Rajiv Gandhi Equity Saving Scheme (RGESS)
Rajiv Gandhi Equity Saving Scheme (RGESS) – Brilliantly Conceived, Poorly Delivered !
RGESS – is a mess ! I could not find any one who could benefit out of it.
Those who need it, are not qualified. Those who are qualified to buy, either dont need it or should not be buying it !!
All this mess started when some brilliant mind suggested to the finance minister that the Indian Government should encourage the average investor to participate in the Indian Stock Market. USA encourages its citizens to invest in 401k, IRA, Roth type of investments. Singapore and other few countries have their tax benefit plans that encourage citizens to invest in their own stock market or their government companies.
Here, Too many cooks spoiled the broth !
I guess this is how they messed up RGESS. The idea originally is to encourage those who don’t have demat account to open one and invest in stock market. Probably this was done by stock brokerage firms with an eye to develop their market. Then some one said Indian markets are too risky for individual investors, so, they added mutual funds into the list. But MF already has ELSS schemes. So, brokerages did not like it very much. So, govt said, ok RGESS Mutual funds should be bought using demat accounts to pacify the brokerage firms. Then some one throw the idea of removing HNI from this list to target only middle income households. Finance Minister bought that idea as well. Then a lock in period is introduced otherwise it is not eligible for tax incentive. Then revenue department objected for one on one deduction, fearing poor tax collection next year. This is also accepted.
When you accept all these ideas from every Tom, Dick and Harry, and put them in the pot and cook, what do you expect be the outcome ?
RGESS ! It stinks..
Let us see Who is eligible to Invest ?
- Should be resident individual – No NRI, no other entity
- Not opened a demat account and has not made any transaction in derivative segment as on the date of notification of the scheme. (I think 30-Nov-2011)
- Opened a demat account before the notification but not made any transaction in the equity segment or the derivative segment till the date of notification of the scheme
- Not the first account holder of an existing joint demat account
- Gross total income for the financial year is less than or equal to ten lakh rupees.
What is the benefit ?
- under section 80CCG for Tax benefits
- Maximum amount individual can invest is Rs.50,000
- 50% of the invested amount can be deducted from the gross income
- This benefit is available only for one year. And not available for the subsequent years, because this person is no longer a new investor in the equity market.
Under the hood :
- Investors in RGESS can invest in both primary and secondary market stocks
- Stocks should be from CNX 100 or BSE 100, PSU’s classified as Maharatna, Navratna or Miniratna Or ETF linked to eligible securities.
- There are also list of mutual funds eligible for RGESS.
- Investor need to give a declaration in form A for designating a demat account for RGESS. This form will be sent to depository participant to check for your eligibility. You are eligible only if you haven’t traded in equity or derivative segments before November 23, 2012, which makes you a new investor as per the RGESS scheme.
- Holding period of RGESS investment is three years.
- During the first year, ( fixed lock-in period), one cannot pledge or sell the shares purchased.
- In the next two years, (flexible lock-in period), you can sell and buy other eligible securities or ETFs, maintaining the value of investment originally made for a cumulative period of 270 days during the two years.
Issues with the design and delivery of this scheme :
- Wrong Target : Individual with income less than 10 Lakhs will be under 30% tax bracket. So, they will be either 10% tax bracket or 20% bracket. Usually people with surplus funds take risk with stock market and they are informed investors and can live with volatility. But they are not eligible.
- Less Tax benefit: If some one in 10% bracket invest Rs.50,000, benefit is Rs.2575/- or some one in 20% bracket, the benefit is 5,150.
- Small investment does not make sense : Anything less than Rs.50,000, your tax savings are so negligible, you have no incentive to invest for 3 years lockin.
- No money beyond 80C savings : Since 80C scheme is giving one to one deduction, and RGESS is giving only two to one deduction, tax payers first will try to fill up their quota under 80C. How many investors after filling up 80C quota of 1 Lakh, can really afford to invest Rs.50,000 in the stock market, after their taxes and regular expenses ?
- No risk Appetite for low income category : Those in the 10% bracket are struggling hard to maintain their savings account with ever raising minimum balance of the bank accounts. Where are they going to find Rs.50,000 to invest in the stock market ? How many of them will have appetite to invest in highly volatile and high risk Indian stock market ?
- KYC will be killing : New investors will bear the torture to go through the KYC documentation. Very few investors can go through this Shaolin Temple tests and still get to the 36th Chamber !
- Narrow Investment Period : Stock Market is for long term investment. Allowing only one year of investment in stock market is stupid idea. Also when every one is recommending SIP as the way to get into the market, forcing investors to invest Rs.50,000 within two months (this has to be done before Mar 31, 2013), is really a bad idea.
- Demat account is wrong idea: Government should have allowed only mutual funds as the medium for stock market exposure and not demat account.
- Buying mutual funds under demat account is another stupid idea. You incur fund expense cost and also brokerage cost. Why take so much in fees from new investor ?
- Opens Avenues for Misselling : If this one time lumpsum investment does not do well, (probability is very high in short term), scruples Brokers may utilize this opportunity to divert small investors to invest in other risky stocks and derivatives with a primary objective to churn the portfolio and earn commission.
- Asset Allocation : Govt should have recommended Only Mutual funds with 60/40 allocation of stocks and bonds for RGESS scheme. This is the only asset allocation a new investor in the market can live with. With a 100% stock allocation, they would become like Tenali Raman’s Cat that burned its tongue with Hot milk and never would they return to the Stock Market again !!