Budget 2024: What does the fixed income market expect?

The fixed income market in India can be encouraged by sovereign support to initiate a transformative phase and propel accelerated growth. Certain strategic measures, if announced in the upcoming budget, will help generate enthusiasm amongst existing and potential investors, particularly in the direct debt space and beyond.

The Union Budget 2023 acted as a significant equalizer for debt mutual funds. The budget eliminated the previously enjoyed benefit of a long-term capital gains (LTCG) tax rate of 20% and indexation for these funds. Consequently, all capital gains from debt funds are now aggregated with investors' incomes and subjected to taxation at their respective slab rates. This move, paved way for investors to look at direct debt instead. Bond Investments still carry the LTCG benefit, thus attracting more buyers.

Municipal Bonds to be incentivised

In 2023 budget, FM Nirmala Sitharaman said that cities will be incentivised to improve their credit worthiness, helping them raise funds via municipal bonds. According to RBI data, municipal corporations have raised Rs.4,500 crores in the last 12 years. Latest news being with Vadodara and Ahmedabad to raise Rs. 300 crores combined via green bonds in January 2024.

Municipal Bonds need lowered obstacles and heightened financial incentives. The extended support from Government will encourage the more cities to issue bonds helping bridge the gap and reduce dependency on state and central government funding.

Green Bonds Tax benefits

The Municipal Bonds are certainly choosing to go the green bond way to help them fund their sustainable projects. With Indore, Vadodara, Ahmedabad and few other cities joining the green wagon and RBI’s Sovereign Green Bonds (targeting Rs. 20,000 crores issue in FY24 & FY25), bond holders have various options to look at.

For now, green bonds have no tax incentive for the bondholder. An upcoming announcement for the same in the interim budget can drive up the demand, leading way to more issues and more sustainability projects. RBI is ready to issue Rs. 5,000 crores green bonds with 30 years tenure. After 50 year tenure G-sec issue this is a bold move to attract, more investors and also contribute to the right environment friendly projects!

Capital gain tax saving bonds (54EC bonds) limit to be raised

Capital gains generated from sale of immovable property, when invested in specific bonds(54EC bonds) issued by PFC, RECL and IRFC, are exempt from tax upto Rs. 50 Lakhs/per year.

There is speculation in the market anticipating that the forthcoming budget might announce an increase in the upper limit of the capital gain tax exemption on the sale of immovable property from Rs. 50 Lakhs p.a. per assessee to Rs. 1 crore p.a. per assessee. This adjustment is hoped to provide significant tax relief to investors of 54EC Bonds.

Tax benefits for Bond Holders

While it might be a bold move, experts suggest that emulating the tax benefits that boosted equity markets, such as LTCG and dividend income tax exemptions, for bondholders could trigger an organic surge in demand for G-secs and corporate bonds. Providing a tax exemption or subsidy on interest earned from debentures/bonds would significantly appeal to fixed-income investors.

In line with India's ambition to become a $5-trillion economy, substantial funds are required for infrastructural development to support economic growth. The fixed income market stands as an ideal avenue to mobilize funds to aid the government and citizens in achieving their financial goals. If the government recognizes this potential and extends exemptions or benefits to bondholders, it could lead to remarkable outcomes. While it may seem like a stretch, tax benefits could be the crucial support needed to democratize bonds.