With the year end (March 31) fast approaching, many of us are scouting for options to save taxes. A new avenue available this year, outside of Sec 80C options is the Rajiv Gandhi Equity Savings Scheme (section 80 CCG).
However, the scheme is riddled with complex clauses and meagre tax benefits, doing very little to enthuse the eager entrants. Read on to go through its contours.
First, the scheme is only for a new investor, who has a gross total annual income of up to Rs 10 lakh. So, any person who does not have a demat account or in spite of having one has not made any transactions until November 23, 2012, is alone eligible under the scheme.
Such investors can put in up to Rs 50,000 and get a 50 per cent deduction of the amount invested. For instance, if you invest Rs 50,000, you can claim a deduction of Rs 25,000 which amounts to tax saving of Rs 5,000 (under 20 per cent tax slab).
However, the catch is that you can only avail of the deduction in the first year of investment. This one-time exemption makes it less attractive than Equity Linked Savings Scheme (ELSS), investments in which are allowed as a deduction every year.
Eggs in your basket
Secondly, there are restrictions on where you can invest. You can invest only in shares included in either ‘BSE-100’ or ‘CNX-100’ or equities of public sector undertaking (PSU) which are categorised as Maharatna, Navratna or Miniratna. This is includes follow-on public offer of such shares.
Initial Public Offer of a PSU whose annual turnover is not less than Rs 4,000 crore is also eligible. As first-time investors, investing in the top 100 stocks cap your risks.
But the reasons for inclusion of PSU stocks remain obscure, particularly when these stocks are highly susceptible to market risks and, in most cases, tinted with abysmal performance.
Some relief is that you can also invest in Exchange traded funds (ETFs) and mutual fund (MFs) schemes with RGESS securities as underlying. . Fund houses such as SBI, UTI, IDBI, and DSP Blackrock, have begun lining up schemes focused on RGESS.
However, you need to pay 2-3 per cent of the investment as fee, which is higher than brokerage charges. Also since the MFs can only invest in the specified stocks, benefits from a certain level of diversification that a mutual fund can offer might get diluted.
Thirdly, investments made under the scheme are locked-in for three years. The first year is a fixed lock-in period during which you cannot sell or pledge your investments.
If you have made investments in instalments, your fixed lock-in is calculated from the date of your last investment. For example, if your first investment is made on December 15, 2012 and a final investment on February 20, 2013, then your fixed lock-in period ends on February 20, 2014.
After the fixed lock-in period, the scheme generously allows selling or buying your investments in the next two years ( flexible lock-in period) which other tax saving options such as ELSS don’t. While this should cheer investors, it doesn’t.
Because although you are free to buy and sell, you must maintain the value of your initial investment (equal to or more than the amount you’ve claimed) for a cumulative period of 270 days each year.
Timing your different investments and calculating the lock-in period itself, may prove a herculean task.
And then comes complex calculations to monitor the value of investments. All for a tax benefit of Rs 5,000 at best.