First-time retail investors in equity will no longer get the benefit of deduction for investments under the Rajiv Gandhi Equity Savings Scheme (RGESS). The Budget 2017 has phased out the tax benefits of up to R25,000 for small investors in equities.
Noting that “a limited number of individuals availed this deduction”, the Budget proposed to rationalise this tax benefit introduced in Finance Act, 2012 and phase it out from assessment year (AY) 2018-19. However, an assessee who has claimed deduction under this section for AY 2017-18 and earlier assessment years would be allowed deduction under it until AY 2019-20.
Conditions for tax breaks
The scheme, which was launched in 2012 by former finance minister Pranab Mukherjee, got a lukewarm response from investors because of the host of conditions imposed on individuals to qualify for it. In FY 2013-14, the income ceiling was raised to R12 lakh from R10 lakh specified in FY 2012-13.
Under Section 80CCG, a new retail investor with gross total income of up to R12 lakh a year could avail benefits under this scheme, with a permissible investment of R50,000 and the exemption was for R25,000, i.e., 50% of the invested amount. This deduction was over and above the R1.5 lakh limit under Section 80C. So, investors in the highest tax bracket of 30% could save up to R7,500 in taxes by investing a maximum of R50,000 under this scheme.
Investors were required to open a demat account and should have never invested in stocks. One could invest in one or more financial years in a block of three consecutive financial years, beginning with the initial year in which the deduction has to be claimed. Under the scheme, the investor could invest in shares of BSE 100 or CNX 100, stocks of public sector enterprises, units of exchange-traded funds and mutual funds.
Never became popular
Despite the tax break, there were hardly any takers for the scheme. As on December 2016, the total number of RGESS accounts in the two depositories—National Securities Depository Ltd and Central Depository Services (India) Ltd—put together was 55,571. Of these, half the accounts had no investments at all. (See graphic) In five years, the total value of initial investments has been only R151.5 crore. Most of these investments have been made in mutual funds (R113.8 crore), followed by equity (R35.9 crore) and exchange-traded funds (R1.8 crore).
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Investments under RGESS have a lock-in period of three years. This lock-in period is split into fixed lock-in period and flexible lock-in period. The fixed lock-in period commences from the date of purchase till March 31 of the year immediately following the relevant financial year. For example, if an investor has invested in FY16-17, then the fixed lock-in period will end on March 31, 2018.
Dhaval Kapadia, director, Investment Advisory, Morningstar Investment
Adviser (India), says with Budget 2017 scrapping the scheme, investors can trade the units during the flexible lock-in-period in the secondary market, as per the provisions of the scheme, for a period of two years starting immediately after the completion of the fixed lock-in period.