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The Rajiv Gandhi Equity Savings Scheme or the (RGESS) was launched in 2013 to encourage retail and small investors to participate in the equity cult. However, the scheme had too many limitations and had to be eventually wound up in 2018. Here is a quick look at the RGESS scheme for equity investing.
The Congress led UPA government had launched the Rajiv Gandhi Equity Savings Scheme in the financial year 2012-13 as part of the Union Budget announcement. The primary purpose of the scheme was to encourage small investors to participate in the capital markets and benefit from the wealth creation capabilities of equities. The additional incentive to lure investors to equities was offered by way of an additional tax benefit under Section 80CCG of the Income Tax Act. The NDA government decided to discontinue the scheme in financial year 2017-18 due to lack of participation and any widespread impact.
RGESS was an equity-cum-tax-saving scheme specifically to encourage first time investors in equities. The reasons were not far to seek. India had one of the lowest numbers of capital market investors in the world in terms of equity penetration. The equity savings scheme by the government was introduced to encourage first time investors into the equity cult.
Here are some of the highlights of the RGESS scheme launched in financial year 2012-13.
For an investor to be able to invest under the RGESS scheme and claim benefits of tax under Section 80CCG, the following conditions had to be satisfied.
The first and foremost condition was that the investor needed a Demat account to invest in RGESS. An investor could purchase all the different securities that were eligible under the scheme through his/her Demat account. Once purchased, the security would be automatically locked-in for a period of 1-year, which is the mandatory lock-in period.
After the initial lock-in period of 1 year, an investor was allowed to sell the securities in the next 2-years, but it was mandatory to maintain the value of the initial investment.
Apart from the tax deduction discussed above, the Rajiv Gandhi Equity Scheme encouraged people to invest in the capital markets that are well-known for their high returns potential. Let us understand how the tax benefit helped the return on RGESS.
Assume that you bought shares of Company X (eligible for RGESS) worth Rs.80,000 as a first time investor. Now the value has moved up to Rs.150,000 in 3 years. Under normal circumstances this would translate into annualized CAGR returns of 23.31%, which is pretty good. How will RGESS be different.
When you invest Rs.80,000 in the RGESS scheme, 50% of that is eligible for exemption. If you are in the 20% tax bracket, you get a tax break of 20% of Rs.40,000 i.e. Rs.8,000. That means, you did not invest Rs.80,000 but effectively invested only Rs.72,000. This Rs.72,000 has grown to Rs.150,000 in 3 years. Now what is your CAGR returns?
You can quickly work out in excel that your CAGR returns over 3 years has now gone up to 27.72%. In short, the RGESS tax benefit under Section 80CCD has enhanced your CAGR returns by 441 basis points from 23.31% to 27.72%.
There are two parts to the issue. First, let us understand why the RGESS scheme was discontinued in the first place. Basically it failed to attract too many investors and the resultant demat accounts it resulted in was just above 20,000. Tax exemption was just 50% and that was not attractive to investors. RGESS was also more complicated and more rigid compared to other tax eligible schemes like the mutual fund Equity Linked Saving Scheme (ELSS).
Now let us address the second part on what about existing investments. You would recollect that RGESS was discontinued from 1st April 2018. No new investors were able to invest in the capital markets under this scheme after that. But, those who invested in 2017/18 are eligible to claim tax deductions as per the scheme’s terms for 1-2 years even after discontinuation. Fresh investments in RGESS are barred effective 01-Apr 2018.
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