Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced by the Government of India (GOI) during Budget 2013 and expanded next year. It was a tax-saving scheme meant to encourage investments from small investors in the domestic capital market. It was designed solely for first-time investors in the securities market.
This post gives a detailed overview of RGESS – features, benefits, eligibility and why it was discontinued from April 1, 2018. Read on!
Rajiv Gandhi Equity Savings Scheme was introduced to increase in-flows in India’s capital market by offering tax benefits for new retail investors. These investors can have a gross total income of Rs. 12 lakh or less to avail benefits of RGESS. Earlier, the total income limit for investors was Rs. 10 lakh to participate in this scheme.
Only investments in certain equities qualify for tax benefits under this scheme. The maximum amount eligible for tax benefits under RGESS in a financial year was Rs. 50,000 available for up to three years from the initial investment.
Investors could get a 50% deduction from taxable income on the amount invested in a year under Section 80CCG of the Income Tax Act. This tax deduction is over and above the Rs. 1.5 lakh limit under Section 80C.
Eligible securities with a value of up to Rs. 50,000 would be subject to a three-year lock-in period, which included a fixed lock-in period of 1 year and a flexible lock-in period of 2 years.
You could pledge or sell securities kept in RGESS during the fixed lock-in period. During the flexible lock-in period, you could sell securities based on certain conditions. Your RGESS Demat account would be converted into a regular Demat account at the end of this period.
The scheme was open for new retail investors with a total gross income of up to Rs. 12 lakh. The investor had to fulfill the following eligibility criteria:
The following equity shares qualified for the benefits of the Rajiv Gandhi Equity Savings Scheme:
To qualify for RGESS, the PSUs needed to have at least a 51% government stake and a minimum annual turnover of Rs. 4,000 crore in the last three financial years.
Individuals could claim 50% of the amount invested as tax deductions where the investment could be a maximum of Rs. 50,000. Thus, you could claim up to Rs. 25,000 as tax deductions under Section 80CCG. Costs such as brokerage and STT (Securities Transaction Tax) could not be included in the upper limit.
Let us say that you invested Rs. 80,000 in investments eligible for deductions under RGESS. Only Rs. 50,000 of the investment would qualify for tax deduction. Thus, you could get Rs. 25,000 (50% of Rs. 50,000) as tax deduction.
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Those with existing Demat accounts could opt for this scheme if they did not make any stock transactions through it. The investor had to designate his Demat account under RGESS if he was eligible. For this, he had to furnish Form A and a copy of his/her PAN card.
First-time investors could open a new Demat account with any DP (Depository Participant). Then, they would have to invest in securities eligible under the scheme through the designated Demat account. After purchase, these would be automatically locked in for 1 year.
If an individual did not want to invest under RGESS, they had to furnish Form B within a month of the transaction.
Over the years, the GOI realised that this investment did not attract many investors. The number of new Demat accounts as a result of this scheme was only 20,000. Moreover, investments made were also very low compared to the country’s tax base.
Some of the limitations of this scheme included more rigidity compared to other tax-saving schemes. Tax deduction of 50% for the investment was also not attractive to investors. Hence, the government decided to phase out RGESS from April 1 2018, during the Union of Budget of 2017.
Although no one could make fresh investments in this scheme, individuals could still claim tax benefits for 1-2 years on their existing investments.
Rajiv Gandhi Equity Savings Scheme aimed to expand the base of retail investors in India by attracting new investors. It offered tax deductions of up to Rs. 25,000 on investment in certain equity shares, mutual fund schemes, ETFs, and IPOs. However, due to a lack of public interest, the scheme was eventually discontinued.
Here are some of the benefits of RGESS:
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