Rajiv Gandhi Equity Savings Scheme: Fund managers give the thumbs-down

The initial enthusiasm among fund managers over the Rajiv Gandhi Equity Savings Scheme (RGESS), announced in the Union Budget, is fading as realisation sets in that the tax advantages of the scheme will only benefit direct equity investments, according to a report in Financial Times.

The RGESS had announced that new retail investors earning less than Rs 10 lakh a year could claim a 50 percent income tax deduction on investments of up to Rs 50,000 in equities.

[caption id=“attachment_256087” align=“alignleft” width=“380” caption=“Investments also have a three-year lock-in period to qualify for the tax benefit, which is also viewed as unreasonable by fund managers.”]  [/caption]

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Now it seems that only direct equity investments in equity will be eligible for tax deductions, the newspaper report said. Mutual fund investments may not be included – which has upset mutual fund managers.

“If the intent is to encourage first time investors to participate in equity markets, a better route would be through well managed equity funds with an established track record,” Sunil Mehta, chief executive of AIG India Asset Management, told the UK newspaper.

Among options being considered by the government to safeguard first-time investors is to limit investments in the the top 100 companies listed on the BSE. According to the report, most experts don’t feel that will provide enough protection.

In addition, the investments also have a three-year lock-in period to qualify for the tax benefit, which is also viewed as unreasonable by fund managers.

Details of the RGESS are expected to be announced in April, according to this Economic Times report.

A Business Line report, quoting a finance ministry official, said there are nearly 1.5 crore individuals with income up to Rs 10 lakh, who do not have a demat account and are, therefore, potential candidates for this scheme.