The benefit of RGESS

Which ETF should be chosen for investment under the RGESS? Is this the right strategy?
-Rajiv Sahani

RGESS aims to encourage first time investors to invest in equity markets. This scheme would give tax benefits to new investors whose annual income is below Rs 12 lakh. This benefit is available for three successive years and above the existing one lakh exemption U/S 80C.

Investments in RGESS are capped at Rs 50,000 per individual, with a tax deduction of 50 per cent on the amount invested. The scheme allows investments only from fresh investors who have never traded in equities through a demat account. Investors in equity funds, and those holding physical share certificates are eligible. RGESS investments have a lock-in period of three years. However, one is allowed to trade in them after the first year on certain terms and conditions. These conditions require you to maintain your demat account at a value equal to or higher than the amount claimed for tax deduction.

To put it simply, if you invested Rs 50,000 in the first year which becomes Rs 55,000 after a year; you will need to have equity worth Rs 55,000 or more in your account at any point of time in the second and third year. You need to buy equities worth the amount you sell. RGESS has been regarded as a complicated product, invest only if you understand the instrument.

There are many ETFs that qualify under the Rajiv Gandhi Equity Savings Scheme. Nifty-based ETFs are as as good a choice as any. On our website, we have a special page to help you choose an RGESS fund: http://goo.gl/DzeByx

This article was originally published on January 27, 2014.