Dr. Sanjiv Agarwal
If hike in diesel prices and controlled supply of subsidized cooking gas cylinders created a political furor all over, the other reform measures such as allowing FDI in retail, substantial reduction in taxes on overseas borrowings by Indian Companies from 20% to 5% and final announcement of Rajiv Gandhi Equity Scheme (RGES) as announced in Budget brought much awaited frenzy on the stock markets.
It is also hoped that interest rates would also be reduced shortly resulting in surge in demand for loans and housing loans. The setting up National Investment Board will also help large projects and capital market. The boost in equity market as well as demand for money would also help government in suppressing the rising demand for gold. With more foreign capital coming in, Indian rupee will improve further against dollar.
Last week Indian stock markets zoomed post reform announcements so much so that the BSE sensex was at the year’s high. These reform measures and a will (at least now visible) to push some more reforms and the toughness reflected in the Prime Minister’s rare recent address to the nation has enhanced the market and the investor’s confidence. The markets have reacted positively, particularly in insurance, financial sector, infrastructure and capital goods sectors.
After almost half of the current financial year has gone by and the budget announced scheme of Rajiv Gandhi Equity Savings Scheme (RGES) has been notified now only. In RGES, tax incentives will be given to first time investors in equities.
Those investors whose annual income will be less than Rs. 10 lakh will get a fifty percent tax rebate on investments of up to Rs. 50,000/- in equities under RGES. Thus, a maximum of Rs. 25,000/- tax gain could be availed on an investment of mere 50,000/. It will have a lock-in period of three years including one year lock-in for trading also. The securities for investment would include a spectrum of companies under BSE 100, shares of PSU maharatna, navratna and miniratna companies including follow-on issues of these companies and initial public offers from state owned companies having annual turnover of more than Rs. 4000 crore. It will also include mutual fund investments.
The RGES shall have multi benefits – one, will bolster equity culture and flow of savings into the market which had virtually stopped; two, curb investment in gold which government wanted to check and three, widen the retail investor base. RGES is aimed as an alternative financial instrument which will encourage more people to invest in liquid securities.
The tax deduction shall be governed by new section 80CCG of the Income Tax Act and SEBI will soon operationalise the scheme. However, the investors would be advised to invest wisely and cautiously as all equity investments may not be alike.
Tax deduction is one motivation, but expectations of return on investments and capital appreciation should be the motto. After all, we have recently relearned from our Prime Minister that money does not grows on trees.