Budget & Investments - 2020 - 21

Greetings of the day!!

Mrs. Nirmala Sitharaman presented the Union Budget on Feb 1 2020. There are changes with respect to personal taxation and taxation of dividends. We will look into these briefly.

a. Taxation of Dividends:

Dividends were tax free in the hands of investors if they were receiving dividends less than Rs. 10 lakh a year. If the dividends exceeded 10 lakhs a year, the dividends were taxed at 10 %. In addition to this a DDT (Dividend Distribution Tax) anywhere between 10 to 30 % were levied on the Mutual Funds and companies declaring dividend. This effectively reduced the money available for dividend distribution.

For eg. : If a company declared dividend to the tune of Rs. 100, it has to pay another Rs. 20 as DDT so far. This DDT is now scrapped which means the companies can declare dividends to the tune of Rs. 120.

However, the investors will have to pay Tax on these dividends at their slab rates. And companies/ mutual funds are asked to deduct TDS on these dividends as well if Dividends crossed Rs.5,000.

Similarly, TDS will be deducted on short term and long-term capital gains by Mutual Funds going forward for Resident Investors. Hitherto, this was applicable for NRIs only.

Given these changes, it makes sense for those in the highest tax bracket to invest in growth mode in Mutual funds to bring down taxation significantly.

We foresee companies declaring special dividends before March 31st 2020 as Dividends with DDT are more beneficial to promoters rather than Dividends without DDT taxable at marginal rate. As buyback taxation is at 20% and Dividends are taxed at marginal rate, you can see re-emergence of buy backs as a tool to reward share holders from next FY 2021.

b. Change in Personal Tax:

Finance Minister has introduced a new tax regime where the taxes are reduced across the board. However, this comes with a caveat. Those wanting to migrate to the new tax regimes will have to forego popular exemptions like 80C, 80D, HRA, LTA etc.

Each and everyone of us must do a cost benefit analysis and figure out if it makes sense to migrate to new tax regime. It is an elaborate process. You may consult with your tax consultants or auditor and come to a conclusion.

These are the major implications of the Budget on Personal taxes and investments. We will send a detailed email as and when more clarifications or roll backs come from the ministry.

These moves have not gone down well with the markets and markets crashed 1000 points on the Budget day. Markets were expecting a consumption boost from the budget. But the Budget was very conservative and fiscal deficit target was largely adhered to. The complicated tax cuts for middle class together with no increase in allocation for MNREGS and PM Kisan scheme aimed at the poor and taxation of dividends for the rich at the slab rate do not give any consumption boost required to bring back real economic growth to 8%.

The nominal GDP growth which includes inflation is expected to be at 10%. 5% real growth and 5% inflation. This will translate to 9-11% annualized returns from the equity markets. Markets were expecting the fiscal stimulus to take up this nominal GDP growth back to 14%.

As this did not materialize, there is a sense of disappointment. However, Investors with a long-term view may consider this as an opportunity to invest in high quality companies at lower prices. There was a steep correction in July 2019 soon after the Budget and there was a smart recovery in Sep 2019. We expect a similar cycle this time too. A smart bounce after all these issues including Corona Virus threat settle down. We will be happy to translate this opportunity to growth for our Investors.

Currency is expected to be stable as fiscal deficit targets were met. Rules were relaxed for more foreign money to flow both in equity and debt space in the Budget. Tax preference were also extended to these Investors. We foresee foreign Investors lapping up BPCL, LIC divestment and pumping in more money in high quality companies as well. This is one of the positive aspects of the Budget.

This corrective phase is akin to the phase in July-Sep 2019. Yet another opportunity to invest in Equities with a 3 year time horizon. The taxation changes should also be looked into while investing so as to optimize tax out go. We will be more than happy to help you out in all these aspects.

Regards,

Team TRFSL