Budget 2020-21: Key Highlights

Finance Minister Nirmala Sitharaman on Saturday, among other things, offered tax cuts with riders, extended tax holiday for affordable housing & abolished the Dividend Distribution Tax in the Union Budget for 2020-21.

FM Sitharaman said this year’s budget is woven around three major things – aspirational India, economic development for all and building a caring society that is both humane & compassionate.

Here are the key highlights:

Securities market related

• The limit for FPI in corporate bonds, currently at 9% of outstanding stock, will be increased to 15% of the outstanding stock of corporate bonds.
• The Debt-based Exchange Traded Fund (ETF) recently floated by the government was a big success. Government proposes to expand this by floating a new Debt-ETF consisting primarily of government securities.
• IFSC, GIFT city has the potential to become a centre of international finance as well as a centre for high-end data processing. With the approval of the regulator, GIFT City would set up an International Bullion exchange(s) in GIFT-IFSC as an additional option for trade by global market participants.
• In recent years, there has been a surge in trading volumes of the Indian rupee in the offshore financial centres. The Government and RBI have taken various measures to permit Rupee derivatives to be traded in the International Financial Services Centre at GIFT city, Gujarat.
• Certain specified categories of Government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well.
• To improve investors’ confidence and to expand the scope of credit default swaps, there is a proposal to formulate legislation, to be placed soon before the House, for laying down a mechanism for netting of financial contracts.
• To remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT. The dividend will be taxed only in the hands of the recipients at their applicable rate.
• Sovereign Wealth Fund of foreign governments will be granted 100% tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure.

Banking & financial services

• To address the liquidity constraints of the NBFCs/HFCs, post the Union budget 2019-20, the government formulated a Partial Credit Guarantee scheme for the NBFCs. To further this support of providing liquidity, a mechanism would be devised. The government will offer support by guaranteeing securities so floated. 
• A robust mechanism in place to monitor all scheduled commercial banks and depositors money is safe. Depositor insurance increased from ₹1 lakh to ₹5 lakh.
• Govt has infused about ₹3,50,000 crores by way of capital into Public Sector Banks for regulatory and growth purposes. Governance reforms would be carried out in these banks so that they become more competitive.
• The limit for NBFCs to be eligible for debt recovery under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 is proposed to be reduced from ₹500 crores to asset size of  ₹100 crores or loan size from existing ₹1 crore to ₹50 lakh.
• It is proposed to sell the balance holding of Government of India in IDBI Bank to private, retail and institutional investors through the stock exchange.
• The government has proposed to sell a part of its holding in the largest insurer LIC via initial public offer (IPO).
• It’s proposed to make necessary amendments to the Factor Regulation Act 2011. This will enable NBFCs to extend invoice financing to the MSMEs through TReDS, thereby enhancing their economic and financial sustainability.

Proposed tax structure

A new optional income tax regime that offers lower rates as a trade-off for foregoing exemptions for annual incomes up to ₹15 lakh was rolled out.

Under the new regime, almost all tax breaks one was claiming in the current tax structure, will not be available. The important tax breaks that will not be available include Section 80C (Investments in PF, NPS, Life insurance premium etc.), Section 80D (medical insurance premium), tax breaks on HRA (House Rent Allowance) and on interest paid on housing loan. However, the National Pension System (NPS) tax break under section 80CCD(2) will continue.

It is proposed to put an upper cap of seven lakh and fifty thousand rupees in a year on tax-exempt employer’s contribution in recognized provident fund, superannuation fund and NPS in the accounts of an employee.

The individual taxpayers will have to analyse & calculate their liability under the old and new tax regime before deciding which one is more beneficial to them. Importantly, taxpayers with business income can not switch back to the old regime after moving to the new tax structure. Salaried people can, however, shift back and forth depending on the benefits.

Markets update

Indian indices dropped the most since November 2016 after the Finance Minister Nirmala Sitharaman’s Union Budget failed to impress investors. BSE Sensex fell 2.43% or 988 points to 39,735 & NSE Nifty 50 fell 2.5% to 11,661.

India’s infrastructure output rose 1.3 % YOY in December of 2019, the most since July, after a downwardly revised 0.6% drop in the previous month. Deposits in India also increased 9.5% YOY in the fortnight ended January 17th 2020.

Investment Ideas in focus after Budget 2020

If you’re considering investment opportunities after Budget 2020, take a look at a special collection of smallcases expected to benefit from the policies announced in the budget:

Rising Rural Demand

Total allocation across all rural programs like MNRGEA, rural roads, irrigation, crop insurance scheme, PM-Kisan etc has increased by 14.9% to ₹225273 crores from ₹196016 crores.

• By 2022, The government is committed to the goal of doubling farmer’s incomes.
• PM KUSUM expanded to cover 20 lakh farmers for stand-alone solar pumps and further also help another 15 lakh farmers solarise their grid-connected pump sets with an estimated budget of ₹700 crores.
• Govt will provide viability gap funding for setting up efficient warehouses at the block level on the PPP model. SHGs run village storage scheme to be launched as well.
• Agriculture credit target for the year 2020-21 has been set at ₹15 lakh crore.  All eligible beneficiaries of PM-KISAN will also be covered under the KCC scheme.
• Govt. will raise the fishery exports to ₹1 lakh crore by 2024-25 and will involve youth in fishery extension through 3477 SagarMitras and 500 Fish Farmer Producer Organisations.
• Fibre to the Home (FTTH) connections through Bharatnet will link 100,000 gram panchayats and ₹6000 crores will be provided for the purpose.

Transporting India

Allocation to various transportation infra related projects like roads, metro etc. has been increased to ₹111228 crores, a 10.11% increase over the previous year.

• Accelerated development of highways will be undertaken and will include the development of 2500 Km access control highways, 9000 Km of economic corridors, 2000 Km of coastal & land port roads and 2000 Km of strategic highways.
• Govt. plans to create a single window e-logistics market and focus on the generation of employment, skills and making MSMEs competitive.
• Solar Power Capacity will be set-up alongside rail tracks on land owned by railways.
• Public-private partnership to be used for 4 station redevelopment projects.

Infra Tracker

• National Infrastructure Pipeline of ₹103 lakh crores has been launched on 31st December 2019 to address the country’s infrastructure needs. 
• Accelerated development of highways will be undertaken and will include the development of 2500 Km access control highways, 9000 Km of economic corridors, 2000 Km of coastal & land port roads and 2000 Km of strategic highways.
• Solar Power Capacity will be set-up alongside rail tracks on land owned by railways.
• Sovereign Wealth Fund of foreign governments will be granted 100% tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure.
• 148 km long Bengaluru Suburban transport project at a cost of ₹18600 crores with fares on the metro model has been proposed. Central Government would provide 20% of equity and facilitate external assistance up to 60% of the project cost.

Affordable Housing

₹27500 crores have been allocated towards Pradhan Mantri Awas Yojna (PMAY) an increase of 8% from a revised estimate of 2019-20

• Currently, an additional deduction up to one lakh fifty thousand rupees is allowed for interest paid on loans sanctioned up to 31st March 2020 for purchase of an affordable house.
• In order to incentivise the purchase of affordable housing, it is proposed to extend the date of sanction of loan to 31st March 2021. Hence, this deduction will also be available in respect of housing loans sanctioned by 31st March 2021.
• Further, in order to boost the supply of affordable houses in the country, a tax holiday is provided on the profits earned by developers of affordable housing project approved by 31st March 2020. In order to promote the affordable housing projects, it is proposed to extend the date of approval of affordable housing projects for availing this tax holiday by one more year. Accordingly, developers of affordable housing projects approved by 31st March 2021 can also avail of the tax holiday. 

Smart Cities

Allocation towards AMRUT and Smart Cities Mission has increased by 40% to ₹13,750 crores compared to 2019-20 revised estimates.

There is a case for maximising the benefits of three separately developing economic activities:

1. The upcoming economic corridors
2. The revitalisation of manufacturing activities
3. Technology and the demands of aspirational classes.

Hence, it is proposed to develop five new smart cities in collaboration with States in PPP mode. Such sites would be chosen that offer the best choices in terms of the aforementioned principles.

[cta color=”blue” title=”Budget 2020 collection” url=”https://www.smallcase.com/collection/5e367544101cc5e7b03924b9?utm_source=smalltalk&utm_medium=banner&utm_campaign=smalltalk&utm_content=postweek” button_text=”See collection”]smallcases expected to benefit from Budget 2020[/cta]