FAQs on New Rajiv Gandhi Equity Savings Scheme
This Article contains all important points concerning the new Rajiv Gandhi Equity Savings Scheme - 2012. The various FAQs will bring home complete answers to tax payers on all aspects connected with this new scheme.
Q1. What are the salient features of Rajiv Gandhi Equity Savings Scheme?
Ans: The Finance Act, 2012 for the first time introduced a special scheme to provide for tax deduction in respect of investments in equities. The salient features are as under :-
- The scheme is applicable only to individuals. Thus, the benefit of tax deduction is not available to any other category of tax payer.
- The maximum deduction will be on investment up to Rs. 50,000 during the Financial Year 2012-13.
- The deduction will be at the rate of 50 per cent of the amount invested in equity shares.
- The total income of the individual should not exceed Rs. 10 lakhs. Hence, if the income exceeds Rs. 10 lakhs, the benefit will not be granted.
- The assessee should be new retail investor in shares.
- There would be lock in period of three years.
Q 2. For taking advantage of investment under the Rajiv Gandhi Equity Savings Scheme, 2012 whether the investment should be made in shares of any company?
Ans : To avail the benefit of tax deduction in respect of investment in Rajiv Gandhi Equity Scheme tax benefit is not available for making any investment in any type of company. It is clearly mentioned in the Income-tax Act that the investment should be made in listed Equity shares only. Hence, if the investment is made in non-listed Equity shares then they are not eligible for any tax deduction.
Q 3. Please inform the listed securities in which investment can be made to avail the benefit of tax deduction under section 80CCG.
Ans: The following investments alone would qualify for investment in listed equity shares :-
- Equity shares, on the day of purchase, falling in the list of equity declared as “BSE-100” or “ CNX-100” by the Bombay Stock Exchange and the National Stock Exchange, as the case may be;
- Equity shares of public sector enterprises which are categorised as
Maharatna, Navratna or Miniratna by the Central Government;
- Follow on Public Offer
Initial Public Offer of a public sector undertaking wherein the government shareholding is at least fifty-one per cent. which is scheduled for getting listed in the relevant previous year and whose annual turnover is not less than four thousand crore rupees during each of the preceding three years;
Q 4. Whether the investment in Equity related Mutual Fund would also qualify for tax deduction in terms of section 80CCG.
Ans: A first reading at section 80CCG will convince the tax payers that deduction will be allowed only for the investment made in listed Equity shares. However, it is also mentioned in the Income-tax Act that such shares etc. to be specified by the Government. The Government has issued a very detailed scheme which is known as the Rajiv Gandhi Equity Savings Scheme 2012. It was issued on 23rd November 2012. Those desiring to make the investment must read this scheme in greater detail so that there is no problem. A glance through the contents of the scheme will give the answer that the units of Exchange Graded Fund or Mutual Fund Schemes with Rajiv Gandhi Equity Savings Scheme if they are listed and traded on a Stock Exchange, then such Mutual Fund Investment would also be eligible for the above tax deduction. Likewise new Fund Offer of the Mutual Fund in tune with the Rajiv Gandhi Equity Savings Scheme will also be eligible for tax deduction.
Q 5. The Rajiv Gandhi Equity Scheme speaks about investment by a new retail investor. Can you please define and explain the meaning of new retail investor.
Ans: The scheme of Rajiv Gandhi Equity Saving Scheme is very clear specially the purpose and object of granting this deduction is that the new retail investor comes into the Equity market. Hence, the new retail investor as per the definition provided in the scheme will be the following resident individuals.
(a) any individual who has not opened a demat account and has not made any transactions in the derivative segment as on the date of notification of the Scheme;
(b) any individual who has opened a demat account before the notification of the Scheme but has not made any transactions in the equity segment or the derivative segment till the date of notification of the Scheme,
(c) and any 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
Q 6 To avail the tax deduction under section 80CCG whether a Non-Resident Indian filing Income-tax Return in India in respect of his Indian income and who happens to be a first time investor in Equity shares, can he also take the benefit of tax deduction by making investment in Rajiv Gandhi Equity Savings Scheme.
Ans: No. It is not possible for a Non-Resident Indian to make investment in Equity shares and claim the tax benefit under section 80CCG. This is mainly because of the fact that the Income-tax section 80CCG clearly speaks that this tax deduction would be permissible only for resident individuals. Hence, other tax entities like Hindu Undivided Family etc. also cannot take the tax benefit.
Q7. The provisions contained in the Income-tax Act relating to granting deduction for investment in Equity Savings Scheme clearly states that the deduction will be granted to the tax payers having income not exceeding Rs. 10 lakhs. Please explain whether a salaried employee having salary income of Rs. 10,85,000 and who contributes Rs. 1 lakh to PPF account thereby having his net taxable salary income at Rs. 9,85,000 only, whether he would be eligible to claim the tax deduction if he were to make investment in Equity Savings Scheme and he happens to be a first time investor in the stock market.
Ans: In this example the tax benefit or tax deduction for making investment in Rajiv Gandhi Equity Savings Scheme will not be granted to the salaried employee. This is mainly because of the fact that the net taxable salary income after deduction of the salaried employee although is Rs. 9,85,000 but the gross salary is in excess of Rs. 10 lakhs. It is clearly mentioned in the provisions of the Law that the deduction will be granted where the gross total income of the assessee does not exceed Rs. 10 lakhs. In this illustration as the gross total income of the salaried employee is in excess of Rs. 10 lakhs although the net taxable income may be below Rs. 10 lakhs but still the tax deduction will not be granted.
Q 8. What is the procedure which is required to be followed for opening a Demat Account for the purpose of making investment in the Rajiv Gandhi Equity Savings Scheme.
Ans: The Government has clearly defined the procedure to be followed at the time of opening a Demat Account for the purpose of availing tax deduction in respect of investment under Rajiv Gandhi Equity Savings Scheme. The following is the procedure which is required to be followed :-
(a) the new retail investor shall open a new demat account or designate his existing demat account for the purpose of availing the benefit under the Scheme;
(b) the new retail investor shall submit a declaration in Form A to the depository participant who will forward the same to the depository for verifying the status of the new retail investor;
(c) the new retail investor shall furnish his Permanent Account Number (PAN) while opening the demat account or designating the existing account as a Rajiv Gandhi Equity Savings Scheme eligible account, as the case may be.
Q 9. It is clearly known now that the maximum amount which can be invested in Rajiv Gandhi Equity Savings Scheme is Rs. 50,000 on which tax deduction will be permissible. Whether this amount of Rs. 50,000 namely the maximum amount to be invested has to be invested in one go or whether the investment can be made in installments.
Ans: The retail investor can make the investment in eligible securities either in one go or in more than one transaction during the financial year in which the deduction is claimed. However, the maximum amount for which tax deduction will be permissible will be Rs. 50,000 only.
Q10. Rajiv Gandhi Equity Savings Scheme clearly speaks about the maximum limit of investment for tax deduction namely Rs. 50,000. What happens if the investor were to invest more than Rs.50,000 or can he not invest anything over and above Rs. 50,000 in the financial year 2013-14.
Ans: The scheme for granting tax deduction specifically speaks that the maximum deduction will be permissible on Rs. 50,000. However, the retail investor will be free to invest more than this amount during the financial year. Thus, there is no restriction on the investor in making higher investment in eligible securities. What is relevant is only that the tax deduction will be on Rs. 50,000.
Q11. If the retail investor opens the new Demat Account and makes the investment in specified securities to claim the tax deduction under section 80CCG but later on in the same Demat Account the investor would like to buy some new securities for which tax deduction is not claimed but the fear is that on the new securities purchased over Rs. 50,000 the securities might be subjected to the compulsory lock in period of three years. In such situation what should the investor do. Should he open a separate Demat Account for this purpose.
Ans: The eligible securities which are purchased to avail the tax deduction under section 80CCG will automatically be part of the lock in period. However, if the retail investor is purchasing some other securities over and above the limit of Rs. 50,000 on which tax deduction under section 80CCG is not claimed because the investment has exceeded Rs. 50,000, then for such shares the retail investor should submit Form B through Depository Participant and then these shares for which tax deduction is not claimed will not be included as investment for the purpose of Rajiv Gandhi Equity Savings Scheme. Thus, it is clear that no separate Demat Account is necessary and just submission of Form No. B would be effective way of dealing with such other investments namely the investments which have been made over and above the tax deduction limit.
Q12. If the new retail investor had opened a new Demat Account, made the investment, got the tax deduction, whether he can get deduction for other new investments in the next financial year also.
Ans: The scheme is very clear whereby the new retail investor will not be allowed any deduction under the scheme for any new investment made in any subsequent year.
Q13. What happens in a given situation when the investment in Rajiv Gandhi Equity Savings Scheme by opening a new Demat Account is made let us say on 31st of March 2013 and in the Demat Account as on 31st March 2013 these shares are not credited. In such situation whether the tax benefit would be granted to the assessee or not.
Ans. The scheme clearly states that the new retail investor shall be permitted a grace period of three 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 purchased in the financial year itself;
Q14. What is the impact in case the securities purchased under the Rajiv Gandhi Equity Savings Scheme 2012 are sold before the lock in period of three years.
Ans. It is true that the provisions of the Law clearly states that the investment should be locked in for a period of three years from the date of acquisition. In case the shares are sold away before the statutory lock in period of three years, in that situation the deduction which was claimed by the assesses shall be withdrawn and the amount of deduction so claimed will be added in the year in which the amount is withdrawn before the date of such lock in period.
Q15. Can you please highlight little more on the lock in period as to what it means under the Rajiv Gandhi Equity Savings Scheme.
Ans: Generally speaking the lock in period of three years as mentioned in the scheme means that such shares should not be sold for a period of three years. However, if we go through in detail the contents of Rajiv Gandhi Equity Savings Scheme 2012, we find that the lock in period has also been bifurcated for the benefit of the investors in two phases. Firstly, the scheme speaks about a fixed lock in period of one year and it also speaks about flexible lock in period also. All eligible securities are required to be held for a period called the fixed lock-in period which shall commence from the date of purchase of such securities in the relevant financial year and end one year from the date of purchase of the last set of eligible securities (in the same financial year) on which deduction is claimed under the Scheme. The period of two years beginning immediately after the end of the fixed lock-in period shall be called the flexible lock-in period.
Q 16. Please explain in detail the concept of fixed lock in period by reference to an example.
Ans: The fixed lock in period will be for a period of one year. But such one year has to start from the last purchase of the shares. Let us explain by an example. An individual makes investment of Rs. 20,000 in the eligible equity shares on 1st December 2012 and further makes Rs. 20,000 investment on 1st February 2013 and finally let us say the sum of Rs. 10,000 will be invested by him on 15th March 2013. In this example although the shares were purchased from December till March 2013 but the last purchase has been on 15th March and the fixed lock in period of one year will start from 15th March 2013. Now coming to the flexible lock in period the details are clear cut provided in the Rajiv Gandhi Equity Scheme 2012 whereby it is possible for the retail investor to change the shares after the expiry of the fixed lock in period. Thus, during the flexible lock ing period it is possible to sell the originally purchased shares under the scheme and buy another set of shares within the list of eligible shares. Thus, flexible lock in period provides flexibility to the investor.
Q 17. What are the formalities required to be done after the expiry of the lock in period.
Ans: The new retail investor’s demat account created under the Scheme shall, on the expiry of the period of holding of the investment, be converted automatically into an ordinary demat account.
Q 18. We know that the total cost of purchase of the shares in the Stock Exchange comprises of the cost of the share, the payment of the brokerage, the payment of Security Transaction Tax, the Service Tax etc. etc. Please inform whether all these items will be forming part of the total investment made by the assessee and are to be included in the total investment to be eligible for tax deduction.
Ans: While making the initial investments upto fifty thousand rupees, the total cost of acquisition of eligible securities shall not include brokerage charges, Securities Transaction Tax, stamp duty, service tax and all taxes, which are appearing in the contract note.
Q 19. Sometimes shares are purchased of certain companies which are eligible for tax deduction under the Rajiv Gandhi Equity Savings Scheme. But later on there may be demerger of companies or amalgamation of company etc. What happens in such a situation.
Ans. Due to demerger of a company or due to amalgamation etc. the investment of the new retail investor might undergo a change but such change will not affect the tax liability on the investor. These types of activities have been classified by SEBI as Involuntary Corporate Action and SEBI has also clarified in yet another circular dated 6th December 2012 that Involuntary Corporate Action will not affect the reversal of tax claim of the assessee. However, Voluntary Corporate Action Life like buy back etc. will be treated as sale transaction.
Q 20. Please inform the tax implications at the time of maturity in respect of the investment made in the Rajiv Gandhi Equity Savings Scheme 2013.
Ans: The principal amount of investment as made under the Rajiv Gandhi Equity Savings Scheme when received at a later date will not be subjected to income-tax. Similarly, any gain derived by the assessee on selling such shares at a later date will also not be liable to any income-tax at all mainly because such gain will be treated as long-term capital gain from listed securities on which as per the present law there is no income-tax liability.
Q 21. Finally please tell us is it a good decision to make investment in Rajiv Gandhi Equity Savings Scheme.
Ans: Oh yes, definitely for all individuals in the country who never have any exposure in the Equity market and whose gross income is less than Rs. 10 lakhs, it is really a good time to make investment decision for making investment in Rajiv Gandhi Equity Savings Scheme 2012 whereby they are able to save income-tax and also start learning about making investment in the stock market
02 Dec - 10:00 hrs
Founder & CEO, Right Horizons