RGESS: Who is a new investor?

The Finance Act, 2012 had introduced a special scheme to provide for tax deduction in respect of investments in equities. The below article provides a comprehensive picture of Rajiv Gandhi Equity Savings Scheme-2012.

The Scheme is open for all new retail investors who have gross total income of up to Rs. 12 lakh. A new retail investor is one:

• Who is a resident individual (the benefit cannot be availed by HUF, corporate entities / trusts etc)
• Who has opened a demat account and not done any transactions in equity or in the derivative segment till the account opening date.
• Who has not opened a demat account and has also not done any trading in the derivative segment till RGESS account opening date.

RGESS: Procedure for investment

• Open a demat account with a broker and submit Form A, which is a declaration that you have never invested in equities before. Also submit a self-attested copy of your Permanent Account Number (PAN) card and your know-your-client (KYC) acknowledgment (assuming you are already KYC compliant).
• An investor can invest in eligible securities in one or more transactions during the year in which the deduction has to be claimed.
• An investor can make any amount of investment in the demat account but the amount eligible for deduction, under the Scheme will not be more than Rs. 50,000.
• The eligible securities brought into the demat account will be subject to lock-in during its first year. If the investment is made in the beginning months of a financial year, the investment may be locked in for more than three years.
• Since the investor is given the flexibility (of no lock-in) for around 90 days in each of the flexible lock-in period, this extra lock-in period in the first year is sort of compensated for. The period of two years beginning immediately after the end of the fixed lock-in period shall be called the ‘Flexible Lock-in’ period.
• An investor will be eligible for a deduction under Section 80CCG of the I-T Act in respect of the actual amount invested in eligible securities, in the first financial year.
• An investor who has claimed a deduction under Section 80CCG, in any assessment year, will not be allowed any deduction under the Scheme for any subsequent assessment year;
• An investor may also keep securities other than the eligible securities in the demat account through which benefits under the Scheme are availed.
• An investor can make investments in securities other than the eligible securities covered under the Scheme and such investments will not be subject to the conditions of the Scheme nor will they be counted for availing the benefit under the Scheme.
• The investment under the Scheme will consist of an investment in any of the eligible securities covered under the Scheme.
• Deductions claimed will be withdrawn if the lock-in period requirements of the investment are not complied with.

Eligible securities

You can pick from a list of listed stocks from four categories: CNX 100, BSE 100, Maharatna and Navaratna & ETFs. Eligible securities include:

• Equity shares falling in the list of securities declared as "BSE-100" or " CNX-100".
• Equity shares of public sector enterprises which are categorised as Maharatna, Navratna or Miniratna by the Central Government.
• Units of Exchange Traded Funds (ETFs) or Mutual Fund (MF) schemes which have securities eligible under Rajiv Gandhi Equity Savings Scheme (RGESS) as underlying, provided they are listed and traded on a stock exchange and settled through a depository mechanism.
• Follow on Public Offer of eligible securities.
• New Fund Offers (NFOs) of eligible ETF's and mutual funds.

RGESS: Joint accounts

In case of joint account holders, only the first account holder will not be considered as a new retail investor. All those existing account holders other than the first demat account holder (eg. second / third account holders or other joint holders) or nominees of the existing account holders will be considered as new retail investors for the purpose of opening of a fresh RGESS account, if otherwise eligible.

In case the demat account is opened as a first holder, but there are no transactions in the equity or derivative segment, then the first account holder is eligible to be a new retail investor.

For taking the benefits under RGESS, the new retail investor will have to submit a declaration, as in Form 'A', to the Depository Participant (DP) at the time of account opening or designating his existing demat account.

Eligible securities, which are brought thereafter into such an account, will be automatically subject to lock-in up to Rs. 50,000, unless the investor specifies otherwise through the Form 'B' specified in this regard.

Form A is the declaration to be submitted by the investors to the depository participants for the benefits under the RGESS. Form B is the declaration to be submitted by the “new” retail investor to the depository participant on purchase of the eligible securities.

RGESS is only meant for the first-time investor. So once you invest in RGESS (in year one), you are no longer a “first-time investor” and therefore cannot ever invest in RGESS again.

It’s good that RGESS allows you to invest in phases in year one. On the flip side, your first year lock-in period will end only a year after you make your last instalment in the first year. Say, you invested Rs.20,000 on 5 September 2012, another Rs.20,000 on 3 December 2012 and then Rs.10,000 on 15 March 2013. In this case, your first-year lock-in would end only on 14 March 2014. This means your first instalment would be locked in for 1 year, 6 months and 9 days and your second instalment will be locked in for 1 year, 3 months and 11 days.

I am a non-resident Indian; Am I eligible for RGESS?

The Scheme is for an individual resident in India as per the provisions of the Income Tax Act.

Can a guardian claim RGESS tax benefit if investment is done in the name of minor?

Yes. Guardian can claim tax benefit for investments done in the name of minor, subject to overall limit for guardian as an individual.

Will I get tax deduction every year for investment in RGESS?

No. Tax benefits are allowed only in the first financial year of investments under RGESS. Even if one claims small deduction under RGESS in first financial year no further deductions can be claimed in subsequent years.

RGESS vs ELSS

An ELSS offers tax deduction benefits under section 80C up to Rs.1 lakh. While your entire investment amount in an ELSS (up to Rs. 1 lakh) is eligible for tax deduction, an RGESS offers you tax deduction benefits of only 50% of your investment amount. However, you can invest in an RGESS, over and above your section 80C limits. So even if you have invested up to Rs.1 lakh in an ELSS, you can still invest Rs.50,000 in RGESS.