The following article describes the complete details of Rajiv Gandhi Equity Savings Scheme (RGESS). This is part 3 of series 3. This article will explain all the features, benefits, eligibility criteria and all other info in detail for the benefit of investors.
What will be the basis for valuation of initial investment made under RGESS for availing tax benefit?
Valuation of initial investments i.e., upto Rs.50,000, for availing tax benefits under RGESS will be based on the cost of acquisition of eligible securities. This means that it excludes brokerage charges, Securities Transaction Tax, stamp duty, service tax and all taxes which are appearing in the contract note issued by the stock broker.The cost of acquisition (or the price at which the specified quantity was purchased) is taken by the depositories directly from the stock exchange on which the transaction has been done. You may verify the entries made by the depositories as “initial investment under RGESS” using the information given in the contract note provided to you by your broker.
What is the holding period for investments made under RGESS?
Investment holding period under RGESS is three years which includes ‘Fixed Lock -in’ of one year and ‘Flexible lock-in’ of two years.
Let us say, you have purchased eligible securities worth Rs. 50,000 on December 31, 2012 in a RGESS designated demat account. The eligible securities will be in ‘Fixed lock-in’ till December 30, 2013 and for flexible lock-in till December 30, 2015.
In case you intend to sell investment made under RGESS within three years, it can be done only after completion of ‘Fixed Lock-in’ period, subject to certain conditions. The lock-in time lines in case of investments made at once and in installments are illustrated in the below mentioned graph.
What is ‘Fixed Lock-in’ period?
‘Fixed Lock-in’ period shall commence from the date of purchase of first set of eligible 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). Investor is not allowed to sell / pledge securities during this period.
If you have purchased first set of eligible securities worth Rs. 20,000 on December 25, 2012 and next set of eligible securities worth Rs. 20,000 on December 31, 2012 in a RGESS designated demat account, then the ‘Fixed lock-in’ period for both set of eligible securities will start from December 25, 2012 and will end on December 30, 2013.
When the lock-in period does start? From the date of purchase or from date of credit of securities in the demat account?
As there can be a time gap between the date of purchase and date of credit, the fixed lock-in period will commence from the date of ‘credit’ of such securities in the demat account during the relevant financial year and end one year from the date of ‘credit’ of last set of eligible securities in the same financial year on which deduction is claimed under the Scheme.
If the fixed lock-in is counted only from the last day of receipt of securities under RGESS, won’t that result in lock-in for more than three years?
Yes, if the investment is made in installments, the lock-in period for the first installment would be more than one year. Since the investor is given the flexibility (of no lock -in) for around 90 days in each of the flexible lock-in period, this extra lock-in period in the first year for certain securities is taken care of.
Can I sell / pledge eligible securities declared for RGESS during ‘Fixed Lock-in’ period?
No. You are not allowed to sell, pledge or hypothecate eligible securities during ‘Fixed Lock-in’ period.
What is ‘Flexible Lock-in’ period?
The period of two years beginning immediately after the end of the fixed lock-in period shall be called the ‘Flexible Lock-in’ period.
Can I trade / sell during flexible lock-in period?
During ‘Flexible lock-in’ period, you can trade (sell/buy) the eligible securities and remain eligible to claim tax benefit under RGESS, provided that, the RGESS demat account is compliant for a cumulative period of a minimum of two hundred and seventy days during each of the two years of the flexible lock-in period. This means that you get almost a quarter of the year to churn your portfolio.
How the valuation of securities is done during the flexible lock-in period?
For checking compliance with the Scheme after any sale is done from the RGESS portfolio during the flexible lock-in period, the following balances of securities will be considered at the closing price as on the previous day of the date of ‘trading’ (which is what get reflected as the value of the portfolio in the demat account of the investor on any day during trading hours; This is done to facilitate the decision making by investors). The date of trading is obtained by the depositories directly from the stock exchanges.
The balances of securities which were under fixed lock-in in the first financial year, irrespective of its status as an ‘eligible security’ as on the date of valuation (This means that even if the security had gone out of the CNX 100 or BSE 100 list, if it was a part of the fixed lock-in and still retained in the account it would be considered towards the valuation of RGESS portfolio).
- The balances of securities which are appearing in the list of eligible securities as on the date of valuation, even though not forming part of the securities which were held under fixed lock in. These securities could have been bought by the investor during fixed lock-in period or subsequently.
- In case of a corporate action on eligible securities under fixed lock-in whereby additional credit of securities is received through Bonus/Rights, the same will be considered as an eligible investment for fixed lock-in as well as during flexible lock-in.
Is there a difference in the valuation of RGESS eligible securities as compared to the general valuation principle adopted by Depositories?
Yes. Valuation of initial investments for claiming tax benefits under RGESS is mentioned in Q. No. 41. The valuation criterion for the securities during the flexible lock-in period is mentioned in Q. No. 49.
Depositories generally value the securities in a demat account based on the closing price of the securities at the exchanges (for CDSL closing price at BSE is taken; for NSDL closing price at NSE is taken) for that day. The same is updated after the close of market hours every day. Since RGESS valuation is done at the actual price of acquisition for the initial investment and at previous day’s closing price during flexible lock-in period, it is different from the general valuation done by depositories for other securities.
However, for RGESS beneficiaries, depositories will show separately the value of initial investment under RGESS and the value of his/ her RGESS portfolio on a day to day basis.
How the three year lock-in condition is implemented?
The total lock-in period for investments under the Scheme would be three years including a fixed lock-in period of one year, commencing from the date of last purchase of securities under RGESS.
After the first year, investors would be allowed to trade, in furtherance of the goal of promoting an equity culture and also as a provision to protect them from adverse market movements or stock specific risks, as also to give them avenues to realize profits.
Investors would, however, be required to maintain their level of investment during these two years 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 a year. This process is clarified below:
- The RGESS account will be deemed to be compliant unless such a trade (sale) is done that brings the value of the RGESS portfolio, on the date of sale, below the amount for which benefits have been claimed under RGESS, when valued at the closing price of the stocks / units on the preceding day of trading. This means that as long as the market valuation of all the RGESS eligible securities in your account is above the amount for which benefits have been claimed, you can sell off securities above such level, without necessitating you to further purchase any RGESS eligible securities. Further, even if the market valuation of all RGESS eligible securities in your account is below the amount for which benefits have been claimed, if you have not sold off any security, you will still be deemed compliant with the Scheme; The clock ticks in only if a ‘sale’ is done from the RGESS eligible securities. This gives protection from general market declines.
- In case of any sale during the flexible lock-in period by which the value of the RGESS portfolio goes below the amount for which tax benefits have been claimed, then the account would be deemed to be RGESS compliant only from the day on which the value of the RGESS portfolio becomes at least equivalent to the amount for which tax benefits have been claimed or the value of the RGESS portfolio before such sale, whichever is less. This may happen in any of the following manner, in part or full:
- Due to market movements, the value of the remaining RGESS portfolio becomes not less than the amount for which RGESS benefits have been claimed or the value of RGESS portfolio before the sale of such securities, whichever is less.
- The investor deposits some RGESS compliant securities so that after depositing these securities, the value of the RGESS portfolio becomes not less than the amount for which RGESS benefits have been claimed or the value of RGESS portfolio in that account before sale of such securities, whichever is less.
- The investor purchases RGESS compliant securities in the account for a value not less than the value of the securities sold off; The maximum amount that an investor needs to bring back is what he sold off if the market movement does not benefit him.
If the account has become compliant once, then it will be deemed to have complied for the rest of the time period until the next transaction happens that takes the value of portfolio below the tax claimed amount. The various scenarios are clarified as below:
The investor need to bother about purchasing back eligible securities, only if the investor sells those eligible securities which were under fixed lock-in (irrespective of their status as eligible securities as on the date of sale) or those securities which were not under fixed lock-in but were considered for valuation of investment of eligible securities during flexible lock-in period as mentioned in Q.No. 49 above.
Example If an investor had claimed deduction on RGESS investment of value Rs. 50,000 of 400 shares of company A and had also bought additional 200 shares of company A (this additional purchase might have been done either in fixed lock-in period or in flexible lock-in period) then:- (a) for any sale upto 200 shares of company A in the flexible lock-in period, it would be deemed that the investor had sold off the additional 200 shares of Company A and not from the original set of 400 shares kept under fixed lock-in; this means that the investor need not have to be concerned about bringing back those shares. (b) Instead, if such an investor sells 300 shares of company A, he will be tracked for recouping the amount (if the residual value of the portfolio was below the investment claimed under RGESS) and value of 600 shares of Company A will be considered as the value of investment portfolio under the Scheme before sale.
If the value of RGESS portfolio falls due to fall in the market value of eligible securities in the flexible lock-in period and the investor sells the eligible securities as mentioned in above, the demat account shall be compliant from the day on which the value of investment portfolio becomes equal to investment claimed as eligible for deduction under Section 80CCG or the value of investment portfolio before such sale, whichever is less, even though there was no purchase of eligible securities after such sale.
What will happen if I do not trade (sell/buy) eligible securities during ‘Flexible Lock-in’ period?
In case, you do not trade (sell/buy) the eligible securities during the ‘Flexible Lock-in’ period, your RGESS demat account will remain complaint irrespective of the value of investment portfolio held under RGESS.
What will happen to my demat account at the end of flexible lock-in period?
Your demat account designated for RGESS will be converted into a regular or ordinary demat account at the end of the flexible lock-in period and the securities contained therein will be freely transferable.
Do I have to value RGESS eligible securities for the purposes of compliance with the provisions of the Scheme?
No. The day to day valuation of securities in your RGESS portfolio and your compliance with the Scheme for 270 days etc will be monitored by the Depositories / Depository Participant (DP) and information about the same can be obtained from the DP. However, you may verify the entries / valuation of securities made into your demat account and in case of any discrepancy immediately take it up with your DP.
How do I claim for tax deduction?
You would receive a copy of the new retail investor certificate and the annual account statement provided by your DP to the Income Tax department. You are required to indicate these details in the Income Tax returns filed by you.
Who will give me new retail investor certificate and annual account statement?
The new retail investor certificate will be issued to you by the concerned DP after verification of your credentials across the other depositories and Exchanges. The certificate will be issued to you within one month from the date of opening the demat account. However efforts are made to reduce this time.
You can either ask your DP to give you the new retail investor certificate or can download it from the web facility offered to you by your DP (efforts in this direction are underway).
The annual account statement will also be provided to you by your depository participants indicating your compliance with the scheme.
What is the penalty if I violate the conditions of RGESS?
If the assessee, in any previous year (including the two years of flexible lock-in), fails to comply with any condition specified under RGESS, the deduction originally allowed shall be deemed to be the income of the assessee of such previous year and shall be liable to tax for the assessment year relevant to such previous year.
If the assessee fails to meet any of the conditions during the second year of RGESS (i.e., first year of flexible lock-in), then he is required to pay tax on the entire investment (not just for the shortfall) claimed as deduction under Section 80CCG (RGESS) in the income for that year and pay tax accordingly.
What will be the effect of different types of corporate actions like split, consolidation, bonus, rights, etc. on RGESS eligible investment during flexible lock in period?
If there is any change in the RGESS investment due to corporate actions where investors do not have any choice (involuntary) e.g. split / demerger etc., there will not be any effect on compliance status of the account during flexible lock in. In case of bonus, etc., the additional shares allotted would be considered as RGESS securities to the extent allowed by the ratio of the existing RGESS securities in the account. The resulting securities would lie in the same category of lock-in (Fixed / Flexible) as the original securities.
If there is any change in the RGESS investment due to corporate actions where investors have the option to exercise their choice and results in debit of securities during flexible lock in, the same will be considered as a sale transaction. SEBI has notified the corporate actions allowed under RGESS, depending on the availability of choice to the investor. See SEBI operational guidelines for allowable corporate actions under RGESS.
How the Scheme is monitored?
PAN has been made mandatory for opening demat accounts. RGESS monitoring is primarily based on the PAN details. Each clients’ unique client code (UCC) assigned by the broker to the client, is linked to the Permanent Account Number (PAN) of that client and hence, depositories can easily verify who is a new investor based on information available with depositories and exchanges. New retail investor certificate will be issued by depositories through the concerned DP after internal and cross verification from the other depository and from stock exchanges as to whether the beneficiary has already traded in equity / derivatives. Depositories also provide valuation of RGESS portfolio through the concerned DP and verify the conformity to stipulated conditions during flexible lock-in period. Income details of the PAN holders availing the RGESS Scheme are verifiable by IT Dept from their electronic database. Further, the details of RGESS beneficiaries will be handed over to the IT Department by the concerned depositories by the end of the financial year.
Whom can I contact for further details?