SEBI to pitch for rationalisation of tax structure to attract household savings in capital markets

With an aim to enhance the investment in domestic equity benchmarks, the Securities and Exchange Board of India (SEBI) will soon propose for rationalization of tax structure of financial products to make them more attractive to retail investors. The SEBI has notified that tax incentive scheme similar to the US 401(k) plan can be introduced in the country. The scheme can enhance long term investments and bring greater depth in capital markets through mobilising household savings to the capital markets. High investment brought by domestic investors would help in curbing the unwanted volatility in domestic equity markets and would reduce the excessive reliance on the foreign investors. In India, only about 8% of the country's households invest in equities, directly or indirectly through mutual funds which is very low as compare to major economies like the US at 42% and China with 14% of households’ invest in equity markets. The market regulator also wants to increase the tax exemptions limits for retail investors in mutual fund retirement plans. Besides, the SEBI will also pitch for increasing investment limit in various mutual fund schemes such as equity-linked savings scheme and RGESS. The rational tax structure is viewed as an important factor which could draw investors towards equity markets. However, to enhance the investment in markets, the government had already introduced various schemes such as Rajiv Gandhi Equity Savings Scheme in the 2012-13 Budget, offering 50% tax rebate to new retail investors who invest up to 50,000 directly in equities. However, the scheme remained ineffective to encourage retail investors due to its complex structure including a lock-in period.