Not just the Rajiv Gandhi Equity scheme, but a group of other measures in the budget will make the equity market attractive for retail investors. Notable of them is that gold and real estate will shed a lot of sheen due to the newly introduced tax on them.
A major step in the budget is to discourage investment in gold. For this the finance minister has imposed a 1% tax on gold transactions. Over the last couple of years, gold has emerged as an important investment asset. People are purchasing gold not just for ornament purposes but to secure a return in the future. This trend has resulted increased household physical investment. Physical investment is unproductive as it means dead money in store.
Another element which may encourage equity investment is the imposition of 1% TDS on real estate transactions. Along with gold, real estate is a major destination for investment resulting in escalating property prices. Now, with the TDS, the real estate deals for speculative purposes will come down.
Adding to the budgetary measures, the financial environment is also quite conducive for equity participation by retail investors. The first one is that the present interest rate is at its peak level. Reduction of interest rate in the near future will make equities attractive compared to bank deposits. Interest rate reduction usually starts boom phase in the equity market.
The government two days back has reduced provident fund interest rate by 75 basis points to 8.25%. This is a big discouragement for the salaried people. A more discouraging factor is that the PF interest cut decision came on a day when the RBI has not changed its high interest rate.
At last, the Rajiv Gandhi Equity Saving Scheme is also capable of directing investors’’ money into equities. The implication of the scheme is that salaried people with income less than Rs 10 lakh can rescue Rs 25000 out of the taxable income if they put Rs 50000 on equities. In future, IPOs will make tailor made features which attracts this Rs 50000 investment from retailers keeping the 3 year lock in period option. At present there are 3 crore taxpayers in India with income less than Rs 10 lakh.