Understanding RGESS and its Benefits
What is RGESS?
Rajiv Gandhi Equity Savings Scheme (RGESS) was announced in the Union Budget of 2012-13 to widen the retail investment in the domestic capital market and encourage savings. It gives an additional route to reduce taxes for eligible investors, under which they can invest in specific stocks or mutual funds. Between stocks and mutual funds, one can opt for the latter if they do not have the expertise to time the market and pick stocks. Various Asset Management Companies offer schemes compliant with the RGESS criteria.
RGESS mutual funds provide new retail investors tax benefits u/s 80CCG of the Income Tax Act, where 50% of the amount invested (subject to a maximum of ₹25,000) is eligible for tax deduction from their total taxable income. This is in addition to the tax benefits available u/s 80C of the Income Tax Act.
Further, RGESS investors can avail these benefits over a block of three financial years, beginning with the intial year (as defined in RGESS), in respect of the investment made in each financial year.
Who can invest in RGESS?
The scheme defines investors fulfilling the given conditions as eligible to invest in RGESS funds.
New retail investors have been defined as anyone who does not own a demat account or has not carried out any trade in the equity and derivative segment. The tax benefit of RGESS funds is applicable to only new retail investors, who invest in this scheme in demat form.
The gross total income of the eligible investor should not exceed ₹12 lakh annually.
Eligible securities are from a universe of top 100 companies from S&P BSE 100 or CNX 100, Maharatna, Miniratna, Navratna or securities of eligible PSU, ETFs and mutual fund units.
A new retail investor can invest in one or more financial years in a block of three consecutive financial years beginning with the initial year. The new retail investor shall be eligible for tax benefits under RGESS only for three consecutive financial years beginning with the initial year, in respect of the investment made in each financial year.
If the new retail investor does not invest in any financial year following the initial year, he may invest in the subsequent financial year, within a block of three consecutive financial years beginning with the initial year, in accordance with RGESS.
For example, Sushma invests under RGESS in the financial year 2012-13. This year is considered as the initial year and she can avail tax benefits u/s 80CCG of the Income Tax Act. If she skips making any investments in 2013-14 but invests again in the financial year 2014-15, then Sushma can avail a tax benefit for the investments made in RGESS in the third year.
Benefits of RGESS
RGESS provides a host of benefits:
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- Tax benefits u/s 80CCG of Income Tax Act for each financial year in a three year block. This is in addition to the tax benefits u/s 80C.
- Exposure to equities, which leads to better capital appreciation over the long-term, helping any investor meet his or her financial goals.
- Dividends earned from equity mutual funds as well as long-term gains on equity mutual funds are tax free.
- Flexible lock-in option after the initial year.