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The Rajiv Gandhi Equity Savings Scheme (RGESS) was announced by the Union Budget in 2012-13 and further expanded in 2013-14. It is a tax saving scheme. It is designed exclusively for new investors with little or no experience in the securities market and who have their gross income per year below a certain amount. The income ceiling when the scheme was introduced was placed at INR 10 lakh in 2012-13. This was raised to INR 12 lakh in 2013-14. Under Section 80CCG of the Income Tax Act, investors qualify for a 50 percent deduction of the amount that is invested during the course of the year, with up to a maximum of INR 50,000 investment per financial year from their taxable income, for three continuous assessment years.
a. Under the Income Tax Act, 1961, Section 80CCG, there was introduced a tax benefit of “Deductions with respect to investment under an equity savings scheme”. This benefits the “new retail investors” with investments up to INR 50,000 in “Eligible Securities”. These investors must have a gross total income of less than or equal to INR 12 lakh.
b. Under Section 80CCG, investors are allowed a 50 percent deduction of the invested amount from the taxable income for that year. This benefit is in addition to the deduction that is available under Section 80C.
The aim of the scheme is to expand the base of retail investors in the securities markets of India and in turn bring about financial inclusion and financial stability. It encourages the improvement of the domestic capital markets by encouraging the flow of savings giving rise to a culture of equity investments in the country.
The tax deduction under this scheme is for new retail investors who fulfill the following the criteria:
a. Retail investors who are Residents of India
b. The investor has no history of trading in the derivatives market and equity market
c. The investor must follow compliance with the scheme
d. Must have a gross total income of less than or equal to INR 10 lakh for the financial year
e. The investments can only be made in companies that belong to BSE-100 or CNX-100 and their “follow-on public offers”
f. Investments have to be made only in IPOs of PSU with 51 percent or more government holding
g. Investments can be made only in Mutual Fund or Exchange Traded Fund Schemes that invest in RGESS eligible securities and their “New Fund Offers” NFO
h. Investments can be made only in PSUs that are designated as Maharatna, Navratna or Miniratna and their “Follow-on Public Offers”
The good news for investors is that there is no minimum eligible investment amount.
Investors can make investments in RGESS through their DEMAT account. The eligible securities that are bought through a DEMAT account are automatically locked-in during the first year. The investor is not allowed to sell or hypothecate or pledge any eligible security during this lock-in period. After the fixed lock-in period is complete, the investor can trade these securities, but under certain conditions.
In the first year, an investor is allowed to invest as many times as they like. The investments that are made in the following years do not qualify for tax exemptions.
a. An investor can get tax benefits on a maximum of INR 50,000 eligible investment, which is eligible only for the first year
b. Deduction of Tax will happen for 50 percent of the invested amount and a maximum of INR 25,000.
As an investor, you may lose your tax benefits if you withdraw the investment and it falls below the threshold of the amount for which you sought tax exemption for the locked-in period. You may also lose this benefit if you fail to comply with or fail to fulfill any of the provisions of the scheme.
Like any other investment that is made in the capital markets, this scheme too is subject to market risk. The risk, unsystematic risk that is, can be minimized substantially by expanding the investment base.
As mentioned, this investment scheme is subject to market risk and it is important for you to understand what exactly those risks are and to what extent it can impact you. Seek sound financial advice prior to investing. For more details on investments in the capital markets, visit ClearTax.