Budget 2024: From removal of STT to crypto regulation, ICRA predicts these changes for markets, MFs and taxation

ICRA Analytics anticipates several potential changes in the upcoming Interim Union Budget for the fiscal year 2025. The Budget will be announced on February 1, 2024. Since the general elections will be held in May, this will be the Interim Budget and a new Budget will be presented in July.

Here's a list of changes ICRA expects from the upcoming Budget:

Taxation

1. Removal of security transaction tax (STT): According to ICRA, the markets have had this demand for removal of STT for a few years now and as the GST collection went up, this demand has again gained traction. The move, if considered, will attract more investors to invest in domestic equity markets.

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2. Double taxation on dividends: The company pays tax on its profit and at the same time the government levies tax on dividends in the hands of shareholders resulting in double taxation on dividends. Thus, relief from double taxation on dividends will be appreciated by the markets.

Pension and Insurance

1. Raising the minimum pension amount under APY: The rating agency also predicted that the government may consider raising the pension floor for the unorganised sector workers under its flagship scheme, the Atal Pension Yojana (APY), as the current amount may not attract enough potential subscribers to enroll.

2. Tax-free status to annuity income from NPS: Senior citizens rely heavily on annuity income during retirement years. Considering the rise in medical expenses for the financial well-being of senior citizens, ICRA believes that the government may accord tax-free status to annuity income from NPS. Also, an investment of ₹50,000 a year is unlikely to yield much pension and the limit may be enhanced to ₹1 lakh.

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3. Separate tax deduction for life insurance premium: A separate tax deduction for life insurance premiums instead of clubbing it under Section 80C will improve the penetration of insurance products in the country and encourage people to secure their family’s financial future by investing in life insurance, noted the agency. Also, the government may reconsider the 18 percent Goods and Services Tax (GST) charged on health insurance policies, it added.

Markets

1. Cryptocurrency: Markets seek a more comprehensive policy on cryptocurrency regulation. ICRA expects a regulatory framework by the government to include more participation in the crypto market.

2. Sovereign green bonds: The stage is set for sovereign green bonds to make a comeback in the Budget as green bonds address the funding requirements for wind, power, and hydropower sectors, stated the agency.

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3. Energy transition fund: ICRA believes that a mega capital outlay may be earmarked for energy transition and net-zero objectives. Government is expected to focus on new-age fuels — green hydrogen, ethanol, and other biofuels.

Mutual Funds

1. Parity in taxation: As per the rating agency, the government may consider addressing the difference in tax treatment between equity mutual funds and Unit-linked Insurance Plans (ULIP). Also, an equity Fund of Fund needs to be at par with equity-oriented mutual funds for taxation.

2. Simplification of capital gains structure: The capital gains taxation structure may be simplified by introducing a uniform holding period across domestic equities and mutual funds. Uniformity in tax treatment is expected to encourage higher compliance. However, it needs to be noted that equity investors take higher risks than other investors and hence the same needs to be taken care of accordingly, noted ICRA.

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3. Revisit taxation change for non-equity funds: The tax amendment to the Finance Bill last year created a level playing field between bank deposits and debt mutual funds. However, an investor in fixed deposits pockets assured returns irrespective of interest rate movements while a debt fund investor is exposed to not only interest rate risk, but credit risk as well in case the issuer defaults. Also, with the removal of earlier indexation benefits, global equity funds, equity funds of funds, gold funds and hybrid funds holding less than 35 percent in equities turned out to be tax-unfriendly and suffered collateral damage. Thus, the tax change might be revisited, it added.

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