Source: ET Wealth: 7 March 2011
Gift Tax:
If you receive a gift worth more than 50000 from a friend, you have to pay tax on it. The gift could be shares, jewellery, artifacts or even property. However, gifts received from specified relatives, through inheritance or on marriage, are not taxable.
Wealth Tax:
If your net income is more than 30L (covering cash, jewellery, cars, a second property), wealth tax - 1%
Source: ET Wealth : 7 Mar 2011
Pension Funds
What's changed? - Annuity income to be exempt from tax
Your Strategy: - Invest in low-cost NPS but choose your fund manager carefully
Public Providend Fund
What's changed? - Nothing
Your Strategy: - Continue investing in this tax-free haven as per your allocation of debt.
Fixed Deposits, Bonds
What's changed? - Nothing. Interest to be taxed at normal rates
Your Strategy: - Build a ladder of fixed deposits of different maturities
Real Estate
What's changed? - Deduction for interest to continue but not for principal. No more tax on notional rent.
Your Strategy: - Big EMI payers have to save more. A second house may be a good option now.
Equities and Equities-Oriented Funds
What's changed? - No change for long-term gains. Short term gains to be taxed at lower rate.
Your Strategy: - Continue investing as per your asset allocation. Use SIPs to counter volatility.
Life Insurance (Including ULIPS)
What's changed? - Deduction lowered to Rs. 50000 a year
Your Strategy: - Buy term plans for life insurance. If buying a ULIP or traditional plan, go for long terms to be eligible for tax breaks.
Debt Funds & Other Non-Equity Schemes
What's changed? - Long-term gains to be taxed as income just like income from fixed deposits. Indexation rules also changed
Your Strategy: - Go for arbitrage funds that are treated as equity funds. Buy before the financial year ends to gain from indexation.
Source: ET Wealth - 7 Mar 2011
Insurance: Stiff Conditions:
· Under DTC, a policy should give a life cover of at least 20 times the annual premium to be eligible for tax deduction. If this condition is not met, not only will you not get any tax deduction on the premium but even the income from the policy will be taxable.
· Right now, income from insurance is tax free. The tax deduction limit for life insurance itself will get reduced from the present 1 lakh a year to only 50,000 a year. Besides, this annual limit of 50,000 would include the amount paid for tuition fees of children as well as medical insurance. So, an insurance policy with a very large premium will get deduction of only up to 50,000.
· In Ulips, that might mean a higher amount being deducted as mortality charge for providing the life cover, but this is necessary if you want tax deduction. The DTC will also nudge policyholders to take a long-term view of their investments. Premature withdrawals from Ulips will be taxed. Don't believe the agent when he tells you that surrender charges have been capped and you can withdraw after 5 years without paying a penny.
Real Estate: Mixed Bag
· The principal repayment of your home loan will not be eligible for tax deduction under the DTC.
· There is a removal of tax on notional rent. Right now, people who own more than one house have to pay tax on notional rental income even if the second house is lying vacant. Paying tax on your earnings is bad enough, but having to pay tax on the income you haven't received is worse. The DTC will end this anomaly and make investments in second homes more tax efficient.
· Another landlord friendly move is that advance rent received from a tenant will be taxed in the year to which it relates, not when it was received. In some cities, landlords take up to 6-12 months rent in advance. Similarly, by retaining the tax benefits on the interest paid on a home loan the DTC has cushioned the impact of high interest rates. The tax benefits reduce the effective cost of the loan.
Source: ET Wealth: 14 March 2011
1. Let the policy lapse.
Let the policy lapse Don't pay the premium and the policy ends automatically. It is also the costliest if the policy has not completed three years. The premium paid in the first two years is forfeited and the policy ends. You also stand to lose the tax benefits availed of in the first two years on the premium payment. You get nothing, except freedom from the policy.
The rule is different for Ulips. Even if it is discontinued after the first year, the policyholder is entitled to some amount after paying surrender charges. However, this sum comes to him only after the lock-in period of five years (three years, if bought before 1 September 2010). The fund value, after imposing all charges and penalties, is frozen in the account and earns 3.5% returns till this period.
2. Surrender the policy
the policyholder can get some money back. It will, however, be a fraction of what he has paid over three years because of the surrender charges levied by the insurer. In the third year, the surrender value is roughly 30% of the total premium paid, but this figure goes down as the term of the policy progresses. This is `3,000 or 20% of the annual premium in the first year. For plans with a premium of over `25,000, the cap is higher at `6,000 or 6% of the annual premium. The surrender charges come down progressively to zero in the fifth year
3. Turn it into a paid up policy
Stop paying the premiums, but don't discontinue the policy. A better alternative to surrendering your insurance policy and losing the life cover is to turn it into a paid-up policy. As in the case of surrendering it, you can use this option only if you have paid the premium for three years and the policy has built up a minimum corpus. Instead of returning the money to the investor, the insurance company uses it to offer him a life cover. Every year, it deducts mortality charges from the corpus.
On maturity of the plan, the diminished corpus and the accumulated bonus are given to the investor. This feature has been widely exploited by agents to mis-sell Ulips to gullible investors. Last year, the Irda issued new rules for Ulips. If the premium of a plan bought after 1 September 2010 is stopped, the policy will be discontinued.
This is meant to reduce the incidence of mis-selling. The paid-up option is by far the best way to exit an insurance policy because it gives the policyholder the best of both worlds. He is freed from the burden of paying the premium that are a drag on his finances, but continues to enjoy the life insurance cover that was the primary objective of the plan
4. Let it continue
Source: ET Wealth: 14 March 2011
1. Low Cover
A policy should give you a life cover of at least 40 times the annual premium. If it does not, you are paying too much for the cover
2. High Premium
You need a cover of at least 5 times your annual income. The premium for this cover should not account for more than 6-8% of your annual income.
3. Tenure
Insurance should cover a person for his entire working life.
4. Return Projections:
An endowment policy appears attractive because of the projected corpus on the maturity of the plan. But one must factor inflation into the calculation. In 25 years, a moderate 5% inflation will reduce the value of 20Lakh to a mere 5.5 lakh.
It is possible to view your account status (shares / mutual funds) etc on NSDL & CDSL.
ICICI (my Depository Participant-DP) has opened a demat account for me in NSDL. So, all my shares come to NDSL
Process of trade:
* I have a trading account with ICICIdirect & a demat account with NSDL. ICICI apparently has its demat accounts on NSDL
* I place a trade in icicidirect. The money is taken from the account and cleared by the clearing corporation.
* The shares then come to the broker account.
* ICICI then transfers the shares to my demat account from the broker account.
I can see my holding on NSDL through a concept called IDEAS. I have to register with NSDL for that and submit the registration form to the DP. I will then get a user name and password. The flip side is that if that happens, then the DP will not send periodic statements to you the way he does nowadays. One can also trade directly through NSDL through a concept called e-Speed. Here too, a registration form has to be filled in and submitted to the DP to get a username & password
Anand Rathi has its DP account with CDSL. This comes into play for my NSEL (National Spot Exchange Ltd) transactions in e-Gold & e-Silver. The procedure of getting user name & password in CDSL is similar. I have to fill up a registration form and submit it to Anand Rathi and then, subsequently I can view my holdings directly on CDSL.
If all taxes are paid and there is no penalty for late filing, why is there such a big rush to file tax returns by 31 July? This is because taxpayers who file belated returns forego some of their rights if they wake up late. For instance, you cannot carry forward losses for adjusting against future gains if you file late. This is especially useful if you have incurred short-term capital losses from investments in stocks. These can be carried forward and set off against short-term or long-term capital gains made in subsequent years. Under current laws, such losses can be carried forward for up to eight years. The Direct Taxes Code had originally proposed that losses be allowed to carry forward indefinitely. However, it has now reverted to the 8-year limit.Source: ET Wealth: 14Feb2011: Six Smart Things to Know
Monthly Income Plans
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
Source: ET wealth: 14 feb 2011
Rule of 72: This tells you in how much time your money will double. Divide 72 by the interest rate you are compounding your money with and you will arrive at the number of years it will take to double in value.
If the interest rate is 9%, then your money will double in:
(72/9=8) 8 years
Rule of 114: Use this to estimate how long it will take to triple your money. It works the same way as the rule of 72.
Divide 114 by the interest rate to know in how many years Rs 10,000 will become Rs 30,000.
Rule of 144: Similarly, this tells you in how much time your investment will quadruple in value.
For instance, if the interest rate is 12%, Rs 10,000 becomes Rs 40,000 in 12 years
Rule of 70: This is a useful rule for predicting your future buying power. Divide 70 by the current inflation to know how fast the value of your investment will get reduced to half its present value.
This is especially useful for retirement planning, as it affects the way you set up your monthly withdrawals. However, do remember that inflation varies from time to time.
Inflation of 7% will reduce the value of your money to half in
(70/7 = 10) 10 years
The 10, 5, 3 Rule: This is a neat little rule that states that you can expect returns of 10% from equities, 5% from bonds and 3% on liquid cash and cash-like accounts.
Pay yourself first rule: Right from your first salary, put away a little for your retirement. Experts say 10% of your income should go into this. It is important to increase the amount as your income rises over the years. If every month you invest Rs 5,000 in a plan that grows 8.5% annually and increase your investment by 10% every year, after 30 years, you will have Rs 2.5 crore.
100 minus your age rule: This rule is used for asset allocation. Subtract your age from 100 to find out how much of your portfolio should be allocated to equities.
The emergency fund rule: Put away at least 3-6 months' worth of expenses in a liquid savings account to ensure it is available at a short notice.
4% withdrawal rule: How much should I withdraw during retirement? We often use the 4% rule to protect the principle and determine how much one can take from the retirement savings.
If every month you withdraw, Rs 50,000, you need a corpus of Rs 1 crore to sustain monthly withdrawals for the next 25 years if the corpus earns 9% and inflation is 6%.
