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Equities, despite their inherent risks, make for a compelling investment choice, given the potential of superlative returns. And if they can help in saving taxes, it makes the deal that much sweeter. Apart from Equity Linked Savings Schemes (ELSS), a new instrument was launched in late 2012 to attract retail investors toward equity investments that also gives the option to save on taxes. It’s called Rajiv Gandhi Equity Savings Scheme (RGESS).
The scheme, announced in the Budget for financial year 2012-13, is meant for first-time investors whose gross total annual income is less than or equal to Rs 12 lakh. Apart from this, the investor has to be a resident individual who has never traded in equity or in the derivatives segment, has never opened a demat account or if he/she has, then has not transacted in the equity or the derivatives segments.
To qualify for tax rebates under RGESS, the investor will have to submit a declaration, in Form ‘A’, to the depository participant (DP) at the time of opening of the account or designating his/her existing demat account for claiming benefits under the scheme. It is important to note that all the RGESS eligible securities, which are purchased via such an account, will be automatically subject to lock-in of up to a value of Rs 50,000, unless the investor specifies otherwise through the Form ‘B’. So if you do not intend to make a purchase under this scheme, fill this form and give to your broker.
For availing tax benefits under RGESS, a new Section 80CCG was introduced under the Income Tax Act, 1961, which provides for 50% deduction the invested amount, up to a maximum investment of Rs 50,000. For instance, out of a total investment of Rs 50,000, the amount eligible for tax deduction will be Rs 25,000 from your taxable income. This deduction is over and above Rs 1 lakh limit under Section 80C and it is not necessary to exhaust this limit in order to avail benefits under 80CCG. A new retail investor certificate will be issued to the investor by the depositary participant after verification of credentials.
The following are eligible securities for this scheme:
ä The top 100 stocks at NSE and BSE; that is those constituting either the CNX 100 or the BSE 100
äStocks of public sector enterprises which are categorized as Maharatna, Navaratna and Miniratna
ä Exchange traded funds (ETFs) or mutual fund (MF) schemes (existing ones or new fund offers) with RGESS eligible securities as underlying, provided they are listed and traded on a stock exchange and settled through a depository mechanism
äInitial public offers (IPOs) of PSUs, which are scheduled to get listed in the relevant financial year and where the government holding is at least 51% and whose annual turnover is not less than Rs 4,000 crore for the preceding three years
There is a holding period of three years under RGESS which includes ‘fixed lock-in’ of one year and ‘flexible lockin’ of two years. Fixed lock-in period begins from the date of credit of first set of eligible securities in a financial year in the designated demat account and ends one year from the date of credit of the last set of eligible securities in the same financial year. Investors cannot sell, hypothecate or pledge securities during this period.
During the two-year ‘flexible lock-in’ period, you can trade in the eligible securities and still claim tax benefit given that the RGESS demat account is compliant for a minimum of 270 days during each of the two years of the flexible lock-in period. If you want to sell your RGESS investment within three years, you can do it only after the fixed lock-in period, subject to certain conditions.
As diligent investors, you should discern between what floats your investment boat. As with all other investment avenues, RGESS investments are exposed to risks of loss and there are no assured returns. However, if you want to dip your toes in the ocean of equity investing, this vehicle can be a good starting point.
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