This is a new tax-saving investment scheme introduced by our finance minister and is now approved for roll out. RGESS is a tax saving scheme meant to invest retail investor’s money into the stock markets that will allow tax breaks. This scheme is similar to ELSS .
Let us take a quick insight at its features, whether you should go for it and if yes, then how to invest in Rajiv Gandhi Equity Savings Scheme.
Salient Features of Rajiv Gandhi Equity Savings Scheme (RGESS)
Investors who earn less than Rs 10 lakh as taxable annual income are eligible to invest in this scheme. The maximum amount that can be invested is Rs 50,000. Tax deduction is allowed to the extent of 50% of the amount you invest in the Rajiv Gandhi Equity Savings Scheme. A new Section 80CCG has been introduced for this purpose.
The Rajiv Gandhi Equity Savings Scheme will include mutual funds and exchange traded funds (ETFs). Stocks which are listed on the BSE 100 or CNX 100 are also eligible.
The investments do not have to be in one go, it can be done under installments. That is a welcome move for small investors who want to invest in small quantities. However, there is a lock in period of one year post which the investors will be able to trade (buy/sell) in the securities with some caveats. You can however sell after 3 years without the caveats.
So, should you invest in RGESS ?
It is important to note that RGESS is open to new retail investors only. So if you have been investing in equity earlier, you don’t stand a chance.
The intent of conjuring us a new tax saving investment vehicle was to expedite or encourage retail participation in equity markets. However, what is perplexing is that this is only for first time investors. This means that you should not have invested in stocks and mutual funds ever. An investor will be identified by his or her PAN number so you cannot beat the system by opening a new DEMAT account to leverage the tax benefit so offered. That will be illegal.
Also, there are many investors who do not have a DEMAT account but have invested in mutual funds. Can they invest in RGESS ? I don’t know yet.
Another thing that comes to mind is how many people will be first time investors? A very small percentage of them I am sure. Records suggest that around 6% of the 3 crore taxpayers fall in the 20% tax bracket (less than Rs 10 lakh category).
But even for a new investor, does this make sense ?
If you are earning less than 10 lakhs per annum, you fall in the 20% tax bracket. So if you invest Rs 50,000, you will get a deduction of Rs 25,000 which translates to Rs 5000 of benefit. That is peanuts for a person who is earning Rs 10 lakhs. Are you interested in putting so much effort for saving Rs 5,000 ?
And that isn’t just it. What is amazing is the absolute mess with the lock in period the Rajiv Gandhi Equity Savings Scheme has. The complication will only turn you off if you try to understand how the scheme works. After one year of holding the shares, you can sell them but the amount of money you invested and which was used for claims for tax deductions will need to be re-invested back in the scheme.
Please stay away from this kind of high-risk products which offers very little chance of growth. if you are looking for tax-planning, please do call us at 0-9962439282 for tax-planning.