The RGESS was launched to encourage small investors to invest in the capital markets. Read on to know what this scheme was, its features, and benefits.
The UPA government launched the Rajiv Gandhi Equity Savings Scheme in 2012-13. The primary goal of the scheme was to encourage small investors to invest in the capital markets. The encouragement was offered by providing tax benefit under Section 80CCG of the IT Act. The government discontinued the scheme in 2017 due to lack of assesses. Take a look at what this scheme was, its features, and benefits.
RGESS was an equity-cum-tax-saving scheme introduced by the government in 2012-2013. Given its size and population, India has one of the lowest numbers of capital market investors in the world. The equity savings scheme by the government was introduced to encourage amateur investors, with gross income under a certain amount, to invest in the capital markets.
This income ceiling was placed at Rs 10 lakhs in 2012-13 (when the scheme was launched) but was increased to Rs. 12 lakhs in 2013-14.
As per section 80CCG, a new tax deduction was introduced for RGESS. Under this new deduction, new retail investors were able to deduct up to Rs. 50,000 from their taxable income by investing in eligible securities. But such new retail investors needed to have an annual income of up to Rs. 10 lakhs, which was later revised to Rs. 12 lakhs.
Also, the deduction was only available on 50% of the investment. But this deduction under Section 80CCG was an additional deduction over and above the standard 80C deduction limit of Rs. 1.5 lakhs.
Investors meeting the below-mentioned criteria were only allowed to claim tax deduction under Section 80CCG.
Indian residents with no equity investing/trading experience
Gross income of less than Rs. 12 lakhs
Investments made in companies listed on BSE 100 and CNX 100 were eligible for RGESS tax deduction
Investments in IPOs of PSUs where the government held at least 51% of the stake
Investments in mutual fund schemes and ETFs, and their NFOs that invested in RGESS
An 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.
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. For instance, let us assume that your initial investment was Rs. 75,000 in the first year, and then you invested Rs. 25,000 more in the same year. You are free to sell securities worth Rs. 25,000 in the 2nd year but not more than that to maintain the initial balance of Rs. 50,000. You were free to buy/sell securities as you like after 3-years
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. So, some of the eligible schemes under RGESS were able to deliver double-digit returns in a year.
This was considerably higher than the returns that people generally receive from their savings bank account of even bank FDs.
Since its launch, RGESS failed to attract a lot of new investors. The tax deduction was not significant and was only applicable to 50% of the amount invested in eligible securities. Moreover, RGESS was also more complicated than most other tax deduction-eligible investment options such as ELSS that generally deliver higher returns than RGESS. Even the working and lock-in period of ELSS is simpler and more convenient.
RGESS was discontinued from 1st April 2018. No new investors were able to invest in the capital markets under this scheme. 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.
But while RGESS is discontinued, investors still have various investment options that are eligible for tax deductions. For instance, the ELSS funds discussed above are eligible for tax deductions under Section 80C. These are close-ended equity schemes that have a lock-in period of 3-years, which is lower than most other 80C eligible investments.
Also, ELSS investments are bundled with other 80C eligible investments, and together they offer a maximum tax deduction of up to Rs. 1.5 lakhs. So, if you have not used up your 80C deductions up to this limit, ELSS funds can be an excellent option.