The Rajiv Gandhi Equity Savings Scheme (RGESS) has been often criticised for its complexity. While the criticism is justifiable as an opinion on the design of the scheme, investors should not take it as advice on the scheme's usefulness. As it stands, RGESS is perfectly usable, and eligible investors must not ignore this excellent way to get started with equity investments while getting a decent tax break. Moreover, one of the major problems with the scheme was that one could use it only for one year in a lifetime. This limit has been relaxed to three years in this year's budget.
Most importantly, a number of RGESS-specific mutual funds have been launched that enable you to easily avoid the complexity. To understand how, let's see how the scheme works. You are eligible if you have never bought any equity through a dmat account and your income is less than Rs 12 lakh. Stocks eligible under the scheme are the ones in the BSE 100 and the CNX 100 indices, large PSUs, and listed mutual funds that are invested in these. The annual limit is Rs 50,000 which gets you a 50 per cent reduction in your taxable income and the lock-in is three years.
So far, so good. The complexity begins when some of the shares you have bought are no longer fit to hold on to and you need to sell them and buy other eligible shares. For the first year, there's no recourse--you have to hold on--and after that there is a complex set of rules that govern such trading. However, if you invest in the RGESS mutual funds, then these problem doesn't arise at all. You can stay locked-in to the fund and the fund manager can do all the buying and selling that's needed because the fund itself is not affected by the lock-in. Birla Sun Life, DSP Blackrock, HDFC, IDBI and UTI have already launched such funds and others will surely follow suit.
So don't avoid RGESS because of its complexity and lock-in. Just use it through one of the eligible mutual funds and get the equity returns and the tax break.
To know in detail all about the working of RGESS, read the cover story in the latest issue of Mutual Fund Insight...
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