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RGESS Tax Sop for New Investors Announced


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.

The Concept

  • Applies to New investors – defined as those whose PAN numbers don’t have equity transactions (even empty demat account holders who’ve never transacted).
  • And then only those with taxable income less than 10 lakh per year.
  • For upto Rs. 50,000 invested in the equity markets, they get a tax deduction of 50% of that amount each year.
  • Eg. if you make Rs. 900,000 per year and invest Rs. 30,000 in stocks, you can get Rs. 15,000 off on your taxable income, taking it down to Rs. 885,000. Effectively, you will probably save about Rs. 3,000 in taxes (at the 20% slab).

The Details

You can invest in:

  • CNX 100 stocks
  • BSE 100 stocks
  • PSUs that are Navratnas, Maharatnas or miniratnas (WTF**)
  • Follow on public offers of the above companies (I suppose this is used to help the PSU offerings above)
  • IPOs of PSUs whose turnover is greater than 4,000 cr. (in each of the last 3 yrs)
  • ETFs or mutual funds that are listed and traded on stock exchanges and settled with a depository mechanism. That means Junior BEES and Nifty BEES (and such ETFs) are included.
  • You needn’t buy in one shot. You can buy in bits and pieces over the year.

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.

"Mutual Funds" are mostly NOT included

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 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.

Locked in

  • You can’t sell for a year, period.
  • After a year, you can sell, but you have to reinvest that much (or whatever you claimed tax benefits on) back into the market, such that the level is maintained for 270 days a year.
  • Scenario 1: You invest Rs. 40,000 but it falls to Rs. 30,000 within a year. You can sell, but you have to put back money to make the value at least Rs. 30,000.
  • Scenario 2: You invest Rs. 40,000 in April 2013, it goes to Rs. 60,000 in one year . You sell all your shares, but you have to bring the level back to Rs. 40,000. The 20K profit needn’t be reinvested.
  • The 270 day limit is very shady. It means you can’t sell after July in any year (since the financial year is April to March) If you sell in September, you don’t have enough time to buy back – there won’t even be 270 days left in the year! I suppose this will get clarified in the tax department announcement.
  • If you violate the lock-in – the tax benefits are reversed. Again, let’s wait for the tax department details.

My Take


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.


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