Friday, December 7, 2012

Rajiv Gandhi Equity Savings Scheme – RGESS

The Indian Stock Markets have been a preferred investment option for the smart or should I say the Risk Taking Investor not only in India but across the globe. But even today a majority of the common-man investor population prefer Bank Fixed Deposits or Gold or Real Estate for investment. In order to motivate such investors to start investing in the Indian Stock Markets, the Indian Government and Income Tax Department have come up with a revolutionary scheme called the “Rajiv Gandhi Equity Savings Scheme – RGESS”.

In March 2012, in an article titled Budget 2012 - Income Tax Slabs Revised in India I had mentioned this term “Rajiv Gandhi Equity Savings Scheme” as a proposed scheme to provide additional tax benefits to investors. However, there wasn’t much clarity surrounding this scheme back then. Now more details have emerged and it looks like this could be a great investment option for the indian investor who is looking for tax benefits as well. The purpose of this article is to go over this scheme and give you the key points that could be beneficial to us.

What is this Rajiv Gandhi Equity Savings Scheme?

The Rajiv Gandhi Equity Savings Scheme or RGESS is a new scheme that was proposed in this years budget by the Finance Minister. The purpose of this scheme is to encourage individual participation in the Indian stock markets. Retail Investors (You and Me) who invest in stocks and equities based mutual funds have been offered tax benefits under this Rajiv Gandhi Equity Savings Scheme or RGESS.

On the 21st of September 2012, the indian finance ministry approved this scheme under which, beginners investing upto Rs. 50,000 in approved stocks and mutual funds can claim 50% of the amount as tax deduction. However, an important point to note here is that this benefit is available only to those with an annual income of up to 10 lakhs only.

What Stocks and Mutual Funds are eligible for purchase under this Scheme?

The following stocks and mutual funds are eligible for purchase under this Rajiv Gandhi Equity Savings Scheme:
1. The top 100 stocks listed on the BSE 100 of the Bombay Stock Exchange
2. The top 100 stocks listed on the CNX 100 of the National Stock Exchange
3. Shares of Government owned – Navratna, Maharatna and Miniratna companies
4. Investments in follow-on public offers (FPOs) of these government owned entities with an annual turnover of Rs. 4000 crores or more in the three years preceeding the issue would also be eligible
5. ETF’s and Mutual Funds that invest in approved securities are also eligible for this scheme

Under What Section can we claim this Tax Deduction?

Investors can claim deduction under the Section 80CCG of the Indian Income Tax Act, 1961. An important point to note is that investments need not be made in one shot. Investments can be made in parts during the financial year for which the deduction is being claimed – just like any other investment under the Section 80C.

Are there any Terms & Conditions?

Of course, YES.

Let me explain the rationale behind the “Why” part of these preconditions before we actually look at them.

Reason 1: To encourage retail participation – According to researchers worldwide the average retail participation in the stock markets is one of the least in the world in India. Less than 10% of the average indian population is invested in Stocks.

Reason 2: To bring in more stability to the Indices – The Stock Indices Sensex and Nifty Indices. The Indian Market Indices are a reflection of the economic scenario in the country. So, the more people stay invested, the more stable the indices would be. If people are only trading – just buying/selling without a long-term investment strategy, the indices will continue to be choppy like they are now. So, the government has given this tax benefit which could motivate guys to buy the top stocks that can directly affect the index movement plus they add a lock-in period so that only investors can use this tax benefit.

Reason 3: One of the main reasons why the common-man investor stays away from the stock market is the RISK Involved. By restricting the investments to only large cap stocks which are much less volatile when compared to the mid or small cap stocks, the government has essentially reduced the overall risk an investor is taking.

So, what are these Terms & Conditions?

The following are the terms & conditions:

The first and most important condition is that this scheme is available only for investors whose annual income is less than 10 lakhs per year.

Investments under this scheme will have a lock-in period of 3 years. For one year from the date of purchase of the Equities/MF’s under the scheme, the investor cannot sell them at all. From the second year onwards, the investor can sell the securities provided the overall portfolio held by the investor does not fall below the amount for which tax deduction was claimed for.

For ex: Let us say I buy shares of State Bank of India worth Rs. 50,000/- today and claim tax benefits for this financial year (2011-12) I cannot sell them during the first year. Next year, let us say I buy shares of some other government organization say Indian Oil Corp for 50,000/- I can sell the shares of State Bank of India because my current portfolio is worth Rs. 50,000.

Some points to note about this scenario are:
a. You cannot claim tax deduction again this year because your net investment is only Rs. 50,000/- for which you have already claimed deduction last year.
b. You cannot sell the shares of Indian Oil for another 1 year

My Take on Rajiv Gandhi Equity Savings Scheme

This is a fantastic initiative from the Indian Government. This will encourage retail participation and bring in a bit more stability to the Indian Markets. Experts predict that this will encourage approximately 8000 to 10000 crores worth of investment from Retain Investors into the select blue-chip stocks each year. Usually blue-chip stocks give us an average of around 10-15% every year. If we club the tax benefits ranging from 10% to 30% the net returns could workout to be even more than the regular returns blue-chip stocks would give us.

By restricting the amount one can invest (to claim to benefits) to Rs. 50,000/- the risk an investor is taking is only minimal. By also putting an upper limit on the income to 10 lakhs, the government is trying to provide this benefit only to the middle income group indian which is a welcome move.

All in all, it is an excellent option which everyone must utilize…

Happy Investing & Tax Saving!!!

End Note: Up until this year we only had ELSS mutual funds and ULIPs which provided us tax benefits under section 80C. Along with section 80C where we can invest 1 lakh every year and claim tax deduction. Now, if we club up this 50,000/- the total works out to Rs. 1.5 lakhs. If an individual religiously invests this 1.5 lakhs every year and builds his/her corpus in a steady basis, they will be left with a sizeable corpus and maybe even retire as a crorepati…


  1. Hi ganesh, I have opened a new demat account for my father on feb 2013. I had insisted to my dp representative that i am opening this demat account to avail benefits under RGESS. Post opening of demat account i have invested INR 50000 in eligible securities. Now when i ask for an acknowledgment from DP, they say that i haven't filled declaration A at the time opening of demat a/c so i will not be eligible for RGESS as i have purchased securities before giving declaration A. so now i have given the declaration as during opening of demat they didn't know about such declaration. Finally they said that they have forwarded my declaration to CDSL and can't confirm anything at this juncture. My query is whether the above mentioned case eligible under RGESS? i.e. opening a new account after the notification and investing in eligible securities and later on giving declaration A is valid or not? Please advice

    1. Hi Shiva,
      I believe this is incorrect. I have a DEMAT Account for 7 years and what if I want to invest in RGESS? Will they ask me that I did not fill the declaration at the time of opening?

      There may be some forms that you would have to fill but I believe this "Did not fill up during opening" seems incorrect. Try to talk to your DP by visiting in person (On call support is usually really bad for such kind of queries) and try to sort it out.

      I think your case is eligible. Read this from the BSE Website about RGESS -



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