What is the RGESS?
The RGESS is a scheme which allows new retail investors to invest directly into the equity capital markets and receive a tax benefit of 50% of the actual amount invested. The maximum amount eligible for investment under this scheme is Rs. 50,000. Deductions can be claimed under sub-section (1) of section 80CCG of the Income Tax Act. However, an investor who has claimed a deduction under this section in any assessment year will not be allowed any deduction under this scheme for any subsequent assessment year.
The deduction for tax purposes under the scheme is available only to new retail investors whose gross total income for the financial year in which the investment is made is less than or equal to Rs.10 lakhs. The investor should also comply with the conditions of the scheme. If he fails to fulfil any of the provisions of the scheme, the deduction originally allowed will be disallowed and will be deemed as income of the investor. Note that the scheme is open only to a new retail investor. This means an investor who is any resident individual and who has not opened a demat account as on the date of notification of the scheme or any individual who has opened a demat account before the notification of the scheme but has not made any transactions till the date of notification of the scheme or any individual who is not the first account holder of an existing joint demat account.
What are the eligible securities under this scheme?
The securities eligible to be invested under this scheme include equity shares of the top 100 companies on BSE and NSE, shares of public sector enterprises which are categorised as Maharatna, Navratna or Miniratna by the Central Government, units of Exchange Traded Funds or Mutual Fund schemes with RGESS eligible securities as underlying, provided they are listed and traded on a stock exchange, follow on public offer of RGESS securities, new fund offers of eligible mutual funds, initial public offer of public sector undertakings subject to certain conditions.
What are the formalities to be followed?
The new retail investor should open a new demat account or assign his existing demat account for availing the benefit under the scheme. He must also submit a declaration know as a Form A declaration to the depository participant to verify his status and submit his PAN copy. The investment in eligible securities can be made in one or more transactions in the year in which deduction has to be claimed. Remember, you can make any amount of investment in this demat account, but the investment amount eligible for tax deduction under the scheme is Rs. 50,000. Further, you can also invest in securities other than the eligible securities through the same demat account. A declaration known as Form B declaration should be given by the investor which indicates that such securities are not to be included as investment for the purpose of RGESS.
Is there a lock-in period?
The eligible securities are required to be held for a period of 1 year, which is known as the fixed lock-in period. During this period, the investor cannot sell or pledge these securities. After the completion of 1 year, the lock-in extends to 2 more years, which is known as the flexible lock-in period. During the flexible lock-in period, the investor can trade in the eligible securities, subject to certain conditions. The depositories can request necessary transaction details from the stock exchanges for enforcing the lock-in period. The stock exchanges are also required to furnish the list of RGESS eligible stocks/Exchange Traded Funds/Mutual Fund schemes on their website.
Things to be kept in mind while investing in RGESS:
The RGESS has been criticized by many that exposing small new retail investors to equity markets may be risky and not in their interest. As an investor, you must exercise care and caution while investing in the eligible securities. Tracking the past performance of the stock can be a good start. You must choose stocks which are transparent in their disclosures. You can also look at the dividend paying history of stocks to ascertain the profitability and your earning potential. As the securities you invest under this scheme are not just meant for tax saving, but also for long term investment purposes, you must opt for stocks and funds in promising, growing sectors.
Summary of key features of RGESS: