The Reserve Bank of India (RBI) is likely to approach the Centre to secure tax benefits for retail investments in sovereign securities (government bonds as well as sovereign gold bonds) under the Retail Direct Scheme (RDS) as per a report in ‘The Economic Times’.
With the exception of sovereign gold bonds, there are no tax benefits for investment in government bonds through this platform. This leaves the strategy of directly buying government bonds at a distinct disadvantage compared to mutual funds.
When you buy a government bond, you are paid annual or semi-annual interest on the same. This interest is fully taxable at your slab rate and it is taxed every year. In contrast, if you buy the same government bonds through debt mutual funds, the interest accrues with the mutual fund. You are not taxed till you redeem your units in the fund. If you hold the fund for more than three years, you are charged a capital gains tax of 20% and given the benefit of indexation.
The scheme has taken India into an elite club of nations democratising ownership of government debt. About 20,314 accounts to own government securities have already been opened till 9 pm on Sunday after Prime Minister Narendra Modi launched the programme Friday.
Tax exemptions would make the scheme more attractive and it would be an added incentive. Experts believe it could also attract global fintech companies such as BondEvalue - a Singapore-based company, which runs the world's first fractional bond exchange. The company is keen to enter India after the RBI 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," Ananth Narayan, associate professor at SP Jain Institute of Management and Research told the ET.
"This could in turn attract intermediaries including global and local fintech companies. Also currently, small savings schemes offer much higher rates than GoI securities," the ET report cites Mr Narayan as saying.
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.
Rahul Banerjee, CEO, BondEvalue acknowledged to the ET that they will soon be opening their first India office in Mumbai.
"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," Mr Banerjee told the ET.
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 now yield 6.36%. "Retail Direct needs awareness among senior citizens who can benefit from it," said Vikram Dalal, CEO at Synergee Capital.
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.
If an investor sells bonds from a demat account after holding them for more than a year, s/he will have to pay a 10% capital gain tax on investment appreciation. Moreover, the annual coupon rate is taxed as per income tax slabs which eats into investment returns.
In the February credit policy, RBI Governor Shaktikanta Das had suggested retail participation in government bonds. While the minimum investment is Rs10,000, the maximum a retail saver can invest is Rs2 crore per security without tax breaks.
According to the scheme, no fee will be charged for opening and maintaining RDG account with the RBI. Payments for transactions can be made using saving bank account through internet-banking or Unified Payments Interface (UPI).
From retail investors’ perspective, easy access to government securities was not available before. With the ability to buy the government securities through the RBI, retail investors now have the flexibility to invest from 1 year to 30-year periods in a completely risk-free environment.
Experts also suggest that RBI should create a mechanism for buying back the G-Secs. If that happens, the portal will immediately attract a lot of interest.