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Wednesday, March 21, 2012

Budget FY 2013 impact- Rajiv Gandhi Equity Saving Scheme



Just like a magician pull a rabbit out of his heat, Pranav Da came out with Rajiv Gandhi Equity Saving Scheme but
Pranav Da’s rabbit may not be that innocuous.
Under this scheme, new retail investors whose income is below Rs. 10 lakh per annum may invest up to Rs. 50,000 directly in equities to get 50 % income tax deduction. The scheme will have a lock-in period of 3 years. Details of the scheme are yet to come.
This announcement is puzzling.  What is meant by the new investor?
Is it the person who never ever invested in stocks so for? Or investors who shall be investing in this scheme for the first time? (As the scheme is new obviously every investor shall be a new one)
Conventional wisdom calls for the second case -this means this scheme can be used for one time only.
Another concern is the ’investing directly’ – Prima facie this means investment should not be done through the mutual fund channel or similar indirect channel.
With the implementation of the DTC, tax benefits on ELSS investment shall discontinue while RGESS shall encourage investors to invest directly in the capital market -on broker’s  tip, on the recommendation of some friend (or acquaintance) or getting mesmerized by  the rally of a fundamentally weak stock.
No need to say about outcomes of such actions.
Investor shall not be able to book loss and exit as there shall be a lock-in period of 3 years.
History has shown us how a bad stock tumbles to the bottom in just few days.
This may happen to a stock in 3 years

Mr. FM should undertake following changes in the RGESS
     (1)    Enable option of investing through mutual funds
     (2)     Scratch the restriction of ‘one time only’-enable investors to invest every year
     (3)    Instead of 50% IT deduction, give at least 80% IT deduction if not 100 %- especially when IT exemption limit did not rise as per the expectations.

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