In order to boost Investments in the Stock Markets and to channelize the savings of the retail investors into stocks, the Finance Minister in the Union Budget for 2012-13 announced a new section, Section 80CCG which allows deduction of 50% for Investments made in IPO’s & FPO’s of specified category of stocks.
50% of the amount invested under this scheme is eligible to be claimed as a deduction from the Gross Total Income of an Individual and Income Tax is levied only on the balance amount. This deduction is over and above the deduction allowed under Section 80C.
This Scheme is referred to as Rajiv Gandhi Equity Savings Scheme (RGESS) and the salient features of this scheme are as under:-
- The Benefit of this Scheme is restricted only to First time Investors with Gross Total Income less than 10 Lakhs for the Financial year in which Investment is made are eligible
- The Maximum amount that can be invested for the purpose of deduction under this Section is Rs. 50,000 and deduction of only 50% of the amount invested is allowed as deduction.
- Investments only in specified category of shares is eligible for deduction
- There is a total lock-in period of 3 years and a flexible lock-in period of 1 year
- 1 Analysis of the above Rajiv Gandhi Equity Savings Scheme (RGESS)
- 2 Reason why I’m not advising my clients to invest in this scheme
Analysis of the above Rajiv Gandhi Equity Savings Scheme (RGESS)
1. First Time Investor with Income less than 10 Lakhs
Deduction under this scheme can be claimed only by a first time investor, and can be claimed only once. So, if an Individual has claimed deduction under this Section in his Income Tax Return for any year, he cannot again claim deduction for any other year. Although in one year he can invest small amounts in different securities but once deduction has been claimed in any year, it cannot be again claimed for new investments made in any other year.
Moreover, only those Individuals are eligible to claim deduction whose Gross Total Income is less than Rs. 10 Lakhs and thus those Individuals who fall in the 30% Income Tax Slab are not eligible to claim benefit of this section.
2. Max Amount Invested – 50,000, Deduction Allowed – 50%
The maximum amount allowed to be invested is Rs. 50,000 and deduction allowed is only 50% of the amount invested. As stated above, those Individuals falling in the 30% slab rate are not eligible to claim deduction under this section and only those Individuals falling in the 10% and 20% Slab Rate are eligible to claim benefit of this section.
- The Maximum Deduction allowed is 50% of 50,000 i.e. Rs. 25,000. So the maximum tax saving is
- For Individuals in 10% Slab: 10% of 25000 i.e. 2500
- For Individuals in 20% Slab: 20% of 25000 i.e. 5000
3. Specified Category of Stocks
The deduction is allowed only for investments made in specified category of stocks and Mutual Funds and not for all stocks. The Ministry of Finance issued a Notification on 23rd Nov 2012 stating the conditions for claiming deduction under this section and this Notification has been hosted on the website of BSE.
4. Lock-in period
There is a fixed lock-in period of 1 year and flexible lock-in period of 3 years and if an Individual sells shares before the expiry of this lock in period, the deduction claimed would be reversed and taxed in the year in which the shares have been sold.
Thus, the amount invested in shares and claimed as deduction under this scheme would lack liquidity. Although Stocks have the potential to create the maximum wealth in its Asset Class, but they also come with a higher risk and that is why liquidity is one of the most important points that are to be considered while making any investment in shares.
Reason why I’m not advising my clients to invest in this scheme
The maximum tax saved by claiming deduction under this Section is only Rs. 5,000 and this Rs. 5,000 of tax saved comes with a lot of complications. The conditions enforced by this Section are too complicated for a common man to understand.
And moreover, these conditions are enforced on a new investor. How could the govt even expect a New Investor to understand the complications of this section???
Many CA’s are advising their clients to stay away from this scheme as it is too complicated for a common man to invest. It’s not that we are advising New Investors against investing in Stocks and Mutual Funds. It’s only that we are advising clients not to claim benefit of this section because of the meagre amount of tax saved is not worth so many complications and the lock-in period.
[This article has been authored by CA Karan Batra who is a visiting faculty member at the Institute of Chartered Accountants of India and also blogs on charteredclub.com ]