RGESS saves tax & engages new investors for the long term




By Amar Ambani

‘The stock market is a ruthless gambling den’ goes one of the most popular myths propelled from generation to generation in the name of ‘good old advice’. Nothing can be farther from the truth. Other prime misconceptions hold it that you need loads and loads of money to become a stock market investor or that you need to watch trading screens all day long before you can amass good returns on your investments. Contrary to what people think or are made to think, equity markets are a great medium to build a neat pile of wealth over the long term. I would in fact call them ‘weapons of mass financial inclusion’ in the context of a country’s economic prosperity.

Come to think of it, India has a diminutive tax rate of 15% on short term capital gains and Zero tax on long term capital gains from stock market investments, tax free dividends in the hands of investors, tax deductions for select equity linked Mutual Fund savings schemes… if stock markets were indeed a gambling den, then the government would never extend such magnanimous tax benefits on stock market returns, would they? 

The truth is that the government acknowledges the crucial role of stock markets in capital formation and nation building. After all, the government too has successfully tapped the market to raise money. Sops have been extended in the stock market to encourage retail participation and build a sustainable equity culture in India. In this bid, the government has made another significant move by introducing the Rajiv Gandhi Equity Savings Scheme (RGESS).

The RGESS has actually paved the way for mass financial inclusion to be driven by the country’s stock market. For long, much of India’s population has hopelessly refrained from investing in the stock market. Presently, only 3-4% of Indian household savings is channelized in equities as against the 42% in the US and 14% in China. We can well imagine the scope and size of the desired financial inclusion before us. 

While the RGESS is a welcome step, there’s hardly any awareness about it in the target population. It is important to know the provisions before you get ready to avail of the perceived benefits. 

For one, a new section 80CCG has been introduced to allow a tax deduction of 50% on a maximum of Rs50,000 invested under RGESS to new retail investors with annual incomes less than or equal to Rs1mn. The RGESS exemption is over and above the Rs100,000 exemption already extended by virtue of section 80C. 

The RGESS investor can invest in both primary and secondary market stocks that are either part of the top 100 stocks (CNX-100 or BSE-100) traded on the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE), public sector enterprises categorised as Maharatna, Navratna or Miniratna and exchange traded funds (ETFs) linked to eligible securities. You need to submit a declaration in form A for designating a demat account for RGESS, which you can get from any registered broker. The holding period of your RGESS investment is three years. During the first year, known as fixed lock-in, you cannot pledge or sell the shares purchased. In the next two years, known as flexible lock-in, you can sell and buy other eligible securities or ETFs, maintaining the value of investment originally made for a cumulative period of 270 days during the two years. Kindly note that you are eligible only if you haven’t traded in equity or derivative segments before November 23, 2012, which makes you a new investor as per the RGESS scheme. 

You may want to consult an expert to gain maximum clarity on all the rules and regulations and advise on the right securities for investment. To make it easier for you, we have put up details on our websitewww.indiainfoline.com/rgess. I would say that keeping it simple is the best option. Of the securities on offer, ETFs seem the best bet for first time investors. 

Before I sign off, a word of simple advice. If you don’t understand some of the stock market terminology despite the best of explanation, don’t let it scare you. Being a novice investor, that’s but obvious. Just bear in mind that by investing in a share, you are as good as a partner in a business that, you have good reason to believe, will perform well. This basic premise of equity ownership (and NOT speculation) will make you more confident about your investment. Over time, you will of course grasp the terminology as also the intricacies much better. Welcome to the world of stock investing!

The author is Head - Research, IIFL, India Infoline Group



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