The next Union Budget on February 1 is an account vote, but the finance minister can still make changes as the last account vote in 2019.
Here are the changes, according to ICRA, the finance minister can bring in the Budget.
Tax
Abolition of security transaction tax (STT): The markets have had this demand for removal of STT for a few years now and as the GST collection has grown, this demand has once again gained traction. The move will attract more investors to invest in domestic equity markets.
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
Increase of the minimum pension amount under APY: The government may consider raising the pension floor for the unorganized sector workers under its flagship scheme, the Atal Pension Yojana (APY), as the current amount may not attract enough potential subscribers to enroll.
Tax free status to NPS annuity income: Seniors rely heavily on annuity income during retirement years. Considering the rise in medical expenses and the financial well-being of senior citizens, the government may give tax-free status to NPS annuity income. Also, an investment of Rs.50,000 per annum is unlikely to yield much pension and the limit may be enhanced to Rs. 1 lakh.
Separate tax deduction for life insurance premium: A separate tax deduction for life insurance 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. Also, the government may reconsider the 18% Goods and Services Tax (GST) charged on health insurance policies.
Markets
Cryptocurrency: Markets are looking for a more comprehensive cryptocurrency regulation policy. A regulatory framework can result in more inclusive participation in the crypto market.
Sovereign green bonds: The stage is set for sovereign green bonds to make a comeback in the Budget as green bonds address the financing requirements for the wind, energy and hydropower sector.
Energy Transition Fund: Mega capital expenditure can be earmarked for energy transition and net-zero goals. Government is expected to focus on new age fuels – green hydrogen, ethanol and other biofuels.
Mutual Funds
Equality in Taxation: The government may consider addressing the difference in tax treatment between equity mutual funds and Unit linked Insurance Plan (ULIP). Also, an equity Fund of Fund must be on par with equity-oriented mutual funds for taxation purposes.
Simplification of capital gains structure: The capital gains tax structure can be simplified by introducing a uniform holding period across domestic stocks and mutual funds. Uniformity in tax treatment is expected to encourage higher compliance. However, it should be noted that equity investors take higher risks than other investors and hence the same should be taken care of accordingly.
Revisit tax change for non-equity mutual funds: The tax amendment to the Finance Act last year created a level playing field between bank deposits and debt mutual funds. However, an investor in fixed deposits pockets assured returns regardless of interest rate movements while a debt fund investor is exposed not only to interest rate risk but also to credit risk if the issuer defaults. Also, with the removal of earlier index benefit, global equity funds, equity fund of funds, gold funds and hybrid funds holding less than 35% in equities turned out to be tax-advantaged and suffered additional damage. Thus, the tax change may be revisited.
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