Why Rajiv Gandhi Equity Scheme failed

Economic Affairs Financial Markets

Union Budget 2017 has proposed to discontinue the benefit of tax deduction for investments in the Rajiv Gandhi Equity Savings Scheme (RGESS), introduced in 2012 with the objective of attracting new investors to the equity market.
This scheme is failed because of the restricted entry, lack of clarity and complex route of investment resulted in lacklustre response from investors.

About Rajiv Gandhi Equity Savings Scheme

This scheme provides tax deductions under section 80CCG of the Income-tax Act, 1961. This deduction is over and above the deduction of Rs1.5 lakh under the familiar section 80C, and is exclusively for investments in RGESS.
Investors who are in the highest tax bracket of 30% can save up to Rs7,500 in taxes by investing a maximum of Rs50,000 under this scheme. Deduction is allowed on 50% of the investment amount, i.e., Rs25,000. Similarly, in case someone invests Rs40,000, she can claim a deduction of Rs20,000 under 80CCG.
Initially, RGESS was available to those who were first-time equity investors and had incomes up to Rs10 lakh a year, and invested in specified RGESS-eligible stocks, mutual funds and exchange-traded funds.
In Union budget 2013, the maximum income threshold was increased to Rs12 lakh per annum.

Analysis:

In this scheme there is a lack of clarity on how to identify first-time investors, how to identify the qualifying stocks under the scheme and other issues resulted in lack of motivation for investors to invest in the scheme.
Although the scheme comes with a three-year lock-in, there is also a complicated route you can use to exit before that. Apart from this, the process of getting identified as a first-time equity investor requires filling multiple forms, in which you also have to state the exact benefit you seek.
In addition to lack of awareness among investors, low interest from distributers also resulted in failure of the scheme. The bad structure of the scheme made it difficult for distributors to recommend the schemes to clients.

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