RGESS Savings Scheme and the tail wagging the dog

Last year a very complicated scheme called the Rajiv Gandhi Equity Savings Scheme (RGESS) was launched with the motive to encourage first time investors to invest in the stock market.

Based on the scheme, you could get a maximum tax deduction of Rs. 5,000 if you invested Rs. 50,000 in certain specified stocks or mutual funds.

Earlier this month, SBI filed its prospectus for their RGESS mutual fund and then IDBI followed suit as well.

Both these products were structured quite differently as one was an open ended fund, and other was a close ended fund, and I got so immersed in trying to understand, evaluate and analyze these two funds that I lost the forest for the trees.

Ultimately, you will get a tax deduction of a maximum of Rs. 5,000 by investing Rs. 50,000 in any RGESS approved scheme, and anyone who is familiar with the share market will tell you that 10% can be wiped out in a matter of days or even hours, so to that extent is it a wise choice to invest in shares or mutual funds to get this tax benefit?

For most people the answer to this question will be no, but unfortunately most people won’t be asking this question.

It’s just the way it has always been when it comes to financial products, and everyone is to be blamed for this.

As soon as a new product is launched – news stories start appearing about it, people start inquiring about it, bloggers start blogging about it and very soon the focus is on the product instead of your financial need.

Why invest in an IPO when you can invest in the thousands of stocks that already exist in the market and why buy the latest insurance product from LIC when hundreds of similar products already exist in the market?

I think we get so carried away with the frenzy of new product launches that we forget to look at all the similar options that already exist in the market and can serve the need better.

The RGESS example was so obvious once I had spent about an hour or so thinking about it but I think the most common example is of someone asking which will be a good mutual fund to invest in.

That question is so common, even a lot of pros start listing out options as soon as they hear the question instead of asking what the person is trying to achieve. Ultimately mutual funds are just investment vehicles that you own because you want a piece of the underlying asset be it stock, gold or bonds, but often we forget to ask that question.

Back to the question of RGESS, I believe someone who wants to invest in the stock market for the first time, and has exhausted the 80C limit should look around and ask for a product that will get him exposure to equities and if there is any tax benefit – even more better.

But in reality, the way it will work is that you would be told that you can save tax by investing in this new thing called RGESS if you have never invested in stocks before, and as a result you will end up owning one of these mutual funds.

It’s as if the tail is wagging the dog in the entire industry.

This is a guest post by Manshu, who blogs on Personal Finance at www.onemint.com – the views expressed herein are Author’s Personal Views.

If you any questions related to RGESS or any other tax saving instrument – feel free to add in comment section.


  1. Thanks Manshu for sharing your views on RGESS. I think readers will be having lot of queries on this mystery scheme. 🙂

  2. “….people start inquiring about it….very soon the focus is on the product instead of your financial need.”

    — Spot on!!

    There is a reason it is called “personal” finance.

    I am eagerly looking forward to this year’s festival season and season of innovation for the indian insurance industry (Jan – Mar) !!!

    Let the rats march behind the piper!

    • Insurance is way ahead of anything else when it comes to new products for the tax season. There have already been two from LIC. Let’s see what else comes up.

  3. Thanks for the opportunity Hemant. I think most people should remember that they can save Rs. 5,000 at most by investing 50,000 in a market that can go down very quickly and very violently. This is the most important thing to remember.

  4. Dear Sir….

    nw days shara scam …..come into picture…so there r thousand invester r misleading n lossing thier hard earned money…. so i will request to you write a x ray report on this dubious co.

    thr r milion costomer who r anticipating problem ..

    sir pls write on ur view about shara india co.

  5. Nice post esp. the title “tail wagging the dog” ! As you’ve rightly said, the way the scheme is structured, the primary objective behind the scheme which is supposedly to encourage more retail participants in the equity markets thereby reducing the volatility is totally lost.

    • Yeah and I don’t know that they should have bothered to introduce a new scheme for this goal. They could have just extended the ELSS product after the DTC regime if DTC still continues.

  6. A comment on the new product of LIC was uncalled for. If you see the claims experience of all companies, investing in LIC makes a lot of sense. There is no harm in looking for investment returns in insurance products as long as there is life insurance also. Indians still think themselves as immortals and only look for investment returns. Atleast insurance products deliver when the money is most needed.

    • LIC doesn’t introduce new term insurance products every year, they introduce unit linked products for the most part where the insurance cover is very less.

      I have a LIC term insurance policy myself and have advocated that many times on my blog due to the claim payment, but LIC is not just term insurance, if anything for most people that is a small part of what it does.

  7. Instead of tax saving schemes like the RGESS, kindly suggest some safe modes of investments which can yield a better and decent return.

  8. Manshu, rightly said about RGESS as ” I lost the forest for the trees”. We Indian belives complicated product is good one. ELSS is much simplere and understandable, ELSS could have been extended without any twiest.

  9. I am informed that the deduction for RGESS is 50% of the amount invested subject to a maximum of Rs 25000. Which is correct

  10. Tax saving ke naam pe sub kuch bikta hai. Tax saving Pruduct bad or good does’nt matter, People will buy because they have been inhabited to get tax benefit with large extent.

  11. Hi Everybody,
    I want to know is this Rs 5000/- saving by investing 50000/- in RGESS, is over and above our tax saving 80c instrument(1 lakh) or a part of it?
    Also want to know Do tax saving infra bonds of 20000/- still apply for this year also(like previous couple of years)?

    • If you invest 50000 , the eligible amount will be 25000/ ( rate of IT will be calculated on this amount) . This is under a different section than 80 C and is available over and above the 1 lakh limit. The tax saving infra bonds do not qualify for tax rebate from this year.

  12. A fantastic eye opener. In fact, I wonder what is the great idea of this schme when you already have the ELSS which are time tested. Is it not unfair to the new investors who had not earlier invested in the stock market earlier to take a blind call through this scheme? As you had pointed out it just takes a few trading days or hours for the investor to loose the benefit fo Rs.5000 and he would be stuck with some dead wood instead of earning a nominal interest of 8%-9% under FDs !!!!!

  13. I think this is very BAD scheme bcz frist time investor invest amt at the market 20000 & no body known what is market condition after 3 year.
    In many share market, mutual fund report say that only SIP investor make money & get profit in market so how goverment launch scheme.
    On against this scheme GOVT launch INFRA BOND of AMT 50000/- with 8% interest.

    And this amt use INDIA infra activity.

    Manoj jain

  14. I think this is very BAD scheme bcz frist time investor invest amt at the market 20000 & no body known what is market condition after 3 year.
    In many share market, mutual fund report say that only SIP investor make money & get profit in market so how goverment launch scheme.

  15. Hi ,

    I would like to have your views on all aspects of International funds.

    Thanks in advance,



    • hi
      Dont go bz int. fund treated as debt fund so tax implication is involved in that fund …there r too many complexity in indian equity market we can’t properlly understand ind. market …hw will u track n understand international market ….one more thing all international fund have involve in exchange rate risk …avoid that international fund.
      keep these things before investing.

  16. Dera Friends,
    one thing I wd like to add here is that u can avail tax benefit under RGESS only for first year and not for subsequent two years …then what is the use of investing a huge amount.
    pl check yrself


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