Budget 2024: Capital gains tax reform, stimulus for private capex push; what mutual fund players want from FM Sitharaman

Union Finance Minister Nirmala Sitharaman will present the Budget 2024 on July 23. While individual taxpayers expect a lower income tax rate, corporate India expects a higher stimulus for investment. Small investors, however, look forward to favourable capital gains and tax provisions during the coalition government's first budget.

At the same time, institutional investors expect fiscal prudence and continuity of rational economic policy.

Here, we list the expectations of mutual fund houses from Budget 2024. Most fund managers expect the government to carry out fiscal consolidation by lowering the fiscal deficit target to less than 5 per cent.

Some also want the profit threshold raised to ₹3 lakh from the current ₹1 lakh so that Long Term Capital Gains (LTCG) can kick in.

One mutual fund expert argues that the government should consider eliminating the capital gains tax an investor pays when he moves his investment from a regular to a direct scheme.

Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services, says, “If the LTCG limit for deduction is raised from ₹1 lakh to ₹3 lakh, it would be a great relief. Secondly, the new tax started on debt mutual funds is detrimental to their growth. Investors demand that this new tax be reversed or at least that indexation benefit be restored for debt mutual funds.”

“Also, investors must pay capital gains tax on the mutual funds when moving from a regular to a direct plan. This makes a lot of investors unwillingly stick with the regular plans. If such transfer can be exempted from tax, then it will turn out to be a big gift to regular investors,” she adds.

Budget 2024: Mutual fund players are pinning their hopes on the following:

I. Fiscal consolidation

Chandraprakash Padiyar, Senior Fund Manager at Tata Asset Management, says fiscal discipline has important implications for the domestic liquidity environment, currency movement, inflation, interest rates, and, indirectly, the equity market outlook.

“The most important aspect of the upcoming budget would be the fiscal deficit target for FY25 and trajectory for FY26. The finance minister, in her pre-election budget, had reiterated the government’s intention to adhere to fiscal discipline with a target to achieve a deficit of 5.1 per cent for FY25 and below 4.5 per cent for FY26,” he noted.

II. Focus on infra and SME sector

Some mutual fund players, besides fiscal consolidation, expect the FM to focus on infrastructure and SME sector this time around.

“The government is expected to reduce the fiscal deficit target below 5 per cent in the coming budget from 5.1 per cent target in the interim budget. There could be additional focus on welfare measures, particularly in rural areas, but the allocation of resources will be done along with state government contributions. The finance minister would be focussing on infrastructure to reduce supply bottlenecks. The SME sector, which has been lagging the overall growth of the economy, could be an additional focus,” says Murthy Nagarajan, Head-Fixed Income, Tata Asset Management.

III. Fall in market borrowings

The chief investment officer of a fund house expects the FM to reduce market borrowings after the RBI's bumper dividend payout.

“There are expectations of some reduction in market borrowings following a bumper dividend pay-out by the RBI. Further, there are some hopes for reduced tax benefit to the mid-range earning bracket. Markets also hope that the capital gain tax benefit available on equities is not curtailed. On the growth front, apart from capex, there is a possibility of pushing agriculture and manufacturing further to cater to the last mile. Overall the budget should be well balanced,” says Mahendra Kumar Jajoo, CIO, Fixed Income, Mirae Asset Investment Managers (India).

IV. Stimulus for higher private sector capex

The mutual fund industry also expects measures to boost private sector capex.

“Stock markets are slaves to earnings. Earnings are driven by economic activity in the country. Despite the continuity of policy for the past many years, we have not seen a significant uptick in private sector capex. Fiscal prudence, continuity of rational economic policy and buoyant demand outlook may encourage the private sector to invest in increased capacity to meet potential future demand,” says Sanjay Chawla, Chief Investment Officer, Equity, Baroda BNP Paribas Mutual Fund.