Rajiv Gandhi Equity Savings Scheme: A Smart Investment Move

The Rajiv Gandhi Equity Savings Scheme (RGESS) was an Indian government initiative to encourage small investors to invest in the domestic capital market. The scheme was announced in the 2012-13 Union Budget and expanded in 2013-14. It was designed exclusively for new investors with little to no experience in the securities market and who had a gross income per year below a certain amount. The income ceiling was raised to INR 12 lakh in 2013-14, up from INR 10 lakh in 2012-13. Under the scheme, investors could claim a 50% tax deduction on investments of up to INR 50,000 in eligible securities. The lock-in period for investments was three years, with a fixed lock-in period of one year and a flexible lock-in period of two years. However, the scheme was discontinued in 2018 due to a lack of participation.

Who is eligible for the scheme?

The Rajiv Gandhi Equity Savings Scheme (RGESS) is a tax-saving scheme designed exclusively for new investors with little or no experience in the securities market. The scheme was launched in 2013 to encourage retail and small investors to participate in the equity culture. Here are the eligibility criteria for the scheme:

• The individual must be a resident of India. The benefits of the scheme cannot be availed by corporate entities, trusts, or Hindu Undivided Families (HUF).
• The investor must have a gross total income of less than or equal to INR 12 lakh per annum. This income bar was raised to INR 12 lakh in the financial year 2013-14 from INR 10 lakh in 2012-13.
• The investor must have no history of trading in the derivatives or equity markets. This includes not having opened a Demat account or having any transactions in equity or the derivative segment until designating the account as RGESS or the first day of the initial year.
• The investor must follow the compliance of the scheme.
• Investments can only be made in companies that belong to BSE-100 or CNX-100 and their "follow-on public offers".
• Investments must be made in IPOs of PSUs with a government stake of 51% or more.
• Investments can only be made in Mutual Fund or Exchange Traded Fund Schemes that invest in RGESS-approved securities and their "New Fund Offers" (NFO).
• The scheme is only open to individuals, and NRIs are not eligible to participate.

The RGESS scheme provides a tax deduction to new retail investors who meet the above criteria. It is important to note that the scheme was discontinued in 2018 due to a lack of participation, and no new investors can enrol. However, individuals who have already invested can still claim tax deductions as per the scheme's terms.

What are the benefits?

The Rajiv Gandhi Equity Savings Scheme (RGESS) offers a range of benefits to eligible investors. Here are some key advantages:

Tax Benefits

The scheme provides additional tax benefits under Section 80CCG of the Income Tax Act, 1961. "New retail investors" can invest up to INR 50,000 in eligible securities and claim a 50% deduction on their taxable income, up to a maximum of INR 25,000. This is on top of the existing deduction of INR 1,00,000 available under Section 80C.

Encouraging Equity Culture

The RGESS was designed to promote an "equity culture" in India and expand the base of retail investors in the securities market. By encouraging small investors to participate in the equity market, the scheme aimed to foster financial inclusion and stability.

Increased Investment Opportunities

The scheme provides an opportunity for eligible individuals to invest in the domestic capital market, specifically targeting those with limited or no experience in the securities market. This helps to diversify their investment portfolios beyond traditional savings instruments like fixed deposits.

Long-Term Benefits

RGESS offers long-term benefits by educating individuals about the retail investment segment. It encourages individuals to invest their savings in capital markets, potentially leading to an increase in productive 'capital formation' assets.

Flexibility in Investments

The scheme allows investors to make instalment investments in the year they are filing tax claims. This flexibility can help investors manage their finances more efficiently.

Dividend Benefits

Dividend payments received under the RGESS are tax-free, providing an additional financial benefit to investors.

What is the lock-in period?

The Rajiv Gandhi Equity Savings Scheme (RGESS) has a lock-in period of three years. This includes a fixed lock-in period of one year, during which investors are not permitted to sell, pledge, or hypothecate any securities. The flexible lock-in period of two years follows immediately after the fixed lock-in period, during which investors can sell or pledge eligible securities subject to certain conditions.

The lock-in period starts from the date of purchase of securities in the financial year and ends on the 31st of March of the following financial year. During the lock-in period, investors are not allowed to sell, hypothecate, or pledge any security.

After the completion of the fixed lock-in period, the designated RGESS demat account will be converted into a regular or ordinary demat account.

How do you invest?

To invest in the Rajiv Gandhi Equity Savings Scheme (RGESS), you must be a first-time investor in the securities market with a gross total income of less than or equal to 12 lakh INR per year. The scheme is also only open to Indian residents, and the benefit cannot be availed by corporate entities, trusts, or Hindu Undivided Families (HUFs).

To invest, you will need to open a DEMAT account with a Depository Participant (DP). You will need to submit a declaration form (Form A) to your DP when opening the account or designating your current account as an RGESS account.

During the year in which you are claiming deductions, you can invest in eligible securities through one or more transactions. The eligible securities that are added to your DEMAT account will be locked in for that year.

You can invest in eligible securities such as:

• Initial Public Offerings (IPOs) of certain Public Sector Undertakings (PSUs)
• Equity shares of companies in the CNX-100 or BSE-100
• Public sector enterprises categorised as Maharatna, Navratna, or Miniratna by the Central Government
• Follow-on Public Offers (FPOs) from the above-mentioned companies that are RGESS-compliant
• Units of Mutual Funds that are RGESS-compliant
• Units of Exchange-Traded Funds (ETFs) that are RGESS-compliant
• New Fund Offers (NFOs) of the above-mentioned companies that are RGESS-compliant

It is important to note that the RGESS was discontinued in 2018 due to a lack of participation. However, those who invested before this date may still be able to claim tax deductions as per the scheme's terms.

What are the risks?

As with any investment in the capital markets, the Rajiv Gandhi Equity Savings Scheme (RGESS) is subject to market risk. It's important to understand the extent of these risks and how they might affect you before investing.

The scheme does not guarantee assured returns in the capital markets. Investors in the RGESS run the risk of losing money in the equity market, just like any other investor. One way to minimise this risk is to expand the investment base.

Another risk is that of losing the tax benefits. If an investor withdraws their investment and it falls below the threshold amount for which tax exemption was sought for the locked-in period, they will lose this benefit. Tax benefits will also be lost if the investor fails to comply with or fulfil any of the scheme's provisions.

The scheme has also been phased out since April 1, 2017, due to a low number of assessees. Individuals who had already invested could continue to claim tax deductions, but no new investors could enrol.

Frequently asked questions