Union Budget 2021 highlights

by Anushi Jain

Industry highlights

Infrastructure

  1. Increasing capital expenditure budget in the state and central level
  2. Proposed to set up a Development Finance Institution capitalised with Rs 20000 crore with the aim to have a Rs 5 lakh crore lending portfolio in 3 years
  3. Government aims to monetise current infrastructure assets - roads, tolls, etc
    Budget of Rs 4.39 lakh crore for capex provided for this financial year. Budget estimate for next financial year capex increase to Rs 5.54 lakh crores. (34.5% increase)
  4. Additional Rs 2 lakh crore allotted to state governments for capital expenditure and push to state governments to increase budget allocation for infra creation.
  5. Rs 1.07 lakh crore allotted for railway infrastructure spending primarily through capital expenditure
  6. Option to consumers to choose between power service providers, between public and private sector.

What it means: Huge push towards infrastructure spending by the government. Infrastructure spending usually translates to growth in demand and economy and more employment. Infrastructure as an investment theme can be attractive over the next 2-3 years

BFSI

  1. Foreign Direct Investment limits increased to 74% in insurance companies
  2. Bank deposit insurance of Rs 5 lakhs unchanged.
  3. LIC IPO to take place in the next financial year.
  4. Disinvestment of IDBI bank aimed to be completed in the next financial year. 2 more public sector banks and 1 insurance company to be privatised.
  5. An Asset Reconstruction Company (Bad Bank) to be setup to help banks manage stressed assets and NPA book.

What it means:

  1. Increase in FDI will not affect private insurance companies as much. It will be very beneficial to distressed public insurance companies.
  2. Disinvestment by the government is always seen as a positive by markets. The companies that are set to be privatised usually gain in value and share price upon announcement or expectation of such news.
  3. A bad bank collects all the bad loans or NPA’s of all the banks and sets up a team to resolve them. This removes the liability from the banks. Nifty Bank saw a huge spike in share price post this announcement.

Public sector companies

  1. Disinvestment and strategic sale of public sector companies highlighted
  2. Rs 1.75 lakh crore estimated collection from disinvestment for the financial year 2021-22

What it means: Disinvestment is seen as a turnaround opportunity for public sector companies because the expectation is that privatising the company will mean better functioning and operations of the company. The government has been very slow in the past to meet its disinvestment targets. If the government meets their target, certain public sector enterprises can see some increase in value.

Healthcare

Rs. 64180 crore spending plan proposed for healthcare over 6 years

What it means: Moderate healthcare budget, allotted over a long period of time. Healthcare/Pharma sector was already growing in the last year so no major push to the sector was given.

Auto

Introduction of scrappage policy to phase out old and unfit vehicles

What it means: Boost for demand in auto companies

Fiscal deficit

Fiscal deficit for current financial year - 9.5% of GDP
Target for next financial year - 6.8% of GDP
Long term target - 4.5% of GDP by FY 25-26

What it means:
Government has kept a high fiscal deficit target meaning they are looking to sustain the increased government spending without putting much pressure on revenue collections through tax and other incomes.

Relevant tax announcements

Reduce compliance and tax filing burden on individuals above age of 75

Exemption from filing IT returns if an individual above the age of 75 years is earning only interest and/or pension income. The TDS will be deducted by  the bank/institution.

Ease of compliance in tax on dividend income

  • Dividend payment on REIT and InvIT exempt from TDS. This will not reduce the overall tax liability but instead will tax the income in hands of shareholders.
  • Advance tax liability on dividend income will arise only after declaration and payment of dividend. Until the dividend is paid, investors do not have to compute or pay advance tax for that portion.

Extending tax holidays till 31 March 2022

  • The additional income tax exemption of Rs 1.5 lakhs for home loans on purchasing affordable housing has been extended to 31 March 2022.
  • In order to promote fund-raising for start-ups, exemption on capital gains tax on investment in start-ups has been extended for one more year.

Capital gains in ULIP's proposed to be taxed as equity mutual funds

All ULIP's issued on or after 1st Feb 2021 will be taxed similarly to equity mutual funds, if the annual premium paid in any of the previous years exceeded Rs 2.5 lakhs. If total annual premium is less than Rs 2.5 lakhs will remain tax-free upon maturity. Annual premium here will be calculated as an aggregate of all ULIP policies under an individual's name.

Ease of filing returns

Details of salary income, TDS and various other heads are already calculated and shown in the income tax return. Going forward, details of capital gains from listed companies and mutual funds, dividend income from stocks and mutual funds, interest from banks and post offices will also come pre-filled in the ITR.

While this will save time to compute the capital gains, interest income, it is advisable that taxpayers re-check the pre-filled data for accuracy.

Summary

Overall, the budget is seen as a positive one. There has been good emphasis on economic growth and the government has committed a strong amount of spending over the medium term. There was no negative tax news or additional tax burden on any income slab. There is also signalling towards promoting growth in capital market investments by not changing any capital gain or dividend tax regimes.