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Tax planning tips for FY’14
I recently got a call from one of my friends who wanted to invest in an investment avenue which is eligible for tax deduction u/s 80C. He told me it’s urgent as he needs to submit the proof of investment to his employer before January 31, 2014. You all know that every year you have to invest Rs 1 lakh in a limited investment avenue to claim tax benefits u/s 80C of the Income Tax Act. Instead of taking some time out at the start of the financial year, most people wait till the end of year and end up buying a product which may or may not be as per their future need.

3 reasons to exit your mutual fund
Nothing lasts forever and this holds true even for your mutual fund investments. There will come a time when you must decide to sell your mutual fund investment. Here is a checklist that can help you make the decision. It is never a good idea to fall in love with your investment — they should be redeemed if circumstances demand so. At the same time selling your mutual fund because you want to buy the latest smartphone is not exactly prudent financial planning.

tax advice
NRI can give a loan to HUF
My queries are:
When a member of an HUF receives a contribution of Rs 1 lakh in his PPF account from HUF, whether (a) this amount is treated as tax-free income of the HUF member and (b) can he claim rebate under Section 80C?

When an HUF member gives a gift to his father’s HUF, the income on this amount becomes taxable at the hands of the member. But when he gives a interest-free loan to the HUF, there is no such tax implication. Is my interpretation correct?

Tax planning tips for FY’14
Pankaaj Maalde

I recently got a call from one of my friends who wanted to invest in an investment avenue which is eligible for tax deduction u/s 80C. He told me it’s urgent as he needs to submit the proof of investment to his employer before January 31, 2014.

You all know that every year you have to invest Rs 1 lakh in a limited investment avenue to claim tax benefits u/s 80C of the Income Tax Act. Instead of taking some time out at the start of the financial year, most people wait till the end of year and end up buying a product which may or may not be as per their future need. This is not the case with only salaried class but also applies to businessmen and professionals. Still you have two months to finalise the best product available for tax benefit, which will also be linked to one of your financial goals.

Here are some tips for tax planning if you are looking for a tax-saving instrument

Calculate the exact amount still pending for investment to get the benefit u/s 80C. If you are not sure, then consult your chartered accountant or tax consultant. You can also consult a financial planner who can guide which product is good depending on your financial goals.

Deduct self EPF contribution (employer contribution is not allowed as deduction), tuition fee paid for two children and housing loan principal repayment (if there is an existing home loan) and existing life insurance premium before arriving at balance amount to be invested under the overall limit of Rs 1 lakh.

Buy online term plan for life insurance needs to protect your family in case of an unfortunate event. This is very important and has to be given a top priority. By rule of thumb, you should have a minimum cover of 12 times your annual income.

Don’t invest in traditional life insurance products, as returns from these products will not beat inflation. Unit-linked insurance plan (ULIP) plans are also loaded with the irrecoverable charges like allocation charges, policy admin charges etc. which reduce your overall return. Investment in insurance does not make sense and always try separate insurance and investment.

Businessmen and professionals must consider PPF investment for tax saving, as it gives an 8.7% tax-free return which is the best in debt category. You can deposit a minimum of Rs 500 and maximum of Rs 1lakh in your PPF account in one financial year.

NSC is also eligible for tax benefit but the interest is chargeable to tax as income from other sources. At present, 5-year and 10-year NSCs are available which have interest rate of 8.5% and 8.8% per annum, respectively. The interest accrued on NSC is also eligible for tax deduction.

Mutual Fund ELSS schemes are the best for those who would like to invest in equity and want to participate in the growth story of India. ELSS scheme invests 100% in equity market. ELSS schemes have the lowest lock-in period of three years compared to all other products available for tax planning.

Fixed deposit with banks and Post office Time Deposit for a period of five years is also eligible for deduction. Interest earned on deposit is chargeable to tax. The rate of interest available at present is around 9% per annum.

Senior Citizen Savings Scheme (SCSS) of post office is also eligible for tax deduction u/s 80C. The rate of interest is 9.20% per annum. The interest is paid quarterly.

Investment in NPS (National Pension System) tier I account also comes under eligible investment list. You should know that liquidity is very poor in this scheme and also the fund performance is not easily available for comparison. There are three options available under NPS. If the liquidity is not the issue, you can also consider the same. Returns under NPS are market-linked and are not guaranteed. Minimum investment under this scheme is Rs 500 per contribution and Rs 6,000 per year.

During the current financial year, tax credit of maximum Rs 2,000 is available for those whose total income is below Rs 5lakh u/s 87A. You should also know this before investing in any tax-saving instrument.

So do not wait till end and plan well in advance. Younger investors should invest more in ELSS scheme of mutual fund where as senior people can opt for PPF deposit or NSCs. The combination of PPF and ELSS scheme is a good option to go with, if you do not have access to professional advice.

The author is Head, Financial Planning, Apna Paisa. The views expressed in this article are his own

3 reasons to exit your mutual fund
Nirmal Rewaria

It is never a good idea to fall in love with your investment — they should be redeemed if circumstances demand so. At the same time selling your mutual fund because you want to buy the latest smartphone is not exactly prudent financial planning.

When should you exit your mutual fund?

Here is a checklist to help you take a decision:

When your financial goal is due

Since investments are typically made for meeting a financial goal such as buying a house or a car or for child’s education or marriage, it follows that you redeem the mutual fund investment once the goal is in sight. Financial discipline is all about being invested till the time you don’t near your goal. Usually, this would be the most common reason for investors to redeem their investments.

When the fund is not what it used to be

You bought the mutual fund for a reason — mainly because it was a good fit for your financial goal. If it continues to remain that way, then you don’t need to exit the investment. However, if there is a fundamental change in the nature of the scheme, which compromises its ability to meet your goals, you must consider exiting the investment. Some of the fundamental changes include takeover by another mutual fund which does not have the requisite track record or change in the fund’s risk profile meaning it is making riskier investments like increased allocations to mid caps which is not what you bargained for or a merger with another fund within the same fund house although with a different investment objective. These are but some scenarios that call for a re-evaluation. Your financial planner is best placed to guide you.

When your portfolio needs re-balancing

Since equity and debt markets are in a state of flux it is unlikely that your portfolio will retain its original allocation. Let’s say you have a 60:40 equity-debt portfolio as recommended by your financial planner. Over a short period of time, equity markets rally 20% and for the sake of simplicity let’s assume this reflects exactly in the equity portion of your portfolio. The debt portion on the other hand is more or less constant. So the portfolio has moved from 60:40 equity-debts to 72:38, which is clearly out of line vis-à-vis your initial allocation and perhaps even your risk profile. If this distortion persists, it calls for re-balancing — meaning you may have to consider redeeming some mutual funds — either completely or in a staggered manner —depending on which fund has grown more or faster than others. The objective is to revert to your original allocation. While these are the primary reasons for redemption, there can be other triggers like a misjudgment in fund selection for instance. At all times, consult your financial planner to ensure you are invested in the right fund and in the desired allocation.

The author is senior vice-president and business head, Edelweiss Financial Planning. The views expressed in this article are his own

tax advice
NRI can give a loan to HUF
SC Vasudeva

My queries are:

When a member of an HUF receives a contribution of Rs 1 lakh in his PPF account from HUF, whether (a) this amount is treated as tax-free income of the HUF member and (b) can he claim rebate under Section 80C?

When an HUF member gives a gift to his father’s HUF, the income on this amount becomes taxable at the hands of the member. But when he gives a interest-free loan to the HUF, there is no such tax implication. Is my interpretation correct?

Can an NRI member of the HUF give interest-free loan to HUF through his NRO account and whether there is any income tax implication on him on the income generated on this sum? Is there a separate section relating to NRI in this regard? — VK Kansal

Any amount deposited in the account of a member by an HUF is allowed as a deduction u/s 80C from the total income of HUF.

There is no tax implication in case an interest-free loan is given to HUF by an individual.

An NRI member of an HUF can give a loan to HUF from his NRO account. There should not be any income tax implications on him on the income generated in HUF account. There is no separate section in this respect in the Act.

I am an employee of the Government of Andhra Pradesh. I have been receiving nearly Rs 10,000-15,000 per month regularly from my younger brother from the USA from his salary (tax paid) who is working in an American company. I have got a permission to accept the amount from him by the departmental authorities. Please clarify whether I have to pay tax on this amount? Are there any suggestions in this regard? — Raghav

On the basis of facts in the query, no tax would be payable on the amount so received by you from your brother as the amount remitted by your brother from America is not your income but is in the nature of a gift from him. I hope your brother has been sending a letter with regard to such a gift. If not, you may obtain such letter(s) for the purpose of your record as well as for tax assessments.

In Futures, you buy a contract which will have a specific lot size of shares. When you buy a Futures contract, you don’t pay the entire value of the contract but just the margin. Open interest is the the total number of contracts not closed or delivered on a particular day.