The Rajiv Gandhi Equity Savings Scheme (RGESS) is a new baby on the tax saving front. RGESS was introduced in the last year’s budget for those who earn Rs.10 lakhs or less and are first time investors in the equity markets.
Features of RGESS:
- RGESS provides first time investors a deduction of 50% of investment into the scheme subject to a ceiling of Rs.50,000/- (maximum deduction hence cannot exceed Rs.25,000/-).
- To avail the benefit of tax deduction, the investor’s annual income should not exceed Rs.10 lakhs.
- The investor should be a first time investor in the equity markets. Surprisingly, the rules says, the investor can own shares but not in the DEMAT form on or before the 23rd of November 2012.
- Investor can invest only in stocks listed under BSE100/CNX100, PSUs and ETFs/Mutual Funds which have RGESS eligible securities.
- The lock in period is 3 years.
- The tax benefit can be claimed only once (1st time only)
New features in the latest budget:
- Effective 1st April 2013, investors with a gross total income of upto Rs.12 lakhs can invest in RGESS.
- Investors can invest Rs 50,000 for three years, effectively availing of a tax deduction of Rs 75,000 from their taxable income at the end of three years.
Should you invest?
To begin with, the tax benefit is not significant. On a investment of Rs.50,000 for a year, you get a deduction of Rs.25,000 enabling you to claim tax benefit of Rs.5150, if you come under the top income tax bracket. However, equity, as an asset class is a must for any investor since it is the only proven asset class which has the capacity to beat inflation on a consistent basis. RGESS is the opening that is given by the government and this investment opportunity must be tapped. For a first time investor, equities are best invested under the guidance of a expert and hence, I would advise the mutual fund route for RGESS investment.
RGESS has a lock in period of 3 years but an investor can switch from one RGESS fund to another RGESS fund after one year. However, I believe that equities should be treated as long term investments and hence I would advise you to treat RGESS like ELSS and leave alone your investment for 3 years. There is no need to churn your funds; take the benefit of compounding returns.
Investors could invest either in lump sum or by installments.
Caveat: Since most salaried class people would have already had their tax deduction done with their employers, these investors would have to ask for tax refut under Sec 80CCG when they file their returns with the Income Tax. Better check with your employers.
Also, please note, you can invest in RGESS scheme even if you do not meet the eligibility criteria. Yes, RGESS is actually open to all investors. But, the non-eligible investors will not get any tax benefit. Further, their money will be locked in for 3 years.
I believe in the saying ‘Something is better than Nothing’ and if you are eligible for RGESS, go for it!