Sunday, 19 July 2015

Investment in Mutual Funds - Boon for Small Investors

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The investors in India, who intend to participate in stock market,are often vary of investing in shares due to risk involved on account of factors like volatility, limited knowledge of stock markets, etc. Shares have proved to be one of the better options to earn good returns over a period of time with advantages like tax benefits, liquidity, etc. The small investors have no wherewithal to make adequate research and analysis of a particular stock to take a longer term view. Further, one wrong choice may result into lower or no returns. The lure of stock markets however entice the investor to invest and sometimes they end up taking wrong decisions. 

The mutual fund industry had established itself in the Indian Stock market in last two decades. The market regulator have played a crucial role to establish a robust mutual fund industry. The investors who are interested in participating the stock markets should, therefore, consider mutual funds as one of the better options. The mutual funds have expert teams of professionals who take appropriate investing calls depending upon market volatility, growth prospectus and various other factors. The asset management companies who manage the mutual funds charge a nominal expense for managing the funds but the returns more than compensate such charges. The mutual funds are well regulated and the risk of loss of capital due to misappropriation or wrong doings is almost negligible. However, it does not mean that the mutual funds are risk free or there is no possibility of risk of loss. The mutual funds are subject to market risk, hence loss or gain on investments depend upon market scenario. The investors may consider investing through mutual funds to meet long term goals. The investment can be either through systematic investment plans where small amounts can be invested in mutual funds on periodical basis. This helps in containing market volatility risk. The lumpsum investment options are also available.

What is PPF - How to open a Public Provident Fund (PPF) Account

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Background
Public Provident Fund (popularly know as PPF) scheme was floated by the Government of India in 1968. The main purpose behind the scheme is to provide an avenue to the people working in unorganized sector and self employed individuals like small businessman. These people can save through PPF for their retirement years or old age since these people do not have protection of Employees Provident Fund, pension schemes or any other retirement benefits available to organized private sector employees or government employees. However, the scheme is available to every individual irrespective of their status of employment or source of income. 

Who can open a PPF Account
Any individual can open a PPF account. Earlier, Hindu Undivided Family’s (HUF) and associations (like Trusts) were also allowed to open PPF Account. However, pursuant to circular issued by Reserve Bank of India (RBI) in the year 2005, HUFs and other entities are now not allowed to open a PPF account. The PPF account can be opened only in the name of an individual including a minor.

Non Resident Indians are not eligible to open an account under the Public Provident Fund Scheme. However, if a resident who subsequently becomes Non Resident Indian during the currency of the maturity period prescribed under Public Provident Fund Scheme, may continue to subscribe to the Fund till its maturity on a Non Repatriation Basis.

An individual can have only one PPF account. A separate account can be opened by an individual on behalf of a minor also (in the capacity of guardian). 

How to Open a PPF Account
The procedure of opening a PPF account is similar to that of a Bank account. The PPF account can be opened in the designated branches of State Bank of India or any of its subsidiaries (like State Bank of  Patiala, State Bank of Mysore, State Bank Bikaner & Jaipur, etc.). The PPF account can also be opened in nationalized Banks (like Punjab National Bank, Syndicate Bank, Bank of Baroda, Bank of India, Canara Bank, etc.) and designated post offices.

Deposit or subscription in the PPF Account
Minimum amount of Rs. 500 per annum is required to be deposited in a PPF account. The maximum deposit permissible in a year is Rs. 1,50,000 (from the Financial Year 2014-15) The amount can be deposited at one go or in installments subject to the maximum of 12 installments in a year.

The account will become irregular if minimum of Rs.500 is not deposited in any year. The amounts already deposited will continue to earn interest. However, loans or interim withdrawals from an irregular account will not be allowed. The account can be regularized by depositing arrears of Rs.500 per annum plus penalty of Rs. 50. Every subscription shall be made in cash or by crossed cheques or draft or pay order in favour of the Accounts Officer at the place at which that office is situated. The date of realization of cheque shall be reckoned as the date of deposit.

Interest on deposits
Deposits in the account earn interest at the rate notified by the Government of India  from time to time. The rate of interest applicable for the year 2011-12 is 8.6% per annum. As per the latest circular of the Government of India, the rate of interest will be notified every year based on the interest rate applicable to other government saving schemes. Accordingly, the rate of interest on PPF account has now become dynamic.

Maturity Period and withdrawals on Maturity
The initial tenure of PPF account  is 15 years. The validity of the account can be extended by 5 years at a time upon completion of the initial period of 15 years with or without subscription.

The account can be closed on maturity or extended maturity, as the case may be, and entire balance lying in the account at the time of closure can be withdrawn.

In case the account holder opts to extend the maturity with subscription, he/she shall be eligible to make partial withdrawals not exceeding one every year subject to the condition that the total of the withdrawals, during the 5 year block period, shall not exceed 60 percent of the balance at his/her credit at the commencement of the said period.

If the account is continued without fresh contribution, the entire balance in the account can be withdrawn either in lumpsum or in installments (maximum one in a year).

Interim withdrawals and loans
The account holder can make one withdrawal every year beginning from the 7th financial year. The maximum withdrawal will be 50% of the balance at the end of the fourth year or the financial year immediately preceding the withdrawal, whichever is lower. The account holder can withdraw the amount as above as per his discretion without assigning any reason.

The PPF account holder can take a loan between the 3rd and 6th financial year (both inclusive) of opening the account for an amount not exceeding 25% of the balance at the end of second preceding financial year.

The loan is to be repaid in 36 months following the month in which loan is taken, either in lumpsum or in one or more installments. The interest on loan will be payable @ 2% p.a. over the interest paid on PPF. If the loan is not repaid within stipulated time, the interest would be charged @ 6% p.a. instead of 2% p.a.

Nomination
The account holder can make nominations in the PPF account. Nomination can be cancelled or changed from time to time. Nominations in favour of minors through guardian are also allowed. The nomination operates similar to the bank accounts. In case of death of the account holder, the outstanding balance in the account will continue to earn interest till withdrawal by the nominees or legal heirs (in case there is no nomination). It is always advisable to make the nominations in PPF account as there will be lot of hassles for legal heirs in withdrawal of money in the absence of nomination (like they will be asked to submit succession certificate or letters of administration or probate of the will or Indemnity and affidavit alongwith death certificate).
No Nomination shall be made in respect of an account opened on behalf of minor. A subscriber to the scheme cannot nominate a trust as his nominee.

Tax Exemption
The deposits made in the PPF account are eligible for deduction under section 80C of Income Tax Act, 1961. The interest earned, the amount received on maturity and interim withdrawal are also tax-free. The balance held in PPF account is also exempt from wealth tax.

Merits and demerits
Being a Scheme formulated and backed by Government of India, it offers highest safety and security. The tax free returns offered by PPF compares well with other investment options available in the market (like the present tax free interest of 8.6% is very lucrative). It also offers tax exemption for deposits under section 80-C of the Income Tax Act, 1961.The balance amount in PPF account is not subject to attachment under any order or decree of court in respect of any debt or liability.

The arguments against PPF are limited liquidity and long term investment horizon. Going forward, the rate of interest may also be reduced in line with the rate of interest on other government securities. Further, in case of organized sector employees, they can make additional voluntary deposits under their EPF accounts where historically the interest rates have been better than PPF. 

Thursday, 27 March 2014

How to Invest in / Purchase NSC (National Savings Certificate)

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National Savings Certificate (also referred as NSC) is one of the oldest and popular instrument for investment not only for the purpose of saving tax but also as a very safe investment option. It gives reasonable return with highest safety and tax benefit. The seasoned investors may be aware of the details about this investment tool including the process of purchase of NSC but first time investors may need some guidance in this regard. The possible queries and answers thereof are as given below: 

How to buy / purchase / invest in NSC (National Savings Certificate)

The investors interested in investing in NSC can purchase the same from designated post offices. The investors need to get in touch with the concerned post office for purchasing the NSC. This instrument is available only through post offices and not through banks or any other agency. The original certificate need to be submitted for payment upon maturity at the post office which has issued the NSC. The proforma of NSC application form is available online at India post website. 

Transfer of NSC

The certificate can be transferred from one post office to another post office. Further, the certificate can also be transferred from one person to another after one year from the date of issue, with the consent of the concerned post master / head postmaster. The format of application for transfer of National Savings Certificate can be obtained from the concerned post office. 

Limit for Investment in NSC / Who are eligible to Invest in NSC

The minimum investment in NSC is Rs. 100/- and there no maximum limit of investment. The individuals can invest in NSC and trust and HUF are not eligible for investment in National Savings Certificates. 

Tax exemption for investment in NSC / Tax liability on Interest 

The investment in NSC is eligible for tax exemption under section 80C of the the Income Tax Act, 1961 within the overall limit of Rs. 1,00,000. Since the interest accrued is payable on maturity, the interest accrued during the year is treated as re-invested and eligible for exemption under section 80C of the Income Tax Act, 1961. However, the accrued interest is not exempted from tax and the same will be added to the income of the holder for the purpose of taxation. Further, the interest on NSC is not subject to deduction of tax at source (TDS). 

Interest rate for NSC

Investment in 10 Year National Savings Certificates will carry interest @ 8.8% per annum whereas 5 Year NSC will carry interest @ 8.5% per annum, with effect from April 1, 2014. It may kindly be noted that interest rates on small savings instruments are notified every year by the Ministry of Finance, Government of India. 

Loan against NSC

The pertinent question asked sometime is - can a loan be availed against NSC ? The banks grant loans by accepting NSC as a security. It means that the holder(s) may get loan by offering NSC as security by way of pledge. The holders may get in touch with the concerned bank for checking about the amount of loan to be granted in this regard. 

Saturday, 16 November 2013

Investment Options in Volatile Markets in India

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Last 2-3 years seems to have been toughest for retail investors in last decade or so when there was a state of all pervasive confusion in almost all assets classes. The real estate, which gave record returns to the investors during last decade, has started showing signs of slowdown in almost all sectors be it commercial space or residential properties. The signs of fatigue are visible in the real estate sector with supply overtaking the demand in most pockets in metros and class A cities in India. Apart from demand supply dynamics, overheating and short term approach of investors have also seem to have acted as spoilers. The rise in prices of real state was too steep and too past which is not sustainable in longer run. The rise has to be gradual and reasonable so that it can be sustained in longer run. Anybody and ever body who have put in money in this sector during last decade and who was able to hold the positions have made handsome money. However, this one way rally seems to have gone too far and not supported by fundamentals. It would be too optimistic to expect same kind of returns in next 5-10 years. The real fall may be limited but low levels of increase in real estate prices in future means dismal returns considering the high level of inflation.

Another dark horse of the decade was bullion and mainly gold which gave astronomical returns over 5 year period till 2012. However, the rally has lost its steam and if we ignore the impact of increase in customs duty and USD - INR exchange rate, gold has given negative returns in 2012 & 2013. In any case, Gold and Silver are non performing assets and spikes are seen in times of economic crises. 

The capital markets scaled new heights in 2008 and the journey was downhill thereafter. The recovery was sallow and unsustainable sometimes. The markets have made strides in between and are at better level now. However, considering the macro economic scenario and political developments, no definite trend can be predicted for the time being. The picture will become clear after national elections once the new government takes charge at centre. 

Considering the above factors, it is really difficult for a common investor to make right investment choices. All investments have their own pitfalls. In our view, it is the right to take a balanced approach to investing by taking reasonable exposure in different asset classes. The capital commitment is high and time horizon is longer for investment in real estate. Hence, someone having sizeable surplus money can take selective calls in real estate pockets where growth is expected to be faster. Buying real estate for own use is always a good decision but as far as investment in real estate  is concerned, taking huge exposures supported by debt is not advisable. As far as gold is concerned, in case there is a need of gold in future, it is better to invest gradually in small lots and gold ETFs can be one of the modes of investment. This will act as hedge against inflation and will result into reasonable quantity accumulation over a period of time to meet future needs for marriages, etc. The stock markets always gives hope and gradual investments through SIPs or selected stocks may result into a sound portfolio which can make you winner in times of euphoria in stock markets. 

Another option is debt instruments which have emerged as good investment options recently and these should not be ignored. The Tax free bonds offered by some Public Sector Undertakings are a boon for individuals who are in higher tax bracket as these bonds offer liquidity combined with good tax free returns as these are listed instruments which can be sold through stock exchanges in the times of need. Other options for investment in debt are parking short term money in liquid funds, investment in Fixed Maturity Plans to lock funds at the prevailing high interest rates, etc. The investors need to seize the opportunity before the interest rates start coming down. 

The aforesaid investment options need to be appropriately balanced and allocation will depend on the age profile, specific goals, etc. of an individual.  

Sunday, 4 August 2013

Income Tax on Adsense / Website Income (Presumptive Taxation Under Section 44AD)

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The bloggers and people running websites in India are always under a dilemma in respect of taxability of the profits / income arising out of their Google Adsense Account or revenue otherwise earned through websites. Normally, it is suggested that it should be treated as Normal Business Income (where profit is arrived at after deducting the expenses related to the business) and the tax liability should be arrived at accordingly. However, we have different view on this aspect. 

      Section 44AD of the Indian Income Tax Act, 1961 deals with the presumptive taxation of income for small enterprises. This Section was initially meant to be introduced for small retailers. However, Section 44AD of the Income Tax Act, 1961 was amended later on and with effect from Assessment Year 2011-12 the scope of the section has been enlarged and it now includes any type of business except business of  plying , hiring or leasing goods carriages referred to in section 44AE. The provisions of section 44AD are available to an individual, Hindu undivided family or a partnership firm, who is a resident in India, but not a limited liability partnership firm and whose annual turnover or gross receipts does not exceed Rs. 60 lacs (Rs. 1 Crore from the Assessment Year 2013-14 onwards). As per section 44AD, a sum equal to 8% of the total turnover or gross receipts of the assessee in the previous year on account of eligible business shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". The 8% of the turnover/ gross receipt is minimum threshold and assesee is free to declare more than 8% as his profit and gain. Such provision are provided to make the small businesses declare profit at the rate mentioned above without maintaining any records and without allowing any other deduction except deduction  allowable u/s 80C to 80U of the Income Tax Act.
       
     Considering the provisions of Section 44AD of the Income Tax Act, 1961, in our view, the income earned through Adsense account with Google or similar income from running the website(s) can be considered under Section 44AD of the Income Tax Act. In such case, 8% of the total amount received in a year through Google Adsense Account and similar revenue earned through a website can be treated as Income of the Year and the applicable tax can be paid accordingly without worrying about keeping cumbersome record of expenses. It can be further simplified by the following example:
T     Total Amout Received in a Financial Year through Adsense / other website revenue - Rs. 10 lac
        8% of the total Receipt  - Rs. 80,000. 
       Hence, income for the purpose of taxation is Rs. 80,000 and no tax is payable in such case as the income of Rs. 80,000 is less than the minimum threshold for the purpose of Income Tax. 
      
      If we take another  example where total receipts of the year are Rs. 50 lac, the 8% of which will work out to Rs. 4,00,000 and the tax will be payable as per applicable slab rates on such sum of Rs. 4,00,000 (In this case, tax for the Assessment Year 2013-14 for an individual other than senior citizen will work out to Rs. 20,600).
      
     Hence, in our view, the tax on income from adsense account and similar income from website(s) can be covered under Section 44AD of the Income Tax Act, 1961. It may please be noted the views given above are the personal views of the author of this article and the readers are advised to consult their own tax advisors in this regard. The author or this website shall not be in any way responsible or liable for any loss or liability incurred or suffered by any person as a result of any action or decision taken by such person based on the views given above.