#IncomeTaxReforms

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Budget 2025: Merging Tax Regimes and Its Impact on India's Stock Market

As India approaches the Union Budget 2025, there is growing speculation about potential reforms in the country's income tax structure. Currently, taxpayers can choose between the old tax regime, which offers various exemptions and deductions, and the new tax regime, introduced in the financial year 2020-21, featuring simplified, lower tax rates with limited exemptions. The new regime has been the default since its introduction, unless taxpayers opt otherwise.

Potential Merger of Tax Regimes

Recent discussions suggest that the government may consider abolishing the old tax regime to streamline the tax system. Experts advocate for adjustments in the new regime to make it more taxpayer-friendly. Proposed changes include introducing additional tax slabs to create a more gradual progression in tax rates, thereby reducing the overall tax burden. For instance, implementing a 25% tax rate for income between ₹25 lakh and ₹30 lakh, while retaining the 30% rate for income above ₹30 lakh, could provide relief to taxpayers. Ninjapromo

Additionally, there is a call for allowing deductions for essential expenses, such as medical insurance premiums under Section 80D and benefits for individuals with disabilities under Section 80U, within the new regime. These measures aim to ensure fairness and equity in the tax system.

Impact on the Indian Stock Market

Tax reforms have a significant influence on market sentiment and investor behavior. Simplifying the tax regime could enhance disposable incomes, potentially increasing consumer spending and savings. This, in turn, may lead to higher investments in financial markets, including equities.

However, the actual impact on the stock market would depend on the specifics of the tax reforms. For instance, any changes in capital gains tax structures could directly affect investor returns and market participation. In the previous budget, the government increased taxes on both short-term and long-term equity investments, aiming to moderate market activities. Market analysts anticipated a short adjustment period but foresaw long-term benefits in terms of market stability and sustainable growth. Reuters

Stocks to Watch: Pre and Post-Budget

Investors often look for sectors and stocks that might benefit from budgetary announcements. Here are some sectors and stocks to watch:

Banking Sector: The banking sector is expected to perform well, with long-term investors encouraged to capitalize on dips amid range-bound market movements. Mobirise

Infrastructure and Defense: These sectors are also promising, with potential growth opportunities in 2025. Mobirise

Nifty Next 50 Stocks: Certain stocks within the Nifty Next 50 index have shown potential for rallies up to 17%, according to technical charts. Mobirise

Technical Analysis: Key Levels

Nifty 50: The index faces resistance at the 200-day Simple Moving Average (DSMA) near the 23,930 mark. Sustaining below 23,460 could trigger further downside. Mobirise

Nifty Auto: The sector appears weak, with 13 out of 15 stocks trading below their 200-day moving average, indicating potential bearishness. Mobirise

Market Sentiments and News

Market sentiment is influenced by various factors, including global cues, domestic economic indicators, and political developments. The recent budget emphasised job creation, rural development, and increased taxes on equities, aiming to balance welfare spending with fiscal discipline. Rueters

Political stability and policy continuity also play crucial roles in shaping market sentiment. The government's focus on infrastructure development and support for key sectors is likely to boost investor confidence.

Conclusion

The potential merging of the old and new tax regimes in Budget 2025 aims to simplify the income tax structure, potentially impacting disposable incomes and investment behaviours. Investors should closely monitor budget announcements, particularly those related to taxation and sector-specific allocations, to make informed decisions. Technical analysis suggests key support and resistance levels for major indices, which, along with market sentiments and political developments, will guide market movements in the pre and post-budget periods.

Sources:

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