Category: Tax

Direct Tax Code (DTC) is supposed to be implemented from the next financial year, but there hasn’t been much news on it lately, and people are beginning to doubt if it will be implemented next year or be delayed even more.

I don’t think it’s a bad thing if it does get delayed because the main premise behind the DTC was that it will simplify the current tax code, and while the first draft was superb, the subsequent revisions have made it somewhat complex.

I think this is best epitomized by the way capital gains on shares is calculated where they will reduce the value by a specified percentage first and then add that to your income. Who comes up with these percentages and why tax people on capital gains on shares now when you haven’t done it earlier?

The first draft of the DTC had tax slabs much higher from the current ones, but the revisions made the slabs come down as well, so even that benefit doesn’t exist to the same extent as earlier.

I have written a few posts about changes related to DTC but they are not very easy to find and when Sowmya left a comment about a primer on DTC – I thought it will be a good idea to have a post that links to the various other posts that I have written on DTC and gives a summary of the changes.

The following table lists down the various changes that will come with the DTC.

S.No.	Head	DetailsÂ
1	ELSS Mutual Funds	These mutual funds that were covered under Section 80C and gave tax relief will no longer reduce your taxable income. The lock in period in the funds will probably be removed, and in some cases the fund sponsor may even merge them with other bigger funds.
2	Double Indexation Benefit on FMPs	Holding period will be calculated from the end of the financial year instead of the date when you buy the units so that means double indexation benefit on FMPs will no longer exist.
3	Long term Capital Gains on Shares	Presently, there is no long-term capital gain on shares but in the future capital gains will be charged using a fairly involved formula.
4	Short term capital gains on shares	Presently, it is 15% of the gain, but in the future it will be taxed on the slab of the investor.
5	Wealth Tax	Wealth Tax will be charged if wealth is assessed at more than 50 crores.

You can click through the links in the above table to read more details about each of these topics, and as more clarity comes in about DTC and other topics get added – I will link them through this table as well.

I did a post about some of the better performing ELSS tax saver mutual funds in January this year, and I thought I would revisit those funds to see how they fared during these tough market conditions.

I wanted to see if there was any big variation between these funds, and if there was any way to predict some of that variation at the beginning of the year.

First, the original list of ELSS mutual funds that were around for 5 years or more and had performed well.

Keep in mind that these returns are for a 5 year period ended in January 2011.

Name	Inception Date	5 year returns	Expense Ratio
Birla Sun Life Tax Relief – 96	March 1996	16.57%	1.96
Canara Robeco Can Equity Tax Saver	March 1993	22.31%	2.38
HDFC Tax Saver	March 1996	17.80%	1.86
ICICI Prudential Tax Plan	August 1999	15.48%	1.98
SBI Magnum Tax Gain Scheme – 93	March 1993	16.32%	1.78
Principal Personal Tax Saver	March 1996	16.42%	2.19
Franklin India Tax Shield	April 1999	17.34%	2.10
Sundaram Tax Saver	Nov 1999	17.73%	1.96
Sahara Tax Gain	March 1997	22.31%	2.50
Reliance Tax Saver	August 2005	15.14%	1.88

I had deliberately kept the list in no particular order because as soon as you order it according to something – say the highest returns – the brain starts telling you that the first fund is the best, and the last fund is the worst – which is what I wanted to avoid.

Now, let’s take a look at how these funds performed in the last 1 year.

Name	Inception Date	1 Year Returns Dec 3 2011	Expense Ratio
Birla Sun Life Tax Relief – 96	March 1996	-23.21%	1.96
Canara Robeco Can Equity Tax Saver	March 1993	-10.95%	2.33
HDFC Tax Saver	March 1996	-17.28	2.07
ICICI Prudential Tax Plan	August 1999	-15.14	1.98
SBI Magnum Tax Gain Scheme – 93	March 1993	-17.06	1.81
Principal Personal Tax Saver	March 1996	-22.35%	2.22
Franklin India Tax Shield	April 1999	-8.26%	2.07
Sundaram Tax Saver	Nov 1999	-18.43%	1.95
Sahara Tax Gain	March 1997	-16.33%	2.50
Reliance Tax Saver	August 2005	-19.31%	1.89

All data from Value Research

There is quite a lot of variation in this list, and the Sensex has returned -17.50% in this time period so anything near that number is what you would expect.

The only two funds that were markedly better in this comparison were Canara Robeco Tax Saver and Franklin India Tax Shield.

So, why did these two funds do so well?

I looked at the portfolio of Canara Robeco Tax Saver and Bharti Airtel is their biggest holding with 7% weight in the portfolio, and that stock has returned about 12% in the last year and I think that one stock had a lot to do with Canara’s good performance.

In Franklin India Tax Shield’s portfolio – I see that Infosys is the biggest component at 8.5% which fell only 5% in the last one year period, then Bharti Airtel is the second biggest component at 7.5%, and ICICI Bank is the third largest component which fell 33% in the last year! They also hold Idea Cellular which was just 1.49% of their portfolio in March but grew to 3.5% of the portfolio by September. Idea Cellular has risen about 37.50% in the last year.

Frankly, I’m having trouble explaining why they did so well in hindsight, so it’s pretty clear to me that I could have never picked these two mutual funds at the beginning of the year to say that they will be ones that will perform better than the rest.

So, yes, there was variation, but there is nothing that I can see which would have indicated at the beginning of the year which funds would do well and which won’t.

Finally, let’s place the best performers in both time periods in one table and look at them side by side.

As on Jan 2011			As on Dec 2011
Name	5 year returns	Expense Ratio	Name	1 Year Returns Dec 3 2011	Expense Ratio
Canara Robeco Can Equity Tax Saver	22.31%	2.38	Franklin India Tax Shield	-8.26%	2.07
Sahara Tax Gain	22.31%	2.5	Canara Robeco Can Equity Tax Saver	-10.95%	2.33
HDFC Tax Saver	17.80%	1.86	ICICI Prudential Tax Plan	-15.14%	1.98
Sundaram Tax Saver	17.73%	1.96	Sahara Tax Gain	-16.33%	2.5
Franklin India Tax Shield	17.34%	2.1	SBI Magnum Tax Gain Scheme – 93	-17.06%	1.81
Birla Sun Life Tax Relief – 96	16.57%	1.96	HDFC Tax Saver	-17.28%	2.07
Principal Personal Tax Saver	16.42%	2.19	Sundaram Tax Saver	-18.43%	1.95
SBI Magnum Tax Gain Scheme – 93	16.32%	1.78	Reliance Tax Saver	-19.31%	1.89
ICICI Prudential Tax Plan	15.48%	1.98	Principal Personal Tax Saver	-22.35%	2.22
Reliance Tax Saver	15.14%	1.88	Birla Sun Life Tax Relief – 96	-23.21%	1.96

There is very little similarity between one and the other – what did well in the first five year period didn’t necessarily do as well in this year. Perhaps the one fund that catches the eye is Canara Robeco Equity Tax Saver because it is near the top for both these time periods, but it’s anybody’s guess if it would continue with it’s good performance or not.

If I had to pick up a tax saver mutual fund – I would pick two or three out of this list, but I don’t think it is possible to narrow it down any further.

A house loan repayment has two components – principal and interest – and both of these components are treated differently for tax benefit calculation purposes.

The principal amount is covered under Section 80C and has a Rs. 1 lakh limit. In order to claim the tax benefit under 80C the house should already be constructed, and should be a residential property.

Section 24: Tax Benefit on the Interest On Home Loan

The interest on the home loan is treated differently, and Section 24 deals with the tax aspect of the interest on house loan repayment.

The maximum limit under this section is Rs. 1,50,000 and you don’t have to actually live in the house to claim this benefit.

The interest payment is deducted from your taxable income and thus reduces your tax liability. There is no limit on the number of houses you can claim this as well as the location of the houses. The only limit is Rs. 1,50,000 on the whole amount.

There are special conditions like when you get the loan disbursed before the construction of the house and pre – EMI interest and Raag has covered these aspects in a lot of detail in his post about tax benefits of a home loan which you can read if you were interested in those details.

Correction: An earlier version of the article stated that the 80C deduction is only available if you are living in the house. CA Karan Batra notified me that you don’t have to live in the house to claim deduction. Apologies for the mistake. 

Section 80U tax deductions are over and above other deductions and are meant for people who suffer from disabilities.

This section can only be utilized if you suffer from the disability yourself and is not applicable for parents, spouse or any other dependents.

They have two classes of disabilities – one where the person suffers from a disability and the other where a person suffers from severe disability.

You need proof from a medical practitioner to decide what kind of disability you suffer from, and a person from disability will get a deduction of up to Rs. 50,000 from his taxable income while a person who suffers from severe disability can get a deduction of Rs. 1,00,000.

TaxWorry has a list of what constitutes disability, and what constitutes severe disability on their site.

You will also find the forms that need to be downloaded on that link.

I can’t quite remember if they propose to have this deduction or any other form of it post the Direct Tax Code, so I’ll update that aspect once I know more about it.

This is fairly simple thing so I’ll stop here, and thank you Furqan for bringing this to my attention!

One of the more popular options covered under Section 80C is the tax saver fixed deposits.

These have a term of at least five years, and given the high interest rate environment we’re currently in – you can find a lot of banks that offer more than 9% on these tax saving fixed deposits.

Here is a list of some of the higher paying ones that I found, and you can see that there are quite a few options that offer over 9.25% if you are a senior citizen.

Even otherwise, there should be a bank near you somewhere that offers 9%, and that’s pretty good as well.

S.No.	Bank	Regular	Senior Citizen
1	Tamil Nadu Mercantile Bank	10.00%	10.25%
2	City Union Bank	9.50%	9.50%
3	State Bank of Travancore*	9.50%
4	Karnataka Bank	9.50%	10.00%
5	IDBI Bank	9.50%	10.25%
6	South Indian Bank	9.25%	9.75%
7	Syndicate Bank*	9.25%
8	Corporation Bank*	9.25%
9	Kotak Bank	9.25%	9.75%
10	Central Bank of India*	9.09%
11	Punjab and Sind Bank	9.05%
12	Lakshmi Vilas Bank	9.00%	9.25%
13	Karur Vysya Bank	9.00%	9.25%
14	J&K Bank*	9.00%
15	Federal BankÂ	9.00%
16	Andhra Bank*	9.00%
17	Bank of Baroda	9.00%
18	Canara Bank*	9.00%
19	Indian Overseas Bank	9.00%
20	Indian Bank	9.00%	9.75%
21	Yes Bank*	8.75%
22	Vijaya Bank	8.75%	8.25%
23	Dena Bank*Â	8.75%
24	ICICI Bank	8.75%	9.25%
25	Bank of India*	8.75%
26	Dhanalaxmi Bank *	8.25%
27	Axis Bank	8.25%	9.25%

Most banks specify the rate of interest on tax saver fixed deposits on their websites, and then some others say that the rate of interest of the tax saver FDs are the same as other fixed deposits with a 5 year maturity.

Then there are some banks that don’t have anything about tax saver FDs on their website. In the above list those are indicated by an asterisk. For these banks I have included their 5 year interest rate as the rate of interest for the FDs. I’ve assumed that these banks do offer tax saver FDs, and haven’t updated their website, so if you know otherwise then please let me know and I’ll update this list.

Also, a slightly dated ET article mentioned some other points about tax saving FDs – chief among them, that they don’t offer overdraft, sweep in facility, and bank loans that might be of interest as well.

The tax filing season is closing in on us, and you don’t want to leave everything down to the last minute. There are still a few months left, and if you haven’t already started planning for your taxes – now is a good time to start.

I’m going to start a series on tax saving instruments here, and every week I’ll try to write at least one post on a tax saving topic.

This week, I start off with an infographic I created with the hope of giving an overview on the various tax saving instruments especially 80C instruments in an easy to digest and graphical manner.

I hope this provides a good overview on the various instruments, how much they save and their lock in period.

I was a little wary of including returns because they can vary so much, and it is natural to compare one with the other but that’s not right since the risk profile of the instruments is different.

Please let me know if you see any mistakes, and also if you want to see any other information on this.

Please share it with friends and colleagues if you think this will be beneficial to them, and as usual I look forward to your comments!

Reader Kanti Kiran emailed me with a couple of corrections related to taxation of NCDs post that I wrote yesterday, and I’m going to talk about them in this post.

I said that the cumulative NCD option is not tax free, and that the money you get during the redemption will attract capital gains.

Kanti Kiran wrote to me saying this isn’t correct, and while the amount is taxable, it’s not taxable as capital gains, but as interest income that will be clubbed with your other income and taxed at your regular tax rate.

This is a meaningful difference because people at the highest tax rate will have to pay about 30% tax on this income instead of the lower capital gains tax rate.

There was another reader who weighed in on the subject, and he opined that if there is a coupon rate associated with the NCD, and if that NCD pays out a cumulative option then you have to declare the income every year, and pay tax on that much like the tax on recurring deposits.

However, if there is no coupon rate on the NCD and they pay a lump-sum amount then that will be treated as capital gains. It’s not quite clear to me how a coupon rate gets associated to a cumulative NCD.

I couldn’t find an authoritative source on any of this, so if any of you have practical experience or know for sure how this income should be treated then please leave a comment or email me.

There was also a comment on treating capital gains on these NCDs in the same way that you would treat the capital gains on shares if you buy or sell the NCDs on the stock exchange.

The rationale for treating them as equity funds is that you pay Securities Transaction Tax (STT) on these transactions. I checked with Shiv on the transactions that he has done on the exchange, and he hadn’t paid any STT on the NCD he sold, so it doesn’t look like you can treat capital gains on NCDs in the same way as equities.

The last point was about no TDS on only those NCDs that are listed and are compulsorily in Demat form. You will remember that this is what we talked about when infrastructure bonds were issued last year when many of them were first compulsorily Demat and then turned into physical form, and a bit of confusion ensued.

Since one of the main features of these NCDs is listing in an exchange, and they are seeing a lot of demand from people who have Demat accounts – I don’t see them changing this aspect of the NCD, but it’s a good point to keep in mind.

So, these are the various interpretations of the tax on NCDs that have been shared so far, and I will appreciate any feedback that you may have on this.

Thanks to Kanti Kiran, ankm83 and Shiv for weighing in and giving input for this post, and I apologize to everyone for not getting this right on the first go.

Sudha wrote a comment a few days ago about the effect of Direct Tax Code (DTC) on dividends from equity mutual funds, and I’ve been meaning to do a post on it since then.

Currently, dividends from equity mutual funds are completely exempt, which means that there is no tax on them at all. Equity mutual funds are unique in this because equity shares are taxed using the dividend distribution tax, and so do debt mutual funds. This tax is collected from the company or the fund issuer, and not the investor, but reduces the money you get nevertheless.

With the DTC implementation, the dividend of an equity mutual fund will be taxed at 5%, and this will have to be paid by the mutual fund holder.

(Source: Direct Tax Code, Tax on Distributed Income, Chapter VIII)

 

The capital gains on these mutual funds will be taxed at redemption as well, so with the new DTC rule coming in, it’s better to buy the growth option of these equity mutual funds than it is to buy the dividend option.

Even without this option I’ve been in favor of putting money in growth option rather than dividend option because that allows your money to compound for longer, and helps it grow.

I constantly hear people talking about getting money from dividends to pay off some other expense like a insurance payment, or an ELSS payment, but that doesn’t make much sense to me.

It’s true that you “feel” that a payment was made without money going out of your pocket, but it’s your money regardless! Now, you have that much less invested in the market and reduced from your net worth.

On a semi related note, I know that a lot of people who have credit card debt are advised to start using cash instead of plastic because if you have to pay Rs. 1,000 in cash money it pains a lot more than if you just had to swipe a card. I can understand and appreciate this psychology, and I think something similar is at play when you can use a dividend to pay off an expense, but I can’t appreciate that, and certainly wouldn’t advise a friend to choose a dividend option for just this reason.

In any case, if nothing changes between now and when DTC kicks in – you should be aware of this 5% tax on dividends of equity mutual funds, and make a decision keeping it in mind.

I discovered something about the new rule that exempts people earning less than Rs. 5 lakhs from filing income tax returns that I hadn’t noticed before, and I thought I’d do a post on it.

I didn’t know that you lost the income tax filing exemption if you had more than one job in a year, even if you met the other criteria.

This tax filing exemption news is a few days old, so I know that I missed this aspect earlier, but I thought it was best to be late than never, and at least have one post on this topic here, since I expect some people to have questions about this rule.

Income tax filing exemption applicable to taxable income of less than Rs. 5 lacs

You have to consider the taxable income, and not your gross salary. So, if you make Rs 5.5 lacs, but invest Rs. 1 lac in Section 80C instruments then your taxable salary is just Rs. 4.5 lacs, and that makes you exempt from filing income tax returns under the new rule.

You should have income from only your employer and a savings bank account

You can earn interest by way of a savings account and as long as that is less than Rs. 10,000 (and you’re below the Rs. 5 lakh limit) you are exempt from filing income tax.

This income tax filing exemption rule is already applicable

The rule is applicable for the salary you earned in the financial year April 2010 – March 2011, so this rule is already applicable.

Should people with less than Rs. 5 lakhs buy growth instead of dividend mutual funds?

You know that ELSS mutual funds will lose their tax benefits when DTC (Direct Tax Code) kicks in, so a lot of people are interested in taking advantage of ELSS funds this year.

However, with this rule kicking in should you invest in growth instead of dividend mutual funds?

It seems to me that you will only need to file income tax returns if you had dividend income or capital gains income, but if you just bought a growth mutual fund which you don’t sell then you will neither have a dividend income nor any capital gains, and thus the tax filing exemption will still be applicable to you.

I’m not entirely certain I understand this correctly, but it is something worth exploring if you were in this situation.

What about exempt long term capital gains?

You know that long term capital gains in equity mutual funds and shares are exempt from tax. However, if you had such income then it will come under Income from Capital Gains in your total income, and that will take away the tax filing exemption from you.

So, you will have to file an income tax return due to income which is not taxable?!

I don’t know if I understand this correctly, but another thing worth exploring if you are in the situation.

Conclusion

This a good step, and will probably expand to capital gains and interest from dematerialized bonds in the future as well, but until that time you have to keep these factors in mind before deciding if you do or don’t need to file taxes this year.

Disclaimer: I’m not a tax expert, and hire someone else to do my own taxes, so you should use this information only as a starting point to your research.

Update 1: Reader Namit emailed me letting me know that I have written that fixed deposits are included under the exemption, but that’s not the case. You are exempt only if you earn interest from a savings bank account, and not a fixed deposit.

Here is an article from Business Standard that confirms what Namit says. Following is the relevant excerpt:

But those with income from other sources such as fixed deposits and mutual funds will have to file returns.

I have corrected the post, and apologize for the error.