Starting in January, individuals who invest in stocks and investment trusts in a Nippon Individual Savings Account will be eligible for tax exemptions of up to five years on their financial gains. The new instrument is aimed at getting people used to accumulating financial assets via small-scale investments.

Modeled after Britain’s Individual Saving Account, the new program will be geared toward younger people.

As of 2012, 1 in 4 households with two members or more had no savings or other financial assets, including stocks, investment trusts, insurance or pensions, according to government statistics.

The new system comes with many restrictions, however, and may be only of limited benefit to investors.

Following are some basic questions and answers about the NISA special account:

Why is the government introducing tax incentives to individual investors?

Two reasons. First, the government, citing those dismal 2012 household financial asset statistics, wants to nudge people, especially the young, to prepare for the future by accumulating financial assets.

Second, the government wants to induce people to move their assets from savings into investments.

Of the ¥1.5 quadrillion in personal financial assets in Japan, 55.2 percent is made up of cash and deposits. The corresponding figure is 40.9 percent for Germany, 30.2 percent for France, 29.2 percent for Britain and 14.5 percent for the United States, according to the government’s website promoting the new account.

The government figures that the more money people invest in companies through stocks and investment trusts, the greater business activities will become, and this will lead to economic growth.

One of the merits of the new account is that investors can start small. Many financial institutions offer plans that allow people to have a fixed amount automatically set aside every month. The minimum investment amount per month varies from company to company, but some brokerages will allow people to start investing at ¥500 or ¥1,000 a month.

Who is eligible?

Anyone who lives in Japan and is at least 20 years old will be eligible to create a NISA, through which they can buy stocks or join investment trusts. Capital gains and dividends arising from those investments will be exempt from the 20 percent levy. Gains from investments not made via the new account will be taxed. Each investor can have only one of the special accounts at a time.

Where can the special account be started and how much can be invested in it?

The account can be opened at a brokerage, a bank or a post office. All gains will be tax-free for five years after the account is set up. Up to ¥1 million a year can be invested into the account for the first four years, but nothing can be injected in the fifth year, during which holders have the option of either holding onto or selling the assets accumulated.

Can already existing assets in a separate account be moved to the new account?

No. The special account will only accept the purchase of new assets starting this Jan. 1.

What type of financial products can be purchased?

Investors can buy listed stocks, exchange-traded funds, which are linked to stock market indexes, real estate investment trusts or other investment trusts. Unlike the British program, deposits, bonds and insurance or pension assets are excluded from the new deposit plan.

Are there other restrictions?

If only a ¥600,000 product is purchased in a year, for example, the remaining tax-exempt amount — ¥400,000 — cannot be carried over to the following year. Once the maximum ¥1 million purchase of stocks or investment trusts is reached, no more purchases are allowed, even if the instruments that were previously bought are sold.

Once a financial institution has been chosen for the special account, it must remain the sole institution for the five-year period.

Although no new injections can be made in the fifth year, and the investor can only hold onto or sell the assets accumulated, it is possible to set up a new NISA account and start investing up to ¥1 million yearly in the same or another institution, thus the system offers a total benefit duration of up to 10 years.

What happens to the special accounts after the tax-free period?

The products bought via the special account will be moved to a regular, taxable account after five years.

To avoid paying taxes on financial gains, investors must sell their assets in the special account within five years from January of the year each was purchased.

For example, someone who bought stocks in December 2014 via the special account would have to sell them by the end of December 2018 to avoid taxes on any gains.

If securities under the account are sold for a loss, can the losses offset gains made on non-NISA accounts?

No. In non-NISA transactions, you are allowed to carry over tax-deductible losses for up to three years. That’s not the case with the special accounts.

Will the special accounts take hold?

It’s hard to say, because critics say the complex restrictions make it too hard for people to benefit.

The British version has seen some 40 percent of all households setting up accounts. Since the government introduced the ISA in 1999 by integrating pre-existing plans, it has made improvements, including to make the tax breaks permanent in 2008, according to a recent report by Mitsubishi UFJ Trust and Banking Corp. on the two systems.

The outstanding balance for British financial assets under the ISA has steadily grown over the years, with people across all income levels putting money into the system, the report said.

“The British ISA has been modified little by little over 10 years to make it more user-friendly,” the bank’s report concludes. “The NISA also needs to make flexible rule changes in the future, to make it a more usable (investment) infrastructure.”

The Weekly FYI appears Tuesdays. Readers are encouraged to send ideas, questions and opinions to hodobu@japantimes.co.jp

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