Investors should not overreact to budgets
The Union Budget 2020 was based on three pillars “Aspirational India” (better standards of living, with access to health, education and better jobs), “Economic development” and “Caring Society”, with an idea to provide “ease of living” to all citizens. I think the steps taken in the budget are in the right direction. The government has taken continued efforts to improve the standard of living of all citizens.
The government in the last budget had laid a roadmap to achieving a $5 trillion economy, and that in this the endeavour financial sector architecture will be a key pillar. An important trend we have seen from the current government has been on improving the investment habits of individuals. The following steps taken by the government will have a positive impact on individual investors and their saving patterns.
-The Deposit Insurance Coverage for depositors have been increased from Rs 1 lakh to Rs 5 lakh per depositor; this will improve banking deposits and instil confidence in depositors
- The Government is floating a new debt ETF, consisting primarily of government securities. This will provide retail investors another avenue to access government securities
- The government proposes to sell a part of its holding in Life Insurance Company (LIC) by way of an Initial Public Offer (IPO). LIC has an AUM much greater than the AUM of the MF Industry, and will provide an interesting investment option for the retail investor.
- Currently, companies are required to pay Dividend Distribution Tax (DDT) on the dividend paid to their shareholders, at the rate of 15 per cent (plus applicable surcharge and cess). In order to increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, the budget removed the DDT. Now, companies would not be required to pay DDT and dividend shall be taxed only in the hands of the recipients at their applicable rate.
Will new slabs discourage financial savings?
The discussion on the Union Budget cannot be complete without discussing the new tax regime which the govt. has introduced on new tax rates at different income slabs. This regime shall be optional for the taxpayers. An individual who is currently availing deductions & exemption under the Income Tax Act may choose to avail them and continue to pay tax in the old regime or choose the new revised lower tax slabs. However the fine print mentions that the option once exercised for a previous year shall be valid for that previous year and all subsequent years. This might result into reduction in investment in financial products like PPF, NPS, Insurance and MF ELSS schemes. This will be opposed to the financial savings culture this government has been promoting, and hence I believe that it is one of the negative points of the budget. However, the only silver lining is that investors should invest in a product mainly for wealth creation and not merely tax savings. Hence, I believe that ELSS being a good wealth creation product might not be impacted as significantly.
I think the instant allocation of PAN based on Aadhaar, will help in better penetration of Mutual Funds, as we have more than 100 crore Aadhaar Cards.
The Indian Economy has been going through a challenging environment and in a slowing global environment it was hoping Union Budget 2020 will provide an impetus for growth. There were also lots of expectations that the budget will provide huge personal income tax cuts and drive consumption. This budget should be seen also in the context of corporate rate cuts (from 35 per cent to 25.2 per cent) effected towards end-September, 2019. The govt. has taken steps in these directions which might not create the big bang impact; nonetheless they are in the right direction. I hope investors don’t over react to budgets, and see them merely as small events in their long-term wealth creation journey.(The writer is CEO, Mirae Asset Global Investments (India))