Fintotal News Analysis | Is RGESS Turning in a Flop Show?
Is RGESS Turning in a Flop Show?
Ruby Jacob, 14 Jan 2013

Rajiv Gandhi Equity Savings Scheme (RGESS) was a lot more talked about when it was rolled out in December 2012 than it is now. Earlier in September mutual fund companies and SEBI had got the Finance Minister to get mutual funds and ETFs under RGESS.

They don't seem to be keen about it anymore. But we are not surprised. Given the long list of clauses attached with RGESS we were skeptical about how this would take off.

RGESS scenario

RGESS was announced in this year's budget session. It gives tax rebate of 50% on investment in select shares to first time investors under section 80 CCG. Later mutual funds and ETFs investing in those shares were also included under RGESS.

Despite the initial excitement mutual funds seem to be cold about launching new RGESS funds. Since the tax rebate is a onetime deal they are not sure how much interest it will generate and whether the funds will see growth in terms of size over time. SBI, IDBI and DSP BlackRock are the only ones who have filed offer documents with SEBI to launch RGESS funds.

Making existing funds RGESS-fit also does not seem viable because listing them on exchanges might not be the best thing for existing investors. Many existing mutual fund investors may not be a having a demat account. Moreover it also involves additional cost for the fund house. However some ETFs have been listed as RGESS eligible on NSE.

Distributors too seem to be shrugging RGESS off. Many small mutual fund distributors may not have trading platform and would have to tie-up with a broker for the same.

What's not right with RGESS?

Using tax rebate as an incentive for investing in areas it considers important is not new with the government. Not a bad thing at first look but it leaves scope for investors to get duped into investing in or buying products that are not best suited for them. Classic example of this is mis-selling of insurance products.

In case of RGESS tax riders are less attractive. It is closed for those with annual income above Rs 10 lakhs. Maximum tax benefit one can get is about Rs 7,500. Tax rebate is limited to 50% of investment and maximum investment permitted is Rs 50,000. Moreover this once in life time rebate is exclusively for those who are using demat account the first time.

The investment universe of RGESS is also very narrow. Shares in NSE 100 or BSE 100 and a set of other PSUs are eligible.

Investment in shares is meant to be long term but the lock-in period of three years along with the other complexities makes ELSS win hands down.

Should you go for RGESS?

Industry players now want the finance ministry to consider widening the scope of RGESS and give 100% tax rebate and also raise the investment cap from the current Rs 50,000. However making it more attractive on the tax front without widening investment scope can lead to too much money being pumped into a few shares and mispricing of those shares.

Investors may give RGESS a miss this financial year and make best use of ELSS. They'd better wait until there is more clarity and see whether it will evolve in the next tax season.

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