Details on the Rajiv Gandhi Equity Savings Scheme

by Manshu on October 17, 2012

in Investments

The Finance Minister recently approved the operational features of the Rajiv Gandhi Equity Savings Scheme (RGESS), and I felt it was a surprisingly complicated scheme which really doesn’t offer any great benefit to investors.

Who is eligible for RGESS?

The intent of this scheme is to bring new people into equities and that means if you have ever bought any shares or traded in derivatives then you are ineligible for the tax benefits under this scheme.

They are going to look at new investors on the basis of the PAN number so you are only eligible in this scheme if there have been no prior equity or derivative transactions in the Demat account linked to your PAN number.

Your taxable income should also be less than Rs. 10 lakhs in order to be eligible for this scheme. If your taxable income is more than that then you don’t qualify for this scheme.

How do you get the tax RGESS benefit?

In order to get the tax benefit, you have to invest in one or more of the following:

  1. Stocks listed under the BSE 100 or the CNX 100
  2. PSUs that are categorized as Maharatnas, Navratnas or Miniratnas
  3. FPO of PSUs mentioned above.
  4. IPO of PSUs whose turnover is not less than Rs. 4,000 crores in the last three financial years.
  5. ETFs and mutual funds who have RGESS securities as their underlying.

The maximum that you can invest for the purpose of this tax benefit is Rs. 50,000 and you can do so in installments in the financial year.

What is the tax benefit under RGESS?

You get to deduct half of the money invested under RGESS from your taxable income and thereby reduce your tax liability. So, if you invested Rs. 50,000 in eligible securities under this scheme then you can deduct half of that – Rs. 25,000 from your taxable income, and if your tax rate is 20% then you save Rs. 5,000 (20% of Rs. 25,000) from your taxes.

Is there a lock in period under RGESS?

There is a three year lock in period under RGESS which is further broken out into an initial blanket lock in period of 1 years which means you can’t trade in your RGESS securities within one year of claiming the tax benefit.

After the initial one year, you can trade in your securities provided you maintain a certain investment level. This investment level is dependent on the value of your shares at the time of the sale.

So, say you invested Rs. 50,000 at the beginning, and at the time of the first sale, the value of your investment is still Rs. 50,000 then you will need to show investments worth Rs. 50,000 in 270 days out of the 365 or 366 calendar days.

However, if your investment was worth only Rs. 25,000 when you initiated the sale then this is the amount you will need to maintain for the 270 days.

If your investment appreciated and is now worth Rs. 1,00,000 then you will only need to maintain investments worth Rs. 50,000 to be compliant with the scheme.

If you fail to do any of this then the tax benefit will be withdrawn however I’m not quite sure how they are going to implement this or even the initial blanket lock in period for that matter.

As you can see this is a fairly complicated scheme which won’t be useful for many people and wherever applicable will offer limited benefits. I’ll be really surprised if it does well.

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{ 18 comments… read them below or add one }

brij sharma October 18, 2012 at 9:42 pm

no words!!!
manshu u r amazing, i accidently came across your blog, and i was surprised to see the range of issues u hv covred, anyone name it and u have.
u may not believe but i have already read almost 25 articles here in last three hours. beauty of your writing is its simplicity no frills attached.
kudos to you!

Reply

Manshu October 18, 2012 at 9:52 pm

Thanks a lot! you made my day! Please subscribe using email or reader as well and there is a Facebook page for OneMint as well :-)

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rukmesh October 19, 2012 at 10:25 pm

Can you list 10 good MF that are eligible under RGESS?

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santonu October 19, 2012 at 10:43 pm

I trade in stocks but never invest in MF before. For MF i am a new investor .am I eligible for RGESSS if i propose my investment in MF

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Ashok October 20, 2012 at 7:41 am

This one is incredibly complex. The bureaucrats have ensured a few jobs for themselves administering this scheme :-). It can be called RG “Employment” savings scheme.

The simplest thing would have been to redesign the existing ELSS into an index fund, reduce the fund management charges to a bare minimum, and keep the lock-in for 3 years.

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dr anz November 7, 2012 at 3:13 pm

does anybody know the date of commencement of rgess

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Shiv Kukreja November 8, 2012 at 12:00 pm

Finance Minister approved the scheme on September 21, 2012., which is considered as the official date of commencement.

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Shiv Kukreja November 29, 2012 at 7:57 pm

CBDT has notified Rajiv Gandhi Equity Savings Scheme (RGESS) w.e.f. November 23rd.

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Manshu November 30, 2012 at 1:21 am

What exactly does that mean Shiv?

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Shiv Kukreja November 30, 2012 at 11:27 am

Companies await these notifications before they launch any such product like it happened in case of Tax-Free bonds. We carried the post on Tax-Free Bonds notification. This notification carries all the terms and features regarding RGESS.

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Manshu November 30, 2012 at 10:41 pm

Thanks!

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Vishal December 26, 2012 at 12:23 am

I am a first time investor. Which MF can I invest through to come under RGESS?
Thanks

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Manshu December 26, 2012 at 12:49 am

So far they haven’t declared the list of eligible mutual funds and are still working on it but they did say that funds that invest in BSE 100 stocks or CNX 100 stocks will be eligible for this. I don’t know right now what those mutual funds are but I will update this post or create a new one once the list comes out.

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Vishal January 15, 2013 at 10:03 pm

Just saw your post on SBI RGESS fund, thank you for sharing your knowledge :)

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ronny January 22, 2013 at 7:22 pm

hi, sorry for asking a stupid question but please do answer at the earliest – which bank do I need to go to get this, Can I go to any bank, say SBI, open a DEMAT account there and ask them for a RGESS form, fill the form and submit it – that’s it right, or am I missing something.

Thanks

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Manshu January 22, 2013 at 7:47 pm

You get this either by investing in shares or mutual funds, so going to a bank will not help you. If you have ever bought share or mutual funds earlier then that’s the way to get advantage of this scheme.

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Shiv Kukreja January 27, 2013 at 9:40 pm
Priyajit March 1, 2014 at 1:17 am

Hi Manshu
First of all,thanks a ton for such a informative article.I have an query.I have opened my Demat A/c on last october-2013 & so far invested in the following MFs via SIP
1. ICICI Pru Focussed Bluechip-Direct
2.UTI Oppourtunities-Direct
3. SBI Pharma-Direct
4.IDFC Dynamic Bond fund_Direct
5.ICICI Pru Discovery Fund
6.ICICI Balanced Adv Fund
So far I have invested 30k in the above mentioned MFs & extra Rs 8600/ in SBI Gold ETS via SEP manner.My annual income is below 10lac & also I am a first time investor.
Am I eligible to avail 50% tax exemption over my total invested amount 38.6k under 80 CCG & are my MFs belong to RGESS ??
Will be grateful to receive ur reply.

Reply

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