Impact of Union Budget 2020 on Investors

17 Feb 2020 5 min read
News: Impact of Union Budget 2020 on Investors - Afinoz

Three prominent themes of Union Budget 2020 are Aspirational India, Economic Development for all and Caring Society. 

A lot was expected from this budget, but the budget seems a mixed bag for investors. Although there are no changes to the long-term capital gain tax (LTCG), dividend distribution tax (DDT) at company level has been scrapped, the investment limit of foreign portfolio investors (FPI) in corporate bonds has been increased, and the exemption was proposed for sovereign wealth funds (SWFs). Under the new tax slab, which is optional, taxpayers will have to give up exemptions they could enjoy in the old tax slab. 

Here are the changes investors should know about Union Budget 2020.

No changes to tax on long-term capital gains (LTCG)

In the current budget, the Finance Minister retained the long-term capital gains (LTCG) tax on equity mutual funds. Moreover, there is no extension of the holding period to enter in LTCG tax bracket. Capital gains arising from sales of equity mutual funds held for more than one year from the date of the investment will still be treated as long term capital gains and subject to 10% TDS on gains over 1 lakh in a financial year. In other words, if you make a profit of over Rs. 1 lakh by selling mutual fund units held over a financial year, you will have to pay 10% TDS as long-term capital gain tax.   

Abolition of Dividend Distribution Tax

Dividend Distribution Tax (DDT) at the company level was proposed to be removed, but dividend income will now be directly taxable at the hands of the investors at applicable rates. Investors will need to pay tax as per the income tax slab they fall under. Hence, individuals who invest in stocks with income exceeding Rs. 10 lakh a year will have to pay 31.2% on their dividends, rather than a flat 20.56% under the DDT. What are more, investors whose income exceeds Rs. 50 lakh, 1 crore and 2 crores will now have to pay the hefty effective tax of 34.3%, 35.8% and 39 %, respectively, on their dividend income. 

However, with the abolition of DDT, now foreign investors can claim credit in their respective countries for all tax paid in India. Tax for foreign investors is capped at 15%, 5% and 10% for the investors from the US, Mauritius and all other countries respectively. 

Tax exemption for Foreign Sovereign Wealth Funds (SWFs)

In an attempt to boost the infrastructure investments, the government will now grant 100% tax exemptions for sovereign wealth funds for investing in the infrastructure sector in India. The tax exemption was proposed for capital gains income, interest and dividends earned from the investment in infrastructure projects for a period of four years before 31st March 2024 with a lock-in period of 3 years. This is a unilateral concession by the Indian government to investment by sovereign funds or foreign government. 

National Investment and Infrastructure Fund (NIIF) is the first Indian Sovereign Wealth Fund (SWF) that was set up by the government of India in 2015.

Tax exemption on SWFs will boost the confidence of investors to invest more in infrastructure assets in India. This move will eventually make mutual funds, which invest in companies that are involved in energy, power, metals, estate, etc., generate higher income.  

Some of the best infrastructure sector funds in India financial year 20 – 21

Fund 6-Month (%) 1 Year (%) 3-Year (%) 5-Year (%)
Franklin Build India Fund  10.3 9.2 6.8 8.1
IDFC Infrastructure Fund 5.7 7.1 1.2 4.9
Kotak Infrastructure & Economic Reform Fund 12.3 16.8 5.6 6.5
Invesco India Infrastructure Fund 18 20.9 9.6 6.4
Kotak Infrastructure & Economic Reform Fund 12.3 16.8 5.6 6.5

Increase in foreign portfolios investors limit

Finance Minister Smt. Sitharaman proposed for raising FPIs’ corporate bonds investment limit from 9% to 15% and opening certain government securities for non-resident investors. These kinds of reforms in FPI norms are expected to boost the confidence of investors and can foster foreign investment in the country. Now, equity investment less than or equal to 15% of capital, which was 9% before this budget, in a company by non-residents will be considered as portfolio investment. Investment above 15% will be counted as Foreign Direct Investment (FDI).

Moreover, the withholding tax rate has been set at 5% for the interest earned on bonds and government securities by foreign investors before 30 June 2023. 

International bullion exchange set-up proposed at IFSC in GIFT City

In the current budget, the Finance Minister proposed to set up an International Bullion Exchange in GIFT-IFSC. This will help India to raise its position in the global market, create jobs and lead to better price discovery of gold.

India has only one International Financial Service Centre (IFSC) in GIFT City, Ahmedabad in Gujarat. IFSC provides financial services to global market participants who are outside the jurisdiction of the domestic economy. Entities regulated by RBI, SEBI and IRDA can set up their offices in IFSC. Such financial centres deal with financial products and services and the flow of finance across the border.

Offshore fund management norms modified

Union Budget 2020 has relaxed the investment norms for Indian residents managing offshore funds from India. As per the new norms, general partners (GPs) can invest Rs. 25 crores in a corpus of minimum Rs. 100 crore for the first 3 years without being counted towards above 5% cap.

Union Budget 2020 is a mixed bunch for investors. With the abolition of DDT, 100% tax exemption for foreign sovereign wealth funds and extension in foreign portfolio limit (FPI), this budget addresses many expectations of foreign investors. While LTCG tax remains unchanged, it should not change the investors' decision to invest in equity mutual funds because they have the potential to offer higher returns in the long term. 

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