Section 80CCG: A Comprehensive Guide to Tax Benefits for First-time Investors under RGESS Scheme

Section 80CCG of the Income Tax Act, 1961 was introduced in the Union Budget of 2012-13 as a measure to encourage retail investors to invest in the Indian stock market. The scheme was named the Rajiv Gandhi Equity Savings Scheme (RGESS) in honor of the late Prime Minister of India, Shri. Rajiv Gandhi.

The scheme is exclusively for first-time investors in the stock market, with an annual income of less than Rs. 12 lakhs. The scheme provides a tax deduction of 50% of the amount invested in eligible securities, up to a maximum of Rs. 25,000.

Eligible Securities

The scheme allows investment in eligible securities for a period of three years. These securities include:

1. Equity shares listed on a recognized stock exchange in India.
2. Follow-on Public Offers (FPOs) of the equity shares listed on a recognized stock exchange.
3. New fund offers (NFOs) of Mutual Funds (MFs) that invest in eligible securities.
4. Exchange Traded Funds (ETFs) that invest in eligible securities.

Conditions to avail benefit under 80CCG

To avail the benefits of this scheme, the following conditions must be met:

1. The investor must be a first-time investor in the stock market.
2. The investor’s annual income must be less than Rs. 12 lakhs.
3. The investor must invest in eligible securities under the RGESS scheme.
4. The investment must be made in the first financial year in which the investor wants to avail of the tax benefit under this scheme.
5. The maximum investment amount allowed is Rs. 50,000.
6. The investment must be held for a period of three years.

Tax Benefit under Section 80CCG

The tax benefit under this section is available only for one year, i.e., the year in which the investment is made. The benefit is available for 50% of the amount invested, up to a maximum of Rs. 25,000. This means that if an investor invests Rs. 50,000, he or she can avail of a tax deduction of only Rs. 25,000.

The tax benefit is over and above the tax benefit available under Section 80C of the Income Tax Act, which allows for a tax deduction of up to Rs. 1.5 lakhs on investments made in specified instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Equity-Linked Savings Scheme (ELSS), etc.

1. Eligibility criteria:

As mentioned earlier, the scheme is available only to first-time retail investors with an annual income of less than Rs. 12 lakhs. In addition to this, the investor should not have a demat account or should not have made any transactions in equity or derivatives before the specified date.

2. Maximum investment limit:

The maximum investment limit allowed under the scheme is Rs. 50,000, which can be made in one or more tranches during the year. However, the tax deduction available is limited to 50% of the amount invested, i.e., a maximum of Rs. 25,000.

3. Lock-in period:

The investment made under the scheme must be held for a minimum period of three years from the date of investment. If the investment is sold before the end of the lock-in period, the tax deduction claimed under Section 80CCG will be reversed and added back to the investor’s taxable income in the year of sale.

4. Exemption from long-term capital gains tax:

If the investment made under the scheme is held for a period of more than one year, any long-term capital gains arising from the sale of such investments will be exempt from tax.

5. Taxation of short-term capital gains:

Any short-term capital gains arising from the sale of investments made under the scheme will be taxable at the normal rates applicable to the investor.

6. Applicability of the scheme:

The scheme is applicable only to individual investors and not to Hindu Undivided Families (HUFs), trusts, or corporate entities.

7. Time limit for investment:

The investment must be made during the financial year in which the investor wants to claim the tax benefit under the scheme. Any investment made in subsequent years will not be eligible for tax deduction under Section 80CCG.

In conclusion

Section 80CCG of the Income Tax Act is a good scheme for first-time investors to reduce their tax liability while investing in the stock market. However, investors should keep in mind the eligibility criteria, investment limit, lock-in period, and other conditions to avail of the tax benefit under this scheme. It is always advisable to consult a tax expert or a financial advisor before investing in any financial instrument.

Read more useful content:

• section 145 of income tax act
• section 10e of income tax act
• section 9 of the income tax act
• section 94b of income tax act
• section 206aa of income tax act

Frequently Asked Questions (FAQs)

Q1. What is Section 80CCG of the Income Tax Act?

A1. Section 80CCG is a provision in the Income Tax Act, 1961, which was introduced in the Union Budget of 2012-13. It provides tax benefits to first-time retail investors who invest in eligible securities under the Rajiv Gandhi Equity Savings Scheme (RGESS).

Q2. Who is eligible to claim tax benefits under Section 80CCG?

A2. Only first-time retail investors with an annual income of less than Rs. 12 lakhs are eligible to claim tax benefits under Section 80CCG. Additionally, the investor should not have a demat account or should not have made any transactions in equity or derivatives before the specified date.

Q3. What is the maximum amount of investment allowed under Section 80CCG?

A3. The maximum investment allowed under the scheme is Rs. 50,000 per financial year.

Q4. What is the tax benefit available under Section 80CCG?

A4. The tax benefit available under Section 80CCG is 50% of the amount invested in eligible securities, up to a maximum of Rs. 25,000.

Q5. What are the eligible securities under the RGESS scheme?

A5. Eligible securities under the RGESS scheme include equity shares listed on a recognized stock exchange in India, follow-on public offers (FPOs) of the equity shares listed on a recognized stock exchange, new fund offers (NFOs) of Mutual Funds (MFs) that invest in eligible securities, and Exchange Traded Funds (ETFs) that invest in eligible securities.

Q6. What is the lock-in period for investments made under Section 80CCG?

A6. The lock-in period for investments made under Section 80CCG is three years from the date of investment.

Q7. Can an investor claim tax benefits under both Section 80C and Section 80CCG?

A7. Yes, an investor can claim tax benefits under both Section 80C and Section 80CCG. However, the maximum deduction available under Section 80C is Rs. 1.5 lakhs, while the maximum deduction available under Section 80CCG is Rs. 25,000.

Q8. Is the tax benefit available under Section 80CCG available every year?

A8. No, the tax benefit under Section 80CCG is available only for one year, i.e., the year in which the investment is made.

Q9. Can an investor invest in any eligible securities to avail of the tax benefit under Section 80CCG?

A9. No, an investor can invest only in eligible securities under the RGESS scheme to avail of the tax benefit under Section 80CCG.

Q10. What happens if an investor sells the investments made under Section 80CCG before the end of the lock-in period?

A10. If an investor sells the investments made under Section 80CCG before the end of the lock-in period, the tax benefit claimed under the scheme will be reversed and added back to the investor’s taxable income in the year of sale.