Budget 2021: Retail investors look for benefits of indexation to beat inflation on investments


In a year, when the government had to pump in Rs 20 lakh crore stimulus, RBI had to intervene to boost liquidity in the market and the fiscal deficit which was estimated at 3.5 percent of GDP is now expected to surge to 7.5 percent of the GDP instead, at such unwonted times presenting the budget has to be a far more challenging task than anticipated.

By November of 2020, the Centre’s fiscal deficit had already crossed 33 percent over the full year’s Budget Estimates (BE). Tax revenue collection stood at 42.1 percent of BE as compared to 45.5 percent of BE during the corresponding year, while non-tax revenues stood at 32.3 percent of BE as compared to 74.3 percent of BE 2019-20 in the corresponding period of last fiscal.

With plunging revenues, surging unemployment, and growing fiscal deficit, the challenge for the finance minister in the upcoming budget is way beyond capacity and comfort zones. On the brighter side, India’s economy is showing strong signs of resilience by bouncing back to recovery far more briskly than other economies. These growth spurts are seen in the record-high December 2020 tax collections, burgeoning foreign reserves, and an 80 percent drop in COVID-19 cases.

Prioritizing Expenditure

The government’s priority spending is likely to focus on the development of healthcare infrastructure to maintain the low levels of COVID-19 cases and additionally support the seamless distribution of the vaccine across the expanse of land. From a manufacturing standpoint, the approved PLI scheme (rolled out in mid-2020) under Atmanirbhar Bharat Abhiyan has reduced India’s dependence on imports, specifically China, it has catapulted product manufacturing in domestic units and is catering to the employment of labour forces in India.

10 labour-intensive sectors will benefit from this reform. Even the real estate sector is witnessing a turnaround with wealthy investors investing their surplus gains from the booming stock markets into physical assets.

Backing Growth

The way ahead to put India back on its growth trajectory is to increase spending, both by the government and taxpayers. Investments in infrastructure must be a priority for the government. While on the flip side, clearly, the government needs to put more money in the hands of taxpayers and consequentially increase the standard deduction.

Take for instance real estate, the reduction on stamp duty charges, and the rebate on the premium collected for construction of all housing projects has given the sector its much-needed boost with investors flocking to lap up unsold inventory at the first opportunity.

Similarly, further reforms of allowing limitless income tax deductions against home loan interest payments or a reduction on the capital gain tax, while lifting the ban on subvention schemes and permitting external commercial borrowing by the sector could be further steps to empower taxpayers to invest while further elevating the growth of the sector.

Taxes & Indexation

To maintain steady growth in the markets the government needs to nudge investors to stay invested for the long-term. What investors look for are the benefits of indexation to beat inflation on investments, where investors are taxed on the real value of their investments. Hence, instruments like gold, debt funds, and real estate are preferred investments as they offer indexation benefits, unlike equity funds.

Additionally, the tax exemption under LTCG is limited to Rs 1 lakh in a financial year, while LTCG is taxed at 10 percent without indexation benefits. This encourages investors to take the easier route and book profits each year, which contradicts the government’s requirement to encourage long-term investments. The incoming budget should consider including equity funds under the indexation umbrella while also reforming the taxation burden on LTGC for retail investors.

Retirement Savings

This budget should encourage long term savings as normal Indian retirement planning continue to be in dire state though push on NPS is step in right direction but more long term savings with tax benefits and exemptions should be encouraged.

The current budget is an opportunity for the government to bring in significant reforms and direct India’s growth in the right direction. While we wait with bated breath for some signs of relief, let’s hope India comes out stronger and progressive in a post-pandemic world.

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