Understanding section 80CCG of the Income Tax Act

Find out everything you need to know about making the most of section 80CCG

How well do you known section 80CG of the Income Tax Act

Section 80CCG of the Income Tax Act was introduced in the Finance Act, 2012. It is also known as the Rajiv Gandhi Equity Savings Scheme (RGESS). The idea behind the introduction of this scheme was to encourage first-time individual investors to invest in the securities market. It aims to bring in a culture of equity trading among the common people, encourage the saving habit, deepen the reach of capital markets beyond institutional investors, and broaden the investor base. 

The RGESS scheme was first notified by the Department of Revenue on 23rd November 2012 and the subsequent corrigendum was issued on 5th December 2012. The operational guidelines were subsequently issued by SEBI on the very next day. The subsection was further amended in Finance Act, 2013 which effectively widened the scope of the scheme. As a result, an amendment notification was issued on 18th December 2013.

Related: Non 80C items that help you save tax

Who is a new investor? 

A new investor is a resident individual who has not opened a demat account or has a demat account but has not traded in the equity and derivatives segment. In case of joint account holders, only the first account holder is not considered as a new investor. If you possess shares of unlisted companies or those received under the employee stock option plan (ESOP), you will not be considered a new investor. However, if you possess physical shares you will be a new investor, as the shares have not yet been dematerialised.

Related: Investment options under 80C

What are the eligible securities? 

Investment under this scheme can be made in top 100 stocks of NSE and BSE, equity shares of Navaratna, Maharatna and Miniratna companies of the government, mutual funds and exchange-traded funds with RGESS eligible securities, follow-on public offers, new fund offers, and initial public offerings of public sector undertakings (with at least 51% government stake and Rs 4000 crore-plus turnover in the preceding three years).

What does the Income Tax Act say?
  

  • The benefit is available only for an assessee who is an individual and a resident of India
  • The assessee must have invested in equity shares or listed units of equity-oriented funds which have been notified by the government as eligible for the deduction under this Act
  •  50% of the investment will be allowed as a deduction in the computation of the assessee’s total income for the previous year, to the extent such deduction doesn’t exceed Rs 25,000
  • The deduction under this sub-section will be allowed for three consecutive assessment years starting with the previous year in which the listed equity shares or listed units of the equity-oriented fund were first acquired
  • The gross total income of the assessee for the relevant assessment year shouldn’t exceed Rs 12 lakh 
  • The assessee must be a new retail investor
  • The listed equity shares or listed units of the equity-oriented fund must be specified under the scheme and have a lock-in period of three years from the date of acquisition

Related: How is taxable income calculated?

Equity market and risk

Anyone investing in the securities market has to face an inherent risk of losing money. Thus investing in RGESS is the same as investing in the normal equity market. The scheme in no way guarantees any assured amount against the investments made. Nevertheless, while designing the scheme, investor interests were safeguarded by selecting mostly large-cap stocks and keeping a considerable lock-in period to take advantage of positive market sentiments. 

Besides, the scheme also included investments in exchange-traded funds and mutual funds, which ensured diversification of investment and reduced the market risk.

RGESS versus ELSS

Equity Linked Saving Scheme (ELSS) is another scheme that offers tax benefits under section 80C. Why offer two different tax benefits for the same investment sector, i.e. equity? Well, the fact is there are certain differences between the two schemes:

  • ELSS investments are only through mutual funds, while RGESS investments can be made directly in listed equity or into mutual fund and exchange-traded fund units. Therefore, RGESS can be said to be riskier than ELSS.
  •  Deductions for investments in ELSS extend up to Rs 1.5 lakh and can be availed of on 100% investment. In RGESS, only 50% investment is eligible for deduction and that too, only up to Rs 25,000.
  • While RGESS benefits can be availed of by a new investor for a period of three consecutive years, ELSS benefits can be availed of by an investor for any number of years.
  • While both ELSS and RGESS have a lock-in period of three years, in RGESS trading can be done after the first year, subject to certain conditions.

Related: Quiz - Are you making the best use of your salary components

The Union Budget of 2017 proposed the phasing out of RGESS with effect from 1st April 2018. The tax benefits for the investments made till that date remained for a year or two. At the time of this decision, only around Rs 150 crore was invested under the scheme, which is quite low for a country of India’s size and tax base. Phasing out this deduction is seen to be in line with the government’s aim to simplify the taxation process and rationalise deductions.

Besides this, January is a very crucial month to maximise your tax deductions. It’s time to gather all your investment proofs and submit it at work. 

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