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Just as retail investors were warming up to investing in Central and State Government Securities via online platforms such as “RBI Retail Direct”, the FY25 Union Budget proposal on deduction of tax at source (TDS) on income from these instruments could prove a dampener.
From October 1, 2024, investors may have to factor in a 10 per cent TDS outgo when investing in Central Government Securities (G-Secs) and State Development Loans (SDLs), if the Union Budget proposal pertaining to this gets passed.
Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP, assessed that the introduction of TDS on Government Securities is a significant change that could affect both retail investors and the online bond platforms that serve them.
“While the proposal aims to improve tax compliance, the practical implications need careful management to avoid discouraging investment in these important financial instruments,” Venkatakrishnan said.
Retail investors’ participation in the Government Securities market has been gradually picking up over the past few years through RBI retail direct platform and other online retail bond portals.
For example, the number of accounts opened on RBI’s Retail Direct platform increased from 89,750 as on July 24, 2023 to 1,56,878 as on July 22, 2024.
Tax brackets
If TDS comes into effect, it may discourage retail participation, impacting transaction volumes on online platforms such as RBI Retail Direct and other online bond portals.
“While G-Secs and SDLs are indeed taxable as per individual tax brackets, the introduction of TDS adds a layer of complexity. The overall impact will depend on how well the bond platforms and investors adapt to the new regime,” Venkatakrishnan said.
Further, the additional layer of tax management might deter some retail investors from investing in G-Secs and SDLs, potentially shifting their preference to other investment vehicles that might be simpler to manage from a tax perspective.
Impact
He observed that retail investors, who often plan their cash flows based on expected interest income, might face disruptions due to TDS deductions.
This could particularly affect those relying on regular interest payments for their livelihood or other financial commitments.
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