Business Standard

A big sop for small investors

RAJIV GANDHI EQUITY SAVINGS SCHEME: First-time investors will get a 50% tax deduction for investments up to Rs 50, 000

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Business Standard

For the first time ever, direct investments in stocks, perceived a high-risk asset class, will get tax exemption. Under the Rajiv Gandhi Equity Savings Scheme, the government proposes to allow tax deduction in equity. Individuals with annual income of up to Rs 10,00,000 will be eligible for the scheme — where investment of up to Rs 50,000, with a minimum lock-in period of three years, gets 50 per cent tax exemption. Depending on income, the move can lead to a saving of up to Rs 5,000. For example, if your taxable income is Rs 10,00,000 and you invest Rs 50, 000 in stock markets, under this scheme, Rs 25,000 will be eligible for tax exemption. At 20 per cent tax slab applicable to this income group, this will result in a saving of Rs 5,000. For the lower-income category of Rs 5,00,000 and below, the maximum savings will be Rs 2,500.

 

Experts say the move will bring in more retail investors to the stock market. “Since the upper limit of annual income is less than Rs 10,00,000, it covers a significant portion of the tax-paying population. This should provide impetus for an individual (who is not in the markets as of now) to enter the capital markets,” says Kishore Bang, co-founder & director, Nirmal Bang Group.

Also, you will not be taxed on gains as you will be locked in for three years. Gains made after a year of purchasing equity is not taxed.

The exact workings of the scheme was not announced in the Budget. This has got brokers speculating about the modalities of it. CJ George, MD, Geojit BNP Paribas Financial Services, says the amount will be locked in, but not the instrument; that is, one can buy and sell, but the money will remain in the system and not come to the investor. Motilal Oswal, CMD, Motilal Oswal Financial Services, says the amount will be locked in and you cannot buy or sell. “If you do, you will not get the tax deduction the next year.”

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First Published: Mar 17 2012 | 3:08 AM IST

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