Rajiv Gandhi Equity Savings Scheme or RGESS was a mutual fund along with tax advantage that was offered by the Government of India to encourage flow of savings of small retail investors in the domestic capital market. It was announced in the Union Budget of 2012-13 and extended in 2013-2014. However, the Union Budget of India of 2017 proposed that RGESS be completely phased out by 2018 with effect from April 1, 2017 due to less number of assessees.
It was a tax saving scheme as well as an equity scheme that aims to include small investors with gross income per year below a certain amount. Its objective was to promote the ‘equity culture’ in India by expanding investor base in Indian securities market and also further the goals of financial inclusion and stability. It was designed for first-time retail investors lacking experience in the securities market. New retail investors are those who would make their first time investment of any kind under Rajiv Gandhi Equity Savings Scheme (RGESS) account on the first day of initial year*. Investors who qualified for first-timers are those who:
a. Didn’t have a demat account
b. Had an account but never made any transaction neither traded in any derivative segment of market and equity before designating an account under Rajiv Gandhi Equity Savings Scheme (RGESS)
a) Under the Income Tax Act, 1961, Section 80CCG, there was introduced a tax benefit of “Deductions with respect to investment under an equity savings scheme”. This benefits the “new retail investors” with investments up to INR 50,000 in “Eligible Securities”. These investors must have a gross total income of less than or equal to INR 12 lakh.
b) Under Section 80CCG, investors are allowed a 50 percent deduction of the invested amount from the taxable income for that year. This benefit is in addition to the deduction that is available under Section 80C.
The aim of the scheme is to expand the base of retail investors in the securities markets of India and in turn bring about financial inclusion and financial stability. It encourages the improvement of the domestic capital markets by encouraging the flow of savings giving rise to a culture of equity investments in the country.
Also Read: Post Office Monthly Income Scheme ( POMIS )
The tax deduction under this scheme is for new retail investors who fulfill the following the criteria:
a. Retail investors who are Residents of India
b. The investor has no history of trading in the derivatives market and equity market
c. The investor must follow compliance with the scheme
d. Must have a gross total income of less than or equal to INR 10 lakh for the financial year
e. The investments can only be made in companies that belong to BSE-100 or CNX-100 and their “follow-on public offers”
f. Investments have to be made only in IPOs of PSU with 51 percent or more government holding
g. Investments can be made only in Mutual Fund or Exchange Traded Fund Schemes that invest in Rajiv Gandhi Equity Savings Scheme (RGESS) eligible securities and their “New Fund Offers” NFO
h. Investments can be made only in PSUs that are designated as Maharatna, Navratna or Miniratna and their “Follow-on Public Offers”
The lock-in period was 3 years, in which the first year was a ‘Fixed Lock-in’ while the next 2 years were ‘Flexible Lock-in’ which commenced automatically after the ‘Fixed Lock-in’ of 1 year. At the end of ‘Flexible Lock-in’ the designated Rajiv Gandhi Equity Savings Scheme (RGESS) account was automatically converted into an ordinary demat account. In ‘Fixed Lock-in’, one could not sell the eligible securities while from the second year it could be done against certain conditions.
New retail investors could invest in the eligible securities maximum up to Rs. 50,000 and could avail 50% tax deduction benefits up to Rs. 25,000 in a single financial year up to 3 consecutive years. Under RGESS, investors can avail tax benefits as provisioned in the new section of 80CCG in the Income Tax act. There is no minimum amount for investment. Tax benefits can be availed for three years counting from the financial year in which the investment is made for the first time under the scheme. One may lose the tax benefits if he withdraws the money or fails to comply with any of the eligibility criteria.
Also, the money invested in securities under RGESS were equities under BSE 100 or CNX 100, shares of PSUs categorised by government under Maharatna, Navratna and Miniratna, certain Mutual Funds, Exchange Traded Funds (ETFs) and Indian Public Offerings (IPOs). It mitigates risks. The Ministry of Finance safeguarded the interests of the first-time investors through restricting the investments to select large cap stocks, lock-in period with enough flexibility to take the benefits of the positive market movements etc.
Like any equity scheme, there are market risks involved. Although, one could benefit from diversification and consequent risk minimization the scheme did not guarantee assured returns in capital markets. The investors in the RGESS ran the risk of losing money in the equity market, like any other investor in the securities market.
Also, many experts had suggested that it would be more beneficial to invest in Equity Linked Savings Scheme (ELSS) than RGESS.
While ELSS invests strictly in mutual funds, RGESS invested in units of mutual funds and ETFs or listed equities. ELSS draws more advantage over RGESS as 100% deduction can be claimed. In an ELSS, any investor can claim the tax benefits who might have invested in the same or other schemes before. While in RGESS, only new retail investors with no trading history could claim the benefits. Also, ELSS investors can avail tax benefits every year in comparison to only 3 years of RGESS and the former is less risky.