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Rajiv Gandhi Equity Savings Scheme (RGESS)

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Rajiv Gandhi Equity Saving Scheme (RGESS), is a tax saving scheme announced in the Union Budget 2012-13 (para 35) and expanded in the subsequent budget 2013-14 (vide para 61 & 144), designed exclusively for the first time retail / individual investors in securities market, who invest up to Rs. 50,000 in a year and whose annual income is below Rs. 12 lakh (around US$ 22333). The investor would get a 50% deduction of the amount invested from the taxable income for that year. This benefit is available for the first three consecutive years for the new investor. Thus the investor can invest a total of Rs. 1.5 lakh in equity / RGESS eligible mutual fund Schemes and can claim a deduction of Rs. 75000 spread over three years.

The Scheme is named after the former Prime Minister of India Shri. Rajiv Gandhi. The broad provisions of the Scheme and the income tax benefits under it have already been incorporated as a new Section -80CCG- of the Income Tax (IT) Act, 1961, as amended by the Finance Act, 2012 . This means that the allowed tax deduction will be over and above the Rs. 1.5 Lakh limit permitted under Section 80 C of the IT Act, making it thus attractive for the middle class investors.

Honourable Finance Minister, Mr. Chidambaram announced the launch of the Scheme on 21 September 2012. The RGESS Scheme was notified on 23 November 2012 and SEBI issued the final operational guidelines on 6 December 2012. The first eight investors were felicitated by the Honourable FM on 9 February 2013 and on the same day the [1] on RGESS was released and the logo for RGESS was launched. Honourable FM also launched a few new RGESS dedicated mutual fund / Exchange Traded Funds (ETF) Schemes on that day. The vital documents related to the Scheme are available on the website of Ministry of Finance.

Vide Finance Bill 2017 it is proposed that no deduction under RGESS shall be allowed in respect of any assessment year commencing on or after the 1st day of April, 2018.

Objective of the Scheme

The Scheme intends to encourage the flow of savings and improve the depth of domestic capital markets, as stated in the Budget Speech by the then Finance Minister Shri Pranab Mukherjee. However, it also aims to promote an ‘equity culture’ in India. This is also expected to widen the retail investor base in the Indian securities markets and further the goal of financial stability and financial inclusion.

Investment Options under the Scheme

Under the Scheme, those 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 cr for each of the immediate past three years, would also be eligible.

One of the main objectives of the scheme is to promote an ‘equity culture’ in India. Accordingly, in the Union Budget 2012-13, it was specified that the scheme would be available only for investing directly in equities. Further, subsequent to the budget announcement, Income Tax Act, 1962 has been amended vide the Finance Act, 2012[i] to include a new section 80CCG with effect from 1.4.2012. The investment referred to at 3 (iii) of 80CCG is about investment to be made in listed equity shares, thereby limiting the ambit to direct equity investment. Notwithstanding the above, within the limited scope of the Scheme, it is provisioned in the interest of providing diversification and consequent minimization of losses to the investor that investments in Exchange Traded Funds (ETFs) and Mutual Funds (MFs) that have RGESS eligible securities as their underlying, and listed and traded in the stock exchanges and settled through a depository mechanism will also be eligible under RGESS. This is also beneficial for investors, as it provides the demat / exchange framework for equity. Investment in listed ETFs and MFs are perceived as investment into a combination of listed equity for the purposes of 80 CCG. Around 10 new RGESS eligible Schemes have been announced by various fund houses as at the end of February 2013, apart from the existing 11 Schemes which are RGESS compliant.

Highlights of the Design of the Scheme

Even though the scheme was designed for new retail individual investors, its scope has been expanded to those who have already opened a demat account, provided they have not transacted in equity / derivatives till the notification of the Scheme.

The choice of investments have been restricted to the stocks included in BSE 100 or CNX 100 and to selected PSU stocks as they, generally, have shown relatively lower volatility, higher liquidity, and there is adequate reporting and analysis available in the market. This has been done with the intention of protecting the interest of the new investors.

Generally tax savings schemes are focused more on the quantum of investments. Here, perhaps the emphasis is more on the entry of the investor. The Scheme, as such, is designed for only the first time new investors. The benefits can be claimed for the first 3 years on his investments.

Generally the tax savings schemes are subject to lock-in conditions. In India, for instance, the Equity linked Savings Scheme available for mutual funds subscriptions, are subject to 3 year lock-in. The total lock-in period for investments under RGESS would also be three years including an initial blanket lock-in period of one year, commencing from the date of purchase of securities under RGESS. However, 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 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. 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. Thus 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. 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 so that the 270 day criteria is met.

In contrast to the general provision that tax saving investments are to be made in one go, in RGESS, investments can be brought in installments in the year in which tax claims are made.

The divident income is also tax free.

One can meet emergencies through pledging or even by selling off some stocks after the fixed lock-in period.

For investments upto Rs.50,000 in the sole RGESS demat account, if the investor opts for Basic Service Demat Account, annual maintenance charges for the demat account is zero and for investments upto Rs. 2 lakh, it is stipulated at Rs 100.

The Scheme has a PAN based monitoring mechanism implemented through depositories.

The day to day valuation of securities in the RGESS portfolio, certification of new investors etc are done by the depositories / depository participants, thus making it easier for the small investors while ensuring electronic monitoring of the Scheme by the Tax Authorities.

In case the investor fails to meet the conditions stipulated, the tax benefit will be withdrawn.

Differences with ELSS

Equity Linked Savings Scheme (ELSS) and RGESS are entirely different schemes: They pertain to different asset classes with ELSS offering passive investment avenues. ELSS is meant for indirect participation in the stock market, whereas RGESS aims at encouraging direct participation in the stock market. The operational differences are given below:

Operational differences
Investments are in mutual funds which invests mostly in equity (80-100% in equity) Investments are to be made directly in selected equity or into mutual funds, Exchange Traded Funds, and select IPOs of PSUs
100% deduction (upto Rs. 1,50,000) is allowed under ELSS Only 50% deduction (upto max. of Rs. 25,000 per year) is allowed under RGESS. However, this benefit can be claimed for the first three years of investments
The ELSS benefit is coming under Section 80-C of the IT Act which has an aggregate limit of Rs. 1,50,000 for all such eligible instruments like LIC policy, PPF etc Separate investment limit exclusively for RGESS over and above the Section 80 C Limit
Lock-in period of 3 years Lock-in of 3-years. However, trading allowed after one-year subject to conditions.
Since investments are in mutual funds, it is perceived to be less risky Since investments are in equity / risk / ownership capital, risk is perceived to be higher

Similar International Experiences

Fiscal incentives have been empirically established to encourage greater retail participation. International experience in countries where such schemes were implemented supports this notion. For example, Loi-Monory scheme introduced in France in 1978 was successful in significantly improving retail participation; the proportion of French households investing in listed securities rose from 7% to 17% during 1977-1982. Similar schemes were launched by other European countries, most notably Belgium and West Germany. Such a scheme in Sweden turned one sixth of the population into investors. All these exemplify the positive manner in which people of relatively modest means will respond to fairer tax treatment [ii].

Closely following on such experiments, Japan, in January 2014, has launched Nippon (Japan) Individual Savings Account, which is a tax exemption programme for small investments and is intended for any residents in Japan aged 20 or more. This programme is modeled after the ISA (Individual Savings Account) in the UK. With the NISA account, all individuals are eligible for a tax exemption on income from capital gains, dividends and coupons from annual investments of up to one million yen made over a five year period as long as they reside in Japan. Under the current legislation, the tax exemption period is up to 10 years for a cumulative investment of 5 million yen when starting in 2014 though speculations exist that it would be made permanent.

For more details please see the websites of Ministry of Finance, SEBI, exchanges and depositories : CDSL BSE NSE NSDL

i) Finance Act is an Act proposed in each year to give effect to the financial proposals of the Central Government in that financial year. It is through the Finance Act that amendments are made to the Income Tax Act 1961 etc. At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill is also presented in fulfillment of the requirement of Article 110 (1)(a) of the Constitution, detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. Finance Bill, once it is passed by the Parliament and assented to by the President, becomes the Finance Act for that year.

ii) “Shares for All – steps towards a share-owning society” by Sir Nicholas Goodison, Templeton lecture 1986, Center for Policy Studies.

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