Tax Deduction at Source (TDS) on interest on Fixed Deposits and Recurring Deposits of banks have caught many savers with surprises. While buying Life Insurance, we are advised that premium payment upto Rs1.50 lakhs are tax deductible under section 80C and maturity proceeds are tax free under 10(10D). But it is not so always! Many insurance products do not qualify for full tax deduction and maturity not fully tax-free. The current low return on Insurance is further impacted by incidence of tax.

 TDS on Life Insurance Proceeds

Insurance products tend to give you a deduction of up to Rs1.5 lakhs from your taxable income under Section 80C. Effective April 2012, the sum assured should be at least 10 times the annualized premiums for life insurance policies to enjoy this tax benefits under Section 80C and on maturity proceeds under Section 10 (10D). Numerous life insurance products are available in the market that do not qualify for full tax savings on entry and will have no tax exemption on maturity. The new section 194DA of the Income Tax Act, 1961, that took effect on 1 October 2014, envisages TDS on life insurance policy payouts which are not exempt under Section 10(10D) and total amount paid to a policyholder towards non-exempt policies that exceeds Rs1 lakh in a financial year, would attract a 2% TDS (tax deduction at source) on the maturity, surrender or partial withdrawal amount of life insurance policy. If you are buying a life insurance product, which does not qualify tax-free returns, this may be an absolute disaster for your investment.

Direct Mutual Funds

When we fall sick, we go to a Doctor who does the diagnosis and prescribes medicines. Thereafter we go to the medicine shop to buy the medicine. We bait on the professional competence of the Doctor for cure of the disease. In case of financial products, be it insurance or mutual funds, most of us   buy the child plan or pension plan or do a SIP in Mutual Fund through an agent or a bank relationship manager. By the time we realize that products bought by us are not suitable for achieving our goals, it is too late.

We should visit a financial doctor to get the right advice, who can analyze our cash flow, investments, insurance policies, loans etc and recommend suitable products to achieve our financial goals. The products should be suitable to our needs. SEBI has now come out with regulation to register SEBI Registered Advisers(RIA) who are like financial doctors and have a fiduciary duty to act in client’s interest. There are more than 200 such individual advisers in India today.

After the EPF taxation Fiasco by the Finance Ministry, another big blow has been passed on to the middle income savers by reduction of interest rates on small savings schemes effective 1st April 2016 for the April-June 2016 quarter. 

  Interest Rate (%)
Schemes Now New
Public Provident Fund 8.7 8.1
Sukanya Samriddhi Account 9.2 8.6
Senior Citizens Savings Scheme (5 yrs) 9.3 8.6
Kisan Vikas Patra 8.7 7.8
National Savings Certificate (5 yrs) 8.5 8.1
Monthly Income Account (5 yrs) 8.4 7.8
Post Office Deposit (5 yrs) 8.5 7.9
Post Office Recurring Deposit (5 yrs) 8.4 7.4
Post Office Deposit (1 yr) 8.4 7.1
(New Rates For April 1 to June 30)

How to open NPS account online?

NPS has emerged as a popular tax saving tool at par with EPF. but the issue on taxation of 60% of the proceeds on maturity or buying annuity is a moot point and hoped to be resolved soon. Opening of NPS account was a herculean task till now but have been made easier through online NPS account.

Types of NPS accounts: There are Two types of account i.e TIER I and TIER II

  • Tier I is the mandatory account for long-term savings. Additional Tax benefit upto Rs.50,000 is available u/s 80CCD (1B) over and above the 80C limit of Rs1,50,000/-
  • Tier II is an add-on account which provides you the flexibility to invest and withdraw from various schemes available in NPS without any exit load.
  • To open Tier II account you need to have Tier I account first.

A subscriber is required to open a Tier 1 account with the Central Recordkeeping Agency (CRA). Each account is identified by a unique Permanent Retirement Account Number (PRAN). It is now possible to open this account online using the e-NPS system by accessing the following link: https://enps.nsdl.com

Tax Planning tips post Budget 2016

1. Think before opting for an EPF

If you got a new job, then think twice when you are opting an employee provident fund or EPF. From April 1, 2016, when you withdraw the EPF, you have to pay tax on 60% portion of amount. Rest 40% will be tax free. Anyway, you have no way out because EPF is compulsory. Similarly, new pension scheme or NPS will also taxed just like EPF. Given a choice, NPS will be better which has an equity component and may generate higher return.

2. Your builder has delayed…don't worry for tax exemption

Currently, most of the home buyers make payment to the builder but do not get possession within stipulated three years' period. Since the buyer does not get possession within three years, he is entitled to get only Rs 30,000 tax deduction. Now, finance minister has raised this time limit up to five years.

1)  Rs 5,000 Rebate for Income upto Rs 5 Lakhs: Rebate increased from Rs.2,000 to Rs. 5,000 for an individual having annual income of up to Rs.5 lakh per annum. Now, such individuals can avail total rebate of Rs.5, 000 in an assessment year.

2) Rs 60,000/- Deduction for House Rent: Deduction amount claimed against rent paid to be increased from 24,000 pa to 60,000 pa under Sec 87A. Not many know about this. Basically this is useful to people staying on rent but do not have HRA as an income component. 

3) Rs 50,000/- add. Tax deduction for home buyers : First time home buyers to get an additional deduction of Rs.50,000 on interest component of EMI. Value of such houses should not exceed Rs50 lakhs and loan Rs35 lakhs. 

EPF is made employee Friendly

UAN (Universal Account Number) is a must

One must get an UAN for availing the online EPF services.UAN is a 12 digit single account number which will be linked to your provident fund account. You don’t need to worry for your different EPF accounts and how to transfer them, when you join a new job. Now each employer will give you a member id, and the member id will be linked with the UAN. Even the employee’s having EPF under private trusts will be assigned the UAN. This is the new system and will be applicable for your current and future employment.

UAN Status in online mode

You have to go to the Employee Provident Fund website (http://uanmembers.epfoservices.in), activate your UAN based registration and complete the details with your login credentials, nearest EPF Office area etc.

EPF Balance:

Once you activate your UAN, you can avail different services such as PF balance, PF passbook, monthly contribution etc through online and SMS.

 

Buy the right products for Tax Planning

The JFM (January, February & March) tax season fever has set in. The Insurance Agents and Banks relationship managers have become super active to push insurance products for tax saving for Rs1.50 lakh limit under section 80 C of the Income Tax Act. One needs to take an advice from a Financial Doctor before buying it from a medicine shop.

 Firstly, before you start rushing to buy any products for tax saving, we suggest you to do some numbers crunching on the following;

  1. Estimate your annual contribution to EPF/PPF/Voluntary PF if any
  2. Take note of your Term Insurance premium/Online Term Insurance premium, if any.
  3. If you have a home loan, get a certificate from the Bank on the breakup of repayment towards principal and interest separately.

 

Life Insurers Claim settlement ratios Pending claims Avg. ageing of pending claims Avg. claim settlement time
  % % Days Days
LIC 98% 0.5% 286 26
Max Life 96% 0.1% 60 26
Birla Sunlife 96% 1.7% 180 29
Tata AIA Life 95% 1.0% 259 30
ICICI Prulife 94% 0.8% 80 20
Star union Daichi 94% 0.3% 113 19
PNB Metlife 93% 1.5% 65 15
Bajaj Allianz 92% 3.0% 46 28
HDFC std Life 91% 2.3% 64 25
Kotak Mahindra 91% 3.3% 293 28
 Sahara life  90% 3.6%   77 27
Canara HSBC 90% 3.2% 134 57
Aegon Religare 90% 0.2% 45 38
SBI Life 89% 3.3% 157 22
Excide Life 86% 1.6% 77 33
Reliance Life 84% 5.8% 160 38
Future Generali 84% 1.8% 68 50
Aviva Life 83% 0.5% 45 26
Bharti Axa Life 81% 2.9% 48 33
India First Life 72% 5.0% 58 46
IDBI Federal Life 72% 4.3% 56 33
Shriram Life 67% 11.2% 83 172
DHFL Pramerica 57% 6.5% 154 207
Edelweiss Tokio 57% 5.1% 60 77
Total 97% 0.8% 206 26

 

Source: Mint Money dated 2nd Feb 2016

 

                                                                                                              

It is boring but do not miss it

 We’ve been writing to you regularly on latest on financial markets. I want to take this opportunity to share some relevant points and reemphasize some of our repeated advice exchanged during our interactions. But Good advice is boring and doesn’t change with time. 

1)   The 3 key factors to success in investing are long term orientation, patience and discipline.

2)   The minimum holding period for equity investment is 10 years. This is only minimum. The preferred holding period should be in decades.

 

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