#NPS Tier-2 account- Ambiguity on #tax treatment at the time of withdrawal of funds

Recently saw an article of Value research online about ," how one should use Tier- 2 account" of NPS as an alternate to mutual funds. 

While NPS is definitely a low-cost product, there is lot of ambiguity over taxation rules at the time of withdrawal.

For those who are not aware, NPS Tier-2 is an optional account over tier-1 which has no withdrawal restrictions like tier-1.
For investment allocation in tier -2, you can choose your investments to be in active choice mode or auto choice mode to be split across across Equity, Corporate bonds and Government bonds. (NPS Booklet)

Articles from the web on tax treatment at the time of withdrawal  of funds from Tier-2 account.

1. Tax Treatment of Tier II Account is similar to that of Debt Mutual Fund: On taxation front, as per the views from various CAs and tax consultants, the tax treatment on proceeds from Tier II NPS account would be similar to debt mutual funds. Indexation benefits can be availed of. (source)
2. Valueresearch article says, the taxation is the same as any other fixed income or debt alternative.
3. Tax angle from Mint  A crucial difference between the two accounts is the tax treatment. Says Rani S. Nair, executive director, PFRDA: “Since Tier II does not have any lock-in period, it does not qualify for a tax deduction under section 80C.” However, right now, the pension regulator is divided on the tax treatment of the amount withdrawn. Says Nair: “We are yet to hear from the tax department on the tax implications.” Going by the product structure, withdrawals will attract capital gains tax. Withdrawals before one year will attract short-term capital gains that is taxed at the marginal rate (the highest tax rate on your income slab). For withdrawals after one year, you will have to pay long-term capital gains—10% for debt funds and nil for equity funds.

Some articles talk about

• Treatment of the whole amount as "debt"- while others talk  about 
• Separate tax treatment for withdrawal from equity and debt portion of tier-2 account. ( Tier 2 withdrawal request online on CRA NSDL provides the option of  lump sum or scheme wise withdrawal- so you can actually withdraw from Equity or Corporate or Government units specifically)

So, as another article says

The problem is the ambiguity over taxation. "There is no clarity on tax treatment of Tier II NPS returns. It is very subjective and different people have different views on the matter.

So, Lets keep our fingers crossed till any formal judgment is out. Please leave a comment ,if you have any valid input.

Oh my God! Look at these investment advices..

One of my friend called me to ask for my second opinion when he had these investment options offered to him.

First my friend was visiting his auditor ( Chartered Accountant) for some income tax advise. the Chartered Accountant suggested him to avail some good investment options from LIC ( pension plans).He also offered that it can be done through an LIC agent known to him.( His wife???)

Second my friend visited his bank to get a tax saving fixed deposit for his mom. The Manager of the PSU bank almost pleadingly forced him into buying a policy where he had to pay some amount annually for 5 years and after that he would get pension from the tenth year onward.

Last he visited a well known financial service provider for investing in an ELSS scheme.There he was lectured on the virtues of a pension policy from a private sector insurance provider.

In all of the cases, people were force selling him some insurance policies just for the sake of some hefty commission!

When the true RO (return on investment)was calculated for all of the schemes . it was less than savings bank interest currently being offered.

In none of the cases, the people selling these schemes were aware of the underlying securities in which the premium will be invested.

None of the parties who were selling these products had any true personal finance knowledge. All of them (except the Shattered accountant) were genuinely doing their job ( for what they were being paid for).

My friend at least had the guts to ask some basic questions and asked for a second opinion. if someone blindly makes an investment based on such random advises, they get tied to poor quality products due to their financial illiteracy.

God only can insure the investors from getting trapped by the insurance agents and insurance companies.

Happy New Year 2016 !

Things I wish I had known 15 years back!

( Warning :- This article is loaded with  "Hindsight bias")


I have been an avid saver and investor over the last decade. I have immensely benefited from my saving and investment habit. Looking back, I think I could have done better in these areas. ( Not an exhaustive list but the things that are on top of my mind at this point of time)

1. I should have "fully loaded" my  PPF  account from first year.

I opened a PPF account 15 years ago( good decision). But I didn't fully invest into it every year. During the initial years, I kept PPF account active by doing some minimum investment. NSC or ELSS was my preferred choice for parking the money. The reason being "15 years in PPF" looked "too long " for me.

I probably didn't understand the power of compounding and also that PPF is more tax efficient than NSC.

This mistake was corrected a few years back and now the PPF account is extended for the next 5 years :-).

2. Choosing growth option in Equity fund.

During initial investment years I thought , Dividends from equity funds was the most efficient way of "profit booking"  a.k.a risk mitigation and it was better than growth plan. But didn't realize that in effect , dividends also broke compounding and selling units of growth option was the best way to book profits , if at all needed.

Now, most of my Equity MF investments are under growth option ( Direct plan- learn more)

3. Should have avoided more money in tax inefficient FD.

Bank FDs were my favourite investment to start with.

FDs are the least efficient way of investing for people in higher tax bracket. It doesn't help to beat inflation and no indexation benefit is available for FD investments.Having all your debt investments in FD is tax inefficient.

Of late, I use debt vehicles that defer taxation till withdrawal.

4. Having too many accounts.

I  used to open one SB account whenever I switched jobs and wanted to hold all the five star funds ! Attractive bank FD rate hoardings led to many banks for opening FDs.

Having too many accounts eother it be SB, FD, demat or MF folio makes life difficult for you. Simple is always better!

Realising this, started closing  many accounts and consolidating folios. Still some more work left here!.

Fixed Deposits or Debt Funds??

Fixed Deposits or Debt Funds??-The main difference for a person in high income tax treatment lies in tax benefit .

1. The Return from FD is completely taxable. i.e the interest income is added the income of a person and he/she should pay tax as per their tax bracket.

2. As far as  debt funds are concerned , the returns are classified as Long capital gains for investments of over 12-months and taxed as follows.

   a.10 per cent  without indexation or

   b.20 per cent with indexation ( refer document page 97, for indexation)

Illustration

1. X invests  100000 in FD on 15 Apr 2009 and Matures on 14 Apr 2010 with value 108500.Income is 8500. If X falls in 30% tax bracket , 8500 will be taxed at 30%.

2. X invests  100000 in Debt fund on 15 Apr 2009 and Matures on 14 Apr 2010 with value 108500.

Option 1

 a. Flat 10% on 8500 without indexation.

 b. From the above chart indexation is roughly 12% ( 711 vs 632) and the returns are actually negative ( So,no tax)

By in investing in end of March of an year for 370 days or so will entail a person for double indexation benefit!

All funds that are not classified as Equity or Equity balanced funds will be covered under the aforesaid tax treatment. That includes Fund of funds, Gold ETFs, Global Equity funds et all.

A few more links on the same topic for reference :-

Where to invest: Debt funds or fixed deposits? - NDTVProfit.com

For fixed income, investing in debt funds better than fixed deposits ...

Choose short-term debt funds instead of FDs - Livemint

REC Tax free bonds "vs" REC

REC has come up with tax free bonds ( issue open until later part this month). 
~
8.26% for 10-year maturity, 8.71% for 15-year maturity and 8.62% for 20-year maturity.


The interest rates look very attractive for investors (esp. if you are in high income bracket,as the interest from the bonds are tax free).

Pros:-

1. High post dividend tax yield is attractive.

2. Can form a good part of your debt portfolio( but make sure your portfolio doesn't already have too much long-term debt in it before you add more.)

3.The issue is rated AAA by rating agencies Crisil, CARE and ICRA

4. Good for those who are looking for regular income vis-a vis compounded growth

Cons:-

1. If you are looking for compounded growth, you have to re-invest interest with great caution  Else, interest can be spent and the face value that you get back at maturity can be a very small amount ( considering inflation). Imagine the value of 1 lakh today vs 10 years later :-)

2.These are very long-term bonds and liquidity can be  limited.

Personally, I think that someone who trusts REC for more than 10 years would be "well off" investing in "REC" shares directly,considering the current market price-  which is below the book value. Dividend yield at current price is 4.5% -tax free :-). 

Disclosure: - I have exposure both to REC shares ( since 2008) and have subscribed to previous issues of REC tax free bonds.

Investors are advised to evaluate on their own before investing.

CMP- Current Market Price -04-Sep-2013

Whats all about RGESS?- Rajiv Gandhi Equity Savings Scheme:.

Of late, there has been a lot of fuss about RGESS. All fund houses have jumped into launching RGESS schemes. This tax saving investment tool is applicable only to a class of investors as of now. ( Budget 2013 may  change something regarding this ~if we have to go by our FM's statement of  the need to increase " equity culture". Lets have our fingers crossed to see if there are any changes to RGESS.).

Following is a snapshot of the RGESS: ( courtesy Business Standard)

Please check the link for the full story.

RGESS FAQ  Doubts on taxation what is RGESS

Changes in taxes that impact salaried class / investments

1. Tax slabs changed (up to 2 lakhs nil , 10% for 2-5 lakhs, 20% for 5-10 lakhs and 30% for > 10 lakhs.

2. Interest from SB a/c tax free up to Rs 10,000

3. Rs. 5000 can be availed for preventive medical check up ( self and family members) within the medical insurance premium deduction of 15k per annum.

4. Investment in infrastructure bonds( 80ccf) up to 20,000 exemption not extended beyond assessment year 2012-13

5. Tax benefits not available  to new life insurance policies having annual premiums of more than 10% of sum assured ( excluding loyalty bonus component)

6. For those with income up to 10 lakhs , Rajiv Gandhi equity scheme will allow up to 50% deduction to new retail investors , who invest Rs 50,000 in equity with lock in of 3 years ( Details need to be elaborated , expected soon from govt.)

For investors,

1. STT for delivery based equity transactions reduced to 0.1 %

2. Sale of immovable property > 50 lakhs in urban and >20 lakhs in rural to attract 1% TDS.

3. Capital gains from sale of house would be exempt from tax , if invested in SME equity 

4.1% additional taxes for cash purchase of jewellery above Rs. 2 lakhs.

5. More options for investing in tax free bonds ( NHAI and HUDCO).

6.TDS for interest from debentures , if amount exceeds Rs 5000.

NPS to save additional tax

Be ready with your NPS account ! if your employer is convinced, you may start getting additional tax benefits.

http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/you-can-save-additional-tax-through-nps/articleshow/11753274.cms


To know more about  NPS, click here

Confusion on HRA exemption.

Most of us would be aware of the 3 rules for calculating HRA exemption and how it works .

(Recap-

As per the Indian income tax law, the HRA exemption should be calculated as the least of the following.

1. Rent paid in excess of 10% of basic salary.

2. Actual HRA received by the employee.

3.  40% of BASIC ( non metro) (50% if metro)  )

If  during a particular year

1) a person remains unemployed for some time or
2) changes employment between metro/non metro and his HRA and rent paid change
3) remains as salaried employee for a particular period of the year only
4) HRA / Rent changes when  working for the same company

and many more such scenarios, how to calculate HRA exemption ( at a yearly/ monthly level)

There is no definite answer I could figure out ,but the following link sounds logical.

If any of the readers have more authentic information, please do drop a mail

http://www.simpletaxindia.org/2011/01/hra-exemption-calculation-monthly.html

Saving taxes through home loan

Are you one of those who are planning to save taxes through home loan . Do you know the answers for these.?

•  Whether you can claim interest deduction and principal under 80c , if you have not got possession of your house?
• Can loan taken from a friend or family be used for claiming deduction?

To find answers to these and a bit more , see this interesting article

http://www.jagoinvestor.com/2011/02/4-home-loan-facts.html

SBI bond issue 2011 and TDS confusion

SBI has come up with a bond issue again. The previous edition was a super duper hit and now the bonds come with more attractive interest rates for 10 year and 15 year periods.

These bonds would be available for trading and would be available in demat form only.

However there is some serious confusion about TDS for the bond issue(  tax deduction at source).

The prospectus says there would be TDS on interest beyond Rs 2500 pa  in one place and talks of TDS above interest of Rs 10000 pa in another ( prospectus on NSE site).

The application form says there will be no TDS as the bonds would be listed and for bonds held in demat form. The confusing part is the bond can be applied only if one has a demat account. :-)

Note :- TDS was not applicable in the previous edition.

SBI and regulators reviewing the prospectus should be more careful when coming up with the prospectus.

IDFC infrastructure bonds - Not seen in your demat account?

I had applied for IDFC infrastructure bond in October 2010. My bank account got debited long back. I was waiting to see the bond credited in my demat account.

Finally got the information letter on allotment last  week but still the demat account wasn't reflecting IDFC  bonds credit.

The bonds are not seen in the 'holdings' section in my demat account ( India infoline). I figured it out in the transactions details.

April - It's time to plan for your taxes

For the salaried class, this is the right time to start planning our taxes for financial year 2010-11

1. Plan your investments under 80c and for infrastructure bonds.

2. Decide on the declarations that you need to make to your employers and do that diligently.

3. Start making investments on a systematic basis and do not wait for Jan-Mar 2011 period.

http://ideasmoney.blogspot.com/2007/12/advantage-of-planning-for-tax.html

Budget 2010 India - Changes that would benefit individual tax payers

Following are the changes that would benefit the salaried class/ individual tax payers.


Direct Taxes


Income tax slabs for individual taxpayers to be as follows
Income upto Rs 1.6 lakh Nil
Income above Rs 1.6 lakh and upto Rs. 5 lakh 10 per cent
Income above Rs.5 lakh and upto Rs. 8 lakh 20 per cent
Income above Rs. 8 lakh 30 per cent


Deduction of an additional amount of Rs. 20,000 allowed, over and above the existing limit of Rs.1 lakh on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government


Besides contributions to health insurance schemes which is currently allowed as a deduction under the Income-tax Act, contributions to the Central Government Health Scheme also allowed as a deduction under the same provision

PPF vs POMIS

of late,PPF has been the most popular search term to land to this site . This is quite understandable considering this is the time when everyone scouts around for tax saving investments. Although the interest from PPF is 8% , the interest earned and paid from this account is also tax free. This makes PPF more attractive. Till the EEE policy on PPF remains, PPF would continue to draw money. (EEE- Exempt on investing, accrual and payout of interest).

With the stock markets lying low, tax saving MFs have gone a bit out of fashion.

POMIS ( Post office monthly income scheme) has also been included as an investment option. Lock in is 6 years and a effective yield of 8.9%. But interest earned and bonus (5%) given at the end of the term is taxable in the hands of investor.

PPF inspite of having a longer 15 year lock in term remains attractive beacuse of the tax free interest when compared to POMIS. So an investment decision for tax exemption in these schemes would also depend on the income tax bracket that the investor.

All said and done, If you are ready to lockin money for > 5 years anyway, my vote goes to SIP (Systematic investment plan) in ELSS ( Equity linked savings schemes in Mutual Fund)schemes as you would get a much higher return ( again tax free) as equities are supposed to outperform other asset classes in a longer investment horizon.

Income tax investment not an year end exercise

Starting December , the salaried class suddenly wakes up to the reality of taxes and realises investment need to be made to save tax. Looking for funds and making a hasty decision while investing is almost a second habit of most of the salaried class. Many tax saving products are bought without looking at options or weighing at the advantages of each of the option.

Mushrooming tax planning stalls at offices and malls try to sell whatever products they have and lot of people buy "investment plans" in a hurry without even understanding where their money goes. For example , a friend of mine invested in a Equity linked ULIP for saving tax . This friend is wary of equity but didn't realise where his money was being invested after charging 30% commission on his initial premium.

So options like NSC, PPF, FDs, ELSS , etc need to be considered at the beginning of the year. One should start investing regularly to save tax from April, May time frame. This helps in

1) Making wise decisions as you are in no hurry to submit proofs to your employer at the beginning of the year.

2) Makes investment a planned activity and helps avoid with huge burdening of investing at the year end.

3) Your money starts working for you a couple of months earlier as you start investing in the early part of the year.

If you have not taken any new year resolution, you can resolve to make planned investments for saving taxes from the next financial year...if you have not been doing this till now.

Medical Reimb. limit too low

Last couple of weeks have been hectic at office. I was not able to post even though I wanted to blog badly for a long time. I was also down bit with cold & cough.

A couple of visits to the doctor (with medicines) cost me almost Rs. 1000/-. I was shocked as I visited a normal doctor and cold is after all a common occurrence!!. This may not be the exact figure that everyone spends for a couple of doctors visit. But I realise, visiting a doctor is getting a costly affair these days.

In these circumstances, a maximum limit of Rs 15000/ p.a prescribed for a salaried employee looks too low. If a family of four or more has only one working person, this limit will be blown of within a few months from the beginning of the financial year.

It is high time that these redundant rules get revisited and made more friendly to the salaried class.

Latest tax calculator 2008-09

Tax Calculator for you - Courtesy ( ICICI Pru life)
http://www.iciciprulife.com/public/images/ICICI%20Taxculator%20Deskmate.zip

Excel sheet to calculate tax liability , tax amount , 2008-09

Some relief for the salaried class at last!

Budget 2008~ the things that strike me first

The tax slabs have been liberally changed in favour of the salaried class. The savings can be from Rs 4000 to around 50000 per annum depending upon your salary range and structure.

The other welcome change in this budget is - You can claim tax benefit on up to Rs 15,000 (20k in case of sr. citizens)which is used to pay medical insurance premium for parents ( apart from 1 lakh under 80c and 15000 Rs medical premium for yourself).

Short Term Capital gains up to 15%- Not good for traders . But doesn't make a difference for true investors.

impact of budget 2008 on salaried class, what are benefits from budget for salaried class, impact of change in income tax structures, change in short term capital gain, impact on investors, benefits to salaried classbudget analysis expert views on budget 2008

New ELSS NFOs

Scheme,Category,Open Date,Close Date,Offer Price (Rs)
Lotus India AGILE Tax Fund
Equity - ELSS
Nov 15, 07
Feb 15, 08
10
SBI Tax Advantage Fund - Series 1
Equity - ELSS
Dec 03, 07
Mar 03, 08
10

Views- You can prefer funds like Magnum tax gain, Sundaram tax saver, HDFC Tax Saver or Principal tax saver fund for your tax investments.