New scheme will aid equity flows to market

From a savings and investments perspective, the big news of the budget is the new Rajiv Gandhi Equity Scheme.

india Updated: Mar 17, 2012 00:49 IST

From a savings and investments perspective, the big news of the budget is the new Rajiv Gandhi Equity Scheme. This is the first enhancement in the tax rebate that one can gain from investing in equity in more than a decade. Since nothing drives investment behaviour as strongly as the prospect of saving tax, the scheme is likely to see wide participation. It’s interesting to note that this is a pure equity scheme. If you want this tax rebate, then you must invest in equity — there’s no choice.

This is a great thing for the equity markets and could be a source of significant new funds. However, based on what the minister said, there is a curious anomaly in this measure. Here’s what he said: ‘The scheme would allow for income tax deduction of 50% to new retail investors, who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of 3 years. The details will be announced in due course.” I hope that when the details are announced, then equity mutual funds are part of the definition.

Otherwise, to instigate inexperienced investors to buy stocks directly with a three-year lock-in could be the makings of an investment disaster that would give investors a decidedly unpleasant association with Rajiv Gandhi’s name. If structured correctly, this scheme could well generate long-term equity inflows of a scale that could match up to FII inflows.

Apart from the equity scheme, the move to exempt interest of up to Rs 10,000 from income tax is significant and more important than it sounds at first. Last year, the government had exempted those who had no income except a salary of up to Rs 5 lakh from filing tax returns.

Unfortunately, few people were able to use it since everyone has at least some interest income from a savings bank account. The new measure fixes that lacunae and will deliver practical simplification for people with simple finances.

Apart from the new equity scheme and the exemption of savings bank interest, there isn’t anything else that’s notable regarding personal finance.

However, over the last few years, tax slabs have lagged behind inflation so this hardly corrects the slippage. Fairness in tax slabs will come in when they start getting adjusted upwards automatically linked with inflation. It’s encouraging to see that this idea has finally gotten some attention. The recently submitted report on the DTC by the parliamentary committee has made this recommendation. It’s disappointing that the DTC is getting delayed more and more. It’s true that the parliamentary committee gave its recommendations too late for the bill to kick off this year, but the finance minister didn’t actually state in so many words that its targeted for next year. I hope that’s just an oversight.

First Published: Mar 17, 2012 00:47 IST