As the economy slowly begins to start up and get back on its feet, it is the time of the year, post extensions, when companies require you to let them know what income deductions you will be availing of in the current financial year and the quantum of investments in various tax saving schemes. This year, however, there is an added dimension to this, you will have to also let your company know if you will be availing of the previous tax regime or the new one.
While this decision is entirely dependent on your ability and willingness to invest in tax-saving instruments as well as various deductions available to you, we are writing to give you some broad indications of which one may be suitable for you.
Below is a quick recap of the tax slabs in both the old and new regimes. The rows highlighted in grey in the new regime are the income slabs which are benefited on income tax versus the old regime. Also, important to remember that if you choose the old regime you can avail of various deductions, whereas you cannot avail of any deductions in the new regime.
Most availed deduction/exemptions in the old regime are as follows
Standard deduction (available by default to everyone)
Sec 80C – up to Rs 1.5L (normally taken care by the EPF contribution for employees, as also school tuition fee or principal repayment of house)
Sec 80D & Sec 80DD – Medical insurance Premium paid for self and Parents
Home loan interest repaid
Let us look at which option seems beneficial under various scenarios.
You are able to avail of entire 80C and 80D medical benefit without investing in any further instruments
What we have noticed with a large part of our customers is EPF or NPS contributions take care of the entire Sec 80C limit. In a few cases where it is not so, the education tuition fees of children or principal repaid from home loan can cover up.
No one takes health insurance to save tax. It is supremely important to have a medical insurance to ensure that your financial goals are not de-railed thanks to an illness. Most customers do have medical insurance and are able to claim a deduction of 25K for self and family. If you are paying the premium for senior citizen parents, you can get a further deduction of 50K.
Since you are not forced to invest any further money to save tax it normally makes sense to stay with old regime.
You have a home loan
If you have a home loan, it is a no-brainer to stick to the old regime, primarily because you will get home loan interest deduction upto 2L apart from availing 80C for principal repayment.
You are a senior citizen investing in PPF for 80C and have fixed deposits or Senior citizen saving scheme
If you are a senior citizen who has been investing in PPF for many years and are comfortable investing further and you hold substantial FDs or Senior Citizen Savings Scheme (SCSS) it would be beneficial to stick to the old regime. This is because you get deduction of Rs 50,000 on interest paid under section 80TTB. This is over and above 1.5L deductions under 80C for investments in PPF.
If you are wondering why a senior citizen will be investing in PPF, many of our customers use this as a tax-free estate planning device. They keep investing and leave it behind for their children. As part of asset allocation, they put some part of their debt monies into such schemes.
If you are eligible for HRA deductions and can avail of deductions under 80C for your ongoing investments or expenses, it is an added reason to be in old regime.
If you are taking Voluntary Retirement and expect to get a compensation amount
Compensation upto Rs 5L received under voluntary retirement scheme is exempt from tax once in your life time. If you are choosing to avail of Voluntary retirement this year, you should stick with the old tax regime.
While the above are basic pointers, there are additional benefits available to you if you choose to invest Rs 50,000 in the NPS scheme, have an educational loan or plan to donate to recognised institutions, in all such cases the old regime is beneficial.
As you can see, I have highlighted many cases where the old regime is beneficial. You must be wondering why bring a new tax structure if it is not beneficial for most. The key to this is that you can claim deductions without making fresh investments in sub-optimal instruments only to avail of the tax deductions. Also, we have looked at the above primarily from a salaried employee’s perspective.
For self-employed or professionals where Sec 80C is not a given, they will need to invest money to avail of tax benefits. In many cases, the choice of investments will be at cross-purposes to their financial goals. In such cases it would be better to opt for new regime and invest your money in instruments of your choice which are aligned with your overall financial goals.
If you have already made the choice of tax regime as a salaried employee, you can change your mind at the time of filing your tax. This is not an option with non-salaried people. As mentioned earlier it is always a good idea to consult with your financial advisor/ tax consultant to get advice which is customised to your unique situation. However, the above pointers may help you understand the reasoning behind the choice.
Image credit: Gerd Altmann, Pixabay
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Over the years, the significance of the Union Budget has come down and doesn’t have such an impact on our everyday lives, and hence doesn’t interest too many of us anymore. That said, there are still some, especially those in the finance businesses, for whom listening to the Budget is a yearly ritual.
But given the negative news as well as poor economy numbers over the last couple of quarters, we would dare say that the FY21 Budget presented last week had more than a usual number of people waiting for it. For most, last week would have been one of anticipation for Saturday to arrive and hope that the finance minister has something up her sleeve to magically move the economy into 4th gear, trigger consumption, improve rural incomes, increase investment, ease credit flows and banking woes and overall reverse the prevailing sentiment, while of course ensuring that the fiscal deficit doesn’t scarily worsen.
Many articles have already dissected the Budget presentation as well as the detailed document post that, so we will not attempt a repeat of that. But even for the most disinterested observers, the least they would have expected is how the budget will put more money into our pocket or at least ease our difficulties in dealing with taxes. So, we have looked at how this year’s budget has panned out for your personal finances and identified 6 changes which could affect you personally.
Changes in Income Tax structure
Who doesn’t love choices? Whether its plain simple breakfast or choosing your next outfit we love it when we have choice, don’t we? However, that doesn’t seem to apply to Taxation structures. This year’s budget has changed the tax slabs but left the choice of sticking to the previous tax slabs or switching to the new ones to you. The catch is if you switch to the new tax slabs, you cannot avail of any of the deductions & exemptions currently available. Here is a quick look at the tax slabs that are currently in existence and the new ones which you can choose to switch to.
How do you decide which of the two options you should choose? What you need to look at is the deductions and exemptions you are currently availing of. The most popular ones being
Rs 1.5 lakh under 80 C, the default option for most being EPF (ELSS, PPF, Life Insurance, School fees, Principal repayment of home-loan etc)
Medical insurance premium under section 80D of Rs 25,000 for self and Rs 50,000 for senior citizen parents (total of Rs 1,00,000 if both self and parents are senior citizens)
Additional deduction of Rs 50,000 for investments in NPS
Deduction of 2L on interested paid on a home loan under section 24(b)
Broadly, if you are claiming home loan interest deduction apart from 80C, you are better off with the previous tax slabs. But if you are not and do not have default investments like EPF for claiming deductions under section 80C and you are currently investing in products especially for the deductions, you can opt for the new slabs.
Finwise Take→ While there is a choice being given currently, the intention clearly articulated has been to move away in the coming future from the exemption and deductions being offered currently. Given this scenario, if you are buying a house or starting a new NPS account primarily to avail of the exemption you may want to rethink your decision.
Currently, a large number of investment decisions are made (and products are sold) at the last moment, primarily on their tax-saving features. We think this is a good step since the products thus bought will pass the tests of suitability towards risk profile and time horizon, and will help investors create substantially more wealth than now. You would be better off seeking the help of a financial advisor to help you make the right decisions customised to your needs, especially given the above.
Increased insurance cover for FDs
Currently each depositor in a bank is insured upto Rs 1,00,000 inclusive of both principal and interest. This budget has increased this insurance limit to Rs 5,00,000, and this would help increase coverage and bring a greater number of impacted people under the insurance fold in case of bank defaults. This will give a lot of comfort, especially to senior citizens, for whom this is the investment of choice.
Finwise Take → While increased insurance cover is a welcome step, it can give investors, especially senior citizens who look for that extra percentage point to prop up their meagre savings, a false sense of security about otherwise “dangerous” investment options in this space.
Our belief is that this insurance benefit is a “perceived” comfort. This insurance is payable by the Deposit Insurance and Credit Guarantee Corporation of India, a subsidiary of the RBI. DICGC will wait for the “defaulter” bank to be liquidated and de-registered, post which the DICGC receives claims from the banks and then pays out the claims, post necessary validations. The wait can be many years for impacted customers, and this risk is definitely not worth taking for extra percentage point of interest.
Our advice to our customers has always been to be safe with debt investments and not take any kind of risk with debt. Credit risk while investing in banks like PMC was ignored and has now come to the forefront. Insurance or no insurance, it is important not be lured by a few percentage points higher return. We often tell our customers to beware of higher interest rates, which some banks or institutions are offering, since higher-then-prevailing interest rate means higher than intended risk, which is opaque to the retail investor and our stance holds going forward too.
TDS introduced for FDs in cooperative banks
Now, cooperative banks will also need to deduct tax at source on fixed deposits and recurring deposits if the interest exceeds 40K (50K for Senior citizens).
Finwise Take → Earlier this was another big draw for investors to invest in co-operative bank FDs, apart from the higher interest rates. This welcome move will encourage people to think beyond tax and interest rate, while choosing their bank for FDs.
Cap of 7.5L on exemption to retirement contribution by employer
As of now employer contributes 12% of basic towards EPF, Rs. 1,50,000 towards super annuation and 10% of basic towards NPS, and any amount of contribution to retirement benefits is exempt from income tax ie. is deducted from your gross income to calculate taxable income. The new budget has introduced a cap to this exemption, from the next FY, only contributions upto Rs 7,50,000 put together towards all retirement benefits will be exempt and any contribution over and above that will be taxed at your slab rate.
Finwise Take → This is a big change and has a significant impact on high net-worth individuals having corporate careers. Senior corporate professionals earning approx. Rs 1 cr or above are likely to be impacted by this while, of course, actual impacts will be dependent on individual salary structures. For eg. someone earning a basic of Rs 2,50,000 per month, will have an annual retirement benefit contribution of Rs 8.1 lakh (assuming contributions to all 3 benefits – EPF, Super-annuation & NPS), and will cross this tax-exempt threshold. For people with such high salaries, this will mean rejigging compensation structures to reduce institutionalized retirement benefits, which in turn will have the negative impact of also reducing the retirement corpuses that these benefits create, requiring such individuals to plan better individually for their retirement.
No more Dividend Distribution Tax
Currently, dividends received from shares and mutual funds are not taxed in your hands, they are paid post payment of DDT. DDT for shares is 20.56%, equity mutual funds is 11.64% and debt mutual funds is 29.12% before paying out the dividends. With new budget provision the dividend will be added to your income and taxed as per your income slab.
Finwise Take → While this is a welcome step for corporates, especially MNCs, since dividend income to MNC shareholders was earlier taxed and is now free, it not such good news for retail investors, especially those in the higher tax brackets.
If you have a largely direct-equity portfolio, the dividend yield will fall substantially. You should consider shifting to equity mutual funds under the growth option where the tax outflow is capped at 10% long-term capital gain, that too on redemption, for investments over one year.
If you have invested in equity mutual funds (both pure equity & equity hybrid) in the dividend option, you should shift to the growth option immediately, for reasons similar to above, since the differential impacts here are even higher than in direct equity.
For debt mutual funds, the approach was dual. For people either in lower tax brackets or for long-term debt allocations (> 3 years), it always made sense to remain in growth, since both tax slab rate and LTCG on debt is lower. Whereas only for investors in the highest tax slab for short term investments (< 3 years), dividend option was better, since the STCG on debt is as per tax slab. With this change now, across the board, growth is the option to go with in debt mutual funds.
Also, one needs to remember that this has made tax-returns filing a bit more cumbersome, since dividend incomes now need to be added to overall incomes to calculate taxes, which earlier was not the case, with DDT.
Just in case an investor in the lower tax bracket is holding on to debt funds under the dividend scheme (due to poor advice or ignorant purchase), they will be hugely benefited as they would need to pay tax as per slab which is lower than the 29.12% being paid by the debt funds.
Key changes for NRIs
Announcements in this section set the cat among the pigeons for NRIs, before clarifications led to clarity and calm. Some key changes
Taxation of global incomes of NRIs who are not tax-resident in any other country
Definition of Resident-tax – 120 or more days in India (reduced from earlier 182 days)
Definition of Resident but not ordinarily-resident – transition period increased to 4 years (from earlier 2 years)
Finwise Take →After giving a big scare to NRIs based out of the Middle East regarding taxing global income, there has been clarity that global income of residents of any country will not be taxed. While this doesn’t impact people resident in tax-free countries, people working in the merchant navy etc. may be impacted, since their long-period travels across the world may lead them to fall into this category of Non-Resident Indian but not resident of any other country.
In addition, such people will be doubly impacted by the second clause above, since they need to ensure they live in India for less than 120 days to classify as non-resident, as against 182 days earlier.
The last clause above is beneficial for NRI’s returning to India after living abroad for many years since it will give them more time without taxing their global income.
Do note that these are broad-based observations and not necessarily one-size-fits-all, do consult your financial planner / advisor for customized advice on your particular situation.
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.
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The interim budget was presented on 1st Feb 2019 and has already receded to the background in most conversations. Now that the dust has settled as well as clarity obtained on a few new proposals, it is a good time for us to look at and quickly recap how this year’s interim budget weighs upon our personal finances.
The one thing which is usually on every salaried person’s wish list from the budget year after year is tax breaks, and this time we did see some welcome changes. A lot of positive moves for those in lowest tax bracket and some for the mid and high-income category too.
No tax if taxable income below Rs. 5 Lakhs, standard deduction raised from Rs. 40,000 to Rs. 50,000
Rebate of Rs. 12,500 has been given to people with taxable salary of upto 5 lakhs, thereby ensuring that people belonging to this group will pay zero tax. Note that if your taxable income is higher than Rs. 5 lakhs you will continue to pay 5% tax for income from Rs. 2.5 lakhs to Rs. 5 lakhs.
The key word here is taxable
income, meaning income after considering all deductions. This means
that people with gross incomes higher than Rs 5 lakh, in fact upto Rs 10.35
lakh can end up paying zero tax, assuming the person has made maximum
investments basis eligibility.
The attached table clearly
illustrates how a person with gross income of 10.35 lakhs will still avail of
the rebate and end up paying no tax. This is for someone with no HRA, donations
or education loan, a person having any of the above will end up paying no tax
on even higher incomes than Rs 10.35 lakh. The fact that a person earning close
to Rs 90,000 a month can end up paying zero tax if she plans her investments is
a huge positive.
The standard deduction which was at Rs 40,000 has now been increased to Rs 50,000. This benefit is available to people across all income slabs and not just < Rs 5 lakh pa.
Limit for deduction of tax at source (TDS) for interest on FD has been raised from Rs 10,000 pa to Rs. 40000 pa
This will come as a relief to
many pensioners as well as people having FDs as a contingency asset. With lower
limits of TDS, one needed to fill forms and submit it on time to avail of non-deduction
of TDS. This will be a welcome change making the process hassle free.
No tax on second self-occupied house on notional rent
People having two houses were
required to pay tax on notional rent on the second house, even when they choose
not to rent out their premises. This is a very thoughtful benefit and has been
extended given the fact that the number of working couples who are forced to
work in different cities to pursue their careers and build their lives is
increasing. Hence going forward, people who have two houses due to various
reasons can now breathe a sigh of relief.
You can reinvest your long-term capital gains in two houses instead of one.
If long term capital gains
accrued on sale of a house does not exceed Rs. 2 crores, then you can avail
capital gains re-investment benefit across two residential houses instead of
one under section 54. This benefit is available to an individual only once in a
lifetime. This again is a thoughtful benefit extended, keeping in mind inter-generational
purchase of houses, due to greater nuclearization of families.
However if the capital gains exceed
Rs 2 crore than old rules will still apply and to avail of the benefit you will
have to invest in 1 residential house.
In our opinion though, in case
one is not obliged to re-purchase a house (to meet familial needs), it will
make better sense to invest capital gains in Sect 54 EC bonds for a period of 5
years rather than locking up capital in in low-yielding real estate. Post the
lock-in period, one can look at financial assets which have potential to make
much higher returns.
Pension for unorganised sector workers
In our opinion one of the highlights of the budget was the pension scheme announced for unorganised sector workers. We all see our maids, drivers and numerous other people struggling to make ends meet and retirement is definitely not on their priority. Pradhan Mantri Shram Yogi Maandhan Yojana promises a minimum pension of INR 3000 pm at age 60 on minimum monthly contributions. A 29 year old, will need to deposit INR 100 a month to avail of this pension. This scheme now provides a much needed social security net for the huge number of unorganized sector workers across the country and each one of us should ensure that our safety nets ie. our domestic helps avail of this scheme so that they too can have their own safety nets.
Finwise is a personal finance solutions firm that helps both residents and NRIs plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at email@example.com or +91 9870702277/9820818007.
National Pension Scheme is not as popular as the government would like it to be. In order to make it on par with other investment options, changes have been made constantly and the latest was announced last week. The biggest and most talked about change is that now NPS enjoys fully EEE status where it was earlier partly EEE and partly EET.
EEE (exempt, exempt, exempt) essentially means there are tax exemptions (up to specified limits) available while you invest, the capital appreciation when you stay invested is exempt from tax and there is not tax exemption when you withdraw.
At this point, a quick recap on how withdrawals from NPS are treated currently will help. It is compulsory to invest 40% of your accumulated corpus in an annuity scheme which gives you pension. The remaining 60% can be withdrawn after you attain 60 years of age. Currently out of the 60%, 40% can be withdrawn tax-free while the remaining 20% is taxable.
Going forward, once the changes announced are implemented, the entire lumpsum withdrawal of 60% will be exempt from tax. The pertinent point to note is that it is still compulsory to buy an annuity with 40% of the corpus and the pension received will be taxable. Therefore, EEE is only for the lumpsum withdrawals. While this is a welcome improvement, it is too minor to change one’s decision on whether to use NPS as a significant investment vehicle.
Taxation is evolving in recent years, as is evident with the long-term capital gains measure introduced for equity investments. I strongly believe that while it is an important factor, it cannot be the only factor in deciding on the vehicle of investment.
If you recall in my previous article I had said that I would not invest in NPS for several reasons, many of which are still applicable, hence my stand in principle remains the same. Let me recap the reasons why I would not invest in NPS, even in its improved avatar.
The corpus is locked in until one turns 60. I have come across numerous clients who want to retire as early as their late 40s. With NPS, your funds will not be at your disposal if you choose to retire early, the only option being to withdraw 20% of your corpus and investing 80% in annuity.
The annuity from NPS currently does not give good returns. It is possible to have an annuity with better returns through investments in mutual funds and if lack of knowledge is a constraint, one can engage a financial planner to help with the same. Compulsorily locking funds with the pension provider alongwith poor returns is a stiff price to pay for investing in NPS.
However, there is a possibility that one could still consider investing to the extent required for extra tax savings of upto Rs 50000 per year, given this change.
Lastly, if you are a central government employee, you can cheer some of the other changes like increased contribution by employer (Govt.), etc. While you stay invested, choose your asset allocation wisely and keep track of it regularly to make the best of the situation.
Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. Please reach us at firstname.lastname@example.org or +91 9870702277.
As some of you would have picked up in the recent financial news, the interest rate on PPF has been increased to 8% from 7.6% from this month. This will again lead to many people wondering if PPF is better than ELSS going forward.
While there are many options available to you for saving tax under section 80C, today we will compare PPF and ELSS. You my know that PPF is a debt investment and ELSS is an equity investment. Normally comparing the two would be like comparing apples to oranges. Since these are the most popular investment options for people who have not exhausted their 80C limits with EPF contributions, the comparison is justified.
Before we go about comparing the two, let’s understand the basic features of both.
You can invest in PPF by opening a PPF account at your bank or post office. The interest rate on PPF is announced on a quarterly basis. The current rate w.e.f 1st Oct 2018 is 8%.
The maturity is 15 years, and it can be renewed for a block of 5 years after the maturity. It’s an illiquid instrument and forces you to park your money for 15 years. This can also work to your advantage if you lack the discipline to hold on to your investment for a long time.
Equity linked Saving Scheme (ELSS) is an equity mutual fund with a 3 year lock in. Please note that not all equity MFs provide tax benefits under 80C, there are certain funds specifically denoted as ELSS that only do so. Since it is equity there is not fixed return like PPF and the returns are based on the market performance.
Having said that they have beaten the PPF returns by a huge margin over the last 10 years. The below table shows returns for Rs 1 Lac invested in various ELSS schemes at the date of inception vs the same amount invested in PPF on the same date. As you can see, over an approx. 20-year period the money has multiplied 55 times in ELSS vs about 5.3 times in PPF. Even over a 5 year period, ELSS has multiplied 2.6 times vs 1.5 times for PPF.
Launch/ Investment Date
Current Value as on 25-09-2018
ELSS Scheme Returns (%)
PPF Current Value
PPF Returns (%)
Franklin India Taxshield-Growth
HDFC TaxSaver-Growth Plan
ICICI Prudential Long Term Equity Fund (Tax Saving) – Growth
IDBI Equity Advantage Fund – Growth Regular
Bear in mind the following while making a choice
Invest with a long-term horizon of 15 years and stick to it, do not link your investment time horizon to the exit clause of the scheme
The returns from equity will be volatile and may even be negative over the short term. Be prepared to hold on to your investment despite double digit negative returns in the interim. If you can digest volatility, see that performance is negative in short runs and still not panic, ELSS may be a good option
Importantly your portfolio will have an asset allocation towards both debt and equity. You should choose PPF if you are looking to augment your debt portfolio, though ideally debt investments are made for shorter time frames and equity for longer time frame
Last but not the least, important to remember the choice of ELSS fund is also important, and the choice must be made with adequate diligence. In case you are not equipped to do that, you should reach out to your financial planner.
Now that you have seen the pros and the cons of both, what should you do? If your investment is for the long term (i.e. at least > 7 years), I would recommend you invest in ELSS. Expect volatility along the way, don’t panic, don’t withdraw in 3 or 5 years, tighten your seat belts and watch the magic of wealth creation unfold. If the volatility is something you cannot handle, PPF would be your option, but remember that it will only preserve your wealth.