(Updated 28 Dec’12) Tax payers were overjoyed when our Finance Minister, in his budget speech of 2012, announced a new avenue to save tax – by investing in direct equity. The announcement was ambiguous and lacking in detail. Hence, everyone new that they could save tax by investing in stock market but no one knew the modalities and restrictions.
Then in Sep 2012, Finance Ministry issued a detailed note outlining the features and clauses of the scheme. In this post, I’ll make an effort to explain it in layman’s language bereft of any jargon. 🙂
The scheme is named as ‘Rajiv Gandhi Equity Savings Scheme‘ (don’t understand why everything in this country gets named after the Nehru-Gandhi family :x). The objective of this scheme is to divert people’s savings into equity markets and promote equity culture generally among small investors.
This scheme comes under section 80CCG of Income Tax Act 1961.
If you don’t have time to read the full post, following is an explanation of this scheme in 4 lines:
Under ‘Rajiv Gandhi Equity Savings Scheme’ – a new equity investor will be able to claim 50% of his investment in direct equity as deduction subject to maximum investment of Rs. 50,000 and provided his taxable income is below Rs. 10 lacs. The investment will be subject to 3 years lock-in.
Key features of Rajiv Gandhi Equity Savings Scheme (RGESS)
- The scheme is open to new equity investors only. They will be identified on the basis of their PAN numbers. If you already have a demat account but you have never made an transaction in it (equity/derivative) before the date of notification of this scheme then you are eligible for deduction under this scheme. Also, if you are a second holder in a demat account but don’t have any account in your name, you can open one to claim deduction under RGESS. (Which is the best demat account? check here)
- Your taxable income should be less than or equal to Rs. 10,00,000
- You can invest a maximum of Rs. 50,000 and a deduction of only 50% 🙁 will be allowed. Hence, the maximum deduction you can claim in a year is Rs. 25000 (something is better than nothing :))
- You can invest in:
- Stocks listed under the BSE 100 or CNX 100
- PSUs which are Navratnas, Maharatnas and Miniratnas
- Follow-on Public Offers (FPOs) of the above companies
- IPOs of PSUs, which are getting listed in the relevant financial year and whose annual turnover is not less than Rs. 4000 cr for each of the immediate past three years
- Mutual Funds and Exchange Traded Funds that have above stocks as their underlying investments and are transacted through demat account.(If anyone has compiled a list of stocks eligible under this scheme, please share)
- You need not invest the full amount in one-go. You can do it in smaller chuncks as per your convenience.
- Lock-in period is 3 years. Out of which, the first year is blanket lock-in.
- After the first year, you can start trading the stocks that you have bought under this scheme. However, care should be taken that you maintain the amount of investment that you have claimed at any point of time. That means, if you have claimed deduction on 50k investment, the total value of shares in your account should not fall below 50k at any point of time in these two years. Basic principle being that whatever amount of stocks you sell, equal amount of stocks should be bought by you.
- Valuation of shares will be on the basis of closing price of previous day.
- In case you break any of the rules stated above, the tax benefit will be withdrawn.
I think Rajiv Gandhi Equity Savings Scheme is a good option to save additional 25k in taxes. However, not everyone would be able to benefit from it. So if you are an existing equity investor (like me), you will not get any benefit from this scheme :(. However, there are other ways to save taxes which I have explained here.
Update 8 Dec 2012: SEBI in its circular dated 6 Dec 2012 has asked stock exchanges to list stocks, mutual funds and ETFs that qualify under RGESS on their website.
Update 28 Dec 2012: List of stocks eligible under RGESS (put out by BSE) – Download here.
I hope this article would have answered a lot of your queries about RGESS. If there is anything which has not been answered here, please do let me know in comments below and I’ll try my best to answer the same. You may also add if I have missed any point.
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