Capital market reforms that investors expect from Budget 2024

Budget 2024 is around the corner and experts have suggested not keeping hopes too high given that this is the last Budget under the current tenure of the government. Whilst investors may not expect big bang announcements, there are certain reforms that they do expect. And the reforms will be sweeter if they are within the realm of capital markets.

Here are key expectations that investors and the common man have from Budget 2024.

Continuity and stability of tax regime The year gone by has been one in which the market rewarded investors with stellar returns. As a result, the mood is upbeat and investors expect the Finance Minister’s announcements on February 1 to take forward this play.

They expect continuity and stability in the tax regime and the larger economic structural reforms to be carried forward, which will help India Inc register strong growth and justify the stock valuations, which some perceive as being elevated.

Lower tax rates Probably the biggest expectation among everyone is a reduction in the tax rate, both for individuals and corporates. For individuals, if the tax-free level is raised from the current 7%, it will leave more money in the hands of individuals, which then can be used for savings, consumption, or investment.

At the corporate level too, lower tax rates will leave more money in their coffers which can be used for expansion, dividend payouts, and investment. In the same way, a reduction in the top tax rate will leave more money in the hands of individuals (high net worth individuals in this case).

Debt instruments Among investors in the debt segment, there is an expectation that the FM would bring parity in the holding time of listed market-linked debentures (MLDs) and debt-oriented mutual funds to be eligible for long-term investment status.
Currently, the former needs to be held for 36 months, and the latter for 12 months to gain this status. Investors are also looking for clarity on long-term capital gains (LTCG) tax.

Reality check Real estate has given spectacular returns this year. Given the renewed interest in the sector, investors are hoping the FM will raise the tax exemption for housing loan interest from the current level of Rs 2 lakh. This will push up demand for housing units of all types, giving a further boost to the current rally in real estate stocks. Removal of STT

For the last many years, market participants have been seeking the abolition of the Securities Transaction Tax (STT), or at least a cut in its rate for the cash market segment. Introduced in 2004, STT has brought in good revenues to the government. The government raked in ₹23,191 crore in FY22, while the projected collection in FY23 was ₹25,000 crore, and in FY24, it is seen at ₹27,625 crore.

Relief from double-taxation of dividends Companies distribute dividends after paying corporate tax. However, dividends in the hands of investors too have been made taxable. Many experts believe this issue needs to be addressed. And so, they expect the FM to take cognisance of this long-standing demand and provide relief.

Streamlining classification Classification of taxes on equity and debt is currently fairly complicated depending on the nature of transactions (for instance, derivatives vs cash equity), holding period, whether the securities are listed or unlisted, indexation benefits and residency status of investors.

Experts say the government should simplify these rules to make the tax structure simpler and easier to follow.

Conclusion While few are expecting FM Nirmala Sitharaman to present a big-bang Budget, any Budget is an opportunity to make things simpler and eliminate problem areas. Within that, capital market reforms are one that could help deepen the market, resulting in a host of benefits for the economy, from lower cost of capital to greater wealth creation for participants.