The Union Budget 2024-25 will significantly influence the investment climate by altering tax structures across various asset classes. Complex tax incentives and disincentives have been introduced to encourage long-term investments and boost domestic consumption. Given these changes, investors need to closely monitor economic indicators and government policies to make informed decisions about where the government is steering investor sentiment. Based on an analysis of budget announcements and government policies, it appears the government is nudging investors toward equity and gold.
This is evident from the increase in short-term capital gains tax (STCG), signalling a push for long-term investing in equities, which aligns with the government’s vision of a stable and mature equity market. Regarding gold, the reduction in customs duty and the favourable tax treatment compared to other asset classes indicate a push to formalise the gold market and encourage domestic consumption. Proposed changes to the taxation of debt instruments suggest a preference for equity and gold as preferred investment avenues for the future.
READ | Internship programme: A game changer or a risky gamble?
Budget’s equity push
While it is commonly said that the market rewards long-term players, the government’s stance on equity investments also signals a long-term approach. In the recently unveiled Budget 2024-25, Finance Minister Nirmala Sitharaman proposed increasing the STCG on certain financial assets from 15% to 20%. Analysts believe this increase is a deliberate attempt to discourage short-term speculation and encourage investors to hold their positions for the long term.
Golden gains
The budget provided a welcome move for gold investors by cutting import taxes on gold, silver, and platinum to reduce smuggling. Following the budget announcement, the prices of these metals declined. Customs duties on gold bars were reduced to 6% from 15%, gold dore to 5.35%, silver bars to 6%, and silver dore to 5.35%. This has caused gold and silver prices to correct across the country. Gold is considered a portfolio diversifier due to its role as an inflation hedge and its negative correlation with equities over the long term. With India’s cultural affinity for gold, the government seems to aim to make the yellow metal more accessible and affordable, favouring long-term holding with complex tax changes.
The lower long-term capital gains tax, albeit without indexation benefits, makes gold an attractive option for portfolio diversification. However, the classification of gold ETFs as specified mutual funds introduces an element of uncertainty.
Real estate: A mixed bag
The real estate sector has received a mix of incentives and regulations. While the reduction in long-term capital gains tax on residential property is a positive development, the overall impact on the sector is complex. The removal of indexation benefits may dampen investment sentiment to some extent.
The government’s emphasis on affordable housing and infrastructure development could spur interest in the asset class. However, much depends on factors beyond tax incentives, such as land availability, regulatory hurdles, and financing costs.
Bond market blues
The taxation of debt instruments, particularly debt mutual funds, has caused concerns among investors due to the removal of indexation benefits for long-term capital gains on bonds and debentures, coupled with the full taxation of debt fund income. While the government encourages investors to explore other avenues, the practical implications for wealth creation and retirement planning are significant.
The debt market plays a crucial role in financing the economy. By discouraging investments in debt instruments, the government risks impacting the availability of credit for businesses and individuals. A balance that encourages both savings and investments is needed for a healthy financial ecosystem.
Changes to capital gains tax
The Union Budget introduced modifications to the tax regime for capital gains. For equities and equity-oriented mutual funds, the long-term capital gains (LTCG) holding period remains at twelve months. However, the tax rate on LTCG exceeding Rs 1.25 lakh has been elevated from 10% to 12.5%.
For asset classes including property, gold, bonds, and debentures, the LTCG holding period has been extended to twenty-four months. The LTCG tax rate has been reduced to 12.5%, but the previously available indexation benefit has been eliminated.
While the government has outlined its investor strategy, much will depend on investors’ responses. Although tax incentives may influence behaviour, market conditions, risk appetite, and financial goals largely shape the investment landscape. Taking a long-term perspective, diversifying portfolios across asset classes such as equity, gold, and debt, and seeking professional advice remains the best strategy to navigate the evolving investment landscape.