Budget 2017: Rajiv Gandhi Equity Savings Scheme to be phased out

New Delhi: Rajiv Gandhi Equity Savings Scheme (RGESS), under which tax benefits of up to Rs 25,000 for small investors in equities have been proposed to be phased out, seems to have had limited takers with more than 4,500 accounts having no investments at all.

Total number of RGESS accounts was 21,999, as of December 31. Of these, only 17,458 accounts were used for investments, which means that 4,541 such accounts have no investments at all, as per the latest data available with the depositories.

Total value of initial investments made by RGESS beneficiaries was Rs 9,372.23 lakh. Most of these investments have been made into mutual funds (Rs 7,568.52 lakh) followed by equity (Rs 1,727.42 lakh) and exchange-traded funds (Rs 76.29 lakh).

The government has proposed to phase out tax benefits under RGESS, which was introduced with much fanfare by the previous UPA regime.

Under the scheme, deduction for three consecutive assessment years is allowed up to Rs 25,000 to a resident individual for investment made in listed equity shares or listed units of an equity oriented fund subject to fulfillment of certain conditions.

Noting that "limited number of individuals availed this deduction", the Union Budget 2017-18 proposed to rationalise this tax benefit introduced in Finance Act, 2012 and phase it out from assessment year 2018-19.

However, an assessee who has claimed deduction under this section for the assessment year 2017-18 and earlier assessment years would be allowed deduction under it until the assessment year 2019-20.

According to depositories' data, investments have been made in the first and second year in 4,691 RGESS accounts, while 1,959 accounts have seen investments in the first, second and third year.

Additional amount invested by existing RGESS beneficiaries in the second year stood at Rs 2,039.33 lakh and Rs 1,595.97 lakh in the third year.

The tax saving scheme, which was announced in the Union Budget 2012-13 and was further expanded the next year, was designed exclusively for the first-time individual investors in securities market with gross total income below a certain limit.

In 2013-14, the income ceiling of the beneficiaries was raised to Rs 12 lakh from Rs 10 lakh specified in 2012-13.

Under Section 80CCG of the Income Tax Act, it provided for a 50 percent deduction of the amount invested during the year, up to a maximum investment of Rs 50,000 per financial year, from his/her taxable income for that year, for three consecutive assessment years.

At that time, the UPA government had said the objective of the scheme was to encourage the flow of savings and to improve the depth of domestic capital markets. This would help in promoting an 'equity culture' in India.

The scheme was also aimed at widening the retail investor base in the Indian securities markets and also to further the goal of financial stability and financial inclusion.