As the Union Budget 2025 draws near, the nation eagerly anticipates measures to address India’s slowing economic momentum and the concerns of market participants. Once a beacon of growth among emerging economies, India now faces challenges that require a fine balance between fiscal prudence and growth-oriented reforms.
The Economic Backdrop: From Confidence to Caution
A year ago, optimism surrounded India’s economic trajectory. Growth indicators were robust, and investor confidence soared. However, the narrative has shifted. While growth remains relatively high globally, it has slowed to levels not seen since the pandemic. Skepticism over official growth numbers and the impact of past fiscal measures further complicate the scenario.
One key area of concern is the capital gains tax regime, which has taken center stage in pre-budget discussions. Investors and experts alike are calling for rationalization to revive market liquidity and restore confidence.
The Capital Gains Tax Conundrum
Capital gains tax, levied on profits from assets like equities, real estate, and mutual funds, has been a critical revenue source. Last year’s budget saw significant hikes in short-term and long-term capital gains taxes, adversely affecting market liquidity and investor sentiment.
- Short-term capital gains tax: Increased from 15% to 20% for equities held less than a year.
- Long-term capital gains tax: Raised from 10% to 12.5% for equities held over a year.
These changes, coupled with higher Securities Transaction Tax (STT) rates, have curtailed market activity. Daily turnover in currency derivatives, for instance, plummeted from ₹40,000 crore to ₹5,000 crore. Similarly, liquidity in equity derivatives dropped by 30-40%.
Industry Voices: Expectations and Recommendations
- Jimeet Modi: The founder of SAMCO Securities emphasizes restoring liquidity in the currency derivatives market as a priority. He advocates rationalizing STT rates to encourage higher market participation, acknowledging potential short-term revenue losses but highlighting the long-term benefits.
- Alekh Yadav: The Head of Investment Products at Sanctum Wealth predicts a continuation of fiscal consolidation policies. He expects minor adjustments in capital gains tax and measures to boost consumption rather than significant capital expenditure growth.
- Pranav Haridasan: The MD and CEO of Axis Securities suggests simplifying capital gains tax to enhance compliance and participation. While rumors of an STT cut persist, he anticipates targeted relief for individual taxpayers, such as enhanced deductions under Section 80C.
- Narinder Wadhwa: The CEO of SKI Capital underscores the need for a stable tax regime. He warns against further increases in STT or LTCG taxes, as they could deter retail and foreign investors.
- Rajul Kothari: A partner at Capital League, Kothari highlights the unintended consequences of taxing debt funds on par with fixed deposits. He calls for LTCG tax exemptions for retirees, arguing that this would provide them with secure, low-risk investment options.
What Lies Ahead?
The 2025 Union Budget presents an opportunity for the government to address investor concerns, stabilize the tax regime, and restore market momentum. Key expectations include:
- Rationalizing capital gains tax for simplicity and market revival.
- Targeted tax relief for individuals to boost consumption.
- Revisiting STT rates to improve liquidity in derivatives markets.
- Exempting LTCG taxes for senior investors to promote secure investment avenues.
Reviving the India Growth Story
Restoring economic momentum will require bold yet balanced measures. The 2025 Union Budget has the potential to rebuild confidence and reinvigorate the India growth story. By prioritizing investor-friendly policies and addressing structural challenges, the government can ensure that India continues to shine as a beacon of growth on the global stage.