In the Union Budget 2012-2013, the Indian Government announced the scheme and it was approved by Shri. P. Chidambaram, who was the Finance Minister at the time, on 21 September 2012. In the Union Budget 2013-2014, the Indian Government further expanded the scheme by providing ‘New Retail Investors’ tax benefits.
Apart from improving the quality of domestic capital markets and encouraging the flow of savings, the scheme also wants to bring about ‘equity culture’ in the country. Under the scheme, the retail investor base is also expected to increase in the securities market in India.
The eligibility criteria for the scheme are mentioned below:
- The individual must be an Indian resident. The benefits of the scheme cannot be availed by corporate entities, trusts, Hindu Undivided Families (HUF), etc.
- Individuals who have not opened a demat account and who have also not been involved in any trading activity till the opening date of the RGESS or until the first day of the financial year in which the eligible investment towards the RGESS is in the account, whichever is later.
- Individuals who have a demat account but have not been involved in any trading until the first day of the initial year or when the demat account has been converted to an RGESS, whichever is later.
- For the financial year, the gross total income of the individual must be less than Rs.12 lakh.
- In order to claim for benefits under the scheme, the declaration form (Form A) must be submitted by the new retail investor. The declaration form must be submitted to the Depository Participant (DP) at the time when the account is being opened or at the time of designation of the current demat account.
- In case the first account holder opens a demat account and no transactions have been made in the form of equity or in the derivative segment, the first holder can become a new retail investor.
- The first account holder cannot become the new retail investor in case of joint accounts. Individuals other than the first account holder or nominees are eligible to become new retail investors in order to open a new RGESS account.
Benefits of the Rajiv Gandhi Equity Savings Scheme
The main benefits of the RGESS are mentioned below:
- Under Section 80CCG, new retail investors can enjoy tax deductions on investments of up to Rs.50,000 on eligible securities. The investors are also eligible for an additional tax benefit of Rs.25,000. These tax benefits are not inclusive of the Rs.1 lakh tax benefit that investors are already eligible for under Section 80C of the Income Tax Act, 1961.
- Returns that are generated from any investments made towards RGESS can be withdrawn after a year. Many other tax savings instruments do not provide such benefits.
- Individuals can make investments in the form of instalments for the year in which tax claims are being filed.
- Dividend payments are tax-free.
- The scheme helps by providing long-term benefits by educating individuals in the retail investment segment and also helps in moving India towards financial inclusivity.
- In case the scheme succeeds, individuals who save their money in fixed deposits or bank deposits invest their money in capital markets. This can lead to an increase in productive ‘capital formation’ assets.
Lock-in period of the Rajiv Gandhi Equity Savings Scheme
- The scheme has a lock-in period of three years. The fixed lock-in period is one year, and the flexible lock-in period is two years.
- The lock-in period starts from the date of purchase of securities in the financial year where it was made until 31 March of the year that follows that particular financial year.
- Immediately after the fixed lock-in period, the flexible lock-in period begins.
- Eligible securities cannot be pledged or sold during the fixed lock-in period. However, the eligible securities can be pledged or sold during the flexible lock-in period.
- The RGESS account will be converted to a normal demat account after the completion of the fixed lock-in period.
Benefits towards the RGESS can be availed for three years consecutively. Benefits begin from the financial year during which the investments have been made under the scheme for the first time.
Where can individuals invest in the Rajiv Gandhi Equity Savings Scheme?
Individuals can invest in eligible securities under this scheme. The schemes that are considered as eligible securities under the scheme are:
- Initial Public Offerings of certain Public Sector Undertakings (PSUs) that will be eligible under RGESS in the relevant financial year.
Equity shares of the companies which include:
- ‘CNX-100’ or ‘BSE-100’ companies.
- Public sector enterprises that have been categorised by the Central Government as Miniratna, Navratna, and Maharatna.
- Follow on Public Offers (FPOs) from the above-mentioned companies that are RGESS-compliant.
- Units of Mutual Funds that are complaint with the RGESS.
- Units of Exchange Traded Funds (ETFs) that are complaint with the RGESS.
- New Fund Offers (NFOs) of the companies that have been mentioned above that are compliant with the RGESS.
Procedure to invest in the Rajiv Gandhi Equity Savings Scheme
- Individuals must submit Form A with a Depository Participant to open a demat account. Form A is to convert the current account to an RGESS account. Individuals can also open a new RGESS account.
- In the year when deductions must be claimed, investors will be able to invest in eligible securities by making one or more transactions.
- The eligible securities that are added to the demat account will have a lock-in period for that year. However, the retail investors can remove the lock-in period by submitting Form B where they can specify that the security that they have invested in should not be included in the maximum limit of investment.
- Investors are eligible for a tax deduction under Section 80CCG of the Income Tax Act for the financial year where they have invested in eligible securities, but have not declared Form B. However, the tax deductions are for a maximum investment limit of Rs.50,000.
- Under Section 80CCG of the Income Tax Act, investors are eligible for a tax deduction of 50% of the total investment they have made in a financial year. However, the tax deduction are for a maximum investment of Rs.50,000. This tax deduction can be made for three years consecutively.
- In case individuals buy eligible securities on the last trading day of the financial year, they are provided with a 7-day grace period so that the eligible securities that have been bought, get added to the demat account and will be declared as eligible securities that have been bought in that particular financial year.
- Securities apart from eligible securities can also be added to the demat account.
- In case investors add securities other than the eligible securities, these securities need not be subject to conditions of the scheme nor will investors be able to avail benefits for these securities.
- In case the requirements of the lock-in period of the scheme or any other conditions of the scheme are not followed, the deductions that have been claimed will be withdrawn.