Who is Eligible?
RGESS is available to all resident individuals whose gross total income is less than 12 lakh and who are investing in equity for the first time. A first-timer has been defined as the one who has not opened a demat account as a 'first holder' before the notification date of 23 November 2012, even if his name appears in a joint demat account opened before this date. The investor who has opened a demat account as first holder before the notification date but has not bought any shares or traded in the futures and options segment will also be considered as a first-time investor.
How can you get tax benefits?
To avail of tax deduction, an investor has to open a new RGESS designated demat account or designate for this purpose his existing demat account, where no trading has taken place before 23 November. He needs to submit a declaration in Form A, certifying that he has not traded before 23 November 2012, to the depository participant, who in turn forwards it to the depository for verifying the status and designate him a new retail investor. He can then start buying the eligible securities, which include stocks from BSE-100 or CNS 100 index. The listed shares of navaratna, maharatna and miniratna pubic-sector undertakings, and initial public offers (IPO) of PSUs, whose turnover is more than 4000 crore, are also eligible for investment. One can avail of tax benefit by investing in the eligible mutual fund schemes too.
What's the lock-in period?
Unlike other tax-saving schemes, the lock-in period here is split in two. The first year is a fixed lock-in and the investor cannot sell, pledge or hypothecate the shares. The next two years are flexible and he can sell, but has to buy other eligible securities with the proceeds. All eligible securities in an RGESS designated account are automatically subject to the lock-in periods. If an investor wants to buy more designated shares and keep these outside the lock-in clause, he has to give a declaration in Form B within a month of the transaction date. The tax benefit under Section 80CCG is withdrawn if these conditions are violated, but if the changes are due to involuntary corporate actions it's not affected.
What are your savings?
While there is no restriction on investment, only 50,000/- is considered for tax purposes. Of this, only 50%, or 25,000/-, is allowed as deduction. Since RGESS is for people with income less that 12 lakh, they will fall in the 10% or 20% tax bracket. The maximum savings under this will be 5000/- for people in the 20% tax bracket and 2500/- for those under 10% (beyond the Section 80C benefits). Besides, the tax deductions will be available for the all the 3 years.
Stocks or mutual funds?
Since direct investment in equity needs expertise and first-time investors are unlikely to have it, they should refrain from investing directly in the market. The risk is also high because 50,000/- is not enough to create a well-diversified portfolio. A better option is to go through the mutual fund route. Various mutual fund houses have also started filing offer documents for eligible schemes with Sebi, while their new fund offerings (NFO) too are expected soon.