The Indian government’s FY25 budget struck the path of fiscal prudence but has ensured that sectors that need help get the necessary resources to ensure a rapid and equitable economic growth. While the budget reaffirms its commitment to infrastructure development, social programs and innovation, changes to the capital gains tax regime sparked sporadic market reaction.
A Vision for Sustainable Growth
Despite the market’s immediate reaction to the capital gains tax changes, it is crucial to view these adjustments within the larger context of the budget’s long-term vision. The budget prioritizes sustainable growth through several measures.
A commitment to infrastructure development, particularly in railways and airports, with significant capex outlay, signals the government’s intent to attract investment and boost economic activity. Targeted allocations and program extensions for farmers, women, youth and the underprivileged demonstrate a focus on inclusive growth. Initiatives like the credit guarantee scheme for MSMEs and support for the manufacturing sector aim to foster innovation and generate employment opportunities.
A lower fiscal deficit target of 4.9% of GDP in FY’25 (as against 5.1% estimated in the interim budget) and a target of 4.5% in FY’26 reflects the government’s commitment to fiscal prudence, further bolstering investor confidence.
Capital Gains Tax Takes Centre Stage
Capital gains tax as always took the spotlight in investor circles. The increase in standard deduction and tweaking of the income tax slabs is likely to benefit over 4 crore salaried employees to the tune of ₹17,500 each. The most significant development impacting investors was the revision of the capital gains tax structure.
Long-term capital gains tax, applicable to listed financial assets held for over a year has been increased from 10% to 12.5% and on unlisted and non-financial assets held for 2 years, has been reduced from 20% to 12.5%, however indexation benefit has been withdrawn. Finance minister has also increased the limit of exemption of long term capital gains on certain financial assets to Rs. 1.25 lakh per year.
Unlisted bonds and debentures, debt mutual funds and market linked debentures will attract tax on capital gains at applicable slab rates, if held for less than 2 years. Short-term gains tax saw a steeper rise, jumping from 15% to 20% for listed securities, if held for less than one year. People will tend to hold for at least one year and look for long term investment. Additionally, share buyback income will now be taxed in the hands of the recipient.
This move, while potentially impacting short-term market sentiment, underscores the government’s aim to broaden the tax base and ensure equitable wealth distribution.
The Securities Transaction Tax (STT) on Futures & Options contracts saw a significant hike to 0.02% from 0.01%. This adjustment, while potentially impacting trading volumes in the short term, aligns with the government’s efforts to generate revenue and curb speculative trading activities.
The Way Forward: Confidence and Continued Growth
The FY 25 budget, while introducing adjustments, ultimately lays the foundation for sustainable and inclusive economic growth. Five schemes with an outlay of ₹2.0 lakh cr have been launched to educate, employ and skill the youth entering the workforce. Over 4.1 crore youth will benefit in the next five years.
The government has made a conscious effort to address the rural distress. Higher spend will create more rural jobs and revive the rural economy. It allocated ₹1.52 lakh cr for agriculture and allied services.
By prioritizing infrastructure development, social welfare and innovation, the government aims to create a conducive environment for long-term prosperity. Market confidence is expected to improve further as the focus shifts back to the fundamentals – a strong economic foundation and a clear roadmap towards becoming a $30 trillion economy or a “Viksit Bharat” (Developed India) by 2047.
(The author is Director & CEO of SMC Global Securities; Views are personal)
