In the last Budget, a new deduction under section 80CCG was introduced, to allow a deduction of 50% of investment made by a new retail investor in equity shares up to an amount of Rs.50,000, the total deduction not exceeding Rs.25,000. The investment was to be made in accordance with a scheme—to be called Rajiv Gandhi Equity Savings Scheme (RGESS)—to be notified. Though the scheme has not yet been notified, last week the government issued a press release setting out the broader details of the scheme approved by the finance minister. The scheme would be notified by the government in the next two weeks and the capital market regulator, the Securities and Exchange Board of India (Sebi), would issue relevant circulars to operationalize the scheme.
Only new retail investors would be able to invest in the scheme. This would include those who have not opened a demat account and those who have opened a demat account but not yet invested till the date of notification of the scheme. Only investors whose annual taxable income is up to Rs.10 lakh would qualify for the deduction.
The eligible stocks would include BSE 100 or CNX 100 stocks, or stocks of public sector units (PSUs) that are navratnas, maharatnas or miniratnas. It would also include exchange-traded funds (ETFs) and mutual funds (MFs), which have such eligible securities as their underlying assets, provided such funds are listed and traded on the stock exchanges and settled through a depository mechanism. Investment in follow-on public offers of such companies, and in initial public offers (IPOs) of PSUs having an annual turnover of at least Rs.4,000 crore in the preceding three years would also qualify for the deduction.
In this respect, the scheme goes beyond the provisions of section 80CCG, which only refers to investment in listed equity shares and does not include unlisted shares (which is the case with IPOs of PSUs, where the shares are not listed at the time of investment, but get listed subsequently) or units of MFs or ETFs. Section 80CCG would, therefore, have to be amended to include such investments as eligible investments if an investor is to get the benefit of the deduction.
Investments could be made in lump sum, or in instalments, but it appears that only investments made during the first year would qualify for the deduction. This is on account of the fact that in the subsequent year, the investor would not be regarded as a new retail investor.
Though the section talks about a lock-in period of three years for the securities, the scheme seems to limit the lock-in to a period of one year from the date of purchase of one year from the last date of purchase of qualifying securities. In the subsequent years, the investor would be permitted to trade in the securities, provided he maintains his level of eligible investments at the amount of investment for which he has claimed income-tax benefit, or at the value of the portfolio before making a sale, for at least 270 days in a year. In other words, an investor is permitted to switch between eligible securities, or to encash the appreciation in the value of the securities as long as the value of the portfolio does not fall below his initial eligible investment on which he has claimed a benefit.
If he does not maintain this level of portfolio, the deduction claimed by him would be withdrawn and become taxable as his income in the year in which he first fails to maintain this level.
While one would have to wait for the actual scheme to be notified to examine the finer aspects, the issue is whether such a scheme would really enthuse investors to enter the equity markets. At best, it is a one-time deduction available to persons who have never invested in shares before. The deduction is again limited to only Rs.25,000, resulting in a maximum tax-saving of Rs.5,150, since only investors with income of up to Rs.10 lakh would get the benefit. This is not a large enough incentive for a new investor, who is used to investing only in bank or company deposits, to switch to investing in shares.
Further, weigh the negatives faced by an investor while starting to invest in shares. Besides the difficulty of understanding the vagaries of the markets, factor in the difficulties faced in opening a demat account and a broking account with a stock broker due to the complicated procedures and forms required by Sebi and the stock exchanges. Anybody who has tried to open a demat or broking account in recent times would testify to the fact that filling up the forms itself is an onerous task, which takes a substantial amount of time, and invariably results in errors being pointed out by the depository participant or broker, necessitating further corrections. One has seen many persons put off from investing in stocks on account of such difficulties in opening a demat account and broking account. A simple action like simplifying the procedures would act as a much greater incentive to a new investor to invest in stocks.
One hopes that Sebi would take into account the need to simplify such procedures to make equity investment a much simpler and problem-free process. It is then that new retail investors may find investing in equity and obtaining tax benefit an attractive proposition.
Gautam Nayak is a chartered accountant. Comment at email@example.com