The Rajiv Gandhi Equity Savings Scheme (RGESS) has finally seen the light of day after being proposed in the Union Budget six months ago. However, most of its beneficiaries and the implementation agencies are trying to decode and simplify the maze of conditions in the guidelines.
As an incentive, for the retail investor, the scheme doles out a one–time tax benefit to those whose taxable income is up to Rs 10 lakh. Simply put, this means those people falling under the 10 per cent and 20 per cent tax brackets and are investing for the first time will be eligible for investing through this route.
Eligibility
The fact that who qualifies as the ‘first time investor’ condition is still being debated. The scheme notification specifies that those who have “opened a demat account but have not made any transaction in equity and/or in derivatives” yet is eligible and this will be checked using their PAN number. To benefit the small investors, the investments are allowed to be made in instalments in the year in which tax claims are made.
So, what about those who have a mutual fund or an equity holding, but not in demat form? What about some who had a demat account, made transactions but the account is classified as dormant due to inactivity?
"Currently, we have nearly two-lakh demat accounts. Post this scheme, we expect this number to double," says Sanjiv Shah, Co-Chief Executive Officer, Goldman Sachs Asset Management (India).
Investment
As per the rules, only BSE-100 and CNX 100 apart from top public sector undertakings (PSUs) are allowed to participate. Follow-on Public Offers (FPOs) of the above companies would also be eligible under the Scheme. The initial public offering (IPOs) of PSUs, which are getting listed in the relevant financial year and whose annual turnover is not less than Rs 4,000 crore for each of the immediate past three years, would also be eligible, the notification says.
If this is the case, then only index fund and large-cap diversified funds are eligible to participate besides a few PSU specific funds, analysts say. Gajendra Kothari of Ética Wealth Management believes that in terms of mutual funds, this is a miniscule portion of the fund industry.
Tax Advantage
According to the norms specified, on investing upto Rs 50,000, one gets a 50per cent tax benefit on this amount. This means only Rs 25,000 is taxable. Now, there are two cases here.
Case 1: 10 per cent tax slab
On Rs 25,000, a 10per cent cut means Rs 2,500. So here the savings is of Rs 2,500
Case 2: 20 per cent tax slab
On Rs 25,000, a 20per cent cut means Rs 5,000. So, here the savings is of Rs 5,000.
Lock In
Rules say that the scheme has a lock in period of three years, including an initial blanket lock-in period of one year. But investors can collect only profits after the first year itself. Post this, investors would be allowed to trade in the securities and withdraw the only the profit made on the investment.
This aspect has come under criticism. Says AK Prabhakar, Senior Vice President (Equity Research), Anand Rathi, “For first time investors investing in stocks with a lock in period of three years is not a very special provision, since we are not sure about the return.” However, Sanjiv Shah of Goldman Sachs Asset Management believes that this will promote a culture of being a disciplined investor.
Investors would, however, be required to maintain their level of investment during these two years at the amount for which they have claimed income tax benefit or at the value of the portfolio before initiating a sale transaction, whichever is less, for at least 270 days in a year.
The calculation of 270 days includes those days pursuant to the day on which the market value of the residual shares /units has automatically touched the stipulated value after the date of debit. In case the investor fails to meet the conditions stipulated, the tax benefit will be withdrawn.
“There are some clarifications required which I am sure market regulator, SEBI, will be putting out in the next 15 days. The operational guidelines are expected to address all the ambiguous points,” says Shah.
Incentive enough?
So at the end of the day, for a maximum of Rs 5,000 gain with a three year lock in, the question is – are the incentives enough for a retail investor to look towards RGESS when there are alternatives? Should you bite the bait?
“We believe that actions / policy changes directed at increasing the reach and penetration of mutual funds among retail investors are positive and welcome. Since these changes have just been announced, we will wait to see the impact of these in enthusing retail investors to participate in mutual funds,” said Anand Shah, chief investment officer, BNP Paribas Mutual Fund.
And all this comes at a time when the mutual fund industry is a tough time. In August, in one of the sharpest declines in number of equity folios, the industry lost 4.6 lakh equity folios (including those of equity linked saving schemes or ELSS). This took the overall number of equity folio closures in current calendar year to a massive 2.36 million – an unseen figure for the country's fund houses in a span of 8 months.
In the five-years period ended June 30, 53.33 per cent of the large cap equity funds failed to beat their leading benchmark index, S&P CNX Nifty, reports suggest. If the last three years are taken into consideration, 57.14 per cent funds underperformed, while in the last one year, 52.63 per cent could not beat the benchmark.
So, will this scheme be able cultivate an equity culture? The jury is still out on this.
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