Rajiv Gandhi Equity Savings Scheme or RGESS as it is commonly called was introduced in Indian Budget 2012 by the finance minister and has now been approved for roll out. For the uninitiated, RGESS is a new tax saving scheme meant to invest retail investor’s money into the stock markets that will allow tax breaks as well.
Let us take a quick peek at its features, whether you should go for it and if yes, then how to invest in Rajiv Gandhi Equity Savings Scheme.
Features of Rajiv Gandhi Equity Savings Scheme (RGESS)
Investors who earn less than Rs 10 lakh as taxable annual income are eligible to invest in this scheme. The maximum amount that can be invested is Rs 50,000. Tax deduction is allowed to the extent of 50% of the amount you invest in the Rajiv Gandhi Equity Savings Scheme. A new Section 80CCG has been introduced for this purpose.
The Rajiv Gandhi Equity Savings Scheme will include mutual funds and exchange traded funds (ETFs). Stocks which are listed on the BSE 100 or CNX 100 are also eligible.
The investments do not have to be in one go, it can be done under installments. That is a welcome move for small investors who want to invest in small quantities. However, there is a lock in period of one year post which the investors will be able to trade (buy/sell) in the securities with some caveats. You can however sell after 3 years without the caveats.
So, should you invest in RGESS ?
It is important to note that RGESS is open to new retail investors only. So if you have been investing in equity earlier, you don’t stand a chance.
The intent of conjuring us a new tax saving investment vehicle was to expedite or encourage retail participation in equity markets. However, what is perplexing is that this is only for first time investors. This means that you should not have invested in stocks and mutual funds ever. An investor will be identified by his or her PAN number so you cannot beat the system by opening a new DEMAT account to leverage the tax benefit so offered. That will be illegal.
Also, there are many investors who do not have a DEMAT account but have invested in mutual funds. Can they invest in RGESS ? I don’t know yet.
Another thing that comes to mind is how many people will be first time investors? A very small percentage of them I am sure. Records suggest that around 6% of the 3 crore taxpayers fall in the 20% tax bracket (less than Rs 10 lakh category).
But even for a new investor, does this make sense ?
If you are earning less than 10 lakhs per annum, you fall in the 20% tax bracket. So if you invest Rs 50,000, you will get a deduction of Rs 25,000 which translates to Rs 5000 of benefit. That is peanuts for a person who is earning Rs 10 lakhs. Are you interested in putting so much effort for saving Rs 5,000 ?
And that isn’t just it. What is amazing is the absolute mess with the lock in period the Rajiv Gandhi Equity Savings Scheme has. The complication will only turn you off if you try to understand how the scheme works. After one year of holding the shares, you can sell them but the amount of money you invested and which was used for claims for tax deductions will need to be re-invested back in the scheme. Let me explain with a diagram.
Gotcha ?
Last Word
I am wondering whether the nation has time and effort to spend on introducing a policy that might find few takers and that might eventually die a slow death.
Our government and regulators are very gung ho about introducing anything new in the market and taking credit for it though they know it will back fire in the long run. So what was the need to introduce a new scheme for tax saving purposes ?
Why cannot the existing ELSS (Equity Linked Saving Schemes) be used for the same end goal? How do the leaders envisage that a new investor dab his hand in equity via this Rajiv Gandhi Equity Savings Scheme? Why cannot they educate investors on equity investing instead of making a mess out of a scheme that will only encourage mis-selling and corpus erosion for newbies in the stock market ?
I am sure but eventually the new investors who are going to invest into this scheme will be taken for a ride by agents who want to make a quick buck in commissions. Not just that, brokerage houses will push for a DEMAT account to be opened luring new customers with this tax advantage. By the time the years roll on, I am sure that the new comers would have learned a lot on the equity investing.
I pray, stay away ! Read more on this product here.
Excellent Post, Thanks for giving so much clarity about the scheme.
Glad you liked it matey 🙂 !
Informative post. Not sure why Govt. is encouraging investment in Equity. Less than 10% of people make money in Equity, moreover investment in equity is for a long term. Very few people realize it. I think it would have been better they kept ELSS.
Another thing to note is that you will save only Rs 5000 in your lifetime if you opt for RGESS because the tax breaks are valid only for the first time investor. Not sure whether that is a huge lure to go for this !
Just a savings of Rs. 5000, that’s peanuts. ELSS is the best avenue available for people to invest in equity, only 3 year locking period. I strongly feel the Govt. should keep it.
Yeah but who explains that to our learned policy makers !
Thanks for info, Wealth Wisher. I thought that it was a good instrument when they announced it. Now that the full details are out, it really doesn’t sound good.
Ha ha ha. Think twice before you invest.