India’s 2024 budget, announced after Prime Minister Narendra Modi’s re-election for a third consecutive term, presents a mixed bag for investors.
This budget reveals increased taxes on gains from share sales, reduced taxes on property sales, and the abolishment of a tax hindering investment in startups.
With a focus on employment, ease of doing business, tourism, and infrastructure, the budget aims to balance economic growth with fiscal responsibility. Here are the key takeaways for investors:
Long-term capital gains tax increased from 10% to 12.5%
Indian finance minister Nirmala Sitharaman announced an increase in the short and long-term taxes on capital gains in what experts said was a move aimed at cooling activity in Indian equity markets but what could dampen retail investor sentiment.
Tax imposed on long term gains from all financial and non-financial assets, called the Long Term Capital Gain (LTCG) tax, was hiked from 10% to 12.5%. The minister however increased the exemption of capital gains on certain financial assets to Rs 1.25 lakh ($1,493) per year. The exemption limit was earlier ₹ 1 lakh on long-term equity gains.
The LTCG tax is applied on profits on the sale of shares or equity-oriented mutual funds held for more than a year.
The FM said listed financial assets held for more than a year will be classified as long term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long term.
Unlisted bonds, debentures, debt mutual funds, and market-linked debentures will be taxed according to individual tax slabs, she added.
Security Transactions Tax on futures and options was proposed to be increased to 0.02% and 0.1% respectively and she also announced tax on income received on buy back of shares in the hands of the recipients.
Markets react, but eventually recover
The benchmark indices of the Indian equities- the BSE Sensex and Nifty first fell at the announcement related to LTCG tax and STT, but eventually pared losses by the close of the day.
The BSE Sensex fell by over 1,100 points to touch its lowest of the day at 79,400.75. However, it recovered losses and gained close to 1,040 points to close at 80,440.41.
“The hike in LTCG tax and STT was a disappointment but it was a relatively small hike and it appears that the anticipation for it had been built in. More importantly, the decrease in custom duties for gold and silver, abolishment of the angel tax, commitment to fiscal consolidation and other positives seem to have balanced the negative reaction,” Sugandha Sachdeva, founder, SS WealthStreet, told Invezz.
LTCG tax on sale of property decreased
The LTCG tax on sale of property was brought down from 20% to 12.5%. However, the budget removed the indexation benefit for calculating LTCG on property sales in what experts said could impact investment in real estate.
Indexation benefit is a method using which the purchase price of an asset can be adjusted for inflation, thus reducing taxable gains.
The move saw a sharp market reaction with Nifty Realty down by nearly 2% compared with a relatively flat Nifty, reflecting investor concerns over a potentially higher tax outgo compared to the previous regime, especially for properties held over a long period where inflation would have significantly increased the purchased price.
“For capital gains on transfer of immovable property, the Long term capital gains tax has been rationalized from a rate of 20% to 12.5%. However the indexation benefits offered as per second proviso to section 48 for calculating the cost of acquisition have been repealed. Accordingly, the rate of tax has reduced by 7.5% but for immovable properties with long holding period, the potential tax outflows may be higher under the new tax provisions, subject to facts,” Dhruv Chopra, managing partner, Dewan P. N. Chopra & Co. said.
Reduction in custom duties of gold and silver boost jewelry stocks
The budget proposed to cut customs duty on gold and silver from 15% to 6%, in a bid to enhance domestic value addition in gold and precious metal jewelry.
This resulted in a rally in jewelry stocks like Titan, Kalyan Jewelers and others.
Jateen Trivedi, VP Research Analyst – Commodity and Currency, LKP Securities said:
“In the Budget, the Finance Minister announced a reduction on Basic Custom Duty (BCD) on gold and silver from 10 per cent to 6 per cent. Adding 5 percent AIDC, which remains unchanged, the total import duty on gold and silver is reduced from 15 percent to 11 percent now. As a result, the price of gold reacted lower in MCX by more than Rs 2000 to Rs 70,350, and silver by Rs 2500 to Rs 86,600 as the market prices in the lower import duty gap of 4%. The broad view remains volatile and weak as Comex gold stays below USD 2415.”
Abolishment of Angel Tax a boost for startups, venture capitalists
In a move that was cheered across the board, the government abolished the Angel Tax for all classes of investors, in what is expected to provide a fillip to the country’s startup ecosystem and “boost entrepreneurial spirit”.
Angel tax is the income tax payable on the capital raised by unlisted companies or startups via issue of shares through off-market transactions where the share price exceeds the fair market value of the shares. It was introduced under a section of the Income Tax Act in 2012 to curb money laundering through inflated share valuations.
The taxation however was considered a bane by startups which had to participate in complex processes to justify valuations based on future potentials and also had to face cash flow problems due to the tax demands.
The potential for tax assessment and disputes discouraged angel investors and venture capitalists from investing in Indian startups. This hesitance impacted the availability of early-stage funding crucial for startups to scale and innovate.
“Earlier start-ups were allowed a tax exemption from Angel tax subject to certain conditions such as the amount of share capital and securities premium post fund raise does not exceed INR 25 crs, the end-use restrictions on funds raised by start-ups such as no investments in financial assets etc., and a requirement to submit declaration in Form 2 to DIPP. The abolition of angel tax provisions will now enable start-ups to raise funds without any such conditions and compliance requirements. This amendment is applicable from AY 25-26,” Anish Shah, partner, M&A tax and regulatory services, BDO India, said in a note shared with Invezz.
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