The Union Budget for 2020-21 had a difficult backdrop – slowing growth with both consumption and investments moderating, weak global trade growth adversely impacting exports, falling household savings, subdued returns of equities, rising remittances under LRS (Liberalised Remittance Scheme) and limited headroom with government to provide fiscal stimulus. Given this backdrop, in our opinion, government has done a remarkable job with FY21 budget.
Budget 2020 was more of Subjective values than that of Quantitative
The initial adverse reaction of equity markets was probably a result of heightened expectations, rather than anything negative in the budget.A careful study of the past budgets / policy actions / views expressed by various government leaders suggests 6 key themes / objectives that are being pursued by this government. These are:
1. Simplification & moderation of taxes and improvement in ease of doing business
2. A large scale up of Infrastructure spends facilitated by long term foreign capital
3. Promoting “Make in India” for employment generation and reducing current account deficit
4. Fiscal discipline
5. Social development covering health, education, sanitation etc.
6. Improving internal and external national security The Union Budget for 2020-21 fits in nicely with the aforesaid strategic themes.
Impact of Budget on Mutual Fund Investors…
1. New tax regime: A positive for mutual fund investments
Budget 2020 introduced a new tax system effective from FY20-21 wherein taxpayers can benefit from lower slab rates by forgoing a majority of tax-deduction benefits to lower their tax burden. Taxpayers will also have the option to continue with the existing tax system. However, the new tax regime would allow taxpayers to invest freely in instruments of their choice without having to worry about tax-saving pressures, and they can explore mutual fund products that don’t necessarily save taxes
2. TDS on mutual fund gains: A negative for mutual fund investments
Budget 2020 has proposed to introduce Tax Deduction at Source (TDS) at 10% on the dividend income above Rs 5000 before it is distributed to the investors. So, if the investor falls in higher tax slab, they would now adjust the TDS payment from their tax obligation while filing the tax returns, whereas if the investor falls in a lower tax slab, they may be required to claim the TDS refund by filing their tax returns, which is an inconvenience. Dividend-generating investments are normally suited to older investors.
3. DDT in the hand of mutual fund investors: A mixed impact
In the existing system, the dividend on equity mutual funds and debt funds is taxed at 11.65% and 29.12%, respectively, while distributing it to the shareholders. However, in Budget 2020, it has been proposed to levy DDT in the hands of the mutual fund investors as per their applicable tax rate. So, for example, if the investor falls in the 30% tax bracket, they will pay tax on the dividend at a 30% rate. So, when the DDT becomes applicable in the hands of investors, those in higher tax brackets will pay more in taxes.
Markets going Forward
As legendary investor Warren Buffet said “Interest rates are like gravity in valuation. If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that’s a huge gravitational pull on value”.
One characteristic of current market is the sharp polarisation in valuations across sectors. While near to medium term forecasting is challenging, past experience suggests that sectors with good returns in the past, mostly delivers moderate returns in the future and vice versa.
Happy Investing
