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RGESS: You might still be a "new" equity investor. Check out.

The buoyant stock market since around one year and the huge expectation from the Modi Government, is again attracting many new retail investors towards equity.

However, given the risks involved with equity investment, it would be wise if these small first-time investors don't take direct exposure to stocks. Rather, they should make their equity investment through the mutual funds. This would not only let them enjoy the expertise of well-qualified and experienced fund managers but also diversify their investment.

Meanwhile, the Government too has been encouraging first-time equity investors by way of tax incentives through the Rajiv Gandhi Equity Savings Scheme (RGESS).

As such, investing in RGESS-compliant Mutual Fund Schemes or Exchange Traded Funds (which are also a type of mutual fund) would undoubtedly be a much safer and better option for such new and amateur equity investors.

Discussed below are the salient features of RGESS.

Are you eligible for claiming tax benefit under RGESS?
Yes, if you satisfy the following conditions:
a) Your gross total income during the Financial Year does not exceed Rs.12 lakhs; and
b) You are a new individual investor i.e. either you do not have a demat account or you have one but so far you haven't transacted in the equity segment. Nor have you transacted in the derivative segment in the past.

Very Important: Even if you have invested in shares or mutual funds in the past, you would still be considered as a new investor under the schemeprovided it has been in the "physical form".

What is the maximum tax benefit that one can enjoy?
Tax benefit under the Rajiv Gandhi Equity Savings Scheme is covered under section 80CCG. The total deduction allowed is 50% of the amount invested (in the specified equity shares or units of mutual funds); subject to a maximum of Rs.25,000 per financial year. In other words, the limit on investment is Rs.50,000 per financial year.

Hence, the tax benefit works out to maximum Rs.2575 (10% tax bracket) / Rs.5150 (20% tax bracket) / Rs.7725 (30% tax bracket).

Important : This is over and above the Rs.1.50 lakhs eligible deduction u/s 80C.

Which shares / mutual funds are specified under RGESS?
- Top 100 stocks on the BSE or NSE.
- Navaratna, Maharatna and Miniratnas public sector enterprises 
- MFs and ETFs investing in the aforesaid equity shares
- Follow-on Public Offers and New Fund Offers of the aforesaid shares, MFs or ETFs
- IPOs of specified PSUs

What is the lock-in period here?
There is a lock-in of total 3 years comprising:
1. Fixed lock-in period of 1 year : During which no transaction is permitted, and
2. Flexible lock-in period of 2 years : During which you are allowed to sell, subject to the condition that the amount would be reinvested in RGESS-compliant shares or mutual funds. (You can also pledge these investments during the flexible lock-in period).

Important : The fixed lock-in period of 1 year is calculated from the date of investment till Mar 31 of the next financial year. So the effective fixed lock-in period is more than 1 year, depending on when you make the investment. Thereafter, the next two financial years are your flexible lock-in period where trading is permitted, provided the investment does not fall below the amount for which you had claimed the tax benefit. 

Is demat account mandatory?
Yes. Demat account is compulsory for those who want to avail sec 80CCG tax benefit. Holding shares in physical form is not permitted. In fact, mutual funds (which are normally held directly with the mutual fund company in the non-demat form ) too have to be bought and held in demat form to avail RGESS tax benefit.

[Note: You can claim tax benefit u/s 80CCG only for three consecutive financial years.]

Concluding, I would like to mention that Rajiv Gandhi Equity Scheme Scheme is rather a difficult scheme to understand, especially the trading part during the flexible lock-in period. So my simple advice would be to simply invest in a RGESS-compliant MF/ETF and forget it for 3 years. This is also desirable from the point of view that equity investments should be held for long term.

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