Wednesday, February 20, 2013

Rajiv Gandhi Equity Savings Scheme - Is it worth considering it?

The scheme: 

We have a new tax saving scheme called "Rajiv Gandhi Equity Savings Scheme" which gives tax advantages for first time equity investors.  The maximum amount of investment allowed for the current Financial year is Rs50,000.  Out of which you can claim 50% as tax deduction.  So, you get tax benefit of anywhere between Rs2500 to Rs5000, depending on your tax slab.  Somebody who is in the 30% tax slab, that is, earning more than Rs10 lakhs, would not be eligible to invest in RGESS scheme.

The investments in RGESS scheme is over and above the already existing Rs1 lakh exemption limit u/s 80C. Therefore, there would be some rush from investors to avail of the additional tax benefit.

Lock in period and Partial withdrawls:

RGESS rules allows investors to partially withdraw after 1 year lock in period.  Compared to other tax savings schmes, where you have to lock in for 3 years, this sounds interesting.  But hold on.  There are requirements to maintain the balance of the original amount of investment you have made for 270 days in year two and three, if you withdraw partially after 1st year.  The least said about the partial withdrawl rule is better.  Otherwise, it will confuse you and I am sure the target audience for this scheme, the first time investors, would be terribly confused by these requirements.

The Finance Minister Mr P Chidambaram has indicated that there is complete revamp of RGESS would happen in this year's budget.  So, its better to wait for the new avatar before you commit money in RGESS.

Important points you should know:

  • RGESS has a lock in period of 3 years. 
  • Only people with less than or equal to Rs10 lakhs of Gross Total Income can invest.  Also, they should not have had prior equity buying experience.  
  • You need to open a demat account, if you want to invest in RGESS 
  • To apply for this RGESS scheme, you need to file a Form A declaring that you have never ever bought any equity shares.  The Form A carries your PAN number and the demat details, which will be checked and confirmed in 4-5 days time, that you have never invested in equity shares. 
  • As per the current regulations, you can invest only once in RGESS.  That is, if you invest this year, the rules automatically debars you from investing in the next year.  

So, whats the bottomline - Should I invest or not?

Invest, only if you have an above average risk appetite.  Since the investments are 100% in equity markets, it may go up and down and so you should be prepared to see the swings in share prices.  Else, pay the additional tax of Rs2500 or Rs5000 and enjoy rest of the money!!!!

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