The government and regulators are discussing fresh tax benefits for investment in equities in an attempt to wean away individuals from parking funds in gold.
The proposal is to take subscription into equity-linked savings schemes (ELSS) out of the Rs 1 lakh deduction limit provided under Section 80C of the Income Tax Act and create a separate window like the one for infrastructure bonds.
ELSS is a mutual fund scheme that invests in equities and comes with a three-year lock-in period, aimed at de-risking the exposure of retail investors who are not equipped to deal with direct investments into the market. The instrument gets investors exemption from payment of long-term capital gains tax.
A source familiar with the discussions on boosting investments in financial products said "there have been preliminary talks" and they may form part of the steps to discourage individuals from parking funds in gold that is expected to be finalized in time for the next Budget. A final decision is yet to be taken.
In fact, in the mid-term review tabled in Parliament on Monday, the finance ministry listed four options being discussed to reduce the demand for precious metals — a modified gold deposit scheme, gold accumulation plans, besides gold-linked accounts and pension products linked with the precious metals.
But these instruments come with the risk of the demand for the metal remaining high, something that the government acknowledged. "Any rollout of gold-linked instruments will have to be monitored carefully to see whether the overall demand for gold actually falls. More generally, however, the demand from the public for financial investments that retain their real value needs to be addressed," the report said.
The finance ministry is also discussing ways to make exchange traded funds (ETFs) in gold more attractive for individuals so that the government is not saddled with a situation where heavy import of the precious metal widens the trade and current account deficits and puts pressure on the rupee. ETFs are also like mutual funds but have gold as the underlying asset.
Those backing sops for ELSS suggested that the move may result in investors reducing their exposure to gold and instead moving to equities.
"Earlier as well, there was a window to encourage investment into equities and equity-linked schemes. As such, implementing an incentive for equity investment will encourage individuals to channel savings into the market provided its is not volatile," said Rahul Garg, head of direct tax practice at consulting firm PricewaterhouseCoopers India.
Even in the last budget, through the Rajiv Gandhi Equity Scheme, Pranab Mukherjee had created a window for retail investors to enter the stock market but the benefit was limited to small investors who were investing in equities for the first time.
Subsequently, Securities & Exchange Board of India got the government to include equity schemes of mutual funds as well as ETFs that invest in index stocks and blue chip public sector companies eligible for tax breaks. They come with the rider that the first-time investor has a taxable income of Rs 10 lakh or less and invests up to Rs 50,000 either directly or via MFs or ETFs.