Finally finance ministry approved the plan Rajiv Gandhi Equity Saving Scheme (RGESS). The plan features are almost same as was announced during the budget session with few clarity on issues. Let us see it’s features and benefits and is it really a innovative scheme for promoting equity investment.
1) This scheme is open to only new investors. So if you are already investor in equity then not eligible for this scheme. Identification will be done through verifying PAN number. New investor means persons who opened demat account but not traded in any equity or derivatives till the date of notification will be eligible. Also investors who are not the first account holder in joint account holding of demat account are eligible. For example, if you are second account holder with first holder as your spouse then you are eligible for this scheme.
2) Annul taxable income must be either equal to or less than Rs.10,00,000.
3) Maximum investment you can do is Rs.50,000 and you will get 50% deduction of the invested amount from the taxable income of that year.
4) Stocks eligible for investment are-BSE100 or CNX100 also public sector undertakings which are called Navratnas, Maharatnas and Miniratnas. Follow-on Public Offer also called as FPOs of the above said companies are also eligible under the scheme. IPOs of PUSs whose are listed on that relevant financial year and whose annual turnover is not less than Rs.4,000 crore for each of the immediate past 3 years, would be eligible.
5) Exchange Traded Funds (ETFs) and Mutual Funds are eligible investment under this scheme but the underlying securities must be of the above said. Hence if ETF or Mutual Fund not have these underlying securities means not eligible to avail tax benefit.
6) Investors can invest in installments too instead of investing lump sum at once.
7) Lock in period will be of 3 years.
8) After one year investors are allowed to trade in securities.
9) 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.
10) Trading is allowed for whatever is the value of security units sold by investor from this scheme portfolio, RGESS complaint securities of at least the same value are credited back into the account subsequently. However investor can take the benefit of whatever appreciation happened from his RGESS portfolio, provided its value, as on the day of previous day trading, remains above the investment for which he claimed income tax benefit. Means if your invested amount of Rs.50,000 appreciated to Rs.60,000 then you can withdraw that Rs.10,000.
11) Valuation of shares for calculation is considered as previous day’s closing price of that particular day.
12) If investor fails to meet the above conditions then they will not get the tax benefit.
13) Section 80CCG incorporated especially to avail tax benefit from this scheme.
My Review-To get one time tax benefit of Rs.5,000 (If person is above 5,00,000 and below 10,00,000 slab) will new investor will take the risk of investing in equity? Especially in Indian mindset? (I calculated if person invest Rs.50,000 which is maximum limit, then he will get the tax exemption of Rs.25,000. So tax saved will be 20% of Rs.25,000). Let us see how Indian investors react to this scheme.
Eventhough ETF and Mutual Funds allowed to invest but the restriction is in terms of underlying securities. They must have same underlying securities which direct investor will invest. In such a case lot of funds will not come under this purview.
ELSS looks good compare to this scheme (at current stage not under DTC, because as per present status ELSS have no place in DTC). Where you can get benefit upto Rs.1,00,000 full exemption for whatever you invest under section 80c. Compare to this, investing maximum Rs.50,000 and getting benefit 50% of what you invested is not a good idea. But only positive point is, instead of clubbing this investment under section 80c they created another section (sec 80CCG).
At current stage RGESS looks not attractive idea for pulling Indian investors from conservative type of investments to Equity. But let us see what new clarifications will come up from IT and SEBI in this regard.