Rajiv Gandhi Equity Saving Scheme PROFESSOR • Priyank Misra DR. Kumar Bijoy • 75140 (CFA,Msc,MA) CLASS • Puneet Arora • 75141 BFIA 2B(2012-13) • Shantanu Vashishth PAPER • 75150 Financial Markets , Institutions and Instruments
Contents• What is RGESS?• Meaning of a ‘new retail investor’?• Eligible Securities• Procedure of Investment Procedure for investors with a newly opened Demat account Procedure for investors having Demat account but no prior trading• Tax Benefits Illustration 1 Illustration 2 Illustration 3• Holding Period & related matters• Effect of Non-compliance• Status of RGESS Demat accounts• ELSS v/s RGESS
What is RGESS? Rajiv Gandhi Equity Saving Scheme (RGESS) is a new initiative by the government of India aimed encouraging first time investors to channelize their savings into the capital markets. As an incentive, a one-time deduction will be available to the new retail investor, whose gross total annual income does not exceed Rs. 12 lakhs, on the 50% of the amount invested in ‘eligible securities’ in the financial year, subject to maximum investment limit of Rs 50,000. For the purpose of claiming benefit under RGESS, the investor needs to invest in select approved securities as notified by the government.
Meaning of new retail investor “New Retail Investor” means the following resident individuals:- (a) any individual who has not opened a demat account and has not made any transactions in the derivative segment as on the date of notification of the Scheme; (b) any individual who has opened a demat account before the notification of the Scheme but has not made any transactions in the equity segment or the derivative segment till the date of notification of the Scheme, and any individual who is not the first account holder of an existing joint demat account shall be deemed to have not opened a demat account for the purposes of this Scheme
Equity shares included in the NSE CNX-100 & BSE-100. Equity shares of PSU categorized as Maharatna, Miniratna or Navratna. Units of ETFs & MFs with eligible securities as underlying and provided they are listed and traded on a stock exchange and settled through a depository mechanism. FPO or NFOs of above eligible securities. IPOs of PSUs with at least 51% government holding and 3 year annual turnover of more than Rs. 4000 crore.Note: The security should be RGESS eligible at the time of investment. Such security will beconsidered for RGESS investment, even if it becomes ineligible at a later date
PROCEDURE FOR EXISTING INVESTORS:•Designate existing demat account for RGESS .•Open a broking account, if not opened•PAN compliant account.•Submit declaration in Form A to DP.
PROCEDURE FOR RGESS INVESTMENT: A new retail investor can make investments under the Scheme in the following manner: Open a Demat account with a broker. 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 exceed fifty thousand rupees. The eligible securities brought into the Demat account, as declared or designated by the new retail investor, will automatically be subject to lock-in during its first year, unless the new retail investor specifies otherwise and for such specification, the new retail investor will submit a declaration in Form B indicating that such securities are not to be included within the above limit of investment. An investor will be eligible for a deduction under subsection (1) of section 80CCG of the Act in respect of the actual amount invested in eligible securities , in the first financial year in respect of which a declaration in Form B.
An investor who has claimed a deduction under sub- section (1) of section 80CCG of the Act, in any assessment year, will not be allowed any deduction under the Scheme for any subsequent assessment year; An investor will be permitted a grace period of three trading days from the end of the financial year so that the eligible securities purchased on the last trading day of the financial year also get credited in the Demat account and such securities will be deemed to have been purchased in the financial year itself. 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 or any other condition of the Scheme is violated.
TAX BENEFITS Tax Benefit u/s 80CCG – deduction from total income. Deduction of 50% of amount invested. Deduction not to exceed Rs. 25,000. Deduction permitted 3 years.
ILLUSTRATION • Case 1:Taxable income<500000 Particulars Individual A Individual B GTI 5,00,000.00 5,00,000.00less:deduction under section 80c to 80u 1,00,000.00 1,00,000.00less:deduction under section 80ccg 25,000.00 0.00 GTI after deduction 3,75,000.00 4,00,000.00 taxable income 1,75,000.00 2,00,000.00 tax payable 17,500.00 20,000.00 tax saving 2,500.00 no. of years 3 total savings 7,500.00
• Case 2:Taxable income <100000 Particulars Individual A Individual B GTI 10,00,000.00 10,00,000.00less:deduction under section 80c to 80u 1,00,000.00 1,00,000.00less:deduction under section 80ccg 25,000.00 0.00 GTI after deduction 8,75,000.00 9,00,000.00 tax payable 1,05,000.00 1,10,000.00 tax saving 5,000.00 no. of years 3 total savings 15,000.00
Case 3: Taxable income<1000000 Particulars Individual A Individual B GTI 12,00,000.00 12,00,000.00less:deduction under section 80c to 80u 1,00,000.00 1,00,000.00less:deduction under section 80ccg 25,000.00 0.00 GTI after deduction 10,75,000.00 11,00,000.00 tax payable 1,52,500.00 1,60,000.00 tax saving 7,500.00 no. of years 3 total savings 22,500.00
• Holding Period ① Investments are required to be held for a period called the fixed lock-in period. The fixed lock-in period will commence from the date of first investment in the relevant financial year and end one year from the date of last eligible investment in the same financial year. ② An investor is not permitted to sell, pledge or hypothecate any eligible investment during the fixed lock-in period. ③ The period of two years beginning immediately after the end of the fixed lock-in
④ The new retail investor is permitted to trade the eligible securities after the completion of the fixed lock-in period subject to the following conditions: The new retail investor will ensure that the Demat account under the Scheme is compliant for a cumulative period of a minimum of two hundred and seventy days during each of the two years of the flexible lock-in period as laid down hereunder: A. The Demat account will be considered compliant for the number of days where value of the investment portfolio of eligible securities , within the flexible lock- in period, is equal to or higher than the amount claimed as investment for the purposes of deduction under section 80CCG of the Act B. In case the value of investment portfolio in the Demat account falls due to a fall in the market rate of eligible securities in the flexible lock-in period, then notwithstanding sub clause(A), I. The Demat account will be considered compliant from the first day of the flexible lock-in period to the day any such eligible securities are sold during this period
II. Where the assessee sells the eligible securities mentioned in sub-clause (B) from his Demat account, he will have to purchase eligible securities and the said Demat account will be compliant from the day on which the value of the investment portfolio in the account becomes: i. at least equivalent to the investment claimed as eligible for deduction under section 80CCG of the Act or; ii. the value of the investment portfolio under the Scheme before such sale, whichever is less
⑤ An investors Demat account created under the Scheme will automatically convert into an ordinary Demat account on the expiry of the holding period of the eligible investment.⑥ For the purpose of valuation of investment during the flexible lock-in period, the closing price as on the previous day of the date of trading, will be considered.⑦ The total cost of acquisition of eligible securities will not include brokerage charges, securities transaction tax, stamp duty, service tax and all taxes, which are appearing in the contract note.⑧ If the eligible investment undergoes a change as a result of involuntary corporate actions like demerger of companies, amalgamation, etc. resulting in debit or credit of securities covered under the Scheme, the deduction claimed by such investor will not be affected.⑨ In case of voluntary corporate actions like buy-back, etc. where a new retail investor has an option to exercise his/her choice, the resulting debit will be considered as a sale transaction for the purpose of the Scheme.⑩ SEBI will notify the corporate actions allowed under the Scheme in this regard.
Effect of Non-Compliance Deduction claimed will be withdrawn. Deemed to be income of the assesse of such previous year . Liable to tax .
Status of Rajiv Gandhi Equity Savings Scheme, 2012 (RGESS)RGESS accounts with NSDL
ELSS v/s RGESSBASIS RGESS ELSSEligibility Annual Income<1200000 noneLock-in period 1+2 years 3 yearsTax Benefits 50%(80CCG) 100%(80C)Max. Investment limit for 50000 100000ExemptionNeed for Demat Yes noEquity linked Yes yesAnnual Return Market based Market basedInvestment Channel Investments are to be made Investments are in mutual directly in selected equity or funds which invests mostly in into a combination of equity equity (80-100% in equity) including mutual funds, Exchange Traded Funds, and select IPOs of PSUs Since investments are in Since investments are inRisk equity / risk / ownership mutual funds, it is perceived capital, risk is perceived to be to be less risky.
Final VerdictWhile an additional tax deduction of up to Rs 25,000 appears good , the real impacton your tax savings is not substantial.The maximum tax benefit one can gain after all the above complications is up to amaximum of Rs.7500/- depending on the individual’s tax bracket.Though the scheme was started with provision of deduction for one year only, thisbudget the provision for deduction has been extended to 3 years, however, still thebenefit that will accrue is insignificant.Investors who have stayed away from stock markets have a very small incentive ofentering stock market. Even this incentive will be washed away by the complicated‘holding period’ norms and exposure to the vicissitudes of the market.Up till now, BI, IDBI and DSP BlackRock are the only ones who have filed offerdocuments with SEBI to launch RGESS funds. This ,again, reflects the lukewarmsentiment towards this scheme.Even for those who might consider this scheme,the investment universe of RGESS is alsovery narrow. Only, Shares in NSE 100 or BSE 100 and a set of other PSUs are eligible.
The government has failed to realize that what has kept investors away from mutualfunds is the failure of Mutual Funds and stocks. Tiny tax benefits are unlikely to motivateinvestors. As such, the RGESS scheme is more regress than progress. Essentially, one can see that RGESS was more to promote Rajiv Gandhi than equity savings scheme!