PERSONALISED INVESTMENT MANAGERS

The 2022 Budget and how it will effect your Investments: An Analysis

09 February, 2022


          
            The 2022 Budget and how it will effect your Investments: An Analysis

The budget presented by Nirmala Seetharaman had some key points for our investors. These are enumerated below.


Impact on Personal Income Tax

Following proposals of Union Budget-2022 impacts the personal income tax

 

Taxation on Virtual digital assets

As per the Budget proposals, the income arising from transfer of virtual digital assets will be taxed at 30%. The loss arising out of any other capital assets or other digital assets cannot be set off against the gains of these digital assets and there is no provision to carry forward the losses also for future FYs. Along with this, there is 1% TDS on payment when a person makes transfer of a digital asset to resident Indian.

As per our view (and from the FMs view - press interview post budget), the taxation on digital assets will not bring any legitimacy to virtual digital assets and it is subject to the expected 'crypto currency bill' from Government.

Now, the taxation on digital assets are the same as income from lottery, horse races, etc. The intention of 1% TDS is to track transactions. However, we feel that there may be challenges in this, since the crypto exchanges situated in abroad are also involved in this. Also, when the transfer of digital assets are peer to peer, how will the government track needs to be observed.

As per our view, taxing digital assets are better than banning them and being called regressive, etc.

  • It will be an additional revenue stream for the Government
  • the 1% TDS would reduce the crypto transactions substantially since it basically discourages the transactions.

Apart from this, we have to wait until Government releases the guidelines on this respective proposal.

Bonus Stripping

There is a practice in the market of buying stocks prior to the record date of bonus issue. Once the stock trades at ex-bonus price, investors sell the stock at lesser price and book capital losses to set-off against the gains from other stocks.

This 'bonus stripping' in mutual funds was eliminated through Income Tax Act 1961 u/s 94(B). The current budget proposes to extend this provision to equity shares also.


Post introduction of LTCG earlier, the attractiveness of bonus stripping had been reduced significantly due to just 5% arbitrage in tax rates and currently, this budget put a permanent end to one of the loopholes prevalent for many years which enabled the tax avoidance.

MIMI PARTHA SARATHY
Managing Director,
Sinhasi Consultants Pvt. Ltd.


Since this amendment is going to be effective from 1st April 2023 onwards, there may be many more bonus announcements in next one year.

 

Dividend Stripping for REIT & InviT

Similar to 'bonus stripping', there was prevalence of 'dividend stripping', again eliminated through the Income Tax Act 1961 u/s 94(7). This refers to the practice of buying shares/MF units prior to record date and selling them when the shares turn ex-dividend at lower price. Due to this, there was an artificial loss creation which was set off against gains.

Now the same provisions have been extended to REiTs & InviTs, since returns from REiT & InviTs are predominantly dividends.

Similar to the bonus stripping related proposals, this amendment will also be effective from 1-April-2023 onwards.

 

Surcharge on Capital Gains

As per current IT Act rules, the surcharge on capital gains arising out of equity shares and mutual funds are all capped at 15%. As per Budget-2022 proposals, the same is now being extended to unlisted shares also.

Earlier the surcharge on capital gains arising out of unlisted shares could go upto a 37.50% surcharge. The Budget proposals makes it at par with listed shares and mutual funds.

This will be helpful for venture capitalist, employees of private entities / start-ups who hold ESOPs.

However, we need to note that the capital gains on unlisted shares are going to be 20% only and Govt has reduced only surcharge and not capital gain tax.

 

Other notable actions pertaining to Income Tax

  • According to the budget proposals, the sum received from an employer towards “treatment of Covid-19 related health issues to an employee or his/her family members” shall not be treated as a perquisite.
  • Any fund received from employer to the family member of an employee due to the death of employee (capped at ₹10 lakh) will not be considered as income if paid within 12 months from the death of the person.
  • According to section 80DD of Income Tax Act, If the 'guardian / parent of a disabled person' receives an 'annuity / lump-sum from Insurance policy', it will be exempt from taxation.
  • Apart from these, Govt has allowed the state government employees to claim the deduction of NPS contribution by state government to 14% instead of existing 10% against their income.
  • According to Budget proposals, the Post Office network will be brought under core-banking system will reduce all the hardships associated with investing in Post Office savings scheme.
  • According to Budget-2022, a 'CBDC - Central Bank Digital Currency based on Block Chain Technology' is proposed and we are curious to know more details about the same. The digital rupee is expected to arrive in FY2022-23.


Fixed Income Markets

There was an expectation of 'tax relief for FIIs to invest more in Indian G-Sec' to further enable 'inclusion of our G-Sec into Global Bond index'. This was expected to attract a minimum of $15 billion foreign money into Indian Bond Markets. However, there is no such announcement in Budget, and it was a disappointment for Bond Markets and the same is reflected in rising of 10-year G-Sec yields.

Govt’s market borrowing is budgeted at ₹14.95 trillion (bit higher than expectations) causing the 10-year G-Sec yields to move beyond 6.80%.

As part of market borrowings, Budget has proposed to bring 'Sovereign Green Bond' to fund green energy related CapEx plans and it will be one more debt instrument henceforth.


Overall View on Budget '22

FROM AN INVESTOR'S PERSPECTIVE

Budget-2022 has to be seen as a continuation of previous budgets along with various reforms announced subsequently like PLI Schemes etc.

Budget has focused on CapEx led growth, increasing CapEx spending, infrastructure creation, etc. This will encourage corporates to set up new manufacturing plants by extending the concessional tax regime of 15% for one more year till March 2024.

Earlier, consumption was seen as a main driver of growthand now the narrative has been changed to 'CapEx led growth' and it is good for entire economy.


We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.

We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.

Reach out to us

We can help you understand how to maximise your investment goals or leave a comment below on your thoughts.

              


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