As Budget fever grips, expectation from market experts soar

Expectations for this Budget from market experts were not very high initially, but after a sharp slide in small-cap and mid-cap stocks and correction in benchmark indices this month, several participants are now looking to the event to pump prime sentiment.

The expectation rose further after Prime Minister Narendra Modi said: “I pray to Goddess Lakshmi to shower the poor, middle class with blessings.” The market cheered the statement with the Sensex rising nearly 1 per cent, small-cap 1.83 per cent and BSE Midcap 1.76 per cent.

Experts want the Budget to kickstart the revival of the consumption cycle, increase government capital expenditure (capex), lower tax on securities, at the same time, maintaining fiscal prudence — a very tough combination.

“Market participants have adopted a neutral tone, particularly concerning government capex. There is some despondency due to a recent year-on-year dip in capex and limited visibility of on-the-ground improvements. Therefore, any capex allocation above ₹11 lakh crore, accompanied by convincing commentary, could positively surprise the market. Investors are also concerned about the possibility of increased freebies after multiple State elections,” said Motilal Oswal Financial Services.

Sunil Damania, Chief Investment Officer, Mojopms, said: The Indian stock market’s wealth creation story has hit a roadblock, with many investors who thrived in 2024 now facing significant portfolio losses. “As the Budget approaches, the critical expectation is to revive market sentiment. Recent Budgets have seen increased taxation on the capital market — higher STT, capital gains taxes, taxation of dividend income in shareholders’ hands and the removal of tax benefits on buybacks,” he added.

‘Don’t put new taxes’

According to him, this year, it’s imperative for the Finance Minister to avoid introducing new taxes on investors. “Instead, providing meaningful tax rebates to enhance consumer spending power could help revive the consumption cycle. Additionally, while higher capex allocations are welcome, the Budget should include clear quarterly timelines for actual spending. Without effective execution, increased allocations lose their impact,” he added.

Given the current weak consumption trends, the market expects measures to improve household income growth, particularly in urban areas. The government may focus on adjusting income-tax slabs to achieve this. It is also possible that indirect taxes on non-essential items could be increased to fund relief on middle-class consumption goods. There may also be some relief on long-term capital gains (LTCG) and short-term capital gains (STCG) taxes from equity markets, said Motilal Oswal Financial.

Nikhil Behl, Co-Founder and CEO, INDmoney, said: India needs to remain competitive globally and attract capital flows. Policy measures that strengthen ease of capital movement — especially around taxation clarity for FPIs and Gift City reforms — could position India as the go-to destination for global investors.

For the stock market, maintaining favourable tax conditions on equity investments will ensure consistent retail inflows, which are crucial for supporting market resilience during global uncertainties. “It will also bolster long-term investor sentiment, ensuring steady participation in primary and secondary markets, which can drive economic growth and create value for investors across all segments,” said Behl.

Clarity on ESOP

According to Devan Gupta, Audit and Direct Tax Partner, Cretum Advisory, another critical reform area is the taxation of Employee Stock Option Plans (ESOPs). Start-ups, a key engine of India’s economic dynamism, require clarity on ESOP taxation, particularly regarding tax liabilities based on the vesting period.

Clarity on Angel Tax is also crucial for the start-up ecosystem. After its abolition in 2024, there is a need for well-defined fair market valuation norms to avoid disputes in fundraising, he said, adding exempting investments from SEBI-registered Alternative Investment Funds and expanding safe harbour provisions will help streamline the fundraising process and protect start-ups from unnecessary regulatory hurdles, fostering a more supportive environment for early-stage companies.

Mutual fund industry is also pinning big hope on the Budget, especially on debt schemes. The Budget should restore a favourable dispensation of tax treatment for debt fund schemes in India, said AMFI, the MF industry body. The removal of indexation benefits in debt funds effective April 1, 2023, have impacted investor interest in debt MF schemes. This is because capital gains from the sale of debt mutual funds are now taxed at the investor’s applicable income-tax slab rate.

Among the other expectations, AMFI seeks that similar to tax-free bonds of NHAI etc, if funds invest in infrastructure with a lock-in period of say three-five years, then similar benefit — as given for such bonds — be given to them.

AMFI has also suggested that the Budget must introduce Debt Linked Savings Scheme on the lines of Equity Linked Savings Schemes (ELSS) and extending tax benefits currently available for National Pension System (NPS) to all the pension schemes floated by the mutual funds.