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National Pension Scheme (NPS) which is a defined contributory savings scheme was introduced by the government with an intention to provide retirement solutions for Indian citizens.

Under the NPS there are two types of accounts – Tier I (pension account) and Tier II (investment account).

  • Tier I is the a mandatory account which allows limited withdrawal options until the person reaches the age of 60.
  • Tier II which is a voluntary savings/investment account is more flexible and allows the subscribers to withdraw as and when they wish without any restrictions.

In Jan 2018, the PFRDA (NPS regulator) relaxed the withdrawal norms and allowed the subscribers to withdraw up to 25% of the balance after the completion of 3 years. The purpose of withdrawal included treatment of specified illness of a family member, education of children, wedding expenses of children and purchase or construction of house.

Partial withdrawals – some more options now

The PFRDA has recently added two more events under which partial withdrawal from the NPS can be made before retirement. They are as follows:

  • Partial withdrawal towards meeting the expenses pertaining to employee’s self- development/ skill development/ re- skillingwill be allowed. This includes gaining higher education or professional qualification for which the employee might require in and out of India. However, if such activities on request of the employee are sponsored by the employer then these will not be considered as a class for withdrawal as in such cases the employer bears all the expenses.
  • Partial withdrawal towards meeting the expenses for the establishment of own venture or a start upshall be permitted. However, if an employer-employee relationship exists, then in that case the partial withdrawal will not be applicable.

There are certain limitations to the partial withdrawal clause which remain unchanged:

  • The subscriber should have been a member of NPS for a period of at least 3 years from the date of joining.
  • The subscriber shall be permitted to withdraw accumulations not exceeding 25% of the contributions made by him or her, standing in his/her credit in his or her individual pension account as on the date of application from the withdrawal without considering any returns thereon.

For instance, if you have Rs. 2 lakhs in your account out of which Rs 1 lakh was contributed by you and Rs 1 Lakh was contributed by your employer, then you will be able to withdraw only Rs. 25000 or 25% of your contributions.

  • The frequency of total partial withdrawals shall remain unchanged i.e. the subscriber shall be allowed to withdraw a maximum of 3 times throughout the entire tenure of the subscription of the NPS. For the withdrawal, the subscriber must make a request to the central record keeping agency or the Nodal office.


Adding equities to your retirement corpus

In addition to adding more withdrawal options, there have also been increases in the allowed equity percentage to the retirement corpus. The percentage of equity assets that a subscriber can choose under active choice have been increased. The percentage of equity assets allowed has been increased to 75% from 50% (applicable for non government employees).

All in all the PFRDA is trying to make the NPS more attractive as a retirement solution. Depending on your age, time horizon, risk profile and current retirement corpus investments, the NPS could still prove as one of the avenues that you could consider using for building a retirement corpus.

 

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Ulips

 

Unlike a pure insurance policy, a Unit Linked Insurance Plan (ULIP) is a product designed to give investors the benefits of both insurance and investment under a single integrated plan. ULIPs are insurance + investment plans suited for investors with long investment horizons. They work well with investors who may not otherwise keep the discipline of investing as they usually come with long lock ins and high exit costs.

The tempting benefit ULIPs offer is the administrative convenience of not needing to execute the two legs of transactions i.e. insurance and investments separately.

From our experience with investors, we understand that there’s a good chance you already own a Unit Linked insurance plan (ULIP) that either your parents bought for you, or you landed up buying one in the hurry scurry of tax related investments, only to realize later that one should not be mixing insurance and investments.

In the case that you may have purchased a ULIP or you may be contemplating to buy one, it is critical to know a few important items related to them so that you are more aware of what you have or might get yourself into.

 

1. Understand the purpose for purchasing the ULIP – tax planning cannot be the sole motive

While tax planning is clearly on the agenda, you should also assess the objective for which you want to purchase an insurance policy. Is the policy being bought for long term wealth creation, retirement planning or building a corpus for your child’s future? A decision that is prompted solely by the need to save taxes often results in the purchase of a wrong or an unsuitable product.

 

2. Check the charges carefully

All Ulips come with a host of charges. Understanding each of them is crucial to understanding if the product is suitable or not. Such charges include:

  • Premium Allocation Charges: As the name suggests, these fees are to cover expenses incurred by the company to allocate funds, do the underwriting, medical expenses, etc.Your agents commission is also covered under this head.
  • Policy Administrative Charges: These are the charges that are deducted on a timely basis to recover the expenses incurred to maintain the policies under the fund.
  • Surrender Charges: Similar to the exit loadin a mutual fund, these are the charges applicable when encashing a part or the full investment in a plan. As we know that in most of the Mutual Funds, exit load is at about one percent. In ULIPs, surrender charges could vary from a few percentage points to very exhorbitant amounts, basically to deter investors from exiting the plan in a short horizon.
  • Mortality Charges: These are the fees that are deducted on a monthly basis to cover the costs borne by the insurerfor providing a life cover to the policy holder. Depending on the age and the sum insured, these charges are deducted for life cover.
  • Fund Management Charges: The allocation of investment in debt and equity requires the insurer to bear the costs of managing the fund.These are charged as fund management charges.
  • Fund Switching Charges: As the name suggests, switching from one fund to another requires the insuredto pay an amount for covering the expenses borne by the company for making the switch.

 

3. Understand the flexibility to Switch

An investor’s need for liquidity, time horizon, and risk appetite will determine the initial allocation but these change over time. ULIPs offer the flexibility of switching between the funds based on changes in market cycles and changes in investor preferences. The number of free switches during a policy year, the cost of switches and the ease of switching are factors that are important evaluation points when choosing a ULIP.

 

4. Analyse and estimatperformance

With the complexity of the ULIP structure plus the huge list of charges and expenses that comes with it, it is difficult to approximate the kind of performance the product may have given during its existence. Always insist with the insurance agent/advisor to show illustrations and data demonstrating how the fund would has performed and is likely perform considering markets ups and downs. More often that not, data would help you decide better on the decision to invest or not.

 

Probably the only benefit, though largely accidental, of an ULIP is that the investor’s money is locked in due to the structure of a ULIP, forcing him to think long term. However, it is needless to say that other options must also be evaluated in comparison to ULIPs before making a choice to invest in them. The most common strategy might be a combination of Pure Term Life insurance policies along with separate investments in Mutual Funds. But like every investment decision, the first step to take is to determine the investment horizon and risk appetite and not get swayed by fancy words or past performance.

 

 

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save on tax

The Tax Season is here! More appropriately, the time for providing those investment/expenses proofs that will give you the tax deduction benefits. Most individuals are therefore looking for smart tips on to how best avail benefits available to individuals so as to minimize their tax outflow.

While there are commonly known avenues that are utilized by one and all, following are some of the lesser known options that you could look into to optimize your tax planning:

  1. Section 80EE: In Budget 2016-2017, a new proposal has been made in which, first time home buyers are eligible for an additional tax deduction of up to Rs 50,000 on home loan interest payments under section 80EE. For claiming tax deductions under this new section 80EE, the following criteria have to be met:
    • The home loan should have been availed or sanctioned in FY 2016-2017.
    • The Loan amount should be less than Rs 35 Lakhs.
    • The value of the home should not be more than Rs 50 Lakhs
    • The buyer should not possess any other residential house under his/her name
  2. Section 80E: The entire interest paid (without any upper limit) on education loan in a financial year is eligible for deduction u/s 80E. However there is no deduction on principal paid for the Education Loan. The loan should be for education of self, spouse or children only and should be taken for pursuing full time courses only. The loan has to be taken necessarily from approved charitable trust or a financial institution only.
  3. New Pension Scheme(NPS): Employer’s contribution up to 10% of Basic salary plus DA (dearness aloowance) is eligible for deduction under this section above the Rs 1.5 lakh limit in Sec 80CCD(1). This is also beneficial for employer as it can claim tax benefit for its contribution by showing it as business expense in the profit and loss account. This comes under Section 80CCD(2).
  4. Leave Travel Allowance: LTA tax break can be claimed for travel of self and family members for journeys undertaken only within India.The non-taxable reimbursement of travel costs is limited to the actual expenses incurred on air, rail and bus fares only. The block applicable for the current period is calendar year 2014-17. The previous block was calendar year 2010-2013. Going forward, the new block will be 2018 to 2022. So make the most of this as any unclaimed allowance will not be carried forward into the new block!
  5. NRE Account: While Non Resident Indians face alot of complications with tax structure, especially Tax Deducted at Source (TDS), they also have some things going in their favor. For example, The interest earned on NRE account is tax-free and continues to be exempt for two years after the individual returns to India. In case a NRI returns to India,, It is suggested to retain deposits held in the FD NRE so as to earn tax-free interest for two more years. After two years, when the tax status changes, these deposits can be moved to the regular savings account or investments.
  6. 80RRB: Income received through Patent royalty (registered on/after 01.04.2003), under the Patents Act 1970 can be claimed up to Rs. 3 lakhs or the income actually received, whichever is less. The taxpayer must be a resident of India who holds the patent.

While it is important to reduce to tax outflow, it is even more critical that it is done in the right way and also by using all appropriate options. Furthermore, making ad hoc investments for last minute tax savings may mean compromising on the larger financial picture. Therefore take professional guidance from a financial advisor and a tax advisor, to ascertain a perfect blend of financial and tax planning and to maintain your financial plans on the right track.

 

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Retirement 1Retirement is usually something that is not considered by most of us till we are nearing it, so naturally we do not plan for it, until it is probably too late. This general ignorance or lack of attention to retirement planning can have far reaching consequences.

Retirement planning in the simplest sense means preparing for life after the tenure of paid work ends.  This does not only include the financial aspect, but other aspects such as what to do during retirement, the lifestyle choices that one can take and what dreams one might want to pursue during the remainder of the years.

While the concept of Retirement Planning applies to pilots just as it does to other individuals, there are certain unique points that are exclusive to retirement planning for commercial pilots. These unique points are crucial while developing a retirement plan for a pilot.

Firstly, under the current DGCA rules, the retirement age in India has been pushed up to 65. This is an entire 5 years longer than the mandated retirement age in most other industries. This translates to more income earning years, probably at the highest salary slab of the industry, since usually pilots around this age are most likely to have their designations as Captain. This extra income earning period is crucial in formulating and ironing out the retirement plan before the pilot ultimately retires. The significant income flowing could be the difference between living a compromised and a fulfilling retirement.

One of the most important things a commercial pilot has to consider is Lifestyle Inflation. Because commercial pilots have one of the best salary packages amongst all industries, they tend to have more lavish lifestyles. And they are comfortably able to match up the ever increasing expenses that come alongside their lifestyle choices. But on retirement, the salary stops. Yet expenses continue to stay, with inflation only adding to it. But more significantly no one would want to compromise on their lifestyle they have become accustomed to. As such it becomes imperative to plan much ahead so that lifestyle compromises don’t become the norm during your golden years.

Just to drive home the impact of inflation, let’s take an example. Consider a pilot Mr. A, currently 30 years of age and has a monthly expenditure of Rs 12 lakhs every year (not a very high amount, from what we hear from our pilot clientele). Assuming he will retire at age 65 and taking an average of 8% lifestyle inflation till retirement,  the same Rs. 12 lakhs expenditure will inflate to approx Rs. 1.75 crores. In other words, to maintain the lifestyle that costs Rs 12 lakhs as of today, Mr. A would require Rs 1.75 Crores annually to maintain the same expenditure choices, forget upgrading!

Furthermore, pilots are used to having extremely busy schedules. So when retirement hits, they are unprepared to handle the ample time in hand. Hence they always look for options to keep themselves engaged. This could mean, taking long leisure trips or finding, researching on and investing lump sums in “exciting investment avenues”, committing money to be part of a start up or just following their long drawn passions or enrol at the local flying clubs just so that they can regularly indulge their lifetime love of flying. All this comes at hefty financial expenditures.

All of the above means that Pilots would need to plan and develop customized retirement plans for themselves to ensure a smooth flight during retirement.

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budget-image-3

 

  1. Budget focussed on job creation, transfer of benefits of demonetisation, good fiscal management & risks to the economy
  2. Structural changes in budget- merger of rail budget, movement of date to February 1, merger of plan & non plan expenditure, certainly different
  3. India largely a tax non compliant nation, as can be seen by the number of tax payers. Not very good news.
  4. Tax rates cut in tax slab of Rs 2.5 lakhs to 5 lakhs by 5%. Benefits of upto Rs 12500 as a result. Income of 50lakhs+ hit by 10% surcharge. Positive for many, negative for some.
  5. Corporate tax rates cut for Micro, Small and Medium Enterprises with turnover up to Rs 50 crores to 25%. Huge benefits to corporatize for smaller businesses. No changes in corporate tax rates.
  6. Innovative political funding options – electoral bonds announced. Big step towards poll funding reform.
  7. Capital gains on immovable property – long term reduced to 2 years holding instead of 3 years. Base year for indexation also changes to 2001.
  8. New web based system for defence pensioners
  9. Draft bill to curtail illegal deposit schemes could boost flows to other financial assets
  10. High speed fibre connectivity to be available in more gram panchayats – augurs well for the new digital India
  11. To simplify labour laws – would this increase India’s ranking in ease of doing business
  12. Desire to move from an informal to a formal economy, bodes well for listed companies longer term. GST 1st step.
  13. Higher oil & commodity prices, deglobulisation/protectionism & higher US interest rates risk to India
  14. Inflation management & lower current account deficit bodes well for the rupee & Indian bonds. Will stable oil prices allow it to continue?
  15. Lower interest rates driven by transmission of rate cuts are a short term positive of demonetisation. Time to refinance your home loan.
  16. Cash transactions limit now at Rs 3 Lakhs. Penal provisions for transactions above that value equivalent to the value of the transaction.
  17. 133 Kilometres per day of road construction and use of technology to better target social spending / MNREGA excellent news
  18. 100% electrification for villages by 2018 has huge multiplier benefits for the economy combined with enhanced road construction
  19. Affordable housing gets infrastructural status & additional benefits. Step towards boosting employment, possibly India’s biggest challenge?
  20. E-learning platform Swayam could change the way Indian youth learns going forward. Testing &certification will need to be combined
  21. Focus on creativity and innovation most welcome in skilling and reskilling – new solutions a must to tackle old challenges.
  22. Aadhar based medical records for senior citizen – great news.
  23. LIC to issue guaranteed 8% pa for 10 years product operationalising PM year end speech
  24. Digital Money gets significant attention – Aadhar pay, BHIM, changes in negotiable instrument act, payment regulatory board.
  25. Airport redevelopment was one of the most visible successes on infra. Railways follow in its footsteps- station upgrades on way
  26. Multimodal transport focus goes back to Keynesian theory in spurring job creation. Execution done right is critical
  27. Consolidation and merger benefits of CPSEs to leverage synergies is a great idea. Starting with a large oil company model?
  28. CPSEs divestment to continue, IRCTC, IRCON to be listed , will continue to use ETF, propose a new ETF on same lines
  29. Another CPSE in offering! Needs to be truly diversified so that commodity related & concentration risks are adequately addressed
  30. New laws to confiscate assets of economic offenders could help – details will be closely awaited
  31. Fiscal deficit at 3.2% of GDP with 3% next year a relief, with the Fiscal Responsibility and Budget Management committee flexibility to be addressed in the future.
  32. Low Tax to GDP ratios- very low profits for companies of different sizes. Individual data no different. Use of data mining could change it.
  33. Foreign Investment Promotion Board abolishment sends a strong message of liberalization. Look out for details. Automatic route needs to be truly automatic.
  34. Theme = Transform, energise and clean India

 

 

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A large number of NRIs do not file taxes, as they live overseas and therefore believe that there is no need. However, there are two major situations when NRIs should file returns in India. Firstly, if the income earned in India exceeds the maximum permissible limit as basic exemption. At this point, the maximum exemption limit is Rs. 250,000. Incomes like salary arising from services provided in India, income from house property, capital gains arising from sale of property in India, income from deposits held in India will be taxable in India. Secondly, they should be filed to claim return if deducted tax is more than what was payable, so that you can claim a refund.

There are two major situations when NRIs should file returns in India. Firstly, if the income earned in India exceeds the maximum permissible limit as basic exemption. At this point, the maximum exemption limit is Rs. 250,000. Incomes like salary arising from services provided in India, income from house property, capital gains arising from sale of property in India, income from deposits held in India will be taxable in India. Secondly, they should be filed to claim return if deducted tax is more than what was payable, so that you can claim a refund.

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A lot of NRIs are unaware of the fact that in order to track expenses and investments above a certain threshold for all individuals – residents or NRIs, Annual Information Reports (AIRs) have to be filed by various entities in India like banks, Mutual funds,  bond issuers, registrars for real estate purchases above a certain value, amongst other transactions. Therefore, you could get a notice due to these reasons if your name appears in an AIR and you are not filing tax returns. Whilst this may not mean that taxes are due, you will need to respond to the notice, which can be rather challenging if you are out of the country. Thus, it is advisable to have your taxes in India in order.

If you are a tax resident in geographies where you may be able to take tax advantage of the double taxation avoidance treaty between India and that country, you must take advantage of that. If you sell direct equity/stocks, short term capital gain applicable is 15%. The long term capital gain on sale of direct equity is Nil ie for equities held over 1 year. NRIs have to trade through a broker if they wish to invest in direct equities. They can trade only on delivery basis and intraday trades are not allowed. They have to open a Portfolio Investment Scheme (PIS) account where their trades get reported within 24 hours.

If you are a tax resident in geographies where you may be able to take tax advantage of the double taxation avoidance treaty between India and that country, you must take advantage of that.

Debt and Equity Mutual Fundshave different tax rules. For equity Mutual funds the tax rate applicable is 15% for holding period of less than 12 months and for holding period of greater than 12 months it is Nil. Non equity mutual funds ie debt funds, gold funds, are taxed like real estate ie the tax rate for a holding period of less than 36 months is as per the marginal rate. If you hold them for a period greater than 36 months a long term capital gain tax rate of 20% with indexation is applicable .

If you are looking at investment options to save for your retirement goal then New Pension Scheme is an option you can look at. NRIs are allowed to invest in NPS.

NPS is useful for NRIs living in Middle Eastern countries, since they do not have mandatory social security benefits in their countries of residence unlike many other geographies. NRIs own contribution is eligible for tax deduction u/s 80CCD (1) of income tax act up to 10% of gross income with overall ceiling of Rs. 1.50 lakhs u/s 80CCE of income tax act.From FY 201516investors are allowed tax deduction of additional Rs. 50,000 under 80CCD1(B).

NRIs wishingto invest in FDs can look at Foreign Currency Non Resident ( FCNR) deposits. It is in the form of a fixed Term deposit account denominated in foregin currencies. In this case NRIs can park overseas income as foreign currency in India without having toconvert it to Indian Rupees. The rates on these deposits depend on tenure of investment and the currency in which you park your funds. Principal and interest are fully repatriable. For NRIs interest is not taxable in India. However, they could be taxed in the country of residence of the NRI, for example in the US. Similar is the case with NRE accounts.

A resident foreign currency account (RFC) account can be used by NRIs who are returning back to settle in India, to park overseas income as foreign currency in India without having to convert them into rupees. Funds are fully repatriable and can be transferred from RFC to NRE and vice versa. Interest earned on RFC account will be exempt from income tax as long as you are Resident but not ordinary resident (RNOR).

Image credit: www.taxinsightworld.com

 

 

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