There has been a lot of discussion (not discussion, but more queries in fact :-)) about the Rajiv Gandhi Equity Savings Scheme (RGESS) which was announced during the budget 2012-13.
So far the understanding about the said scheme was; the investor whose income is less than Rs. 10,00,000 they can invest up to Rs 50,000 in listed stocks on the recognized stock exchanges in India and avail 50% of the investment as tax benefit. But during mid of September, the Finance Ministry announced the inclusion of mutual funds and exchange traded funds in the Rajiv Gandhi Equity Savings Scheme (RGESS) – with an aim not just giving an extra scheme of tax saving, but to improve the equity investing culture in the country (mainly within retail investors class).
In this article I would like to put some more light into the said scheme like, what is this all about, for whom it’s beneficial, what are the points you need to see before going for such plans etc.
During the Budget 2012-13, Rajiv Gandhi Equity Saving Scheme (RGESS) was proposed by the then Finance Minister Pranab Mukherjee for new retail investors whose annual income is less than Rs. 10,00,000 and who want to invest up to Rs 50,000 in listed stocks, on the recognized stock exchanges in India.
Though RGESS has predominately been designed to encourage direct investment into equities, but during last month the finance minister Mr. P Chidambaram approved and outlined the details of the RGESS. The government has also included investments through exchange traded funds (ETFs) and mutual funds (MFs) following request from various stakeholders. Here the investments made in top-100 listed stocks (BSE 100 and CNX 100) and public sector undertakings (Navratnas, Maharatnas and Miniratnas) would be eligible under the scheme. ETFs and MFs with these stocks as underlying will only be eligible.
The most important point you need to note is, this scheme is said to be open to only new retail investors “identified on the basis of their PAN. This also includes those who have opened the DEMAT account but have not made any transaction in stocks and /or in derivatives till the date of notification of this scheme.
This scheme has been incorporated as a new Section – 80CCG of the Income Tax Act, 1961, as amended by the Finance Act, 2012. This scheme offers a tax deduction of 50% of the amount invested. For Example: – If you invest Rs 50,000 in a year then you can claim a tax deduction of Rs 25,000 i.e. 50% of Rs 50,000 in the year of investment.
The total lock-in period for investments under the scheme would be three years, including an initial blanket lock-in period of one year, commencing from the date of last purchase of securities under RGESS.
After the first year, investors will be allowed to trade in the securities, however they are required to maintain their level of investment during the following two years 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 else the tax benefit will be withdrawn if an investor fails to meet the conditions stipulated for the scheme.
There are few key deciding factors you need to look into before choosing RGESS, such as;
- The money invested in this scheme will be locked for 3 years. This means, if you sell it within the lock-in period, the benefit will be withdrawn and the value of deduction availed by you will be added back to your income in the year in which you sold the investment.
- Remember, the tax benefit here is available only once in a life time and may not be repeated in future.
- Investor whose annual income is Rs. 10,00,000 and more will not be allowed to invest in this scheme.
- Finally it’s an investment into Direct Equity, which means investors with less knowledge with equity market it may be a risky option of investment for them.
So what are you thinking now? 🙂 Investing or NOT, do share your thoughts.