Tax Breaks Needed to Attract Retail Investors Into Stocks: Analysts

Experts feel separate tax-breaks are required to incentivise people to invest in equity through primary market.
Only 2 per cent of India's over 1.2 billion people are estimated to invest in equity markets. Analysts say Finance Minister Arun Jaitley must consider in announcing tax breaks and other incentives to increase the participation of retail investors in stock markets.
"The Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT), which are levied on purchase or sale of securities, lower depth and liquidity in the market, thereby lowering volumes. We are currently seeing lower volumes in cash and future markets. We want STT to go or it should be reduced substantially," says D K Aggarwal, managing director of SMC Capital.

"In India, just 5 per cent of the total retail savings is into financial assets, while same number in developed markets is around 25 per cent," he added.

Jimmy Patel, CEO, Quantum Mutual Fund, says, "Equity mutual fund investors are paying double STT, firstly, at the time of buying and redeeming mutual fund units and secondly when the mutual fund goes to the market to sell shares or buy shares. The application of double STT needs to be addressed."

Experts feel separate tax-breaks are required to incentivise people to invest in equity through primary market.

"There is no incentive for new investors to put money in initial public offering. Retail response to IPOs has been quite muted. In order to create more retail participation some tax incentives are required," said Mr Aggarwal.

The government had introduced the Rajiv Gandhi Equity Savings Scheme (RGESS) in 2012-13. But experts feel the tax saving scheme has many conditions attached to it. Under RGESS, first time equity investors, with annual income of less than Rs. 12 lakh, will get a deduction of 50 per cent for the amount invested up to Rs 50,000.

Mutual Fund industry also wants a special status for tax-saving mutual funds known as Equity-Linked Saving Schemes (ELSS).

"I would like the government to increase the limit for ELSS," Waqar Naqvi, CEO, Taurus Mutual fund.

"For boosting equity investment, there has to be separate section for ELSS. Today ELSS is cluttered with other products under Section 80C," said Mr Patel of Quantum Mutual Fund.

He wants the government to reintroduce sections 54EA, EB (withdrawn in 2000), under which capital gains were not charged if the proceeds from a sale of capital assets were invested in specified bonds and debenture.

"Government should give tax breaks to investors if they invest in mutual funds which invest in the equity and bonds of infrastructure companies. It will benefit the government by helping it raising funds for infrastructure projects, benefit the mutual funds companies as well as retail investors," says Mr Patel of Quantum Mutual Fund.

The industry also wants gains on National Pension Scheme to be made tax-free in this year's Budget.

"NPS needs significant tax changes, making the withdrawals tax-free. Also, process of withdrawals should be more streamlined. It was the instruments created for unorganised sector but currently the tax-incentives makes it more attractive to the salaried class," says Manoj Nagpal CEO, Outlook Asia Capital, a wealth management firm.

"Currently, contributions up to 10 per cent of the salary by the employer on behalf of employee are eligible for additional deduction apart from Section 80C. This is basic flaw which needs to be corrected. It should have uniform tax exemption for both salaried and non-salaried class, to make NPS more amenable for non-salaried people, the category for it was introduced," he added.
Source : NDTV