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Equity Linked Savings Scheme(ELSS) vs. Rajiv Gandhi Equity Scheme (RGESS) – Which is better?

 

In this year’s Budget of 2012, the central government has proposed a new equity tax savings scheme called ‘Rajiv Gandhi Equity Savings Scheme’ or RGESS for individuals with annual income below INR 12 lakhs. The maximum investment per year is INR 50,000 and maximum tax deduction is 50% of amount invested.

This tax deduction is over and above the INR 1 Lakh limit under Section 80C. This  is second such tax saving scheme encouraging equity investments after the current ELSS (Equity-linked savings scheme).

But which one should you choose to optimise your investment as well as tax savings?

We present you features of the 2 schemes and the better option for you.

Features:

Features

ELSS

RGESS

Maximum investment for tax deduction

INR 1 Lakh

INR 50,000

Maximum Tax Deduction per year

INR 1 Lakh

INR 25,000

Lock-in Period

3 Years

3 Years

Eligibility

Available to all individuals with no cap w.r.t. annual income

Available for individuals with annual income below INR 12 lakhs per annum

Mode of Investing

Through cheque or online net banking account

Need a Demat Account

Type of Equity investment

Promotes indirect participation in the stock market through investment in equity-oriented mutual funds

Promotes direct participation in the stock market through investment in stocks listed under the BSE 100/CNX 100 and/or public sector undertakings -Navratnas, Maharatnas and Miniratnas*

 

 

 

* As per current guidelines

 

Tax Savings as per current Tax Slabs:

If an individual below 60 years of age wants to invest INR 50,000 in a tax saving equity scheme in FY 2012-13 and wants to choose between ELSS and RGESS

Scheme

Income Tax Slab

10%

20%

30%

ELSS

5,150

10,300

15,450

RGESS

2,575

5,150

Not Eligible

 

Note:

Ø  Annual taxable income IN FY 2012-13 assumed for:

 

10% Tax Slab – INR 5 Lakhs

20% Tax Slab – INR 10 Lakhs

30% Tax Slab – INR 20 Lakhs

 

Ø  Click Here for Income Tax Rates FY 2012-13 (AY 2013-14)

 

Conclusion:

As you can see from the above tables, by investing INR 50,000 per annum and a lock-in period of 3 years, the tax savings from RGESS are quite limited. If you have to choose among the 2 schemes, ELSS proves to be a better investment in terms of tax savings as well as ease of investment.

For FY 2012-13 though, both ELSS and RGESS would be available for investing and an individual looking for long-term savings can make optimum use of the same.

The effective return to the investor (tax savings + capital growth) by making full use of both ELSS as well as RGESS in the FY 2012-13 will be covered in a separate article.

Author

By Priya Rao, Certified Financial Planner (CFPCM) at InvestmentYogi.


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Published Nov 27 2012




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