Rajiv Gandhi Equity Savings Scheme, 2012 (RGESS)

To encourage the flow of savings of small investors into the domestic capital market, the Government of India announced a scheme named Rajiv Gandhi Equity Savings Scheme, 2012 (RGESS) in the last budget.Also a  new section 80 CCG under the Income Tax Act, 1961 on ‘Deduction in respect of investment under an equity savings scheme’ was introduced to give tax benefits to “New Retail Investors”who invest up to `50,000 in ‘Eligible Securities’ and have a gross total annual income less than or equal to Rs.10 Lakhs.

A ‘New Retail Investor’ for the purposes of this scheme is defined as  is any Resident Individual

• who has not opened a demat account and has not made any transactions in the equity or derivative segment as on the date of notification of the scheme i.e., November 23, 2012. OR
• who has opened a demat account as a first holder, but has not transacted in the  equity or derivate segment till November 23, 2012.OR
• who has a demat account as a joint holder.  

The eligible securities are:-
(i) Equity shares of companies which are included in either ‘CNX-100’ of NSE or BSE-100 or equities of public sector enterprises which are categorized as Maharatna, Navratna or Miniratna by the Central Government.
(ii) Exchange Traded Funds and Mutual Fund schemes with RGESS eligible securities as underlying securities.
(iii) Follow on public offer of BSE-100 or CNX-100 and public sector enterprises which are categorized as Maharatna, Navratna or Miniratna.
(iv) New fund offers of eligible mutual fund schemes.
(v) IPOs of eligible public sector undertakings.

You can find a list of eligible securities here and here.

A ‘New Retail Investor’ can invest any amount in eligible securities.However only investment upto Rs.50,000 will be considered for availing  tax benefits under RGESS. Under RGESS,the‘New Retail Investor’ is eligible for a tax deduction on 50% of the amount invested. So if a person invests Rs.50,000 under RGESS, the amount eligible for tax deduction from his/her  income will be Rs.25,000. Alternatively, if he/she invests Rs.40,000 under RGESS, the amount eligible for tax deduction will be Rs.20,000.This tax deduction is over and above limit of Rs.1,00,000 currently available under Section 80C of Income Tax Act. Also a person cannot split his/her investment under RGESS over two or more financial years and claim deduction.The investment during the first financial year of investment can only be claimed as investment under RGESS to claim deduction.

The mode of holding of eligible securities under RGESS is compulsorily in demat form.So its compulsory to get/have a demat account.You can open a demat account with any Depository Participant (DP) of CDSL or NDSL. To do so, you will be required to fulfill the KYC requirements i.e., submit proof of PAN/identity,address, etc. as prescribed by SEBI to the DP where you wish to open a demat account along with declaration in prescribed format for availing RGESS benefits.In case you already have a demat account and are otherwise eligible for RGESS benefit,you can designate your existing demat account as a RGESS account by approaching your DP.Be sure you  submit a declaration in ‘Form A’ duly signed by the account holder(s) for designating the demat account for RGESS. You can get ‘Form A’ from your DP, where you have designated your demat account for RGESS. By doing so you ensure that your investments in this  demat account become eligible for the tax benefits under RGESS. Note well that you can have only one demat account across depositories for RGESS. But you can  hold other securities (viz., equity shares, debentures, bonds, mutual fund units, etc.)other than eligible securities in your demat account designated for RGESS.

To invest in eligible securities of RGESS,after you have successfully opened a RGESS designated demat account  you can approach any SEBI registered stock broker for investing in any eligible securities from the secondary market.In case you are investing in mutual funds, you need to simply provide your demat account details like Demat Account Number and DP ID for receiving credit of the mutual fund units into the demat account.For investing in any FPO/NFO of the eligible securities, you can subscribe for the same and provide your demat account number for receiving credit of the eligible securities into the demat account.

Also do remember that the basis for valuation of the RGESS eligible securities while making the initial  investment is the cost of acquisition of eligible securities without including brokerage, Securities Transaction Tax, stamp duty, service tax etc.

Like all tax saving products,the RGESS too has lock-in conditions.Once the investments are made in the eligible securities, they will be locked-in from the date of investment till one year from the date of last purchase of RGESS eligible securities. This period is called the ‘Fixed Lock-in’ period during which you cannot pledge or sell these securities.During the subsequent two years called the ‘Flexible Lock-in’ period, you can sell and buy RGESS securities. However, you will have to maintain the value of RGESS investment for a cumulative period of 270 days during each of these two years.For example:Let us say, you have purchased eligible securities worth Rs. 50,000 in an RGESS designated demat account on December 31, 2012. The eligible securities will be in ‘Fixed lock-in’ till December 30, 2013 and for ‘Flexible lock-in’ till December 30, 2015.During ‘Flexible lock-in’ period, you can sell your eligible securities, subject to certain conditions which are as follows:If you sell eligible securities during the ‘Flexible lock-in’ period, then the investment under RGESS must be at least equivalent to the investment claimed as eligible for deduction or equal to the value of the investment portfolio before such sale, whichever is less. This can be by way of increase in market value. This condition must be met for a cumulative period of 270 days in a year for two years.

If there is any change in the RGESS investment due to corporate actions where investors do not have any choice (involuntary) e.g. split / demerger etc., there will not be any effect on the compliance status of the account during ‘Flexible lock- in’.If there is any change in the RGESS investment due to corporate actions where investors have the option to exercise their choice and it results in a debit of securities during the ‘Flexible lock-in’, the same will be considered as a sale transaction.

An important detail to note is that credit received in your demat account through off market transfer/ through dematerialisation not eligible for RGESS investment.

Eligible securities brought into the demat account will be automatically locked-in. However, if you do not want certain securities credited to your demat account to be considered for the RGESS, then a declaration in the prescribed format (Form B) should be submitted within one month from the date of credit to the DP.You  cannot claim tax deduction in respect of the amount invested in eligible securities which are specified in Form B.

In case y fail to comply with any condition specified for the scheme,the deduction availed under the scheme will be treated as your income and you will be liable to pay tax as per the provisions of the Income Tax Act, 1961.

At the end of the ‘Flexible lock-in’ period your demat account that was designated for RGESS will be converted into a regular or ordinary demat account.

Also if the security which was eligible under RGESS at the time of investment is no longer eligible, you RGESS investment will not be affected.It is only necessary that the security should be RGESS eligible at the time of investment. Such a security will be considered for RGESS investment, even if it becomes ineligible at a later date.

The RGESS is something you should opt for if you meet the eligibility criteria and wish to start investing in the stock market for the first time.At the very least your upfront costs to open a trading account with a broker etc will be defrayed by the tax saving.To keep upfront and recurring expenses low do insist on a Basic Service Demat Account (BSDA),at least at the beginning when you might not wish to invest much.Investing in stocks does involve a measure of capital risk.Also returns from  stocks are lumpy.Some years you will gain more,in some years you might lose your gains and maybe even a bit of your capital,but should you pick basically good stocks and stick with them for decades you will not regret it. Equities are the asset class with the highest inflation adjusted returns.So don’t be put off by the scare mongering of the ‘investment advisers’ around .I you want to be wealthy,its a good idea to invest the money,time and effort  to know more about stocks.Keep your expectations realistic.Do not chase returns.Beating the market returns every year is a fool’s dream.At first buy stocks that have steadier price performance i.e lesser highs and lows,companies that are good consistent dividend payers and make certain the company has no debt problems.Prefer consumer goods companies to cyclical commodity producers till you know more.Invest only the money you can afford to lose.Then go ahead get your feet wet and learn. Accept you know little and do not invest all your money at once or on one script. You will not regret the decision to start and learn.