Say Good Bye to Dividend Option

This year’s budget hit mutual fund investors very badly. Not only it levied Long Term Capital Gain Tax @10% on Equity Funds but also introduced 10% dividend distribution tax on dividend declared by Equity Funds. Post demonetization and stiff fall in interest rates large chunk of flow came to mutual fund. It’s really unfortunate that large chunk of fund came in balanced funds which invests minimum 65% in equity under monthly dividend option with so called assured 1% return every month. Product was largely missold to the senior citizens who were looking for the regular income every month. The dividend now is falling and new investors are realizing that something is wrong but still most of them are in confused mind. The dividend option takes away 10% in equity funds and around 29% in debt funds.

Normally dividend is declared when there is good appreciation in the NAV due to better performance by the scheme compared to bench mark. But, in practice it is largely misused to garner the new business which is what happening in recent time. Most of the people do not understand this sales pitch and are lured to invest in the fund without understanding the risk involved in the scheme. What exactly happens if dividend is declared can be understood by an example. Suppose “X” an equity fund scheme has NAV of Rs. 20 in growth option as well in dividend option. The scheme was launched at Face Value of Rs. 10 few years back. Suppose the Fund house today decides to declare Rs. 1.20 per unit i.e. 12% as dividend in the dividend option. In above case after the ex-dividend NAV of Growth option in “X” fund will remain the same at Rs. 20 but NAV under  the dividend option will come down to Rs. 18.80 as Rs. 1.20 is paid back to investor by way of dividend. By looking at attractive 12% dividend income you opt to invest Rs. 10,000 which investors have done in recent times. Most of the lay investors think that they will get same kind of dividend every year which is not true. The returns in equity are volatile and also not guaranteed. The corpus can also go negative and fund manager can’t declare dividend if there is no surplus generated. You have to remember while investing in mutual fund that past performance is not indicator of future returns and returns can vary depending on market.

According to me dividend option does not make any sense in both equity and debt. Let us understand the implications for both separately. First if you want regular income periodically than equity is not the correct asset class to invest. Opting for dividend option in debt funds is worst as there is a dividend distribution tax of around 29% compared to 10% in equity funds. Most of the investors are not aware of this because DDT is directly deducted by the AMCs before paying dividend to them. Also distributors do not tell or are not aware of this facts.

On other hand equity investment comes under high risk high return category. You should invest in equity after understanding the risk involved in it.  You must invest in equity only if your time horizon is long term say 5 years or more so that you get better inflation adjusted returns. So if you want to take the advantage of India’s growth you should stay invested in equity for longer period of time. Dividend option reduces your investment by dividend declared amount in equity so it will not give you advantage of power of compounding in longer run. So in equity also dividend option is not advisable.

Dividend Distribution Tax reduces overall return and it is right time to say Good Bye to dividend option. If you want a regular income opt for Systematic Withdrawal Plan in debt funds and avoid equity funds for regular income. Tax planning is very important part of financial planning which most investors ignore. You should know final outcome of the investment post tax and also study the hidden charges while taking financial decision.

To conclude making a new investment in mutual fund on the basis of dividend declared is not at all a good idea. You should take informed decision before investing in mutual fund schemes. You should consult a professional if you want regular flow of income every month and also know tax implications. Investing for short tern gain without understanding the long term impact may hit you badly. SEBI must also intervene and should abolish dividend reinvestment option and also stop monthly dividend option in equity funds to protect the interest of investors.

This article first appeared at indianotes.com on 20th June 2018

https://www.indianotes.com/en/articles/say-good-bye-to-dividend-option/

Will amnesty scheme for tax evaders work? (ET Wealth - 7th March'2016)

Who will pay 45% tax under Income Declaration Scheme?

The present Government got absolute majority in last election because of the corruption issue. They also promised to curb the black money and assured to get back the black money lying outside India. In around two years of their tenure they have not got any breakthrough in this direction. Opposition also cornered them from time to time for depositing Rs. 15 lakhs in each Indians account which they promised in election campaign. The budget has now again tried to address black money issue and new disclosure scheme is announced. 

The Finance Minister in his budget speech announced income declaration scheme, 2016 so that Indian citizens can declare their undisclosed income and pay 45% tax. The total comprises of 30% tax, 7.5% surcharge and 7.5% penalty. The scheme will give immunity to assessee’s declaring black money from prosecution in future. This is another opportunity for tax evaders to come clean and be a responsible citizen. The government plan to open the disclosure scheme from 1^st June to 30^th September’2016 with the option to pay amount due within two months.

We have seen many such disclosure schemes in past and among them VDIS (Voluntary Disclosure of Income Scheme) of 1997 got a huge success and collected record tax of around Rs. 10,000 crores at that time.  It is also important to note that highest tax slab of 40% was reduced to 30% in that budget. I have doubt whether the present scheme will get the same response. The major difference is in 1996 scheme was the tax liability was kept at 30% only and full waiver of interest and penalty was given. The present scheme proposes to levy 45% tax on disclosed income which is 50% more compared to VDIS. To me this scheme will not get desirable response because of 50% higher tax compared to previous scheme. If you ask me seriously I will also not pay 45% tax if I had black money. 

In the last Budget also the government had announced similar disclosure scheme for declaring undisclosed assets held broad. The response to that has not been made public. To me this open and shut case and the Government is likely to get poor response unless the tax rates are revised.

So is there any better option available to curb the black money. Answer is yes if you think out of box and come out with new innovative idea. I herewith propose one scheme for the kind consideration of the finance minister. Instead of levying any tax on the undisclosed income, Government should try to issue 0% Government bonds for a period of 5 years against the disclosed income. The money is locked in for a five years period without any interest on it and after the completion of five years person disclosing the same will get full amount without any deduction as white money in his bank account. The advantage to the Government is they will not have to pay any interest on it and the advantage to person who is disclosing the same will get 100% amount back after completion of five years. I think this can be better option compared to asking to pay 45% on the disclosed income.

Other option which is there since last many years is the proposal given by Arthakranti. They propose to withdraw high denomination currency notes and restricting cash transactions up to certain limit. They also propose to change existing tax system and introduce transaction tax on banking transactions. But I think nobody is serious about the same because of the reason that large black money is with the politicians and bureaucrats and they will never punish themselves.

As middle class Indian citizen I can only dream of Achhe Din but in real life it’s never going to come. The budgetary proposal of levying tax on EPF after retirement is classic example of the same. We hope Government also looks at the middle class families who voted them to power and try to tax rich people more in future.

Equity Income Fund – Better than Fixed Deposits/ FMPs

Tax planning is one of the most important aspects of financial planning. Before making any investment decision you should know final outcome post tax. Just to remind you long back there were two RBI bonds available in the market; one is 6.5% tax free and another one 8% taxable. Because of tax advantage in first option there was a huge inflow in tax free option as to a person in 30% tax bracket was getting additional 0.90% compared to taxable 8% option (net 5.60%). Government had to withdraw the tax free bonds after they realize that smart money is heavily coming in tax free option and government is losing on income tax revenue. You can’t afford to ignore tax planning even you are in lowest tax bracket.

The budget of 2014 made debt funds long term after a period of 3 years instead of previous clause of 1 year. This single amendment changed the entire investment pattern in debt funds and FMPs. We had floods of 1 year FMPs in the market prior to this amendment and also sizable amount came in MIP funds (Monthly Income Plans) due to its tax advantage. The advantage in FMPS and MIP funds had a blow after the change in long term definition of other than equity funds. This advantage has gone now and again the sizable amount has moved to bank fixed deposits which attract tax liability. So is there any other option available to save tax. The answer is yes.

After debt funds are made long term after 3 years, a new category of investment has arrived in the market in the name of equity income fund. J P Morgan and ICICI prudential Mutual Funds are the first to launch this investment option in the market. The equity income funds are similar to MIP funds but these new funds are treated as equity funds for tax purpose. The fund is classified as equity fund if it invests 65% of the fund in equity category and for income tax purpose the fund will be treated long term after a period of one year. So what is the difference if the risk is almost same like MIP funds? These new equity income funds invest up to 25% in equity and up to 40% to 50% in arbitrage which are treated as equity investment and thus classify as equity oriented fund for income tax purpose. The equity income fund invests balance in debt products like government and corporate bonds or money market instruments.

The arbitrage means buying in cash market and selling the same quantity in future and option market. So if any fund does arbitrage means there is no equity risk as the equity position is hedged in f & o segment. This arbitrage will give you debt kind of return depending on the premium available on the stock. So as far as risk is concerned it is same like hybrid aggressive debt oriented funds i.e. MIP funds but tax treatment is like equity funds and not of debt funds. This tax treatment gives equity income fund an edge over MIP funds and FMPs.

But surely this product is not meant for one year time horizon even it gives tax free return after one year. Equity investment always is risky investment and even 25% investment can give you negative return if your time horizon is one year. The equity income fund is suitable for those whose time horizon is 2- 3 years and can extend for another six months if needed. The bank deposit will give around 6% return post tax and 3 year FMP will give around 8% return but this fund can give you 2% more if you take calculated risk. The returns in equity income funds are not guaranteed as the funds are market linked. Investors should definitely consider if they understand the risk involved during this 2-3 years period. 

The funds are very new and have not completed one year so past performance is not available for comparison. Comparing this fund with aggressive MIP funds will give you rough idea about the risk and reward. Normally I don’t recommend any fund which has not completed 3 years time but this new category is almost same like MIP funds so it’s easy to understand and tax treatment is added advantage. Corpus of around Rs. 1,000 crore in less than one year period indicates that smart money has started coming in this funds. Hope with growing demand other AMCs will also follow the suit.

This article first appeared at indianotes.com

http://www.indianotes.com/Analysis/Equity-Income-Fund--Better-than-Fixed-DepositsFMPs/194687/6/PF

NPS: Not Promising Solution

National Pension System has a triple tax advantage post budget. Salaried people can deposit 10% of their basic plus D.A. in NPS up to Rs. 1.50 lakhs, this budget gave additional benefit of Rs. 50,000 p.a. for investment in NPS by inserting a new section and also your employer contribution to your NPS account also qualifies for tax benefit. Is there any reason to cheer or investment needs to be assessed before jumping into it. Most of the experts fill it is a good choice for tax and retirement planning but to me NPS is not a promising solution. NPS was launched in the year 2004 for all Government employees and in 2009 it was opened for all to encourage investment for retirement. Surprisingly after 6 years of time still people have not opted for it. The reason could be either there is no incentive to sell NPS or scheme is not competitive compared to other investment options available. I would like to highlight few important points so that you can take informed decision before opening a NPS account.

1) Not transparent:

Investment scheme needs to be transparent about the portfolio and performance and should be easily available for comparison. After 6 years also the portfolio and performance of the different schemes under NPS is not easily available. I would not recommend any instrument for long term investment which is not transparent. You can’t keep your investment for rainy days whose details are not easily available. You should note that not only schemes details of mutual fund products and unit linked insurance plans are available at companies website but also many independent agencies also track and give their ratings which helps investors to know where his fund is moving.

2) Not Liquid:

Investment needs to be judged on three parameters, risk, reward and liquidity. There is moderate to high risk in the NPS 3 options but it is not liquid. If you want to withdraw fund before the age of 60 years, you can withdraw only 20% of the corpus and after 60 years you can withdraw 60% of the corpus only. Liquidity should be available as the life is not so smooth and every person has to pass through good time and bad time in his career. Liquidity is not always require for funding any future goal or unexpected expenses but liquidity also helps you to switch to other options if your investment is not performing well compared to other options.

3) Tax Implications:

Pension amount receivable after retirement under NPS is taxable and you have no flexibility to plan for tax free income post retirement. It is also not clear whether the lump sum withdrawal of 20% or 60% as the case may be is tax exempt or taxable. Most of the expert feels the same is taxable. Still there is confusion over this and government needs to clarify this at earliest. One need to know that even life insurance pension products allows you to commute 1/3^rd of the corpus tax free on vesting date.

4) No Immediate Pension Market:

There is lack of good and matured pension market in India at present. Even today you will not get good pension rate for your retirement. I remember that even when yield of 10 year Gsec was around 9% the rate of pension were not revised upward by any life insurance companies and even today the rates are same. This clearly shows that nobody is ready to guarantee for longer duration. You can’t plan your retirement when you don’t have matured pension market ans your scheme forces you to buy annuity.

5) Maximum 50% in equity:

NPS is a long term investment for retirement and allows only 50% in equity under scheme E. Normally above 10 year time horizon you need to take higher risk by taking equity exposure between 80 to 100%. If your long term investment does not beat inflation by margin then you are definitely likely to struggle in later years. To me 50% is very low exposure to equity for long term time horizon.

6) Index funds not a good idea.

Even this 50% of equity investment is done in index funds either in sensex or nifty stocks. Ours is a growing economy and if we are aiming at double digit growth then you need to invest in active funds. Index funds are passive funds and there is no role of fund manager in selecting the stocks whereas fund manager in active fund can identify growth or value stock from minimum 500 good companies listed on both the exchanges. Good active funds have given 3 to 5% higher returns compared to index funds over a 10 year period. Even taking exposure of 30-35% in mid and small cap funds is not a bad idea for long term time horizon.

7) Debt fund is a duration game:

Debt option under NPS is not as safe as EPF and is subject to interest risk and default risk. If you don’t understand this risk, you may have to face tough time if interest rates go up when you are near to your retirement. You have to opt for minimum 50% in debt fund under NPS either through Scheme C or scheme G. Both the debt schemes are subject to interest rate risk and scheme C is also subject to default risk. At present returns in these two schemes are good due to softening of interest rates and which may not remain permanently. Interest rate also run in cycles and could go up also if the inflation shoots up. The option of short term debt and liquid fund is a must when you reach near to your retirement.

Tax incentive is just like a sale with 20% or 30% discount but you have to be very careful while going for it only because it gives you tax benefit. The Hon’ble financé minister has tried his best to sell the NPS by offering additional benefit in this budget, but you have to take informed decision as the investment is meant for retirement. It is always advisable to consult a certified financial planner and prepare a comprehensive financial plan. 

this article first appeared at myiris.com on 1st April'2015

http://www.myiris.com/financial/storyShow.php?fileR=20150401170932043&secID=finan&secTitle=Financial&dir=2015/04/01

Budget - Mr. FM restrict tax deductions to expenses only

The Hon’ble Finance Minister is busy in finalising the Union Budget. After a stable government is formed in the Centre, people’s expectations have gone up and most of the people are expecting a landmark budget which can revive the growth and create more job opportunities. On individual front there is a demand for enhancing the basic limit of tax-free income from Rs. 2 lakhs to Rs. 5 lakhs and also people want tax deduction u/s 80-C to be increased from Rs.1 lakh to Rs. 2.50 lakh. All sections of society are making representation to Finance Minister and giving their wish list. I will represent middle-class families through this article and urge FM to take note of the same.

The middle-class at present is struggling with managing their monthly budget not only because of high food inflation but also increasing education and medical costs. The rise in fuel prices has also increased their transportation and conveyance expenses considerably. People think that food inflation is too high but are unaware that education and medical inflation has also risen much higher than food inflation in the recent past. Expenses are part of life and nobody can avoid the same. You can live happily without making investments but can’t survive without incurring unavoidable expenses. Personal finance is one of the most neglected areas and I think important issues need to be addressed so that people take necessary corrective steps to improve their life style.

At present tax deduction is available for few expenses as well as for investment in specified instruments. We have seen lot of mis-sell happening in life insurance segment as a tax saving avenue. Common investors always forget to take tax implications on their investment which reduces their overall return. Very few people plan their investments for tax saving purpose and most of others end up investing in a product which may not suit their risk profile or may not be in line with their future financial goals. Investing, just to get the tax benefit leads to wrong buying. There is lack of awareness and most of the selling for tax savings is driven by high commissions. Looking at the present scenario of tax saving investment, lots of mis-sell happens in the market, I am of the firm opinion that tax deductions related to investment should be abolished and should be restricted to the genuine expenses which are unavoidable and are also necessary for the family for their future. If expenses are given tax break automatically surplus will increase and would be available for future investment. But it is equally important to look beyond tax planning for making investment.

I would like that Finance Minister consider my points for the betterment of middle-class families as I firmly believe that the present government represents middle-class families.

1) Do not allow tax-deduction for any investment which is not mandatory as most of the products which are sold are driven by high commissions. People are not literate to plan their investment. There is lack of awareness which allows agents to sell the complex products only because they are tax deductible. There are simple products also like Bank Fixed Deposit, N.S.C and Postal schemes which are available for tax deduction but in reality very few opt for these types of avenues. Secondly, interest is taxable which many do not take into account, thirdly these are short-term in nature and can’t beat inflation in the longer run.

2) Allow deduction up to Rs.1 lakh per child for education expenses including tuition fees paid to classes. Every parent’s priority is children’s future and nobody is ready to compromise on the same. Today providing good education and establishing a professional career is expensive and will further go up with time. It is today’s expense but also investments, as children are future of India. This deduction will allow parents to spend more for higher education which ultimately is good for the society at large. FM should also make sure that education loans are also available easily for all the courses in India and abroad. The rate of interest is also high and should be lower like home loan interest rate.

3) Allow deduction up to Rs. 1lakh for life term plan premium, health and disability insurance premium, preventive health check up, medical bills incurred for parents who are not covered under health insurance. As we do not have social security mechanism in place, having adequate insurance can help a lot to the family. I will also request FM to withdraw service tax levied on life and health insurance plans as this will make products cheaper and affordable to the public at large.

4) Increase the home loan interest deduction amount from present Rs. 1.50 lakhs to Rs. 3 lakhs p.a. u/s 24. This home loan EMI again a fixed cost to the family for 20 years and has to go month on month just like other regular expenses. The home loans are available at very attractive rate of interest, I think it should be restricted to first home only. Any additional loan for second or third house for investment should be given under loan against property.  Availability of cheaper home loan with additional tax benefit has helped rich people to create wealth in real estate which has deprived many middle class families to buy their own home.

5) Allow deduction of Rs.1 lakh for retirement benefit under EPF, PPF. Living long is also a concern and has to be addressed carefully at younger age. The rising trend of nuclear family, advancement of science and medical facility has forced people to seriously think about the same. Both the investments are simple to understand, safe, secure and also give high tax-free returns as compared to other debt instruments. Both instruments are mainly long-term in nature which can help people build part of their retirement kitty.

Earn, Save and then spent, should be the correct way of planning your finances. This article is only about tax planning avenues which drives the investment market and people lose their hard earned money. I am hopeful that FM will consider this expenses linked tax deduction for uplifting the standard of living of millions of middle-class families. This will also ensure people will spend enough for their children’s higher education and also take adequate insurance which can help them in case of unfortunate event in the family. The need of the hour is spare poor, give maximum possible relief to middle-class and tax rich people. 

article first published at moneycontrol

http://www.moneycontrol.com/news/tax/budget-mr-fm-restrict-tax-deductions-to-expenses-only_1112005.html

Tax Planning (My article in Tribune - Delhi)

Tax Planning (My article in Amar Ujala - North India)

My article on 80-C tax planning in today's Gujarati Vyapar

Click on the image to read the full article.

Rajiv Gandhi Equity Savings Scheme – Higher risk inbuilt

Surveys after surveys have revealed the truth that people have lost their hard earned money in insurance products when they choose to invest in insurance products. This is also a known fact that insurance products are mainly bought in India to save tax. Now we have a new investment scheme with tax benefits targeted towards first time investors in equity. Buying any financial product only for tax benefit cannot be considered a good idea unless you invest in the product after evaluating the merits and demerits of the scheme before investing. The finance minister has recently issued details of much awaited Rajiv Gandhi Equity Savings Scheme after six months since it was announced in the last budget. The time will tell us whether “History repeats itself again or not”.  Let us understand the nitty gritty of the scheme on the basis of the communication from the Finance Ministry.

First of one should know about certain preconditions before they become eligible to invest in the scheme for taking tax benefit. The scheme is targeted towards first time equity investors to be identified on the basis of PAN numbers and whose annual income is up to Rs. 10 lakhs p.a. in the current financial year. The maximum investment eligible for the tax benefits is Rs. 50,000 on which the investor will get a deduction of 50% of the amount invested. People earning 10 lakhs fall maximum in 20% tax slab so will be able to save maximum tax of Rs. 5,150. Before investing one must know that to claim the tax benefits investors have to invest in equity either directly in stocks of BSE 100 or CNX 100 index or those of public sector undertakings which are Maharatna’s Navratna’s and Miniratna’s. In addition mutual fund schemes or ETFs who invests in such eligible securities are also brought under this scheme.

It is not clear whether person who invests through mutual fund route in equity but do not have demat account will be considered as first time equity investor or not. There may be many cases where people have invested in direct equity long back but now they do not invest directly but still have demat account lying ideal. Also people have opened the demat account for subscribing in infrastructure bonds issued for tax exemption. This all to be clarified before scheme is launched officially.

We always advise our clients not invest directly in equity as it requires in depth knowledge and continuous research and analysis which an individual is not capable of doing unless it is his full time job. Before investing in equity people must also know equity as an asset class. Equity investment comes under high risk and high return category. Investors must invest in equity accordingly to their asset allocation ratio. It is also advisable to review investment portfolio periodically and rebalance the portfolio if need be. Never try to time the market and always stay invested for a long term are the success mantras for investing in equity. But once you open demat and trading account with a broker for this scheme, you will be tempted to buy other stocks on the basis of tips from friends and relatives. This may lead to heavy losses in future. Government must try to create disciplined and systematic long term way of investing in equity.

The scheme has a lock in period of three years commencing from the last day of purchasing under RGESS. Surprisingly investors are allowed to sale and repurchase the stocks after one year and scheme has a complex formula of 270 days which will be difficult for a lay investor to understand.  It seems that government wants to promote trading culture amongst the new investors and not long term investment culture. I am not in favour of churning portfolio frequently and this is not going to work.

Investing through mutual fund or ETFs is a good option but we have to wait for the details and announcements of exact schemes which will be eligible for this scheme. There are many schemes which are not performing as compared to their benchmark.  You should be extra careful while investing in those schemes just to save nominal amount of tax of around 10% of the amount invested. It is also not clear whether this scheme will continue next year or not. Investors should take informed decision before investing in any financial instrument so that it should not result in any financial loss in future. 

BUDGET 2012 – Opportunity Missed

The Hon’ble Finance Minister Mr. Pranab Mukhrjee presented union budget in the parliament. The budget is neither reform looking nor favorable to common man. The GDP growth for 2011-12 is estimated at 6.9% as compared to 8.4% in preceding two years. India’s GDP growth in 2012-13 is expected to be 7.6% +/- 0.25%. The disinvestment target is set at Rs. 30,000 crores for the 2012-13.  The budgetary deficit is estimated at 5.1% of the GDP i.e. around Rs. 5 lakhs crores which is a big concern. On one hand he has given some direct tax benefits and on the other hand indirectly increased the burden on common man by increasing and widening the service tax base. He has preferred to play safe looking at present political situation.

The main highlights of the budget relating to personal finance are:

► The Income Tax limit in general category is raised from 1,80,000 to 2,00,000, giving nominal benefit of Rs. 2,000 per annum for individuals having income less than 8 lakhs.

► The tax slab of 20% is revised from 5 lakhs to 8 lakhs, to 5 lakhs to 10 lakhs. Individuals having income more than 8 lakhs will benefit from this proposal. Maximum benefit shall be Rs. 22,660.

► The senior citizens are exempt from paying advance tax if they have their income other than business or profession.

► New benefit up to Rs. 5,000 under section 80-D is provided for preventive health check up within the existing limit of Rs. 15,000.

► Proposal to allow individual/H.U.F.’s, a deduction of up to Rs. 10,000 for interest from savings bank accounts.

► New Rajiv Gandhi Equity Savings Scheme is announced which will allow for income tax deduction of 50% for new retail investors, who invest up to Rs. 50,000 directly in equities. The same however is available only to individuals whose income is below Rs. 10 lakhs. The scheme will have a lock in period of 3 years.

► The deduction of Rs. 20,000 for infra bond u/s 80-CCF is not extended.

► For Insurance Policies purchased after 1^st April’2012 benefit u/s 10(10)(D) of Income Tax Act, in respect of maturity proceeds of life insurance policies, will only be available if premium paid during any year does not exceed 10% of the sum assured.

► Service tax on traditional life insurance plans raised from 1.54% to 2.06%.

► TDS of 1% in levied on all transaction of property except agricultural land above 50 lakhs in specified cities and Rs. 20 lakhs in other areas.

► ELSS scheme benefit u/s 80-C will continue next year also. DTC proposes to withdraw this benefit.

► The limit for audit raised from 60 lakhs to 1crore for business man and from 15 lakhs to 25 lakhs for professionals.

► The Service tax rate is hiked from 10.30% to 12.36%. Standard Rates for excise duty also raised from 10 to 12%.

► The STT is reduced from 0.125% to 0.1% for delivery of equity shares.

► Customs duty on standard gold raised from 2% to 4%.

► The GST to be rolled out from August’ 2012. DTC postponed for another one year.

Budgetary deficit, Inflation, higher interest rates and political uncertainty still a concern for double digit growth. The coalition dharma politics has taken away the opportunity available to the finance minister. Hike in oil prices in coming days is inevitable.

Tax Planning – Why Wait till end.

Most of the salaried people have to submit their investment proofs in a month or two to their employer to claim deduction u/s 80-C. It is a long history that most of the people plan for this at the end of the year and end up buying instrument, which may not be in line of their financial need. This also applies to businessman and professionals who also waits till end to plan for tax planning. Nearly 70 to 80% of the life insurance business happens in the last quarter of the year and this JFM quarter is like a season for insurance professionals. We all know very well that every year we have to save Rs. 1 lakh to claim tax benefits u/s 80-C of the Income tax, but still we wait till end and end up buying wrong product. It is not at all advisable to wait till end and end up buying unwanted product in portfolio. At present still you have 5 months to finalise the best product available for tax benefit, which will also be linked to one of your financial goal. Here are some tips for tax planning if you are looking for tax saving instrument.

► Calculate what is the exact amount still pending for investment to get the benefit u/s 80-C. If you are not sure than, consult your C.A. or Tax Consultant. You can also consult Financial Planner who can also guide which product is good depending on your financial goals.

► Buy Online Term Plan to protect your family in case of unfortunate event. This is very much important and has to be given top priority. Calculate exact life cover required depending on your expenses and future goals.

► Avoid other Insurance products, as you will be not having time to assess and compare the products for the long-term benefit of yourself and your family. Insurance products are loaded with irrecoverable charges, which need to be assessed & analyzed. Do not commit yourself for long-term premium payments unless you very well understand the features of products you are buying.

► Finalise your asset allocation and be sure where your investment has to go. Whether you would like to go for risky products for higher returns or want capital protection fund.

► Business man and professional must consider P.P.F. investment for tax saving, as it gives an 8% tax free return which is the best in debt category. You can deposit up to Rs. 70,000 per annum in one financial year. This is likely to be increased to Rs. 1 lakh soon.

► Principal payment of your home loan EMI is also eligible for tax benefit.

► N.S.C. interest is also eligible for tax benefit but the interest is chargeable to tax as income from other source.

► Tuition fees for two children’s are also eligible for tax benefit.

► Mutual Fund ELSS schemes are best for those who would like to invest in equity and want to participate in growth story of India. ELSS schemes have lowest lock in period of 3 years.

► Do not buy any fixed income instruments with lock in period of 5 years. Rather invest in ELSS schemes of mutual fund, as the 5-year time horizon is very good for equity investment.

► You can also buy health insurance products or increase your family cover for mediclaim and get additional tax benefit of Rs. 15,000 u/s 80-D of the Income Tax Act. You also get additional Rs. 15,000 benefit for covering your parents ( Rs. 20,000 if they are senior citizens).

► You can also avail the benefit of investing in infrastructure bond for one time benefit for F.Y. 2011-2012 u/s 80-CCF up to Rs. 20,000.

One also has to plan his tax planning this year in such a way that it also matches with the DTC, if passed in next budget. As per DTC Draft Bill, Life Insurance Premium will qualify for deduction only up to 50,000 only, compared to available deduction of 1 lakh at present. The overall limit of 50,000 as per new section 73of DTC, includes life insurance premium, health insurance premium and tuition fees paid for two children’s.

The following investments shall also be not eligible for deduction after DTC is passed. One also needs to check this before cheque is written.

1. Payment of Housing Loan Principal
2. ELSS schemes of Mutual Funds
3. Fixed Deposits with Banks
4. National Saving Certificates
5. Term Deposits of Post Office

Every investment has its own risk and also some charges in built. If you do not give your valuable time today to assess this, than will result in monetary loss. This decision can also spoil your financial plan.

This article first appeared at moneycontrol.com on 28th Nov. 2011, the link is attached below.

http://www.moneycontrol.com/news/tax/tax-planning-why-wait-tillend_625430.html

 

BUDGET 2011 – NOTHING GREAT AS EXPECTED.

The Hon’ble Finance Minister Mr. Pranab Mukhrjee presented budget on 28.02.2011. The budget is neither reforming nor favorable to common man. One hand he has given some benefits and on the other hand increased the burden on common man by widening the service tax base and increasing excise duties. He has preferred to play safe looking at present economic scenario and political issues. He has neither tried to hit a four nor has bowled out by populist budget.

The main highlights of the budget relating to personal finance are:

► The Income Tax limit in general category for males is raised from 1,60,000 to 1,80,000, giving nominal benefit of Rs. 2,000 for full year.

► The female taxpayers in general category will not benefit at all. The exemption limit is Rs. 1,90,000 at present, which is unchanged.

► The senior citizens age criteria is reduced from 65 to 60 years. This will be like a bonus for those who will be completing 60 years in the next year. The basic limit is raised from 2,40,000 to 2,50,000, giving again nominal benefit of Rs. 1,000 for full year.

► He has also created a new category of very senior citizens for age 80 years and above.   The basic limit is set at Rs. 5,00,000. I think Finance Minister has created this category for himself and his fellow MPs. This will only benefit Politicians, Bureaucrats and HNIs, and will not give any relief to common man.

► He has extended one more year for additional deduction for infra bond u/s 80-CCF, which gives additional benefit of Rs. 20,000 to tax payers.

► The tax rates are unchanged. Service tax rates are also unchanged but he has smartly added new services in the list. Hotels with tariff above Rs. 1,000, Restaurants with Bar & AC, and Hospitals with 25 & more beds with AC and air travel are added in service tax list. FM must reconsider levying tax on hospitals from this as it is related to health care and people are not sufficiently insured for this. This burden, as we all know, will be passed to patients only.

► The Finance Minister has again put faith on FII’s by allowing them to buy mutual fund units instead of giving more benefits to Indians. The Finance Minister should have encouraged Indian Public to invest in mutual funds by giving more tax relief.

► There is nothing on GST & DTC. Budgetary deficit, Inflation and higher interest rate still a concern for double digit growth.

► Once again he has talked about non-filing of returns by salaried and also introduction of saral IT form, which was abolished two years back. Every three years they repeat the same and are not sure about giving relief to small taxpayers.

► Scams & scandals, elections in two states & higher crude oil price have taken away the opportunity available to the Government. Hike in oil prices after elections in two states is also not ruled out.