More often than not investors tend to get lured over rebates, may it be on premium paid for life insurance policies or monetary benefit received upon investing money in a particular scheme. This sole factor of deriving some monetary benefits out of investments made or premiums paid leads to wrong and sometimes disastrous investment decisions.

The Budget 2012 presented on March 16, 2012 has made a similar pitch to the investors by introducing a tax rebate on the ‘Rajiv Gandhi Equity Scheme’. Though the complete details are yet to surface, let us understand the scheme with whatever little details we have.

Scheme details:
The ‘Rajiv Gandhi Equity Scheme’ would allow for income tax deduction of 50% to new retail investors who invest up to Rs 50,000 ‘directly in equities’ and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of 3 years.

But given the present feature of the scheme, we think there are some areas which need to be addressed, which are:

 

1. Direct equity exposure: For naïve investors investing in stocks directly may turn out to be a bad idea as picking up good stocks for investing definitely demands more effort as compared to picking up fresh vegetables for cooking. Also, an investor would require to open a demat account for investing in stocks directly.
    
2. Once in a lifetime rebate: As per available literature on the ‘Rajiv Gandhi Equity Scheme’, the 50% income tax rebate mentioned would be available for only "new retail investors". Thus it appears to be only a once in a lifetime rebate, where the first time investors (i.e. new retail investors) who are investing Rs 50,000 would get a tax deduction of Rs 25,000 for that particular financial year only, in which they constitute to be new investors in the equity markets .
   
   But we think that if the Finance Minister really wanted to generate voluminous participation in equities from the retail investors, the scheme should not have been restricted to only new investors. This mandate ignores all the existing demat account holders (which are few in numbers as compared to the population in the country) which will restrict deeper retail participation.
    
3. Income has to be below Rs 10 lakhs: Another negative for the investors is that the individual investor would be eligible for deduction under the said scheme only if his / her annual income is below Rs 10 lakhs. This again impedes deeper retail participation, in era where incomes are rising and more people are being placed in under the "middle class".
    

Moreover, there is lack of clarity on whether mutual funds (which help investors in taking the equity exposure through the indirect route) would be considered under the said scheme.

 

Our View:

We believe the ‘Rajiv Gandhi Equity Scheme’ should have proper structure in place for its effective implementation. Also, there should be some infrastructure created to guide the equity investments of the naïve investors. There should be thorough checks and balances in place to protect investors from the self-centred distributors luring the naïve investors with a rosy sales pitch.

Investors should also keep this very important thing in their mind that the tax planning exercise should not be left for the eleventh hour and instead should be considered at an early stage. Also, just because you get an income tax rebate in an investment, don’t fall for it and always take expert advice before investing in direct or indirect equity.

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Comments
turab786@yahoo.com Apr 13, 2012 Scheme meant for "new investors" is a negative thought. Reduction in locking period is a must. guidelines should be clearly defined and stated unambiguously for the investors. It can generate savings and growth for investors and help the economy and create saving culture. involvement of Mutual Fund is a serious issue.
pandyads@yahoo.co.in Mar 28, 2012 very bed structure
samba.y@steelcitynettrade.com Mar 29, 2012 For this type of accounts specially with out demat maintnance charges proposal is reuired from the government of india through nsdl and cdsl lock in period is clarity is required how it locked and revoked these shares are purchased in this scheme only how to know the government after receiving full details media will be campaign to the investors/income tax payers who are having below 10lakhs income
jskohli@gurkirpa.com May 10, 2012 Investing does not require you to have money. The most important thing to have is education, self control plus experience in what you want to invest in.Also your investment vehicle depends on what your goals are, your risk assessment/management. All I can say is that I m not a fan of mutual funds. The cash flow it gives is pathetic and the return on investment in heartbreaking. Also, the risk exposure is too great. However, if you have no experience and no idea about what investing really is, it is probably the best investment for you.
rawatminesh@gmail.com Oct 10, 2012 can any1 plz tell me d same deduction will be allowed in d income or in tax....?

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