NRIs: Three changes to tax rules that decide residential status

NRIs: Three changes to tax rules that decide residential status

Some persons, particularly HNIs, manage their stay in various countries in such a way that they do not become residents of any country for tax purposes

A large number of Indians work outside India or have businesses outside India. They visit India, at times for an extended period, or after a stint abroad, even return to India. Tax Liability in India in such cases depends on whether a person is a resident or a non-resident. If an individual is not a resident in India, only then is the income that is earned in India or which is received in India is taxable in India. So, to avoid world income becoming taxable in India, one must be careful about the period of stay in India.

The Finance Minister, in the Budget that she presented last month, has proposed three changes to the rules for deciding the residential status of an individual.

New resident rules

An individual becomes a resident in India if he satisfies any one of the following conditions: (i) he has stayed in India for 182 days or more in the financial year; or (ii) he has stayed in India for 60 days or more in the financial year and his total stay in the earlier four financial years is for 365 days or more.

However, in the case of Indian citizens and Persons of Indian Origin (PIO), the second condition is relaxed. The relaxation enables them to stay longer in India without becoming liable to tax on their world income. Presently, if an Indian citizen or a PIO visiting India stays in India for less than 182 days, he/she retains his status as a non-resident. The Finance Bill proposes to reduce this period of 182 days to 120 days.  As a result, now, if an Indian citizen or a PIO stays in India for 120 days or more while visiting India, he/she will become a resident of India. This may make his/her world income chargeable to tax in India.

The second change proposed is an anti-abuse measure. Some persons, particularly high net worth Individuals (HNIs) manage their stay in various countries in such a way that they do not become residents of any country for tax purposes. They are classified as ‘stateless Indian citizens.’ The Finance Bill proposes to introduce a new provision for such stateless Indian citizens. Under the new proposal, if an Indian citizen is not liable to tax in any country on account of his/her stay or domicile, he/she will be considered as a resident in India. As a result, she/he may become liable to pay tax in India on her/his world income.

Tax fears

This proposal created a genuine fear that Indians working in countries such as the UAE, which do not levy income tax, will be deemed as residents. In such a case, they will have to pay tax in India on their salaries earned abroad. The government immediately issued a press release stating `The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. In some section of the media the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. This interpretation is not correct.’ The government’s communication also stated that in the case of Indian citizens who become deemed residents of India under this proposed provision, income earned outside India by them shall not be taxed in India unless it is derived from an Indian business or profession and, if required, necessary clarification will be incorporated in the law. Let us hope that it is done when the Finance Bill is passed.

While the two proposals considered above are restrictive, the third proposal relaxes and simplifies the criteria to become a `Not Ordinary Resident’ (NOR). In the case of an NOR, although he/she is a resident, his/her foreign income is not chargeable to tax in India unless it is from a business controlled from India or profession set up in India. This provision is particularly helpful to returning Indians. It gives them time to arrange their affairs before their foreign income becomes taxable in India.

Presently, to become an NOR, a person must be a non-resident for at least nine out of the 10 previous financial years or his/her total stay in India should not be more than 730 days in the preceding seven financial years. It is now proposed that an individual will be an NOR if he/she has been non-resident for at least seven years out of the 10 preceding financial years. The other condition of `not more than 730 days stay’ in India is being deleted. Now a returning Indian, who has been a non-resident for 10 years or more, will be an NOR for four years and his/her foreign income will not be taxed when he/she is an NOR. A welcome change, indeed!

Happy Investing
Source: Moneycontrol.com

The long and short of capitals gains tax

The long and short of capitals gains tax

Sold your mutual fund units, gold or house property? Understand how the gains and losses are taxed

With the Union Budget 2020-21 just a few days away, pre-Budget expectations are running high. Calls for a reduction in tax rates and increase in section 80C exemption limit are annual rituals. But the wish-list this year features an additional demand – abolition of long-term capital gains (LTCG) tax on equity and equity-oriented instruments imposed in the financial year 2018-19. Whether Finance Minister Nirmala Sitharaman accedes to this request on 1 February or not remains to be seen. On your part, you would do well to be aware of how gains – long and short – made on sale of capital assets, are taxed.

Know your capital assets and indexation

As per the Income Tax rules, any asset you own – whether or not it is connected to your business or profession – qualifies as a capital asset. This includes stocks, mutual fund units, bonds, company fixed deposits, gold and house property. Likewise, your jewellery or art collection will also be bracketed in this category. However, if you are a businessperson, any stock-in-trade, consumable stores or raw materials will not be treated as capital assets. Agricultural land in a rural area, subject to certain parameters, is also not termed a capital asset.

Any gains arising out of the sale of a capital asset are subject to capital gains tax. However, the taxable gains in some investments factor in indexation – the effect of inflation on your purchase price. Put simply, indexation is a tax facility that recognises that the price at which you had bought the asset years ago (cost price) would get inflated over the years because of inflation. The indexation facility pushes up your cost price, notionally only though, so that the gains (selling price less cost price) are lower than the actual amount. This softens the taxation blow.

On the other hand, if you have incurred a capital loss, you can set it off against capital gains made on other capital assets. However, while short-term losses can be set off against both long-term and short-term gains from any capital asset, long-term losses can be set off only against long-term capital gains. Your holding period determines whether you pay short or long-term capital gains. This threshold is different across asset classes.

Equity investments

The asset class includes equity and equity-oriented mutual funds, which are all subject to the same set of capital gains tax rules. The holding period for your equity investment to be considered long-term is one year. If you sell your holdings before one year, any profit made will be termed short-term capital gains (STCG). The current STCG tax rate is 15 per cent.

If sold after one year, the capital gains of over Rs 1 lakh will be subject to 10 per cent LTCG tax plus cess, without indexation benefits. However, the computation is not simple, thanks to the grandfathering provision introduced along with the tax.

For one, if the total aggregate gains made from the sale of your equity investments do not exceed Rs 1 lakh during a financial year, you will not have to pay any tax. Then, there is the grandfathering clause that ensures that the fair market value – that is, highest traded stock price or net asset value of your equity mutual fund units – as on January 31, 2018 (or stock price as on last traded date) will be considered as the cost of acquisition for computing LTCG. “However, if your actual cost of purchase is higher than your equity asset’s fair market value as on 31 January 2018, the former will serve as the cost of acquisition,” says chartered accountant Karan Batra, Founder and CEO, Chartered Club (see table).

If you hold unlisted shares of a company, the minimum holding period to qualify as a long-term capital asset will be two years. Any gains made after this period will be taxed at the rate of 20 per cent plus cess, after indexation.

Debt instruments

For debt and debt-oriented mutual fund units to acquire the long-term capital asset label, they have to be held for at least three years. If you sell it within three years, the profit will be considered short-term gains, added to your taxable income and taxed as per the slab rate applicable to you. LTCG tax rate is 20 per cent plus cess, with indexation benefits. Indexation takes into account the effect of inflation every year, notionally pushing up the cost of your acquisition, thus reducing the LTCG and tax to be paid on it.

If you hold listed tax-free bonds and trade them within one year of acquisition, the appreciation will be considered short-term in nature. They will be simply added to your income and taxed accordingly. If held for more than one year, the profit will be subject to LTCG tax of 10 per cent plus cess, without indexation benefits. However, interest earned will not be subject to any tax. Listed corporate bond holdings, too, acquire long-term status after one year. Interest earned, though, is subject to tax. For unlisted bonds, the relevant holding period to be considered long-term is three years. LTCG is taxed at 20 per cent plus cess, with indexation.

House property or land

In the case of immovable properties such as house or plot of land, the holding period to be bracketed as a long-term capital asset is two years. Any profits made on the sale will attract a 20 per cent LTCG tax, after indexation (see table).

Now, this entire LTCG can be tax exempt, courtesy provisions under section 54. “If you have purchased a residential house one year before the date of sale or transfer of the house in question, the exemption will apply. Likewise, if you buy another residential property within two years of the sale or transfer of the original one. In case you are constructing a house, this period gets extended to three years,” explains Archit Gupta, Founder and CEO, ClearTax. This benefit is available only to individuals or Hindu Undivided Families (HUFs), provided the new residential property is located in India. “The amount of exemption will be the lower of capital gains arising on transfer of residential house and investment made in purchase or construction of a new residential house property,” adds Gupta. Any balance amount will be taxed. Also, starting 2019-20, you can use the gains to acquire more than one house, provided the amount does not exceed Rs 2 crore. “However, this option can be availed only once in a lifetime,” points out Gupta.

The exemption can be claimed by investing the gains in certain specified long-term bonds, redeemable after five years, issued by the National Highways Authority of India or the Rural Electrification Corporation Limited (REC). You have make the investment within six months from the date of transaction.

Section 54GB offers yet another tax-free exit route. If such capital gains are invested in small or medium enterprises, they will not be taxable. Union Budget 2019-20 extended this benefit to start-ups entitled for the same under this section. “If you subscribe to 50 per cent or more equity shares of eligible startups, then tax on long term capital gains will be exempt provided that such shares are not sold or transferred within five years from the date of its acquisition,” explains Gupta. The start-ups will also be required to use the amount to purchase assets and cannot transfer asset purchased within five years from the date of its purchase.

Gold

Capital gains tax treatment for gold – physical as well as gold ETFs – is largely similar to that of debt instruments. While interest earned on sovereign gold bonds is taxable, capital gains on redemption at maturity are exempt. If you sell these bonds through the exchanges after three years, however, LTCG tax with indexation will come into play. If traded within three years, the gains, if any, will be added to your income and taxed at the applicable marginal tax rate.

Happy Investing

Source: Moneycontrol.com

Income tax deduction under section 80CCD

Section 80CCD: Income tax deduction under section 80CCD

Section 80CCD: Income Tax Deductions under section 80ccd can be availed for contributions made by an employer to the National Pension Scheme. 

Taxpayers governed by the provisions of the Indian Income Tax 1961 have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides taxpayer deductions against investments made in specific sectors. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard.

There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In this case, the deduction of a maximum of 10% of the salary in the case of salaried employees and 20% of the gross income in the case of self-employed taxpayers is permitted. The total amount of deductions under this subsection of Section 80CCD cannot be above INR 1 lakh in a fiscal year. Subsection 2 of Section 80CCD refers to the contributions made by an employer towards NPS on behalf of an employee. This subsection allows the employees to claim the contribution as a deduction. The deduction amount is limited to 10% of the employee's salary.

 

Terms & Conditions for claiming deductions under Section 80CCD

Let's look at the terms and conditions that must be fulfilled to claim deductions under the provisions of Section 80CCD:

-Deductions available under this section can be claimed by both salaried and self-employed individuals, as well as their employers, so long the contributions have been made to the National Pension Scheme/Atal Pension Yojana.

-A maximum deduction of INR 1.5 lakh can be claimed under Section 80CCD. The computation is as follows: 10% of the salary in case of salaried individuals (this would include the basic salary plus the dearness allowance granted) or 20% of the gross income in the case of self-employed individuals.

-From FY 2016-17 onwards, the Finance Department has permitted individuals to claim an additional deduction of up to INR 50,000 on account of any contributions made towards NPS only under subsection 1B. This subsection provides that an assessee is allowed a deduction in the computation of his total income of the whole of the amount paid or deposited in the previous year in his account under a pension scheme notified by the Central Government. This deduction is irrespective of the amounts claimed as deduction as 10% of the salary or 20% of the gross income in subsection 1.

-If an individual is claiming deductions under Section 80CCD, the same cannot be claimed under Section 80 C.

-Any deductions made under subsection 1 of Section 80CCD are capped at INR 1 lakh per year. Any deductions made under subsection 2 of Section 80CCD are capped at INR 1.5 lakhs and is over and above the INR 1 lakh limit.

 

Who is eligible for claiming deductions under Section 80CCD?

Deductions under Section 80CCD can be made by salaried as well as self-employed assesses. However, such deduction is only permitted for contributions made towards the National Pension Scheme or Atal Pension Yojana.

Deductions on employer contributions are also permitted under Section 80CCD. However, corporate or HUFs or any other class of assesses are not allowed to claim any deduction under the provisions of this section. It is also important to note that only contributions made to Tier 1 accounts of NPS are eligible for the benefit of the deduction. The deductions can be claimed at the time of filing the income tax returns at the end of the financial year.

 

How to claim tax deductions under Section 80CCD?

The deductions under this section can be claimed at the time of filing IT returns. Evidence of payment of the contribution to the pension account should be provided. If you are filing your returns online via the website of the income tax department, the details of deductions under Section 80CCD will be populated on its own from the information available in Form 24Q. The total amount of deduction under Section 80CCD (1) cannot exceed INR 1.5 lakhs. An assessee can also utilize the provisions of Section 80CCD (1B) to claim an additional deduction of INR 50,000 for the contributions (made by the assessee itself or deduction from salary) towards NPS.

Claiming a deduction can reduce your tax liability significantly. Therefore, it is crucial to calculate the tax deductions carefully when filing the returns.

 

FAQs

Are HUFs eligible to claim Section 80CCD deductions?

No, this section provides tax deduction benefits for individuals only.

 

What is the National Pension Scheme?

National Pension Scheme was launched in 2004 by the Government of India as a pension-cum-investment scheme. This scheme benefits Indian citizens between the age of 18-65 years. NPS is a very popular option for those individuals who do not draw a steady post-retirement pension. The scheme is regulated by the Pension Fund Regulatory and Development Authority. NPS is based on a contribution model: the subscriber of NPS, while employed, is required to contribute to the retirement account on a regular basis. The contributions received are, in turn, invested by pension funds. The investments are in equity, bonds, government bonds, and alternative assets. The total amount accumulated in the NPS account is dependent on the contributions made and the income from the investment of the amount. The subscribers are permitted to withdraw from the NPS account only for specified reasons.

 

What is the Tier-II account of the National Pension Scheme?

Tier-II account is a voluntary savings account. It can be opened only where a subscriber has a Tier I account under NPS. The minimum initial contribution is INR 1,000. A minimum of INR 250 should be contributed at one time. Except in the case of government employees, there are no restrictions on the withdrawal of funds from the Tier II account. This account also allows the subscriber to transfer the funds to the Tier I account at any time.

 

Is it possible to claim Section 80CCD deduction on the amounts contributed to the Tier II account of the National Pension Scheme?

No, the benefit of the deduction is only available for the contributions made to the Tier I account.

 

I have a Tier I NPS account, and I am self-employed. I wish to claim Section 80CCD deduction. What investment proof do I need to furnish to claim the benefits?

You can submit the Transaction Statement as proof of investment. You can also download the receipt of voluntary contribution made in Tier I account for the financial year in question. It can be downloaded from the tab titled "Statement of Voluntary Contribution under National Pension System (NPS)" once you log on to the NPS website.

 

What does the word ‘salary’ refer to for claiming Section 80CCD deduction?

As per the explanation appended to Section 80CCD, salary includes dearness allowance but excludes perquisites and any other allowances provided by an employer.

 

Rahul has a Tier I NPS account. He is self-employed and makes his contributions to NPS through cheque. Is this contribution eligible for claiming deduction under Section 80CCD?

Yes, both cash and cheque are permitted for claiming deductions.

 

Are there any exclusive benefits available for claiming tax deductions under Section 80CCD in the case of government employees?

Except for those employed with the Armed Forces, in case of government employees who joined services after 1st January 2004, an additional deduction of up to 10 percent of salary is eligible for tax deduction under Section 80CCD(2). Government employees are also eligible to enjoy an increased income tax deduction of 14% of the employer’s contribution.

 

Ritesh is an NRI. Is he eligible to open an NPS account?

Yes, an NRI is eligible to open an NPS account. However, all contributions made to NPS account by an NRI is subject to the regulations prescribed by RBI and FEMA. Additionally, OCIs and PIOs are not eligible to open NPS accounts in any capacity.

 

Is it possible to open multiple NPS accounts?

No, an individual can only have one NPS account. However, you can consider opening an NPS account and an account under Atal Pension Yojana.

 

What are the benefits available for the contributions made to Atal Pension Yojana?

As per the clarification issued by the Central Board of Direct Taxes in 2016, Atal Pension Yojana qualifies as a pension scheme for the purpose of Section 80CCD. Therefore, the benefits are precisely similar to that of the National Pension Scheme.

 

What is the deduction allowed under Section 80CCD(2)?

As per the provisions of Section 80CCD (2), an assessee who is a salaried individual is eligible to claim deductions up to 10% of the salary. This includes basic pay and dearness allowance. The contribution made by the employer towards NPS can also be claimed as a deduction under this section. The deduction under this subsection is in addition to the benefits under Section 80CCD(1).

Happy Investing

Source: Moneycontrol.com

Income Tax Deduction Under Section 80C

Section 80C: Income Tax Deduction Under Section 80C

Section 80C: Tax deductions under section 80C provide a means for individuals to reduce their tax burden. 

Legitimately reducing tax liability is every taxpayer’s dream. Planning investments in tax saving schemes can be particularly useful in reducing taxable income. One of the ways to enjoy tax benefits is to claim deductions under Section 80C of Income Tax Act. Section 80C has come into effect from April 1, 2006 and allows an assesee to claim tax exemption on specific investments. As on date, the total amount of deduction that can be claimed under Section 80C stands at INR 1.5 lakh. As it is a substantial amount, planning your investments well can reduce your tax burden to a great extent. There is a large variety of investments that are exempted under various sub-sections of Section 80C.

 

Deductions on investments under Section 80C of Income Tax Act

Set out below is a snapshot of the various investments that can be made to claim tax benefits under Section 80C:

Public Provident Fund: is one of the most popular savings schemes in India. PPF is a retirement focussed investment. It encourages individuals to start saving early into their careers and offers attractive tax benefits in return. The goal of PPF is to secure the future of individuals who do not have the benefit of an employee pension scheme. It is offered by all leading commercial banks in India as well as India Post. PPF requires a subscriber to invest a minimum of Rs.500 and a maximum of Rs.1.5 lakh towards a PPF account in a financial year. The interest for PPF is announced by the Government of India annually. The present rate of interest offered is 7.6% per annum (for FY 2017-18). The interest is compounded annually. The amount is credited to the PPF account at the end of every financial year. All deposits made by a subscriber towards a PPF account can be claimed as tax deductions under Section 80C of the Income Tax Act. Even the interest earned on the deposits made is also not taxable.

Provident FundThis is usually in the form of an employee provident fund. The contributions for an employee provident fund are deducted from the monthly salary. The provident fund account receives contributions from both employers and employees. Any contributions made by the employees towards provident fund account enjoy the tax benefits under Section 80C. Any voluntary contributions made by the employees are also eligible for tax deductions under Section 80C of Income Tax Act.

Equity Linked Savings SchemeELSS is a popular tax saving scheme. You can start investing with INR 500 only. There is no upper limit on the amount of money you can invest in ELSS. You have the option of choosing between two types of ELSS: dividend and growth. The average returns offered by ELSS are in the range of 15%-18%. It is the only pure equity investment that offers tax benefits up to INR 1.5 lakh in a financial year under Section 80C of Income Tax Act.

Sukanya Samriddhi Scheme: Sukanya Samriddhi Scheme is a small savings scheme introduced by the Government of India as part of its BetiBachao- BetiPadhao initiative. The scheme exclusively for a girl child and is part of the National Saving Schemes of the Government of India. The account under the scheme should be opened in the name of the girl child. A minimum of INR 250 is required for the initial deposit, the minimum amount is INR 250. The maximum amount of deposit is capped at INR 1.5 lakh (per SSY account) per year. The deposits should be made in multiples of INR 100 subject to the annual cap. The interest received is compounded annually. Sukanya Samriddhi Scheme is an attractive option to save taxes. The amount at maturity and the interest earned on the deposited amount are eligible for the tax benefit available under Section 80 C of Income Tax Act. The deposits made to the account are also exempt from taxation under Section 80C of Income Tax Act, subject to a maximum of INR 1.5 lakhs.

Repayment of housing loans: If you have availed a housing loan, you are eligible to claim tax deduction under Section 80C of Income Tax Act. The deduction is available for the principal amount of the loan. The interest to be paid on the housing loan does not enjoy tax benefits under Section 80C.

Investment in infrastructure bonds:Infra bonds are a very popular investment option. These bonds are issued by various infrastructure companies. If you invest in these bonds, you are eligible to claim tax deductions up to INR 1.5 lakh under Section 80C of Income Tax Act.

Investment in Unit Linked Insurance Plans (ULIPs):Unit Linked Insurance Plans are a popular investment option for insurance policies. They are also a great way to reduce tax burden as you can claim deduction under Section 80C of Income Tax Act for the investment.

Payment of registration fees and stamp duty during purchase of house: When you buy a house, you are required to pay stamp duty for the transaction. You have to also pay registration fees to register your property details with the Sub-Registrar. Section 80C of Income Tax Act provides tax benefits for these charges as you can claim them as tax deductions.

 

When should I Invest to Claim Deductions under Section 80C of the Income Tax Act? 

Planning for your tax deductions requires dedicated and consistent efforts. It is always advisable to start early and plan your investments for the year. This is particularly helpful as certain schemes also offer tax benefits on the interest amount. If you start your investments at the beginning of the financial year, you can claim the tax deduction under Section 80C for the interest earned for the entire year. Having said that, it is never advisable to invest blindly.

Make a thorough assessment of your investment goals and pick schemes that are suited to your investment objectives. There are a number of sub-sections of Section 80C of Income Tax Act that offer tax deductions for investments in schemes like National Savings Schemes and LIC. You can also receive tax deductions for availing educational loans and medical insurance policies. As the old adage goes: the early bird catches the worm. Therefore, the right time to commence your investments for claiming the deduction is as early as you can identify the schemes you want to invest in.

 

Deductions on Investments under sub-sections of Section 80C

Here is a snapshot of the various deductions that can be claimed under the respective sub-sections of Section 80C:

-Under Section 80CCD (2), deduction up to 10% of the salary amount can be claimed for the contribution by the employer to the National Pension Scheme account.

-Under Section 80CCD (1B), an additional deduction of INR 50,000 can be claimed as a deduction for the contribution made to the National Pension Scheme

-Under Section 80TTA(1), a deduction up to INR 10,000 can be claimed for the interest earned from the savings account.

-Under Section 80TTB, senior citizens are eligible to claim a deduction of INR 50,000 for the interest earned on savings with post offices or banks

-Under Section 80GG, if the assessee is not receiving any housing rent allowance from the employer and paying house rent, a tax deduction of INR 5000 per month, rent less than 10% of total income or 25% of the total income, whichever is lower can be claimed as a tax deduction.

-Under Section 80E, you can claim a deduction on the interest paid on educational loans availed. This deduction can be claimed for a period of 8 years.

-Under Section 80D, the tax deduction is available for premium payments made for insurance policies. The amount of deduction is capped at INR 25,000 for self, spouse, parents, and dependent children. In case the parents are above the age of 60 years, the amount of deduction of INR 50,000.

-Under Section80DD, you can claim a tax deduction for the medical treatment of handicapped persons who are dependent. The amount of deduction is INR 75,000, where the disability is more than 40% but less than 80%. If the disability is more than 80%, the amount of deduction is capped at INR 1.25 lakh.

It is also important to remember that only a maximum of INR 1.5 lakh can be claimed as tax deduction under Section 80C after taking into account all the investments made.

 

FAQs

 

Rajesh wants to invest in some tax saving schemes. Will the interest component earned be eligible for tax deduction under Section 80C?

Interest is usually taxable at the hand of the investors. However, investments made to public provident fund and sukanya samriddhi yojana are exceptions where the interest component is also eligible for tax deductions under Section 80C.

 

Neha wants to take a housing loan for carrying out extensive repairs in the house. Can she claim deduction under Section 80C?

While Section 80C deduction is available for home loans, Neha will not be eligible to get the tax benefits as the loan is for renovations.

 

Are members of Hindu Undivided Family eligible for the tax deduction benefits under Section 80D?

Members of Hindu Undivided Family are eligible to claim tax benefits under Section 80D in case of premiums paid for mediclaim policies. The quantum of deduction stands at INR 25,000 at present where the members who are covered under the insurance policy are less than 60 years old. If the members are more than 60 years old, the quantum of the deduction is INR 50,000. Dependent children and spouses are covered under this benefit. Even financially independent parents are eligible if the premium is paid for health insurance policies covering them.

 

Geeta’s mother has passed away. She is currently paying the insurance premium for a mediclaim policy that covers her father. Is she eligible to claim benefit under Section 80D of Income Tax Act?

Yes, she is eligible to claim tax benefit in this case as well. In the case of a single parent, Section 80D deduction can be claimed as per the actual amount of premium paid. Therefore, the amount eligible for deduction will be the actual premium paid or INR 50,000 (or INR 25,000), whichever is lower.

 

Raja pays the insurance premium for a mediclaim policy that insurers his parents. However, his mother is employed with a bank. Does this impact his eligibility to claim deduction under Section 80D?

No, Raja is still eligible to claim the benefit of tax deduction under Section 80D, even though his mother is not financially dependent on him.

 

Mr. Gupta is a senior citizen. What kind of tax saving schemes can he invest in to claim 80C deduction?

One of the best options for Mr. Gupta is to invest in senior citizens saving scheme. He can get attractive returns on investments. The interest is computed on a quarterly basis. Investments in senior citizens saving scheme are eligible for a tax deduction of INR 1.5 lakh under Section 80C of Income Tax Act.

 

Are five-year post office term deposit schemes eligible for deduction under Section 80C?

Only the interest component that is earned from such investments is eligible for 80C deduction. The duration of such schemes can be between one to five years.

 

NABARD offers rural bonds. Are these bonds eligible for deduction under Section 80C?

NABARD rural bonds are eligible for 80C deduction. The maximum amount of tax deduction that can be claimed is capped at INR 1.5 lakh.

 

Is the interest paid for availing a housing loan eligible for deduction under Section 80C?

Only the principal amount of the housing loan can avail 80C deduction. The interest is fully taxable at the hand of the loan applicant.

 

In case of employee provident fund, is the entire amount eligible for deduction under Section 80C?

No, only the contribution by the employee can enjoy the 80C deduction. A similar benefit is not available for the amount contributed by the employer.

 

What is the ideal time to start investments in order to avail 80C deduction?

One should start investments as early as possible. However, it is advisable to not follow the crowd and invest blindly. The risk appetite and investment objectives are not the same for all individuals. This factor should be taken into account before deciding on the investments.

 

I have submitted my claim for 80C deduction. How will I receive the money?

The claims for deduction are submitted at the time of filing the IT returns. Once the department processes the returns, the amount that is claimed as deduction is refunded.

 

What is the Rajiv Gandhi Equity Savings Scheme? Can individual claim tax deductions under this scheme?

Section 80CCG provides tax deductions for investments made in Rajiv Gandhi Equity Savings Scheme for Financial Year 2018-19. This benefit is available to those assessees who are residents and have a total gross income less than INR 12 lakh. Further, the assessee must fulfill the eligibility criteria set out under the scheme. The investments should be made the investor as per the procedure specified in the scheme. The scheme sets out a minimum lock-in period of 3 years for investments from the date of acquisition. The amount of deduction is 50% of the amount invested in equity shares or INR 25,000 for three consecutive assessment years, whichever is lower.

Happy Investing

Source: Moneycontrol.com

Bond categories for making investments

Bond categories for making investments

Look at the credit rating, goodwill of the business group issuing the instrument and post-tax returns

We have discussed about investing in bonds earlier. Now, we will go into the types of bonds available in the secondary market that you can invest in. This clarity is required for taking a suitable investment decision.

To start with, let’s talk of the category that comes to our mind when we think of bonds. Let’s call it ‘conventional,’ i.e., regular bonds. These bonds are defined by a maturity date, coupon (i.e., interest) rate and face value (i.e., nominal value). The maturity is usually a single date, which is called bullet maturity, or it may be spread over multiple pre-defined dates, which is known as staggered maturity. The dates for coupon payment are defined as well. On maturity, the face value of the bond is paid back to the investor; if there is a premium on redemption, which is rare, maturity will happen accordingly. There are certain zero coupon bonds – there isn’t any regular coupon pay-out for such instruments; the difference between the issue price and maturity price is the equivalent of interest.

Factors associated with bond purchase

There is a credit rating, which gives you a perspective on the credit quality or the default risk of the bond. Usually, bonds have credit ratings across the range – AAA and below. Investment grade is defined as BBB. Other features may include put and/or call option(s). A call option is a choice that an issuer has of calling back the bond; i.e., redeeming it before maturity, on a pre-defined date. A put option allows an investor to put or redeem the bond with the issuer, prior to maturity, on a pre-defined date. In a way, put and/or call option(s) effectively reduce the maturity of the bond, against the stated maturity date.

The price of a bond in the secondary market would vary depending on demand-supply, interest rate movement in the economy, credit rating/credit perception of the bond, etc. The coupon rate is always payable on the face value of the bond. When the interest rate in the economy moves up, bonds of the same issuer/similar quality bonds are available at a higher interest rate.

To adjust to this, the market price of the bond – for trades in the secondary market – will adjust lower, so that the buyer gets an equivalent return. Similarly, when interest rates are moving down, the holder of the bond will command a price premium, i.e., a price higher than the face value, and the buyer gets a return commensurate with the prevailing rates. In other words, the buyer of the bonds pays a price higher or lower than the face value, to buy the defined coupon, according to prevailing market rates.

Categories you can consider

Apart from conventional bonds, there are certain other types of bonds you can invest in. The basic features remain same as discussed above; some features are different to make it a different category. One such category is tax-free bonds; the unique feature here is, the coupons are free of tax. In conventional bonds, the coupons are taxable at your marginal slab rate. In a tax-free bond, you save as much as 30 per cent (or more if you pay higher surcharge and cess) of the coupon payment and your effective return is that much higher. The issuers of tax-free bonds are certain defined PSUs, and these bonds are rated AAA. Hence, this category offers a combination of good credit quality (i.e., AAA rated PSUs) and tax efficiency.

Then there are certain perpetual bonds. Usually, bonds have a defined maturity date, as discussed earlier. There are certain bonds that don’t have an ‘expiry date,’ so to say. Theoretically, as long as the company issuing the bond remains in existence, the investor will get the coupon, and may be used for passing a legacy to next generation. However, the way the bond market looks at perpetual bonds is that, in most cases, there is a call option, and it is expected that the issuer would call back the bond on that date, though it is not a legal obligation.

Within the broad class of perpetual bonds, there is one category called Bank Additional Tier I (AT1) Perpetual bonds. As per capital requirement norms, a certain part of the capital of banks has to be raised through issuance of AT1 Perpetual bonds. The current norms, under the Basel III framework, stipulate a five-year call option in these bonds, i.e., five years from the date of issuance. The bond market assumes that these will be called back on the call date, and are traded in the secondary market on that basis.

There may be certain other minor variants such as bonds guaranteed by a State Government, and Infrastructure Debt Fund bonds. So, how do you compare various bonds on offer? Look at the credit rating, goodwill of the business group issuing the instrument, post-tax returns and compare accordingly. There are several maturities available. Hence, you can buy many bonds and spread out the maturities as per your requirements.

Happy Investing

Source: Wiseinvestor.in

Investing in bonds

Investing in bonds

You may go for bonds of issuers with a combination of high credit rating (AAA / AA) and where you have the confidence on the standing of the business group.

A lot has been discussed about investing in bond mutual funds. Here is what you need to know about how to invest in bonds or debentures.

Q: Is investing in bonds more difficult than doing so in equity shares?

A: Arguably, investing in bonds is simpler than doing so in equities, because there is a defined maturity. That is, the issuer of the debt instrument commits to pay back the invested amount on a specified date. In equities, there is no maturity, so the issuer would not repay you. Therefore, you have to sell it in the secondary market when you need to. The selling price of your equity shares depends on someone else, i.e., the purchaser at that point of time, over which you have no control.

Q: Sounds good. But is there any catch?

A: As you are dependent on the issuer of the bond for getting back your money, the credit-worthiness of the issuer is of paramount importance. It is possible to sell a bond in the secondary market prior to maturity, but if there is any deterioration in the quality of the issuer, the purchaser would consequently pay a lower price. Obviously you would want to buy bonds or debentures issued by a good-quality issuer. But how do you ascertain the quality of the issuer? The answer to that is the credit rating given to the instrument. Credit rating agencies give their opinion on the credit-worthiness of issuers, as AAA, AA etc. Professional investors such as fund managers or corporate treasury managers do their own research about the fundamental quality of the issuer, but not every investor will have the bandwidth do so.

If you do not have the bandwidth to research the bond issuer, you may add your bit to it: the general standing or goodwill of the issuer. There are certain business groups perceived to be of good standing. You may go for bonds of issuers with a combination of high credit rating (AAA / AA) and where you have the confidence on the standing of the business group.

Q: Okay, I buy bonds of good quality. But what about the returns?

A: Your return on a bond is defined when you buy it. There is a coupon or interest, usually payable every year, which is usually a percentage of the face value of the bond. For example, if the face value of the bond is Rs 100 and the coupon/interest rate is 8 per cent, you will get Rs 8 every year. There may be a small exception to this: if your purchase price is higher or lower than the face value, your return will consequently be a little lower or higher. The reason for this phenomenon is that the interest is payable on the face value, and your purchase price has no role in that. When a bond is issued in the primary market, most of the times, it is issued at face value and your return is the same as the coupon/interest rate. If you purchase the bond in the secondary market, depending on your purchase price being lower or higher than the face value, your return will be a little higher or lower than the interest rate.

Q: So do I always get a fixed return on a bond?

A: If you hold the bond till maturity, then your return is fixed. But if you sell the bond before maturity, the price depends on market conditions at that point of time. If your sale price is higher than your purchase price, your return is accordingly higher and vice versa. One issue about investing in bonds is that the secondary market lacks liquidity, at least for retail lots. The bond market is less liquid than the equity market, which means if you want to sell before maturity, you may not get the right price.

Q: What is the way out then?

A: There is reasonable liquidity for highly rated bonds of leading issuers. But for lower-rated bonds (less than AA), this is an issue. The way to go about it as a retail investor is to buy the bond of the tenure you can hold for. That is, if you are buying, say, a five-year maturity bond, you ideally hold it for five years and don’t need to sell it earlier. For purchase of bonds, primary issuances of bonds are suitable for you as you can purchase in lot sizes suitable for you. In the wholesale secondary debt market, trades take place in large lots only. Most of the primary bond issuances have various maturities – three years, five years, seven years, etc. Hence, you can pick the one that suits you.

Q: What do I need to invest in bonds?

A: As long as you have a demat account, you can purchase bonds/debentures in a primary issuance, by filling up the application form provided by the manager to the issue/sub-broker to the lead manager. For a secondary market trade, you need to go through a broker.

Happy Investing

Source: Wiseinvestor.in