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

Demat Account

Demat refers to a Dematerialized account. If you want to buy or sell stocks you need to open a Demat account. It is just as opening an account with a bank. To open your Demat account you have to approach the DPs (Depository Participant). Demat account will help you to buy and sell shares without endless paperwork and delay. Practically all the trades have to be settled in Dematerialized form. So a Demat account is a must for trading and investing. Demat Account is just Like a bank account where actual money is replaced by shares,

For Example: Your portfolio of shares are 200 of Wipro, 100 of Infosys, 50 of HCL, All these will show in your Demat  account, you don’t want to show any physical certificates that you hold that shares. If you buy or sell the shares all are held electronically in your account. They are all held electronically in your account. As you buy and sell the shares, they will be automatically adjusted in your account. It is just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.

For opening a Demat Account, You should approach a DP and fill the Demat account opening form. NSDL and CDSL Web sites will list the approved DPs. Then you will receive an account number and a DP ID number for your account. Quote both the numbers in all future correspondence with your DPs.

Benefits of Demat account

• A safe and convenient way to hold securities
• Immediate transfer of securities
• No stamp duty on transfer of securities
• Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.
• Reduction in paperwork involved in transfer of securities
• Reduction in transaction cost
• No odd lot problem, even one share can be sold;
• Nomination facility
• Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately
• Transmission of securities is done by DP eliminating correspondence with companies
• Automatic credit into Demat account of shares, arising out of bonus/ split/ consolidation/ merger etc.
• Holding investments in equity and debt instruments in a single account.

Disadvantage of Demat account

• Securities may become uncontrolled in case of Dematerialized securities.
• Incumbent upon the capital market regulator to keep a close watch on the trading
• Stock-brokers, needs to be supervised as they have the capability of manipulating the market
• Various regulatory frameworks have to be complete to, including the Depositories Act, Regulations and the various By-Laws of various depositories.
• Additionally, agreements are entered at various levels in the process of Dematerialization. 

Fees Structure

There are four major charges usually levied on a Demat account: 

• Account opening fee
• Annual maintenance fee
• Custodian fee and
• Transaction fee.(All the charges vary from DP to DP)  

Account opening Fee

Private Banks, such as ICICI Bank, HDFC bank does not have any account opening charge. Depending on the DP, there may or may not be an opening account fee.

Annual maintenance fee

This is also called as folio maintenance charges, and is generally levied in advance

Custodian Fee

This will be charged monthly depends on the number of securities (international securities identification numbers – ISIN) held in the account. Generally it is between Rs. 0.5 to Rs. 1 per ISIN per month.

Transaction fee

The transaction fee is charged for crediting/debiting stocks to and from the account on a monthly basis. While some DPs, charge a flat fee per transaction, and some DPs peg the fee to transaction value, subject to a minimum amount. The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting the securities while others charge for both. DPs will charge if your instruction to buy/sell fails or is rejected. Service tax is also charged by the DPs. DP also charges a fee for converting the shares from the physical to the electronic form or vice-versa

Infrastructure Bonds

Section 80CCF of Income Tax Act ,1961 as inserted by Finance Act,2010 w.e.f 1-4-2011 says:

Deduction in respect of subscription to long-term infrastructure bonds.

In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, the whole of the amount, to the extent such amount does not exceed twenty thousand rupees, paid or deposited, during the previous year relevant to the assessment year beginning on the 1st day of April, 2011, as subscription to long-term infrastructure bonds as may, for the purposes of this section, be notified by the Central Government.

Description:

The investment market in India is flooded with a range of products like Life insurance policies, NSE and PPF, it really becomes very difficult for the individual to decide on the product that yields the maximum benefits. But most of the people already have tax saving investments to their credit and they want to further invest in products that will exempt them from paying heavy amounts as tax and also yield returns in the form of interest. And in this Scenario, Infrastructure bonds are the latest introduction in the field of investment. An important thing to be kept in mind is that no two people have the same needs and requirements. Hence people should invest according to their requirements.

There are a number of companies that offer infrastructure bonds like IFCI, LIC SBI, IDFC and L&T Infra. However the concept of investing in bonds is still at a nascent stage in the country. People still are not very well aware of the product and think twice before making such an investment.

Here is a brief analysis on this product-

There are four parameters on which we will analyze investment option:

1. Actual tax saving

2. Return on Investment

3. Opportunity Cost

4. Effect of Inflation

Assumptions:

1. Lock In period of 3 yrs

2.  Rate of return is 5.5% per annum

3. Inflation rate 8%

Tax Groups:

Tax group 1: Taxable income Rs. 1.6-5 lakhs

Tax group 2: Taxable income Rs. 5-8 lakhs

Tax group 3: Taxable income above Rs. 8 lakhs

Parameter 1: Actual tax saving

Actual tax saved on the investment; so for an individual having 10% tax slab the tax saved by him is Rs.2,000 (10% of Rs 20,000 = Rs 2,000)

Parameter 2: Return on Investment

At the end of Lock in period of 3 years, on an investment of Rs 20,000 the interest earned would be Rs. 3,484. Total return on 3 year lock in period is Rs 25,485 (Rs 20,000+3,484+2,000).

Parameter 3: Opportunity Cost

If Rs 20,000 had been invested in other tax saving instruments like ELSS Mutual Funds which also comes under 3 yrs lock in period which gives a return of 15% (which is very reasonable considering that the benchmark Sensex and many mutual funds have given comparatively higher returns on a long period) the effective return will be Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15% per annum for 3 yrs).

Parameter 4: Effect of Inflation

The minimum amount required to counter the inflation at the end of 3 yrs is Rs 25,194 at 8%

                Thus, it is clear that for a person in tax group 1, the benefit is of Rs 291 (25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2,182.

So it is clear from the above analysis that if you are looking for getting tax benefit for an investment locked in for 3 yrs in Infrastructure Bonds then people who fall in tax group1 should not invest in Infrastructure Bonds. If you are in the tax group2 then think of only upto 3 yrs period investing in Infrastructure Bonds to remain neutral and people in the tax group3 are highly benefited from Infrastructure Bonds and can invest for long term.

Points to remember:

• Infrastructure Bonds do not offer any protection against high inflation since the rate of interest they offer is pre-determined.
• Against the pledging of the infrastructure Bonds with a bank, one can borrow money from banks. The amount depends on the market value of the bond and the credit quality of the instrument. 
• Moreover, it should be noted that although Infrastructure Bonds are considered to be safe, there is no assurance of getting the full investment back.

Interest Income is Taxable:

The interest income from infrastructure bond is taxable. The interest will be added to investors taxable income. This means even though the investment in these bonds is exempt from tax (maximum Rs 20,000). interest income is not. Thus investment under section 80CCF is advisable only after the investor has completely exhausted Rs One Lakh investment under section 80C.

The proposed DTC has left infrastructure bonds out of the ambit of tax-saving investment avenues. 

 

Dividend Stripping Transaction

As per the text of Income Tax Act, 1961,

Section 94(7) says, Where -

(a) any person buys or acquires any securities or unit within a period of three months prior to the record date;

(b) such person sells or transfers—

(i) such securities within a period of three months after such date; or

(ii) such unit within a period of nine months after such date;

(c) the dividend or income on such securities or unit received or receivable by such person is exempt,

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.

In simple terms,

Dividend stripping refers to transacting in shares or securities linked to shares of a company on which dividend is payable. Typically, a dividend stripping transaction involves the following steps:

1. Purchase of securities/ units linked to shares of a company on which dividend is payable, at a price, say INR 100

2. Holding on the investment in the above securities/ securities linked to shares of a company and enjoying the benefit of dividend distributed on such investment, say INR 10.

3. Sale of the securities/ units linked to shares of a company at a lower price, say INR 85. This fall in price of the shares/ units linked to shares of a company is largely attributable to the dividend payout.

A dividend stripping transaction is particularly lucrative for a taxpayer since by virtue of section 10(33) of the ITA, dividend distributed by a company is not taxable in the hands of its shareholders. Further, the taxpayer may claim a carry forward or set off of the loss arising from selling the shares/ units linked to shares of a company at a lower price. Interestingly, section 94(7) of the ITA provides that only so much of loss is available for set-off or carry forward, which exceeds the amount of dividend earned on the shares/ units linked to shares of a company. In effect, in the above example the taxpayer would have incurred a loss of INR 15 by virtue of sale and purchase of the shares (100-85 = 15), however by virtue of section 94(7), only INR 5 (15 – 10 = 5) would be available as loss for set of and carry forward purposes.

In its recent ruling of CIT, Mumbai v. M/s Walfort Share and Stock Brokers Pvt. Ltd., the Supreme Court of India has held that losses arising from the purchase and transfer of units of a mutual fund, on which dividends have been freshly paid (also known as ‘dividend stripping’), are genuine.

The above analyzed ruling is noteworthy for two reasons. Firstly, the Supreme Court of India upheld the validity of dividend stripping transactions, as permissible affair under tax laws. Secondly, this ruling is yet another recognition of the distinction between tax avoidance and tax planning. The Supreme Court has reiterated that tax planning is perfectly valid, since it is within the four corners of law.

It is important to note that the Indian government is planning to introduce the Direct Tax Code (“DTC”) from April 2012. The DTC proposes to introduce a General Anti Avoidance Rule (“GAAR”), which could empower tax authorities to re-characterize a transaction entered into by a taxpayer and the income there from. The GAAR provisions are proposed to override the other provisions of the DTC. Currently tax planning is considered as legal. However, it remains to be seen how GAAR would impact tax planning by taxpayers, including in cases of dividend stripping.

Gold Linked Debentures... Less Risky and reasonable returns

Gold-linked hybrid products are non-convertible debentures where the rate of interest is linked to spot gold prices. It Helps protect capital and also gains from the upside in equity markets

Recently, gold has caught the fancy of companies. Some broking houses and asset management companies have launched gold-linked debentures. The amount that can be invested is Rs 5 lakh to Rs 5 crore. The product also has a lock-in of three years. This Product is structured for investors willing to take exposure to other asset classes like gold, but with limited risks.

The product functions like this: The fund manager invests 80 per cent of the money in three-year fixed income bonds like government securities or AAA-rated bonds. The rest is used to buy gold options in overseas markets, with regular churning. Typically, fixed income securities give around 20 per cent returns for a period of three years. So, 80 per cent of the amount invested in debt instruments will give 20 per cent returns, protecting your initial investment.

The additional gains come from gold options. Depending on the price at which you invest, real returns on the gold portfolio over three years may range between 30 per cent and 50 per cent or more. As a result, the total return on the hybrid product will be 12-15 per cent per annum.

There are also options where a person can opt for higher exposure to gold. In this case, the capital protection option is diluted to that extent. In the 80-debt, 20-gold options model, the loss, if any, will take place in the gold portfolio. But, the initial investment is protected because of the high debt exposure.

In other Model, some Mutual Funds are planning to launch a product which will invest both in debt-oriented products and gold. The fund house plans to invest a minimum of 65 per cent in fixed-income securities. It will invest a fixed 10 per cent of the amount in gold, which will be increased to a maximum of 35 per cent.

But, remember that such products are meant for portfolio diversification and should not be part of your core portfolio. They are mostly a good hedge against sharp downslide in equities.

This hybrid product is highly in demand due to stock market resistance. Since now silver is more volatile than Gold, Certain financial institutions which develop hybrid structures have been working on a silver-based product and soon we will have Silver Linked debentures in market.

"COINS AND NOTES"

1. Facility for exchange of notes and coins at bank branches

All the designated bank branches provide facility for exchange of damaged/mutilated notes. All branches of banks in all parts of the country provide the following customer services, more actively and vigorously to the members of public so that there is no need for them to approach the RBI Regional Offices only for this purpose:

(i) meeting the demands for fresh / good quality notes and coins of all denominations,
(ii) exchanging soiled notes, and
(iii) accepting coins and notes either for transactions or exchange.

None of the bank branches / staff can refuse to accept small denomination notes and / or coins tendered at their counters.

A mutilated note is a note of which a portion is missing or which is composed of more than two pieces. Mutilated notes may be presented either at designated bank branches of commercial banks.

2. Reserve Bank of India (Note Refund) Rules, 2009 Delegation of full powers

(a) In terms of Section 28 read with Section 58 (2) of Reserve Bank of India Act, 1934, no person is entitled as a right to recover from the Government of India or RBI the value of any lost, stolen, mutilated or imperfect currency note of the GOI or banknote. However, with a view to mitigating the hardship to the public in genuine cases, RBI may, with the previous sanction of the Central Government, prescribe the conditions and limitations subject to which, the value of such currency notes or banknotes may be refunded as a matter of grace.

(b) With a view to extending the facility for the benefit and convenience of public, designated branches of banks have been delegated powers under Reserve Bank of India (Note Refund) Rules, 2009 for exchange of torn / mutilated / defective notes free of cost.

3. Liberalised definition of Cut Notes

 In order to facilitate quicker exchange facilities, the following types of soiled and cut notes are freely exchanged by all bank branches. They are also accepted over bank counters in payment of Government dues and for credit of accounts of the public maintained with banks.

a. Single numbered notes – Re.1/-, Rs.2/- & Rs.5/-

Note presented should not be in more than two pieces. No essential feature of the note should be missing. Both the pieces should be of the same note.

II. Double numbered notes–Rs.10/-,Rs.20/-,Rs.50/-,Rs.100/-,Rs.500/-& Rs.1000/-

The note presented should not be in more than two pieces. No essential feature of the note should be missing. Both the pieces should be of the same note. The above types of notes will be treated as soiled notes and be kept along with soiled notes.

4. Extremely brittle, burnt, charred, stuck up Notes

Notes which have turned extremely brittle or badly burnt, charred or inseparably stuck up together and, therefore, cannot withstand normal handling, will not be accepted by the branches for exchange. Instead, the holders should tender these notes to the concerned Issue Office where they will be adjudicated under a Special Procedure.

5. Notes bearing slogans / political messages, etc.

Any note with slogans and message of a political nature written across it ceases to be a legal tender and the claim on such a note will be rejected under Rule 6(3)(iii) of Reserve Bank of India (Note Refund) Rules, 2009 Similarly, notes which are disfigured may also be rejected under Rule 6(3)(iii) of Reserve Bank of India (Note Refund) Rules, 2009

6. Display of Notice Board

All designated bank branches are required to display at their branch premises, at a prominent place, a board indicating the availability of note exchange facility with the legend, "MUTILATED NOTES ARE ACCEPTED AND EXCHANGED HERE". The note exchange facility should not be cornered by private money changers / professional dealers in defective notes by the bank branches.

7. Withdrawn Coins

Aluminium coins of 5 paise, 10 paise, 20 paise, aluminum-bronze coins of 10 paise, stainless steel coins of 10 paise, cupronickel coins of 25 paise, 50 paise and rupee one denominations are being withdrawn and remitted to the mints, people may pack each of these denominations separately and also metal-wise with 100 coins in each sachet before they are tendered at the counters.

Effective Money Management

We hear so many management themes such as human recourse management, office management, business management etc. whatever may be the theme the core is to manage or control the things effectively. It includes steps to take effective and smooth going of things related to the theme. Here money management also includes planning and controlling your money matters such as fixing your financial goals, budgeting, avoid unnecessary expenditures, saving and investment, capacity to bear risk etc. etc. It requires taking decisions according to the current scenario, economic movement and considering the internal and external matters affecting money matters. When considering the management of money it includes both inflow and outflow of money in various forms and sources.

Money Management strategies

1) Always Ask for a Discount:

If it is not a fixed price store, there is a 70% chance that you will get a discount if you just ask for it. If you get a 10% discount, it is equivalent to earning an immediate 10% return on your money. Over the long term, you will save a huge amount that will accelerate you even faster towards your targeted net worth.

2) Always Ask for a ReceiptAlways get a receipt so that you can track every single expense at the end of the day and, if possible, claim it as a business expense and get a tax deduction.

3) At the End of the Day, Record all Expenses in your Daily Expense Sheet

4) At the End of the Month, Update Your Monthly Income Statement

At the end of every month, add up the total expenses from your daily expense sheet and update your monthly income statement. At the same time, update all your income for the month. Deduct your total expenses from your total income to get your monthly savings.

5) Make Budgets:

You need to make a budget and follow it unfailingly. Always purchase what you really need and never go out to the market without a purpose. You should make sure to save at least 10% of your monthly income in your bank account, and make your best efforts to increase this figure.

6) Shopping :

When you go out to the market, do not take extra cash with you and always leave your credit card back at home. If you do not have money, you will not be able to spend; it’s as simple as that. You should avoid impulsive shopping under any circumstance and if you think that you will not be able to control yourself, it is better to give your wallet to the person who is accompanying you to the market and tell him to stop you when you are shopping some unnecessary item.:)

It is not a surprise that money matters seemingly hit the young generation the hardest. This is because they do not have very good money management skills and they have a natural tendency to spend all that they can on latest gadgets and luxuries. One major factor that contributes to this is that getting loans has become very easy now-a-days. No matter what your needs are, try to avoid borrowing money unless there is an unavoidable emergency.

If you own a credit card, make sure to pay its bills regularly as credit card loans perhaps come with the highest interest rate.

You must use a system to track where every single rupee goes. Only when you know where your money is going, can you take steps to channel it to your savings and investments