Equities, despite their inherent risks, make for a compelling investment choice, given the potential of superlative returns. And if they can help in saving tax, it makes the deal that much sweeter.
Apart from Equity Linked Savings Schemes, or ELSS, a new instrument was launched late 2012 to attract retail investors to equity investments. Announced in the Union Budget 2012-13, the Rajiv Gandhi Equity Savings Scheme, or RGESS, is also a tax-saving scheme.
1) Who qualifies?
- Resident individual
- First-time investor
- Gross total annual income less than or equal to Rs 12 lakh
2) How is a first-time investor defined?
- An individual who opened a demat account as a ‘first holder’ after November 23, 2012.
- If he opened the account prior to this date but never bought any shares in or traded in the Futures and Options (F&O) segment, he qualifies to be eligible under this scheme.
- If his name appeared second in a joint demat account before this date, he still qualifies to open one under this scheme as a 'first holder'.
- If an investor opened a demat account to invest in a Gold ETF but the demat account has no equity security, the individual will be considered a new retail investor.
3) Which are the eligible securities?
- Stocks of public sector enterprises which are categorized as Maharatna, Navaratna and Miniratna. The list of of companies that fall into various categories can be found listed in the Department of Public Enterprises.
- Stocks from the universe that comprise the CNX 100 or the BSE 100 indices.
- Exchange Traded Funds, or ETFs, and mutual funds with RGESS underlying eligible securities, provided they are listed and traded on a stock exchange and settled through a depository mechanism.
- Initial Public Offers, or IPOs of public sector companies which are scheduled to get listed in the relevant financial year, where the government holding is at least 51%, and whose annual turnover is not less than Rs 4,000 crore for the past 3 years.
4) Is there a lock-in period?
There is a holding period of 3 years under RGESS which includes the ‘fixed lock-in’ of 1 year and the ‘flexible lock-in’ of 2 years.
The fixed lock-in period begins from the date of credit of the first set of eligible securities in a financial year in the designated demat account and ends 1 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 2-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 2 years of the flexible lock-in period.
If you want to sell your RGESS investment within 3 years, you can do it only after the fixed lock-in period, subject to certain conditions.
5) Under what tax bracket does it fall?
For the tax benefit under RGESS, a new Section 80CCG has been introduced under the Income Tax Act, 1961. This deduction is over and above the Rs 1 lakh limit under Section 80C and it is not necessary to exhaust this limit in order to avail benefits under 80CCG.
6) How does one invest?
The new investor will have to submit a declaration, in Form ‘A’, to the Depository Participant, or DP, at the time of opening the account or designating his existing demat account for claiming benefits under RGESS. A new retail investor certificate will be issued to by the DP after verification of credentials.
7) Should you opt for it?
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 start.
Also, the maximum savings would be Rs 5,000 (20% tax bracket) and Rs 2,500 (10% tax bracket). So if you invest a small amount, the tax saving would be negligible.
