With new conditions now introduced, it requires amendment in Parliament

The Rajiv Gandhi Equity Savings Scheme (RGESS) is all set to allow investment through mutual funds to get tax benefit. But there will be some conditions attached to that. The Finance Ministry is in the process of notifying the scheme.

“We may allow listed mutual fund equity schemes with underlying shares belonging to BSE-100 and/or NSE-100 to be part of the new scheme,” a senior Finance Ministry official said. The Government announced the new scheme in this Budget to bring first-time investors into the stock market.

Originally, the scheme had proposed to allow first-time investment in equity to get tax benefit. However, Finance Minister P. Chidambaram on August 17, said: “the Government has also taken note of the recommendation of SEBI that the RGESS should also provide for investments in equity schemes of mutual funds which have the securities allowed under RGESS as the underlying.

“I have asked the Department of Economic Affairs, Capital Markets division, to examine the recommendation of SEBI and I expect that it would be possible to take a decision shortly.”

Under the scheme, as announced in the Budget, investment in equity by the first-time investor will be eligible for deduction of up to Rs 25,000 from his taxable income. A person can get the tax benefit only once and the condition is that his annual income should not exceed Rs 10 lakh.

Two options

Since this new scheme was part of the Finance Bill already approved by the Parliament, any change now in the Budget proposal will require moving an amendment in Parliament. Alternatively, as soon as the session is over, the Government can also bring in an ordinance to effect the change.

After the change in the scheme, the investors will have two options under mutual funds to get the tax benefit. At present, mutual fund schemes such as Equity Linked Saving Scheme allow to get the deduction up to Rs 1 lakh from taxable income. Here, the lock-in is three years. However, investment in such a scheme made after the implementation of Direct Tax Code will not get tax benefit as this is not a part of tax incentive instruments.

Secondly, one can invest up to Rs 1 lakh every year to get the tax benefit under ELSS, but this will not be possible under RGESS.


(This article was published on August 30, 2012)
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