Little for salaried individuals in this budget

Main Tables

Honourable Finance Minister started his tax proposals with the words “In the formulation of these proposals, my priorities are directed towards making taxes moderate, payments simple for the taxpayer and collection of taxes easy for the tax collector”.  However, these priorities were not reflected in this year’s budget.  Atleast not for the individual tax payers.  One of the reasons may be the implementation of Direct Tax Code (DTC) from next year.  Since major changes and rationalization of slabs are expected to happen in DTC, there has not been any tweaking with the tax rates this year.  The basic exemption limits has been moderately hiked from existing Rs. 1,60,000 for males to Rs. 1,80,000.  This will lead to a nominal tax saving of Rs 2,060 for male individuals.  However, their female counterparts are not so lucky with nothing in store for them this time.  The tax slabs and rates remains the same for them and hence there will be no change in their tax liabilities.

Investment in New Pension Scheme (NPS) was made tax-free couple of years back when it was brought under the investment limits of Rs 1,00,000 under Section 80C.  Such investments up to 10% of the employee’s salary were included for calculation of Rs. 1,00,000 limit.  This amount can be either by employee investing himself or employer contributing to NPS on employee’s behalf.  Now, the employer’s contribution is proposed to be removed from Rs. 1,00,000 limit.  This means that amount invested by employer in NPS on behalf an employee, subject to the cap of 10% of the salary, will be allowed as deduction over and above Rs. 1,00,000 limits under Section 80C.  Further such employer’s contributions will also be allowed as business expenditure for the companies.  This will encourage investments in New Pension Scheme.

The benefit under Section 80CCF of Rs. 20,000 invested in infrastructure bonds is extended for additional one year.

Another welcome change is doing away with the requirement of filing of Income Tax return in case the tax has been deducted by employer.  In post-budget press conference, CBDT Chairman Sudhir Chandra hinted that salaried individuals having income up to Rs. 5 lakh need not file the return.  If the individual wishes to opt for this, he needs to disclose his other income such as interest, etc to the employer for tax deduction.  However, in case individuals have any other sources of income such as capital gains or house property income, they needs to file the return with the tax authorities.  More clarity on this is expected to emerge in coming months.

This post was also carried in Mumbai edition of DNA of 1st March 2011.

Survey Results - How do individuals plan their tax related investments?

Every individual, whether salaried or in business, tries to ensure that his tax outgo is at the minimum.  Tax-related investments such as Provident Fund, Equity Linked Saving Schemes, etc form major avenues of saving taxes.  Each year, in the months of February and March, insurance and mutual fund companies heavily advertise their products to lure the last minute rush by individuals to save their tax.  New tax-saving products are launched by these companies to cash in the tax fever.

Whether the insurance and mutual fund companies benefit by launching their products in the last quarter of the year?  How do tax payers plan their tax related investments?  Do they plan their investments early or they rush for investments during the year-end?  Which is the favourite instrument of tax saving for individuals?

Bachhat did a survey amongst its readers to gain answers to these questions and the responses were a bit surprising.  Total of 49 individuals participated in the survey.  Almost all the participants were salaried employees and more than 75% of the participants were less than 30 years old.

Key Takeaways from the Survey

 

  

 * sum of all percentages will be more than 100, since few individuals have chosen more than one option.

 

1.    Only 24% out of all respondents make major part of their tax investments in the months of January to March.  Most individuals (59%) spread their investment over the entire year.  This is contrary to the popular belief that people wait till year end for tax planning.  This also correlates perfectly with the outcome of the other survey question on where do the individual invests (See Point 2).

2.    Provident Fund (78% of respondent have invested either in PPF, EPF or both) and Life Insurance (72%) are most popular investment options for tax planning.  Home Loan is also a significant component for those who have opted for it.  Since both EPF and Home Loan are periodic payments, major portion of the 80C investments are spread over the entire year and supports the findings in Point 1 above.

3.    Pension Fund (20%) and Bank Fixed Deposits (16%) are the least prefer investment options.  The quantum of investment in these instruments is also less as compared to other alternatives.

 

4.    16% of the respondents pay more than Rs. 50,000 for life insurance cover, where as significant 20% pays between Rs. 25,001 to Rs 50,000.  Taking note of the fact that life insurance coverage in India is low and pure term insurance does not cost much, the above findings justify that many individuals invest in insurance + investment products offered by the insurance companies.

5.    Infra Bonds are yet to find flavor amongst individuals (mainly due to low interest rate on offer) with only 42% individuals investing in the same.

6.    Similar for health insurance cover with just 42% of individuals opting for it.  However, this figure does not take into account the health cover provided by employer to their employees.

Are you an exception to the above findings or does your tax planning replicate this?  Do share your comments and suggestions.  Thanks.

Implications of Direct Tax Code on Fixed Maturity Plan Investments

Few days back, I carried a blog post on Fixed Maturity Plan (FMPs) and its benefits.  One of the benefits of FMPs was double indexation benefit in case it is invested during the end of the financial year.

To recap, double indexation is benefit of two years' of indexation for calculation of long term capital gain tax even though the investment is for substantially less than two years.  For eg: In case one makes FMP investment on 29th March 2011 in 370 days FMP, the FMP will mature on 2nd April 2012.  For calculating indexation benefit on capital gain tax, this investment will be considered to be made in FY10-11 and sold in FY12-13 and thus you will get benefit of two years of indexation.

However, with Direct Tax Code (DTC) the situation changes a bit.  The holding period of asset is important for the purpose of determining whether it will be short term or long term.  Under current tax law, holding period is difference between the selling date and buying date. If that period is more than 12 months, it is treated as long term, otherwise short term.

Now in DTC, the holding period will start from the end of the financial year in which the asset is purchase.  Thus irrespective of whether the asset is purchase on 1st September 2010 or 1st March 2011, the holding period will start from 1st April 2011 and to consider the investment as long term, it should be sold after 31st March 2012. 

Applying above provisions of DTC in our FMP example, the holding period will start from 1st April 2011 and the indexation benefit will be available from FY 11-12 and not from FY 10-11 as the present case.  Hence the investor will get indexation for one year instead of two years.  

Irrespective of the above change, FMPs do not loose their attractiveness over Fixed Deposits.  Read more here.

The DTC is still in draft stages and the final provisions may vary.  Further there is no clarity on treatment for assets purchased before DTC becomes applicable.

Suggestions and comments appreciated.

SBI Bonds – one more opportunity to invest in a good instrument, but you must be really fast to pick it up!

SBI is back again with its second long tenure bond issue.  It had raised Rs. 1,000 crores in October 2010 and is now contemplating raising another Rs 2,000 crores with an option to retain over-subscription in Retail Category.  The bonds are issued in two categories – Retail & Non-retail and are available for the tenure of 10 years and 15 years.  The details of the bond issue are:

Series	Series 3 (Tenure 10 Years)		Series 4 (Tenure 15 Years)
Categories	Non-retail	Retail	Non-retail	Retail
Interest Rate	9.30%	9.75%	9.45%	9.95%
Call Option*	After 5 years		After 10 years

 *option for SBI to redeem the bonds

Issue Open Date: 21^st February 2011

Issue Close Date: 28^th February 2011

The closing date is irrelevant since going by the response the earlier issue of SBI bond received; it is most likely to get oversubscribed by end of the first day.   Hence investors willing to invest in this instrument should ensure that they submit their application forms on the first day itself.

This brings us to the procedure for subscribing these bonds.  These bonds are not available for online subscription and one need to visit SBI branch to collect and submit the application form.  Demat account is mandatory and these bonds will be listed on stock exchanges.  Hence it provides liquidity if someone wants to sell the bonds before completion of the tenure.  

Interest earned is taxable and if the bonds are sold on stock exchange, then they are also liable for capital gain tax.

How does it compare with other investment options (for retail investors)?

Though these bonds are unsecured, it carries AAA rating by CRISIL and is issued by one of the most trusted bank of India.  Hence an investor can be reasonably assured of the investments.  There are very few comparable options available for such a long tenure.  The table below gives comparison with other investment alternatives available for retail investors.

	SBI Retail Bonds	Bank Fixed Deposits	PPF	Infrastructure Bonds
Tenure	10 & 15 Years	Max 10 Years	15 Years (extendable)	Max 10 Years
Coupon Rate	9.75% – 9.95%	9.25%*	8%	8% – 8.30%
Tax	Taxable	Taxable	Tax-Free	Taxable
Limits	Rs. 5,00,000	No Limits	Rs. 70,000 p.a.	No limit

 *Kotak Mahindra Bank 10 Year Fixed Deposit

As can be seen, there is dearth of options for a person looking to invest for 15 years, except for PPF and this long tenure makes SBI bonds attractive. The retail bonds score over all forms of investments, except for PPF.  However, in case of PPF, there is an upper limit of Rs. 70,000 p.a. whereas, one can invest up to Rs. 5,00,000 in SBI Bonds. 

 

Hence for an investor who has exhausted his PPF limit for the current year, these bonds provide good long term investment opportunities.

Are you planning to invest in SBI Retail Bonds?  Were you lucky to get allotment in the earlier SBI Bond Issue?  Do share your comments with other readers below.

Endnote:  In case you have not yet participated in the survey of planning your tax-related investments, you can do so by clicking here.  The survey closes on Sunday, 20^th February 2011.  Thanks.

Health Insurance Portability – Another consumer friendly step by IRDA

 

Courtesy: Ted Swedenburg from Flickr

It seems ‘portability’ is the buzzword amongst the regulators this year.  After the much awaited mobile number portability allowing users to switch their mobile operator while retaining the number, Insurance Regulatory and Development Authority (IRDA) has instructed insurance companies to allow health insurance portability from 1^st July 2011.  This is continuation of consumer friendly measures initiated by IRDA which started with modifying structure of ULIP policies last year.

From 1^st July 2011, policyholders can change the insurance companies without losing any credit for the period of cover with the previous insurer.  This is most beneficial in case of pre-existing diseases.

Pre-existing diseases, generally, are excluded from the health insurance cover for a certain period of time from the commencement of the policy.  Depending on the health insurance plan, it varies from one year to three years.  In existing scenario, in case the policyholder changes the insurance company say after 4 years, the new policy will again have the above exclusion and any pre-existing diseases will be excluded from cover for one year to three years depending on the plan. 

This works to the detriment of the policyholder and he is force to stay with the same insurance company even though he is not satisfied with their services.  This also acts as anti-competitive. IRDA has now directed the insurance companies to take into consider the period served with previous insurance company and reduce the same to consider coverage of pre-existing diseases.

For example: Suppose Rahul purchased a health insurance policy from ABC Insurance Company last year.  The said policy excluded pre-existing diseases from coverage for first two years.  Now Rahul, not satisfied with the services of ABC Insurance, wants to discontinue this policy and change to XYZ Insurance Company, whose insurance plan also exclude pre-existing diseases from coverage for two years.  As per the new guidelines, XYZ Insurance Company will take into consideration the period of coverage with ABC insurance and reduce the same to define the coverage for pre-existing diseases under the new policy.  Hence the new policy will only be able to exclude pre-existing diseases for further one year.

One important point to note here is this benefit is restricted to the sum assured (including bonus) under the previous policy.  In case one wants higher coverage, then he again needs to fulfill the criteria of pre-existing diseases.

Had such conditions restricted you to change your insurance company in the past?  Will you now be switching to another insurance company?  Do write your comments and suggestions below.

Endnote:  Have you participated in the survey of planning your tax-related investments?  If not, please click here to participate.  It will not take more than 2 minutes.  Thanks.