SEBI registered Investment advisor (RIA) with Registration number – INA 000000342.

What is RGESS and how can it help you to save tax?

If you are earning up to Rs. 12 lakhs in a year and are looking out for saving income tax, Rajiv Gandhi Equity Savings Scheme will be of interest to you. But the scheme is a bit complicated for investors. So, before investing, please check whether you are eligible for income tax benefits under the Rajiv Gandhi Equity Savings Scheme.

Rajiv Gandhi Equity Savings Scheme(RGESS)

Rajiv Gandhi Equity Savings Scheme (RGESS) – Eligibility for tax benefits

If you satisfy both the below given conditions, you are eligible to get tax benefits under Section 80 CCG of the IT Act.

  1. Your annual income should not be above Rs. 12 lakhs
  2. You should be a first time investor in equities

Rajiv Gandhi Equity Savings Scheme (RGESS) –  First time investor

Even if you have investments in Equity Mutual Funds either directly or in demat form, you will be treated as a first time equity investor. Even if you are having investments in Shares other than demat form, you will be considered as a first time investor for RGESS.

But, if you have invested in Equity Shares or Derivatives in demat form, you will not be considered as a first time investor.

Where you have to invest?

Under RGESS, a first time investor can invest up to Rs. 50,000 in a year and can avail deduction of 50% of the investment. The investment is permitted in the following instruments:

  1. Equity Shares which are part of the BSE 100 or CNX 100
  2. Equity Shares of public sector enterprises which are categorised as Maharatna, Navratna or Miniratna
  3. Units of Exchange Traded Funds (ETFs) or Mutual Fund (MF) schemes with RGESS-eligible securities as underlying
  4. Initial Public Offer of a public sector company in which the government holds at least 51% stake and whose annual turnover is not less than Rs. 4,000 crores in the preceding three years
  5. Mutual Funds which invest in the above shares, which is approved as RGESS compliant.

Rajiv Gandhi Equity Saving Scheme (RGESS) compliant Mutual Funds 

How much can be invested and what is the tax benefit?

You can invest up to Rs. 50,000 in a year and you will get 50% of the investment as deduction from the taxable income. So, if you invest the maximum permitted amount of Rs. 50,000, you will get a deduction of Rs. 25,000 from your taxable income.

This deduction is over and above the tax deduction of Rs. 1 lakh under Section 80C.

You can invest this amount for 3 consecutive years and avail the income tax benefits.

To get the tax benefits under RGESS, it is mandatory for you to invest in Shares and Mutual Funds through demat account.

How long the investment is locked in?

RGESS is a 3-year close-ended scheme. But after 1 year, you will have some flexibility. These 2 years is called flexible lock-in.

What is flexible lock-in in RGESS?

During this 2-year period, you are permitted to sell the Shares or Mutual Funds with certain conditions. Selling is permitted, but you have to maintain your unit balance till the end of the 3rd year. Please see the following chart to understand the flexible lock-in under different situations.

Case-1 Case-2 Case-3
Amount invested in first year 50,000 40,000 30,000
Market value of investment at the time of  selling 45,000 45,000 40,000
Investment sold 20,000 5,000 40,000
Investment balance 25,000 40,000 NIL
Fresh investment required 20,000 NIL 30,000

Understand before investing in Rajiv Gandhi Equity Savings Scheme (RGESS)

For the first time investors, investing in shares will not be a good idea, if you don’t understand the company and its business. You may go for Mutual Fund route to avail the tax benefits under Rajiv Gandhi Equity Savings Scheme. But please note, that the tax savings should not be the only reason to invest in this. Please remember equities will give you good returns in the long term, but is risky in the short term.

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