The government on Friday approved the Rajiv Gandhi Equity Saving Scheme (RGESS), which was announced in the Union Budget to provide tax incentives for individuals with annual income of less than Rs 10 lakh.
The centre in a press note also highlighted the salient features of the scheme.
Market experts say that the intentions behind launching the scheme are good, however, they are too complicated for first-time equity market investors and pose a lot of uncertainties. The following are few areas where market players seeking more clarity.
Whether existing MF investors will be eligible?
Although the government has said that the scheme is exclusively for first-time investors in the securities market. It raises doubts whether existing equity mutual fund investors will be not be allowed to participate in this scheme. RGESS was earlier meant for direct investments into the stock market, however after requests from various stakeholders, including market regulator Sebi, the government also allowed MFs and ETFs to be part of this scheme. “As the government has also included mutual funds for RGESS, theoretically it will disqualify existing mutual fund investors,” said a CEO with a domestic AMC. So if an individual has never invested in stocks directly but has been a investor in mutual fund schemes that qualify for RGESS, will he/she still qualify?
Who would be responsible for monitoring?
The scheme is only open to new retail investors. Those who have already have opened the demat account but have not made any transaction till the date of notification of this scheme will also be eligible. Further, all existing demat account holders other than the first account holder who wish to open a fresh account will also qualify for tax breaks. Although the government has said such investors will be identified on the basis of their permanent account number (PAN), monitoring and filtering eligible investors will be too difficult a task say market players. They also want to know whether the onus of monitoring eligible investors will be on the Income Tax (IT) department, Sebi or brokers?
Will secondary market purchase of MFs and ETFs units be allowed?
The scheme has allowed mutual funds and ETF schemes with specified stocks as their underlying to be part of this scheme. It, however, remains to be seen whether both open-ended as well as close ended schemes will be allowed. Also, whether secondary market purchases of MFs and ETFs through the stock exchange platform will also be considered valid investments.
Who will guide first-time investors?
The conditions laid out are too complicated for first-time investors and they may not have the sophistication needed to understand the scheme.
Like other tax-saving schemes, RGESS too has a three year investment lock-in. The unique features about this scheme is that it allows investors to trade in securities that they had bought to avail tax benefit after a blanket lock-in of one-year. However, the government has stipulated tough conditions for trading in RGESS portfolio. For instance, investor has to maintain investment level for which tax benefit is availed for at least 270 days. Also, shares sold have to be replenished with only RGESS compliant securities of at least the same value. In case the investor fails to meet the conditions stipulated, the tax benefit will be withdrawn.
Expert says first-time investors will need a lot of guidance right from picking the correct stocks to ensuring portfolio value is properly maintained. But the question is who will do the hand-holding for new investors?
Hopefully, market regulator Sebi, which will be issuing a circular on RGESS in the next two weeks, will provide more clarity.
