RGESS Tax Saving Scheme – Too Complicated

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?