Rajiv Gandhi Equity Saving Scheme

The Union Budget 2013-14 has proposed to liberalise the Rajiv Gandhi Equity Savings Scheme (RGESS) to enable first time investors to park funds in Mutual Funds (MFs) and listed shares and extended tax benefits to three successive years. Also, the limit for investors wanting to invest in RGESS has been raised to Rs 12 lakh from Rs 10 lakh earlier.

The RGESS, which was originally announced in the Budget for 2012-13, seeks to provide tax benefits to first time investors in stock markets. The basic idea of the RGESS scheme is to increase investor participation in equities.

Salient features of the scheme are as follows:

• The maximum investment permissible under RGESS is Rs 50,000 and investors get a 50 per cent deduction of the amount invested from the taxable income for the year.
• Deduction under the scheme has now been expanded to cover investments in listed units of equity oriented funds.
• The scheme is open to new retail investors identified on the basis of their permanent account numbers (PAN).
• The tax deduction allowed will be over and above the Rs 1 lakh limit permitted allowed under Section 80 C of the Income Tax Act.
• In addition to the 50 per cent tax deduction for investments, dividend income is also tax free.
• Stocks listed under BSE 100 or CNX 100, or stocks of public-sector undertakings (PSUs) that are Navratnas, Maharatnas, and Miniratnas will be eligible under the scheme. Follow-on public offers (FPOs) of these companies will also be eligible.
• IPOs of PSUs, which are scheduled to get listed in the relevant financial year and whose annual turnover is not less than Rs 4,000 crore for each of the immediate past three years, will also be eligible.
• Exchange-traded funds (ETFs) and MFs that have RGESS-eligible securities as their underlying and are listed and traded in the stock exchanges and settled through a depository mechanism have also been brought under the RGESS to provide the advantage of diversification and consequent risk minimization.
• To benefit the small investors, investments are allowed in instalments in the year in which tax claims are made.
• The total lock-in period for investments will be three years including an initial blanket lock-in of one year.
• After the first year, investors will be allowed to trade in the securities. Investors are free to trade / churn their portfolios for around 90 days in each of the years following the first year of investment.
• 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 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. However, the investor is allowed to take benefit of the appreciation of his RGESS portfolio, provided its value remains above the investment for which he has claimed income tax benefit.
• In case the investor fails to meet the conditions stipulated, the tax benefit will be withdrawn. 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 Act.