Rajiv Gandhi Equity Savings Scheme (RGESS)
Rajiv Gandhi Equity Saving Scheme (RGESS), is a tax saving scheme announced in the Union Budget 2012-13 (para 35), designed exclusively for the first time retail / individual investors in securities market, who invest up to Rs. 50,000 and whose annual taxable income is below Rs. 10 lakh (around US$ 18500). The investor would get a 50% deduction of the amount invested from the taxable income for that year.
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 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 notification is expected in two weeks’ time.
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. Investment in listed ETFs and MFs are perceived as investment into a combination of listed equity for the purposes of 80 CCG.
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 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 last 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 Scheme has a PAN based monitoring mechanism. The day to day valuation of securities in the RGESS portfolio, certification of new investors etc will be 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:
|Investments are in mutual funds which invests mostly in equity (80-100% in equity)||Investments are to be made directly in listed equity|
|100% deduction (upto Rs. 1,00,000) is allowed under ELSS||Only 50% deduction (upto max. of Rs. 25,000) is allowed under RGESS.|
|The ELSS benefit is coming under Section 80-C of the IT Act which has an aggregate limit of Rs. 1,00,000 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].