The Rajiv Gandhi Equity Savings Scheme (RGESS) is creating quite a buzz. Under this scheme, first-time equity investors can invest in approved stocks and mutual funds and claim an income tax deduction on 50% of the amount invested under Section 80CCG of the Income Tax Act.

 

Here is what you need to know to grasp the facts.

 

• Who qualifies?

 

There are 3 requirements that an individual has to pass to be eligible for this scheme:

• Resident individual
• Gross total income less than Rs 10 lakh

 

How does one define a first time investor? 

 

That would be an individual who opened a demat account as a ‘first holder’ after November 23, 2012.

 

What if he opened a demat account prior to this date but never bought any shares or traded in the Futures and Options (F&O) segment? 

Then he too qualifies to be eligible under this scheme.

And if his name appeared second in a joint demat account before this date? 

 

He still qualifies to open one under this scheme as a 'first holder'.

If an investor opened a demat account to invest in a Gold ETF does that disqualify him? 

No. Since the demat account has no equity security, the individual will be considered a new retail investor.

 

• How much needs to be invested?
•  

There is no restriction on the amount to be invested – minimum or maximum. However, only Rs 50,000 is considered for tax purposes. Of this, only 50%, or Rs 25,000, is allowed as deduction. Even if you invest less than the upper limit of Rs 50,000, only 50% of what you invest is allowed as a deduction.

 

Do note that additional expenses incurred on the acquisition of eligible securities like brokerage, stamp duty, securities transaction tax (STT), service tax etc will not be considered.

• What can be bought?

• Stocks from the universe that comprise the BSE-100 or CNX-100
• Shares of listed Navratna, Maharatna and Miniratna public sector enterprises 
• Initial Public Offerings (IPOs) of PSUs with turnover more than Rs 4,000 crore and where the government shareholding pattern is at least 51%
• Units of Exchange Traded Funds (ETFs) or mutual fund schemes investing in RGESS eligible shares provided these units are listed and traded on the stock exchange and settled through the depository mechanism

 

Since a direct investment in equity needs considerable expertise, a first-time investor is not advised to take the plunge. They can opt for the mutual fund route.

 

Various mutual fund houses have also started filing offer documents for eligible schemes with the Securities and Exchange Board of India (SEBI). A few new fund offerings (NFOs) are also expected to hit the market soon.

 

As per regulations, the initial offering period of any mutual fund should not be more than 15 days. But schemes eligible under RGESS have it extended right up to 30 days.

 

• Will investment in a regular open-ended diversified equity fund qualify?
•  

 Only mutual fund schemes whose units are listed and traded on the stock exchange and settled through the depository mechanism qualify for Section 80CCG benefits. Since open-ended mutual fund schemes are currently not allowed to be listed on the stock exchange, investments in any fund will not qualify.  

 

• Is there a lock-in period?
•  

There is an overall lock-in period of 3 years which is further divided.

 

The first year is the fixed lock-in period. During this time frame, the investor will not be permitted to sell, pledge or hypothecate any of the shares.

 

The next two years are the flexible lock-in years. The investor can sell but will have to buy other eligible securities with the proceeds in the same financial year. Meaning that the buying and selling will have to be done in the same financial year. This is to ensure adherence to a cumulative holding period of 270 days during each of the 2 years of flexible lock-in.

 

• Is this over and above the Section 80C limit?
•  

 Yes. This benefit is over and above the Rs 1 lakh limit under Section 80C.