The budget is over and the market is flooded with analyst reviews about the budget. Every budget has provided some tax benefits to the Aam Admi (Mango People) linked with the market returns. This time also the Union Finance Minister Shri Pranab Mukherjee has provided a tax incentive linked with market return over a long period of time.
A new scheme called Rajiv Gandhi Equity Savings scheme, is proposed in the Union Budget 2012-13 to encourage flow of saving in financial instruments and improve the depths of domestic capital market. The scheme has been introduced for the first time in stock market. The specifications of this scheme are:
• New investors with income below Rs 10 lakh can buy stocks up to Rs 50,000 into direct equity market.
• The scheme will have lock-in period of three years.
• You get an income tax deduction of 50% of Rs.50000 (Rs 25000)
• Hold this investment for three years to save a tax over above 80c deduction (this is not included in 80c tax bracket)
The amount Rs.50000 might sound very small but when calculated on a larger scale the Indian stock market will witness one of the huge flow of capital in to the market. There are about 3 crorer tax payer citizens in India who are having income below 10lac thresh hold. If every one of the investors invest Rs.50000 then putting altogether almost Rs1.5lacs will flow in to the stock market. Above all the three years lock in period will result to a tax saving of around Rs 5000 for the income category within 10 lacs.
This scheme will draw many retail investors to do investment in this new scheme called as Rajiv Gandhi Equity Savings scheme. Retail investors from the remote villages will find a prospective investment avenue over a existing schemes available on the streets. But the success of the scheme will depend upon how the brokers will pick up stock for the investors. Large cap should be the best preferred investment segment as compared to others since mid cap and small cap are the runner ups in stock market performance. It should be wise to design the portfolio with a mixed bag of large, mid and small cap. Midcaps and small caps should be taken into account since today’s midcaps are tomorrow’s large caps and small caps are tomorrows mid caps.
It is well expected that in coming budgets the proposed limit will be hiked so as to draw more savings into stock market. One thing should be kept in mind that this investment scheme is not an ELSS. Those who do not yet have a depository (demat) account would be the target investors for RGESS. It is roughly estimated that there are around 15 million Permanent Account Number (PAN) holders with income between Rs. 2 lakh and Rs. 10 lakh, that do not have a demat account at present.
All we need is to wait for some further clarifications from the Government as well as from SEBI about how to move ahead with the scheme.
Indraneel Sen Gupta
Writer and Research Analyst on Global Macro-Economic.
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