RGESS - A positive initiative to increase retail participation in equities

In the Union Budget 2012-13, the then Finance Minister Pranab Mukherjee announced the Rajiv Gandhi Equity Savings Scheme (RGESS) with the objective of shifting the focus of Indian equity markets from speculative trading to long-term value creation. As per the latest numbers, only 10% of equity volumes are investment-driven (delivery-based) while 90% are driven by trading or speculation. RGESS is a step in the right direction to improve investor participation and penetration in the equity markets. The scheme allows tax benefits to first-time investors in predefined stocks either directly or through mutual funds. While the former route will be relatively riskier as it involves equity selection, the latter is a more convenient way to access the benefits of RGESS.

RGESS: Tax benefits

RGESS provides tax benefits under Section 80CCG for first-time investors which can add to the total returns of the equity investments. This tax saving is over and above the Section 80C benefits which have a cap of Rs 1 lakh. Besides these benefits, returns from RGESS would also be tax-free if held for over one year as long-term capital gains from equities or equity oriented mutual funds are exempt from tax.

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TAX Benefits under RGESS

  • Eligible gross total income less than or equal Rs 10 lakh
  • You can claim the benefit instead of one year to three years. It means that you can carry forward the current year investment tax benefit till 3 years.
  • Maximum Investment permissible Rs 50,000
  • Maximum tax deduction on investment 50%
  • Effective amount considered for tax deduction Rs 25,000 (50% of Rs 50,000)
  • Highest tax rate applicable 30%
  • Total tax savings Rs 7,500* (30% of Rs 25,000)
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Important Change for year investment made in Financial 2013-2014 (as per budget 2013)

  • As of now only tax payers whose taxable income less than or equal to Rs.10,00,000 are eligible for investment in this scheme. Now this limit raised to Rs.12,00,000.
  • One more important change in RGESS, you can claim the benefit instead of current one year to three years. It means that you can carry forward the current year investment tax benefit till 3 years.

About Rajiv Gandhi Equity Savings Scheme

  • Open to new retail investors who have a PAN number; those who have demat accounts without any transactions in equity /derivatives till date or those who wish to open a fresh demat account.
  • Open to investors with annual taxable income less than or equal to Rs 10 lakhs.
  • Maximum permissible investment under the scheme is Rs 50,000 per annum.
  • Investors can avail a 50% deduction of the amount invested on the taxable income for that year under section 80CCG
  • Exchange traded funds (ETFs) and mutual funds (MFs) that have RGESS eligible securities as their underlying is one of the eligible and investment avenUe.
  • Lock-in period for investments under the scheme would be three years but securities can be traded after one year. Investors would, however, be required to maintain their level of investment during these 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.
  • In case an investor fails to meet the aforementioned conditions, the tax benefit will be withdrawn.
  • Earlier the gross total annual income for people to invest in RGESS was less than or equal to Rs. 10 lakh per annum. In the Annual Budget 2013-14, the income level of individuals has been raised from Rs. 10 lakh pa to Rs. 12 lakh pa.

Investor's dilemma - mutual funds or direct equity for RGESS

While the objective of the government is to improve the width of the equity markets by incentivizing first-time investors through a tax rebate, such investors need to understand the nuances of equities before taking the plunge. Investors also need to know the risks involved despite the selection of stocks being restricted to highly liquid stocks and government-owned companies. In such a scenario, the mutual fund route (which would offer RGESS eligible stocks through an ETF or as an actively managed fund) would be ideal for investors as they would stay away from stock selection and leave it to professional fund managers

How to choose funds

There are various mutual funds under Rajiv Gandhi Equity Savings Scheme But trying to pick a mutual fund ahead of time that will beat the market is extraordinarily difficult therefore, Mutual Fund Wala will help you to choose the best out of all various mutual funds.