What We Don’t Need Is Yet Another Tax-Saving Equity Scheme To Lure New Investors

The government, it seems, is mulling the launch of yet another scheme to get Indians to invest directly in equity. A Mint report talks of extending the Rs 50,000 tax deduction currently available under the Rajiv Gandhi Equity Savings Scheme (RGESS) to Rs 2 lakh but under a new scheme that will be simpler to understand and administer.

RGESS, like many things associated with the former prime minister, was a flop, largely because it was trying to entice new investors with a complex scheme. Investors had to open a demat account (if they already had one, they were ineligible). The money invested had a lock-in period and the list of stocks eligible for investment limited to those in the BSE 100. The point of all these restrictions was to ensure that new investors did not lose money by picking the wrong stocks.

Question: why try to entice novices to the stock game, given all the risks, when it would be far easier for them to invest in equity mutual funds, exchange-traded funds (ETFs), index funds or even the tax-saving equity-linked savings scheme (ELSS), under which Rs 1.5 lakh of investment can be obtained as tax relief anyway?

How does it make any difference to the stock market’s depth, or the investor’s net worth, whether she invests in stocks indirectly or directly? In fact, one would think that indirect investments should be safer for new investors.

The finance ministry is on the wrong track. While RGESS surely needs a quiet burial, there is no need to create a new animal to expand the base of stock market investors (India has fewer than 27 million of them, which is the number of demat accounts, many defunct).

The only thing that needs to be done is to raise the section 80C benefit of tax deduction to Rs 2 lakh (since it anyway includes other investments, such as LIC premia, PF contributions, repayment of home loan principal, etc). Currently, the Rs 2 lakh limit can be used only if you invest an additional Rs 50,000 in the National Pension Scheme (NPS). Just as the entire Rs 2 lakh limit can be used for NPS, the same could be allowed for investments in ELSS, Index Funds and exchange-traded funds.

Simple and easy.