Are taxes eating into your returns?!

The investment world is vast and complicated, and most people often fail to see, or choose to overlook the intricacies involved. The decision on where to invest is often arrived at arbitrarily; for example because a relative/friend/ colleague recommended it.

 

But investing is much more than that. Investing involves not only looking at returns but also understanding impact of other variables like inflation or taxation on returns. In this article, let us look closely at the impact of taxation on returns.

 

Public Provident Fund (PPF) versus bank fixed deposits FD

On the face of it PPF and FDs may look starkly similar.Both are low-risk options and offer moderate and more or less similar returns. PPF has a 15 Year term; FDs can have varied terms.

 

Now coming to the tax aspects. As far as deductions are concerned, both are available for deduction under secion 80C. However, an FD with a lock in of 5 years qualifies.

 

Coming to the returns. Returns on FDs are taxable, but the return on PPF is tax-free. So, lets say, if both these options gave a return of 8 per cent. The post tax returns on PPF would still be 8 per cent but on an FD it would be 5.6 per cent (assuming you are in the 30 per cent tax bracket).

 

NSCs, KVPs and Govt. of India Bonds

National Savings Certificate (NSC) and Kisan Vikas Patra (KVP) provide a returns of 8 per cent. However, the interest is taxable and if you are in the highest tax bracket of 30 per cent, your post tax returns come to 5.6 per cent.

 

So other things being equal, you should be looking at investing in options which offer higher post-tax returns or preferably options which give tax-free returns. And as far as possible avoid investments in options where the returns could get taxed substantially. Let us look at some such options.

 

Equity MFs and stocks

In the long term, equities are relatively less risky and the systematic investing route can definitely help reduce the downside. Also, equity mutual funds or direct equities become tax efficient only in the long term. If you sell your equity mutual fund or share holdings after holding them for over 1 year, you would not be liable to pay any tax. If you sell them before 1 year, your gains would attract a short term capital gain tax of 15 per cent plus cess.

 

Insurance versus Pension Plan

Pension plans have always been a favorite among investors, the word 'pension' acting as a psychological soother. The premiums are paid during a certain tenure and at vesting (retirement age), the payouts start. These payouts will however be taxed at normal rates.

 

There is an alternate to this. All payouts from any type of insurance plans; guaranteed, bonus linked or Unit linked are tax–free. So why not choose a whole life insurance plan with an option of year-on-year withdrawals. Such payouts are tax-free.

 

Debt Funds Vs. Bank Deposits

Liquid funds are appropriate for very short term deposits.

Avenue	Bank deposit	Liquid plus
Amt Invt.	Rs 1 lakh	Rs 1 lakh
Tenure	90 days	90 days
Return (%) per annum #	5.25%	6%
Maturity amount	Rs 101270	Rs 101447
Returns	Rs 1270	Rs 1447
Taxability of returns	30.9%	-
Dividend distribution tax	-	14.16%
Tax applicable	Rs 392	Rs 205
Post tax yield	Rs 877	Rs 1242
Post tax returns (%) per annum	3.61%	5.13%

#Average returns for Liquid Plus funds for Jun 09
Tax rates are inclusive of 3% cess

 

If you are looking at a slightly longer tenure (more than 1 year), you could look at Fixed Maturity plans (FMPs) which would prove to be an interesting and efficient option. With the help of FMPs investors can get 'double indexation' benefit. This advantage can be availed by investing in an FMP just prior to the end of a financial year and withdrawing it after the end of the next financial year. Here's a quick look at how one could benefit by investing in FMPs as against FDs.

A 13 Month FMP, launched on March 2007, will mature in April 2008. It will pass through two financial years and thus has the benefit of double-cost indexation for the purpose of calculating post-tax yield.

Details	Bank fixed deposit	FMP - with indexation	FMP - without indexation
Investment Rs	10000	10000	10000
Indicative yield (annualised)	9.5%	9.5%	9.5%
Tenure (mths)	13	13	13
Maturity amount Rs	11033	11033	11033
Return/capital gain Rs	1033	1033	1033
Indexed cost Rs	NA	11214	NIL
Indexed long term capital gain Rs	NA	-181	NA
Tax rate	30.3%	20.6%	10.3%
Tax Rs	313	NA	106
Post tax gain Rs	720	1033	927
Post tax annualised return	6.63%	9.5%	8.52%

Cost Inflation Index FY06-07 - 519; FY08-09 – 582

As is evident above, the post tax returns of FMPs with double indexation can be significantly higher (over 50% higher returns), even while pre tax returns are similar.

Gold

Holding physical gold is risky, however, often it is the usual last resort for someone who needs money urgently. Sale of Gold jewelry within a period of 36 mths, is treated as short term capital gains and taxed at normal rates. Post 3 Yr horizon, one needs to accommodate indexation benefit and would end up paying roughly about 10%-20% of taxes. There is a definite need to give a second thought on undue acquisition of gold. Investing in Gold via Mining funds (mutual funds) / exchange traded funds would be far more tax-efficient.

Real Estate

Here again, it would depend on the holding period. If you sell off the asset before 36 months, you would have to pay taxes at normal rates. For any period exceeding 36 months, if the asset is a residential property, you have the option of claiming exemption if it is re-invested. However, not only is the asset illiquid, earning a decent return on income could take an average of 10 yrs – given that the market cycle is inherently longer.

The list of avenues is not exhaustive; we have touched on the key avenues. We leave you with the wishful thought to prioritize tax-efficient avenues for your investments.he list of savings / investment options presented here is not exhaustive; I have touched only on the more popular options and leave you with the thought that tax-efficiency is a key yardstick in evaluating investment options.

Summary

• Invest don't save
• Look at Post tax returns wherever relevant
• Wherever possible choose tax free/lower tax instruments
• Low risk – tax free combo would fit Traditional insurance options and PPF/VPF. Gold/Debt Mutual funds/Real Estate are relative less taxed than fixed deposits
• Medium/High Risk tax efficient avenues are Unit Linked Insurance Plans, Equity/Balanced Mutual Funds and direct equities
• Interest bearing assets are generally tax inefficient. Hence look at post tax return before investing.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

Source: http://wealth.moneycontrol.com/columns/tax-planning/are-taxes-eating-into-your-returns-/13672/0

 

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Complete guide: Tax sops on donations

 

INSPITE of all the contributions made to social causes, there is a huge gap between the demand of money from the needy and the amount donated by philanthropists.

This probably, is the reason why the Government has given tax benefits on donations. The amount donated towards charity attracts deduction under section 80G of the Income Tax Act. Section 80G has been in the law book since financial year 1967-68 and it seems it's here to stay. Several deductions have been swept away but the tax sop for donations appears to have survived the axe. The main features of tax benefit with respect to charity are as follows:

Who can get a tax break?
Any person or 'assessee' who makes an eligible donation is be entitled to get tax deductions subject to conditions. This section does not restrict the deduction to individuals, companies or any specific category of taxpayer.

Which donations can get you a tax break?
There are thousands of trusts registered in India that claim to be engaged in charitable activities. Many of them are genuine but some are untrue. In order that only genuine trusts get the tax benefits, the Government has made it compulsory for all charitable trusts to register themselves with the Income Tax Department. And for this purpose the Government has made two types of registrations necessary. Only if the trust follows the registration, they will get the tax exemption certificate, which is popularly known as 80G certificate.

How much deduction will I get if I donate?
Firstly, a taxpayer claiming deduction under section 80G should find out the donation amount that qualifies for the deduction. He has to compute the actual donation with reference to the qualifying amount. For this purpose, donations can be broadly divided into two categories:

1. Donations to private trusts

Step 1: Find out the qualifying amount

The qualifying amount under this category will be lower of the the following two amounts:

a) The amount of donation

b) 10 per cent of the gross total income as reduced by all other deductions under Chapter VI-A of the Income Tax Act such as 80C (PPF, LIC etc.), 80D (mediclaim), 80CCC (pension schemes etc.

For example, a taxpayer named Laxmi Arcelor has taxable salary of Rs 500,000. He has deposited Rs 70,000 in Public Provident Fund and Rs 60,000 in his company provident fund. He donates Rs 45,000 to CRY (Child Relief & You) trust. Presuming he has no other income, his taxable income will be computed as under:

Gross salary	Rs 500,000
Less: Deduction under section 80C restricted to	Rs 100,000
Gross total income (before 80G)	Rs 400,000

After making donation to CRY, his qualifying amount for 80G will be:

Actual amount of donation	Rs 45,000
10% of Gross total income as computed above	Rs 40,000 whichever is lower

Since 40,000 is lower, the qualifying amount will be Rs 40,000

Step 2: Find out actual deduction
The next question that arises is how much would be the actual deduction? In the case of donations to private trusts, the actual amount of donation would be 50 per cent of the qualifying amount.

Therefore, in the example given above, since the donation is made to a private trust, the deduction will be 50 per cent of the qualifying amount ie 50 per cent of Rs 40,000 = Rs 20,000.

So,

Gross total income (Before 80G)	Rs 400,000
Less: deduction under section 80G	Rs 20,000
Total income (taxable income)	Rs 380,000

Step 3: Check upper limit
Finally, the deduction under section 80G cannot exceed your taxable income. For example, if your income before deduction is Rs 3 lakh and if you have given donation of Rs 5 lakh to the Prime Minister's National Relief Fund, please do not expect to claim a loss of Rs 2 lakhs. Your income will be NIL (Rs 3 lakh - Rs 3 lakh). The deduction will be restricted to the amount of your income.

ii) Donations to trusts/funds set up by the Government
In this category, the entire amount donated ie 100 per cent of the donation amount is eligible for deduction. There is a long list of 21 funds/institutions/purposes for which donations given would qualify for 100 per cent eligibility. Notable among this list are:

- The National Defense Fund

- The Prime Minister's National Relief Fund

- Any fund set up by the State Government of Gujarat for earthquake relief

The funds that figure in this long list are all set up by the Government. Private Trusts do not figure in this list.

Thus, in this category of donations, the ceiling of 10 per cent of the gross total income as reduced by all other deductions under Chapter VI-A of the Income Tax Act does not apply.

In the above example, if instead of donating to CRY, had the donation been given to say, The Prime Minister's National Relief Fund, then the calculations would have different as shown below:

Gross Total Income (Before 80G)	Rs 400,000
Less: Deduction under section 80G	Rs 45,000
Total Income (Taxable Income)	Rs 355,000

iii) Donations to approved research organizations:
There are special sections for businessmen and professionals who earn income under the head Profits and Gains of Business or Profession. Section 35AC and 35CCA allow a deduction of 100 per cent of the amount donated for scientific research and rural development to approved research organisations. For this, the research organisation requires the approval of the Government.

Those who do not have any business or professional income (like salaried persons), donations can be given to such organisations and 100 per cent deduction can be claimed under section 80GGA.

What points should I keep in mind for claiming deduction?
Following points must be borne in mind:

i) A stamped receipt is a must:
- For claiming deduction under Section 80G, a receipt issued by the recipient trust is a must. The receipt must contain the name and address of the Trust, the name of the donor, the amount donated (please ensure that the amount written in words and figures tally!).

- The most important requirement is the Registration number issued by the Income Tax Department under Section 80G. This number must be printed on the receipt. Generally, the Income Tax Department issues the registration for a limited period (of 2 years) only. Thereafter, the registration has to be renewed. The receipt must not only mention the Registration number but also the validity period of the registration.

The donor must ensure that the registration is valid on the date on which the donation is given. For example, the registration of a trust may be valid from April 1, 2004 to March 31, 2006. Now, if the trust does not get its registration renewed after April 1, 2006 then even if donation receipt is issued by the trust to the donor for donations received after April 1, 2006, the donor would not get any tax benefit.

So, please check the validity period of the 80G certificate. Always insist on a photocopy of the 80G certificate in addition to the receipt.

ii) File the original donation receipt with your return of income:
For claiming deduction under section 80G, file the original donation receipt alongith the return of income. If the receipt is not filed, you will not get the deduction.

iii) Only donations in cash/cheque are eligible for the tax deduction:
Donations in kind do not entitle for any tax benefits. For example, during natural disasters such as floods, earthquake, many organisations start campaigs for collecting clothes, blankets, food etc. Such donations will not fetch you any tax benefits.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

Source: http://wealth.moneycontrol.com/columns/income-tax/complete-guide-tax-sops-on-donations-/12282/0

  

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Budget: Service tax rate may be raised to 12 pc

With the government's fiscal deficit ballooning, there are chances of service tax rate being restored to 12 per cent in the upcoming Budget, official sources said. The government had last year cut down service tax rate from 12 to 10 per cent as part fiscal stimulus measures to help the economy tide over the then slowdown. Official sources said service tax rates could be raised to the original level of 12 per cent as the booming sector is something the revenue department banks upon but the 2 per cent duty cut has brought a dip in the service tax revenues. Together with cut in service tax and excise duty reductions, Plan expenditure was also stepped up, leading to widening of fiscal deficit as the total stimulus amounted to Rs 1,86,000 crore. The fiscal deficit, which was projected to be 2.5 per cent of GDP at the beginning of 2008-09, crossed six per cent by the end of the fiscal. It is projected to further rise to 6.8 per cent this fiscal. "With rising fiscal deficit to manage and the economy showing some signs of recovery, the government may withdraw the fiscal stimulus, though not completely. Service tax ambit could be widened and the rates may see upswing to the pre-stimulus period," said Ernst and Young Partner and Indirect Tax Leader Vivek Mishra.   Source: PTI

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