RGESS Tax Saving Scheme – Too Complicated !

RGESS or Rajiv Gandhi Equity Saving Scheme is the new tax saving scheme, for saving taxes. This is mainly  for first time equity investors in securities market. The whole idea for introducing the RGESS scheme is to promote an ‘equity culture’ in India as well as widen the  retail investor base in the Indian securities markets. Look at the below video where a discussion is going on RGESS.

Lets us look at some major points which defines RGESS

1. Maximum Investment Limit and Tax Saving

RGESS scheme is available only to those investors whose taxable limit is less than 10 lacs per year; and the maximum limit of investment is Rs 50,000 per year. The tax advantage will be available on only 50% of the amount invested –  which means that tax saving can be done only on upto Rs 25,000. Which means, if you invest Rs 50,000 and belong to 20% tax slab , you will be able to save 20% money on 25,000 (50% of 50,000) – a Rs 5,000/- tax saving.

2. Applies to new Investors Only

The RGESS Scheme is available only for “new investors”; defined as those whose PAN numbers don’t have equity transactions, which means either a person has not opened a demat account ever, or has opened a demat account, but have never invested in equity before the scheme came into effect. The investment can be done throughout the year, and not restricted to a one time investment, so investing Rs 50,000 in one shot or investing Rs 10,000 in 5 shots , both are eligible. But the big confusion is for those investors who already have equity investments through mutual funds, but do not have demat account ?

3. Lock In period of 3 years

This rule is a little messy. There will be 3 year lock in period for this investment. However if an investor wants to, he can collect “profit” part after a year of investment.  So for the entire first year, you cant sell your shares! And after the first year of investment, he can take out the profits if he so chooses. He can sell all his shares if he wants, but he will have to bring back the same amount through some other stock.  After first year, 2 more years of lock in will apply, and in this period, you have to maintain your balance at the end of first year, which should be minimum of the amount on which you claimed income tax or the balance at the end of the 1st year .

So if a person invests Rs 50,00 , and in next one year

Case 1 : His worth is Rs 55,000 , then he can take out 5,000 and after that he has to keep his balance minimum 50,000 (the amount on which tax exemption is claimed), if a person wants, he can sell off his shares totally, but then again has to come back with 50,000 investment in some other or same stock. He can take out the profits part (above 50,000) if he wants in these next 2 yrs

Case 2 : His worth is Rs 25,000 , then in this case, he has to maintain this 25,000 balance in next 2 years. If you are still unclear, Deepak Shenoy has done a better job in explaining this lock in part, in his article on RGESS.

4. Where can you invest for RGESS Scheme?

You can invest in stocks which belong to

  • CNX 100
  • BSE 100
  • IPOs of PSUs whose annual turnover is not less than Rs. 4000 Crore for each of the immediate past three years
  • Large Listed PSU’s
  • And any ETF , Mutual fund which are listed and traded in stock exchange and whose portfolio includes stocks which are eligible under RGESS

Should you invest in RGESS ?

Personally, I feel that RGESS has too many terms and conditions to follow, and is not that easy to understand for a common man. Especially a new investor who is anyways afraid of markets and his money being lost. The restriction of “can’t not sell at all in first year” is kind of scary, especially for those who are too risk averse.

Another bad point about RGESS is that it’s a once in a life time investment scheme. Once you become eligible for this scheme, for next year you will not be a “new investor” and hence wont be eligible, so its only for the fresh batch of new investors each year. The only positive point is that for those who were anyways going to take plunge in stock markets will get extra benefit of some tax saving and might instill some compulsory discipline of investing (lock in period).

Let us know what do you think about this RGESS Scheme (Rajiv Gandhi Equity Saving Scheme) , and if it interests you. Will it be a hit tax saving scheme or a flop one? What do you think?

76 CommentsAdd Comment

  1. priyajitgh

    Hi Manish
    First of all,thanks a ton for such a informative article.I have an query.I have opened my Demat A/c on last october-2013 & so far invested in the following MFs via SIP
    1. ICICI Pru Focussed Bluechip-Direct
    2.UTI Oppourtunities-Direct
    3. SBI Pharma-Direct
    4.IDFC Dynamic Bond fund_Direct
    5.ICICI Pru Discovery Fund
    6.ICICI Balanced Adv Fund
    So far I have invested 30k in the above mentioned MFs & extra Rs 8600/ in SBI Gold ETS via SEP manner.My annual income is below 10lac & also I am a first time investor.
    Am I eligible to avail 50% tax exemption over my total invested amount 38.6k under 80 CCG & are my MFs belong to RGESS ??
    Will be grateful to receive ur reply.

  2. Vikram

    Just trying to understand the terms and conditions can give you a headache.

    Somebody with too much time on his hands or too much confusion, or both, seems to have designed the RGESS.

    This scheme sounds like utter bullshit

  3. Jha

    I think, now Govt has given much clarifications on this scheme and now, this scheme is attractive as it is possible to save upto Rs5150 for a person of 20% tax slab. This saving is upfront savings. I hope to invest in this scheme in next week. Any insights on this? Pl. share the same. Thanks, Jha.

  4. Dear Manish,
    As per the new budget announced on 28 feb for 2013-2014. The RGESS purchased in next year can get tax exemption for 3 successive years. What about this year i.e 2012-2013?
    I am bit confused whether to go for RGESS in this financial year or wait for next year i.e. 2013-2014 to get 3 years exemption.
    Kindly guide me as the time is getting closer to end of the financial year.

  5. prakash kumar

    Dear Sir,
    I want to invest in RGESS. But, from where I can obtain it ? please give us the information where I can invest in RGESS. Is SBI authorized for RGESS ?

    Thanks & Regards,

    Prakash Kumar

  6. SUDHANSHU

    Hello Manish,

    I have SIP in HDFC top 200 can i invest in RGESS, i have KYC No. but i havent do any share trading.. can u please let me know how can i open a Demate Account .

    also tell me can i invest Rs 10000 only in RGESS for 2012-13?

  7. SETUL LALAN

    Hi Manish,

    is there any special procedure to get stocks under RGESS, i have a new demat account in icici direct and supose i buy equity now can i claim under RGESS and as a proof what is to be given to employer. is gold etf eligible under RGESS

  8. Neeraj Kumar

    Hey Manish,

    These days I am going through “Jago Investor” book written by you. I must say, it’s really a sincere effort from your behalf to apprise us of different aspects of our own financial life. I can say that being a newbie in this zone am really getting something out from this book.

    After reading chapter of equity vs debt funds, am pretty much convinced that equity is a good option for long term and as am a bachelor so i should spend 80-100% of my investments on it.
    Now the problem is, I am investing in PPF , FDs and life insurances for tax saving.
    I feel if i will invest in equity then i wont be able to save tax so it will be really helpful if you could provide valuable suggestion of yours on this.

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