Saturday, December 28, 2013

Are you paying more tax then you are supposed to.....

For getting a bargain of some 100 Rupees we would travel 10 Km. But when it comes to check whether we are paying appropriate amount of tax we are supposed to we becomes lazy.

I have noticed while filing our tax returns we do not cross check the final calculation considering that our Accountant/Chartered Accountant or accounts deptt. must have done it correctly.

There is no doubt that above professional do their work efficiently, but we need to understand that they might not be aware of lot of expenses or investment which we made and are tax efficient. So it is our job to remain updated about the deductible/allowances and incentives allowed for tax . Also its our duty to provide the details to them in time.

I remember the year I bought my house, I was not having much of surplus section 80C investment, But I got the entire rebate because I was knowing that stamp duty paid for registry qualify for section 80C rebates,

Some of the deductibles/allowance/incentives I briefed in my last year's blog,, please check for validity of certain clauses from your chartered accountant.

Appending below the slab rates applicable for Assessment year 2014-15 for ready reference.

Income Tax Rates applicable for Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI) in India is as under:

Assessment Year 2014-15, Relevant to Financial Year 2013-14 

For Individuals below 60 years age (including Woman Assessees): 

Tax Rate
Upto 200,000
200,000 to 500,000
10% of the amount exceeding 200,000
500,000 to 1,000,000
Rs.30,000 + 20% of the amount exceeding 500,000
1,000,000 & above
Rs.130,000 + 30% of the amount exceeding 1,000,000

For Individuals aged 60 years and above but below 80 years (Senior Citizen):
Tax Rate
Upto 250,000
250,000 to 500,000
10% of the amount exceeding 250,000
500,000 to 1,000,000
Rs.25,000 + 20% of the amount exceeding 500,000
1,000,000 & above
Rs.125,000 + 30% of the amount exceeding 1,000,000

For Individuals aged 80 years and above (Very Senior Citizen):
Tax Rate
Upto 500,000
500,000 to 1,000,000
20% of the amount exceeding 500,000
1,000,000 & above
Rs.100,000 + 30% of the amount exceeding 1,000,000

Tax Credit: Rs. 2,000 for every person whose income doesn’t exceed Rs. 500,000

Surcharge on Income Tax: 10% of the Income Tax payable, in case the total taxable income exceeds Rs.10,000,000. Surcharge shall not exceed the amount of income that exceeds Rs.10,000,000.

Education Cess: 3% of Income Tax plus Surcharge

Professionals always work on the information provided by us. So it's our job to provide them with all the relevant information.

Saturday, December 21, 2013

Great Investment opportunity for lower tax bracket or no tax individuals

Great news specially for senior citizens who are facing really hard time with their retirement funds because of high CPI inflation of almost 10%/Yr. for last 3 years and low interest rates.

RBI has atlast launched the much awaited Inflation Indexed National Savings Securities - Cumulative (IINSS-C) as promised. It is in continuation of Inflation indexed bonds (IIB) launched earlier. 

IIB's were targeted at large investors, so the markup- the additional payment over and above the inflation rate or the real coupon (interest) was arrived at via competitive bidding. RBI plans to pay this real Coupon on regular basis, then inflation component will be added to the principal and paid only at the time of redemption.

In a way it offers twin benefit first it protects the principal from inflation and you get the real value at maturity and second is an increase in cash inflow every year even when the real coupon rate remain constant.e.g. If Rs.1 Lakh invested in IIB and real coupon raet is 1.5% and the Whole sale price Inflation for 1st year is 5% then real payour for first year would be Rs.1500(1.5% of Rs.1 Lakh) and that for the 2nd year will be Rs.1575(1.5% of 1.05 Lakh).

But as the IIB were linked with WPI (Wholesale Price Index) it could not interest retail investors. As historically investors are more affected by CPI (Consumer Price Index) which is much above WPI. Like WPI for November was 7.52% whereas CPI was 11.24% i.e. a difference of 3.72%.

Now RBI has realised the same in the benefit of retail investors and has come up with IINSS-C (Inflation Indexed National Savings Securities - Cumulative) which is linked with combined CPI .Rbi has also avoided competitive bidding and markup fixed of 1.5% over CPI.

Obviously it is going to be a great instrument for the people who are in lower tax bracket or with non taxable income. I think they are the one who needs real protection from falling interest rates and rising inflation.

Appending below the scenario and benefits to investors :

IINSS-C Returns for difference tax Bracket
Considering markup of 1.5% on base rate
Tax SlabNIL
Inflation Rate8.00%9%10%
Interest Rate9.50%10.50%11.50%
Effective Rate8.00%9.00%10.00%
Effective Rate due to half
yly compounding9.73%10.78%11.83%
Tax Slab10.30%
Inflation Rate8.00%9%10%
Interest Rate9.50%10.50%11.50%
Effective Rate due to half
yly compounding8.73%9.67%10.61%
Tax Slab20.60%
Inflation Rate8.00%9%10%
Interest Rate9.50%10.50%11.50%
Effective Rate7.73%8.56%9.39%
Tax Slab30.90%
Inflation Rate8.00%9%10%
Interest Rate9.50%10.50%11.50%
Effective Rate6.72%7.45%8.17%

Now lets look at negative side - Interest is accrued and compounded every six months. Hence even though you do not receive interest tax has to be paid in each financial year.Looking at above calculation the IINSS will still not be that attractive for retail investors in higher tax bracket and also for senior citizen who requires regular income should avoid IINSS-C.

Instead of that it is better to invest in Tax free bonds, although it doesn't carry guarantee of Central bank.But with good credit rated bonds you have much better returns net of tax annually with much lower risk.

Saturday, December 14, 2013

Save your wealth from going into wrong hands...

Recently I came across a study that shows 80% of the pending cases in High Court are related to property. Todays' newspaper shows banks are sitting on a pile of FD's amount to Rs.3600.00 Crore which are unclaimed for more then 10 years after maturity.
In most of the cases reason might be that the FD holder might have died and his successor doesn't know about it or proper nominations were not done.

Why is it so that the same brother and sister who used to live as family suddenly becomes enemy after their parents death, it doesn't end there but is followed by unending process of court cases/litigation and high expenses.

We can stop this from happening in our family or friends by just preparing a small one or two page statement called as will or Estate Plan. 

Contrary to perception, it is not necessary to write will on stamp paper or even get it registered. You can write a will on plain paper and it will be as legally valid as one prepared by a lawyer.

It's a myth that only super rich need to write wills. The fact is that everyone who owns a asset in any form should write a will so that his heirs do not face problems in accessing what is rightfully theirs and avoid disputes among them.The assets can be anything - Property, Jewellery, Painting, Cash, Bank FD's, Shares, Mutual Funds ,Insurance Policies, etc...

For most people, will making is do it yourself exercise. the only requirement is that the will should be legible. However, if your assets and ownership are a little complicated , you may seek help of a legal professional to draft the will.

Essential clauses of Will

  1. Name - The name and description like age, religion etc...of person making the will.
  2. Revocation of earlier wills : A declaration that the present will is his last will and he revokes all other earlier wills.
  3. Appointment of executors : A executor is a person who has been confided with the job of execution of will.
  4. Mention that you are not under any influence or duress while making the will. The witness must also attest the same at bottom.
  5. Give clear details of Assets and how it should be distributed.
  6. Residue Clause - It helps to include any other asset you may have left out inadvertently while enumeration your net wealth.
  7. Mention full name of beneficiaries clearly with address.

Points you should know :
  •  Preparation of will does not require any specific language
  • Will need not be stamped
  • Registration of will is not mandatory
  • Will can be revoked by testator (Person making will) anytime during his lifetime.
  • It is important to note that the attesting witnesses need not know the content of the will
  • Review your will at regular intervals for the changes in your assets  or due to change in circumstances (Like beneficiary or executor mentioned in will dies).]
Consult your financial planner as Estate planning is an integral part of Financial planning.

By sparing five minutes in a year you can avoid lot of litigation within your family member and also save them from lot of expenses and mental agony.