- Wealth PMS
In another horribly named scheme*, the government has announced an Equity Savings Scheme, named after Ramesh Gelli. No, Ram Gopal (Verma). Okay, it doesn’t matter, so let’s get to the concept that was first announced in Budget2012.
* I detest that any thing is named after the Gandhi family – they have a hugely disproportionate number of things named after them. Indira or Rajiv Gandhi, or Nehru in airports, hospitals, schemes, programmes – what the heck? I would support a "renaming" exercise and fund the costs of it.
Also why don’t we call it a Dhirubhai Ambani scheme instead? He brought the small investor into equity markets.
You can invest in:
WTF** = why this silly clause? If you are a whatever-ratna, you better well compete with private companies and come into the top 100 stocks just like anyone else. This pandering to government owned companies is ridiculous, but it’s being used as an attempt to attract people to the useless government IPOs coming soon.
A common misconception is that mutual funds have been included in the RGESS scheme. They have not. The clause says:
Exchange Traded Funds (ETFs) and Mutual Funds (MFs) that have RGESS eligible securities as their underlying and are listed and traded in the stock exchanges and settled through a depository mechanism have also been brought under RGESS.
That only means listed Mutual Funds that are traded in the exchanges. Most equity mutual fund purchases are not done on an exchange (for instance, mutual funds bought through an intermediary like fundsindia.com are not).
I don’t if this means that RGESS includes purchases of equity mutual funds that traded in the "MFSS" segment of exchanges. Even there, there’s a depository mechanism. But clarity will only come when the income tax department notifies it. But even if it does, it means buying an equity fund from your friendly neighbourhood "agent" will not qualify.
With so many ifs, buts, exclusions, lock-ins and all that, I don’t see the ESS as a game changer. It applies only for the first year of investing, and that too in some specific securities. It is also supposed to help the government sell its IPOs but that is not going to work – if current, regular investors won’t buy those stocks then new investors will not.
Secondly, the benefit is not great. You will save taxes on 50% of the money invested, and with less than 10 lakh income, you’re probably in the 20% tax bracket. For Rs. 50,000 invested you will save about Rs. 5,000 in taxes. That means if the investment falls by 10% or more, you’re worse off than not investing at all (and you can’t even exit properly because of the lock-in complexities). However, you can think of this as the government giving you a 10% cushion on the downside.
Lastly, the fact that mutual funds – the more common non listed, equity oriented – are not included is a bummer.
Note: You might see changes when the actual notifications from the income tax department or SEBI come along.