80C Investments Soon To Be a Thing of the Past!

The Finance Minister (FM) announced a simple and straightforward FY24 Union Budget. The government continued its thrust on Capital Expenditure by allocating an outlay of Rs.10 lakh crore. Having said that, the major highlight of the Budget was the government’s initiative to push the salaried class to the new income-tax regime.

The Government had announced the new tax regime in Budget 2020. However, there was a lackluster response from the salaried class to shift to the new tax regime, which was devoid of standard deductions, 80C, 80D and many other exemptions.

The FM’s move to increase the rebate u/s 87A to Rs.7 lakh and slab rates to ratchet in blocks of 3 lakhs might incentivize the middle class to migrate to the new scheme. This might lead to a negative impact on the trend of financialisation of savings. This is because there is no incentive for investments by way of a deduction for specified investments or expenses under Chapter VI-A. This migration could potentially kill the 80C investment industry.

Under the new regime, there would be no push for ELSS investments or availing housing loans due to interest deductions as these deductions and exemptions too have been expunged. The growth of the ELSS category has been slowing for the past few years and the new regime simply intensifies the hurdles on the growth road.

Next, the FM announced a proposal to tax the income received from Life Insurance Policies exclusive of Unit Linked Insurance Policy (ULIP) if premiums paid on such policies exceed Rs 5 lakh in a year (except in case of death benefit). This is expected to be detrimental to the insurance sector – as it will impact savings products and margin products (other than protection). However, smaller policies remain unfazed.

Insurance companies have already started facing the heat of this unforeseen announcement. The proposal is going to have an impact of 10-12% in the top-line of the Life Insurance companies.

Nonetheless, what is bad for the insurance industry actually acts as a blessing in disguise for the mutual fund (MF) industry. A lot of mis-selling was happening in the insurance industry where investors were sold a packaged investment-cum-insurance product as an endowment scheme or other schemes where premium outlay for investors in a financial year used to be Rs 5 lakh and above. So, they were actually sold some investment product with some insurance part in it.

Now, with the tax advantage of such schemes going away, such products will become less lucrative for investors and therefore, a large part of this money which would have otherwise been invested in insurance, will now flow either to MFs or fixed deposits (FDs) or equities.

The FM’s coax to migrate to the new tax regime implies that in the years to come, deductions under 80C would be a thing of the past now. The government’s move shifts the focus to consumption from savings. Investors must keep a close eye on quality names from the consumption space, heavy industrials, cement, green growth, and FMCG sectors with a long-term horizon, as they would be prime beneficiaries of the reforms announced in this Budget.

Technical Outlook

Nifty50 reversed from the support zone and managed to close above its 200 EMA which is placed at 17,550 levels on the daily time frame.

For the entire week, volatility was the main concern where the index continued to close within the range of 17,600 – 17,650 levels. Finally, the index on Friday’s session recovered strongly from 17,585 levels and closed positively above its 21 EMA which is placed at 17,775 levels.

Nifty50 stands at strong support near 50 EMA at 17,400 levels on the weekly chart. If prices fail to hold at the given level, then it's likely to see a further correction towards 17,200 – 17,000 levels. Only a sustained close above 18,250 levels is likely to trigger bullish momentum for 18,500 levels. On the weekly chart, there is a range contraction which suggests a strong directional move is on the cards.

Expectations for the week

The upcoming week will be jam-packed with significant events. To begin with, we have a balance of trade data of two major economies, the US, and the UK. China will report its MoM and YoY inflation rates. UK will also release GDP and 3-month average GDP numbers. This will be watched closely by investors globally as it will determine the trajectory for global indices.

Back home, the focus would be on the RBI’s interest rate decision. After three consecutive 50 bps rate hikes, the RBI increased it by 35 bps in December. The CPI for December stood at 5.72%, below the upper band of the central bank’s tolerance limit of 6%. Therefore, the Street expects a 25bps rate hike and a dovish tone from RBI. Given the number of key events coming up, investors are advised to be vigilant and cautious in their investment decisions.