The stock market is quite a dynamic and everchanging place. It tends to hover from one stance to another depending upon the market and other hosts of factors. Budget is one of those factors that tend to affect the stock market. And since the Union Budget is right around the corner, it’s time we look into this.
The budget tends to create quite a lasting effect in the form of fluctuations in the stock price, the change in the market stance and much more. We here look into how the budget affects the stock market and tends to create a fluctuation in the stock prices around.
The Synopsis on Budget and its aftermath
Even if you are stationed anywhere in the nation, from the very east to the west or the south to the north, budget is something that you’d surely hear about. Budget, as we know, is the estimation of the expenses and revenue for the specified future period of the nation. The central government forms the budget and announces it.
The budget tends to bring forth a change in the taxation and economic policies of the nation. This creates a domino effect on the market and the economy of the nation. That, in turn, creates a seismic shift in the stock market. It’s not uncommon to see the market drop a few points or gain quite a historic height on the very aftermath of the budget announcement.
How the budget affects the stock market?
Here’s how the budget tends to affect the stock market.
Increase in exemption limit for taxpayers and its impact
Every year and now with the budget, the news of the change in income tax exemption slab comes forth. Whenever the exemption limit is increased for say, this provides the taxpayers quite a benefit. They can save the amount that would have been paid as taxes. With increased savings levels, a person can finally realize their dream to fulfil their financial goals by investing in the stock market and generating greater corpus. And when people start investing in the market, the share market tends to be on the positive side and heads towards the bullish side.
Change in corporate tax and its impact
Corporate tax is a duty paid by the company falling under the specified purview of revenue as mentioned under the Income Tax Act, 1961 and the Finance Rules. As is the case of the change in taxation limit, the government also tends to change the corporate tax rates with every budget announcement. This tends to increase or decrease the burden on the company depending on whether the tax rate is increased or decreased. If the rate is decreased, the burden decreases on the company and their profit margins will increase. They can then utilize that extra bit of funds for expansion and growth that will help to increase the company’s market value and swell their share prices.
Stance on LTCG and its effect in the stock market
With every budget announcement, there is news doing the rounds about the long term capital gain on equities and more. For say, there are whispers about the increment in the holding period for the stock so as to qualify for a long term capital asset or removing the long term capital gain completely. A person’s tax liability is determined on the basis of whether it’s a short term or long term investment. The rates for short term and long term capital gains are different and if long term capital gain is removed then the taxation liability will decrease down. That will increase the return margins for the people and will entice them to invest further in the market.
Taxation on Buyback of Shares
Budget brings forth plenty of new changes and during recent years taxation on buyback shares was one such thing. This step saw the levy of 20% tax on the buyback of the shares which means that the investors will receive lesser payout than what was intended. This may put some investors at the backfoot when it comes to investing in the market as taxation liability will decrease their net return.
Sector-wise hit and their impact on the stock market
The budget announces different sector-related policies or rules every year. These sets of new policies tend to affect those sectors be it positively or negatively. If such an announcement is in favour of the industry or the sector, the sector will see a spurt of growth and will tend to perform well, which will then relate to the increase in stock prices of them. People will gear to invest in them sensing the growth. Similarly, if the announcement is on the stringent side, then the sector will take a hit and with that their stock prices plummet. That will make them a less lucrative deal to go for.
As an investor or a potential investor, this period of the pre-budget announcement is quite intense. You never know what will be in the store for you and that often keeps you in the dark about whether to go for the investment or not. As an existing investor, it is advised to keep a watch at the pre-budget predictions and look forward to the budget as that will showcase a clearer picture of your existing portfolio and potential investments that you will make further. If you’re a newbie investor then you can wait for the budget announcement to see how the market behaves and then make the right decisions. But for long term investors, the theme remains the same as budget announcements are merely one announcement coming in every year and you are in for the long run. For long term investors budget doesn’t tend to affect much in their investment plans as their investment value will continue to grow along with time.