Saving tax while building the equity habit - RGESS

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There are only approx 2.71 crore demat accounts in our country of over 125 crore population, implying a meager penetration of just over 2%. To penetrate further and promote ‘equity culture’ in the country, the government of India launched Rajiv Gandhi Equity Savings Scheme (RGESS) in the Union Budget of 2012-13. The scheme aims to bring first-time investors to the equity market. It also seeks to help the young to benefit from equity investing over the long term, and saving tax in the process. The eligible investment options under RGESS are a list of equity securities (primarily blue chips and public-sector companies) or mutual funds (closed-ended schemes and exchange traded funds). Direct route can be relatively tedious for investors, investing through RGESS approved mutual funds can be a more convenient.

Eligibility, Brief Features and benefits of investing in RGESS

  • Open to the first-time retail investors, who have a gross total income of less than or equal to Rs 12 lakh.
  • Eligibility - The investor should be a resident individual and has a demat account without any transactions in equity/derivatives until date or one who wishes to open a fresh demat account by submitting a duly signed 'Form A', available with brokerage houses.
  • Maximum permissible investment for deduction under the scheme is Rs 50,000 per annum during a Financial Year.
  • Eligible stocks and investment avenues:
    • Stocks that are a part of the BSE 100 or Nifty 100 index or those of public-sector undertakings (PSUs) that are Navratnas, Maharatnas and Miniratnas (the detailed list of PSUs is available on www.dpe.nic.in). Follow-on public offers (FPOs) and new fund offers (NFOs) of the above.
    • Units of Exchange-traded funds (ETFs) and mutual fund schemes and equity oriented funds that have RGESS-eligible securities as components.​ These funds must be listed and traded in the stock exchanges and settled through a depositories.
    • Unlisted equity shares – initial public offerings (IPOs) of PSUs: (a) which are scheduled to get listed in the relevant financial year; (b) in which the government holding is at least 51%; and (c) whose annual turnover is not less than Rs 4,000 crores for each of the immediate past three years.
  • Investors can avail of a 50% deduction of the investment amount on the taxable income for that year under section 80CCG.
  • Facility for pledging securities after the fixed lock-in period.
  • Lock-in period for investments under the scheme would be 3 years, but securities can be traded after one year. The first year is a fixed lock-in and the investor cannot sell, pledge or hypothecate the shares. The next two years are flexible lock-in.
  • Tax savings under RGESS is over and above the Section 80C benefits (capped at Rs 1.5 lakh). Besides, returns (if any) from RGESS will also be tax-free, if held for more than one year, as long-term capital gains from equities or equity-oriented mutual funds are exempt from tax.

Why 'equity culture'?


The need for promoting the equity culture stems from the fact that India is a very young country with a median age of less than 30 years. The young have a long investment horizon, which they can utilise to generate optimum returns by systematically investing in equity. The S&P BSE Sensex, a preferred benchmark for equity, returned a 15% compound annual growth rate (CAGR) over the 15 years to December 2016, compared with an 8% average return by banks. The same rate of returns of equity (15%) and fixed income assets (8%) is invested regularly through monthly instalments of Rs 1,000 over 30 years, the cumulative amount would grow to ~Rs 70 lakhs, compared with ~Rs 15 lakh from fixed -income assets.

India’s demographic trend

 

Source: United Nations data

RGESS-approved mutual funds - A better option for retail investors

While the first-time investors can venture into equity to get the tax benefit, by directly investing into the list of approved securities by the government, this may be tedious for a retail investor.

A better option can be approved mutual fund schemes – (a) passively managed funds (index-based ETFs) and (b) actively managed closed ended funds based on the RGESS criteria. Investors can choose between the two according to risk preference. Investment through the mutual funds enable investors to harness the benefits of the professional managers.

BSE and CRISIL Research

Maximum rates of more than five years’ term deposits from the RBI website

See following chart:

 

RGESS versus other tax-saving investment avenues


    - Investors have traditionally preferred Public Provident Fund (PPF), National Savings Certificate (NSC) and other avenues, as they offer safety of principal and fixed returns. However, they usually generate marginal inflation-adjusted returns. For long-term wealth creation, it is essential to consider equity-linked investments (directly or mutual fund route). RGESS and the Equity Linked Saving Schemes (ELSS) are the two tax savings options within mutual fund domain. Some of the key differences between the two schemes are:

    - While ELSS falls under Section 80C of the Income-Tax Act, 1961, RGESS falls under Section 80CCG. Investments up to Rs 1.5 lakh per financial year can be claimed as deduction under Section 80C, which includes other traditional products, such as PPF, NSC and life insurance premium, among others. A relatively new tax-saving section created by the government is Section 80CCG, which gives benefits only to RGESS.

    - Only a 50% deduction of the investment made (up to a maximum of Rs 25,000 in any one year) is allowed under RGESS, compared with 100% deduction (up to Rs 1.5 lakh) allowed under ELSS

    - RGESS and ELSS have a lock-in period of three years, but trading is allowed in the case of RGESS after one year, subject to conditions.

Summing up

RGESS provide an optimum investment opportunity for first time investors in the equity market to benefit from the long term potential available with the asset class, while also saving tax. RGESS approved mutual funds would be the right choice for retail investors, however they should do due diligence on the scheme before investment.

Disclaimer : Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.

Mutual Fund investments are subject to market risks, read all scheme related document carefully.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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An investor education initiative, SBI MUTUAL FUND.