Rephrase the title:Budget 2024 expectations: From removal of security transaction tax to sovereign green bonds

• There is a suggestion to grant tax-free status to annuity income from the National Pension Scheme (NPS).
• There is a proposal to simplify the capital gains taxation structure by introducing a uniform holding period across domestic equities and mutual funds.
• Providing relief from double taxation on dividends is anticipated to receive positive feedback from the markets.

The FY 2025 budget is around the corner and it is expected that Finance Minister Nirmala Sitharaman will fulfil some of the wishes of both the industry and the common people. A report by ICRA analytics lists down some changes they foresee when it comes to taxation and other investment products.

Taxation

The persistent call for the removal of the security transaction tax (STT) in financial markets has gained momentum in recent years, and as GST collections have risen, this demand has once again become a focal point. The potential elimination of STT is seen as a measure to attract more investors to participate in domestic equity markets.

Another significant concern in the taxation landscape is the issue of double taxation on dividends. Under the current system, companies pay taxes on their profits, and simultaneously, the government levies additional taxes on dividends in the hands of shareholders. This results in double taxation on dividends. Addressing this issue by providing relief from double taxation on dividends is anticipated to receive positive feedback from the markets.

Pension and Insurance

In the domain of pension and insurance, there is a proposal to raise the minimum pension floor for unorganised sector workers under the Atal Pension Yojana (APY). The rationale behind this proposal is that the current pension amount may not attract enough potential subscribers to enrol in the scheme.

Additionally, there is a suggestion to grant tax-free status to annuity income from the National Pension Scheme (NPS). This move is particularly crucial as senior citizens heavily rely on annuity income during their retirement years.

Considering the rise in medical expenses and the financial well-being of senior citizens, providing tax-free status to annuity income is seen as a step towards supporting this demographic.

Further, proposing a distinct tax deduction for life insurance premiums, separate from Section 80C, could boost the adoption of insurance products, encouraging people to secure their family’s financial future through life insurance investments. Furthermore, there is a recommendation for the government to review the 18% Goods and Services Tax (GST) imposed on health insurance policies.

Markets

In the financial markets, one of the pressing issues is the need for a comprehensive policy on cryptocurrency regulation. With the rising popularity and usage of cryptocurrencies, a regulatory framework is considered essential to ensure orderly and secure participation in the crypto market.

Another area of interest is the potential reintroduction of sovereign green bonds in the budget. Sovereign green bonds play a crucial role in addressing the funding requirements for sectors like wind, power, and hydropower, promoting sustainable investments.

Additionally, there is speculation about the allocation of a significant capital outlay for an Energy Transition Fund. The focus of this fund would be on new-age fuels such as green hydrogen, ethanol, and other biofuels, aligning with the government’s emphasis on energy transition and net-zero objectives.

Mutual Funds

Within the mutual funds sector, there are several proposals to address taxation-related disparities and encourage a more investor-friendly environment. There is a call for parity in taxation between equity mutual funds and Unit Linked Insurance Plans (ULIPs). Achieving parity between equity Fund of Fund and equity-oriented mutual funds for taxation is also under consideration.

Furthermore, there is a proposal to simplify the capital gains taxation structure by introducing a uniform holding period across domestic equities and mutual funds. This move is expected to enhance compliance and streamline the tax treatment for investors.

Lastly, there is a suggestion to revisit the tax changes introduced for debt funds last year. The amendment, while creating a level playing field between bank deposits and debt mutual funds, inadvertently affected certain categories of funds.

However, a depositor in fixed deposits secures guaranteed returns regardless of fluctuations in interest rates, whereas an investor in debt funds is susceptible to both interest rate fluctuations and credit risk in the event of issuer defaults.

Moreover, the elimination of the previous indexation benefit adversely impacted the tax-friendliness of global equity funds, equity fund of funds, gold funds, and hybrid funds with less than 35% equity exposure. Consequently, there is a possibility of revisiting the tax changes to address these issues.

This revision aims to address unintended consequences and restore a tax-friendly environment for investors.