Budget 2024- Push and pull of money in the hands of investors and traders

Kudos to Ms. Nirmala Sitharaman for her record making budget speech! Yesterday, she replaced the record of Mr. Morarji Desai(total 6 budget speeches) as she presented her 7th consecutive budget speech! As an Indian and as a woman, I rejoice when such steep records are broken by an Indian woman!

Modi government and FM Nirmala Sitharaman are both known for their 'no-nonsense' approach and it is yet another occasion where they have shown that their allies can be supported without losing political control. The government stuck to its policies of continuous capital expenditure (poised to spend 3.4% of GDP in 2024 on capex, Rs. 11.1 lakh crores) along with fiscal prudence and inflation control. Kudos to the government for their ability to control inflation (under 5%) despite the global inflation scenario while keeping the fiscal deficit at 4.9% of GDP.

Yes, all are looking at the 'special capex plans and acts' laid out for Andhra Pradesh and Bihar, but given the current political scenario, it doesn't come as a surprise that they had to 'please' their allies. After all, BJP kept most of the plum cabinet posts to themselves! With my humble understanding of economics, I know one thing for sure, no matter where in India the capex is laid, it will all add up to the country's GDP. As long as the funds do not just end up in a minister's pockets (or should I say a house!), I am happy for the growth and stability of my fellow countrymen regardless of which state they belong to. For far too long UP and Gujarat have been the recipients for many infrastructure projects, it’s about time that we see other states flourish as well (especially when UP didn’t seem to value the favours it received).

All my salaried class friends must be happy today with the likelihood of increased disposable income in their hands. This is owing to the revised tax slabs and standard deduction increase to Rs. 75,000 only for the new tax regime. Govt estimates a savings of up to Rs. 17,500 for a person earning above Rs. 15 lakhs. Every rupee saved in taxes is always a welcome news!

The entire spin in this budget came around in taxation. While there were a few good news for e.g. changes in the new tax regime, reduction in custom duty on gold, silver, shrimp, fish, and 25 other critical minerals, however, there were far more negatives with deeper and wider impact. The three of which that strikes the hardest is the removal of indexation benefit on all asset classes including real estate, STCG (Short Term capital gains) increased from 15% to 20%, LTCG (long term capital gains) increased from 10% to 12.5%.

The removal of indexation benefit in real estate in this budget will surely be remembered as a pivotal point resulting in the change in the landscape of real estate in India in the years to come. FM later clarified that indexation benefit is removed only for properties purchased after 2001. To explain the impact in simple words, if you purchased a property for 20 lakhs in 2005 and it is today valued at 80 lakhs, earlier you could adjust your purchase cost (20 lakhs) for inflation and the indexed value today would have been 20*363/117=62 lakhs, then you had to pay 20% tax on 80-62=18 lakhs i.e. tax of 3.6 lakhs for an 80 lakhs sale. Now, as per the revised rule you have to pay 12.5% on 80-20=60 lakhs i.e. 7.5 lakhs tax for an 80 lakh sale (no indexation). Yes, indeed taxation has become simpler but it has become costlier. Also, it opens the gate for future governments to change the tax rate from 12.5% depending on the then situation. This will impact people across the country and across classes but it will impact the luxury houses the most. It is a move that can potentially supress the luxury segment home buyers’ market in India and the potential buyers who purchase houses as 'investment' rather than for self-occupation. Also, we need to understand that sellers would now have to park more money to save capital gains tax on real estate sale under section 54.

Having dealt with other aspects of the budget, let me come to the elephant in the room (or should I call it elephant in the trading floor or the pit!). In my opinion, the way the government has dealt with disposable income in the hands of an average investor signals greed and immaturity both with the government as well as the regulator. To explain my point, I would like to draw your attention to the sequence of events and its impact on an average trader or an investor.

1. At the start of the pandemic, everyone was working from home, people saved on the time spent in traffic, money spent in travel and in some cases rent too was saved as they shifted to their hometowns, moratorium was given on loans (all aptly done as the need of the hour then, no complaints), free rations were given, etc. Result: More time, more money in the hands of the people.

2. The new tax regime was introduced in 2020 by the government (a great move that I have always supported), it simplified taxation, period. But, on the flip side, Indians who always believed in saving, reduced saving significantly. Why? Because new tax regime does not have provision for any tax saving instruments. Result: More disposable income in the hands of the aspirational class. (Not per say a bad thing, read further to know more.)

3. Rise and rise of finfluencers: The pandemic saw an unusual rise in finfluencers who promised investors higher returns in equity, futures and options. Most of these finfluencers were not registered with SEBI and their credentials or claims were not verified. Result: Push of the aspirational class towards the equity markets. (From just 40.9 million demat accounts in 2020, there are a whopping 151 million demat accounts in 2024!). It is now in 2024 that SEBI has finally started talking about the menace created by the swarm of unregulated players in social media platforms like YouTube, Telegram, Twitter, Instagram, etc. Even today, there is an absence of stringent laws to curb unregulated financial advice on the social media. I believe the regulator has finally started working on this aspect now.

4. Jan 25, 2023 SEBI Study: This study done by the regulator found that 9 out 10 equity traders in India incur losses, with an average loss of Rs. 1.1 lakh in FY22. Among those who made profits, average profit was a mere Rs. 1.5 lakh. Result: In the minds of people, government and the regulator, trading in F&O was akin to gambling and horse racing and there was a constant fear mongering created around F&O trading instead of running educational drives around the same.

5. The menace of daily expiries: In 2023 and 2024, the exchanges (both NSE and BSE) as well as the regulator (SEBI) saw a great opportunity in the expiry day trading volumes. Traditionally in India, the trading volume in F&O has been highest on the expiry day. For every transaction in F&O, the government earns STT, GST and stamp charges, the regulator (SEBI) earns ‘SEBI charges’ and the exchange earns ‘transaction charges’. When SEBI published the study in Jan 25, 2023, they spoke of losses net of all these charges. Prior to 2023, index trading volumes were concentrated primarily in SENSEX, Nifty and Banknifty where nifty and banknifty both had expiry on Thursday for both weekly as well as monthly options. Since the beginning of 2023 i.e. after the SEBI study was published, both the exchanges made several changes to the expiry dates and they introduced newer instruments. Today, every day at least one expiry of an important instrument is there (See table below).

DAY	Instrument
Monday	Bankex, Nifty Midcap select
Tuesday	Finnifty
Wednesday	Banknifty
Thursday	Nifty50
Friday	Sensex

The permission for this move by the exchanges was granted by SEBI knowing that the trading volumes will increase. It was done to primarily boost the income generated by the exchanges, SEBI as well as the government. This was done soon after SEBI’s study that increasing trading volume will only put more financial pressure on the retail investors. Result: A masterstroke for the exchanges became a macro issue of rise in F&O volume by retail investors.

6. July 24, 2024 SEBI Chairman’s speech: Madam SEBI Chairman flagged F&O volume surge as a Macro issue citing RBI’s report of 42.8% rise in F&O activity over the past few years.

7. Economic Survey 2024 tabled before the budget also flagged the rise of F&O activity in the past year and called the rising trend of speculation as a ‘red flag’.

8. Budget 2024: The following taxation changes were introduced in the context of Equity and F&O trading and investing:

Tax	Instrument	Earlier	Now
STT	Options	0.0625%	0.1%
STT	Futures	0.0125%	0.02%
STCG	F&O and Equity	15%	20%
LTCG	Equity	10%	12.5%

These taxation changes were introduced seeing the glaring opportunity in the increased volumes to earn additional revenue coupled with the concerns to reduce the F&O trading volumes. Result: the traders who were already in ‘loss’ (as per SEBI study) will now incur additional cost furthering their losses. And those 10% people who made money will also pay more taxes in the form of STCG. It wouldn’t be a surprise if SEBI conducts the same study in 2025 and if more than 95% of the F&O traders are in loss.

To sum up my long sequence of events, the concern regarding F&O volume spike is real, the losses by the retail traders is also real but the approach taken by the regulator and the government to curb this is not adequate and is not in the right direction. From their actions so far, it looks like they want to only increase the taxes i.e. increase their income while inadequately acting on three major causes: the rise of unregulated finfluencers, daily expiries and inadequate financial education. This in my opinion is resulting in a push and pull scenario in the money and opportunity in the hands of an average trader. One possible solution I can think of is educating and incentivizing F&O instruments to be used only as a hedging tool. The regulator can run campaigns through regulated entities on how F&O can be used as a hedging tool. The regulator can also tie the margins based on the max loss of a given strategy varying between hedged and unhedged position heavily discouraging naked or unhedged positions in F&O. Till we do not work on the real issue at hand, we will not be able to find a solution to the problem. 

Additional taxes will soon be forgotten and absorbed with the exit of only a few players who can’t reinvent their game. After all, most retail traders do not understand the heavy penalty of taxation until it is too late!