The
Rajiv Gandhi Equity Savings Scheme (RGESS) has been officially notified and
will be launched by Finance Minister P Chidambaram this week. ET Wealth
explains what you should consider before opting for this tax-saving option
available under Section 80CCG.
Who
is eligible?
RGESS
is available to all resident individuals whose gross total income is less than
Rs 10 lakh and who are investing in equity for the first time. A first-timer
has been defined as the one who has not opened a demat account as a 'first
holder' before the notification date of 23 November 2012, even if his name
appears in a joint demat account opened before this date. The investor who has
opened a demat account as first holder before the notification date but has not
bought any shares or traded in the futures and options segment will also be
considered as a first-time investor.
How
can you get tax benefit?
To
avail of tax deduction, an investor has to open a new RGESS designated demat
account or designate for this purpose his existing demat account, where no
trading has taken place before 23 November. He needs to submit a declaration in
Form A, certifying that he has not traded before 23 November 2012, to the
depository participant, who in turn forwards it to the depository for verifying
the status and designate him a new retail investor. He can then start buying
the eligible securities, which include stocks from the BSE-100 or CNX 100
index. The listed shares of navratna, maharatna and miniratna public-sector
undertakings, and initial public offers (IPO) of PSUs, whose turnover is more
than Rs 4,000 crore, are also eligible for investment. One can avail of tax
benefit by investing in the eligible mutual fund schemes too.
What's
the lock-in period?
Unlike
other tax-saving schemes, the lockin period here is split in two. The first
year is a fixed lock-in and the investor cannot sell, pledge or hypothecate the
shares. The next two years are flexible and he can sell, but has to buy other
eligible securities with the proceeds. All eligible securities in an RGESS
designated account are automatically subject to the lock-in periods. If an
investor wants to buy more designated shares and keep these outside the lock-in
clause, he has to give a declaration in Form B within a month of the transaction
date. One can also keep other securities in this account without the lock-in
clause. The tax benefit under Section 80CCG is withdrawn if these conditions
are violated, but if the changes are due to involuntary corporate actions it's
not affected.
What
are your savings?
While
there is no restriction on investment, only Rs 50,000 is considered for tax
purposes. Of this, only 50%, or Rs 25,000, is allowed as deduction. Since RGESS
is for people with income less than Rs 10 lakh, they will fall in the 10% or
20% tax bracket. The maximum savings under this will be Rs 5,000 for people in
the 20% tax bracket and Rs 2,500 for those under 10% (beyond the Section 80C
benefits). Besides, the savings are only for the first year, not subsequent
years. So, those who don't have enough money or time to invest Rs 50,000 in
2012-13 should consider postponing it to 2013-14.
Stocks
or mutual funds?
Since
direct investment in equity needs expertise and first-time investors are
unlikely to have it, they should refrain from investing directly in the market.
The risk is also high because Rs 50,000 is not enough to create a
well-diversified portfolio. A better option is to go through the mutual fund
route. As of now, several exchange traded funds (ETFs) have been declared as eligible
securities and investors can invest in these. Various mutual fund houses have
also started filing offer documents for eligible schemes with Sebi, while their
new fund offerings (NFO) too are expected soon.
~
Source : ET
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