Why is Rajiv Gandhi Equity Savings Scheme not successful?

What is RGESS?

Rajiv Gandhi Equity Savings Scheme (RGESS) has been set rolling from the financial year 2012-2013. Under this tax saver scheme, Indian residents who have an income up to 10 lakhs & are first time investors in the stock markets are eligible to invest. The tax deduction will be under the Section 80CCG of income tax act. This is over & above the 1 lakh limit given under section 80 C.

But even after the attractive tax rebate (as per the government), people are shying away from the scheme. The data collected for the financial year term of 2012-2013 does not paint a pretty picture. According to the data, the investments in this scheme are a meagre 51.67 crores & only about 21,800 demat accounts have been opened which invest in this scheme.

Reasons for a no show....

One of the main reasons that the scheme has proved to be a dud, lies within the basic framework of the scheme. According to the scheme only new investors, i.e. those who have never invested in stock markets are eligible to invest in the scheme. Considering the volatile nature of the stock markets, which has seen constant fluctuations after 2008, the existing investors are treading with caution. Fiasco of the companies like Lehmann Brothers in the U.S.A & Satyam Computers in India has not helped to lift the investor sentiment either. The lock-in period for 3 years in the scheme proves to be a dampener.

The total investment limit in this scheme is Rs. 50000/ year. Out of this limit, only 50%, i.e. 25000 can be availed for tax benefit. This means that for an investor investing Rs. 50000, in the 10% tax bracket, the tax saving is only Rs. 2500.

These are uncertain times for the stock markets.  The economy which was booming a few years back has slowed down considerably. Analysts estimate a sub 5% growth for 2014. The environment is not seen conducive to equity investing. People prefer Public Provident Fund PPF, tax saving bonds, 5 year bank tax saving fixed deposits for tax saving purpose. This is also because these instruments promise a fixed return & capital appreciation happens. As far as RGESS is concerned, the scheme structure along with a very volatile capital market may be considered to be the reasons that it is under-performing.

Although the scheme has been launched recently, it is very difficult to pass a judgement whether it is working or not. The rationale of the government does not hold clarity. But one thing is sure. We believe that this kind of a scheme will only work out in the longer run, only if it is made more investor friendly. Also, investors need to be given confidence about the wealth creation ability of the equity market in the longer run.