Tax Incentives for Stocking Up

Print Edition: November 2012

Equities have been a recommended investment for those looking for high returns. If you haven't started investing in stocks yet, it might be a good time to start with small amounts.

In order to encourage individual participation, first-time retail investors in stocks and equities-based mutual funds have been offered tax benefits under the Rajiv Gandhi Equity Savings Scheme (RGESS).

The finance ministry on 21 September 2012 approved the scheme under which beginners investing up to Rs 50,000 in approved stocks and mutual funds can claim 50% of the amount as tax deduction. However, the benefit is available to only those with an annual income of up to Rs 10 lakh.

Rs 25,000 is the maximum deduction available for first-time equity investors

Top 100 stocks listed on the BSE 100 (of the Bombay Stock Exchange) and CNX 100 (of the National Stock Exchange) indices and shares of government-owned Navratna, Maharatna and Miniratna companies have been approved for the benefit.

Investments in follow-on public offers (FPOs) of the aforementioned companies and initial public offerings of state-owned companies with an annual turnover of Rs 4,000 crore or more in the three years preceding the issue would also be eligible for the deduction.

Exchange-traded funds (ETFs) and mutual funds investing in approved securities have also been included in the incentive scheme. The tax deductions can be claimed under Section 80CCG of the Income Tax Act, 1961. Investments can be made in parts during the financial year for which the deduction is claimed under the scheme.

Investments under the scheme will have a lock-in period of three years. For one year from the date of purchase of equities/mutual funds units under the scheme, an investor cannot sell the securities or take appreciation benefit at all.

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From second year onwards, one can sell the securities provided the portfolio does not fall below the amount for which deduction was claimed or the value of the portfolio before initiating the first sale transaction, whichever is less, for at least 270 days in a year during the lock-in period. If an investor fails to meet these conditions, the tax benefit will be withdrawn.

By restricting the ambit of the incentive scheme to large-cap stocks, the government has tried to limit the risk for new investors. Some market experts had expressed concern that the scheme might expose small investors to the vagaries of stock markets. Equity market experts and the mutual fund industry have welcomed the move saying it would broaden the equity investors' base and bring more depth into equity markets.

"We believe this will provide some impetus to retail participation in the market by bringing in new investors," says Dipen Shah, head, private client group research, Kotak Securities, a brokerage firm. Akshay Gupta, chief executive officer, Peerless Mutual Fund, welcomed the move to include mutual funds under the scheme.

"We estimate that Rs 8,000-10,000 crore will be invested under the scheme every year," he says.

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