The Union Government, in its reformist avatar, has finally cleared the Rajiv Gandhi Equity Savings Scheme (RGESS). The scheme, which was announced in the Union Budget, is supposed to help bring back retail investors into the stock market, and more importantly make stock investment more attractive from gold purchases which results in higher forex outflow.
The good part: Unlike the previous finance minister’s realm, which was opposed to allowing mutual funds in the scheme, RGESS has been extended to mutual funds as well.
However, there are serious doubts if the tax sops will really help bring back retail investor to the market, at least for now.
One of the prime concerns of mutual fund houses was that under the Direct Taxes Code, equity-linked savings schemes (ELSS) are expected to go out of Section 80C. Therefore, there are no incentives for the investor to put in money into equity schemes. The introduction of RGESS will partly offset the adverse impact.
But ELSS, for some time now, has been doing quite badly. In the last four calendar years, net collections from these schemes have been falling consistently – from Rs 5,642 crore in 2008 to Rs 813 crore in 2011. In 2012, the net flows stand at Rs -132 crore, implying outflows.
The scheme, itself, has very few benefits. Investors whose annual income is less than Rs 10 lakh can invest up to Rs 50,000 and get a deduction of 50 per cent of the investment. So, if you invest Rs 50,000, you can claim a tax deduction of Rs 25,000 (50 per cent of Rs 50,000).
By capping it for investors whose incomes are less than Rs 10 lakh, a person in the 20 per cent tax bracket can get this benefit. And the maximum benefit will be Rs 5,000 (20 per cent of Rs 25,000).
On the other hand, under ELSS, the entire amount (up to the limit Rs 1 lakh) was tax deductible. Two, ELSS gives benefits to investors of all income levels.
By restricting the income level, the government is actually not giving benefits to the high income bracket – people who are more comfortable with equities as an investment. But, I guess, the tax benefit is not enough to attract them anyway.
Allowing mutual funds in the scheme is important because no one wants retail investors to get influenced by tips and lose money. This will drive, not only them but their friends from the market, for a long time.
RGESS, along with Sebi’s recent guidelines for mutual funds which allows for a higher expense ratio if money is collected from centres beyond the top 15 cities, will help develop equities.
But, a better option perhaps would be to allow NPS or EPF to invest in market more aggressively (not just 50 per cent in ETFs as has been mandated in the NPS). But who will risk taking on the labour unions?
