Rajiv Gandhi Equity Saving Scheme or RGESS was a mutual fund along with tax advantage that was offered by the Government of India to encourage flow of savings of small retail investors in the domestic capital market. It was announced in the Union Budget of 2012-13 and extended in 2013-2014. However, the Union Budget of India of 2017 proposed that RGESS be completely phased out by 2018 with effect from April 1, 2017 due to less number of assessees.
Individuals who have already invested can claim tax deductions but no new investor can enroll under RGESS.
Details about Rajiv Gandhi Equity Savings Scheme
It was a tax saving scheme as well as an equity scheme that aims to include small investors with gross income per year below a certain amount. Its objective was to promote the ‘equity culture’ in India by expanding investor base in Indian securities market and also further the goals of financial inclusion and stability. It was designed for first-time retail investors lacking experience in the securities market. New retail investors are those who would make their first time investment of any kind under RGESS account on the first day of initial year*. Investors who qualified for first-timers are those who:
- Didn’t have a demat account
- Had an account but never made any transaction neither traded in any derivative segment of market and equity before designating an account under RGESS
*Initial Year is the financial year in which investment in securities is done in RGESS account. It may or may not be the same financial year in which demat account under Rajiv Gandhi Equity Saving Scheme is created.
Who could invest/were eligible?
- Any Indian resident with income up to Rs.12 Lakh per annum was eligible to have such an account and invest availing the tax deduction benefits. The income bar was raised to 12 lakh p.a in the financial year of 2013-14 from Rs. 10 Lakh p.a. specified in 2012-13
- The resident individual who is registering under RGESS and availing its benefits must not have had any history of any kind of trading in equities by the investor
- Only individuals could hold such an account. Hindu Undivided Families (HUFs), trusts or corporate entities could not register under RGESS.
The lock-in period was 3 years, in which the first year was a ‘Fixed Lock-in’ while the next 2 years were ‘Flexible Lock-in’ which commenced automatically after the ‘Fixed Lock-in’ of 1 year. At the end of ‘Flexible Lock-in’ the designated RGESS account was automatically converted into an ordinary demat account. In ‘Fixed Lock-in’, one could not sell the eligible securities while from the second year it could be done against certain conditions.
What were the benefits & returns?
New retail investors could invest in the eligible securities maximum up to Rs. 50,000 and could avail 50% tax deduction benefits up to Rs. 25,000 in a single financial year up to 3 consecutive years. Under RGESS, investors can avail tax benefits as provisioned in the new section of 80CCG in the Income Tax act. There is no minimum amount for investment. Tax benefits can be availed for three years counting from the financial year in which the investment is made for the first time under the scheme. One may lose the tax benefits if he withdraws the money or fails to comply with any of the eligibility criteria.
Also, the money invested in securities under RGESS were equities under BSE 100 or CNX 100, shares of PSUs categorised by government under Maharatna, Navratna and Miniratna, certain Mutual Funds, Exchange Traded Funds (ETFs) and Indian Public Offerings (IPOs). It mitigates risks. The Ministry of Finance safeguarded the interests of the first-time investors through restricting the investments to select large cap stocks, lock-in period with enough flexibility to take the benefits of the positive market movements etc.
Like any equity scheme, there are market risks involved. Although, one could benefit from diversification and consequent risk minimization the scheme did not guarantee assured returns in capital markets. The investors in the RGESS ran the risk of losing money in the equity market, like any other investor in the securities market.
Also, many experts had suggested that it would be more beneficial to invest in Equity Linked Savings Scheme (ELSS) than RGESS.
Difference between ELSS and RGESS
While ELSS invests strictly in mutual funds, RGESS invested in units of mutual funds and ETFs or listed equities. ELSS draws more advantage over RGESS as 100% deduction can be claimed. In an ELSS, any investor can claim the tax benefits who might have invested in the same or other schemes before. While in RGESS, only new retail investors with no trading history could claim the benefits. Also, ELSS investors can avail tax benefits every year in comparison to only 3 years of RGESS and the former is less risky.
The scheme has been phased out with effect from April 1, 2017. Those who have invested and claimed deduction in previous and earlier years will continue to benefit, but new investors cannot enroll under RGESS. Although, it helped educate and widen the retail investment segment and drive financial inclusivity apart from tax free dividends, the complexities offset the returns. The success of this could lead to a change from traditional savings instruments such as Fixed Deposits to capital markets leading to diversification in portfolio of retail investor. However, due to very less adoption rate, it has been phased out.