In the last Union Budget, then Finance Minister (FM) Pranab Mukherjee announced a new Section 80 CCG, which would give you deductions in respect of investments made under the Rajiv Gandhi Equity Savings Scheme. If you have no clue yet as to what this scheme is all about, here are the details, explaining why this investment options sucks.
Rajiv Gandhi Equity Savings Scheme has been launched with the objective of encouraging savings of small investors in the domestic capital market.
1. Who can invest: Anybody who has not invested in equities before and has a gross total annual income of Rs10 lakh or less. Which means, you have not opened a demat account in the past. You have not made any transactions in equity and derivatives in the past (until November 23, 2012.) However, if you do have a demat account but have not done equity or futures and options transaction in the past (until November 23, 2012), you can invest in RGESS. If you are a joint demat account holder (2nd or 3rd account holder), you can open a new demat account as the 1st holder and invest in RGESS.
2. How much: You can make any amount of investments, but the amount eligible for an income tax deduction is a maximum amount of Rs 50,000.
3. How to invest: To invest in RGESS, you will need to open a demat account. You will also have to fill in declaration Form A to the Depositary Participant (DP).
4. What is the lock in: There is a lock-in period of total three years. This lock-in period is further divided into two – fixed and flexible.
Fixed Lock-in: The first one year from the date of investment is a fixed lock-in. During this period, you cannot sell any securities or pledge them to get loans.
Flexible Lock-in: The flexible lock-in period is for next two years from the date of the end of the fixed lock-in period. During this period, you are permitted to buy and sell eligible securities, provided that for a cumulative period of 270 days each year, you are maintaining the value of your initial investment. In short, the value of the investment portfolio should be equal to or more than the amount you’ve claimed as investments for the purpose of deduction under Section 80 CCG.
5. Finer details: As a retail investor, you can either invest a lumpsum or in parts (in one financial year). The treatment as to how the lock-in period works will really depend on the type of investment option, you’ve chosen.
Option 1: You’ve made a lumpsum investment in RGESS. (See graphic 1) Let’s assume you’ve invested a lumpsum on 23 November 2012 for the amount of Rs 50,000. So, your first year fixed lock-in-period begins on 23 November 2012, and ends on 22 November, 2013. On 23 November, 2013, your first year of flexible lock-in-period begins and ends on 22 November 2104. Likewise, on 23 November, 2014, your second year lock-in-period begins and ends on 22 November, 2015. Here, as shown in the graphic, the applicable financial year for compliance (270 days clause mentioned above) will be 2014-15. On 23. November 2015, the demat will be converted into an ordinary demat account.
Option 2: Here’s how the lock-in-period will work of your investments are bought in instalments. (See graphic 2)
Let’s assume that instead of making a single lumpsum investment, you made three part investments in one financial year. First was Rs 10,000 on 23 November, 2012, second was Rs 30,000 on 15 January, 2013 and Rs 10,000 on 11 March 2013. In this case, the fixed lock-in- ends only on 12 March, 2104. So, the first part of your investment is invested for one year, three months and sixteen days.
The second part for one year, one month and the third part for one year. And, the one year flexible lock-in-period ends 10 March, 2015 while second year flexible lock-in-period ends 10 March, 2016. Keep in mind that the RGESS portfolio is allowed to be changed during the flexible period, provided to compliance clause mentioned above is met.
6. Expiry of period: Once the period of holding expires, the demat account will be converted automatically into an ordinary demat account.
7. Tax benefits: Remember you will get a deduction for investment up to Rs50,000. As per the Indian Income tax, a deduction is up to 50 percent of the amount invested in such equity shares to the extent such deduction does not exceed Rs 25,000. So, if you are in the lowest tax bracket of 10 percent your tax benefit will be Rs 2,500. And, if you are in the 20 percent tax bracket, your tax benefit will be Rs 5,000.
8. Firspost take: For the first-time investors, this product is too complex to make sense of. It’s like asking a KG student to solve a standard eight algebra paper. It is complex and confusing, to say the least. Just being invested in the products comes with so much headache, forget about getting your investments right (being a new investor and all that). The activity of compliance for 270 days makes matters worse. All this pain for a tax benefit of Rs 2,000 to Rs 5,000? Too much effort, too little gain. We give it a big thumps down.