Small equity scheme? What a capital idea

In an attempt to encourage participation of retail investors in the capital markets, the government has proposed a tax exemption scheme for equity markets targeted at new investors. Called the Rajiv Gandhi Equity Saving Scheme, it will encourage the flow of savings in financial instruments and deepen the capital market, said finance minister Pranab Mukherjee in his speech on Friday.
The scheme will allow for income tax deduction of 50% to new retail investors, who put up to Rs 50,000 directly in equity and whose annual income is less than Rs 10 lakh. The scheme will have a lock-in of 3 years. As the maximum tax rate applicable on those with an income of up to Rs 10 lakh is 20%, the tax saved will be a maximum of Rs 5,000.
Still, the provision is bound to attract investors to the equity market, and thereby deepen the stock market, reduce volatility and promote equity culture.
Since the long-term capital gains in equity are also tax-free, an investor can expect a good return if the market performs well. But, to take full advantage of the scheme, the investor will have to put money directly in equity, which would expose him or her to the market’s volatility.
Finance secretary R S Gujral said the details of the scheme would be announced later. He did, however, reveal that it would be a one-time, and not an annual, deduction. Those not having a demat account will be eligible to participate in this scheme but only after they open one to facilitate investments.
Budget 2012
Budget News 2012