Rajiv Gandhi Equity Savings Scheme (RGESS): Features, Benefits, Eligibility & Why It Was Discontinued

Personal Finance

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!

Features of Rajiv Gandhi Equity Savings Scheme

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.

Rajiv Gandhi Equity Savings Scheme Eligibility

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:

• Be a resident individual and not an HUF (Hindu Undivided Family), company or trust. 
• An individual who did not have a Demat account and had never made any transactions in derivatives was eligible.
• Investors who had physical shares of companies but no Demat account could get the tax benefits under this scheme.
• Anyone with a Demat account who did not invest in equities or derivatives till opening his/her RGESS account or the 1st day of the initial year qualified for RGESS. This is the financial year in which an investor designates his/her Demat account as the Rajiv Gandhi Equity Savings Scheme account. 
• Individuals who were the second account holder of a joint Demat account and did not have their first name in any Demat account were eligible. 
• Third account holders and nominees of existing Demat account holders were also eligible. 

Where Could One Invest to Qualify for Benefits under RGESS?

The following equity shares qualified for the benefits of the Rajiv Gandhi Equity Savings Scheme:

• Top companies falling in the NSE CNX-100 or BSE 100 list. However, this did not mean that investors only had to invest via NSE or BSE 
• Shares of PSUs (Public Sector Undertakings) under the Miniratna, Maharatna or Navratna categories
• FPOs (Follow-on Public Offers) of the securities mentioned above
• Units of RGESS compliant mutual fund schemes or ETFs (Exchange Traded Funds). 
• NFOs (New Fund Offers) of the above schemes 
• IPOs (Initial Public Offering) of PSUs scheduled for listing in the relevant fiscal year

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.

Deductions under Rajiv Gandhi Equity Savings Scheme

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. 

Also Read: How To Save Income Tax On Salary?

How Could You Opt for Benefits under RGESS?

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.

Why Was Rajiv Gandhi Equity Savings Scheme Discontinued?

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. 

Also Read: Best Gold Mutual Funds in India to Invest in 2022

Final Word

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. 

FAQs on Rajiv Gandhi Equity Savings Scheme

1. Did investors have the risk of losing their principal amount through RGESS?
   Yes, as this scheme required investors to allocate their funds to the stock market, they were vulnerable to its inherent risks. This included the risk of losing the capital amount with no guarantee for returns.
2. How are ELSS funds different from RGESS?
   ELSS is an equity mutual fund investing primarily in equities and offers tax deductions of up to Rs. 1.5 lakh under Section 80C. They are meant for indirect participation in stock markets and are perceived to be less risky than RGESS.
3. Could you get the benefits of RGESS if you held only physical shares?
   Yes, you would be considered a new retail investor till you held a Demat account and made investments in eligible securities. However, you would have to make fresh investments after opening a new Demat account and assigning it for RGESS.
4. Could I get the benefits of RGESS if my annual income exceeding Rs. 12 lakh after investment?
   No, as soon as your annual income increased above Rs. 12 lakh, you would not have got the benefits of RGESS for that financial year. However, you would get the tax benefits for the previous financial years. 
5. What are the advantages of investing in RGESS?

Here are some of the benefits of RGESS:

• The scheme offered tax deductions over the limits set by Section 80C.
• Investors could buy or sell the securities after the fixed lock-in period.
• Its benefits were available for three consecutive years.

Before you go…

Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!

Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.