Budget 2021 – What’s in it for you?

Fiscal spending and debt funding appear to be the primary gears that Budget 2021 plans to use in full throttle – in the hope of reviving the economy.

The big picture first. Fiscal deficit at 9.5% of GDP for FY-21 will not ease any time soon. It will take a slow path to reducing to 4.5% by FY-26. What does this mean? The thus-far fiscally-prudent government has decided it is necessary to spend to spur growth, with a slow glide path to fiscal prudence. And the stock markets love this!

The budget proposes to continue the Rs 12 lakh crore of gross borrowing from the market for FY-22, similar to the figure for FY-21 (planned) – a year hit by the pandemic. The debt market instantly reacted with the yield of 10-year bonds moving up 1.87% to 6.06% (when we wrote this). But this was not the only big ‘debt’ related news.

 Of the total spending of Rs 34.8 lakh crore, capex spending at Rs 5.54 lakh crore is a good 34.5% over the budgeted estimate of 2020-21. The budget has found it necessary to come up with novel ways to finance the spend, especially the capex spends. Let’s list some of them here:

#1 Development Financial Institution for infra-financing

Budget 2021 has proposed to introduce a bill to set up a Development Financial Institution exclusively to finance infrastructure. With a capitalization of Rs 20,000 crore, this institution is expected to lend at least Rs 5 lakh crore in 3 years. This is expected to provide a significant boost to the cash-strapped infrastructure space, and can prove beneficial as infrastructure financing typically involve long gestation periods that banks find difficult to adequately fund.

#2 Bad bank to free-up good banks

With banks struggling to clean up their bad loans, the budget proposes to clear the mess with the formation of an asset reconstruction company and asset management company to take over the bad loans of banks and eventually dispose them off to those who have the risk appetite – such as Alternate Investment Funds. This long-expected proposal will free up bank balance sheets and is therefore expected to spur bank lending at a time when banks have turned risk-averse to lending.

#3 New infrastructure funded by existing infrastructure assets

The Budget proposes a “National Monetization Pipeline” of potential brownfield infrastructure assets. In other words, Infrastructure Investment Trusts (InvIT) would be formed on existing assets of key infrastructure owners such as NHAI, PGCIL, GAIL, Railways and Airports. The assets would be monetized by listing them. This would provide funding for the parent companies to fund new infrastructure projects.

#4 Bonds for infrastructure

The Budget has proposed to notify infrastructure debt funds that can raise money through zero-coupon bonds. At a time when interest rates are all set to climb up, this might turn out to be an interesting investment proposition for retail debt investors as well.

#5 PSU asset monetization and PSU bank recap

Surplus land of government departments as well as public sector enterprises are set to be monetized by way of sale or concession through special purpose vehicles. Besides the Rs 1.75 lakh crore divestment plan and plan to privatize two public sector banks, the Budget also proposes Rs 20,000 crore to recapitalize public sector banks.

What’s in it for your investments?

The stock market cheered the Budget with 5% budget-day jump – a move not seen since 1997. We can attribute the move to 2 broad reasons:  one, stock markets love spending and love deficits. The capex spending and thrust on infrastructure has meant pockets of opportunities in this space.

The other big sector to receive a thumbs-up was the banking space. Pulled down by bad loans for several years now, the expectation of a new lease of life for banks from the asset reconstruction mechanism has heightened prospects for this sector. Public sector recap and asset monetization also provide a boost to the unfavored PSU space.

But we think you have more to take note of in the debt space than equity. Why?

• One, the high spend means that bond yield trajectory will be up. The bond market reacted immediately to this news. This confirms our debt outlook that interest rates are more likely to move up this year. It will open a spate of opportunities for those of you starved for returns. Focus on accrual/income strategy will likely come to the fore. You can look to us to provide recommendations on this front.
• Two, you might have access to newer debt options like the infra-zero-coupon bonds or more of hybrid instruments such as InvITs.
• Three, some of the measures such as a proposed body to buy investment grade and below securities in the debt market may mean slowly moving towards a more liquid debt market. This is good news not just for your debt fund but also for retail investors wanting to tap the debt market directly.

Budget and your personal finances

The Budget 2021 did not deliver any tax breaks. On the other hand, it has introduced procedural changes to ease the tax filing process, reduce the period within which your returns can be picked up for scrutiny, and so on. So far so good.

But for those of you who make massive EPF/VPF contributions and buy ULIPs with high premiums, the Budget 2021 will give you quite the jolt. Here are the key provisions that will impact you on the personal finance front.

The good and the average

• Interest deduction on affordable housing: If you bought a home that met the criteria for affordable housing (i.e, it should be your first residential property, have stamp duty less than Rs 45 lakh), then you would get a deduction up to Rs 1.5 lakh from the interest you are paying if your loan was sanctioned between April 1 2019 and March 31, 2021. This has now been extended to include loans sanctioned up until March 31, 2022.
• Removal of the need to file tax returns for those over 75 years: For those 75 years and older, this budget does away with the need to file tax returns. However, based on our understanding of the provisions, it is quite restrictive. The condition is that the person needs to be earning only pension income and interest income from the bank in which he/she is receiving the pension amount. So if you have your pension account in, say, Canara Bank but you have interest income from a deposit in say, SBI or a senior citizens savings scheme, it appears that you would still need to file your returns. Two, you need to give a declaration to the bank with particulars and details. The government will specify what these details are. Three, the government will specify the banks where this filing-exemption is allowed. Given these conditions, the benefit of this provision may not be very wide-reaching. The provision is also unclear on the procedure in the event of tax refunds becoming necessary.
• DICGC provisions will apply more easily: As we have talked about before, when a bank is floundering, you do not have immediate access to the deposit insurance guarantee. In the Budget 2021, the provisions of the DICGC will be amended so that depositors in a bank will be able to immediately access the insurance if a bank finds itself unable to pay them. While the fine-print is yet to be spelled out, this is a good move, which can prevent depositors’ money being frozen while a resolution is worked out.
• Dividend income won’t be included in advance tax calculations: This one is pretty straightforward. When you are making your advance tax calculations, you can leave dividend income out of it. Up until now, if you failed to pay the advance tax or it fell short, you would have to bear an interest penalty. In this Budget, you will not have to pay this penalty if the income came from dividends.
• Gold import duties cut: Domestic gold prices are usually a factor of global gold prices, the exchange rate, and customs duties. This last factor has been reduced in this Budget. Gold currently attracts a 12.5% customs duty as does silver. This will stand reduced to 10% each (7.5% customers duty + 2.5% agriculture infrastructure & development cess). This will effectively reduce the final price of gold and silver. Incidentally, the cess also applies on petrol and diesel, but excise duties on both have been cut to compensate for the cess.

Apart from the above, there are several other provisions on the tax front. A notable one is that the tax department can pick your returns for scrutiny or reassessment only for 3 years unlike the 6 years it is currently. Only in cases where the income escaping the assessment is Rs 50 lakh or higher can the time limit be stretched to 10 years. The procedures for reassessments have also been overhauled. Tax rules for NRIs returning home but holding retirement funds overseas are proposed to be changed to make it easier. We haven’t delved too much into such taxation rules as we don’t claim to be tax experts.

The not-so-good

• Interest taxed on high EPF contributions: If you’re a high earner, chances are that your EPF contributions are more than Rs 2.5 lakh a year. Or, you could be making high EPF or VPF contributions to take your total above Rs 2.5 lakh a year. In such cases, be prepared to pay tax. The Budget has made provisions to tax interest earned on contributions above Rs 2.5 lakh. Thus, if your contribution in a year is say Rs 3 lakh, the interest earned on Rs 50,000 will be subject to tax. However, it is not yet clear whether this tax needs to be calculated and paid in the year of accrual or accumulated in the final year of withdrawal. In our view, it is likely to be the former. This rule will be effective on contributions made from April 1, 2021. So, if you have been using the EPF as a tax-efficient route to debt investments, you may have to rework contributions if you are keen on reducing the tax impact.
• Proceeds from ULIPs with premia above Rs 2.5 lakh taxable: To bridge the gap between equity taxation and ULIPs, the Budget 2021 proposes to tax proceeds on ULIPs where premiums are high. Accordingly, for ULIPs issued after Feb 1st, 2021, if the premium you pay is more than Rs 2.5 lakh, the maturity proceeds from the policy will be taxed. This Rs 2.5 lakh can be the premium of a single policy or multiple policies clubbed together. It will not apply to sums received on the death of the insurer. This provision does not affect ULIPs you already have and you will continue to have tax-exempt maturity proceeds from these. It applies on new ULIPs only. While the tax rules are yet to be clearly spelt out, the tax rate is set to be the same as for equity funds. These rules come into effect from the next financial year.

In a nutshell, the Budget 2021 hasn’t given you much in terms of taxes but hasn’t taken anything away either. In other words, carry on as usual!

You can read the full budget speech here.

Also read:

Should you exit HDFC Housing Opportunities fund?

Nifty Analysis on 7th March, 2021