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Not enough tax incentives for middle-class investor to go for RGESS

Feb 12 2013, 09:28 IST
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SummaryThe Rajiv Gandhi Equity Savings Scheme was launched by the government with the objective of mobilising savings from new retail investors to improve the depth of the domestic capital market.

The Rajiv Gandhi Equity Savings Scheme (RGESS) was launched by the government with the objective of mobilising savings from new retail investors to improve the depth of the domestic capital market.

Under the RGESS, an individual with an annual income of less than R10 lakh can invest up to R50,000 in blue-chip stocks (BSE-100 & CNX 100) and PSU shares (maharatna, navaratna and miniratna categorised PSUs), either directly or through mutual funds, and can claim deduction of 50% of this investment. This tax benefit, as per Section 80CCG of Income Tax Act, is over and above the R1 lakh deduction available under Section 80C.

As a part of the steps undertaken to unfurl the scheme, the Securities Exchange Board of India (Sebi) also released a circular in December 2012, clarifying on some of the hiccups noted by the markets and investors. Further, various asset management companies have lined up numerous mutual funds eligible for the newly created RGESS.

On paper, given the tax benefits and the plethora of mutual funds being made available to the potential RGESS investors, this looks to be a model “carrot approach” to entice investors to invest their savings in the capital market. However, considering that the scheme is aimed at enticing the middle-class retail investors who have been refraining from taking a bite out of the forbidden fruit, i.e., investing in the volatile capital market, one would opine that RGRESS’ incentives may fall short of the industry’s expectations.

While an additional tax deduction of up to R25,000 appears good, the real impact on one’s tax savings is not substantial. Since the scheme is only for income below R10 lakh, taxpayers in the 30% tax bracket are not eligible. So, the maximum benefit a taxpayer in the 20% bracket can derive is R5,000. The savings are lower at R2,500 for those in the 10% tax slab.

Besides, the scheme is restricted to first-time investors and there are no tax benefits in subsequent years. Additionally, it is also to be noted that the first year is a fixed lock-in and the investor cannot sell, pledge or hypothecate the shares. The next two years are flexible and he can sell, but has to buy other eligible securities with the proceeds. The tax benefit under Section 80CCG is withdrawn if these conditions are violated.

Considering the inadequacies of the Indian social security and health care systems to provide adequate long-term coverage and health

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