February 2017

Reduce Tax , India Taxes, Save Money in tax , Year end TAX planning

Five SMART things to do in Feb / March from TAX perspective.

Last 2 months left for financial year end.
Five SMART things to do in Feb / March from TAX perspective. (Financial Year End 2016-2017 ends in March)
1. Make sure that the 80C investments are done 1.5L for you and spouse(if applicable)
2. Check your short term Capital Gains (from Stocks/MF) – if possible plan to REDUCE GAIN by realizing losses (if any) from underperforming MF or Stocks
3. Check your Other sources of Income and make sure to pay timely Advance TAX to avoid interest cost later.
4. Do not generate income by means of selling assets (House/MF/Stocks/Bonds/etc) in Feb / March. POSTPONE it to April (next financial year)
5. Make timely declarations to your company for components like HRA/Interest/Loss from house property/80C declarations etc.
Conceptually, All the above helps INCREASE your monthly Cash Flow.
Plan to keep things SIMPLE. Simplicity is the way to BRILLIANCE….
… Kapil

January 2015

6 good ways for year end tax planning.

Tax planning strategy, year end tax saving strategy, Section 80C deductions, Benefits of investments and taxation

You can use the following 6 good ways for year end tax planning.

1. Let your dud stocks help you save tax
Since long-term capital gains from stocks sold on stock-exchange is exempt from tax; long term capital losses from the stocks is also not allowed to be set-off and / or to be carried forward. Therefore you should convertyour short term unrealized losses from stocks into actual loss and reduce your tax liability.

What if you want to retain the loss making stocks for a long term? It’s very simple—just sell it on or before March 31 and buy it back any time from 1st April onwards. In other words, book temporary loss for tax purpose.

In simple words, it is always preferable to book short term capital losses at the end of financial year on your loss making stocks (even if you want to keep them for long term and don’t want to dispose) and buy them in next financial year. By that way, you will be able to lower your capital gains (by utilizing these losses for setting off against your other capital gains) and consequently lowering your tax liability.

2. Use bonus-stripping 
Do you know that bonus shares also provide tax arbitrage opportunity? How? What is the relationship between issue of bonus shares and saving tax?

The practice of buying the shares at cum-bonus price and selling the ‘original shares’ at ex-bonus price and booking short term losses in the process is called ‘bonus stripping’ and similar to ‘dividend stripping’.

As per the current IT provisions, tax laws allow ‘bonus stripping’ in case of equity shares.

So, if during the financial year, you’ve purchased any shares against which company has further allotted you bonus shares, then you must sell the ‘original holdings’ and book short term capital loss.

But how does it help save tax? Let me explain with the help of an example, suppose you purchased 100 shares of ABC ltd at a price of Rs 300 per share in the month of November 2012. Later on, in the month of January 2013 when the price was ruling at Rs 350 per share, the company came with 1:1 bonus and you were allotted 100 additional shares so that after the bonus issue, you held 200 shares at the adjusted ex-bonus market price of Rs 175 and now the market price is ruling at, say, Rs 200 per share. Now, if you sell the original 100 shares and keep the ‘bonus shares’, you can book a short term capital loss of Rs 10,000 (Rs 20,000 – Rs 30,000) for tax purposes.

Your next question will be: Won’t this tax benefit get set-off against gains from selling bonus shares? Yes, only if sell the bonus shares before one year from the date of allotment. On the other hand, if you sell the bonus units after a period of 12 months, the capital gains will be long term and therefore completely exempt.

3. Invest your short term surplus in Debt Funds
By investing in a Debt Funds at the end of the financial year (i.e., the month of February & March), you an avail an additional year indexation benefit  by holding the investments >3 yrs. Also, UNLIKE FD’s there is NO TDS deduction in debt funds. Considering the benigh interest rate scenario over next year, it makes a lot of sense to invest in debt funds. In case of partial withdrawals, the tax treatment is applicable only to the capital gain and not on the principal amount. So you benefit in terms of lower tax payments.

4. Advance tax payment: Way out

Note that even though TDS is being deducted by your employer on your salary income, you are liable for payment of advance tax on your other income like interest, capital gains etc if the tax liability exceeds Rs 5,000.

It is good, if you can calculate tax on your other income and pay the advance tax by yourself. But if you want to avoid the hassle, there’s a way out. You can submit the particulars of ‘other income’ to your employer and request him to deduct tax on your additional income. The employer cannot refuse because it’s a right provided to you under income tax law.

5. Get Form-16, even if tax on your salary income is ‘nil’
Form -16 is more important than your tax-return. Now-a-days everybody asks for it as proof of your income. So how to ensure that your employer issue you a Form-16 even when your salary income is below the basic exemption limit. In other words, how to force the employer to deduct a nominal amount of tax and issue you a TDS certificate in ‘Form-16’

There are two possible scenarios:

o Your income is below taxable limit without availing section 80C deductions: Submit a declaration showing other income such as capital gains, income from house property, interest on savings account, bank FDs, NSC, KVP and NCDs (if any).

o Your salary income goes below taxable limit only after availing section 80C deductions: Don’t submit any proof for tax savings or submit so much evidence so as to bring your taxable salary income to such a level which is marginally higher than basic exemption limit.

In both the cases, your employer would be forced to deduct TDS from your salary income and issue you a TDS certificate in ‘Form-16’.

6. Avail depreciation benefit on cars, books & computers
If you’re a professional and planning to buy a new car, books or a computer, consider purchasing on or before March 31 to avail depreciation benefit for 6 months and thereby save tax.

Remember this financial year FY 14-15 , the tax deduction u/s 80C has been increased to 1.5 lacs and the home loan interest deduction u/s 24 has increased to 2 lacs. Avail these benefits.

Be a Smart Investor and savvy tax saver….

July 2014

Latest Cost of Inflation Index March 2014 & Double indexation benefits.

Latest Cost of Inflation Index March 2014 , Double indexation benefits, Short term debt, 30% tax bracket, Investing strategies, year end tax planning

Cost of Inflation Index upto FY 2013-14. (The year mentioned is financial year(FY) 

The cost of inflation index is useful for income-tax assesses in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.

A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation (Debt Mutual Funds, FMP’s, Real Estate Gains etc.) .

The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained.

Assume, if the investor invested Rs 1,00,000 in the growth option on March 30, 2012 and redeemed the investment on April 2, 2013 for Rs 1,10,000 

The investment happened in financial year 2011-12, for which the government has declared cost inflation index of 785.

The investor redeemed the investment in financial year in 2013-14, for which the cost inflation index is 939.

The capital gains is Rs. 110,000 minus Rs. 100,000 i.e. Rs. 10,000.

The holding period is 367 days, which is more than 1 year. Therefore, it is a long term capital gain.

The maximum tax the investor has to bear is 10% (plus surcharge plus education cess) on the capital gain of Rs. 10,000. Thus, the maximum tax payable would be Rs. 1,000 (plus surcharge plus education cess).

Investor can benefit from indexation. The indexed cost of acquisition is Rs. 100,000 X 939 ÷ 785 i.e. Rs. 119,618 . This is higher than the selling price of Rs. 110,000. Thus, the investor ends up with a long term capital loss of Rs. 9,618. So no tax payable and also this can be set off against long term capital gains, as discussed in the next section.

Another point to note is that although the investor held the investment for slightly more than a year, the investor gets the benefit of indexation for two years viz. 2011-12 and 2012-13. Hence the name “double indexation” for such structures.

Mutual funds tend to come out with fixed maturity plans (FMP’s) towards the end of every financial year to help them benefit from such double indexation. Even short term debt is a good investment towards the financial year end, as they too offer the same benefits. 

Largely investors are unaware about this benefit. This benefit can and should be taken by investors who are in 30% tax bracket as they get the maximum benefit. So, invest in wither FMP’s or Short term Debt (Holding period > 1 yr) towards the end of a financial year, and sell towards the beginning of a financial year and take advantage of   double indexation tax benefit for virtually tax free capital gains. Money saved is indeed Money earned.

Be Money Savvy and invest smart. Happy Investing. 

February 2014

Understand Income Tax Clubbing provisions and How to invest in Spouse’s Name

Income Tax clubbing Provisions, Investing in Spouse Name, Tax Implications, Section 64

Financial planners contend that couples should ideally combine their finances. The meshing together of the investments of the husband and wife not only strengthens the household’s financial fibre but gives them a comprehensive view of the real situation.

However, the taxman has set limits to this joining of the finances of the two spouses. He has no problems if one spouse gives money to the other. After all, it’s their money and spouses are in the list of specified relatives whom you can gift any sum without attracting a gift tax.

But if that money is invested and earns an income, the clubbing provisions of the Income Tax Act come into play. Section 64 of the Income tax Act says that income derived from money gifted to a spouse will be treated as the income of the giver. It will be clubbed with his (or her) income for the year and taxed accordingly.

For instance, if you buy a house in your wife’s name but she has not monetarily contributed in the purchase, then the rental income from that house would be treated as your income and taxed at the applicable rate. Similarly, if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be taxed as your income. Don’t think you can get away by clever ploys involving other relatives.

For instance, one may think of gifting money to his mother-in-law, a transaction that has no gift tax implications. Then a few days later, the lady gifts the money to her daughter, which again does not have any tax implications. The money can then be invested without attracting clubbing provisions, right? Wrong.

Given that most big-ticket transactions are now reported to the tax department by third parties (banks, brokerages, mutual funds, insurance companies), it may not be difficult to put two and two together. If the taxman discovers this circuitous transaction, you may be hauled up for tax evasion. Are there ways to avoid the clubbing provisions without crossing the line between tax avoidance and tax evasion? Yes.

If you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, you can loan her the money. In exchange, she can give you her jewellery. For example, if you transfer a house worth Rs 10 lakh to your wife and she transfers her jewellery for the same amount in your favour, then the rental income from that house would not be taxable to you.

One can also avoid clubbing of income by opting for tax exempt investments. There is no tax on income from the Public Provident Fund (although the 8% interest rate offered and the 15-year lock-in does not compare with fixed deposits). There is also no tax on gains from shares and equity mutual funds if held for more than a year. So, if one invests in these options in the name of the spouse, there is no additional tax liability.

In fact in case of PPF , Shares, Mutual Funds, FMP’s , Tax free Bonds etc the section 64 clubbing provisions are still applicable but as the income is tax free, no worry for you.

(~ Source Economic Times)

December 2013

Top 10 ELSS Mutual Fund Investments for 2014!!!

Section 80C investments, ELSS, Mutual Funds investments, Tax saving , Tax planning

Most of the investors have begun to ask about investing in ELSS Mutual funds as we are nearing March. As you are aware, ELSS investments can be claimed as deduction u/s 80C (up to a max of 1 lac)

Here is the list of top performing ELSS Mutual funds.The list is based on past 5 years performance One can also choose and invest based on past 3 years performance. Since the ELSS as locked in products for 3 years, it does not make a lot of sense to compare or invest based on performances of less 1 year.

Top 10 ELSS based on 5 years performance are :
Scheme Name
1. ICICI Pru Tax Plan 25%
2. Canara Robeco Equity Tax Saver 22.4%
3. Quantum Long Tax Saving 22.2%
4. HDFC Long Term Advantage 21.8%
5. Franklin India Tax Shield 21.1%
6. L&T Tax Advantage 20.9%
7. Reliance Tax Saver 20.6%
8. IDFC Tax Advantage 20.4%
9. DSPBR Tax Saver 20.3%
10. Birla SL Tax Relief 96 19.7%

Happy Investing…..

 

July 2013

What is Wealth Tax?

Wealth Tax in India, Tax planning, Tax filing, Assets which are liable to taxes

There may be liberty and justice for all, but there are tax breaks only for some. ~ Martin Sullivan

A majority of the tax payers in India are ignorant about the wealth tax, and it’s implications.

Wealth tax is a good potential annual recurring income stream for the government. However, it is perplexing why the tax authorities are lax on this aspect of tax collection. Political compulsions, Pressure from the affluent to look the other way, or probably because they have more pressing revenue sources, whatever the reasons may be, the common man needs to be aware of the implications of wealth tax, as the authorities can come after them at any point in time.

So what is Wealth Tax?

Wealth tax is a direct tax levied on the ownership of certain assets by individuals and Hindu Undivided Families (HUFs) even though these assets may not generate any income. It is an annual tax and is imposed with reference to the previous financial year or the present assessment year. It is governed by the Wealth Tax Act, 1957. 

The assets which are taxable under the Wealth Tax Act are residential property other than one house, guesthouse, farmhouse, motor cars, precious metals including those in (more…)

June 2013

Increase in Dividend Distribution Tax from June 01 2013 in Debt Mutual Funds – Impact

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In the FY14 Budget the Finance Minister has proposed to increase the Dividend Distribution Tax (DDT) on Debt Mutual Funds (other than liquid and money market funds on which the DDT was already 25%) from 12.5% to 25% (plus surcharge and cess) for individuals and HUFs. The hike is proposed to provide uniform taxation for all types of funds other than equity oriented mutual funds in the Mutual Fund Industry.
This amendment will take effect from 1st June, 2013.

Classification of Funds: As far as tax implications on Indian mutual funds are concerned, they are classified as three parts as ‘Equity oriented Funds’, ‘Liquid and money market Funds’ and ‘Debt Funds other than Liquid Funds’.

In ‘Equity Oriented Funds’, the categories coming under are Equity Diversified, Equity Sector, Hybrid – Equity Oriented (more than 65% equity) and Arbitrage Funds.

Liquid Funds and Liquid ETF are coming under ‘Liquid Funds’ while Ultra Short Term Funds, Floating Rate Funds, Short Term Income, Dynamic Income, Income Funds, Gilt Funds, Fund of Funds, Hybrid – Debt Oriented (less than 65% equity), MIP, FMPs are coming under ‘Debt Funds other than Liquid Funds’.,

Summary of Changes proposed :

Classification of Debt funds , Short term taxation , dividend distribution tax DDT, Effective yield


Tax on distributed income:Given the tax provision on the distributed income, fund houses pay taxes on the dividend distributed to the investors. Fund houses deduct DDT from the Dividend. So the dividends are tax free in the hands of investors.
Existing tax structure on DDT:As per the existing structure, there is no tax levied on the dividend distributed by Equity oriented mutual fund schemes for any investors. But, Liquid and money market Funds are liable to pay the DDT of 25% (plus surcharge and cess) for retail investors while the funds other than Liquid and money market funds are liable to pay DDT of 12.5% (plus surcharge and cess).

For institutions and corporates, DDT on Equity funds is nil while 30% (plus surcharge and cess) in case of the dividends from the investments in Liquid Funds and debt funds other than Liquid funds.

Proposed Structure: From June 01, 2013 onwards, retail investors who invest in all debt funds (other than equity funds) are liable to pay DDT of 25% (plus surcharge and cess) on the dividend income. The DDT for corporate investors has been kept unchanged at 30% (plus surcharge and cess).
Increase in Surcharge: Further, the surcharge on Dividend Distribution Tax for all mutual fund schemes has gone up from 5% to 10%.
Impact: This move will make dividend options in Debt Mutual Funds unattractive for retail investors. Because the net post tax return in the hands of the investors from dividend plans would be lower as the DDT charged on the debt funds has been increased from 12.5% to 25% (plus surcharge and cess). Meanwhile, the Growth options in the Debt Mutual Funds will become attractive for retail investors who redeem the investments after a year, taking advantage of long term capital gains.

Capital Gain: Since the DDT is applicable for Dividend plans, Capital Gains tax is applicable to Growth plans. The gains from the debt mutual scheme (growth option) are taxed depending on the period the investments in the mutual funds are kept. If the debt mutual fund units are redeemed after a year, then the gains thereon are liable to Long Term Capital Gain tax while the proceeds from the investments which redeemed before one year are taxed as Short Term Capital Gain. For long term capital gains in debt funds, the investor has to pay the tax @ lesser of 10% without indexation or 20% with indexation; (plus education cess). Short Term Capital Gain is taxed as per the normal slab of the investors. (more…)

February 2013

Time to take double indexation benefit ~ From Now until March 2013

 

Double Indexation Benefit, Save Taxes, Invest in FMP's, Fixed Maturity Plans NFO'sIt is that time of the year when you have a window of opportunity to intelligently invest for just over 1 year and get tax free returns.

The opportunity arises every year from mid-feb until financial year ending i.e March 31

You need to invest in Fixed Maturity Plans (FMP’s) of more than 14 months and which matures in April 2014. By doing this, your investment in a debt product spans over three financial years. And thus enables you to take advantage of double indexation on long term capital gains (which is taxed @20.6% post indexation) .

With inflation running at almost 8 %, the returns virtually becomes tax free. And is ideal for investors in highest tax brackets (30%). (Cost Inflation Index Table)

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). These funds are available from leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. You can find the open NFO’s at the AMFI Website : NFO’s

The estimated current yields on these FMP’s should be in the range of 9.5 %.

FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  Please note that the drawback of investing in FMP’s is illiquidity.

The advantage of investing over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 8.5% and so the post tax returns (for the highest tax bracket) is pathetically around 5.8%

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

December 2012

Taxation (2012-2013) on Mutual Fund Schemes ~ Snapshot

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The Tax Maze never ceases to amaze. There are various options available to investors in equity, debt etc. And each type of investment is taxed differently according to the residential status, period of holding, type of investment & tax bracket.

Here is a snapshot of the taxation (2012-2013) on Mutual Fund Schemes in India. This if of help in understanding the tax implications and judiciously allocating funds across assets.

Dividend
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes Tax Free Tax Free Tax Free
Other than Equity Oriented Schemes Tax Free Tax Free Tax Free

 

Dividend Distribution Tax (Payable by the Scheme)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* Nil Nil Nil
Other than Equity Oriented Schemes 12.5%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 12.5%+ 5% Surcharge+ 3% Cess
13.519% 32.445% 13.519%
Money Market & Liquid Schemes 25%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 25%+ 5% Surcharge+ 3% Cess
27.0375% 32.445% 27.0375%

 

Long Term Capital Gains (Units held for more than 12 months)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* Nil Nil Nil
Other than Equity Oriented Schemes 12.5%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 12.5%+ 5% Surcharge+ 3% Cess
13.519% 32.445% 13.519%
Money Market & Liquid Schemes 25%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 25%+ 5% Surcharge+ 3% Cess
27.0375% 32.445% 27.0375%

 

Short Term Capital Gains (Units held for 12 months or less)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* 15% + 3% Cess 15% +5% Surcharge # + 3% Cess 15% + 3% Cess
15.45% 16.223% 15.45%
Other than Equity Oriented Schemes 30%^ + 3% Cess 30% +5% Surcharge # + 3% Cess 30%^ + 3% Cess
30.9% 32.445% 30.9%

^Assuming the investor falls into the highest tax bracket
# The total income of the corporate would exceed Rs. 1 Crore

Tax deducted at source pertaining to NRI Investors$
Short Term Capital Gain Long Term Capital Gain
Equity Oriented Schemes 15.450% ## Nil
Other than Equity Oriented schemes (Listed) 30.90% 20.60%@
Other than Equity Oriented schemes (Unlisted) 30.90% 10.30%

*STT @ 0.25% will be deducted on equity oriented schemes at the time of redemption and switch to the other schemes.
Mutual Fund would also pay securities transaction tax wherever applicable on the securities bought/sold
** The tax rates are subject to DTAA benefits available to NRI’s. As per the Finance Act, 2012, submission of tax residency certificate containing prescribed particulars, will be a necessary (though not sufficient) condition for granting DTAA benefits to non-residents
*** These are the tax rates applicable to capital gains, in case the rate of tax is lower than 20% and if the NRI does not have a Permanent Account Number, then for the purpose of TDS, the withholding tax rate would be 20%
## Subject to NRI’s having Permanent Account Number in India
$ As per the Finance Act 2012, with effect from July 1, 2012, a list of transactions is proposed to be specified, wherein the rate for tax deduction at source needs to be determined by the assessing officer. In case the transaction of sale of mutual fund units by an NRI gets covered within such list, then an application would be required to be made to the assessing officer to determine the tax deduction at source rate
$$ As per the Finance Act, 2012, in case of transfer of unlisted securities by non-resident, the tax rates in case of long term capital gains shall be 10% (plus surcharge and cess) without indexation
@ after providing for indexation

The information  is for general purposes only. Please consult your financial advisor before making any investment decisions.

November 2012

Section 80C Tax saving investments

section 80C, tax saving investments, ELSS, PPF, NSC, Senior Citizen Savings, Pension Funds,

Income during an income year of an Individual is assessed for tax under Income Tax Act 1961. It is general tendency of assesses to commence savings during the end of the Income Year, mostly to seek exemption from Income Tax thus reducing Income Tax liability. They have to combine their savings with financial planning

Section 80C 
Under section 80C, a deduction from taxable income is allowed subject to a limit of 1Lac.

The following investment routes can be used to avail this tax benefit.

  1. Life insurance premium paid for traditional products.
  2. Unit-linked insurance plans (ULIPs).
  3. Pension plans.
  4. Repayment of the principal component of home loan.
  5. Employee provident funds (EPFs).
  6. Equity linked saving schemes (ELSS).
  7. Tuition fees paid for children.
  8. Five-year tax saving bank deposits.
  9. Public provident funds (PPFs).
  10. National savings certificates (NSCs).
  11. Senior citizen savings schemes (SCSs).
  12. Stamp duty and registration charges.
  13. Infrastructure bonds.
  14. Pension funds.
  15. Post office time deposit – five years.

Tax Planning involves making investments with the objective of minimizing the tax liability and maximizing returns. Ideally, one should carefully  plan and invest through the year rather than at the end of the year in order to take the tax advantages.

 

October 2012

Cost of Inflation Index AY 2012-13 ~ Long term Capital Gains ~ Double Indexation

Double Indexation, FMP, Cost of Inflation Index AY 2012-13 ,To compute Long term Capital Gains Indexation, AY 2012-13, Tax Planning, Fixed Maturity Plans, Debt Funds Taxation, Real Estate Capital Gains
COST INFLATION INDEX TABLE – FINANCIAL YEAR 1981-82 ONWARDS:
Assessment Year (AY)
Financial Year (FY)
Cost Inflation Index (CII)
2014-15
2013-14
2013-14
2012-13
852
2012-13
2011-12
785
2011-12
2010-11
711
2010-11
2009-10
632
2009-10
2008-09
582
2008-09
2007-08
551
2007-08
2006-07
519
2006-07
2005-06
497
2005-06
2004-05
480
2004-05
2003-04
463
2003-04
2002-03
447
2002-03
2001-02
426
2001-02
2000-01
406
2000-01
1999-2000
389
1999-2000
1998-99
351
1998-99
1997-98
331
1997-98
1996-97
305
1996-97
1995-96
281
1995-96
1994-95
259
1994-95
1993-94
244
1993-94
1992-93
223
1992-93
1991-92
199
1991-92
1990-91
182
1990-91
1989-90
172
1989-90
1988-89
161
1988-89
1987-88
150
1987-88
1986-87
140
1986-87
1985-86
133
1985-86
1984-85
125
1984-85
1983-84
116
1983-84
1982-83
109
1982-83
1981-82
100

The cost of inflation index is useful for income-tax assesses in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.

A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation (Debt Mutual Funds, FMP’s, Real Estate Gains etc.) .

The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained. (~ The Hindu)

Assume, if the investor invested Rs 1,00,000 in the growth option on March 30, 2009 and redeemed the investment on April 2, 2010 for Rs 1,10,000 

The investment happened in financial year 2008-09, for which the government has declared cost inflation index of 582.

The investor redeemed the investment in financial year in 2010-11, for which the cost inflation index is 711.

The capital gains is Rs. 110,000 minus Rs. 100,000 i.e. Rs. 10,000.

The holding period is 367 days, which is more than 1 year. Therefore, it is a long term capital gain.

The maximum tax the investor has to bear is 10% (plus surcharge plus education cess) on the capital gain of Rs. 10,000. Thus, the maximum tax payable would be Rs. 1,000 (plus surcharge plus education cess).

Investor can benefit from indexation. The indexed cost of acquisition is Rs. 100,000 X 711 ÷ 582 i.e. Rs. 122,165. This is higher than the selling price of Rs. 110,000. Thus, the investor ends up with a long term capital loss of Rs. 12, 165. This can be set off against long term capital gains, as discussed in the next section.

Another point to note is that although the investor held the investment for slightly more than a year, the investor gets the benefit of indexation for two years viz. 2009-10 and 2010-11. Hence the name “double indexation” for such structures.

Mutual funds tend to come out with fixed maturity plans towards the end of every financial year to help them benefit from such double indexation. 

Largely investors are unaware about this benefit. This benefit can and should be taken by investing towards the end of a financial year, if the investor has surplus funds, because the capital gains virtually becomes tax free due to the double indexation benefit.

July 2012

What is form 26AS~Important Tax Statement

 

What is Form 26AS?

A1Form 26AS is a consolidated tax statement issued under Rule 31 AB of Income Tax Rules to PAN holders. This statement with respect to a financial year will include details of:
a) tax deducted at source (TDS);
b) tax collected at source (TCS); and 
c) advance tax/self assessment tax/regular assessment tax etc. deposited in the bank by the taxpayers (PAN holders). 
Form 26AS will be prepared only with respect to Financial Year 05-06 onwards. [Source : Income Tax India Website]

The information will be useful when filing taxes online.

Tax Filing ~ Which ITR (Income Tax Return) forms to file~File Online

Income Tax India, Tax filing, Online, Form 26AS, ITR forms, Income from salaryNow you can File taxes online using the website : https://incometaxindiaefiling.gov.in/portal/index.jsp. Follow these simple steps for filing online.

1. Register using  your PAN. Once you login you can choose the Assessment Year for filing the tax :

Tax Filing, Which ITR (Income Tax Return) forms to file, Form 26AS, Individual , HUF,

2. Use the following ITR forms based on your type/ source of Income.

Tax Filing, Which ITR (Income Tax Return) forms to file, Form 26AS, Individual , HUF,

3. Download the return preparation excel sheet. There is excel utility excel templates which are provided for each type of ITR forms. 

Income tax return, Excel Utility, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-4

4. Use form 16 to fill in the form (4 pages). Click Validate. This will generate the XML File. Now you just need to upload the file using the following form :

Income tax return, Excel Utility, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-4Income tax return, Excel Utility, XML, Upload return, refund, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-45.  You will get an email from income tax office. You need to send the signed form to the address mentioned on the file by ordinary post or speed post.

And that’s it… Remember online tax filing is mandatory for Income over 10lacs/Optional for income < 10lacs. You can either sign digitally or send by post.

Ensure that you check Form 26AS for TDS information and verification. 

The document : Common_Mistakes  which should be avoided when filing taxes online. 

Happy Tax filing

February 2010

Tax Savings – Section 80C – Part II

Tax Planning,minimizing the tax liability, section 80C, 80CCC and 80CCD,ELSS (Equity linked savings scheme), 5-Yr tax-saving bank fixed deposits (FDs) of banks, PPF (Public Provident Fund), EPF (Employee’s provident fund),In this part, I will cover the Life Insurance premiums, pension plans on mutual funds and from insurance companies, and various expenses which are also eligible for deductions under 80C.

Life Insurance premiums covered under Section 80C
Premium paid towards life insurance for yourself or your family (spouse and children) is eligible for section 80C tax break. The maximum deduction available is upto a maximum of Rs. 100,000/- under Section 80C. The sum received (including bonus) under life insurance policy (excluding Key man Insurance) is tax free. Please note that Life Insurance needs to be planned properly and should not only be taken for the purpose of Tax savings. (Note that most of the Life Insurance companies come up with innovative , yet inadequate products during the Jan-Feb-Mar period every year to lure investors into schemes which offer inadequate coverage and inadequate returns. They know that people are looking out for avenues). Be-aware.

Types of Life Insurance Policies briefly are :

– Term Policy : This is the undoubtedly the best life insurance scheme which covers only Risk of Death and no survival benefits. This offers maximum coverage for lowest premiums.

– Endowment Policy : This plan accumulates capital over a period of time, returns sum assured + bonus at end of period and covers risk in case of premature death

– Money Back Policy : This plan accumulates capital over a period of time, provides periodic payment during the policy + balance and bonus at the end of period and covers risk in case of premature death

– Whole Life Policy : This plan runs through the life of the policy holder, requiring the payment of premiums throughout the life. There are no survival benefits to the policy holder as he is not entitled. Sum assured + bonus is payable to beneficiaries.

– Annuities : This is an investment that is made ( single lump sum payment or through installments ), in return for a specific sum that is received every year/ 1/2 year or every month, either for life or for a fixed number of years.

– ULIP – Unit linked insurance plans : Unit Linked Insurance Plan – is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire – equity, fixed-return or a mixture of both. Ulips gets covered under life insurance – 80C, and they are popular. However, you should avoid ULIPS as far as possible. I will discuss about this more on my ULIP Awareness post later on.

Pension Plans from Mutual Funds covered under Section 80C

There are two mutual fund pension plans –Templeton India Pension Plan  and UTI Retirement Benefit Pension Plan. Both have a mandatory lock – in period of 3 yrs. And they encourage investors to invest for long term. THese funds are primarily debt oriented mutual funds and offer tax benefit under Section 80C. However these funds have not yet gained popularity among investors. Pls note that unlike traditional pension plans of insurance companies, these mutual funds do not provide pension or annuity.

Regular Pension plans of Insurance Companies covered under section 80C

 

Pension plans are offered by insurance companies and the contributions, qualifies for tax benefit under section 80CCC instead of section 80C.

Payment of premium for annuity plan of LIC or any other insurer Deduction is available upto a maximum of Rs. 100,000/-. (aggregate deduction under Sec. 80C, 80CCC and 80CCD)

Tax Savings – Section 80C – Part I

Tax Planning,minimizing the tax liability, section 80C, 80CCC and 80CCD,ELSS (Equity linked savings scheme), 5-Yr tax-saving bank fixed deposits (FDs) of banks, PPF (Public Provident Fund), EPF (Employee’s provident fund),Tax season is around the corner.

Tax Planning involves making investments with the objective of minimizing the tax liability and maximizing returns. You should try do tax planning to maximize your income by saving on taxes. Section 80C, of Income Tax Act, 1961, gives a number of options that can be used for the purpose of tax deduction.  The total deduction under this section (alongwith section 80CCC and 80CCD) is limited to Rs. 1,00,000/- (One Lakh).

There are avenues such as ELSS (Equity linked savings scheme), 5-Yr tax-saving bank fixed deposits (FDs) of banks, PPF (Public Provident Fund), EPF (Employee’s provident fund), VPF (Voluntary provident fund), NSC (National Savings Certificates), Various types of Life Insurance schemes, ULIPs (Unit-linked insurance plans), 5-Yr Post Office Time Schemes, NABARD (National Bank for Agriculture and Rural Development Bonds) and Life Insurance Premium

Equity Avenue:

Equity linked savings scheme (ELSS)

This is considered as the one of the best 80C option. It is a mutual fund scheme investing entirely in equities and therefore has the potential to deliver the best returns. There is a 3-yr lock in which is involved in this option. (This is also the shortest lock in period available when compared to other avenues) You can visit the following sites to get more information on the best performing mutual funds in this category www.valueresearchonline.com. Some of consistent good performers in this category are Canara Robeco Equity Tax Saver, HDFC Taxsaver, Sundaram Tax Saver.

Debt Avenues:

PPF – Public Provident Fund

This is a assured returns small saving schemes. Current rate of interest is 8% and the normal maturity period is 15 years. The interest earned on deposits in PPF accounts is fully exempted from income tax. Minimum contribution is Rs 500 and maximum is Rs 70,000. (There is flexibility to make Deposits in installments up to maximum 12 installments) Note that the interest rate is assured but not fixed. The interest and principal in a PPF account cannot be attached by a court decree. Open a PPF account and invest at least the minimum amount of Rs 500, maintain every year, even if you do not intend on using it for investment immediately. The reason is that  after 10+ years, original lock in period of 15 years will get reduced to just < 5 years. And this is of good advantage for parking funds, assured returns, (for short period) at that point in time in future.

EPF – Employee’s Provident Fund

PF is deducted from your salary.You and your employer contribute to it. Your contribution forms part of 80C investments.

NSC – National Savings Certificate

This is a 6-Yr small savings instrument . Rate of interest is 8% compounded half-yearly, so, the effective annual rate of interest is 8.16%. If Rs 1,000 is invested, then it becomes Rs 1601 after 6 years. Minimum amount is Rs 100/-. There is no max limit. The interest accrued every year taxable, Interest accruing annually is automatically reinvested, and such re-invested interest qualify for tax rebate under section 80C of the Income Tax Act.

POTD – 5-Yr Post-Office-Time-Deposit Scheme

Post Office Time Schemes are similar to bank fixed deposits. Scheme offers the facility of investing surplus funds at relatively higher rates of interest. They are available for variable duration like one year, two year, three year and five year. However , 5-Yr post-office deposit qualifies for tax saving under section 80C (This is w.e.f financial year 2007-2008, assessment year 2008-2009). This offers 7.5 per cent rate of interest and the Effective rate is 7.71% per annum (p.a.). The rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable. Minimum amount is Rs 200/-. No Maximum limit.

BTDS – 5-Yr Special Bank Term Deposit

BTDS is the only deposit scheme with banks where tax benefits under section 80C are available to depositors. Interest rate varies from bank to bank. Interest is taxable. Tax is deducted at source. Unlike FD’s , premature exit is not possible. For , as of Feb 2010, Eg: Axis Bank Interest Rates On Domestic Deposit is 7% (7.5% for Senior Citizen). Interest Rate for Tax Saver deposit is 7.25% (8% for Senior Citizen). Minimum amount is Rs 100/-. Maximum amount is Rs 1,00,000/-

POSCS – Post Office Senior Citizen Savings Scheme 2004

Post Office Senior Citizen Savings Scheme (SCSS) is the is meant only for senior citizens.It is the most lucrative scheme. Current rate of interest is 9% per annum payable quarterly.Interest is payable quarterly and not compounded quarterly. Thus, unclaimed interest on these deposits will not earn any further interest. Interest income is chargeable to tax. Minimum amount is Rs 1,000/- and maximum amount is Rs 15,00,000/-.

I will continue this post in next couple of days and cover other avenues as well……