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Should you consider RGESS this year?

Should you consider RGESS this year?

Mutual Funds are offering an easier way to invest as per the Rajiv Gandhi Equity Saving Scheme rules this year, should you invest?

RGESS Series 1 performance

Scheme Expense Ratio (%) Assets (Rs crore) 6-month return* (%) 3-month return* (%) 1-month return* (%)
Birla RGESS Series 1 2.96 42 7.27 -2.93 -2.93
DSP BR RGESS Series 1 2.94 44 4.73 -4.48 -4.47
HDFC RGESS Series 1 2.87 113 10.45 -3.35 -3.48
IDBI RGESS Series 1 2.69 18 6.68 -0.85 -1.95
LIC Nomura RGESS Series 1 2.34 17 8.86 -5.75 -4.16
UTI RGESS Series 1 1.61 25 5.54 -3.93 -3.1

*Returns as on Feb 5, 2014

Have you never invested in equity through a demat route and are earning less than Rs12 lakh per annum? There is now a simple way for you to explore stock market investments as the second set of schemes under RGESS norms are now open.

Scheme launches this year
HDFC Mutual Fund, ICICI Mutual Fund and Birla Sun Life Mutual Fund have new fund offers (NFO) for their schemes targeting the investors eligible for RGESS. The NFO for ICICI Prudential Equity Savings Scheme – Series 1 closes on February 7, 2014, the Birla Sun Life Focused Equity Series 1 closes for subscription on February 13, 2014, while the NFO period for the HDFC RGESS – Series 2 ends on February 24, 2014.

Remember, that investments into these schemes would be locked in for three years like on any other tax-saving investment instruments.

The tax benefit
Under this scheme investors who have never invested into equity directly and have an annual income below Rs12 lakh can claim tax benefits. This is available for only the first three consecutive years as per the recent Section 80CCG. The tax deduction is in addition to deduction of Rs1 lakh available under Sec 80C.

However, not all the money that you invest in RGESS is allowed for deduction. Only 50% of the amount invested can be claimed for tax deduction. The investments are capped at Rs 50,000 per year. So, you can claim a maximum of Rs25,000 as tax deduction each year. Hence you can save a maximum ofRs 7,500 if you’re under the 30% tax bracket, while Rs5,150 for those in the 20% tax slab and Rs2,575 for the 10% bracket.

The RGESS investment option is available only for a maximum of three years in the lifetime of a fresh equity investor. He will have to make lumpsum investments if he goes by the mutual fund route as these are closed-ended schemes open during the January-March tax-saving window.

In tax-saving mutual funds or Equity Linked Saving Schemes (ELSS) a person can invest on a continuous basis in open-ended schemes. Plus there are no limitations set in terms of number of years (at least until clarity emerges on Direct Tax Code). You can invest by way of systematic investment plans (SIPs) to even out the highs and lows of equity market.

The average 6-month return for RGESS schemes has been 7.255% and the best performing scheme has delivered 10.45% over six months. ELSS schemes as a category offered 11.04% over a six-month period and the best scheme stood at 22.68%. One would argue that 6-months is too short a period to look at returns, but then we don’t have much of history for RGESS schemes that will complete a year only next month. The best performing ELSS scheme had a return of 13.1% over a three year period and 14.84% over a one year period.

The balance of tax benefit too swings in favour of ELSS as you get a 100% tax deduction upto Rs1 lakh under section 80 C. However, one benefit is that the RGESS tax benefit is over and above the Section 80 C window (though only for 3 years). So, only if you have exhausted your 80 C investments should you look at RGESS.

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