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Last Updated : Feb 20, 2017 12:03 PM IST | Source: Moneycontrol.com

No tax deduction for RGESS; what it means for investors

While it was launched with much fanfare, the RGESS never seems to have struck a chord with taxpayers.

Adhil Shetty

In the recent Union Budget, the Finance Minister Arun Jaitley announced the decision to do away with the Rajiv Gandhi Equity Saving Scheme (RGESS), which was launched by the UPA Government in 2012-2013.

The RGESS was launched to encourage investors who aren’t dabbling in equity but would like to give it a try. The incentive offered to them was tax-saving under Section 80CCG of the Income Tax Act. Four years later, the scheme has been discontinued.

In this article, we look at the underlying reasons for the discontinuation, and how it may impact investors who were looking forward to saving a little extra in taxes while earning market-linked returns.

Tepid response to the scheme

While it was launched with much fanfare, the RGESS never seems to have struck a chord with taxpayers. The reasons for this were many. The scheme was only for new investors who were tip-toeing around the idea of stock market investment. The fact is, such investors may not change their investment patterns merely due to minor tax breaks. The tax savings were not significant enough to attract investors—you could have saved a maximum of Rs 7,500.  

As far as ease of investment is concerned, a comparison can be done with ELSS or Equity Linked Saving Scheme. You can invest in ELSS with almost all mutual fund houses. All you have to do is to invest in an ELSS fund and remain locked in for three years after which you can redeem it, tax-free. Moreover, you can avail this benefit every year under Section 80C up to the full exemption limit of Rs. 150,000.

In case of the RGESS, you could only invest in selected stocks from the basket of BSE 100 or Nifty 100, and ‘Maharatnas’ as designated by the government. The deduction would apply on 50 percent of the amount invested under this scheme. The maximum one could invest was Rs 50,000 in a year. The tax exemption was allowed for a period of three years.

Low investment under RGESS and rationalization of deduction

As per recent data, the total investment under the RGESS is a meagre Rs 151 crore. While this is too low for a country of India’s size and tax base, the other thing playing on the Finance Minister’s mind was to simplify the tax process and rationalize the deductions.

There are many avenues for tax savings without making much difference. It adds to the administrative work of the Income Tax Department without offering any discerning benefits to either the tax payers or the Government. Hence, the RGESS was done away with.

Impact on taxpayers

The RGESS will be discontinued from April 1, 2018. No new investment will be accepted under this scheme anymore. However, investors who have invested in the past (less than three years ago) and who are eligible for benefits for next 1-2 years, will be allowed to avail this scheme.

For example, a taxpayer who has taken the benefits of the scheme last year, i.e. FY 2015-2016, or who has invested under the RGESS in FY 2016-2017 will be able to claim the benefits for next three years starting from the year when the benefits started. This can be taken till the FY18-19.

If you have invested in this scheme, you can continue to avail the benefit for three years from the year of investment. If you were looking forward to investing in RGESS as a first-time equity investor, this is no more available.

However, as mentioned above, ELSS is another option where you can invest under Section 80C. ELSS are closed equity mutual funds, whose tax exemption is bundled under 80C. Hence, if you have all used up the limit under 80C, you will not be able to use your ELSS investment for tax benefits.

Finally, do not look to investment just as a means to save a little extra in taxes. Plan it well in advance and remember that investing is for your future.  

The writer is CE of BankBazaar.com
First Published on Feb 20, 2017 12:03 pm