Things a retail investor should budget for

Given that Union Finance Minister P Chidambaram has much rising on the booming equity markets, it would be a fair assumption to expect a bagful of goodies, especially targeted at fanning the feel-good factor among retail investors.

Any measure that increases the earnings capacity of industries or helps it become more efficient has a bearing on valuations and should cheer the retail investors.

Similarly, any relaxations in the government policy on foreign direct investment and portfolio investment in sectors should have a bearing on valuations.

So look out for policy statements in the drab Part A of the Budget speech on the banking sector, on infrastructure and textiles, to name a few.

Constrained as he may be by the recommendations of various committees advocating the removal of tax exemptions, Chidambaram is also an astute politician.

So retail investors can expect a skillful trapeze act. Here is what retail investors can look forward to, particularly having a bearing on their portfolios, and the different scenarios:

# The securities transaction tax (STT) will in all probability be hiked. Chidambaram had bet big on the STT to get him at least Rs 5,000 crore.

According to data from the two major exchanges, the Bombay Stock Exchange and the National Stock Exchange, the government is getting no more than Rs 5 crore per day, or Rs 100 crore per month.

# The system of collection of tax has been streamlined, and the government has been able to convince market entities of the fairness of the tax. The next stop for Chidambaram, the markets suspect, will be to hike the tax slabs. The most likely scenarios include raising the STT on non-delivery transactions from the current 0.15 per cent (15 paisa per Rs 100) to 0.25 per cent, and for delivery based transactions from 0.075 per cent to 0.15 per cent.
# Issues related to long-term and short-term capital gains have been sorted out for equity investments, there is one small issue of capital gains on debt mutual funds which remains to be sorted out.

Last year, while cleaning up the capital gains structure, Chidambaram had brought equity mutual funds on par with equity instruments. Long-term capital gains were scrapped and only the STT was leviable at the time of redemption.

Short term capital gains were reduced to 10 per cent for equity instruments. But investors in debt mutual funds were kept out of this benefit.

# That anomaly could be sorted out this year, according to mutual fund industry sources. Equity-linked savings schemes could be back in focus. The eligibility limit for such schemes has stagnated at Rs 10,000 per annum for the last few years, despite the industry’s demand to raise it to Rs 30,000 per annum.

# Since Chidambaram wants retail money to flow into the stock markets, it is fair to expect that this expectation may finally come true. As regards Chidambaram’s other pet theme of finding money for infrastructure, the markets expect the Budget to provide additional tax sops for equity investments in eligible infrastructure projects, over and above tax concessions on investments in infrastructure bonds.

# But this seems very unlikely as it opens a vast world of discrimination between infrastructure and non-infrastructure equity offers. Finally, the retail investors’ need to watch out for the Budget’s take on sectors and industries, apart from changes in the direct tax structure.

The government will in all probability announce its view on the Employees Provident Fund Organisation investing a small percentage of its incremental corpus in the equity markets and equity-linked mutual funds.

The excluded category of provident funds have recently been allowed to invest a maximum of 5 per cent of the annual accruals directly in the equity markets and another 10 per cent in equity mutual funds.