Fact Box: Rajiv Gandhi Equity Savings Scheme (RGESS)

RGESS schemes to become more investor-friendly – Finance Minister P. Chidambram

Finance Minister P. Chidambaram has expressed the need revisit the Rajiv Gandhi Equity Savings Scheme (RGESS) to make its provisions more retail investor-friendly. It was felt by the minister that the in current form the scheme is too complex for the small investor to understand and that complying would be difficult. He is expected to bring necessary changes to in the coming Budget.

More about RGESS:

Union Government has approved the new Tax saving scheme called the ‘Rajiv Gandhi Equity Savings Scheme”, with a view to provide tax benefits. The scheme is exclusively for first time retail investors in the securities market with annual income of below 10 lakh rupees in a financial year. The maximum investment permissible under the scheme is 50 thousand rupees and the investor would get a 50 per cent deduction of the amount invested from the taxable income for that year. The scheme will not only encourage the flow of savings and improves the depth of domestic capital markets, but also aims to promote an equity culture in the country. To benefit the small investors, the investments are allowed to be made in instalments in the year in which tax claims are made.

Important features of the Scheme:

Retail investors participating in this scheme will be identified on the basis of their PAN numbers. This includes those who have opened the Demat Account but have not made any transaction in equity and /or in derivatives till the date of notification of this Scheme and all those account holders other than the first account holder who wish to open a fresh account.

  • Investors of the scheme should have annual taxable income is ≤ Rs. 10 lakhs.
  • Rs 50,000 is maximum Investment permissible limit and the investor would get a 50% deduction of the amount invested from the taxable income for that year.
  • Stocks listed under the BSE 100 or CNX 100, or those of public sector undertakings which are Navratnas, Maharatnas and Miniratnas would be eligible. Follow-on Public Offers (FPOs) of the above companies would also be eligible under the Scheme. IPOs of PSUs, which are getting listed in the relevant financial year and whose annual turnover is not less than Rs. 4000 Crore for each of the immediate past three years, would also be eligible.
  • Exchange Traded Funds (ETFs) and Mutual Funds (MFs) that have RGESS eligible securities as their underlying and are listed and traded in the stock exchanges and settled through a depository mechanism have also been brought under RGESS
  • Investors can make the investments in installments in the year in which tax claims are made.
  • 3-year is the total lock-in period for investments including an initial blanket lock-in period of 1 year, commencing from the date of last purchase of securities under RGESS.
  • After the first year, investors would be allowed to trade in the securities in furtherance of the goal of promoting an equity culture and as a provision to protect them from adverse market movements or stock specific risks as well as to give them avenues to realize profits.
  • Investors should maintain their level of investment during these 2 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. The calculation of 270 days includes those days pursuant to the day on which the market value of the residual shares /units has automatically touched the stipulated value after the date of debit.
  • The general principle under which trading is allowed is that whatever is the value of stocks / units sold by the investor from the RGESS portfolio, RGESS compliant securities of at least the same value are credited back into the account subsequently. However, the investor is allowed to take benefits of the appreciation of his RGESS portfolio, provided its value, as on the previous day of trading, remains above the investment for which they have claimed income tax benefit.
  • For the purpose of valuation of shares, the closing price as on the previous day of the date of trading will be considered so that new investors are certain about their debits and credits into the account.
  • The tax benefit will be withdrawn if the investor fails to meet the stipulated conditions.

Similar to other financial products (post office savings, life insurance policies etc.) which provide tax benefits to the retail investors, this tax break for direct investment in equity is expected to encourage the retail participation in securities market as well as to enhance their participation in the growth of Indian industry. Entry of more retail investors are expected to further deepen the securities markets as they bring in long-term stable funds, which can counteract the volatility created by the liquidity providers of the market. The Scheme, thus, also promotes the goal of financial stability and is in furtherance to financial inclusion. Since Exchange Traded Funds and Mutual Funds have also been brought under the Scheme, the Scheme is expected to provide encouragement and re-assurance to the first time investors.

Finance Minister P Chidambaram had approved the RGESS on September 21, 2012.

    • Implementation delayed due to the deliberations on inclusion of Mutual Funds (MF) in it. Thus, further consultations with the RBI, SEBI and the law ministry on the coverage of RGESS.
    • It might be so that only MFs fitting in specific conditions would be allowed.
    • Tax benefits for investing up to Rs 50,000 in the capital markets for first-time retail investors with an annual income of Rs 10 lakh.
    • The scheme initially announced in Budget 2012 had allowed tax benefits for investments in stocks. Later, Exchange Traded Funds (ETFs) and MFs were included under its ambit.
    • Open to retail investors who have opened demat accounts but have not made any transactions in equity or derivatives till the notification of the scheme.
    • All those opening fresh accounts would also be eligible to participate in RGESS.
    • Investments can be made in various installments during a year,
    • Total lock-in period: 3 years, including an initial lock-in of one year in the stock/ETF/MF in which the money has been invested.
    • Stocks listed under BSE 100 or CNX 100 or those of PSUs which are Navratnas, Maharatnas and Miniratnas would be eligible.
    • Investment in follow-on offers of these companies would also be eligible for tax deduction.

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