Rajiv Gandhi Equity Savings Scheme Explained & Compared to ELSS

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Rajiv Gandhi Equity Saving Scheme (RGESS) ,Tax Saving Scheme

Rajiv Gandhi Equity Saving Scheme (RGESS) is a tax-saving instrument announced in the Finance Act, 2012 to attract new investors to the equity market. It is exclusively for first time retail investors in the securities market. These investors are called “NEW INVESTORS”.

Even after initial explanation some doubts do remain in the mind of investors. To remove those doubts here is a table with practical example to give you a deeper insight to exactly how Rajiv Gandhi Equity Saving Scheme (RGESS) is beneficial to you and will you be eligible to get deduction under this scheme.

Let us understand this better by using four different scenarios.

Mr. Rahul Mr. Raj Mr. Ankit Mr. John
Gross Total Income (Rs.) 7 Lakhs per annum 9 Lakhs per annum 13 Lakhs per annum 11 Lakhs per annum
Ordinarily Resident in India Yes Yes Yes No
Existing Investment Holdings Mutual FundsExchange Traded Funds (ETFs)Equity shares in physical mode

Debenture /Bonds through demat account

Equity Shares in demat mode
DerivativesSystematic Investment Plan (SIP) in Mutual Funds.
Equity-linked saving schemes (ELSS) of
Mutual FundFixed DepositsPost Office Deposits
No Investment
Demat A/c Yes. But as Joint Holder Yes Yes No
Eligibility? Yes. You qualify as a New Investor under RGESS as you fulfill all criteria. No. As you already hold shares and derivatives in your demat account, you do not qualify as a new investor. No. Since your gross annual income is above 12 lakhs, you do not qualify as a new investor No. Since you are a non-resident Indian, you do not qualify as a new investor under RGESS.

How is RGESS different from ELSS schemes of Mutual Funds?

ELSS and RGESS are entirely different schemes. ELSS is meant for indirect participation in the stock market, whereas RGESS aims to encourage direct participation in the stock market. The main operational differences are given below:

  ELSS RGESS
Investment in Investments are only in mutual funds Investments are to be made directly in listed equity or a combination of equity, mutual funds, ETFs.
Deduction %age 100% deduction (uptoRs. 1,00,000) is allowed under ELSS Only 50% deduction (upto a max. of Rs. 25,000) is allowed under RGESS.
Deduction Under Section The ELSS benefit is coming under Section 80C of the IT Act which has an aggregate limit of Rs. 1,00,000 for all such eligible instruments like LIC policy, PPF etc. RGESS deduction is available under Section 80CCG. This is a separate investment limit exclusively for RGESS, over and above the Section 80C Limit
Lock-in-period Lock-in period of 3 years Lock-in period of 3-years. However, trading allowed after one-year, subject to conditions.
Risk Perception Since investments are in mutual funds, it is perceived to be less risky. Since investments are in equity / risk / ownership capital, risk is perceived to be higher.
Income Eligibility No income eligibility criteria. Demat account is not required. Income eligibility criteria – Gross annual income less than Rs 12 lakhs. Demat account is required.

 

Form A is what you need to fill and give your depository participant before you make your first RGESS investment. This form will certify that you are, indeed, a first-time investor and are eligible to invest in an RGESS.

If you buy any RGESS-eligible security, within the overall investment limit of Rs.50,000, but don’t want it to be counted as an RGESS investment, then you need to give form B. This would mean that you can sell this security anytime you want and not be subject to the lock-in of three years. Needless to say you will also lose the tax benefits available.

However, if you buy an RGESS-eligible security beyond your Rs.50,000 limit, don’t bother giving any form then it will automatically not be counted as RGESS-eligible.

These explanation must have quenched the thirst of your confusions.