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Posts Tagged ‘#taxplanning’

FMP

Fixed Maturity Plans are a category of debt mutual funds that are currently attracting the attention of Ultra HNI and retail investors alike. With the debt market looking fragile and the 10 year Gsec yield on a back breaking spree, are FMPs the next alternative investment solutions that can save the investors from interest rate risk? Are FMPs for you, read to find out.

Fixed Maturity Plan or FMPs are close ended debt mutual funds that have a fixed maturity period. The AMC launches a New Fund Offer (NFO) and inviting subscription to scheme. Unlike an open ended scheme which stays open for subscription all the time, a FMP remains open for a limited period. The NFO will have a launch date and a closing date till when an investor can subscribe to the fund and after it’s maturity the fund ceases to exist. In the interim, an investor can trade the FMP on the stock exchange.


Where do FMPs invest and what are the indicative returns?

Being a debt fund, FMPs invest in debt securities like corporate and government of India (GOI) bonds, Non Convertible Debentures (NCD), and liquid instruments like T-bills, Repo, Corporate Deposits (CD) and Commercial Papers (CP), based on the market yield and the scheme’s investment objective, an FMP could invest in AAA to A+ rated securities with varying credit risk.

With the 10 year G-sec yields having crossed 7.9% mark, the bond yields too have surged. Now a portfolio of high quality of AAA rated securities can easily give a return in the range of 7.7-8.4% thus making them very attractive.


What is the maturity of an FMP?

The maturity of an FMP is similar to the maturity of its underlying assets. Since the FMP exists for a fixed period which is defined during the subscription of the NFO, it invests in debt securities with similar maturities such that they mature on or before it’s maturity date.

Eg: If the Fund has the maturity period of 1110 days then it will pick instruments that will mature on or before 3 years.

The fund manager of a close ended FMP follows a passive investment strategy where in they buy and then hold securities until they mature. Therefore there is minimum churning unlike in a open ended fund where the fund manager churns the portfolio more regularly based on his strategy and market outlook.

This helps an FMP keep its expenses lower.


How are they taxed?

Most FMPs have a maturity of 3 or 5 years. Being a debt fund, the biggest advantage of investing in a FMP is the indexation benefit that an investor receives after completing 3 years.

Although it is similar to a Fixed Deposit, the tax benefit that an investor earns makes an FMP triumph over any FD or NCDs.

Assume you had invested Rs 10 lakhs in a FD and FMP with the maturity of 5 years. Even though return generated by an FMP is higher, to level the playing field lets consider both had generated a return of 8%.

FDvs FMP

As you can see from the table above, you can potentially save Rs 1 Lakh in taxes by investing in an FMP. Even for an investor in 20% tax bracket, the post tax corpus earned from an FD would be significantly higher than a bank FD.


What are the drawbacks of an FMP?

Being a close ended fund an investor can’t redeem the units until the FMP matures. However, the investor does have an option of early exit through a stock exchange. For this the SEBI has mandated the FMPs to be listed on the stock exchange. The problem is that there is little demand for them in the secondary market and even when there is a buyer the price offered is lower than its NAV.

So an investor must subscribe to an FMP with an intention to keep their money locked-in for the duration of the fund and with the knowledge that this money would not be needed in the interim.

Also the indexation benefit can be enjoyed only if the debt fund investment has been held for 3 years, so it would be ideal to pick FMP with a maturity of at least 1100 days which is just a few days over 3 years.

 

Who should invest in a FMP?

Unlike a debt fund, an FMP is insulated from the interest rate volatility since the fund manager buys and holds the securities until maturity. Thus the returns of the FMP are less impacted by the price fluctuations triggered by the swinging interest rates of the market.

Therefore, HNI, ultra HNI in the highest tax bracket, retail investors and even senior citizens can benefit from investing in an FMP as the yields offered are competitive and the capital gains are taxed with indexation benefit making FMPs a very attractive investment solution in the tumultuous and uncertain interest rate scenario.

 

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Retirement-Coin-Jar-Thumbnail

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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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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