The Budget has done a great deal to encourage investment in the stock markets.
First, it has proposed that dividends will become tax-free in the hands of investors from the next financial year, i.e., from April 1, 2003. That's quite a saving, especially for persons in the top tax bracket since such income is currently taxed in their hands at their tax rate applicable to them.
However, the levy of a 12.5 per cent dividend distribution tax on companies may affect pay-outs by some companies marginally. The second important step the budget has taken is to exempt all listed equities from the incidence of long term capital gains tax.
This, however, holds true only for those listed equities that are acquired on or after March 1, 2003, and sold after the lapse of at least year. Long term capital gains are also taxed at 10 per cent (without an indexation benefit), which means that there would be a considerable saving even on this count for equity investors.
Investors need to note here that this exemption holds only for listed equities, and unless there is some further clarification on the issue, it seems that equity-oriented mutual funds have been kept out of the purview of this exemption.
Investors in equity-oriented mutual funds can, nevertheless, take heart from the fact that their mutual fund companies will be exempt from paying the dividend distribution tax of 12.5 per cent proposed in the budget.
Even as the finance minister has doled out incentives for investors to invest in equities, his move to cut small savings rates by one percentage point to eight per cent has made some alternative investment avenues less attractive.
Such a move automatically means that interest rates on all relief and savings bonds will be also be cut by one percentage point.
Moreover, the Reserve Bank of India has already announced a 0.5 percentage point cut in both the savings account and repo rates. With this secular decline in interest rates as a backdrop, the new measures in the Budget clearly make a fresh case for investing in equities.