The Rajiv Gandhi Equity Savings Scheme was launched in 2012. Its purpose was to draw investors to the equity market for the first time. It was allowed for only those investors whose annual income was less than Rs. 12 lakhs. Contrary to the expected positive response from first-time equity investors, the RGESS scheme failed and was withdrawn by the Finance Minister Arun Jaitley during this year’s Union Budget.
Additional Reading: Investing in ELSS
RGESS: Investment Logic
The RGESS was framed to target and bring in investment to equities from such investors who didn’t have a demat account. Under Sec 80CCG of the Income Tax Act, 50% of the total investment in RGESS is allowed as a tax deduction with a cap on maximum investment up to Rs. 50,000. It means if you invest Rs. 50,000, you can claim a deduction of Rs. 25,000. So, depending on your slab rate, you can save from Rs. 2,500 (in the 10% slab) to Rs. 7,500 (in the 30% slab).
RGESS investments have a lock-in. The fixed lock-in period is one year while the flexible lock-in is two years after the fixed lock-in. Under the fixed lock-in, you can’t sell or pledge your RGESS investments.
Under the RGESS, you can invest in eligible stocks, Mutual Funds and ETFs to get tax benefits. In the equity segment, you can invest in shares listed on CNX 100, BSE 100, and stocks of PSUs.
Additional Reading: Investing in equity
Why RGESS Failed
The RGESS had several confusing aspects to its fixed and flexible lock-in period. Investors were not clear about these norms. Maintaining the two-year flexible lock-in deterred some investors from the RGESS, as the typical equity investment need only be more than 12 months old in order to qualify for tax-free capital gains.
There was a lack of awareness in the investors about the RGESS. The target audience for the scheme wasn’t adequately informed. Segregating investors who didn’t have demat accounts from those who did was also difficult. Many investors possessed demat accounts. Even if they had never traded in equity, they became ineligible for RGESS investments.
There were no special incentives for brokers while opening an RGESS demat account, so they too gave this scheme the cold shoulder. The three-year holding meant low transaction volumes, making brokers further uninterested in the scheme.
There were also reports in the media that Mutual Fund companies had paid high commissions to distributors to sell RGESS products. Due to a high distributor commission, the end returns from the products reduced, further reducing investor interest.
There are other investment options that are much easier to understand. For example, a person who has not exhausted the Section 80 (C) limit can invest in an ELSS Mutual Fund to save tax instead of in the RGESS. ELSS is much easier to understand in comparison to the RGESS and it offers better flexibility as well.
What after RGESS is discontinued?
After the 2017 Union Budget announcement, it is clear now that deductions under Section 80CCG won’t be allowed for the assessment year 2018-19. Investors who have already taken positions under the RGESS scheme shall be allowed to get the benefit of deduction till the assessment year 2019-20, provided that such investors opt to receive the deduction till that period.
The government has already allowed tax relief by introducing a tax cut from 10% to 5% for the lowest tax slab, so you need not worry about that extra deduction of Rs 25,000 that you would not get because of RGESS being discontinued.