80CCG, Rajiv Gandhi Equity Savings Scheme, 2012

·         Introduction

Finance Act 2012 has come up with a new section 80CCG, to be made applicable from F.Y. 2012-13 onwards. The Scheme not only encourages the flow of savings and improves the depth of domestic capital markets, but also aims to promote an ‘equity culture’ in India. This is also expected to widen the retail investor base in the Indian securities market.

·         Salient features of the Scheme are as under:

1.     Eligible Investors: Scheme is open to new retail investors, identified on the basis of their PAN numbers. This includes those who have opened the Demat Account but have not made any transaction in equity and /or in derivatives till the date of notification of this Scheme and all those account holders other than the first account holder who wish to open a fresh account.

2.     Max. Amount: Deduction is restricted to 50% of eligible investment subject to upper limit of Rs. 25000/- for deduction. That means limit for investment is fixed at Rs. 50,000/-

3.     Eligible Securities: Under the Scheme, those stocks listed under the BSE 100 or CNX 100, or those of public sector undertakings which are Navratnas, Maharatnas and Miniratnas would be eligible. Follow-on Public Offers (FPOs) of the above companies would also be eligible under the Scheme. IPOs of PSUs, which are getting listed in the relevant financial year and whose annual turnover is not less than Rs. 4000 Crore for each of the immediate past three years, would also be eligible.

In addition, considering the requests from various stakeholders, Exchange Traded Funds (ETFs) and Mutual Funds (MFs) that have RGESS eligible securities as their underlying and are listed and traded in the stock exchanges and settled through a depository mechanism have also been brought under the scheme.

4.     Lock In Period: The total lock-in period for investments under the Scheme would be three years including an initial blanket lock-in period of one year, commencing from the date of last purchase of securities under the scheme. The initial first year is known as Fixed Lock-in Period, in which no trading of securities is allowed. After the first year, investors would be allowed to trade in the securities in furtherance of the goal of promoting an equity culture and as a provision to protect them from adverse market movements or stock specific risks as well as to give them avenues to realize profits.

5.     Valuation: For the purpose of valuation of shares, the closing price as on the previous day of the date of trading will be considered so that new investors are certain about their debits and credits into the account.

6.     The deduction under Section 80CCG will be allowed in addition to the 1 lakh limit allowed under section 80CCE covering the sections 80C, 80CCC and 80CCD. Moreover, it will be allowed to all the Individual Assessees irrespective of his/her source of income. In short, a salaried person can also avail the benefit of this scheme.

7.     The deduction under this section is available if following conditions are satisfied:

a.     The assessee is a resident individual (may be ordinarily resident or not ordinarily resident)

b.    His gross total income does not exceed Rs. 10 lakhs;

c.     He has acquired listed shares in accordance with a notified scheme;

d.    The assessee is a new retail investor as specified in the above notified scheme;

e.     The investor is locked-in for a period of 3 years from the date of acquisition in accordance with the above scheme;

f.     The assessee satisfies any other condition as may be prescribed.

8.     Withdrawal of deduction – If the assessee, after claiming the aforesaid deduction, fails to satisfy the above conditions, the deduction originally allowed shall be deemed to be the income of the assessee of the year in which default is committed.

9.     Illustration:

Mr. X, a businessman who has a gross total income of Rs. 17 lakhs, invested in the eligible securities, an amount equal to Rs. 50,000. The total deduction allowed to him under section 80CCG shall be NIL, since his gross total income exceeds Rs. 10 lakhs.

Mr. Y, a salaried person, having a gross total income of Rs. 9 lakhs, invested in notified shares an amount of Rs. 60,000. The total deduction available to him shall be 50% of Rs. 50,000 (maximum limit), i.e. Rs. 25,000 only.

·         Differences with ELSS

Equity Linked Savings Scheme (ELSS) and RGESS are entirely different schemes: They pertain to different asset classes with ELSS offering passive investment avenues. ELSS is meant for indirect participation in the stock market, whereas RGESS aims at encouraging direct participation in the stock market. The operational differences are given below:

Operational differences
ELSS	RGESS
Investments are in mutual funds which invests mostly in equity (80-100% in equity)	Investments are to be made directly in selected equity or into a combination of equity including mutual funds, Exchange Traded Funds, and select IPOs of PSUs
100% deduction (upto Rs. 1,00,000) is allowed under ELSS	Only 50% deduction (upto max. of Rs. 25,000) is allowed under RGESS.
The ELSS benefit is coming under Section 80-C of the IT Act which has an aggregate limit of Rs. 1,00,000 for all such eligible instruments like LIC policy, PPF etc	Separate investment limit exclusively for RGESS over and above the Section 80 C Limit
Lock-in period of 3 years	Lock-in of 3-years. However, trading allowed after one-year subject to conditions.
Since investments are in mutual funds, it is perceived to be less risky	Since investments are in equity / risk / ownership capital, risk is perceived to be higher