Details of Rajiv Gandhi Equity Savings Scheme

The Union Finance Minister Shri P. Chidambaram approved a new tax saving scheme called "Rajiv Gandhi Equity Saving Scheme" (RGESS),exclusively for the first time retail investors in Securities Market. This Scheme would give tax benefits to new investors who invest up to Rs. 50,000 and whose annual income is below Rs. 10 lakh.

The Scheme not only encourages the flow of savings and improves the depth of domestic capital markets, but also aims to promote an 'equity culture' in India. This is also expected to widen the retail investor base in the Indian securities markets.

Salient features of the Scheme are as under:

1 . Scheme is open to new retail investors, identified on the basis of their 

     PAN numbers.This includes those who have opened the Demat Account 

     but  have not made any transaction in equity and /or in derivatives till 

     the  date of notification of this Scheme and all those account holders

     other than the first account holder who wish to open a fresh account.

2 . Those investors whose annual taxable income is ≤ Rs. 10 lakhs are 

     eligible under theScheme.

3. The maximum Investment permissible under the Scheme is Rs. 50,000 and

    the investor would get a 50% deduction of the amount invested from the

    taxable income for that year.

4. Under the Scheme, those stocks listed under the BSE 100 or CNX 100, or 

    those of Public sector undertakings which are Navratnas, Maharatnas and 

    Miniratnas would be eligible. Follow-on Public Offers (FPOs) of the above

    companies would also be eligible under the Scheme. IPOs of PSUs, which 

    are getting listed in the relevant financial year and whose annual turn

    over is not less than Rs. 4000 Crore for each of the immediate past three 

    years,  would also be eligible.

5. In addition, considering the requests from various stakeholders, Exchange 

   Traded Funds (ETFs) and Mutual Funds (MFs) that have RGESS eligible

   securities as their underlying and are listed and traded in the stock 

   exchanges and settled through a depository mechanism have also been

   brought under RGESS.

6. To benefit the small investors, the investments are allowed to be made in 

    instalments in the year in which tax claims are made.

7. The total lock-in period for investments under the Scheme would be three

    years including an initial blanket lock-in period of one year, commencing

    from the date of last purchase of securities under RGESS.

8. After the first year, investors would be allowed to trade in the securities in

   furtherance of the goal of promoting an equity culture and as a provision to

   protect them from adverse market movements or stock specific risks as well

   as to give them avenues to realize profits.

9. Investors would, however, be required to maintain their level of investment

   during these two years at the amount for which they have claimed income

   tax benefit or at the value of the portfolio before initiating a sale

   transaction, whichever is less, for at least 270 days in a year. The

   calculation of 270 days includes those days pursuant to the day

   on which the market value of the residual shares /units has

   automatically touched the stipulated value after the date of debit.

10. The general principle under which trading is allowed is that whatever is 
     the value of stocks/units sold by the investor from the RGESS portfolio,
     RGESS compliant securities of at least the same value are credited back
     into the account subsequently.However, the investor is allowed to take  
     benefits of the appreciation of his RGESS portfolio, provided its value, as
     on the previous day of trading, remains above the investment for which
     they have claimed income tax benefit.

11. For the purpose of valuation of shares, the closing price as on the

     previous day of the date of trading will be considered so that new 

     investors are certain about their debits and credits into the account.

12. In case the investor fails to meet the conditions stipulated, the tax 
     benefit will be withdrawn.

Like all financial products which have reached out substantially to the retail investors (post office savings, life insurance policies etc) through tax benefits, this tax break for direct investment in equity is expected to substantially encourage the retail participation in securities market as well as to enhance their participation in the growth of Indian industry.

Entry of more retail investors are expected to further deepen the securities markets as they bring in long-term stable funds, which can counteract the volatility created by the liquidity providers of the market. The Scheme, thus, also furthers the goal of financial stability and promotes financial inclusion. Since Exchange Traded Funds and Mutual Funds have also been brought under the Scheme, the Scheme should provide encouragement and re-assurance

to the first time investors.

The broad provisions of the Scheme and the income tax benefits under it have already been incorporated as a new section 80CCG of the Income Tax Act, 1961, as amended by the Finance Act, 2012.

Department of Revenue will notify the Scheme and SEBI will issue the relevant circulars to operationalize the Scheme in the next two weeks.

Source: Taxman