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Introduction

Investing in equity has always been a lucrative investment option to risk takers. Thousands of lakhs are gained and lost in the equity market every day. A segment with such a large cash flow did deserve a tax break. Thus came into existence, Section 80CCG of Income Tax, with the Rajiv Gandhi Equity Savings Scheme (RGESS), which aims at incentivising small, first-time investors to encourage investing in the equity market and directing more funds into the domestic capital markets.

The Rajiv Gandhi Equity Savings Scheme (RGESS), is a tax saving scheme designed exclusively for first-time individual investors in the securities market, whose gross total income for the year is below a certain limit. It was initially announced in the Union Budget of 2012-13 (para 35) and further expanded vide Union Budget 2013-14 (para 61 & 144) (para 61 & 144). The income ceiling criteria of Rs. 10 lakhs in 2012-13 was increased to Rs. 12 lakhs in 2013-14.

The scheme is under Section 80CCG of the Income Tax Act. As per the provisions of this section, first-time investors will get a specific deduction, from their taxable income for the year, up to a limit of 50% of the amount invested during the year in selected stocks. The maximum investment taken into consideration will be 50% of Rs. 50,000 per financial year. This rebate is available for three consecutive assessment years.

What is the objective of Rajiv Gandhi Equity Savings Scheme?

As stated earlier, the purpose of the scheme is to promote the flow of capital savings and improve the depth of domestic capital markets. This will help to foster an 'equity culture’ in India. The scheme intends to expand the institutional investor base in Indian capital markets and to further the objective of financial stability and financial inclusion.

What are the benefits of Rajiv Gandhi Equity Savings Scheme over other tax savings schemes?

  • The permissible tax deduction u/s 80CCG will be above and beyond the Rs. 1.5 lakh cap allowed under Section 80C of the Income Tax (IT) Act, rendering it appealing to middle class investors.
  • The benefits can be accessed for a span of three consecutive years.
  • The investor is free to trade the portfolio after a set lock-in time, within certain restrictions.
  • Gains resulting from higher market value of RGESS qualifying shares may be achieved within one year: as in fixed lock-in date. Provisions exist to shield the investor from general market losses to a certain degree. This is in contrast to all other resources for tax saving.
  • Facilities for pledging stocks after set lock-in time.
  • For investments up to Rs. 50,000 in your single RGESS demat account, if you opt for the Simple Service Demat account, the annual maintenance charges for the demat account shall be zero and for investments up to Rs. 2 lakhs, it is fixed at Rs. 100.
  • Investments need not be done in a single shot; multiple investments over the financial year is considered cumulatively.

Who is eligible to avail the benefits under this scheme?

This scheme is available for ‘New Retail Investors’. This definition includes individual investors meeting the following eligibility criteria –

  • Is a person who is a resident individual (the benefit cannot be availed by HUF, Corporate entities / Trusts, etc.)
  • Is a person who has not opened a Demat account and has also not traded in the derivatives section until the opening date of the RGESS account or the first day of the first year in which the RGESS qualifying transaction is included in the account, whichever is later.
  • Is a person who has opened a Demat account and has not made any investments in the equity and/or derivative segment until such time as an account is classified as RGESS or on the first day of the "initial year" in which an RGESS qualifying investment is included in the account, whichever is later.
  • In the case of joint accounts, only the first account holder would not be deemed a new retail investor. Any existing account holders other than the first account holder (e.g. second/third account holders or other combined account holders) or nominees of existing account holders may be treated as new retail investors for the purposes of opening a new RGESS account if they are otherwise qualified.
  • In the event that the demat account is opened by the first holder, but there are no trades in the stock or derivative category, the first holder of the account is entitled to become a new retail investor.
  • In order to take advantage of the RGESS incentives, the new retail investor would have to submit a statement, as in Form 'A' to the Depository Participant (DP) at the time of the opening or designation of his current account.
  • Eligible shares, which are consequently entered into such an account, shall immediately be locked-in up to a valuation of Rs. 50,000, unless otherwise specified by the lender in the form 'B' specified in that regard.

What are the investment options available under this scheme? What are the "Eligible Securities" of the RGESS?

Investment prospects under the scheme may be limited to the following types of securities:

Listed Equity Shares & Units

  • The top 100 stocks at NSE and BSE, i.e., CNX-100/ESB-100 (This does not mean that one has to trade either via NSE or BSE. If the shares constituting BSE 100 or CNX 100 are listed and exchanged in any new stock exchange that might exist at a later date, they will be eligible for the same.
  • Equity shares in public sector companies listed by the Government as Maharatna, Navaratna and Miniratna
  • Units of Exchange Traded Funds (ETFs) or Mutual Fund (MF) schemes with RGESS qualifying securities as referred to in the first two points as underlying securities, such that they are listed and traded on a stock exchange and settled by way of a depository mechanism
  • Follow-on Public Offers (FPOs), New Fund Offers (NFOs) 

Unlisted Equity Shares & Units

  • Initial Public Offers (IPOs) of PSUs, which are expected to be listed in the relevant financial year and where the government ownership is at least 51% and the annual turnover of which is not over Rs.4000 crores in the 3 immediate preceding years.

How do you make RGESS Eligible Investments?

Open a new demat account with any DP and enter it under RGESS or enter your current demat account under RGESS via Form A. If you wish to use the Basic Service Demat Account facility, you can tell your DP that your account will be designated accordingly. You can contact any licenced SEBI stock broker to open a trading account to make an investment in any eligible stock on the stock market or to apply for eligible IPOs.

In the event that you are invested in mutual funds through some distributor, you clearly need to include information of your demat account, such as Demat Account Number and DP ID, in order to claim credit from the mutual fund units in your demat account.

In order to invest in any IPO/NFO of eligible securities, you can subscribe to the same and provide information of your demat account, such as Demat Account Number and DP ID, in order to obtain credit from eligible securities in the demat account.

What are the key differences between ELSS (Equity Linked Savings Scheme and RGESS?

ELSS and RGESS are completely separate schemes: they belong to different asset groups, with ELSS providing passive investing options. ELSS is designed for indirect participation in the stock market, while RGESS seeks to promote direct participation in the stock market. The operating differences are given below:

ELSS

RGESS

Investments are strictly to be made in mutual funds

Investments need to be rendered directly in listed equity shares or in units of mutual funds and ETFs.

100% deduction is authorised under ELSS

Only 50% of the investment made up to a limit of Rs. 25,000 in any one year is permitted under RGESS.

ELSS incentives can be utilised by an investor every year.

RGESS incentives are limited to new investors and can only be accessed for 3 consecutive years.

The ELSS gain falls under Section 80C of the IT Act, which has an overall cap of Rs. 1.5 lakhs including all qualifying instruments such as LIC Policies, PPFs, etc.;

RGESS exclusion is applicable under Section 80CCG. There is a special investment quota specifically for RGESS over and above Section 80C Limit Rs. 1.5 lakh.

Lock-in period of three years

Lock-in duration of 3 years. However, trade is permitted after one year subject to restrictions.

Since investments are made in mutual funds, they are considered to be less risky

Since the investment is in equity, the risk is considered to be higher

How much tax deduction is an investor eligible for under RGESS?

You would be entitled to claim a tax exemption from the 80CCG of the Income Tax Act of 50% of the amount paid subject to a cap of Rs. 50,000 as an investment in each financial year.

For example, if you have invested Rs. 50,000 under RGESS, the amount available for tax deduction from your taxable income would be Rs. 25,000. Let’s say you invested Rs. 40,000 under RGESS, then the amount available for tax deduction would be Rs. 20,000 from your taxable income. This deduction is over and above the lakh limit of Rs. 1.5 lakhs set out in Section 80C.

How do I open an RGESS Demat Account with a Depository Participant (DP)?

You can contact any registered DP to open a demat account under RGESS. The list of DPs registered with NSDL and CDSL can be found on their website.

You are required to comply with the Know Your Customer (KYC) requirements specified by SEBI, if not done earlier, by submitting proof of identity, proof of address, etc. and to provide PAN to the DP with whom you intend to open a demat account along with a declaration in the prescribed format (i.e. 'Form A for RGESS benefits.)

What are the documents to be submitted to open an RGESS Demat Account

All the below documents should be submitted in photocopies, duly self-attested: 

Proof of Identity

  • Passport
  • Voter ID Card
  • Driving license
  • PAN card with photograph
  • Aadhaar (Unique ID) letter
  • Identity card/document with applicant’s Photo, issued by a) Central/State Government and its Departments, b) Statutory/Regulatory Authorities, c) Public Sector Undertakings, d) Scheduled Commercial Banks, e) Public Financial Institutions, f) Colleges affiliated to Universities (this can be treated as valid only till the time the applicant is a student), g) Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their Members; and h) Credit cards/Debit cards issued by Banks.

Proof of Address

  • Ration card
  • Passport
  • Voter ID Card
  • Driving license
  • Bank passbook
  • Verified copies of utility bills like Electricity bills, gas bills (not more than three months old)/ Residence Telephone bills (not more than three months old)/ Registered lease or sale agreement of residence / Flat maintenance bill / insurance copy
  • Bank account statement / passbook
  • Self-declaration by High Court & Supreme Court judges, giving the new address in respect of their own accounts.
  • Proof of address issued by any of the following: Bank Managers of Scheduled Commercial Banks/ Scheduled Co-Operative Bank/Multinational Foreign Banks/ Gazetted Officer/Notary public/ Elected representatives to the Legislative Assembly/Parliament/Documents issued by any Govt. or Statutory Authority.
  • Identity card/document with address, issued by a) Central/State Government and its Departments, b) Statutory/Regulatory Authorities, c) Public Sector Undertakings, d) Scheduled Commercial Banks, e) Public Financial Institutions, f) Colleges affiliated to universities (this can be treated as valid only till the time the applicant is a student); and g) Professional Bodies such as ICAI, ICWAI, Bar Council etc., to their Members.

RGESS FAQs

1. Are NRIs eligible to avail the benefits of RGESS?

No, the scheme is for an individual resident in India only. NRIs cannot avail the benefits.

2. Can the guardian claim an RGESS tax gain if the transaction is made in the name of a minor?

Yes, guardians may seek tax benefits for investments made in the name of a minor, subject to the maximum cap.

3. Are shares of unlisted companies eligible for RGESS tax benefit?

No. Unlisted shares are not eligible for RGESS tax benefit.

4. If I invest less than Rs. 50,000 in a financial year, can I invest more in the next financial year and avail the full tax benefit?

No, the deduction is capped at Rs. 50,000 for a particular financial year. Any unclaimed amount cannot be carried forward to the next year.

5. How often is the portfolio of the RGESS mutual fund scheme published?

The portfolio of closed mutual fund schemes shall be published on a monthly basis by the respective mutual fund and shall be made available on the website of the respective mutual fund. ETF portfolios are reported on the respective website of the mutual fund or on the website of the stock exchanges on a regular basis.

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