This also suggests that the removal of Capital Gains tax on Equity Mutual Funds could now remain a pipe-dream. On the debt investment side, there were a couple of yet to be detailed announcements pertaining to strengthening Fixed Deposit Insurance as well as the proposed issuance of tax efficient Infrastructure bonds. The interest on Employee Provident Fund (EPF) contributions in excess of Rs 2.5 lakh has been made taxable and in the case of debt funds, the enhanced government borrowing program could trim returns.
The reduction in customs duty on Gold albeit partially countervailed though by an agri-infra cess, may weaken Gold prices in the near term, but there can be no mistaking it’s utility as an in-built hedge in an equity heavy portfolio. Overall then, the Budget has not significantly altered the scope for investing in the aforesaid asset classes. So, stay focused on your asset allocation plans and goals, and side-step the periodic distractions with all its high decibel accompaniments.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com