As investment is a long-term process, planning for tax saving should be evenly distributed throughout the year. The common practice of planning for tax saving just before the end of the financial year can be observed in almost all the investors. As the last deadline of paying the taxes approaches near the investors often end up choosing wrong schemes in a hurry. This situation can be avoided if the clients plan for tax benefits wisely through the year.
Rajiv Gandhi Equity Saving Scheme (RGESS) is one of the investment methods available under mutual funds. The scheme targets at providing a twin advantage of tax saving and wealth accumulation. Launched in the year 2013-14, RGESS is a beneficial plan for the clients who have their yearly income less than INR 12 lac and those who have never traded in the equity market before. RGESS is named after the sixth PM of India and was declared by the then finance minister Mr. P. Chidambaram. The scheme aims at encouraging the retail investment and occupies a distinct position under the Section 80C of the Income Tax Act, known as Section 80CCG. Thus, by investing in RGESS, a client can accumulate corpus as well as save tax in one single shot.
How do RGESS works?
Ramesh works as a manager in one of the multi-national firms. His monthly income is INR 50,000. His income is taxable and so he is in search of investment avenues that will provide maximum tax saving benefits. Some of his friends suggested him to put his money in PPF account, which is a government sponsored scheme. But, Ramesh decided to take advice from an investment consultant. After the consultation session, he found out about RGESS and along with investing in the scheme he shared the details with his friends.
He figured out that RGESS is a scheme which is suitable for novice investors like him who may or may not has a Demat account and have never traded in the stock market ever. The client gets an additional tax benefit after the stipulated rebate of INR 1.5 lac under the Section 80C of Income Tax Act. This means the client is eligible to get an extra deduction in tax for investing in RGESS even if the customer has already invested in any of the schemes under Section 80C. So, Ramesh’s income is INR 6 lac per annum. His income up to INR 2.5 lac is non-taxable, and he will have to pay tax for INR 3.5 lac. If he invests INR 1.5 lac under Section 80C, he will get a tax rebate from the Income Tax Department and will have to pay tax on the remaining INR 2 lac. But, if he invests an additional amount of INR 50,000 in RGESS then his total taxation benefit will amount to INR 2 lac and his taxable income will be INR 3.5 lac.
Certain limitations of RGESS
Every coin has its two sides. So far we have seen the benefits of the scheme, but there are some limitations attached to it. Only those investors who have not traded in the stock exchange are eligible to avail the gains provided by RGESS. No other client is allowed to invest. The newbie investors are entitled to invest only if his/her yearly income is below INR 12 lac. RGESS has a lock-in period of three years. This means that the client cannot withdraw the invested sum before a stipulated time period of three years but can trade the units of the scheme after completion of one year from the date of commencement of policy. To trade the units of RGESS, the client needs to have shares which are equal to the amount invested through the scheme. For example, if the client has invested INR 30,000 in RGESS then he needs to have stocks equivalent to the same amount in his Demat account. Any client cannot have a tax benefit of more than INR 50,000 in a single financial year. One can invest more than that, but the rebate cannot exceed the limit. Lastly, only Indian residents are allowed to invest in the scheme.
The capital gains provided by RGESS are also non-taxable. This means that when you redeem the units of the policy after the lock-in period, you would not be required to pay any tax on the profit as it is termed under the long-term capital gains. RGESS invests in equities that are listed under BSE-100 or CNX-100 index. These are among the top listed companies in the Indian stock market. The indices include all the Navratanas, Miniratnas, and Maharatnas public sector undertakings. RGESS also invests in the IPOs of various private sector companies and in the joint ventures where the government owns a significant stake.
With the introduction of online investment strategies, it has become easier to put your money in RGESS. The plan has emerged as a boon to the new investors who can easily commence the investment process and quickly understand the ups and downs of the financial market along with the additional Benefits of ELSS under the Section 80C of the Income Tax Act.