Rajiv Gandhi Equity Savings Scheme | Fixed Deposit, Mutual Funds ...

In an attempt to encourage participation of retail investors in the capital markets, the government has proposed a tax exemption scheme for equity markets targeted at new investors.

Called the Rajiv Gandhi Equity Saving Scheme (RGESS), those investors whose annual income is less than Rs. 10 lakh can invest in it. You will be able to invest in this scheme up to Rs. 50,000 and get a deduction of 50% of the investment. So if you invest Rs. 50,000 (maximum amount you can invest), you can claim a tax deduction of Rs. 25,000 (50% of Rs. 50,000).

This will translate to a maximum benefit of Rs. 5,000 (investors whose annual income is a maximum of Rs. 10 lakh falls under the 20% income-tax bracket). Those whose annual income is Rs. 10 lakh or more will not be able to invest in RGESS. Just like ELSS (equity-linked saving scheme), your money will be locked in for three years.

Benefits from RGESS are limited though, if compared with ELSS. ELSS is available for all investors and offers deduction up to Rs. 1 lakh under section 80C. Also, your entire amount invested, subject to a maximum of Rs. 1 lakh, gives you tax deduction benefits.

For FY13 though, both ELSS and RGESS will be at your disposal, provided the capital market regulator, the Securities and Exchange Board of India (SEBI), releases guidelines and allows these schemes to launch.

MFs or direct equities?

Budget 2012 is silent on how this scheme would operate. In his Budget speech, the finance minister said this scheme would be available for investments made ?directly in equities?, but went to add that ?the scheme will have a lock-in period of three years?. In simple words, it is unclear that RGESS is available only if you buy equity shares directly or whether MFs will also be launch such ?schemes?. ?The effort to increase retail participation in equity markets is a long-term positive. However this should be extended to equity funds as well. Small investors are better off accessing the equity markets through funds with a good track record rather than directly, which requires expertise and resources.

What to do?

Wait for further clarification! Since RGESS is an investment scheme that warrants stock market investments, SEBI will regulate it and issue guidelines. Also, clarity is needed on how the government will ensure that your equity investments are locked-in for three years and whether premature redemptions will be allowed under special circumstances or not.

ELSS schemes don?t allow premature redemptions. For now, continue investing in ELSS if you?re seeking tax deduction limits since ELSS will continue for one more year. You can look for ?Best Tax Saving Mutual Fund / ELSS Fund to invest in 2011-12?

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Source: http://apnaplan.com/rajiv-gandhi-equity-savings-scheme/

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