Equity savings scheme could be tweaked to make it more attractive

The government's Rajiv Gandhi Equity Savings Scheme (RGESS), aiming to draw retail investors into the equity market through tax exemptions, could be changed in the coming Budget for 2015-16.

According to sources, the government might reduce the lock-in for the scheme from the existing three years to one year, to draw investors. Currently, the scheme offers a fixed lock-in for the first year and flexible lock-in for the next two years.

Additionally, the plan is to increase the benefits for not only first-time investors but those already doing so in equity, if they put money in the scheme.

RGESS was launched in 2012 to draw first-time investors to the equity markets. The scheme has failed to excite the markets since then. As of December 2014, the total number of demat accounts with Central Depository Services under RGESS is 30,747 and total investment in those accounts is close to Rs 38 crore. The total number of demat accounts with National Securities Depository is 16,811 and total investment in those is a little over Rs 64 crore.

According to data from the Association of Mutual Funds in India, there are a total of 23 schemes launched by 15 fund houses that comply with RGESS.

With just a little over Rs 100 crore of investment in the scheme in two years, the Securities and Exchange Board of India has taken up issues regarding the scheme with the Centre. It has suggested major changes are needed, such as the two mentioned earlier.

Additionally the investment limit eligible for tax benefit could be raised from the existing Rs 50,000 to a higher limit, yet to be finalised. RGESS gives a tax benefit to only first-time retail investors with annual income of less than Rs 12 lakh for investments totalling a maximum of Rs 50,000, of which half is deducted before calculating one's personal income tax liability.

The maximum possible tax saving is Rs 5,150. The exemption is over the Rs 1.5 lakh limit permitted by Section 80C of the Income Tax Act.

Another change being mulled is to allow more than the top 100 securities to be a part of the securities.

Currently, the top 100 stocks on the National Stock Exchange and BSE are part of the RGESS, as are shares of public sector enterprises categorised by the government as Maharatna, Navaratna and Miniratna.