Despite persistent difficulties, the Union budget, which is set to be announced on February 1st, is anticipated to boost economic development. Among the most important factors that investors will keep an eye on are prospective tax changes and the forecast for capital expenditures.
Budget 2025: On February 1, Finance Minister Nirmala Sitharaman will present the Union Budget 2025. As usual, investors in the stock market will find this event crucial since it shapes market patterns and has an impact on a number of industries.The market is buzzing with rumors ahead of the budget, ranging from a reduction in long-term capital gains tax to a reorganization of income tax slabs and potential targets for the fiscal deficit.
The top five budgetary requirements for stock market investors
These are the main points to look out for in the next Union Budget, along with the variables that may affect the direction of the market.
1. Modifications to the capital gains tax system
In practically every budget, lowering the capital gains tax is a top request among stock market participants. Although the majority of analysts think that a cut like this might improve Dalal Street mood, it is unlikely to be implemented in Budget 2025.
"The main goal of tax expectations is to rationalize capital gains tax in order to make compliance easier and promote greater market participation. According to Pranav Haridasan, Managing Director & CEO of Axis Securities, there has been some conjecture regarding a reduction in the Securities Transaction Tax (STT), although this seems improbable given the government's emphasis on income.
Shripal Shah, MD & CEO of Kotak Securities, argued that a decrease or moderation in capital gains tax or Securities Transaction Tax might greatly enhance market dynamics, even though it may be overly optimistic.
Such actions, in Shah's opinion, will not only encourage domestic retail involvement but also increase the appeal of Indian stocks to overseas investors, reducing FII outflows, stabilizing the currency, and improving market sentiment generally.
2. Lower income tax rates
The basic exemption level for personal income tax is expected to be raised by the government; EY India has suggested raising it from ₹3 lakh to ₹5 lakh. It is anticipated that this action will increase disposable income and boost the economy, which is now experiencing a slowdown.
According to a Reuters story, international brokerages Citi and Jefferies also stated that any significant reduction in income tax for people earning between ₹10 lakh and ₹20 lakh annually could contribute to an increase in demand.
"We expect the finance minister to simplify tax structures and raise tax exemption limits to boost consumption in the economy, especially the urban side, which has recently shown signs of a slowdown," said Manish Chowdhury, Head of Research.
3. Targeted fiscal deficit
Bond rates and, in turn, equities markets can be impacted by the government's target budget deficit. Concerns about inflation brought on by a larger-than-anticipated fiscal deficit could affect investor confidence. On the other hand, a well-rounded approach to fiscal management might improve market mood.
Puneet Singhania, the director of Master Trust Group, stated that the target budget deficit may be reduced from 4.8% of GDP in FY 2025 to 4.5% of GDP. The analyst stated that a reduction in the fiscal deficit of this magnitude may significantly boost confidence in the stock markets. According to him, this action could support expansion plans in the social and infrastructure domains.
4. Capex hike
The first half of FY25 was difficult for the Indian economy because of a number of issues, including negative corporate earnings, slower spending habits, seasonal factors including intense heatwaves and constant rainfall in some areas, and lower capital expenditure (capex) brought on by election season. It is anticipated that this tendency would reverse in the second half of FY25.
According to some brokerages, the government's capital growth projection for FY 26 is 10%, which might be advantageous for industries including railroads, infrastructure, and defense.
Given the recent slowdown in the Indian economy and business profitability, we think that fiscal discipline and policy continuity will be important triggers in the next Union Budget. "A fiscal deficit target of approximately 4.5% for FY26, 10-12% growth in capital expenditures, and initiatives to revive private sector capital expenditures would set a positive tone for markets," stated Chowdhury of Stoxbox.
According to Haridasan of Axis Securities, despite the emphasis on boosting economic growth, unhinged capital expenditure from the center is improbable given how crucial it is to balance the fiscal position.
5. An increase in gold customs duties
In the July Budget, the government lowered the customs levy on gold, which led to a spike in gold imports. There were worries that this customs tax cut would lead to higher consumption and a wider trade deficit.
In light of this, Sugandha Sachdeva, the founder of SS WealthStreet, stated that in order to control growing imports, the government may increase the basic customs charge on gold in Budget 2025.
Sachdeva pointed out that India's imports of gold totaled $47 billion in the first 11 months of 2024, a substantial increase over the $42.30 billion paid in 2023.
"To address this growing trend, particularly after last year’s unprecedented reduction in import duties, the government may consider increasing the duty in the Union Budget 2025," Sachdeva stated.
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