The Union Budget 2021 was announced on 1st February 2021 by Nirmala Sitharaman, our Finance Minister. In this article, we discuss how the new laws will impact the common investor of the country. Read on to find out the highlights of Budget 2021 for investors.
Expectations of budget 2021
As a result of Covid-19 and the lockdown which followed, resulting in a financial crunch, there was an expectation that the government would bring out a new cess or tax to make the citizens pay more which did not happen. Another expectation was increasing the limit for tax exemptions, since so many people suffered financially in the past year, which again did not happen.
Budget 2021 for Investors Highlights
Stock market rise
With the announcement of budget 2021, the stock market saw a steep rise. The 50-day moving average of the market was 13700 at this point. It was expected to move up by 14200-14300 as technically is the case. Secondly, the put call ratio was stuck below 1 which was quite unique. The Indian as well as foreign stock markets had already been corrected to some point which is why the budget announcement was not expected to impact them majorly. But yes, the budget did bring about a big jump in the stock market which was unexpected.
Another point was that the government initiated more investment in the growth and development while not taking more taxes from the citizens. The government also announced new reforms for banking, NPA, insurance sectors which overall led to a boost in the economy.
Last year the government had proposed to sell of assets worth Rs 2.10 lakh crores and raise capital which did not happen. This year too the government could have set enormous disinvestment plans which it did not. Instead, it put forth a reasonable target of Rs 1.75 lakh crores worth of disinvestment. With the current scenario in mind, this target seems plausible and the government may even be able to surpass it.
Since the government wants to invest more in the economy, it has two choices to raise capital for it. Either collect more taxes from citizens or use disinvestment plan. In the long run, as seen in foreign countries too, privatization and disinvestment will lead to major growth of the country.
The government announced that it will establish an AMC which will takeover the NPAs of two PSU banks thus privatizing them. The announcement of this new financial institution where the government will invest Rs 20,000 crores which can be a helping hand to get more loans in case there is any financial trouble, is false. There is no scope of deck improvement unless the YTM improves.
There was also some movement in the interest rate of long term bonds due to this, which resulted in drop in NAVs. Keeping in mind the government’s target of loans it plans to take, the long-term debt fund investors need toreview their portfolio in the next two months. Since there maybe no positive growth immediately on long-term debt funds.
What is YTM?
YTM stands for Yield To Maturity. YTM is the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity, with all payments made as scheduled and reinvested at the same rate.
Allocation of capital to infrastructure exceeded last year’s by around 35%. This will in turn have a positive impact all across the economy. For example, budget 2021 brought about an extension in affordable housing. This results in tax free profits for a year for the builders of affordable housing. Thus, the builders get a reason to construct more housing. With more construction taking place, other factors involved such as labour, materials, etc. also see a positive impact.
The core of any economy is infrastructure. If the government plans to invest money in infrastructure then other participants see growth in relative fields too. Thus, the economy grows.
On the other hand, there can be two types of expenditure – revenue expenditure or capital expenditure. During lockdown, the government gave revenue expenditure in terms of loan moratoriums, interest cutting, etc for short-term relief in the economy. Now, the government is looking at the future with capital expenditure. Since impact of capital expenditure stays till for a few years after and gives a boost to the economy in the longer run.
GDP growth rate
Budget 2021 gave an estimated GDP growth rate of 9.5%. While other economies are giving a GDP growth of 11-12%, the government opted for a prudent approach and gave a realistic figure for the country. This figure looks achievable currently and we might even be able to surpass it.
75+ years exempt from ITR
Citizens above the age of 75 years will not have to file ITR, with regard to some conditions. Although this does not imply that income taxes do not have to be paid. Taxes will still have to be given but banks themselves will deduct them. Only the filing of ITR is not necessary anymore.
Tax exemption on ULIP
ULIP with premium of over Rs 2.5 lakhs will not get tax-free maturity. This will be applicable on ULIPs bought from 1st February 2021.
Similarly, EPF funds with over Rs 2.5 lakhs premium will not get tax exemption for amount above Rs 2.5 lakh. Earlier, people who opted for voluntary retirement would pay as much of their salary as PF contribution as they wanted. This would give them tax-free interest rate, which will not be applicable anymore.
Tax audit limit
The Income Tax department can now call people for tax audit frauds up to three years only. Earlier they could call people for pending tax liabilities of 5-10 years or more. But now this will not be possible. Furthermore, when filing ITR, people will be able to see their capital gains already filled out. This will be a welcome move for common citizens who have to rely on CAs to do their ITR filing. Moreover, they will also not be able to claim false exemptions and deductions anymore.
For traders, if 95% of their transactions is digital then they be exempt from audit for up to Rs 10 crore. This will just be simplifying things for traders and making their work life easier.
Dividend payments to REITs, InVITs exempt from TDS
Dividend on REITs and InVITs will be exempt from TDS. These are new investment instruments in the market with much promise. Additionally, advance tax liability on dividend income will arise only declaration or payment of dividend. For foreign investors, lower treaty rate benefit will be given.
EPF Vs NPS
In most cases, salaried employees have to opt for EPF if their firm is contributing to it. While, self-employed people have the option to opt for NPS if they want some retirement saving plan. Hence, all people do not have the option to open both EPF and NPS accounts. So anyways comparing both is not viable.
But for comparison sake, EPF is a better option. But NPS has an obligatory annuity clause. Mutual funds would be even better option than NPS.
FDI limit in insurance
New agricultural and infra-development cess have come about on small number of items such as apples, peas, alcohol, etc. Excise on petrol and diesel were removed but new cess was put on both.
FDI has now been allowed in insurance. Private players in the insurance sector were slowly brought about which also saw impositions earlier. Then 74% FDI was asked in the insurance sector to help the industry grow like other sectors with FDI. This move took a long time to come into effect. There are also talks to start IPO for LIC. All of this will need to more employment and overall economic growth.
Import tax on gold
Import duty is no longer valid on gold. This led to a fall in gold prices. This will also reduce purchase of gold with black money or illegally. It is also possible to buy gold upto Rs 15,000 with PAN card now.
Budget 2021 impact on investors
- Focus will now shift to old-economy stocks and sectors which were not getting enough development.
- PSU banks and commercial vehicles will come to the forefront while IT and pharma sectors will move to the side for sometime. This will not be a con for IT sector though since people will always prefer digitization of all work over physical presence. Pharma sector maybe showing less returns but it will still give positive returns as more investment will be pumped into it.
- Insurance sector will continue to grow as money will keep coming into it.
Watch the full discussion on budget 2021 for investors in the video below.
Read more, Budget 2021 Highlights for Employees & Businesses.
Budget 2021 Highlights For Railways & Passengers.
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