Deduction under section 80CCG

CA. Sujit Kumar Sinha

Background and Provision

Deduction under section 80CCG a new scheme was introduced to encourage flow of saving in financial instruments and improve the depth of domestic capital market. However, it also aims to promote an ‘equity culture’ in India. This is also expected to widen the retail investor base in the Indian securities markets and further the goal of financial stability and financial inclusion.

The Scheme is named after the former Prime Minister of India Shri. Rajiv Gandhi.  The deduction under section 80 CCG was enacted in 2012. The broad provisions of the Scheme and the income tax benefits under it have already been incorporated as a new Section -80CCG- of the Income Tax (IT) Act, 1961, as amended by the Finance Act, 2012.

This concept was introduced in India in the finance Act,2012. Finance Act,2012 introduced a new scheme under “ Chapter VI A” to provide for a one time deduction to a resident individual who acquires listed equity shares in a previous year in accordance with a scheme notified by the Central Government. SEBI vide circular no. CIR/MRD/DP/32/2012 dated December 06, 2012 directed inter-alia Mutual Funds to take a note of RGESS notification and take necessary steps to implement the RGESS. In the Finance Act, 2013, certain conditions of RGESS were liberalized. Ministry of Finance thereafter vide Notification no. 94/2013 F. No. 142/35/2012 -TPL dated December 18, 2013 notified RGESS, 2013 i.e. the amended RGESS.

The deduction was 50 % of amount invested in such equity shares or ₹ 25,000, whichever is lower. The maximum Investment permissible for claiming deduction under RGESS is Rs. 50,000. The benefit is in addition to deduction available u/s Sec 80C.

The following conditions had to be satisfied for claiming the above deduction under section 80CCG for A.Y. 2013-14 :-

a)      The gross total income of the assessee for the relevant assessment year should be less than or equal to ₹ 10 lakh.

b)      The assessee should be a new retail investor as per the requirement specified under the notified scheme.

c)       The investment should be made in such listed investor as per the requirement specified under the notified scheme.

d)      The minimum lock in period in respect of such investment is three years from the date of acquisition in accordance with the notified scheme.

In addition to the above, other conditions may also be prescribed , subject to fulfilment of which, deduction under section 80 CCG can be claimed. At present Rajiv Gandhi Equity Savings scheme,2012 has been notified under section 80 CCG [ Notification No.51/2012 dated 23.11.2012]

The Finance Act,2013 has amended the provisions of section 80 CCG w.e.f. AY 2014-15. After that benefit of deduction under section 80 CCG is available to a new investor, being a resident individual with gross total income of up to 12 lakh, for investment in listed equity shares or listed units of equity oriented fund, in accordance with a notified scheme

Further, the deduction shall be allowed for three consecutive assessment years, beginning with the assessment year relevant to the previous year in which the listed equity shares or listed units of equity oriented fund were first acquired.

The minimum lock in period in respect of such investment is three years from the date of acquisition are remain the same.

THEREFORE, the conditions under section 80 CCG for claiming deduction from Assessment year 2014-15 would be :–

ü  The gross total income of the assessee for the relevant assessment year should be less than or equal to ₹ 12 lakhs.

ü  The assessee should be a new retail investor as per the requirement specified under the notified scheme.

ü  The investment should be in such listed equity shares or listed units of equity-oriented fund specified under the notified scheme.

ü  The minimum lock in period in respect of such investment should be three years from the date of acquisition .

“New retail investor” means a resident individual,-

(a)     who has not opened a demat account and has not made any transactions in the derivative segment before the date of opening of a demat account or the first day of the initial year, whichever is later:

Provided that an individual who is not the first account holder of an existing joint demat account shall be deemed to have not opened a demat account for the purposes of this Scheme; or

(b)   who has opened a demat account but has not made any transactions in the equity segment or the derivative segment before the date he designates his existing demat account for the purpose of availing the benefit under the Scheme or the first day of the initial year, whichever is later;

Deduction under section 80 CCG can be claimed by a new retail investor shall make investment under the  Rajiv Gandhi Equity Savings scheme,2013  has been notified [ Notification No.94/2013 dated 18.12.2013] in the following manner, namely :-

a) The new retail investor may invest in one or more financial years in a block of three consecutive financial years beginning with the initial year;

b) The new retail investor may make investment in eligible securities in one or more than one transaction during any financial year during the three consecutive financial years beginning with the initial year in which the deduction has to be claimed;

c) The new retail investor may make any amount of investment in the demat account but the amount eligible for deduction under the Scheme shall not exceed fifty thousand rupees in a financial year;

d) The new retail investor shall be eligible for the tax benefit under the Scheme only for three consecutive financial years beginning with the initial year, in respect of the investment made in each financial year;

e) If the new retail investor does not invest in any financial year following the initial year, he may invest in the subsequent financial year, within the three consecutive financial years beginning with the initial year, in accordance with the Scheme;

f) The eligible securities brought into the demat account, as declared or designated by the new retail investor shall be under a lock-in for a period of three years.

g) The eligible securities brought into the demat account, in respect of which the assessee is eligible for deduction under the Scheme, shall be under a fixed lock-in during the first year, as per the provisions of scheme, unless the new retail investor specifies otherwise, and for such specification, the new retail investor shall submit a declaration in Form B, either in electronic or physical form, to the depository participant indicating that such securities are not to be included within the above limit of investment;

h) The new retail investor shall be eligible for a deduction under sub-section (1) of section 80CCG of the Act in respect of the actual amount invested in eligible securities and in respect of which a declaration in Form B has not been made, subject to the maximum investment limit of fifty thousand rupees in a financial year;

i) The new retail investor who has claimed a deduction under sub- section (1) of section 80CCG of the Act in any assessment year shall not be allowed any deduction under the Scheme for the same investment for any other assessment year;

j) The new retail investor shall be permitted a grace period of seven trading days from the end of the financial year so that the eligible securities purchased on the last trading day of the financial year also get credited in the demat account and such securities shall be deemed to have been acquired in the financial year itself;

k) The new retail investor can make investments in securities other than the eligible securities covered under the Scheme and such investments shall not be subject to the conditions of the Scheme nor shall they be counted for availing the benefit under the Scheme;

l) The deduction claimed shall be withdrawn if the lock-in period requirements of the investment are not complied with or any other condition of the Scheme is contravened by the new retail investor.

Effect of failure to fulfill conditions. –

(1) If the new retail investor fails to fulfill any of the provisions of the Scheme, the deduction originally allowed to him under sub-section (1) of section 80CCG of the Act for any previous year, shall be deemed to be the income of the assessee of the previous year in which he fails to comply with the provisions of the Scheme and shall be liable to tax for the assessment year relevant to such previous year.

(2) Without prejudice to the provisions of sub-paragraph(1), where the demat account is not in compliance with the conditions laid down in respect of flexible lock-in period, the deduction originally allowed to the investor under section 80CCG shall be liable to tax in the following manner, namely:-

a) If the investment portfolio in flexible lock-in period corresponds to the investments made in only one assessment year, the deduction allowed to the investor under section 80CCG for such assessment year shall be liable to tax;

b) If the investment portfolio in flexible lock-in period corresponds to the investment made in two assessment years, and–

• the value of investment portfolio of eligible securities in the demat account is equal to or more than the value of the investment portfolio of the eligible securities in respect of which the deduction was allowed for any one assessment year but is less than the aggregate value of the investment portfolio of the eligible securities in respect of which the deduction was allowed for the two assessment years for 270 days in the flexible lock-in period, the deduction allowed to the investor under section 80CCG for the other assessment year shall be liable to tax;
• is not covered by above clause, the aggregate deduction allowed to the investor under section 80CCG for both the years shall be liable to tax. Explanation.-It is hereby clarified that in the case where the value of the investment portfolio of eligible securities is more than the corresponding value of such securities in respect of which deduction has been claimed in either of the two financial years, the deduction corresponding to the financial year in which the value of investment portfolio of eligible securities is less, shall be liable to tax.

A new retail investor who has invested in accordance with the Rajiv Gandhi Equity Savings Scheme, 2012 shall continue to be governed by the provisions of that Scheme to the extent it is not in contravention of the provisions of this Scheme and such investor shall also be eligible for the benefit of investment made in accordance with this Scheme for the financial years 2013-14 and 2014-15.

Example:-

Mr A, new retail investor, have made the following investment in equity share/units of equity oriented fund of Rajiv Gandhi Equity Savings Scheme for the Previous year 2012-13,2014-15 and 2015-16 as below :

Particulars	P.Y 2013-14	P.Y 2014-15	P.Y 2015-16
Investment in listed equity shares	₹ 15,000	₹ 42,000	₹ 30,000
Investment in units of equity oriented fund	₹ 45,000		₹ 12,000
Sale of all units of equity oriented fund purchased in P.Y 2013-14		₹60,000
Gross Total Income (comprising of salary income and bank interest)	₹11,50,000	₹11,75,000	₹12,25,000
Deduction under section 80 CCG	₹ 25,000	₹21,000	Nil
Remark	(Restricted to 50 % of ₹ 50,000)	(Restricted to 50 % of ₹42,000)	(Not eligible since GTI exceeding   ₹12,00,000
Amount liable to tax (on account of violation of condition)		₹ 22,500

Note :-  Since the deduction under section 80 CCG was not allowed during the P.Y 2015-16 on account of the Gross Total Income exceeding ₹ 12 lakhs, no amount relating to that year can be subject to tax in the P.Y.2012-15, being the year of violation of condition, even though the units were sold within 3 years. However a deduction of ₹ 22,500 (50 % of ₹45,000) was allowed under section 80 CCG in respect of investment of ₹15,000 in units of equity oriented fund in the P.Y,2013-14. Since such units have been sold in the P.Y. 2014 -15, the condition under section 80 CCG has been violated and ₹ 22,500 would be subject to tax in the P.Y.2014-15.

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:

Similar International Experiences
Fiscal incentives have been empirically established to encourage greater retail participation. International experience in countries where such schemes were implemented supports this notion. For example, Loi-Monory scheme introduced in France in 1978 was successful in significantly improving retail participation; the proportion of French households investing in listed securities rose from 7% to 17% during 1977-1982. Similar schemes were launched by other European countries, most notably Belgium and West Germany. Such a scheme in Sweden turned one sixth of the population into investors. All these exemplify the positive manner in which people of relatively modest means will respond to fairer tax treatment.

LOCK-IN PERIOD 

i. The total lock-in period for investments under the RGESS would be divided into ‘fixed lock-in period’ and ‘flexible lock-in period’. The initial period of lock in shall be known as Fixed Lock-in Period, which shall commence from the date of purchase of such securities in the relevant financial year and end on the 31st day of March of the year immediately following the relevant financial year.

ii. The period of two years beginning immediately after the end of the fixed lock-in period shall be called the flexible lock-in period.

iii. Thus, upon completion of the fixed lock-in period, new retail investors would be allowed to trade in the eligible securities. Investors would, however, be required to maintain their level of investment during the next two years (i.e. the flexible lock-in period) at the amount for which they have claimed income tax benefit or at the value of the portfolio before initiating a sale transaction, whichever is less, for at least 270 days in each of these 2 years. Such investment value shall exclude the value of investment which is under the fixed lock-in period.

iv.  The balance of the investment portfolio of Eligible Securities in the RGESS Demat Account, at any point of time during the flexible lock-in period, shall not be less than the amount corresponding to the value of the securities in the fixed lock-in.

v. The general principle under which trading is allowed is that whatever is the value of stocks / Units sold by the investor from the RGESS portfolio, RGESS compliant securities of at least the same value are credited back into the account subsequently.

vi. However, the investor is allowed to take benefits of the appreciation of his RGESS portfolio, provided its value, as on the previous day of trading, remains above the investment for which they have claimed income tax benefit.

vii. The Depositories will be required to ensure the enforcement of the lock-in on Units under the Scheme in terms of RGESS guidelines.