What is Rajiv Gandhi equity savings scheme (RGESS)?

The union budget 2012-13 introduced this equity savings scheme with a view to promote equity investments among people and to promote the scheme, will allow a deduction of 50% of the amount invested subject to a maximum of Rs 25,000. The deduction is claimed through a new section introduced in chapter VI A of the income tax Act, called the 80CCG. The investments can be made in installments throughout the year or in a lumpsum and it should be made after 23rd November 2012- the date on which the scheme came into force.

Schemes similar to RGESS were earlier introduced in Belgium and France which had positive results. In France, the implementation of a similar scheme resulted in public participation in retail trade which increased from 7% to 17%.The scheme is introduced in India with the same objective – to promote equity investment among freshers. That means, only first time investors will get the twin benefit of equity investing and tax exemption. One more condition that has been attached to this is that the new investor should not have an income before tax deductions that exceed 10 lakhs in a year.

From the government’s side, the benefit of this scheme is that it would improve the depth and liquidity of our equity markets. More savings would be channelized into the market which will improve common people’s perception about the stock market as something very dangerous. So it’s a win-win scheme. Both the government and the investor has benefits from it.

Concerns:

An investment of Rs 50,000 results in a deduction of Rs 25,000 from the taxable income. This in effect, means that the investor will get a maximum tax saving of Rs 5,000 in a year, assuming that he falls in the tax bracket of 20% under the Income Tax Act. Now, the big question is – equties are inherently risky investments. It’s a field where only expert investors can make money. However, the exemption is for new investors who may not know the basics of investing. Would it be worth for such a new investor to open a demat account and make such a high investment even before knowing what to buy? Even if someone manages to quickly learn all the basics and make an attempt to invest, would it be worth to take a risk of Rs 50,000 for getting a tax benefit of Rs 5000? The answer would depend from person to person , we guess.May be those who have already exhausted 80C limits may prefer this scheme.

Equity investments.

For the purpose of the scheme, equity investments do not have the broad meaning as understood by all of us. Here equity investments means:

Investments in shares of companies that are included in the BSE-100 or CNX 100 or equity investment in the PSUs which are categorized as the Maharatnas, Navratnas orMiniratna by the central government. Investments could be done right now by purchasing shares or  ETFs / mutual fund schemes which invests in stocks approved by the RGESS scheme.

Equity shares can be purchased from the secondary market or it could be done on a follow on public offer or an IPO of eligible PSUs. An investor can also opt to invest in new fund offers of eligible mutual fund schemes.

The Stock exchanges are directed by the SEBI to furnish list of RGESS eligible stocks / ETFs / MF schemes on their websites. The details of qualified equity investments are now available on the BSE and NSE websites.

So basically, equity investments are allowed only in a certain category of stocks / mutual funds and not in all types of small caps and speculative stocks. The reason is that top corporates and PSUs are ‘relatively safe’ when compared to others. Relatively safe in the sense that – for such stocks, the volatility is lower, the liquidity is high and adequate information is available for research. Such a condition is introduced for protecting the interest of the new investors.

Eligible Equity investor.

The scheme offers tax soaps only to ‘new’ equity investors. A new equity investor is someone who has not done any trades in the equity or derivative markets on or before 23rd November 2012. The logic is that, 23rd November was the date on which the scheme came into force. So, that date has been fixed as the cutoff date.

The scheme says that no investments / trades should have been entered into by a ‘first holder’ on or before 23rd November 2012, but does not mention the date on which the trading and demat account should be opened. So , that means-

Even if you have an old demat account in which you have not bought even a single stock or derivatives before 23rd November 2012, you are still eligible to be counted as a new equity investor and,

Even if you are the ‘second holder’ of an existing demat account in which trades have been made, you can still avail the benefit by becoming the ‘first holder’ of a fresh demat account opened in your name.

Any other conditions?

Yes. There is a lock in period.

The investment should be held of for a minimum period of 1 year. You cannot sell / pledge the shares/ mutual funds for 1 year. This 1 year period is also called a ‘fixed lock in period’.

After the completion of 1 year fixed lock in period, the lock-in extends to 2 more years, which is known as the ‘flexible lock-in period’. During the flexible lock in period, the investor can trade in the RGESS eligible securities, subject to certain conditions. The conditions is that , the investor should  maintain the value of investments at the amount for which they have claimed income tax benefit or at the value of the portfolio before initiating a sale transaction, whichever is less, for at least 270 days in a year.

This process of maintaining the value of the portfolio may be a bit complicated for new investors.

Summary of the scheme:

  • It’s Only for new investors in equity markets
  • Annual income should be less than 10 lakhs
  • Maximum exemption is Rs 5000
  • Fixed lock-in period of 1 year and flexible loch in period of 2 years.

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1 Response to “What is Rajiv Gandhi equity savings scheme (RGESS)?”

kuwar

January 27, 2013 at 5:25 pm

This is very nice information. Every trader must know it I like to share this on my blog Stock Market Guide

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