There's news that in the forthcoming budget, one of the changes that savers can expect is an overhaul of the Rajiv Gandhi Equity Savings Scheme (RGESS). The RGESS was launched in 2013 by the then Finance Minister Pranab Mukherjee with the expressed goal of introducing people to equity investments. With investments of ₹91 crore in all these years, it's difficult not to conclude that the scheme is an utter failure. Now, it seems that the there is a serious move to repair it in some fashion.
Will the repair job (if it happens) succeed? That depends on whether the right lessons have been learned, and what exactly is being changed in the scheme. The RGESS has failed because it is a Rube Goldberg machine of complexity, with a design that is the epitome of the command-and-control bureaucratic culture more suited to an earlier time. It ticks every box of what the government wants savers to do, while the utility it provides is meagre in proportion to the effort and the complexity.
To understand why savers almost completely ignored the scheme, and what the nature of the fix should be, it's interesting to look at the details of the scheme, as it exists now. The scheme allows new retail investors, who have never invested in any equity investments earlier, to get a tax break. They can invest up to ₹50,000 in each of these years, with a lock in of three years, and get half of the invested amount deducted from their taxable income.
Retail investor is defined by the scheme as anyone with a gross income of up to ₹12 lakh, and 'new investor' as someone who has never opened or invested through a demat account. All investments to RGESS have to be made through a demat accounts designated for the purpose. The investments must be made in stocks that are part of the BSE-100 or CNX 100 indices, shares of navratna, maharatna and miniratna PSUs, or IPO of PSUs, with turnover of more than ₹4,000 crore, or in mutual funds that have been specified as sticking to the above norms.
Even more complicated are the lock-in rules. There is a fixed lock-in period and a flexible one, during which investments can be switched. A comprehensible explanation of the implications of the lock-in rules requires several hundred words but even then is only fit for tax lawyers' consumption. A flow chart explaining the lock-in needs twelve intricately connected boxes. The government's official FAQ for the RGESS is 38 pages. And the saver has to tackle all this to get a tax break of the grand maximum of ₹2,500 or ₹5,000 depending on the tax bracket.
Oh, and did I mention that you can invest in the RGESS for a total of only three years in your lifetime, and those three years must be consecutive? In fact, if you came across a description of the RGESS on a satire website as an example of a bureaucratic complexity gone wild, you would never suspect that such a thing actually existed in the real world.
So how is the government going to fix this monstrosity? From what I've heard, by wiping the slate clean and launching a newer, simpler scheme. The new scheme is said to be simpler, more flexible and most importantly, a better ratio of savings made to tax saved. It's also said to have an SIP (systematic investment plan) in equity mutual fund as an element. This sounds great.
However, as an objective evaluation of the failure of RGESS shows, the design of the scheme is very important. Any tax saving scheme is a series of trade-offs between the benefits and the limitations. Keep in mind that each of RGESS' conditions effectively made the set of potential customers smaller and smaller. Hopefully, those who are formulating the new scheme will keep both the pros and cons in mind and bring balance to the universe of savers it addresses.