STCG, LTCG Taxes: Union Budget 2025 May Not Boost Stock Investor Sentiment, Says Jefferies
Jefferies, in its 2025 India outlook, expressed concerns that the Union Budget 2025 may fail to lift investor confidence in stock markets. The report outlines key factors impacting fiscal plans and their potential effects on equity markets.
Key Factors Impacting Investor Sentiment
1. Aggressive Fiscal Consolidation
The government aims to reduce the fiscal deficit to 4.4% of GDP by FY26. While this is a positive step for fiscal discipline, it could limit spending capacity. As a result, government expenditure growth may remain weak in the first half of FY25. However, a modest recovery is expected in the second half.
2. Slower Capital Expenditure Growth
Capital expenditure (capex) is likely to grow at a slower pace compared to recent years. Jefferies estimates a 6-7% YoY growth in total spending for FY26. Unfortunately, capex growth may fall behind the trends seen in previous years, limiting its economic impact.
3. Possible Tax Hikes on Capital Gains
Jefferies predicts a potential increase in the short-term capital gains tax (STCG) on equities to a marginal rate of 30% + surcharge. This change would align taxation rates with other assets like debt, gold, and property.
The government previously raised capital gains tax rates in the July 2024 Budget. STCG increased to 20%, while long-term capital gains rose to 12.5%. If this trend continues, investor sentiment could suffer further.
Jefferies believes these changes will likely be addressed in the upcoming Direct Tax Code (DTC), which may weigh heavily on equity market optimism.
4. Revenue Slowdown in FY26
The fiscal deficit target for FY26 stands at 4.4% of GDP, down from 4.7% in FY25. Despite this, Jefferies forecasts a revenue slowdown.
One reason for the decline is the expected fall in the RBI dividend, from ₹2.1 lakh crore in FY25 to ₹1.5 lakh crore in FY26. This could reduce government revenues by 20 basis points of GDP.
5. Slower Tax Revenue Growth
Tax revenues, particularly from income taxes, have shown impressive growth—26% CAGR between FY21 and FY25. However, Jefferies anticipates this growth to decelerate to 10% in FY26, slightly down from 11% in FY25.
Outlook for Equity Markets
Investor sentiment may weaken due to the government’s fiscal measures and potential tax changes. However, this could create a buying opportunity in the equity markets post-Union Budget 2025.
Sovereign Bond Rating and Fiscal Deficit Target
Positive Outlook from S&P
The government’s focus on fiscal consolidation aims to secure a Sovereign bond rating upgrade. In May 2024, S&P upgraded India’s outlook to positive.
To achieve a rating upgrade to BBB (from BBB-), the consolidated fiscal deficit (central and state governments combined) must drop below 7% of GDP.
Conclusion
The Union Budget 2025 may focus on fiscal consolidation and tax reforms to strengthen India’s economic fundamentals. However, these measures could create challenges for stock market investors. Potential tax hikes and slower capex growth remain key concerns that may limit optimism in FY2025.
