Advantages of investing in Fixed deposits

Fixed deposit has remained the most favoured investment option as it not only preserves your capital but also provides surety of returns that are going to be only profitable. Even though the trend is changing and investors are moving on to other preferred modes of investment the old world charm of a fixed deposit remains the same.

Despite the shift and the changing market dynamics, fixed deposit continues being a prominent investment avenue for people because of the surety of returns it offers. Not only fixed deposit remains a stable investment vehicle for traditional investors, its simple application process and low risk has made it a popular choice even among the new investors.

No matter how enticing it may sound to begin investing in fixed deposit, there are a certain things that you must know about this particular investment option that has been going really strong for so many years.

Here are the things that no one ever told you about investing in a fixed deposit schemes:

They are a Relatively Safer Investment Option
It is true that opening a fixed deposit account keeps your money safe and secure with ensures interest. All the financial institutes in India are regulated by the Reserve Bank Of India, which ensures that no fixed deposit scheme offering entity defaults on the interest payment to the investor and also pays the principal amount without fail at the time of maturity.

Your Deposit Will be Insured
When you open a fixed deposit account with any financial institution for up to Rs.1 lakh you get an insurance cover from the institution. This means, even if the lender gets into any financial crisis they are bound to pay your money back, thus you will not lose your money.

It Offers Tax Benefits
Under the section 80C of Income Tax act, any fixed deposit up to Rs.1 lakh is tax exempted, however one must invest for the fixed deposit scheme for at least 5 years to get the tax benefit on their FD. This way, you will not be eligible to withdraw your FD amount until maturity.

FD Interest is Taxable
If the interest accrued on your fixed deposit exceeds Rs.10,000 per year than that interest amount becomes taxable as per the income tax and comes under the ‘other income’ head at the time of filing your income tax return. However, this will further depend on your tax bracket whether the total income is taxable or not.

It Offers Steady Income
Once you invest your money in fixed deposit you get the option to realize its interest amount on the monthly, quarterly and annual basis. So, if you are looking for some steady and sure shot monthly income, then FD can be your option as it will not only help you meet your regular expenses but will also keep your money safe.

You Can Opt For Best Rates on Investment
Every financial institution or bank offer different tenures and interest rates on their fixed deposit schemes, which means you get the flexibility to chose the best interest rate offer. Also, fixed deposits with longer tenure offer higher rate of interest as compared to the short term investments. Though, your funds will be locked for a longer period of time, you can be assured of regular income. To understand the interest and tenure for every fixed deposit scheme you can use any only fixed deposit interest calculator and find the best investment rate and tenure for your money.

You Can Take Loan Against Your Fixed Deposit
If you are facing any immediate need of money than you get an option of taking loan against your FD instead of withdrawing the money from the investment scheme. Even though the interest charged on your loan against FD will be a little higher than the interest you are getting on your FD, your hard earned money will remain safe and you can repay the loan in equal monthly installments. You can get up to 90% of your FD amount as loan from any financial institution.

You Can Invest in Various FD Schemes Together
Say, you have RS.5 lakhs for investment and you want to go for a safer option that is fixed deposit. So, instead of investing the entire Rs. 5 lakhs in one FD scheme, break the amount in five parts and make 5 Rs. 1 lakh each FDs in different financial institutions. This way, you can also get insurance on every FD investment that you have made for Rs.1 lakh as only that much amount is insured under FD scheme.

With so many features and benefits, it can be easily concluded that bank fixed deposits are safest to invest, especially when you are not up for any risks involved. However, if you are open to other investment options then you can consider stocks, mutual funds, etc. as well while keeping some amount safe in your fixed deposit scheme.

Advertisements

Income tax rules you must know before declaring investments

It is that time of the year when many of you would be giving your investment declarations for the year to your employer. Based on the investment declaration given by the employee in the beginning of the financial year, the employer deducts tax from the salary every month. So, before making the investment declaration it will be good to know the new tax rules applicable from the current financial year 2017-18.

1) The tax rate for income slab of Rs 2.5 lakh – Rs 5 lakh has been reduced from 10 per cent to five per cent. This reduction in tax rate will result in a tax benefit of Rs 12,500 for taxpayers. If you add education cess (2 per cent), and higher and secondary education cess (1 per cent) to it, the tax saving will increase to Rs 12,875.

2) The tax rebate enjoyed by the taxpayers under Section 87A has been reduced from Rs 5,000 to Rs 2,500. Earlier, it was available to those with a taxable income of Rs. 5 lakh, whereas now the limit has been reduced to Rs 3.5 lakh.

3) In case of let out property, the set-off of ‘loss from house property’ from other income streams has been limited to Rs 2 lakh in a financial year. There was no cap on it earlier . So, if there was a loss from house property as the entire interest of home loan for a let out property was tax deductible, you could set off the entire loss against any other source of income hence reducing the tax burden substantially. But now, you can set off losses only up to Rs 2 lakh while can carry forward the loss for next eight years. But as in the initial years the interest cost is high, the tax savings will reduce substantially due to the Rs 2 lakh cap.

4) In another move to encourage people to save more for their retirement, partial withdrawals from National Pension System (NPS) – up to 25 per cent of the contribution made by the employee – have been made tax-free. Moreover, self-employed individuals will now be eligible to claim deduction of up to 20 per cent of their gross total income, as against the existing 10 per cent, in respect of contribution made to NPS. This would be subject to the overall deduction limit of Rs 1.5 lakh.

5) The tax break on Rajiv Gandhi Equity Savings Scheme available to first time equity investor will not be available from this year.

6) Any taxpayer who is eligible to file tax return will face higher penalty in case he or she delays the filing of income tax return after the due date – July 31 of the assessment year is generally the last date. A tax penalty of Rs 5,000 will be levied if returns are filed after this date, and Rs 10,000, if filed after December 31 of the assessment year. However, for small taxpayers with income not exceeding Rs 5 lakh for a financial year, the penalty will be Rs 1,000 for delay in filing tax return. Earlier a taxpayer could file return till the end of the assessment year, and was penalised with a fine of Rs 5,000 at the discretion of the tax officer in case of delay.

7) The time period for revising a tax return has been reduced to 12 months from completion of the financial year. The time frame for scrutiny assessments has been reduced from 21 months to 18 months for the next financial year, and is slated to be reduced further to 12 months from 2018-19.

8) The holding period for computation of long term gains in case of property has been reduced to two years, from the existing period of three years.

9) The base year for indexation has been shifted from 1-4-1981 to 1-4-2001. Indexation means adjusting the impact of inflation during the holding period of the capital asset so that it reflects the current market prices. The shift in base year will result in less tax liability for the buyer.

10) It will be now be mandatory for those claiming a House Rent Allowance (HRA) of more than Rs 50,000 per month to deduct tax at source at the rate of 5 per cent. The TDS will have to be deducted on the last month of the year in which rent is paid or the last month of tenancy. In case the landlord (payee) does not have a Permanent Account Number (PAN), the tax deduction shall not exceed the amount of rent payable for the last month of the previous year, or the last month of the tenancy.

Source : Indiatoday/21.4.2017

Tax savings that do not actually help save much

I find it utterly amazing how focused many people are on not paying tax, even if they actually end up losing money overall by not doing so. I’m not talking of those with black money who lost out during demonetisation, but of those who have legitimate income but will make terrible investment decisions just because it saves them from paying tax.

This was brought home to me as a side-effect of something that has changed in this budget. One of the more obscure and harder to understand measures in the recent budget have been the resetting of the base year of the Cost Inflation Index from 1981 to 2001. Soon after the budget, all the experts stated in the media that this would bring down capital gains tax liability. However, most investors could not figure out how and for what, and there were few publicly available explanations that were easily digestible.

First, the change in base year brings some tax advantage to those who are selling assets (essentially, real estate) purchased between 1981 and 2001. The tax liability is completely unchanged for anything bought before 1981 or after 2001. When you sell such assets, you have to pay tax on the gains you make.The amount of this tax is effectively adjusted for inflation during the time that you held the assets. This is done by adjusting upwards the original purchase price according to the Cost Inflation Index.

For assets bought before the starting point of this index (the base year), the purchase price is its `fair value’. These fair value calculations generally result in a lower tax liability for real estate than cost index based ones. This is especially so if, in the period in question, property prices rose faster than consumer inflation. The 30 years between 1981 and 2001 were, for the most part, such a period.

As expected, this shift brought about a spate of questions and discussions. Apart from seeking to understand the base year issue, a lot of questions and discussions sought reassurance that the money realised from sales of assets could still be invested in capital gains bonds.Why are people so interested in capital gains bonds? Obviously, because they save you tax. However, it so happens that even a cursory examination reveals these bonds to be a most useless investment.

Basically, if you have capital gains from the sale of an asset, you can avoid paying capital gains on it by investing Rs 50 lakh in these bonds up to that are issued by NHAI and REC. The bonds are for three years and earn a mere 6% interest, which is itself taxable. Since most investors are in the top tax bracket, they effectively earn 4% from these bonds, which, over three years, is a post-tax opportunity loss of at least 10% compounded, even when compared to a debt fund.

It so happens that if you had paid capital gains tax on the original gains, after allowing for cost inflation, you would either gain a bit, or at the very least, break even with these capital gains bonds. You would have the money available for deploying in other more useful activities right away, instead of being locked for three years.

Many people who are in this situation understand this and yet buy capital gains bonds. Why? Because it saves tax. This behaviour, as well as various observations during the demonetisation period, has made me come to the conclusion that rich Indians have a pathological hatred of paying taxes, even if it makes no financial sense.

Looking at the above example, it’s crystal clear that the capital gains bonds are effectively not tax-free. By paying you a pittance as interest (and then taxing that interest as income), the government is actually taxing you fully, specially when you consider that the bond issuing entities would otherwise have to be funded by the government.

Capital gains bonds are a bad investment. However, people who are otherwise financially smart keep falling for it just because they have a `tax saving’ label on them.

Source : ET/27.2.2017

Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS), 2016

1. What is Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS), 2016?

Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS), 2016 is a scheme notified by the Government of India on December 16, 2016 which is applicable to every declarant under the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016.

*2. Who is eligible to deposit in PMGKS?*

The deposit under this Scheme shall be made by any person who declared undisclosed income under sub-section (1) of section 199C of the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016.

*3. In what form will the deposits under this scheme be held?*

The Deposits shall be held at the credit of the declarant in Bond Ledger Accounts (BLA) maintained with Reserve Bank of India.

*4. Who are the authorized agencies where the application and amount of deposit will be accepted?*

Application and amount for the deposit (in the form of Bond Ledger Account) shall be received by any banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (Authorized Banks).

*5. Where can declarants get the application form?*

Application for the deposit will be available at branches of authorized banks. It is also available in the Reserve Bank of India website.

*6. When can a declarant make the deposit into the scheme?*

The deposits under this Scheme shall be made in a single payment in any of the authorized banks from the 17th day of December, 2016 till 31st day of March, 2017

*7. What are the Know-Your-Customer (KYC) norms?*

Permanent Account Number (PAN) is the KYC document for individuals depositing in the scheme. If a declarant does not hold PAN, he shall apply for PAN and provide the details of such PAN application along with acknowledgement number to the bank while making the application. On receipt of PAN, the details may be updated with the bank from which application was made.

*8. What is the minimum and maximum limit for depositing in the scheme?*

The deposit by a declarant shall not be less than twenty-five per cent of the undisclosed income declared under sub-section (1) of section 199C of the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016. Deposit shall be made in multiples of ₹ 100.

*9. Will any interest be paid on the deposit under the scheme?*

No interest shall be paid for deposits made in this scheme.

*10. After making the deposit, will any documentary evidence be issued?*

On deposit, an acknowledgement receipt mentioning name of declarant and amount deposited will be duly authorized and provided by the bank from which application was made. Subsequently a certificate of holding for the BLA will be issued which may be collected from the authorized bank.

*11. When will the deposit be repaid?*

Repayment of the deposit will be made after a period of 4 years from the effective date of deposit (ie., date of tender of cash or the date of realization of draft or cheque or transfer through electronic transfer)

*12. What will the declarant get on redemption?*

On redemption, the entire amount deposited into the scheme will be repaid.

*13. How will the declarant get the redemption amount?*

The redemption amount will be credited to the bank account furnished by the person in the application form.

*14. What are the procedures involved during redemption?*

On the date of maturity, the proceeds will be credited to the bank account as per the details on record.

In case there are changes in any details, such as, account number, IFSC code, email ids etc then the investor must intimate Reserve Bank Of India , through the authorized banks promptly.

*15. Can the deposit made into this scheme be prematurely redeemed ?*

No, option for premature redemption of the BLA is not available.

*16. Can the BLA be gifted/transferred to a relative or friend on some occasion?*

No, the BLAs cannot be gifted/transferred to any relative or friend. Transferability of the Bond Ledger Account shall be limited to nominee or to the legal heir of an individual holder, only in the event of death of the declarant.

*17. Who will provide other services to the declarants after deposit in the scheme?*

The banks through which the deposit into this scheme was made will provide other customer services such as change of bank account details, cancellation of nominee etc.

*18. What are the payment options for depositing in PMGKS?*

The deposit shall be made in the form of cash or draft or cheque drawn in favour of the authorised bank accepting such deposit or by electronic transfer.

*19. Whether nomination facility is available for these investments?*

Yes, nomination facility is available as per the provisions of the Government Securities Act 2006 and Government Securities Regulations, 2007. A nomination form is available along with Application form. In case of cancellation/change in nomination, a separate form is to be filled and submitted to the authorized bank.

*20. Are the BLAs tradable?*

No, the Bonds ledger Account are not tradable.

Frequently Asked questions on New Pension Scheme (NPS)

1. What is the New Pension System (NPS)?

The NPS is a new contributory pension scheme introduced by the Central Government for its own new employees. Under the new pension system, each new central government employee will open a personal retirement account on joining service. Every month, and till the employee retires or leaves government service, a part of the employee’s salary will be transferred into this account. When the person retires, he will be able to use these savings to take care of the needs and expenses of his family during old age.

2. Who is covered by the NPS?

You are covered by the NPS if
a.You joined central government service on or after 01 January 2004, and
b.You are an employee of a Central (Civil) Ministry or Departments, or
c.You are an employee of a non-civil Ministry or Department including Railways, Posts, Telecommunication or Armed Forces (Civil), or
d.You are an employee of an Autonomous Body, Grant-in-Aid Institution, Union Territory or any other undertaking whose employees are eligible to a pension from the Consolidated Fund of India.

3. If I joined Central Government service on or after 01 January 2004 do I have an option of not being covered by the NPS?

No. The NPS is mandatory for you.

4. I am covered by the NPS. Do the old Pension Rules apply to me?

No. The Central Civil Service Pension Rules (1972) do not apply to you. You are covered only by the New Pension System Rules framed for the NPS.

5. I am covered by the NPS. Can I contribute to the GPF?

No. The General Provident Fund (Central Service) Rules, 1960 also do not apply to you. You will not be permitted to contribute towards GPF.

6. Am covered by the NPS. Am I eligible to Gratuity?

No. You will not be eligible to Gratuity.

7. How does the NPS work?

When you join Government service, you will be allotted a unique Personal Pension Account Number (PPAN). This unique account number will remain the same for the rest of your life. You will be able to use this account and this unique PPAN from any location and also if you change your job. The PPAN will provide you with two personal accounts:

1. A mandatory Tier-I pension account, and
2. A voluntary Tier-II savings account.

8. What is the difference between Tier-I and Tier-II accounts?

1. Tier-I account: You will have to contribute 10% of your basic+DA+DP into your Tier-I (pension) account on a mandatory basis every month. You will not be allowed to withdraw your savings from this account till you retire at age 60. Your monthly contributions and your savings in this account, subject to a ceiling to be decided by the government, will be exempt from income tax. These savings will only be taxed when you withdraw them at retirement.
2. Tier-II account: This is simply a voluntary savings facility for you. Your contributions and savings in this account will not enjoy any tax advantages. But you will be free to withdraw your savings from this account whenever you wish.

9. How will I contribute to my Tier-I (pension) account?

Every month, the government will deduct 10% of your salary (basic+DA+DP) and automatically transfer this amount to your Tier-I account in your name.

10. Will the Government contribute anything to my Tier-I (pension) account?

Yes. As your employer, the Government will match your contribution (10% of basic+DA+DP) and transfer this amount also to your Tier-I account in your name.

11. Can I contribute more than 10 into my Tier-I account?

Yes. You will be permitted to contribute more than the mandated 10% of Basic+DA+DP into your Tier-I account – subject to any ceiling that may be decided by the Government.

12. Will the Government also contribute more than 10 into my Tier-I account?

No. The contribution of the Government will be limited to 10% of your basic+DA+DP.

13. What will happen if I am transferred to another city or country?

The PPAN number will stay the same and you will be able to use the same accounts from anywhere in the world.

14. If I leave Government service before I retire will the Government continue to contribute to my Tier-I account?

No. The 10% contribution by the Government will stop when you leave Government service. However, your savings in your Tier-I and Tier-II accounts will stay in your name and you will be able to continue using these accounts to save for your retirement.

15. What if I die or become permanently disabled during my service?

Pl.refer Office Memorandum: Additional Relief on death/disability of Government servants covered by the NPS(New Pension Scheme) recruited on or after 1.1.2004 No.38/41/06/P&PW(A) Dated 5th May, 2009

16. Where will my savings be invested?

Each PFM will offer you a limited number of simple, standard schemes. You will be free to choose any of the following schemes for investing your savings:

Scheme A This scheme will invest mainly in Government bonds

Scheme B This scheme will invest mainly in corporate bonds and partly in equity and government bonds

Scheme C This scheme will invest mainly in equity and partly in government bonds and corporate bonds.

17. I am covered by the NPS. Do the old Pension Rules apply to me?

No. The Central Civil Service Pension Rules (1972) do not apply to you. You are covered only by the New Pension System Rules framed for the NPS.

18. I am covered by the NPS. Can I contribute to the GPF?

No. The General Provident Fund (Central Service) Rules, 1960 also do not apply to you. You will not be permitted to contribute towards GPF.

19. Who will be responsible for the NPS and for protecting my interests?

The Government is setting up a new dedicated regulatory authority. This will be named the Pension Fund Regulatory and Development Authority (PFRDA). The PFRDA will be responsible for the NPS and for protecting your interests in the NPS.

20. When will my contributions start?

Your contributions (and the matching contribution by the Government) towards your Tier-I pension account will begin only from the month following the month in which you join Government service. During the first month of your service, you will be allotted the PPAN.(PRAN)

21. Who in the Government will issue me a PPAN open my accounts and be responsible for the deductions?

When you join service, your Drawing and Disbursement Officer (DDO) will instruct you to fill out a NPS form. You will be required to provide your full professional and personal details including details of your nominee in this form. The DDO will issue you the PPAN number(PRAN) and will also be responsible for all administrative matters related to your NPS accounts including deduction of your contributions, transferring your contributions and the matching contribution of the Government to your Tier-I pension account.

22. What will happen to my contributions to my Tier-I account?

Your monthly contributions, and the matching contributions by the Government into your Tier-I account, will be transferred by the Government in your name to a Pension Fund Manager (PFM). The PFM will invest your contributions on your behalf. In this way, your savings will earn an interest and grow over time.

23. Which agency will serve as a PFM?

The PFRDA will appoint a limited number of leading professional firms to act as PFMs. One of these PFMs will be a public sector agency.

24. Who will decide which PFM manages my contributions and savings?

You will select a PFM to manage your contributions and savings.

25. Will I be permitted to select more than one PFM to manage my savings?

Yes. If you wish, you will be able to spread your savings across multiple PFMs – where a part of your savings are managed by 2 or more PFMs.

26. Will I be permitted to change my PFM preference?

Yes. If you wish, you will be free to change the PFM and move all your savings to another PFM of your choice.

27. Where will my savings be invested?

Each PFM will offer you a limited number of simple, standard schemes. You will be free to choose any of the following schemes for investing your savings:

Scheme A This scheme will invest mainly in Government bonds

Scheme B This scheme will invest mainly in corporate bonds and partly in equity and government bonds

Scheme C This scheme will invest mainly in equity and partly in government bonds and corporate bonds

28. Will I be able to select more than one scheme?

Yes. You will be free to spread your savings across these three schemes. Whenever you decide, you will also be free to switch your savings from one scheme to another.

29. How will my contributions be transferred to the PFM and scheme selected by me?

You will specify the PFM and scheme to your DDO. The DDO will arrange for transfer of your contributions to the PFM(s) and scheme(s) that you have selected.

30. What rate of return will my contributions earn?

Your contributions will not earn any specified rate of return. The PFM will invest your savings in a scheme of your choice.The returns earned by the PFM on the scheme selected by you will be credited to your account.

31. Will I have to pay any fees or charges under NPS?

You will have to pay a fee to the Central Recordkeeping Agency (CRA) which will maintain your accounts and also to the PFM(s) which manage your savings. These charges will be deducted from your savings on a periodic basis. The fees and charges by the CRA and PFMs will be regulated by the PFRDA.

32. Can I contribute more than the 10 of basic+DA+DP into my TierI account at the moment?

No. You will be allowed to do so only when the PFRDA, CRA and PFMs are appointed.

33. What will happen to my contributions and earnings in my Tier-I account when the PFRDA CRA and PFMs etc. are appointed?

Your full contributions, matching contributions by the Government, and the interest earned on the same will be transferred in your name to the PFM and scheme selected by you.

34. Will I have the option of continuing with the current 8 percent rate of return?

No. Once your savings are transferred to the PFM, your savings will enjoy only the rate of return earned by the PFM on scheme you have selected.

35. When will I be permitted to withdraw from my Tier-I account?

You will be able to withdraw your savings in your Tier-I account at age 60.

36. What will happen to my savings in the Tier-I account when I retire?

You will be able to withdraw 60% of your savings as a lumpsum when you retire. You will be required to use the balance 40% of your savings to purchase an annuity scheme from a life insurance company of your choice. The life insurance company will pay you a monthly pension for the rest of your life.

37. Can I use more than 40 of my savings to purchase the annuity?

Yes.

38. What will happen to my savings if I decide to retire before age 60?

You will be required to use 80% of your savings in your Tier-I account to purchase the annuity. You will be able to withdraw the balance 20% of your savings as a lumpsum.

39. Will the annuity also provide a family (survivor) pension?

Yes. You will have an option of selecting an annuity which will pay a survivor pension to your spouse.

40. What will happen to my savings if I decide to retire before age 60?

You will be required to use 80% of your savings in your Tier-I account to purchase the annuity. You will be able to withdraw the balance 20% of your savings as a lumpsum.

41. What will happen to my savings in the Tier-I account when I retire?

You will be able to withdraw 60% of your savings as a lumpsum when you retire. You will be required to use the balance 40% of your savings to purchase an annuity scheme from a life insurance company of your choice. The life insurance company will pay you a monthly pension for the rest of your life.

42. What if I die or become permanently disabled during my service?

The Government is yet to issue any guidelines on this.

43. Will I have to pay any fees or charges under NPS?

You will have to pay a fee to the Central Recordkeeping Agency (CRA) which will maintain your accounts and also to the PFM(s) which manage your savings. These charges will be deducted from your savings on a periodic basis. The fees and charges by the CRA and PFMs will be regulated by the PFRDA.

44. What will happen to my contributions to my Tier-I account?

Your monthly contributions, and the matching contributions by the Government into your Tier-I account, will be transferred by the Government in your name to a Pension Fund Manager (PFM). The PFM will invest your contributions on your behalf. In this way, your savings will earn an interest and grow over time.

Investment in NPS account and deduction U/s. 80CCD(1B)

Who can Open NPS account

Any individual who is citizen of India aged between 18-60 years can open NPS account. Even an NRI can open an NPS account whereas they are not allowed to open a PPF account or extend the existing account after becoming NRI. People generally put the EPS and NPS on parity and feel that they can not open this account unless their employer offers them the facility. This is not true. Any individual including a self employed person can open NPS account. So even if your employer has not implemented NPS scheme, you yourself can open the account and contribute to it, as contribution of employer is not mandatory for opening and maintaining this account. You can even open NPS account even if you are already contributing towards employee provident funds or public provident funds.

Type and Tenure of the account

Under the scheme of NPS you can open two types of account i.e. Tier I and Tier II. Opening of Tier I account is mandatory and it is the NPS proper account. The tax benefits and restriction about tenure apply to this account only. Tier II account is voluntary and can be used to park your surplus fund pending withdrawal or transfer to Tier I account.

The NPS account does not have any fixed tenure but the age up to which you can contribute in this account is restricted to the time when you complete 60 years of age. So once you complete the age of 60 years, you can not contribute and have to mandatorily withdraw 40% of the accumulated balance for purchase of an annuity from a Life Insurance Company in India. The balance 60% is allowed to remain in the account which can be withdrawn anytime before you complete 70 years. The account has to be closed on completion of 70 years of age.

 How to open an NPS account?

Online Account – There are 2 ways to open an NPS account online – one, directly through NPS Trust’s website and two, through an intermediary, like your bank, ICICI Direct, HDFC Securities etc.

Offline Mode – You can also approach a POS (Point of Service) and get this account opened.

Documents Required – PAN card copy, address proof copy, 2 passport-size photographs, investment cheque and Duly filled subscriber Registration form.

What are the Exclusive Tax Benefit u/s 80CCD (1B)

If you decide to invest in NPS, you can avail a tax exemption of Rs. 50,000 from your taxable income. As the minimum investment requirement is Rs. 6,000, you can contribute any amount between Rs. 6,000 and Rs. 50,000 to save tax.

Which Account is eligible for Rs. 50,000 Deduction – Tier I or Tier II? – Your contribution to Tier I account is eligible for up to Rs. 50,000 tax deduction u/s 80CCD (1B). Tier II account does not entitle you to any tax deduction.

The tax benefits for a salaried person can be claimed only for contribution upto 10% of his salary towards NPS within the overall limit of Rs. 1,50,000/- along with other eligible items like Life Insurance premium, school fee, repayment of home loan, NSC, PPF, repayment of home loan, ELSS etc. For tax purpose the self employed tax payer can contribute to Tier I account upto 10% of his gross total income i.e. income before deductions under various Section like 80C, 80 CCD, 80 CCC, 80 D, 80 E, 80 TTA . The overall deduction shall not exceed Rs. 1,50,000/-.

This budget has provided for an additional deduction of Rs. 50,000/- for contribution towards NPS account and in respect of which a lots of confusion is prevailing. This is in addition to the existing limit of 1,50,000/-. Let us understand this with example. Suppose aggregate of all the eligible items of deduction exceeds 1.50 lacs, your eligibility will be restricted to Rs. 1.50. However in case if it includes any amount of your contribution of NPS which gets excluded due to this limit of Rs. 1.50 , you will be able to claim the deduction for the NPS contribution which gets so excluded upto Rs. 50,000/- from current financial year. So in case you exhaust your limit of Rs. 1.5 lacs without even taking into account NPS contribution, you can claim extra deduction for NPS upto Rs. 50,000/-. For those of you who have not yet opened their NPS account, as the limit of Rs. 1.50 lacs was getting exhausted due to other regular items, can open NPS Tier I account and claim tax benefits by depositing upto Rs. 50,000/-.. It is interesting to note that limit of 10% of salary of Gross Total income does not apply to this additional contribution of Rs. 50,000/- so for those of you who were contributing over 10% of the limit can claim the same under the new provision without actually having to make any additional contribution.

As far as contribution of the employer is concerned, the above limits of Rs. 1.50 lacs or Rs. 50,000/- do not apply and any contribution by your employer is fully deductible without any monetary cap as long as it does not exceed 10% of your salary.

Tax treatment on Maturity

Since you have to compulsorily buy an annuity for 40% of the accumulated balance on your reaching 60 years, this 40% does not become taxable at the this stage but the annuity as and when received becomes taxable under the head “Income from other sources”. The withdrawal out of the balance 60% of the corpus will become taxable as and when you withdraw it. So even if you have a very short period of service left, you can still contribute in NPS and effectively reduce your tax liability as the tax rate slab applicable to you post your retirement will be lower and you are also able to defer your tax liability to future.

What is the Minimum/Maximum Annual Contribution in NPS account ?

As per the NPS rules, you need to contribute at least Rs. 6,000 in this account in a financial year. However, you can do so in multiple instalments and minimum contribution in a single contribution is Rs. 500.

However, there is no upper limit on your contribution to NPS. You can contribute any amount to your NPS account. But, as far as tax benefit is concerned, you can have only up to Rs. 50,000 in tax deduction.

What is PFM in NPS account ?

These are the pension fund managers (PFMs) which are managing the subscribers’ money in NPS at present.

  1. HDFC Pension Management Company
  2. LIC Pension Fund
  3. ICICI Prudential Pension Fund
  4. Kotak Mahindra Pension Fund
  5. Reliance Pension Fund
  6. SBI Pension Fund
  7. UTI Retirement Solutions

Who are the Service Providers in NPS account ?

These are the insurance companies which would provide you pension as you retire at 60 years of age.

  1. Life Insurance Corporation of India (LIC)
  2. SBI Life Insurance
  3. ICICI Prudential Life Insurance
  4. Bajaj Allianz Life Insurance
  5. Star-Daichi Life Insurance
  6. Reliance Life Insurance
  7. HDFC Standard Life Insurance

Where your money gets Invested in NPS?

Your NPS contribution will get invested in Equity (E), Government Securities (G) or Corporate Debt Securities (C) either as per your own choice (Active Choice) or as per your age (Auto Choice).

Active Choice – Under “Active Choice”, you can have your money invested in these three asset classes as per your own choice. You can allocate your money among these three asset classes (E, G or C), but there is a cap of 50% for Equity (E) investment allocation.

Auto Choice – Under “Auto Choice”, your money gets invested based on your age i.e. the higher your age as the subscriber, the lower would be the allocation for Equity.

Deciding to Invest in the name of Wife

Often we come across questions where a person has invested in the name of his wife such as given below:

  • I bought a House with name of my Wife who is house wife, but I am paying EMI of House Loan . Can I get Tax benefits/Exemption in House loan or not?
  • Can I invest my money in a fixed deposit in my wife’s name with her pan card to save tax?                                                                                                          
  • My wife, who is a homemaker, opened a demat account in her name and She traded in stocks (on a small scale). How will the capital gains be calculated?
  • I bought a piece of land with my income in the name of my wife, who is a homemaker. Now, I am constructing a house on the plot and the payment for the material and labour is being made by me. What is the procedure I need to follow in order to have a joint ownership of the property?                                                            

Let us look into,  why a person would want to invest in his wife’s name, why is it not allowed, what are income tax rules that apply, how can one invest in wife’s name legally.

What is the need for a husband to invest in name of his wife?

A person would want to invest in the name of wife mainly to save tax. Usually husband is in the high tax bracket than his wife. Therefore he would want to invest in name of his wife to save tax. When you transfer money to someone in the lower tax bracket, you are essentially trying to avoid tax which is considered unlawful. Please remember that now most of the investments require PAN number so tracking is very easy. And the big-ticket transactions are reported to the tax department by third parties (banks, brokerages, mutual funds ,  insurancee companies) . In other words it is easy for authorities to find out the transactions. Infact even if you give to your other relative say mother-in-law who then gives it to your wife can easily be traced.

If You Gift money to your wife ?

As per section 56 of the Income-tax Act, money received by an individual from any person during any financial year without consideration, the aggregate value of which exceeds Rs. 50,000, is taxable under the head Income from other sources. However, exemption is available if the money is received from a relative, which includes among others the spouse of an individual.  So money given by husband to his wife is not be taxable in her hands.

Your money but investment is in name of Wife

While gifting money is not taxable in case of relatives but what if this money is invested and there is some income and tax liabilities?  Then for investment in name of spouse, minor child and daughter in law the income made from investment is added to the income of the person who has given the money and that person only would have to pay taxTechnically Section 64 of the Income Tax Act contains clubbing provisions as per which any income from investment made or assets purchased in the name of close relatives (spouse, minor child or daughter-in-law) is clubbed with the income of the person making the investment and taxed accordingly .This applies to all types of investments such as shares, fixed deposits, land, building, post office savings and mutual funds and follows the rules of the specific investment. For example,  if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be added to your income as Income from other sources and taxed . However, if the spouse/relative has a source of income and has bought the asset through his/her own funds, the income will be taxed in his/her hands. Please note that clubbing provision comes into play only for spouse,minor child and for  daughter in-law, for parents, for adult child the clubbing on income do not apply.

Investing in Fixed Deposit in the name of Wife

As mentioned earlier if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be added to your income as Income from other sources and taxed .

Investing in House in name of wife

  • If you buy a housein your wife’s name but she has not monetarily contributed in the purchase and you have rented the house, then the rental income from that house would be treated as your income under Income from House Property and taxed accordingly.
  • If a loan has been availed of to buy the property, you must know that the loan is always given to the owner of the house and, being a co applicant, does not entitle one to the tax concessions. (The wife may not be considered an eligible candidate for a loan by housing finance companies if she does not have an income of her own.) For claiming income tax deduction, the EMI amount is divided into the principal and interest components. The repayment of the principal amount of loan is claimed as a deduction under section 80C of the Income Tax Act up to a maximum amount of Rs 1 lakh individually by each co-owner. The repayment of the interest portion of the EMI is also allowed as a deduction under section 24 of the Act.
    • If you have a home loan in which you are a co-applicant but, the total EMI amount is paid by you. Then you can claim income tax exemption if you are a co applicant in a housing loan as long as you are also the owner or co ownerof the property in question.If you are only person repaying the loan, you can claim the entire tax benefit for yourself. You should enter into a simple agreement with the other borrowers stating that you will be repaying the entire loan.
  • If you are paying part of the EMI, you will get tax benefits in the proportion to your share in the loan. For example you pay 75 percent of the EMI then In case you are living in the house for which home loan is taken, both of you shall be entitled to deduction in the ratio (3:1) on account of principal upto 1 lakh and interest on borrowed money up to a maximum of Rs. 1.5 lakh individually. If the house is given on rent, there is no restriction on this amount and both co-owners can claim deduction on interest in the ratio of ownership, 3:1 in your case.

Investment in stocks or equity mutual funds in name of wife

If  is she has traded in stocks  or equity mutual funds the tax rules for stocks i.e capital gain tax apply. For capital gains tax, it has to be seen whether the shares qualify as long- or short-term capital asset, which depends on the period of holding.

  • If the shares or equity mutual funds are held for at least 12 months from the sale date, they shall be classified as long-term capital assets.Long-term capital gains (LTCG) shall be computed as the difference between the net sales proceeds (after deducting incidental transfer charges) less the indexed cost of acquisition. In case of LTCG, while calculating the cost of acquisition, the cost inflation index has to be considered. The net taxable LTCG shall be clubbed with your income and shall be taxable in your hands at 20.6% (including education cess). Further, in case the shares (other than equity on which securities transaction tax, or STT, is applicable) are listed, you have an option to offer LTCG either at 20.6% (including cess) with indexation or 10.3% (including cess) without indexation. The LTCG resulting from sale of shares, on which STT has been paid, could be claimed as tax-exempt under section 10(38) of the Act. However, the said LTCG should be disclosed in your tax returns to be compliant from disclosure perspective. The charges for the demat account to the extent to which they can be related to purchase and sale transactions, and brokerage on the sale and purchase transactions, can be reduced from the gross gains to arrive at the tax.
  • If the shares  or equity mutual funds are held for less than 12 months from the sale date, it shall be classified as short-term capital asset.Short-term capital gains (STCG) shall be computed as the difference between net sale proceeds (after deducting incidental transfer charges) and cost of acquisition, but the benefit of indexation shall not be available. The net taxable STCG should be clubbed with your income and shall be taxable as per the applicable income-tax slab rate. Further, STCG arising from sale of equity shares on which STT has been paid shall be taxable at 15.45% (including cess).

Can Clubbing provisions be avoided without tax avoidance?

Are there ways to avoid the clubbing provisions without crossing the line between tax avoidance and tax evasion? Yes.

Loan money : If you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, you can loan her the money. In exchange, she can give you her jewellery. For example, if you transfer a house worth Rs 10 lakh to your wife and she transfers her jewellery for the same amount in your favour, then the rental income from that house would not be taxable to you.

Invest in Tax Exempt Income : One can also avoid clubbing of income by opting for tax exempt investments. There is no tax on income from the Public Provident Fund . There is also no tax on gains from shares and equity mutual funds if held for more than a year. So, if one invests in these options in the name of the spouse, there is no additional tax liability.