The Budget does nothing much to change the plight of the retail investor except allowing him to stagger his investments in RGESS over three years, and allowing even people with an annual income of R12 lakh (earlier R10 lakh) to avail the tax deduction. Retail investor interest in equity markets has waned over the past two-three years, but had shown some signs of bottoming out over the past five months. We expected the Budget to speed up the recovery in sentiment, but that has not been the case.
A key expectation from the Budget was that it shall enable higher household savings and ensure that more of that flows into financial instruments. Apart from the minor tweak in RGESS and a promise to introduce inflation-indexed bonds/national security certificates, nothing much was done in this direction. In terms of investment too, the Budget doesn?t make it any easier for the retail investor to invest in financial markets. The proposal to hike dividend distribution tax on debt mutual fund schemes from 12.5% to 25% for individual and HUF investors is a dampener and shall discourage investors from investing in a product that has been one of the very few bright spots for investors in mutual funds over the past five years. Rather, despite the concern over rising flow of household savings into real estate, additional incentives have been provided to home buyers.
It was a pleasant surprise to see the Budget focusing this much on insurance, MFs and capital markets. Buying insurance has been made easier by ensuring better reach and availability and by doing away with the need for a separate KYC. The intent to promote capital markets seems to be there, but the road map is not clear. Most of the proposals for capital markets were aimed at facilitating and promoting higher FII investments (even after record FII inflows over the last nine months) rather than rekindling the interest of domestic retail investors. The fact that mutual funds can now become members of stock exchanges will allow them to cater to a wider audience. Apart from that, nothing much has been done to make it easier for the retail investor to invest in MFs. Rather, they have been discouraged from investing in debt MF schemes due to the doubling of dividend distribution tax.
On the income tax front, the retail investor gets just two benefits ? a small sweetener in the form of a R2,000 tax credit for those having total income of not more than R5 lakh (as a substitute for a 10% hike in threshold limit of R2,00,000; a move to ensure that those with income above R5 lakh don?t ?t get the benefit, and, an additional deduction (over and above the current limit of R1.5 lakh) of R1 lakh on interest on home loan, if the loan is up to R25 lakh, property is valued at less than R40 lakh and the loan is taken in FY14. Even this deduction is available only for one year, though any shortfall can be carried over to the next year.