Rajiv Gandhi Equity Savings Scheme
After announcement in
the budget The government has finally approved much awaited “Rajiv Gandhi
Equity Savings Scheme” (RGESS). Two things which come out clearly from the
features of the scheme are: 1) it is a scheme intended to provide tax benefit
to first time investors investing directly in equity, mutual fund and exchange
traded funds (ETF). 2) It is an attempt
to attract investors into stock market and broaden investor base in stocks.
The scheme offers tax
benefits to investors whose income is up to Rs 10 lakh. This means that the
scheme is open for investors paying income tax in two tax brackets—10% and 20%.
For an investment up to Rs 50,000, 50% of investment will qualify for tax
benefit. For an investor in 10% bracket, the total tax benefit offered by the
scheme will be Rs2,500 ( 50% of Rs50,000 is Rs25,000 and 10% tax benefit on
this amount is Rs2,500), while for an investor in 20% tax bracket this benefit
will be Rs5,000 which can be availed only once. The tax benefits as such do not
seem very attractive but in our country where investments are done on the basis
of tax benefit, this amount is good enough to catch attention of an investor.
Tax benefits on stock
investments are not new to the investors in India. Equity Linked Savings Scheme
(ELSS)—a tax benefit product—has been in existence for quite some time now but
has failed to attract investors. When Compared to ELSS in terms of tax benefits,
RGESS looks like almost same. The major difference is that it is available to
first time investors alone. The most important question that RGESS raises is,
“Can tax incentives alone attract new investors to the stock market and broaden
investor base in the country?”
As per existing tax
provisions in India, investment in stocks is extremely attractive in terms of
taxation of returns. There are no long-term capital gains taxes in the country
for an investor if he purchases stocks which are traded on recognized stock
exchanges and Securities Transaction Tax (STT) is paid on these stocks.
Contrary to this, bank deposits and fixed deposits in particular are subject to
taxation as per the tax slab in which income of an individual falls. Another
attraction of investment in stocks is that it allows an investor to set off
capital loss against capital gains subject to some conditions. But in bank
deposits there are no such provisions.
In spite of there
being very attractive tax structure for investment in stocks, investors prefer
bank deposits to stock investment. RBI (Reserve Bank of India) data shows that
banks deposits have shown consistence increase in deposits year on year basis.
Even insurance as a product has shown similar trend. However, total change in
stock investments during last ten years is less than a single year change in
the bank deposits. In fact during last five years, due to bad performance of stock
market, total change in the investment in stocks has been marginal.
Looking at the data
and trends in investments in financial assets in India, can a marginal tax
incentive actually attract investors in stock market? If we believe the
same , will they remain invested beyond the lock-in period? The answer seems to
be an no at this stage. The failure of ELSS as a product is an example of it.
Investors have been
avoiding equity market because of volatility and speculation in the market. The
common investor today feels that volatility in India equity market is too much
and have not much confidence with respect to investment in equity.
There should be prepared
an environment for growth of equity market. This should start from investor
education and strict regulatory controls in capital market. Investors need to
be given confidence that equity market creates wealth in long term. Corporate
governance practices need to be implemented strictly so that investors can
believe on companies and their operations.
Regards,
Arvind Trivedi
Certified Financial Planner
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