In an interview to CNBC-TV18 Anil Rego of Right Horizons commented on the pros and cons of Rajiv Gandhi Equity Saving Scheme (RGESS).
Basically the scheme has many restrictions and a huge filter. Some of the restrictions are only first time investors and investors with taxable income of less than Rs 10 lakh can participate. There is also one year blanket lock-in, and an overall lock-in of three years, so it is not liquid, says Rego.
The maximum investment allowed is Rs 50,000 and the investor gets a tax rebate that is 50% deduction of the amount invested, this one of the plus point of the scheme, asserts Rego.
Below is the edited transcript of his interview on CNBC-TV18
Q: Can you just take us through the benefits, the pros and cons of the Rajiv Gandhi Equity Saving Scheme, especially for a first time retail investor considering it entails one a lock-in period as well as, as the fact that it can only be claimed once?
A: Let me give you a quick brief of what the scheme actually is. First, it is restricted only to first time equity investors with taxable income less than Rs 10 lakhs, so that itself is a huge negative and so for those who have invested even once in the past, it is not applicable.
Second, is that it is completely equity scheme for first time investors, so one needs to be a little wary about it. The scheme allows investments only in largecap type of stocks, CNX 100 etc
Third, in terms of lock-in there is one year blanket lock-in and an overall lock-in of three years. It is not very liquid. But on the plus side, a new investor gets a deduction of 50 percent of the Rs 50,000, which is the maximum investment allowed. Depending on the 10 percent or 20 percent tax bracket you are in, accordingly you will save tax.
Q: How is this first time investor check made? It would be for those who have a pan number and therefore you detect even if you have a mutual fund investment, would it be counted as not a first time retail investor. I am wondering how many will really hear of it and come because of this huge filter?
A: It is a very huge filter and so the depositary participant is given the responsibility of checking it out. They will check it out from the pan number and they will also ensure lock-in through depositary participant as well. That is how it is but thanks to a lot of the automation that has happened.
Q: What you are saying is the potential candidates will not have a DP account at all?
Caller Q: This scheme has a lock-in period of one year which is fine but in case my portfolio appreciates after one year, can I sell some of it? But if I retain my Rs 50,000, can I take profits home?
A: The scheme allows some bit of flexibility after the first year but in the first year you cannot do anything. The stocks just stay as is. Subsequently, you need to keep a minimum of Rs 50,000 and it allows you flexibility to move around stocks and also take some money out.