Retail Direct Scheme: Soon, you may get tax benefits for investing directly in govt securities

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Retail Direct Scheme: Soon, you may get tax benefits for investing directly in govt securities 

Key Highlights

  • The central bank is likely to approach the government seeking tax benefits for retail investments in sovereign securities under the RDS,
  • Already 20,314 accounts have been opened till 9 pm on Sunday under the RDS after PM Modi launched the programme Friday.
  • Experts say, tax breaks have the potential to increase the attractiveness of the scheme.

New Delhi: Soon, retail investors may get tax benefits for investing in government securities directly under the Reserve Bank of India’s (RBI) Retail Direct Scheme (RDS), which allows retail investors to invest up to Rs 2 crore and minimum Rs 10,000 in G-secs. At present, if an investor sells bonds from a demat account after holding them for more than a year, then he will have to pay a 10% capital gain tax on investment appreciation. However, if you invest in government securities, the annual coupon rate is taxed as per income tax slabs, which, eats into investment returns. 

According to a report in the Economic Times, the central bank is likely to approach the government seeking tax benefits for retail investments in sovereign securities under the RDS, which takes India into an elite club of nations democratising ownership of government debt.

Worth mentioning here is that already 20,314 accounts have been opened till 9 pm on Sunday under the RDS to invest in government securities after Prime Minister Narendra Modi launched the programme Friday.

Citing tax experts, the financial daily mentioned in the report that, tax breaks have the potential to increase the attractiveness of the scheme. Experts believe it could also attract global fintech companies such as BondEvalue. The Singapore-based company, which runs the world’s first fractional bond exchange, is keen to enter India after the central bank launched the programme.

“If retail taxation of direct debt investments is brought in line with investing through debt funds, we should see some retail interest emerging,” the publication quoted Ananth Narayan, associate professor at SP Jain Institute of Management and Research as saying. “This could in turn attract intermediaries including global and local fintech companies. Also currently, small savings schemes offer much higher rates than GoI securities.”

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BondEvalue, regulated by the Monetary Authority of Singapore (MAS), has already reached out to local fintech companies and banks to start in Mumbai immediately after New Delhi’s formal announcement.

“We will soon be opening our first India office in Mumbai,” Rahul Banerjee, CEO, BondEvalue told ET. “We see massive demand from NRIs globally to invest in India. Using our digital platform, we want to allow every man’s money to be invested in government securities and government linked securities.”

Bonds globally haven’t been as successful as equities in drawing retail investors. However, countries such as Japan have funded their development using domestic retail bond markets. The US and Brazil, too, have put in dedicated efforts. In India, fixed-income products such as small savings schemes or debt mutual funds offer better returns with similar tax structures. Sukanya Samriddhi Yojana accounts, for instance, earn 7.6% while the Debt GILT funds offer on average 8.77% through a 10-year period, show data from Valueresearch Online. By contrast, benchmark bonds yield 6.36%.

“Retail Direct needs awareness among senior citizens who can benefit from it,” the publication quoted Vikram Dalal, CEO at Synergee Capital as saying. “A tax break is also needed to bring parity with existing savings plans, including mutual fund debt schemes. GOI bonds can be an alternative to LIC annuity plans as retail investors can invest in the longest maturity until 2061.”