Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced on 21st September 2012 by our then finance minister Mr. P Chidambaram in the memory of India’s 6th Prime Minister Mr. Rajiv Gandhi. RGESS 2012, was later amended in year 2013 to form RGESS 2013. Aimed at increasing flow of retail investors in the Indian capital market, the scheme provides tax benefits u/s 80 CCG of the Income Tax Act, 1961.
RGESS was introduced by the Ministry of Finance with the sole purpose of “motivating small investors to invest their savings in the domestic capital markets.
Rajiv Gandhi Equity Savings Scheme Eligibility
This deduction is available to the ‘new retail investors’ who comply with the RGESS guidelines and whose gross total income as calculated under the Income Tax Act, 1961 is less than or equal to Rs. 12 lakhs (with effect from April 2014, prior to which it was Rs. 10 lakhs). By ‘new retail investor’ it is meant to include those who have not opened a demat account in the past.
This would include those who have opened a demat account however have not been able to invest in equity or the derivatives market i.e. the future and options of the market in the past. Further it would also include those whose name is there as a joint holder but not the 1st or primary holder in the demat account.
To keep new retail equity investors away from shocks or temporary pull backs in the market the RGESS 2013 guideline states that an investor who wishes to avail this deduction should invest only in the BSE 100 or CNX 100 scrips, shares of public sector companies categorized by the government of India as one of the 7 Maharatna (eg. ONGC, SAIL, BHEL, CIL etc.) or 17 Navratna (eg. HPCL, BPCL, MTNL, BEL, PFC, CONCOR etc.) or 73 Miniratna (eg. Hindustan Copper, Balmer Lawrie, MOIL etc.). Select Exchange Traded Funds (ETFs), Mutual Fund and Initial Public Offerings (IPOs) of public sector companies meeting the criteria are also considered as eligible securities.
The investment done under this scheme should have a horizon of 3 years. The investment has 2 lock in periods – fixed and flexible:
Fixed lock-in Period: One year from the date of investment is the fixed period when the investment cannot be sold or hypothecated.
Flexible lock-in Period: The next two years of holding past the first one is flexible lock-in period. During this tenure the investor is allowed to transact i.e. buy or sell eligible security on the condition that for a cumulative period of 270 days in a year the investor maintains the value of initial investment. This means that the valuation of the investment portfolio should be equal to or greater than that of the investment done for the purpose of deduction available under this scheme. For example if you have invested Rs. 50,000 to claim deduction u/s 80 CCG, the valuation of the investment done in eligible securities should be equal to or greater than Rs. 50,000 /- during these two years.
Maximum permissible investment
RGESS 2013, states the maximum amount that can be invested under this scheme is limited to Rs. 50,000.
The tax benefit the investor would be limited to 50% of the amount invested in this scheme. This deduction is available u/s 80 CCG of the Income Tax Act 1961. This deduction is available over and above Rs. 1.5 lakhs u/s 80 C and Rs. 40,000 u/s 80 D.
Gross Total Income
Rs. 2.5 – 5.0 Lakhs
Rs. 5.0 – 10.0 Lakhs
Rs. 10.0 – 12.0 Lakhs
> Rs. 12.0 Lakhs
Maximum amount Invested u/s 80 CCG
% Deduction available
Maximum amount of Deduction available
Rs. 25,000 (50% of Rs. 50,000)
This deduction is available for 3 consecutive years.
If the investor does not comply with the conditions of the RGESS guidelines during the 3 years then the amount which was allowed as deduction from total income would be reversed and included in the total income for the year in which the guidelines under the section were not complied upon.
Operation of the Demat A/C
To invest in REGSS one has to open a demat a/c and fill & sign the Form A declaration to the depository participant. Once the 3 years of lock-in finishes this account shall automatically change from a REGSS a/c to an ordinary demat a/c.
Illustration of Lock-in period
Fixed Lock-in period
Flexible Lock-in period
Fixed tenure held
RGESS portfolio can be shuffled i.e. Applicant can transact in eligible securities
Aug 31, 2016
1 Year 7 months
Nov 30, 2016
1 Year 4 months
Feb 28, 2017
1 Year 1 month
Fixed Lock-in ends
First year of flexible lock-in ends
Second year of flexible lock-in ends
March 31, 2018
March 31, 2019
March 31, 2020
- As stated earlier the total lock-in period of 3 years can be divided into two – Fixed & Flexible. The first year when there can be no transaction in the securities is the fixed period while the next two years are the flexible period.
- The eligible securities can be purchased either on lumpsum or installment basis.
- Lumpsum – If eligible securities worth Rs. 50,000 are purchased in one day. The fixed lock in period will begin from the date of purchase of securities in the relevant financial year and end on March 31 of the year immediately following the relevant year. If all the securities worth Rs. 50,000 is purchased on November 30, 2016 then the fixed lock in period shall end on March 31, 2018.
- Installment – As shown in the graph above if partial purchase of stocks under RGESS is done over a period of a fiscal then too, the fixed lock-in period shall begin from purchase of such securities in the first installment in the applicable fiscal and end on the 31 day of March immediately following the applicable fiscal. If as stated in the above graph the eligible securities are purchased in 3 installments August 31, 2016, November 30, 2016 and February 28, 2017 during a fiscal. Then the fixed lock-in period shall begin with the 1st installment on August 31, 2016 and end on March 31, 2018.
- During the flexible lock-in period (next 2 years) the investors are allowed to trade in the eligible securities however they are expected to uphold the level of investment during this period at the amount as required for the income tax benefit or the value of the portfolio just before the sale of securities; whichever is less, for 270 days in the 2 years. In simple words to maintain the balance during the flexible period one should purchase eligible securities to the match the amount that has been sold.
In continuation of the example stated above if you have purchased eligible securities worth Rs. 50,000 on November 30, 2016 to avail deduction u/s 80 CCG of the Income Tax Act, 1961, your flexible lock in period shall begin from 1 April 2018. If you wish to sell the securities on June 30, 3018, when the value of your portfolio is Rs. 70,000, then you have to maintain Rs. 50,000 as the level of investment for 270 days both in the fiscal 2018-19 and 2019-20. However if the value of investment on June 30, 2018 is Rs. 40,000, then you have to maintain Rs. 40,000 as the level of investment for 270 days each in fiscal 2018-19 and 2019-20.
To encourage retail investment in the domestic capital market, the government has introduced the RGESS scheme. Under this scheme deduction is available u/s 80 CCG over and above the deduction claimed u/s 80 C and u/s 80 D.
- The maximum amount that can be invested under this scheme is Rs. 50,000.
- The maximum deduction available is limited to 50% of the amount invested i.e. Rs. 25,000.
- The applicant’s gross total income for the relevant previous year should not exceed Rs. 12 lakhs
- The investor should be a ‘new retail investor’ as defined in the RGESS guidelines
- Investment should be made in ‘eligible securities’ as stated under the RGESS guidelines
- The investment would be locked-in for a period of 3 years from the date of Investment in the RGESS
Though the objective of the scheme seems to be nice, the complexities of the remaining invested in it seem to be higher than the reward associated with it. The clause with respect to average holding value in 270 days in the relevant previous year makes the product complicated for an ordinary investor to comprehend. Specially keeping in mind the tax saving that is associated to it is as low as Rs. 2,575 if you are in the 10% tax bracket and Rs. 5,150 if in the 20% tax bracket.