Investments are made in the stock market, equity market, or share market, all of which are the aggregation of buyers and sellers of stocks, representing ownership claims on businesses. These may also include securities listed on a public stock exchange, as well as stocks that are traded privately. The equity market is that market where shares are issued and traded, either through exchanges or over-the-counter markets. This market gives companies a way to raise the needed capital amount and also gives investors the opportunity for gain by allowing those companies' stock shares to be traded.
Section 80CCG allows for greater deductions than Rs. 1,50,000 as per the previously prevalent Section 80C. The scheme is extremely useful for people making greater investments. The deductions can be claimed at the time when the income tax returns are filed by the taxpayer.
What is Section 80CCG?
Section 80CCG was introduced in the Finance Act, 2012 and was part of the Income Tax Act. The other name of this section is the Rajiv Gandhi Equity Savings Scheme (RGESS). While the idea was to enhance the investment habits of existing investors and encourage first-time investors, it also helped in strengthening the investment force in the securities market. Therefore, by this one scheme, the Government planned on targeting several socio-economic factors like encouraging the habit of savings, expanding the reach of capital markets beyond the institutional investors, broadening the base of investors, and bringing on a culture of equity trading among the common masses.
The RGESS scheme came into notification by the Department of Revenue on 23rd November 2012 and the soon the subsequent corrigendum was issued on 5th December 2012. The very next day, SEBI (Securities and Exchange Board of India) issued the operational guidelines. Eventually, more amendments took place to widen the scope of the scheme by the Finance Act, 2013. The amendment notification was issued on 18th December 2013.
Individuals eligible to claim the benefit of RGESS
Before one goes on to discuss the eligibility criteria to get the benefits of this scheme, let us first understand our conception of a "new investor". A new investor is one among the resident individuals who have not opened a demat account, or even if there is has not been able to make a trade in the equity and derivatives segment. There are other cases when there are a group of individuals contributing their part as joint account holders. In such a case, the first account holder is not considered as a "new investor". You will also not be considered a new investor if you possess shares of unlisted companies or those received under the Employee Stock Option Plan (ESOP). However, if you do possess immaterialized physical shares, you can be considered a new investor.
The scheme in Section 80CCG is meant to encourage the new investor to be a part of the market.The following list should help in identifying the eligible securities for RGESS-
- 1. Top 100 shares of NSE and BSE that means CNX-100/BSE-100
- 2. Equity Shares of the Public Sector Enterprises which are categorized as Navratna, Maharatna, and Miniratna as categorized by the Government.
- 3. Follow-on Public offers (FPOs) of the securities as mentioned above in both the categories.
- 4. Units of Exchange Traded Funds (ETFs) or Mutual Fund (MF) Schemes with RGESS eligible securities as mentioned in the first two categories.
- 5. New Fund Offers (NFOs) of ETFs and Mutual Fund Schemes of RGESS eligible securities.
- 6. Initial Public Offers (IPOs) of Public Sector Undertakings (PSUs) which are scheduled to get enlisted in the relevant financial year and where the government holding is less than 51%. The annual turnover is not less than Rs 4000 crores for each of the immediately previous three financial years.
Main Features of Section 80CCGOne must note the following features of Section 80CCG or RGESS to make an informed choice of claiming its benefits-
- 1. Only individuals can claim the income tax deductions under Section 80CCG for their investments. No other groups and companies can benefit from this. HUFs (Hindu Undivided Family) or BOI (Body of Individuals) are not claimed as the benefitting parties of this scheme. It should be made clear that the individual should necessarily be a resident of India and cannot claim the benefits, if staying out of India.
- 2. The maximum income of the investor who is a part of this scheme should be 12 lakhs for the on-going or relevant financial year in which the investment is being made.
- 3. The RGESS claiming individual should note that there is a lock-in period of three years for the investment done under Section 80CCG. While the first year is the fixed lock-in period, the next two years have a flexible lock-in period.
- 4. The investor is prohibited from selling the securities of the market in the first year of lock-in that is the fixed year. However, the securities can be sold off in the second and third years, which become the flexible lock-in period.
- 5. During the flexible lock-in period, investors selling the securities would be required to re-invest in any of the eligible securities in such a manner that they maintain their level of investment during the two years at the same amount by which they claimed the income tax deduction under the Section 80CCG. Or else, they are advised to maintain their level of investment at the value of the portfolio before initiating the same transaction.
The RGESS as per the Income Tax Act, 1961
- 1. The benefits are available only for an individual assessee who is a resident of India.
- 2. The benefits can only be bestowed to an individual who is a new retail investor.
- 3. The total gross income of the individual shouldn't exceed the limit of Rs 12 lakh for the relevant assessment year.
- 4. The individual must have invested some amount in equity shares or the listed units of equity-oriented funds as notified by the Government as eligible for deduction under this Act.
- 5. After the computation of the assessee’s total income of the previous year, 50% of the investment should be allowed as a deduction. It should be calculated to the extent such that it doesn’t exceed the cap of Rs 25,000.
- 6. The deduction under this subsection of the Act will be permitted for three consecutive years. The period begins from the previous year in which the listed equity shares or the enlisted units of the equity-oriented fund were first acquired.
- 7. The listed equity shares or listed units of the equity-oriented funds must necessarily be specified under the scheme and have the lock-in period of three years starting from the date of acquisition.
The risk involved in Equity Market
It is an inevitable fact that if you decide on investment in the stock or equity market, there is an inherent risk of losing a lot of money, including the capital amount. The market is a volatile space, and the value of stocks keeps changing their graphs. Investing in RGESS is the same as investing in any other volatile market, and it does not guarantee any assurance of regaining any of the amounts invested in the security. However, the makers and designers of the scheme did take some special measures to reduce risk. Thereby, the makers of RGESS made sure that the interests of the investor were safeguarded by the selection of the majorly large-cap stocks and also by keeping a considerable lock-in period to take advantage of positive market sentiments. Moreover, the scheme also included investments in exchange-traded funds and mutual funds, which ensured the diversification of investments and also reduced the market risks.
Deductions allowed in RGESS
When an individual puts their money in the RGESS, the deduction allowed for tax benefits is 50% of the total amount invested, and this is subject to a maximum investment of Rs. 50,000.This criterion can be visualized through the help of some examples-
- 1. If the amount invested in RGESS in Rs 50,000, which is the maximum amount permitted, the deduction will be on Rs 25,000, which is 50% of the amount invested.
- 2. If the amount invested in Rs 90,000 and the maximum amount permitted is Rs 50,000, the deduction shall be calculated from the maximum amount of Rs 50,000 and the deduction allowed will be again 50% of 50,000 which be Rs 25,000. Thereby, the extra amount will be negligible in counting the deduction and will be quite a waste of investment.
- 3. If the amount invested in Rs 20,000 which lesser than the limit amount of Rs 50,000, the maximum eligible investment will be Rs 20,000, and the deduction will be calculated as 50% of this amount, which will be Rs 1,000.
RGESS against ELSS
The Rajiv Gandhi Equity Savings Scheme was introduced to offer tax benefits for individuals investing in the equity market. The Equity Linked Saving Scheme or ELSS, was another scheme that offers similar tax benefits under Section 80C. However, there are some differences to be noted while going for either of the two schemes for your investments.
|No.||RGESS (Rajiv Gandhi Equity Savings Scheme)||ELSS (Equity Linked Saving Scheme)|
|1.||RGESS is supposed to have more risk as the RGESS investments are made directly in the enlisted equity or into mutual fund and exchange-traded fund units.||ELSS has more risk, comparatively as the ELSS investments are only mutual fund based.|
|2.||RGESS has a lock-in period of 3 years, but permits trading after the first fixed year based on certain conditions.||ELSS, too, have a lock-in period of 3 years, the flexibility is, however, reduced.|
|3.||The benefits from RGESS can be availed by the new investor for a limited period of three consecutive years.||In ELSS, there is no such limit, and the benefits can be availed for any number of years as per the choice and convenience of the investor|
|4.||In RGESS, only 50% of the investment is eligible for the deduction, and the capping amount is only Rs 25,000||In ELSS, deductions for the investments can extend up to Rs 1.5 lakh and can be availed on the 100% amount of the investment.|
Phasing out RGESS
It was noticed eventually that when the scheme was launched, there was not much investment made during this scheme, and the amount was relatively low compared to the country's size and tax base. The Union Budget of 2017 proposed the phasing out of RGESS with effect from 1st April 2018. The tax benefits were noticed to be made till the date only for a year or two. The Government perceived that phasing out this scheme was more in line with simplifying the process of taxation and the rationalizing of deductions on investments.
Section 80CCG or RGESS was started to promote an 'equity culture' such that individuals had the scope of saving their taxes while investing in the equity or stock market. There are several unique features of the scheme which have allowed progress for the individual's economic establishment, and the government’s need to flourish the stock market. There are, also, a few complications in the scheme concerning the treatment of securities sold in the flexible lock-in period, and a thorough explanation can be deduced by the FAQs on RGESS which was released by the Ministry of Finance on 5th February 2014.
Frequently Asked Questions
Q- What is 80CCG?
Known as Rajiv Gandhi Equity Savings Scheme, it was in 2012-13 that 80CCG came into effect. The purpose of this tax-saving scheme was to encourage the first-time investors and strengthen investment force in securities market.
Q- Is ELSS under 80CCG?
The Equity Linked Saving Scheme or ELSS, was another scheme that offers similar tax benefits under Section 80C just as RGESS under 80CCG. ELSS is a mutual fund based investment, it has more risk compared to the RGESS.
Q- How do I invest in 80CCG?
If you are a first-time investor and earn less than Rs 12 lakh per year, then you are eligible to invest in 80CCG, commonly called RGESS. You have the option of either buying specific stocks or mutual funds notified under the scheme. You can invest and claim a tax deduction up to Rs 25,000 under section 80 CCG of the Income Tax Act, 1961.
Q- Is there any lock-in period?
Yes, RGESS has a lock-in period of 3 years, where the 1st year has a ‘fixed lock-in’ period and the subsequent 2 years have a ‘flexible lock-in’ period.
Q- I am non-resident Indian. Am I eligible for RGESS?
As per the Income Tax, 1961, RGESS or Section 80CCG is for an individual resident in India who is a first-time investor. As you are a non-resident Indian, you cannot avail any benefits under RGESS.
Q- Does Rajiv Gandhi equity saving scheme 80ccg allow extra rebates from tax deduction cap of 1.5 lakh under 80C?
Ans: Yes Rajiv Gandhi equity saving scheme allows extra rebates upto Rs 25000 p.a. over and above tax deduction cap of Rs 1.5 lakh under Section 80C. However, it has been discontinued w.e.f AY 2018-19.
Q- I have invested about 25k in stocks. How can I avail tax exemption for the investment and what is the procedure to claim that?
Ans: If you are a new retail investor or resident individual with gross total income upto 12 lakhs, and have invested in equity shares or units, then 50% of the amount invested or rs 25000, whichever is lower shall be allowed as a deduction from gross total income. If you have invested Rs 25000 in stocks and fulfill the other conditions, you can avail tax exemption of Rs 12,500 and same can be claimed by entering the required details while filing the income tax return. However, RGESS has been discontinued w.e.f AY 2018-19.
Q- Are RGESS funds a good tax saving investment option for people earning less than 12 LPA?
Ans: Yes, a resident individual having gross total income of upto 12 LPA can avail the tax benefits offered by Rajiv Gandhi Equity Savings Scheme. It is a good tax saving investment option. However, RGESS has been discontinued w.e.f AY 2018-19.
Q- Can I invest in the Rajiv Gandhi Equity Savings Scheme even if I have prior investments in equity mutual funds, without a Demat account?
Ans: No, as per the RGESS notified by the central government, only a new retail investor is eligible for investing in it. Any investor who has prior investments in equity mutual funds, without a Demat Account shall not be a new retail investor and hence will not be eligible to invest in RGESS. However, RGESS has been discontinued w.e.f AY 2018-19.
Q- Does Bharat 22 ETF come under RGESS (Section 80 CCG)?
Ans: No, RGESS had been discontinued during the Union Budget 2017 and as such, the tax deduction is no longer applicable to any equity savings scheme.
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