A few years ago, the government had introduced the Rajiv Gandhi Equity Saving Scheme (RGESS) to encourage more people to invest in equity. The scheme provided tax savings on 50% of the investment up to Rs. 25,000 per annum for first-time investors in the stock market.
This means if investors put Rs 50,000 in the RGESS, their tax savings would be Rs 25,000. The scheme received a lukewarm response from investors. There were various reasons for this. The equity options were restricted to BSE 100. If you are in the 30% tax bracket, your highest tax savings would be just Rs. 7,500. There was a lock-in of three years. Moreover, the rules of investing were too complex for first-time investors.
Now, the government has scrapped the RGESS and is going to replace it with a new equity savings scheme with larger tax benefits and easier norms.
In this article, we will take a look at how this new scheme is expected to take shape.
What We Know So Far
The government has taken feedback from various investor groups about why the RGESS failed and how it could be improved upon. It plans to incorporate the feedback into the new scheme which is still being developed. So far, here’s what has been reported in the media about the new scheme.
More tax savings
The tax deductible will be higher under the new scheme. The earlier investment limit was Rs. 50,000 which wasn’t significant enough to tempt most new equity investors to try their luck in the stock market. The government plans to increase the limit by four times, i.e. to Rs. 2 lakhs. This will lead to substantial tax savings, even if we assume a cap of 50%. For example, if we apply the 50% limit for a full investment of Rs. 2 lakhs, the maximum tax savings for an investor in the 30% bracket would be Rs. 30,000 in a year.
Scheme for all investors
The RGESS was open to new equity investors who did not have a demat account, or existing investors who had never traded in equity. However, the new scheme is expected to be open to all investors.
The lock-in period for the new scheme is expected to be reduced. This is again a learning from the past equity scheme. The elongated lock-in of three years disadvantaged equity investors, who had to risk their capital for longer periods.
One of the RGESS norms mandated that investors invest for three successive years and remain invested for three years to avail tax benefits. The new scheme is expected to lift such complications.
The new scheme may allow a larger universe of stocks to choose from. In the RGESS, investments only in BSE 100 stocks and select ETFs and Mutual Funds were eligible to get tax benefits.
Income limit for investors
The annual income of investors seeking to benefit from this scheme may be capped at Rs. 12 lakhs per annum. This may not change from the RGESS.
What Investors Must Do
Equities are known to provide higher returns and are suited to long-term wealth creation. Encouraging investing into equities is welcome, and allowing tax savings on such investments will further motivate investors. However, investors should not jump into any equity scheme with only tax savings in mind. Equity investments are fraught with risk and must be selected with due care.
As such, before jumping in, investors must await the full details of the scheme, whose launch date isn’t clear at the moment.