16/02/2013
In the last Union Budget, then Finance Minister (FM) Pranab Mukherjee announced a new Section 80 CCG, which would give you deductions in respect of investments made under the Rajiv Gandhi Equity Savings Scheme.
Rajiv Gandhi Equity Savings Scheme has been launched with the objective of encouraging savings of small investors in the domestic capital market.
1. Who can invest
Anybody who has not invested in equities before and has a gross total annual income of Rs10 lakh or less. Which means, you have not opened a demat account in the past. You have not made any transactions in equity and derivatives in the past (until November 23, 2012.) However, if you do have a demat account but have not done equity or futures and options transaction in the past (until November 23, 2012), you can invest in RGESS. If you are a joint demat account holder (2nd or 3rd account holder), you can open a new demat account as the 1st holder and invest in RGESS.
2. How much:
You can make any amount of investments, but the amount eligible for an income tax deduction is a maximum amount of Rs 50,000.
3. How to invest:
To invest in RGESS, you will need to open a demat account. You will also have to fill in declaration Form A to the Depositary Participant (DP).
4. What is the period:
There is a lock-in period of total three years. This lock-in period is further divided into two – fixed and flexible.
Fixed Lock-in: The first one year from the date of investment is a fixed lock-in. During this period, you cannot sell any securities or pledge them to get loans.
Flexible Lock-in: The flexible lock-in period is for next two years from the date of the end of the fixed lock-in period. During this period, you are permitted to buy and sell eligible securities, provided that for a cumulative period of 270 days each year, you are maintaining the value of your initial investment. In short, the value of the investment portfolio should be equal to or more than the amount you’ve claimed as investments for the purpose of deduction under Section 80 CCG.
5. Finer details:
As a retail investor, you can either invest a lumpsum or in parts (in one financial year). The treatment as to how the lock-in period works will really depend on the type of investment option, you’ve chosen.
Option 1: You’ve made a lumpsum investment in RGESS. Let’s assume you’ve invested a lumpsum on 23 November 2012 for the amount of Rs 50,000. So, your first year fixed lock-in-period begins on 23 November 2012, and ends on 22 November, 2013. On 23 November, 2013, your first year of flexible lock-in-period begins and ends on 22 November 2104. Likewise, on 23 November, 2014, your second year lock-in-period begins and ends on 22 November, 2015. Here, as shown in the graphic, the applicable financial year for compliance (270 days clause mentioned above) will be 2014-15. On 23. November 2015, the demat will be converted into an ordinary demat account.
Option 2: Here’s how the lock-in-period will work of your investments are bought in installments.
Let’s assume that instead of making a single lump sum investment, you made three part investments in one financial year. First was Rs 10,000 on 23 November, 2012, second was Rs 30,000 on 15 January, 2013 and Rs 10,000 on 11 March 2013. In this case, the fixed lock-in- ends only on 12 March, 2104. So, the first part of your investment is invested for one year, three months and sixteen days.
The second part for one year, one month and the third part for one year. And, the one year flexible lock-in-period ends 10 March, 2015 while second year flexible lock-in-period ends 10 March, 2016.
6. Expiry of period:
Once the period of holding expires, the demat account will be converted automatically into an ordinary demat account.
7. Tax benefits:
Remember you will get a deduction for investment up to Rs50,000. As per the Indian Income tax, a deduction is up to 50 percent of the amount invested in such equity shares to the extent such deduction does not exceed Rs 25,000. So, if you are in the lowest tax bracket of 10 percent your tax benefit will be Rs 2,500. And, if you are in the 20 percent tax bracket, your tax benefit will be Rs 5,000.
FAQs
1. What is the maximum investment amount required for availing tax benefits in RGESS?
You can invest any amount up to Rs. 50,000 for availing tax benefits in RGESS.
2. How much tax deduction will I be eligible under RGESS?
Under RGESS, you are eligible for a tax deduction for 50% of the amount invested. Let us say, you invest Rs. 50,000 under RGESS, the amount eligible for tax deduction from your income will be Rs. 25,000. Alternatively, if you invest Rs. 40,000 under RGESS, the amount eligible for tax deduction will be Rs. 20,000.
3. Is this tax deduction of maximum of Rs. 50,000 over and above limit of Rs. 1 lakh currently available under Section 80C of Income Tax Act?
Yes. You can avail Rs. 1 lakh under Section 80C of Income Tax Act and Rs. 25,000 for investment of Rs. 50,000 under 80CCG.
4. What will be the mode of holding eligible securities?
The mode of holding eligible securities under RGESS will be in a ‘demat account’.
5. How can I open a demat account?
You can open a demat account with any depository participant (DP) of CDSL (Central Depository Services (India) Ltd).
6. What are the formalities that I need to fulfill at the time of opening demat account?
You will be required to fulfill the KYC (know your customer) requirements i.e. submit proof of PAN/identity, address, etc. as prescribed by SEBI (Securities and Exchange Board of India) to DP where you wish to open a demat account along with declaration in prescribed format for availing RGESS benefits.
7. Can I use an existing demat account for RGESS?
In case you already have a demat account and are otherwise eligible for RGESS benefit, you can designate your existing demat account as a RGESS account by approaching your DP.
8. Is there any specific document to be submitted to the DP for designating the demat account for RGESS?
Yes. You should submit a declaration in ‘Form A’ duly signed by the account holder(s) for designating the demat account for RGESS.
9. Where will I get ‘Form A’?
You can get ‘Form A’ from your DP, where you want to designate your demat account for RGESS or download the same by clicking on SEBI Circular-Rajiv Gandhi Equity Savings Scheme-2012, under the What’s New menu of CDSL.
10.Can I hold other securities i.e., other than eligible securities in my demat account designated for RGESS?
Yes, other securities (viz., equity shares, debentures, bonds, mutual fund units, etc) can be held in the demat account designated for RGESS.
