First-time investors in RGESS to get tax breaks

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Hiten Shah
Associate director, Tax and Regulatory Services
EY

During the past year-and-a-half, there has been both stability and growth in the Indian capital market. But small investors have stayed away, parking their savings in debt funds or instruments that yield lower interests. To get this investment flow into the capital market, promote equity culture in India and widen the retail investor base in the Indian security market, the government has launched the Rajiv Gandhi Equity Saving Scheme (RGESS).

Ajay was discussing with a friend options of investing money from his salary into instruments that could give him good returns in the long run and also earn him tax breaks. Since Ajay would be a first-time investor, his friend recommended RGESS to him.

He explained that a person with a taxable income of less than R10 lakh can avail benefits under this scheme, with a permissible investment of R50,000 and the exemption is available for R25,000, i.e. 50% of the invested amount under Section 80 CCG of the Income-Tax Act.

This exemption is available to an individual over and above the exemption available under Section 80 C of R1 lakh. Under the scheme, an investor has the choice to invest in listed shares, unlisted securities of public sector undertaking, exchange-traded funds and mutual funds. Most importantly, Ajay could make these investments in instalments over the year.

As this scheme comes with a tax-break, there is also a lock-in period. Ajay asked his friend how he would be able to realise his gains. He was told that he could not sell the investment for the first 12 months, but after that he could do so to realise his gains. However, he would have to maintain the initial level of investment, for a total period of three years.

His friend listed more benefits: tax-free dividend payments; and tax-free long-term capital gains on any sale of the investment (as the holding period of a listed security is more than 12 months). However, if the investor violates any of the conditions prescribed under Section 80CCG of the Income-Tax Act, the amount of exemption allowed would be taxed in the year of non-fulfillment of conditions.

On hearing about the benefits, Ajay wanted to know about the procedure of investing in the scheme. He was told that all he needed to do was open a demat account to make the investment.
The scheme thus strengthens the goal of financial stability and promotes financial inclusion.

Views expressed are personal.