Budget 2018: STT on bonds, more exemptions under section 80C among key expectations of investors

The Indian economy has witnessed numerous initiatives to stimulate growth in the recent past. The growth trajectory has improved the sentiments for the equity markets, leading to greater participation from individual investors, including home makers and those from the low income group.

Much to the relief of the stock market and investors, Budget 2017 did not alter the long term capital gains tax on equity investments. With sentiments turning positive, equity investors are now again hoping for a tax-friendly 2018 Union Budget.  
Here are some key expectations.

Higher exemption under section 80C for ELSS

In terms of section 80C of the Income tax Act 1961 (Act), investments into tax saving mutual fund schemes, also known as Equity Linked Savings Scheme (ELSS), will be eligible for deduction from taxable income, provided there is a lock-in period of 3 years.

The current limit of INR150,000 for section 80C provides very little scope for deduction for investments in ELSS, as there are many categories of investments that are covered here, such as PF, NSC, tuition fees, home loan repayments, fixed deposits etc.
Therefore an additional deduction of INR 50,000 over and above the existing limit would benefit equity investors and channelize long-term savings into capital markets.

Reinstating Equity Savings Scheme

The government has always intended to provide tax incentives to new equity investors, and had introduced equity savings schemes in the past; however, only some of them were continued, while others were terminated.

Reinstating equity savings schemes by providing additional tax deduction for investments made into capital markets with a minimum lock-in period of investments would be a welcome move.

The eligibility criteria for availing deduction under this scheme shall be based on the taxable income threshold restricting it to low income group investors.

This would help channelize long term savings of this income group into capital markets and help them reap benefits of such investments.

Broad basing and enhancing limit for investment of capital gains under Section 54EC

The options for investment of long term capital gains for availing tax deduction under Section 54EC are limited to capital gain bonds issued by NHAI and REC or any other notified bonds.

Inclusion of mutual funds into the basket of eligible investments with lock-in period of 3 to 5 years would channelize money from real estate back into capital markets.

Further, the ceiling for investment could be enhanced from the present limit of INR 5,000,000 to INR 10,000,000, considering spurt in the property prices and resulting capital gains.

Besides providing impetus to the infrastructure sector, this would help the government in mobilizing resources at lesser costs.

Rationalisation of period of holding

The exemption under section 10(38) was introduced with a view to foster long-term investments. However, it is seen that often investors sell their investments after holding for a year to reap benefits of exemption.

This proves detrimental to the interests of both capital markets and equity investors, who are unable to benefit from long-term investments.

Instead of blanket abolition of exemption, it would be good to tweak tax provisions by extending the period of holding from 1 year to either 2 or 3 years.

This would boost long-term investments and would also bring the period of holding for equity instruments at par with debt instruments and allow government to reap additional tax benefits of taxing short term capital gains for the extended period.

Securities Transaction Tax (STT) on bonds and related exemptions

currently, bonds and debt instruments do not enjoy any tax exemptions, similar to long term equities, which is further dented by the slab rate tax on short term capital gains. This makes investments into bonds not very tax-friendly, compared to equity investments.

Introduction of STT on bonds and bringing them under the ambit of long-term capital gains exemption would likely foster investments into bond markets. This would also rationalize provisions of equity at par with debt and allow the government to enhance collections on account of STT.

though the wish list of an investor could be never ending, the broad theme of the Budget could be tweaked to encourage more individual participation into equities, by neutralizing provisions which would ultimately help add revenue to the tax kitty of government.

Divya Baweja , Partner, Deloitte India