Will income tax booster by Modi government safeguard stock market bulls against FII selloff? | Stock Market News

The Union Budget provided a major relief to middle-class taxpayers as Finance Minister Nirmala Sitharaman raised the income tax exemption limit to ₹12 lakh. According to stock market analysts, this move could increase the disposable income in the hands of the middle class, which could flow into the stock markets, providing further cushion against the heavy foreign investor selling that is currently plaguing Dalal Street.

Under the new tax regime, individuals earning up to ₹12 lakh annually will not have to pay any income tax. Earlier this limit was at ₹7 lakh. The government also rationalized the income tax slabs, with individuals earning ₹24 lakh and above liable to pay 30% income tax as against those who earned ₹15 lakh or above.

“The government’s move to giving relief to the middle class by raising the tax exemption limit will likely leave more spare money in the hands of investors, some of which may move to stock markets. This will likely provide stability to the market that has been reeling under the relentless selling by foreign institutional investors (FIIs),” said Puneet Singhania, Director at Master Trust Group.

Foreign institutional investors (FIIs) have sold Indian stocks worth ₹72,676 crore in January 2025 and emerged as net sellers in the last three out of four months. While the sharp selling has sent the stock markets into a tailspin, the fall wasn’t exacerbated thanks to record participation from retail investors. From its September peak of 26,270, the Nifty 50 index is down 10.6% as of today, February 1, which puts the index in correction territory.

According to estimates by Deven Choksey, Managing Director of DRChoksey FinServ, the increased savings-to-GDP ratio of 30% will result in greater participation in financial markets, strengthening mutual funds, insurance, and stock investments.

“With 40% of incremental savings projected to be allocated to financial assets, capital markets are expected to see heightened retail participation and deeper liquidity,” Choksey added.

Growing retail clout

The number of retail investors in India surged to 132 million as of December, up from 49 million in FY20, reflecting a growing trust in the capital markets, showed the Economic Survey released by the government on Friday. Monthly SIP contributions have more than doubled in the last three years, growing from ₹0.10 lakh crore in FY22 to ₹0.23 lakh crore in FY25.

As of December 2024, retail investors hold mutual fund units worth ₹18.6 lakh crore, reflecting strong confidence in this investment option. The total number of mutual fund folios has risen to 22.5 crore, up from 17.8 crore at the end of FY24, according to the survey.

How will market move post Budget?

Overall, the budget announcements were largely as per expectations, said Singhania, adding that the government has kept its focus on marginalised communities and continued to support its existing schemes in the manufacturing segment. 

Hopefully, this will encourage more private capex. We believe the market to be volatile in the short term but continue rallying in the medium to long term, he said.

Today, the benchmark indices exhibited strong volatility as they gyrated between gains and losses. However, they ended the day on a flat note, with BSE barometer Sensex settling at 77,506, up 0.01% and Nifty finishing 0.11% lower at 23,482.15.

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