Have you been too lazy or too busy to attend to your tax planning through the year? Have you avoided stock markets from a young age? Good! The government is really keen that you join the ranks of two crore other small investors who enjoy the bounties of equity investing. Welcome to the Rajiv Gandhi Equity Savings Scheme (RGESS) which offers tax breaks for first-time investors in stocks.



What is it?

The RGESS, launched in the 2012 Budget, is a tax-saving scheme which targets new investors with an income of up to ₹12 lakh a year. If you don’t have a demat account or you own a demat account but for some strange reason didn’t use it, congratulations, you qualify.

Once you open a demat account, you get a 50 per cent tax deduction on the amount (up to a maximum of ₹50,000) that you invest in shares for the first three years. So if you invest ₹50,000, you get to skip taxes on ₹25,000 of your annual income. Depending on which tax slab you fall into, your savings on taxes can then range from ₹2,500 to ₹7,500.

But the government isn’t willing to offer you tax breaks if you invest in just any stock. Only investments in BSE 100 and CNX 100 stocks, Maharatna, Navratna and Miniratna PSUs, and initial public offerings of some public sector companies qualify as RGESS investments.

All this sounds too simple for a government scheme, right? Well, the devil does lurk in the details. In the first year of investment, you can’t sell your shares; all you can do is watch them go up and down.

In the next two years you are free to buy and sell shares. But there are strings attached. If you juggle between stocks, you need to make sure that the value of your portfolio does not dip below the initial sum for at least 270 days each year. So if you started out with an investment of ₹50,000 in 2013 and then sold some shares in 2015, you have to quickly ‘refill’ the account with until its value rises up to ₹50,000. If the laxman rekha is crossed, you have to give up the tax benefit.

If all this is making you dizzy, do not despair. Instead, go for the mutual fund version of the RGESS. Here a fund manager from HDFC Mutual Fund or ICICI Prudential will rack his/her brains about how to build a great portfolio out of Rajiv Gandhi-approved stocks.



Why is it important?

The RGESS was the UPA government’s smart idea to kill two birds with one stone — get more retail investors into the market and lend a shoulder to its own struggling divestment programme. It was being hoped (against hope) that the RGESS would make people shift their loyalties from unproductive gold to financial assets.



Why should I care?

You’ve exhausted your investment limit of up to ₹1 lakh (under section 80 C of the Income Tax Act) for the year, but want to save some more. Then, provided you don’t own shares at all, this scheme is for you.



Bottomline

The tax breaks you earn from RGESS shouldn’t cloud your judgement on equity risks. You know stock market investments carry risk to your capital; so put in sums that you’re willing to spare.

(A weekly column that puts the fun into learning)

(This article was published on February 24, 2014)
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