In his budget announcement for the financial year 2013-14, the Union Finance Minister, P. Chidambaram, announced a few sops for individuals and amongst them were two offers that could benefit home loan borrowers.
First, the additional tax benefit on the interest component of a housing loan by increasing the tax exemption limit from Rs.1.50 lakh to Rs.2.50 lakh under Sec. 24 of the Income Tax Act, 1961, for those who take a home loan during 2013-14. The loan value should be under Rs.25 lakh. Secondly, in its quest to encourage investment in capital markets, the government introduced the Rajiiv Gandhi Equity Savings Scheme (RGESS), allowing investors whose annual income was below Rs.10 lakh to invest a gross and maximum amount of Rs.50,000 in specified stocks and mutual fund schemes and claim tax rebate of Rs.25,000 from the investment made under Sec. 80CCG.
For the year 2013-14, to bring more people under the said Section, the annual gross income limit was increased to Rs.12 lakh from Rs.10 lakh. The maximum limit of investment per individual is pegged at Rs.50,000 for a tax benefit of Rs.25,000. If a lesser amount is invested, say Rs.40,000, the tax benefit would be calculated at Rs.20,000.
Crucial factor
Points to be noted before investing under RGESS: You should be a (1) “New Retail Investor” who has never traded or invested in the stock markets ever in the past, (2) You should not have a demat account, (3) If you have a demat account it should be a dormant one without “any” stocks-related transactions done before.
Further, the securities that can be invested in are termed as “eligible securities” and one is allowed to invest in stocks that are part of CNX-100 Index (of National Stock Exchange) or of BSE-100 Index (of Bombay Stock Exchange) to the extent of Rs.50,000 as per the prevailing prices of the selected stocks on the date of investment/purchase.
Alternatively one can invest in listed Public Sector Undertakings (PSUs) that are classified as Maharatna (companies such as BHEL, Coal India, NTPC, ONGC, SAIL & others), Navratna (BEL, BPCL, HPCL, MTNL, Power Grid etc.) or Miniratna (BEML, Engineers India, MOIL, MMTC, NHPC & others). The complete list of companies can be accessed on the respective stock exchange website. If investing in stocks sounds a bit complicated one can choose the mutual fund route by investing in schemes that are listed and traded as Exchange Traded Funds, commonly known as ETFs, such as Goldman Sachs Nifty Exchange Traded Fund (Niftybees), Goldman Sachs Junior Exchange Traded Fund (Juniorbees), DSP BR RGESS Fund, and SBI Sensex ETF that are exclusive and dedicated tax-saving funds. The investment made under RGESS is locked in for a period of three years. In the first year the entire amount is locked-in and not allowed to be sold at all. But some flexibility has been offered during the second and third years wherein the investors are allowed to sell those securities that are in profit, thereby booking some long-term profits, rebalance their portfolio back to Rs.50,000 or as per the declared amount when it was invested.
Individuals can contact any stockbroker or a qualified financial advisor and get more details of the investment processes and procedures. Now, to understand the benefits of investing under RGESS, it is a known fact that equity markets or stocks are highly volatile and risky but empirical evidence can prove that investing for a longer term has indeed been beneficial, which has offered inflation-beating returns. Investing is all about taking calculated risks, and RGESS tones down the risk by restricting the investments in stocks that are part of one of the main indices (CNX-100 / BSE-100) of either stock exchanges, NSE/BSE or companies that are public sector undertakings. The investment can also be in exchange traded funds that are passively managed. In the days of chit funds that are completely unorganised and people investing out of greed to make some extra returns, equity markets on the contrary are fully organised and regularised and are part of the organised financial sector wherein companies such as Reliance, Infosys, SBI, Maruti, ONGC, TCS, HDFC, and Tata group have created immense wealth to their shareholders over the years.
The biggest benefit of investing even such small amounts of Rs.50,000 a year can lead to long-term wealth creation and with the assistance of a good advisor and markets performing well in the years to come, people can use such created wealth to clear their housing loans or even make bullet payments, thereby reducing their outstanding loan.
Illustrating the power of long-term wealth creation possibilities, if an amount of Rs.50,000 is invested continuously for three years and remains invested for 10 years and if the compounded annualised returns is 12 to 15 per cent, the value of the invested amount of Rs.1,50,000 (Rs.50,000 x 3) could be Rs.4.20 lakh-Rs.5.30 lakh. As per the present Income Tax rule, all long-term capital gains and dividend received from equities are fully exempt from any type of taxes, which adds to the attraction of taking a risk and investing a small amount such as Rs.50,000 a year and create a sizeable corpus over the future years.
