Budget 2023: Key takeaways for mutual fund investors

The Union Budget is one of the most awaited events in the calendar. The market usually has a lot of expectations from the Budget, but since 2024 will be an election year, the market only had reasonable expectations from the Budget. This was evidenced by the lack of the usual market rally leading up to the Budget. The Finance Minister presented the Union Budget on 1^st February 2023, which was well received by the market. The Sensex closed the Budget day, up 160 points from previous day close. In this blog post, we will discuss about Union Budget and the key takeaways for mutual fund investors. While many investors may have expected this to be a populist budget, the Budget had several positive takeaways for investors.

Commitment to fiscal consolidation roadmap

The Government has shown its commitment towards fiscal discipline and the fiscal roadmap. The Government is on track to meet its fiscal deficit target of 6.4% of GDP in FY 2022-23. For FY 2023-24, despite 2024 being an election year, the Government has set a fiscal deficit target of 5.9%. The Government’s commitment to fiscal discipline will boost confidence of foreign investors and rating agencies, which will be a positive for Indian equities.

Government spending – thrust on economic growth

The Finance Minister had a difficult balancing act between maintaining fiscal prudence and reviving economic growth. The Government has been spending heavily on capex to revive the economy from COVID slump and we have seen very encouraging results in terms or industrial growth revival. The latest Index of Index of Industrial Production (IIP) data shows 7.5% year or year growth in November). For FY 2023-24, the Government plans to increase its capex spending by 33% from Rs 7.5 lakh crores to Rs 10 lakh crores.

The capex spending will mostly be focused on infrastructure, green energy and the agricultural sector. Infrastructure spending may incentivize private sector capex spending, increase employment and strengthen the long term structural India growth story. Spending on green energy may attract foreign investor interest (especially ESG focused funds) on the companies that benefit from Government spending on green energy. Finally, Government spending in the agricultural sector has the potential to boost rural consumption spending which has been slow. The thrust on capex spending in Budget 2023 will be a positive of equity investors with long term investment horizon.

Changes in direct taxes – relief in income tax

In a relief to the salaried class, the Finance Minister announced several changes in the new income tax regime. The Government has proposed to increase the basic exemption limit under this scheme from Rs 2.5 lakh to Rs 3 lakh. The Government has also extended the standard deduction of Rs 50,000 (available to tax payers under the old regime) to tax payers in the new income tax regime.

Finally, the Finance Minister has hiked the rebate available under Section 87A from Rs 12,500 to Rs 25,000 in the new tax regime. So if your income is Rs 7.5 lakhs or less, then you do not have to pay any income tax as per the new tax regime (see the table below). The Government expects the savings in income tax to boost private consumption expenditure or savings, both of which will be positive for the equity and debt markets.

Note: The above figures are purely illustrative based on certain assumptions. These figures may not be indicative your tax obligations. Please consult with your tax advisor / tax consultant to know your tax liability.

Changes in direct taxes – relief for HNIs

The Government has proposed to reduce the surcharge at income levels exceeding Rs 5 crore from 37% to 25% under the new tax regime. This will reduce the effective tax rate for individuals in the highest tax slab from 43% to 39%. This taxation change may also be a positive for Indian capital markets, since this will make India more attractive for HNIs who may have been investing their capital in overseas markets.

Taxation of life insurance policies

The Finance Minister has made a major change in the taxation of maturity proceeds of life insurance policies. Maturity proceeds of traditional life insurance plans (non unit linked) with annual premiums of Rs 5 lakhs or more will no longer be tax exempt. Policyholders should note that the taxation of maturity proceeds for premiums exceeding Rs 5 lakhs p.a. applies only to survival benefits; it will not apply to death benefits. In other words, death benefits will continue to be tax exempt. Investors should also note that the change in life insurance taxation announced by the Government, only applies to traditional plans (e.g. endowment, money back etc) and not to Unit Linked Insurance Plans (ULIPs). For ULIPs, as per the 2021 Budget, maturity proceeds for annual premiums exceeding Rs 2.5 lakhs were taxable.

While the change in taxation of life insurance maturity proceeds for premiums exceeding Rs 5 lakhs p.a. may come as a disappointment for investors who had invested in such policies, you may consider mutual funds as tax efficient investment options. Capital gains in equity mutual funds held for a period of more than 1 year is tax exempt till Rs 100,000 and taxed at 10% thereafter. You can also invest in debt mutual funds, where capital gains for investments held for more than 3 years are taxed at 20% after allowing for indexation benefits. Indexation can reduce your tax obligations considerably, especially for investors in the higher tax brackets.

What should investors do?

• The market’s reaction to the Budget has been on the positive side. The Sensex was up by 160 points at the end of trading session on the Budget day.


• The Budget has many positives for equity investors. Depending on your risk appetite and financial goals, you should continue to invest in equity funds with a long investment horizon. You can invest in lump sum with long investment horizon or in Systematic Investment Plans (SIP) depending on your financial situation and goals.


• The Budget has also been very positive for debt mutual fund investors. With the Government’s commitment towards reducing fiscal deficit, the 10 year Government Bond yield has eased. This may be a good time to invest in debt funds versus traditional fixed income investments.


• Investors in traditional life insurance plans may consider mutual funds for their investment needs, depending on your risk appetite and investment needs. Mutual funds provide long term tax efficient investment solutions for different investment needs, financial goals and risk appetites. For your life insurance protection, you can rely on term life insurance plans which are much more cost effective from life insurance standpoint and are not impacted by the taxation changed announced by the Finance Minister


• As we approach the end of this financial year, you should make sure that you have completed your tax planning for the year e.g. avail the tax savings benefits u/s 80C and other provisions of the income tax so that you can claim maximum benefits available to you under the provisions of the Income Tax Act.


• Finally, the Union Budget is an annual exercise. However, your financial goals do not change. You should remain disciplined towards your financial goals and have a financial plan to achieve your goals. As we get nearer to the end of this financial year and begin a new financial year, you should ensure that your financial plan is fine tuned to achieve your short, medium and long term goals. You should consult with mutual fund distributor / financial advisor to ensure that you are on track.

Disclaimer: An Investor education and Awareness initiative of Aditya Birla Sun Life Mutual Fund.

All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Funds and redressal of complaints including details about SEBI SCORES portal, visit link https://mutualfund.adityabirlacapital.com/Investor-Education/education/kyc-and-redressal for further details.