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Tuesday, February 22, 2011

How to reduce tax on your retirement benefits

Perhaps one of the most ignored challenges after retirement is to manage your benefits. Ironically, you are anxious about everything else: the sharp fall in income, life without colleagues, lack of drive, and so on. But for obvious reasons, you are excited about the benefits—provident fund, gratuity, leave encashment, superannuation fund, etc.

However, not all these returns are exempt from tax. So, it is important to distinguish the ones that are tax-free from those that are not. You should also be aware of ways to steer clear of such tax ‘traps’.

If you are a government employee, there can be a marked difference in the way your funds are taxed. “There is tax exemption on certain receipts such as commuted pension, gratuity, leave encashment, etc.

Private sector employees are generally taxed on the basis of prescribed rules,” says Suresh Surana, founder of RSM Astute Consulting, which offers specialised accounting and auditing services. Let’s take a look at the taxable and tax-free benefits and learn how to reduce your burden.

Provident fund:
It is completely tax-free. However, ensure that your office invests it in a recognised provident fund. “Unrecognised provident funds have different tax structures compared with the recognised ones. Further, the employer’s contribution and interest credited to such funds are taxable as income in the year of receipt,” says Surana.

When it comes to the Employee Provident Fund (EPF), the interest and amount paid at retirement are not tax-free if your employer had been contributing more than 12% of your salary to the account. Similarly, the interest “credited in excess of 9.5% per annum is included in gross salary”, says Ameet Patel, partner, Sudit K Parekh.

The benefits of working continuously for five years with an organisation are widely known. “The payment of accumulated balance from a recognised provident fund (RPF) is taxable unless the employee has worked continuously with a firm for five years,” says Sandeep Shanbhag, director at tax and investment advisory firm Wonderland Consultants.

However, if you know you are going to retire in less than five years of joining a new company, you can secure tax-free RPF on retirement by making sure you transfer the EPF account from the previous company to the current one. Gratuity: This is one corpus where government employees have an edge over others.


“Gratuity is a lump-sum payment made by an employer for long and meritorious service rendered by an employee,” says Surana. Any amount that the government employees receive is exempt from tax, but there is a cap for non-government staffers. For employees covered under the Payment of Gratuity Act, the cap is the least of the following: a) actual amount received b) 15 days’ salary for each year of service c) Rs 10 lakh.

“The salary for 15 days is calculated by dividing your last drawn salary by 26, which is the maximum number of working days in a month,” says Surana.

There could still be situations when you end up paying tax on gratuity. “Any gratuity received by an employee who is covered under the Payment of Gratuity Act and has worked for less than five years is fully taxable,” says Shanbhag. The clause, ‘completion of the five years’ service’ is not applicable in the case of death or disablement of an employee. Also, employees who are not covered under the Act do not have to complete five years of service to get tax-free gratuity.

Superannuation fund:
The amount received as superannuation is exempt from tax if it is paid on death, retirement, in lieu of or as annuity. “Any commutation of pension is exempt up to one-third of the commuted value of pension, where the employee receives any gratuity and half of such value otherwise,” says Shanbhag.

The interest that is accumulated on the superannuation fund is taxed under certain circumstances. “This exemption is not available if the employee resigns,” says Shanbhag.

“The escape route in cases where the amount becomes taxable is to purchase SAF (state annuity fund)-related annuity without any commutation. If you don’t do this, TDS (tax deducted at source) will be applicable on the average rate at which the employee was subject to during the preceding three years or during the period, if it is less than three years, when he was a member of the fund,” notes Shanbhag. The rest of the amount is exempt from tax only if annuities are purchased from life insurance companies.
Leave encashment: “The tax treatment of leave encashment depends on the status of the employee as well as the point at which the leave is encashed, that is, during employment or at the time of retirement,” says Surana. Leave encashment during the period of employment is taxed, but not at the time of retirement or leaving a job, adds Surana.

Any amount received as leave encashment by the state or central government employees is exempt from tax . However, the bar is stricter when it comes to others. The amount of encashed leave that is exempt from tax is the lower of Rs 3 lakh and the amount paid according to a calculation specified by the Income Tax Act.

“The taxable portion of leave encashment would form a part of the normal salary income and would be taxed as per the normal slab rate applicable to the employee. There is no special rate for this,” says Patel.

Voluntary Retirement Scheme:
“VRS is applicable only to those employees who have completed 10 years of service or are over 40 years of age,” says Surana. When you opt for the voluntary retirement scheme, the company will pay you a compensation, which is tax-free if it is lower of the two: Rs 5 lakh or the last three months’ average salary multiplied by the number of years of service. Beyond that, it is added to the income and taxed accordingly.

There are ways to avoid being slotted in the higher income tax bracket because of the hefty compensation paid in the year of retirement. “This exemption is also available if the VRS amount is paid in instalments spread over several years. Staggering this amount would mean that the employee not have to pay the entire tax upfront but is subjected to TDS as and when the instalments are paid,” says Shanbhag.

Moreover, employees will also benefit from the interest on the outstanding VRS amount at a rate much higher than the market rate and from a safe source: his erstwhile employer.


New Pension Scheme:
The central and state government employees who joined service in and after January 2004 are entitled to pension via the New Pension Scheme. Though they get tax benefits when they invest in this scheme, the amount they receive at maturity from this scheme is taxed. Also, the hefty bonus they get as golden handshake is fully taxable. “There is no exemption for such a payment,” says Patel. Any other amount that is not mandatory—that the employer pays of his own volition—is taxable.

The bottom line: the amount of tax you save on your retiral benefits will depend on how well-informed you are about the rules governing their taxation.

Curtesy: Economic Times

Thursday, February 17, 2011

Appointing a nominee for your investments

Manyof us invest in shares, deposits and mutual funds without bothering to fill upthe nomination details. Since choosing a nominee is not mandatory while makingan investment, the decision is often postponed. 
However, this process simplifies for nominees the realisation of investment proceeds in case of the originalinvestor’s demise. This is even more critical when an investment is heldin one person’s name since death makes it difficult to access his fundstill several formalities arecompleted.

If nominees havebeen appointed, they can produce basic documents, such as a death certificate,to access the funds. The absence of a nominee may require more documentation,such as the probate of will and certified list of legal heirs, before theinvestment can be transmitted or withdrawn. Nominees are deemed to hold theinvestment proceeds in a trust if it is disputed by legal heirs, pending adecision by thecourts.

Documentation: Most investment forms provide a space for selecting a nominee. If it is notfilled up at the time of investing, other prescribed forms can be used later.

Multiplenominees: Most investments allow more thanone nominee and the percentage of share that each would be entitled to.

Signature: The nomination form has to be filled up by all joint holders, irrespective ofthe mode of operation of theinvestment.

Transmission: Nominees can have investments transferred in their names for redemption later.For this, they need to complete the KYC and PANformalities.

Pointsto note

Whocannot nominate : Kartas of HUFs and powerof attorney holders are not authorised to make or change nominations or beappointed as nominees to aninvestment.

NRIs: Non-resident Indians can be named as nominees of investments made in rupees.However, the proceeds cannot be repatriated and have to be continued to be heldinrupees.

Whocan be the nominees: Certain investmentspermit the nomination of a trust, religious or educational institutions. Othersonly permit individuals to benominated.

Courtesy Centre for Investment Education and Learning(CIEL)

Six smart things to know about Monthly Income Plans (MIPs)

1) MIPs are schemes created by mutual funds that seek to generate regular income. There is no guaranteed rate of return.

2) MIPs invest primarily in debt instruments, but hold a small portion in equity (between 5 and 35%), to enable growth in investments.

3) Investors can choose from growth and dividend options in an MIP, depending on their need and tax status.

4) Investors choosing a growth option can redeem a part of their units regularly using a systematic withdrawal plan to generate regular income.

5) Withdrawals are subject to capital gains tax, but an investor who falls in the tax-free or low-tax category, can use it to reduce his tax outgo.

6) The dividend distributed by an MIP is tax-free in the hands of the investor, but is given after a dividend distribution tax has been paid directly by fund.
Courtesy : Centre for Investment Education and Learning (CIEL)

Note: If you are interested in monthly returns Open DMAT and Trading account with us and become fund manager of your money.

Thursday, February 10, 2011

Worst is not yet over..Dont Be Panic !

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. "
                                                                                                                        Warren Buffet

Wednesday, February 9, 2011

Scam Effect

Money matters Financial services was Trading around 700 levels during 21st November 2010 is trading around 100 level now.

To be continued.

Bear Attack :-(

Tuesday, February 8, 2011

Long term call update

Market is falling from 4 weeks.Most of the stocks hitting  52 week low daily.

By Gods grace our long term call Guj Fluro made new high. Till now 60% returns.

PPF as a tax saver and investment option

1. What is the difference between EPF and PPF?
Where Employees Provident Fund serves all salaried employees, the Public Provident Fund serves everyone - the employed, the unemployed, even children and housewives. The access to the fund is also quite easy as any post office and some State Bank of India branches can help you open the fund. The purpose of a provident fund is to provide individuals some form of savings for their retirement years. Naturally, the EPF and PPF are for long term savings.

2. What kind of income can I one expect from PPF?
The returns from the fund is in the form of interest paid. The interest rate currently is 8% compounded annually. The interest however is not paid out but is compounded (like a bank recurring deposit) till the maturity or withdrawal. With the current levels of inflation real and stated, the returns from the PPF fund could be low. This is a typical asset class mismatch.

3. Is there any capital appreciation?
Being a typical debt investment, there is no capital appreciation for the investment.

4. What is the risk involved with this investment?
There is hardly any risk for the capital or the returns from the PPF deposit. The risk however is with inflation which could possibly reduce the value of the returns in the long term and the other disadvantage is the long lock-in period of 15 years.

5. How about liquidity of the investment?
The PPF gives very little liquidity too. The fund, as mentioned earlier, is for a minimum of 15 years. This can be extended for a further period of 5 years each indefinitely.
The liquidity is in the form of withdrawals that can be made from the fund from the 7th year onwards. The withdrawal value is however limited to a maximum of 50% of the average of the last 3 years’ fund values. After the 7th year, one withdrawal can be made every year, based on the same condition.

6. What happens in the case of the death of the account holder?
In case of death of the account holder before the maturity of the account, the fund will be paid to the nominee/ legal heir.

7. How is PPF treated for tax?
This is where the PPF scores very high. The PPF comes under the Exempt- Exempt- Exempt category currently. This means that the amount invested gets tax benefits, the interest is not taxed and this applies for the final maturity amount as well.
The investment gets benefits under Section 80C of the IT Act. The investment however is limited to a maximum of Rs.70,000/- per year per person. This limit of Rs.70,000/- includes the deposits made in the name of any dependent children.

8. Are there any other specific benefits that I need to know?
Some other unique benefits from the fund are:
1. There is no wealth tax on the value of the fund.
2. In case of insolvency the money in the fund will not be attached to the assets. So only this investment is truly ours, come what may. (Except for education in a philosophical sense). This feature can be very useful particularly for business people in high risk industries / businesses. The fund cannot help anyone if there is tax evasion though. 

9. How does it score on convenience?
The fund scores high on convenience. As a savings tool, it is incomparable in terms of the flexibility of payment and quantum. You can make up to 12 contributions per year. Each contribution can be as low as Rs.100/- subject to a minimum of only Rs.500 per year.
There has to be at least one contribution per year. In case no payment is done for a whole year, there is a charge of Rs.50/- when the next investment is made. The objective is to make savings as comfortable and convenient for the minimum possible investment.
A minor disadvantage is that the fund is yet to go online. So we have to carry our passbook and also face a queue to make the payment every time.

To sum up
PPF is a typical savings tool but one has to invest for the long term. This means that there is an asset class mismatch. But on the convenience side, the fund scores pretty high for the flexibility that it offers.
There are additional unique advantages in the form of wealth tax and insolvency benefits from the Public Provident Fund. On the flip side, the long term (minimum 15 years) of the plan is a limitation.

Note: This article first appeared in Money Control

Choosing the right tax-saving product!

The tax season is just round the corner! And there are too many tax saving options available broadly categorized under two heads: one equity and two debt products! There is your financial consultant but more often than not he might suggest only those products that will get him the highest commission! Obviously you are confused! How about analyzing the right tax saving product for you? Want to know how?

To begin with ask yourself these two questions: your risk tolerance level and what stage in life you are in. But why should you do it in the first place?

Importance of finding your risk profile
Finding answer to this question can lead you to the right tax saving plan! Analyzing your risk tolerance level will help you shape up your investment portfolio and get the best out of it. Now what is risk tolerance? Your investments are prone to both positive and negative changes. In the risk of negative changes the big thing is to find out how much you can afford to lose on your investment. This is your risk tolerance level.

How to find your risk tolerance level?
There are two sides to it: one is financial and the other is emotional. The financial risk tolerance level is self explanatory. That is the amount of money you can afford to lose. If you can afford to lose more money then you have a high risk tolerance level and if you cannot afford to lose huge money your financial risk tolerance is moderate and if you do not want to take risk at all your financial risk tolerance is called low.
Emotional risk tolerance is all about the stress level that you are put into when you lose money on your investment. The more your stress is, the lesser is your risk tolerance.

Investors fall into three categories based on their risk profile: conservative, balanced and aggressive
As the name implies conservative investors are averse to taking risk. Typically they have a low risk tolerance and prefer investing in safe havens like Public Provident Fund (PPF), National Savings Certificate (NSC), and Employees Provident Fund (EPF), Endowment plans when it comes to life insurance and on tax-saving bank fixed deposits.

The balanced investors are those who wouldn’t mind taking some amount of risk but still would park their investments in low-risk products like balanced unit linked insurance plan or ULIPs. In other words, their risk tolerance is moderate.

Those investors with the highest risk tolerance levels belong to the aggressive investors category. They have an appetite for taking risk. If you belong to this category you could invest in tax saving products like the equity linked savings scheme or ELSS.

Let us see the pros and cons of each of the tax saving products in all three categories of investors.

Products for conservative investors
With low or almost nil risk tolerance level the conservative investors usually go for fixed income products that would secure their investment.
Returns (%)
8% annual tax free return
Min amount: Rs. 500Max amount Rs. 70,000/year for 15 years till it matures.
Loan facility available.
Enjoys ‘EEE’ status that is ‘exempt-exempt-exempt’ from tax. Your contribution, accumulation and withdrawal are exempt from tax.
Long lock in period. You cannot withdraw until the beginning of the sixth year.
The loan amount is limited to a maximum of 25 percent of the balance at the end of the first year.
8 percent annual pre-tax return
Min amount: Rs 500 per year. No maximum limit.Enjoys ‘exempt-exempt-tax’ (EET) that is no tax on contribution but the interest is taxable on an accrual basis that is on each-year basis.
Maturity period: 6 years. No premature encashment option. Interest income is taxable.The effective post-tax return for the highest tax bracket is only 5.53% every year.
Employees Provident Fund
8.5 percent tax-free returns every year.
PF withdrawal is not taxable if contributions for over five years.’EEE’ status that is the contribution, accumulation and withdrawal is ‘exempt-exempt-exempt’ from tax.
PF withdrawal before five years is taxable. Premature encashment is available but only with conditions.
Endowment plan
Lower returns compared to products like the PPF.
Life coverage and returns.
High premiums. Compared to the premiums that are paid in the first few years the surrender value might be lower.
Tax saving fixed deposit
6 to 8 % returns every year.
Min amount: Rs. 100 but varies with banks.Lock in period: 5 years, comparatively lesser than investing in products like PPF.
TDS is applicable for interest income of more than Rs. 10, 000 in a year. No premature withdrawal.

Products for the balanced investors
The risk tolerance level of these investors is moderate and they invest in low-risk products as the conservative investors and also in unit linked insurance plan or ULIPs.
Provides both insurance and investment.Long term saving products hence absorbs market volatility.
Investing in debt funds is also available.
Tax free returns.
Subject to market risk as a percentage is invested in stock markets.For better returns premiums for the entire duration should be paid.

Products for the aggressive investors
These investors with high risk appetite can invest in tax saving products as the conservative and the balanced investors do. Apart from this they can also invest in equity-linked products, which generally do better than the conservative products but returns may vary with funds.

Equity-Linked Savings Scheme (ELSS)

Invest in Shares
Minimum amount is Rs 500. Lock-in period: Three years. Dividend and returns at maturity are tax-free.

No lock in period, less charges etc. 
ELSS invests in stock market and hence is prone to market risks.

Wrong selection of stocks leads to capital erosion


Importance of having goals
Your stage in life will also have a say in deciding your investment portfolio composition. If you are someone young then you could consider investing in equity like ELSS, ULIP or take a home loan or educational loan to save tax. Once you grow older you can slowly get out of these avenues and invest in fixed income tax saving products like the PPF, FDs etc.

How to use risk profile + goals to choose the right option?
Returns on your investment are important but this alone should not be the driving factor in deciding your investment choice. There is no investment per se that can save you tax and simultaneously secure your investment and give highest return. Your final choice of tax saving investment should be guided by both your risk profile and your goals in life which again depends on the stage of life you are in. Remember, the goal is to have an investment portfolio that can give you decent returns and the risk tolerance level you can handle.

Note: This article first appeared in Money control