After almost six months of its announcement in the Union Budget, the Rajiv Gandhi Equity Savings Scheme (REGSS) was made operational for retail investors last week.
The scheme proposes to give retail investors a 50 per cent deduction for investments up to Rs 50,000 under a new Section 80CCG (which will save you Rs 5,000 in the 20 per cent tax bracket and Rs 2,500 for the 10 per cent tax bracket), which can be availed of only once. The eligibility limit is up to Rs 10 lakh of taxable income or around Rs 12-13 lakh of total income. That is, after taking into account benefits under Section 80 C (Rs 1 lakh), medical insurance benefits of Rs 20,000, home loan interest benefit of Rs 1.5 lakh and others.
Scores on choice of stocks: By just allowing investment in BSE 100, NSE 100, ETFs and PSUs, the scheme is trying to protect the first-time investors from putting their money into stock ideas that they could get from friendly ‘tips’ or rumours.
Allows profit-booking: Suppose you invest Rs 50,000 in stocks or mutual fund for the RGESS benefit. The money is locked for three years. On the other hand, if you were to invest the same amount and withdraw it after one year, there will be no capital gains tax. In this scheme you can withdraw the profits but have to maintain the initial investment in years two and three. So, the scheme locks your money and does not let you exit with a quick buck. But it tries to entail the habit of long-term investing in stocks, which is a plus.
A managing director and chief executive officer (CEO) of a fund house, on whether he thinks the scheme will attract a large number of retail participants, hesitantly said it will not, as the tax incentive is not good enough.
“You might see investors getting pushed by their financial planners to invest systematically through this route, though the number will not be large,” he adds.
The scheme is similar to the equity-linked savings schemes (ELSS) being offered by mutual funds, though at a much lesser degree. An investor could get the benefit of investing the entire amount up to Rs 1 lakh in an ELSS. The benefits under RGESS are substantially less.
The troubles, on the other hand, are manifold. For one, investors in direct stocks will have to open a demat account. While market regulator, Securities and Exchange Board of India (Sebi), has introduced no-frills accounts and made the application form just a one-pager, much less cumbersome than the earlier version, opening a trading account just for the benefit of Rs 2,500 or Rs 5,000 is something which may not inspire many.
“To keep the retail investors’ interest alive in equities, what the government and market regulator need to do is make this scheme more robust, in terms of tax benefits,” says a market player.
Homi Mistry, tax partner at Deloitte, Haskins and Sells, says it will be a toss-up between whether one wants to invest in a scheme like this for a tax benefit of just Rs 5,000 and get his money locked in for three years or have the advantage of investing in good quality stocks and stay invested for the long run.
Dhirendra Kumar, CEO of Value Research, says put smaller amounts in the scheme, like a systematic investment plan to average out costs. “One can start by investing Rs 5,000-6,000 for the next eight to 10 months. This will ensure that one will get the benefit of cost averaging and also spread the investment risk,” he says.
There isn’t clarity on whether the scheme will be extended to only first-time investors in case of mutual funds. But, experts feel this scheme is too much trouble for too little profit.
