Union Budget Deconstructed: Continuity with conviction

The most awaited event of the year was the Union Budget under the NDA government – version 3. After the Statement of Accounts presented in Feb’24 which was a non-event, today’s budget was awaited with bated breath by all market participants. A big positive was the government’s fiscal deficit target for FY25. This has been estimated at 4.9% of GDP, vs the earlier estimate of 5.1% presented in Feb’24. More importantly, it has guided for a fiscal deficit target of 4.5% for FY26 and would further go down over the years. The government is committed to stay on the fiscal glide path, which is a key monitorable by international rating agencies to improve the creditworthiness of India in global markets.

Highlights

• Long Term Capital Gain Tax for other instruments (except debt mutual funds) is revised downward; however, indexation benefit has been removed. Illustration 1 given below shows how the new tax rate is beneficial if pre-tax returns are >12.5% (assuming a holding period of 3 years).
• Basic Custom Duty on Gold/Silver has been reduced from 15% to 6%, because of which the price of physical Gold/Silver, Gold/Silver ETF & FoFs will be impacted by 9%.
• Increased tax liability by 25% for Long Term and 33% for short holding period, compared to the old tax rate. Further, PMS/ AIF investments could have higher tax incidence.
• While the tax rate has been increased for long term capital gains, the reduction in holding period is huge positive for these instruments. The tax rate has been standardised for both listed and unlisted REITs/InvITs, while holding periods are different.
• The government proved its intent to provide support to the economy by keeping its target on Capital Expenditure (Capex) unchanged. Capex for FY25 is budgeted at INR 11.11 Lakh Cr, a 17% increase from FY24 projected capex of INR 9.5 Lakh Cr.