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How Many Mutual Funds Should You Have? (Part 1)

This week I am back with some discussion around Mutual Funds. In one of my workshops, during our mutual fund's discussion, I had this one trainee ask me - So what's your number?

I stared at her for a while not knowing what I am supposed to answer to that. Well, she rephrased her question, 'What is the number of mutual funds you are invested in?'  I said, '6 Mutual Funds'.She had the bewildered look on her face wondering how I had so fewer funds. I decided to show her my portfolio.


How many mutual funds schemes should you own? 

Owning around 5-7 mutual fund schemes across various categories is enough. These many mutual fund schemes will help you diversify, do your asset allocation, and also map these investments to your goals. You can invest your savings in the mutual fund schemes as per the below categories:

  1. Large Cap Mutual Fund (Equity)
  2. Large & Mid-Cap Mutual Fund (Equity) (your ELSS tax saving schemes are generally a Large & Mid Cap Mutual Fund)
  3. Mid Cap Mutual Fund (Equity)
  4. Small-Cap Mutual Fund (Equity)
  5. Thematic Mutual Fund (where you understand specific sectors and have a higher risk-taking appetite)  
  6. Short Term Debt Mutual Fund (For your short term goals)
  7. Long Term Debt Mutual Fund (For your long term goals)

In addition to the above, I have one Liquid Mutual Fund where I park my Emergency Funds. You can park your Emergency Fund in a Bank Fixed Deposit as an alternative.


Why only 5-7 Mutual Funds?

When you invest in Mutual Funds, you already diversify your risk across the stocks of the companies a particular mutual fund has invested in. Hence, with a large-cap mutual fund, your risk is diversified across more than 70 stocks that particular large-cap mutual fund has invested in. Investing in three different large-cap funds is not going to reduce your risk further, it will only make your investment portfolio messy.

'Mutual funds investing is to diversify your risk and not to di"worsify" the same'.

Further, reducing the number of schemes to a minimum of 5 also reduces the cost of managing the same and the time that goes in keeping a track of it and analyzing it regularly.


What do I do when I have more savings to Invest?

Increase your investment in the existing mutual fund's schemes you own. 
Investing in a new scheme every time you have extra savings will just lead you to own 15-20 mutual funds schemes with no plan in sight. Hence, it is important to do your due diligence and identify the mutual funds you want to invest in and stick to them. 

Yes, you must review your schemes regularly to see how are they performing in various market cycles but know that all schemes will not give you the best results always. There are some time periods where mid-cap and small-cap schemes will do better, other times when large-cap schemes will outperform and sometimes your debt investments will be the best performer for the year. Hence, it is important to be diversified across categories.


'Every time I check for the best mutual fund scheme and invest in the ones that are on the top' 

Studies have proven that selecting mutual funds based on high-performance track records is naive. The Star rating of various mutual fund keeps changing, a fund that is top rated in this one year, is hardly the top-rated fund in the subsequent years. Tim Courtney, a chief Investment advisor of US-based Burns Advisory did backtesting of past performance of the funds most highly rated, he found that they usually performed poorly after they have gotten 5 ratings. Hulbert financial digest, an investment newsletter found that if investors continually adjusted their mutual funds' holdings to hold only the highest-rated funds, a total stock market index would have beaten them by 45.8 % in the past decade (he studied funds from 1994 to 2004 in the USA). In fact over the years, it has gotten even more difficult to beat the markets and get alpha on your investments.  - extracts from Millionaire extracts - How to build wealth living overseas by Andrew Hallam

Hence, just investing in top-rated schemes is not going to give you the desired returns but only make your portfolio messy and not even get you the best returns.

Wealth cafe Takeaway - While you are investing in 5-7 different schemes across the options stated above, ensure that you invest across various AMCs as well. This will ensure that you are diversifying your risk and your entire money is not with only one AMC.

We shall follow up this article with a part 2 on how to downsize your portfolio.

Until then, keep reading, if you find this helpful, do share it with your friends.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



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One size does not fit all!

Hi fellow investors,


Ever walked into the ladies' shoe section of the mall during the sale season?

They have long tables filled with all kinds of shoes and each table has the shoe size written on it. I happened to have very petite feet (a size 36) and I look forward to the sale season to upgrade my shoe collection. And during the sale, I go to the mall oozing with enthusiasm to pick up some great heels at flat 50% off, fight off scores of other women and claw my way to the front of the table only to find ugly black chappals in my size!

However, at the end of the store, there is a table filled with some amazing shoes and without the commotion around it, but they are SIZE 41 - 42. Ugh! I hate having small feet during the sale season. All the best brands have their best discounts on shoes in the 40-42 size range. They even have color options! They have so many great options that I am even tempted to try them on just to see what they'd look like. But I do NOT buy these shoes because they are NOT my SIZE. They may be the BEST shoes out there but I DO NOT BUY it. Why would anyone spend money on shoes that would ever fit them, right?

So, in spite of knowing not to buy shoes that do not fit them, why do people invest without knowing what is the right fit for them?

Everyone is always searching for:
'The best Mutual Funds to Invest in?' 
'Tell me where can I get the maximum return possible'
'How much returns will I make through this investment'

The best returns are in the shoe of size 42 but clearly, they do not fit me and will only be a waste of money and similarly, so will your investments if they are bought considering only the 'best returns' as criteria.

You need to invest your money in the investments which are 'RIGHT' for you as per your risk profile. The investments which fit perfectly well in the asset allocation determined by your risk profile just as my feet size determine the final shoe design I pick.

What is this Risk Profile?

The risk profile is your risk-taking capacity and how much risk you can take so that you can peacefully sleep at night. It is based on your ability to take a risk and your willingness to take the risk. Where the ability is more a function of your age, your money, and your goals, willingness is completely behavioral and is determined by your life experiences and education.

Before you start your investments, it is very important that you take a risk profile test (we have attached an indicative risk profile for your reference) and know what is the RIGHT Debt-Equity mix for you.

High Risk = High Returns
Low Risk = Low Returns

Where you make the investment decision based on the risk you are taking, you will eventually be able to achieve your goals with peace of mind and not worrying about the volatility in the markets.
Shouldn't that be the whole point of investing in the first place?

Hence, don't just run behind the highest returns, they might not be the right fit for you. Instead, understand what you want to achieve by investing, plan accordingly, and then invest.

Disclaimer -  These articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.  



tax

Questions Related to Income Tax

GENERAL FAQs

  1. How will I get my excess paid tax refunded back?

Once you file an income tax return, the excess fund will be transferred to your bank account or by cheque once the refund gets processed.

 

  1. Is it possible to communicate with CPC in paper form?

No, no paper communication is allowed with CPC.

 

  1. What is the toll-free CPC help line number?

It is 1800-425-2229.

 

  1. What to do when an assessee is not able to call on toll-free number from abroad?

In that case, you can use the chargeable number 080-22546500 to contact IT department.

 

  1. What is the email id to contact CPC?

There is no Email ID provided from CPC to contact them. The only way is through the toll-free and chargeable contact number.

 

  1. What are the working hours of CPC?

It is 8.00 am to 8.00 pm from Monday to Friday, excluding all the national holidays.

 

  1. How to claim a refund for TDS deducted due to late PAN submission?

Your employer can file the “Correction Statement” and provide your PAN information. In this case, you have to file IT return even if your income is below the tax slabs.

 

  1. Do I have to file Original return once again, if the Original e-return declared to be invalid due to non-receipt of ITR-V?

If the ITR-V has not been received by the CPC and you have the 120 day period remains, then you will have to sign a new ITR-V form and send it to CPC within the time frame. But if the time frame has expired, then you have to file a revised return which will be ultimately treated as original return.

  1. What is the password to open ITR-V

The password to open ITR-V is the combination of your PAN number and your DOB. It should be last 5 digits of your PAN number and ddmmyyyy of the DOB.

 

  1. Can more than one ITR-V be sent in one envelope?

Yes, more than one form can be sent together in one envelope but one needs to take care that the barcode does not get folded.

  1. Can I send the ITR-V to CPC by Registered Post?

No, ITR-V can be sent only via ordinary post or speed post.

 

  1. I am not receiving any communication from ITD CPC regarding receipt of ITR-V, Intimation u/s 143(1) or other communications. What should I do?

All the CPC communications are done by email and mobile number and that is why you must check this information first. Go to the E-filing website and access the user account and review the details. For help, contact your tax practitioner.

 

  1. How many times can I file the revised return?

You can do it multiple times till the expiry of one year time limit.

 

  1. How can a taxpayer find his Assessing Officer (AO) Code?

Go to www.allindiaitr.com and log into your account. Under the account tab, click on “services” menu and under that click on “Know Your Jurisdiction” tab.

FAQs ON BANK DETAILS

  1. What is IFSC Code and where to find it?

It is called as Indian Financial System Code, which contains 11 alpha numeric characters which is a must required thing for electronic transfers. This code can be found in the cheque leaf or from the passbook or you can get it by contacting the bank.

 

  1. What is MICR code and where to find it?

Magnetic Ink Character Recognition is required for cheque processing technology and can be found in the bank account cheque book.

 

  1. What is a bank branch code?

It is a unique code for a bank branch which helps in recognizing it.

 

  1. What is ECS?

It is an electronic fund transfer mode that can be used for paying interest, dividends, pension and to pay bills for electricity, telephone or water.

FAQs ON CONTACT DETAILS

  1. Is it mandatory to enter email id and if so, then Which email ID should I provide?

Yes, it is mandatory to provide email ID while filing e-return through online system. You must enter your personal email ID.

 

  1. Should I provide my permanent address or current address?

You can provide either of them, whichever is best available to communicate.

 

  1. Which documents will serve as proof of ‘identity’ for individuals and HUFs?
  • The following documents are needed:
  • Matriculation certificate
  • School leaving certificate
  • Educational degree certificate from a recognized institution
  • Depository account
  • Bank account
  • Credit card
  • Water bill receipt
  • Ration card
  • Property tax assessment order
  • Passport
  • Voter identity card
  • Driving license
  • Certificate of identity signed by an MP or an MLA or a municipal councillor or a Gazetted officer

FAQs ON RESIDENTIAL STATUS

  1. What will serve as the proof of ‘address’ for individuals and HUFs?

All of the below mentioned documents can be used as address proof:

  • Electricity bill
  • Telephone bill
  • Depository account
  • Credit card
  • Bank account
  • Ration card
  • Employer certificate
  • Passport
  • Voter identity card
  • Property tax assessment order
  • Driving license
  • Rent receipt
  • Certificate of address signed by an MP / MLA / Municipal councilor / Gazetted officer.

 

  1. Does taxability change as per residential status?

Yes, it does depends on the residential status of the taxpayer.

fy

Income-tax Rates FY 2019-20 (AY 2020-21)

Before knowing the tax rates, it is very important to understand the terms Financial year (FY) and Assessment Year (AY).

The below-mentioned tax rates/ slab is on the income earned for the period 1 April 2019 to 31 March 2020. FY stands for the ‘financial year’ which is from 1 April 2019 to 31 March 2020. AY stands for Assessment year which 2020-21.

For individuals, the due date to file the income tax return for the income earned from 1 April 2019 to 31 March 2020 is 31 July 2020. However, this year due to COVID 19 economic relaxations, the due date is pushed to 30 November 2020

Income tax Rates 

Tax Rates for Individuals (below 60)

Income Tax Slab

(in Rupees)

Tax Rate for Individual Below the Age Of 60 Years
0 to 2,50,000*Nil
2,50,001 to 5,00,0005% of total income exceeding 2,50,000
5,00,001 to 10,00,000Tax Amount of 12,500 for the income up to 5,00,000

+ 20% of total income exceeding 5,00,000

Above 10,00,000Tax Amount of 1,12,500 for the income up to 10,00,000

+ 30% of total income exceeding 10,00,000

Tax Rates for Senior Tax Payers between the age of 60 years to 80 years old

Income Tax SlabSenior Citizens (between 60 years – 80 years)
Up to 3,00,000Nil
 3,00,001 to 5,00,0005% of income exceeding 3,00,000
 5,00,001 to 10,00,000Tax Amount of 10,000 for the income up to 5,00,000

+ 20% of total income exceeding 5,00,000

Above 10,00,000Tax Amount of 1,10,000for the income up to 10,00,000

+ 30% of total income exceeding 10,00,000

Tax Rates for Super Senior Taxpayers above the age of 80 years

Income Tax SlabVery Senior Citizens of and above 80 years of age
Up to 5,00,000Nil
 5,00,001 to 10,00,00020% of income exceeding 5,00,000
Above 10,00,00030% of income exceeding 10,00,000

Important Notes:

  • The income tax rates are applied to the annual income calculated. Thereafter Surcharge and Cess are added to the tax payable.
    • A surcharge is also applicable slab wise. The surcharge is calculated on the Tax amount. If the income is:
  1. Above Rs.50,00,000 and up to Rs.1 crore – then 10% surcharge is applicable
  2. Above Rs.1 crore and up to Rs.2 crore – then 15% surcharge is applicable.

In the Union Budget 2019-20, a new surcharge on income tax for super-rich individuals has been levied. So, individuals earning:

  1. Between Rs.2 crore and up to Rs.5 crore –then 25% surcharge is applicable;
  2. For Above Rs.5 crore – then a 37% surcharge is applicable.
  • An additional Cess of 4% for Health & Education is applicable to the income tax plus surcharge.
  • Section 87A allows tax rebates to Individuals whose total annual income falls below Rs.5,00,000. The rebate is limited to Rs.12,500 or the actual tax amount whichever is lower.

Income Tax Slabs for HUF

The Income Tax Slab for Hindu Undivided Family (HUF) is the same as the Tax slabs for Individuals under the age of 60 years in the year 2019 – 2020.

Income Tax Slabs for Partnership Firms

There is a flat tax rate for Partnership Firms and LLPs (Limited Liability Partnerships) and they are to pay Income Tax at the rate of 30%.

Added to the tax amount is:

  1. Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
  2. Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus surcharge

Income Tax Slabs for Local Authorities

Local Authorities to are to be taxed at a flat tax rate of 30%.

Added to the tax amount is:

  1. Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
  2. Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus a surcharge.

Income Tax Slabs for Domestic Companies

Domestic Companies have received a boost. With the turnover raised from 250 crores to 400 crores for a tax rate of 25%. The turnover slab wise tax calculation is:

Turnover ParticularsTax Rates
Gross turnover up to 400 Cr. in the previous year25% (subject to conditions as set out in the Taxation Laws Amendment Ordinance, 2019)
Gross turnover exceeding 400 Cr. in the previous year30% (subject to conditions as set out in the Taxation Laws Amendment Ordinance, 2019)

Added to the tax amount is:

Surcharge on tax:

  1. 7% in cases where the annual income is between Rs.1 Crore to Rs.10 Crore
  2.  12% in cases where the annual income is more than Rs.10 Crore

Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus surcharge

Income Tax Slabs for Foreign Companies

Foreign Companies are taxed at a rate of 40%.

Added to the tax amount is:

  1. Surcharge on tax: 2% in cases where the annual income is between Rs.1 Crore to Rs.10 Crore
  2. 5% in cases where the annual income is more than Rs.10 Crore
  3. Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus surcharge

Income Tax Slabs for Co-operative Societies

Income Tax SlabIncome Tax Slab Rate
Up to Rs.10,00010% of Income
Rs.10,000 to Rs.20,00020% of Income exceeding Rs.10,000
Over Rs.20,00030% of Income exceeding Rs.20,000

Added to the tax amount is:

  1. Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
  2. Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus surcharge
  3. So, to calculate your tax liability for the year, you should keep a track of your annual income to know what Income slab you will be falling under for the year 2019 – 2020.

Income tax rates for a non-resident – Individuals

Income SlabsIncome-tax rates
Up to 2,50,000Nil
From 2,50,000 to 5,00,0005%
From 5,00,000 to 10,00,00020%
Above 10,00,00030%
Ø  Surcharge: 10% of tax where total income increases Rs. 50 lakhs

15% of tax where total income increases Rs. 1 crore

Ø  Health & Education cess: 3% of tax plus surcharge

Capital Gains Taxation on Mutual Funds/Direct Equity

For Equity Oriented Schemes/Direct Equity

  • Long Term Capital Gains (units held for more than 12 months)
  • Short Term Capital Gains (units held for 12 months or less)

For non-equity oriented schemes

  • Long Term Capital Gains (units held for more than 36 months)
  • Short Term Capital Gains (units held for 36 months or less)
 Individual/ HUFDomestic CompanyNRI

Equity Oriented Schemes/Direct Equity

Long term capital gains10%*10%*10%*
Short term capital gains15%15%15%

Other Than Equity Oriented Schemes

Long term capital gains20% (after indexation)20% (after indexation)Listed – 20% (after indexation)

Unlisted – 10% (without indexation)

Short term capital gains30%^30%^^/25%^^^30%^

 

 

 

Tax Deducted at Source (Applicable to NRI Investors)

 
 Short term capital gains$Long term capital gains$
Equity oriented schemes15%10%*
Other than equity-oriented schemes30%10% (for unlisted without indexation) and 20% (for listed)

* Income-tax at the rate of 10% (without indexation benefit) on long-term capital gains exceeding Rs. 1 lakh provided the transfer of such units is subject to STT.

$ Finance (No.2) Act, 2019 provides for a surcharge at:

  • 37% on base tax where income exceeds Rs. 5 crore;
  • 25% where income exceeds Rs. 2 crore but does not exceed Rs. 5 crore;
  • 15% where income exceeds Rs. 1 crore but does not exceed Rs. 2 crore;
  • 10% where income exceeds Rs. 50 lakhs but does not exceed Rs. 1 crore.

Further, “Health and Education Cess” to be levied at the rate of 4% on the aggregate of base tax and surcharge.

@ Surcharge at 7% on base tax is applicable where the income of domestic corporate unit holders exceeds Rs 1 crore but does not exceed 10 crores and at 12% where income exceeds 10 crores. Further, “Health and Education Cess” to be levied at the rate of 4% on the aggregate of base tax and surcharge.

# Short term/ long term capital gain tax (along with applicable Surcharge and “Health and Education Cess”) will be deducted at the time of redemption of units in case of NRI investors.

^ Assuming the investor falls into the highest tax bracket.

^^ This rate applies to companies other than companies engaged in manufacturing business who are taxed at a lower rate subject to fulfillment of certain conditions.

^^^ If total turnover or gross receipts during the financial year 2017-18 does not exceed Rs. 400 crores.

Further, the domestic companies are subject to minimum alternate tax not specified in the above tax rates. Transfer of units upon consolidation of mutual fund schemes of two or more schemes of equity oriented fund or two or more schemes of a fund other than equity oriented fund in accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt from capital gains.

Income-tax implications on dividend received by Mutual Fund unitholders

 Individual/ HUF Domestic CompanyNRI

Dividend

Equity oriented schemesNilNilNil
Debt oriented schemesNilNilNil

Rate of tax on distributed income (payable by the MF scheme)**

Equity oriented schemes*10% + 12% Surcharge + 4% Cess10% + 12% Surcharge + 4% Cess10% + 12% Surcharge + 4% Cess
= 11.648%= 11.648%= 11.648%
Money market or Liquid schemes /debt schemes (other than infrastructure debt fund)25% + 12% Surcharge + 4% Cess30% + 12% Surcharge + 4% Cess25% + 12% Surcharge + 4% Cess
= 29.12%= 34.944%= 29.12%
Infrastructure Debt Fund25% + 12% Surcharge + 4% Cess30% + 12% Surcharge + 4% Cess5% + 12% Surcharge + 4% Cess
= 29.12%= 34. 944%= 5.824%

* Securities transaction tax (STT) shall be payable on equity-oriented mutual funds schemes at the time of redemption/switch to the other schemes/sale of units.

** For the purpose of determining the tax payable by the scheme, the amount of distributed income has to be increased to such amount as would, after reduction of tax on such increased amount, be equal to the income distributed by the Mutual Fund. In other words, the amount payable to unitholders is to be grossed up for determining the tax payable, and accordingly, the effective tax rate would be higher. The above-mentioned rate is without considering the grossing up.

Surcharge mentioned in the above table is payable on base tax. Further, “Health and Education Cess” is to be levied at 4% on the aggregate of base tax and surcharge.

Disclaimer – The tax rates mentioned here are from the Finance Act 2019 and can be subject to changes. It is advisable to consult your tax consultant or financial advisor before finalizing your tax returns.

adult-bar-businessman-1308625

What is MSME Registration and how will it help freelancers and small business owners?

Micro Small and Medium Enterprises who obtain registration under the MSMED Act, 2006 can avail benefits under many schemes issued by the government.

Before discussing further on what are these benefits and how to obtain the registration, you must know who is MSME and how are you qualified for the same.

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:

The companies are segregated into micro, small and medium enterprises based on their investment in equipment and plant and machinery.

  1. Micro Enterprise:
    1. Investment in Machinery: Not more than INR 25 lakh
    2. Investment in equipment: Not more than INR 10 lakh
  2. Small Enterprise:
    1. Investment in Machinery: Between INR 25 lakh and 5 Crore
    2. Investment in equipment: between INR 10 lakh and 2 Crore
  3. Medium enterprise:
    1. Investment in Machinery: Between INR 5 Crore and 10 Crores
    2. Investment in equipment: Between INR 2 Crore and 5 Crore

 

Being a freelance designer, you should know about everything that protects your interest and enhances your business.

 

Listed below are advantages that you get for your MSME registration.

1.Collateral Free loans from banks:

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS) was launched by the GOI to make available collateral-free credit to the micro and small enterprise sector. Both the existing and the new enterprises are eligible to be covered under the scheme. The Ministry of Micro, Small and Medium Enterprises, Government of India and Small Industries Development Bank of India (SIDBI), established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises.

2. A hefty 50% subsidy on  Patent registration

Enterprises that have MSME Registration Certificate can avail 50% subsidy for patent registration by making an application to respective ministry.

3. 1% exemption on the interest rate on overdraft

Enterprises that have MSME Registration can avail the benefit of 1% exemption on the interest rate on OD as mentioned in the scheme (this is bank-dependent).

4. Eligible for Industrial Promotion subsidy

Enterprises that have MSME Registration are eligible for Industrial Promotion Subsidy as may be prescribed by the government in this behalf.

5. Protection against delayed payments

The Ministry of Micro, Small and Medium Enterprises gives protection to MSME Registered Business against delay in payments from Buyers and right of interest on delayed payment through conciliation and arbitration and settlement of dispute be done in minimum time. If any micro or small enterprise that has MSME registration, supplies any goods or services, then the buyer is required to make the payment on or before the date agreed upon between the buyer and the micro or small enterprise. In case there is no payment date on the agreement, then the buyer is required to make payment within fifteen days of acceptance of goods or services.

Further, in any case, a payment due to a micro or small enterprise cannot exceed forty-five days from the day of acceptance or the day of deemed acceptance. In case of failure by the buyer to make the payment on time, the buyer is required to pay compound interest with monthly interest rests to the supplier on that amount from the agreed date of payment or fifteen days of acceptance of goods or service. The penal interest chargeable for delayed payment to an MSME enterprise is three times of the bank rate notified by the Reserve Bank of India.

6. Concession in electricity bills:

Enterprises that have MSME Registration Certificate can avail Concession on electricity bill by making an application to the electricity department along with MSME Registration Certificate.

7. Reimbursement of ISO Certification charges

Enterprises that have MSME Registration Certificate can claim reimbursement of ISO Certification expenses by making an application to the respective authority.

accounting-analytics-balance-black-and-white-209224

Comparison of old & new Tax Regime FY 2020-21 (AY 2021-22)

The Finance Minister introduced new tax regime in Union Budget, 2020 wherein there is an option for individuals and HUF (Hindu Undivided Family) to pay taxes at lower rates without claiming deductions under various sections. The following Income Tax slab rates are notified in new tax regime vs old tax regime:

Income Tax SlabTax Rates As Per New RegimeTax Rates As Per Old Regime
₹0 – ₹2,50,000NilNil
₹2,50,001 – ₹ 5,00,0005%5%
₹5,00,001 – ₹ 7,50,000₹12500 + 10% of total income exceeding ₹5,00,000₹12500 + 20% of total income exceeding ₹5,00,000
₹7,50,001 – ₹ 10,00,000₹37500 + 15% of total income exceeding ₹7,50,000₹62500 + 20% of total income exceeding ₹7,50,000
₹10,00,001 – ₹12,50,000₹75000 + 20% of total income exceeding ₹10,00,000₹112500 + 30% of total income exceeding ₹10,00,000
₹12,50,001 – ₹15,00,000₹125000 + 25% of total income exceeding ₹12,50,000₹187500 + 30% of total income exceeding ₹12,50,000
Above ₹ 15,00,000₹187500 + 30% of total income exceeding ₹15,00,000₹262500 + 30% of total income exceeding ₹15,00,000

New tax regime slab rates are not differentiated based on age group. However, under old tax regime the basic income threshold exempt from tax for senior citizen (aged 60 to 80 years) and super senior citizens (aged above 80 years) is ₹ 3 lakh and ₹ 5 lakh respectively.

However, under new tax regime person cannot claim up to 70 income tax deductions while calculating taxes. Hence, every person has to make his/her own calculation as per old and new tax regime and calculate which one is beneficial based on type of investments made and returns earned on those investments.

Which Exemptions And Deductions Are Allowed And Which Have Been Removed? 

Exemptions means the taxpayer is free from the tax burden on certain incomes. For example, you do not have to pay tax on income from agriculture.

Deduction means removing certain investments and expenditures the taxpayer makes and then calculating the gross income. For example, if you pay Rs. 20,000 as health insurance premium, you can deduct this amount from your total income.

In the ‘old tax regime’ there are 120 exemptions. Taxpayers do not benefit from all of them. Most of them complicate the direct tax system. After thorough study, the Ministry of Finance has removed around 70 exemptions.

Now the question is if you opt for the new tax regime, what are the exemptions and deductions you wouldn’t be able to claim further? Here’s a list

  • Leave Travel Allowance
  • House rent allowance
  • Standard deduction of Rs 50,000 that was available for salaried individuals
  • Deductions available under Section 80TTA/TTB ( on interest from savings account deposits )
  • Entertainment allowance deduction and professional tax ( For government employees)
  • Tax relief on interest paid on home loan for self occupied or vacant property u/s 24
  • Deduction of Rs 15000 allowed from family pension under clause (iia) ( Section 57)
  • Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so on. These popular tax saving investment options include ELSS, NPS, PPF, tax break on insurance premium among others.

One can still claim deduction under sub-section ( 2) of section 80CCD which is basically employer’s contribution towards employee’s account in NPS and section 80JJAA ( for new employment). Also note that if the employee’s contribution to EPF and NPS exceeds more than Rs 7.5 Lakh, in the financial year in question, then the employee is liable to pay tax. Here’s a list of important exemptions that are retained in the new system

Important exemptions which are retained in the new system:

  • Income from Life Insurance,
  • Agricultural Income,
  • Standard reduction on rent,
  • Retrenchment compensation,
  • Leave encashment on retirement,
  • VRS proceeds up to Rs 5 lakhs,
  • Death cum retirement benefit,
  • Money received as a scholarship for education, etc.

An example of a comparison between old and new tax regime? 

Consider an example, a person aged 35 years has a total income of ₹11, 00,000, and has made the investment under section 80C of ₹1, 50,000, and under Section 80CCD of ₹50,000. He has claimed income tax deduction with medical and Leave travel allowance of ₹50000 and HRA of ₹1,50,000 The tax payable under new and old tax regime is as follows:

ParticularsNew RegimeOld Regime
Gross total income₹ 11,00,000₹ 11,00,000
Less: Deductions under 80C₹ 0₹ 1,50,000
Less: Standard Deduction (Medical & Travel Allowance)₹ 0₹ 50,000
Less: Deductions under 80CCD₹ 0₹ 50,000
Less : HRA deduction as per section 10(13A)₹ 0₹ 1,50,000
Taxable Income₹ 11,00,000₹ 7,00,000
Taxes payable as per slab rates
₹0 – ₹2,50,000₹ 0₹ 0
₹2,50,001 – ₹ 5,00,000₹ 12,500₹ 12,500
₹5,00,001 – ₹ 7,50,000₹ 25,000₹ 40,000
₹7,50,001 – ₹ 10,00,000₹ 37,500₹ 0
₹10,00,001 – ₹12,50,000₹ 20,000₹ 0
Total taxes₹ 95,000₹ 52,500
Which one is better ? – Both systems have their own sets of pros and cons. The old system has many exemptions and deductions under numerous sections – availing a few of these required people to invest in tax saving investment options, which helped inculcate a good habit of investing. On the other hand, the new system gives people more flexibility and tries to simplify the process. If you are someone who was claiming a lot of deductions under the old regime, you can probably save better sticking with the same system, as per the calculations. If you weren’t making any tax-saving investments or claiming any deductions earlier too, then maybe the new system may prove beneficial. It also varies based on which slab you are in as well. However, since the system is new, it makes sense to consult a competent tax expert who can suggest the optimal tax saving route for you.
assorted-color-wall-paint-house-photo-1370704

How to Save Long Term Capital Gains Tax from Property?

The long-term capital gains from property can be huge especially if the asset was held for really long term. These gains are taxed at 20% + cess (effectively 20.8% from FY 2018-19) which can cause a major dent in the amount received on sale. So if we have an option to save, we must save on this tax. The post below gives details of the 3 sections concerned with the Saving of Long Term Capital Gains Tax from Property.

As capital gains taxation is concerned property can be two types:

  1. Residential(house, apartment used for residential purpose)
  2. All others(this includes land, commercial buildings etc)

There are 3 sections using which tax payers can use to save tax on their long-term capital gains. We discuss these one by one:

  1. Section 54(buy residential property on sale of residential property)
  2. Section 54EC(buy specified bonds on sale of any property – land/building/residential/commercial)
  3. Section 54F(buy residential property on sale of any property – land/building/residential/commercial)

We discuss each section in detail:

Section 54 (buy residential property on sale of residential property)

Section 54 is applicable in case of long-term capital gains arising out of sale of any residential property. The exemption is up to following:

  1. Purchase of another residential property(including under construction property) 1 year before the sale of 2 years after the sale and/or
  2. Construction of residential property within 3 yearsof sale
  3. From FY 2019-20 a person can nowbuy two houses on sale of 1 house if the capital gains are less than Rs 2 crore. This benefit can be availed only once in lifetime. [proposed in Budget 2019]

The new property purchased or constructed should not be sold with-in 3 years of purchase/construction. In case the sale happens within 3 years, the purchase price of the property would exclude the capital gains exemption that was claimed.

There is NO limit to the amount of capital gains that can be exempted u/s 54. If the long-term capital gains are less than or equal to the new house purchased/constructed, the entire gains would be tax exempted. In case the capital gains are more, the difference of capital gains and cost of new house would be taxed.

The NEW House should be on the same name as on the previous property which was sold.

Even if the builder fails to hand-over the under construction property with-in 3 years, the exemption still holds.

Relevant Points:

The section 54 tax exemption is available only if the amount is invested in only one residential property in India [Budget 2014]

Under section 54, the tax payers are given 2 years to purchase the house or 3 years to construct it, however the long-term capital gains arising out of sale is taxable in the financial year the transaction happened. Both the above provisions are not consistent to each other. To avoid this, the tax payer has to deposit all their unutilized long-term capital gains in “Capital Gains Account Scheme” of banks before the due date of filing returns (in most cases before July 31). The income tax return forms ask for details of the capital gains account, which should be filled in correctly. Also, the amount which has already been utilized for purchase/construction would be exempted from capital gains.

In case the amount deposited in capital gains account has not been utilized (partially or fully) within 3 years, it would be considered capital gains of the year in which the 3 years would be completed from the date of sale.

Section 54EC (buy specified bonds on sale of any property)

You can save long term capital gains on assets if you invest the gains in specified long term capital gains bond within 6 months of sale of asset. As of today, NHAI (National Highway Authority of India), REC (Rural Electrification Corporation) and PFC (Power Finance Corporation) issue capital gains bond and have annual interest rate of 5.25%. The interest earned is taxed as per the income tax slab. Also, the bonds have tenure of 3 years which would increase to 5 years from FY 2018-19 (as changed in Budget 2018). Until this year these bonds were available for long term capital gains from any asset but from FY 2018-19 the capital gains resulting from sale of property (land/building/residential/commercial) can only be invested.

 

Section 54F (buy residential property on sale of any property)

Any long-term capital gains arising due to sale of any asset can be made exempt by:

  1. Purchase of another residential property(including under construction property) 1 year before the sale of 2 years after the sale and/or
  2. Construction of residential property within 3 yearsof sale

In case entire amount is not invested in new purchase, the exemption would be proportionate.

Amount Exempt = Capital Gains X [Amount Invested / Net Sale Consideration]

The NEW House should be on the same name as on the previous property which was sold.

Even if the builder fails to hand-over the under construction property with-in 3 years, the exemption still holds.

There are certain limitations:

  • The tax payer should not have more than 1 residential house as on the date of sell of the asset.
  • The tax payer purchases any residential house other than the new house within 1 year of sale.
  • The tax payer constructs any residential house other than the new house within 3 years of sale.
  • Budget 2014 also made it compulsory that the new house should be located in India. Also, the capital gains account scheme can be used by the tax payer if required.
  • The proceeds should not be invested in a commercial property or in another vacant plot.

Some of you may be confused between Section 54F and 54. Below is a comparison to make things more clear:

Section 54F Vs 54:

Section 54Section 54F
When Applicable?buy residential property on sale of residential propertybuy residential property on sale of any property
Full Exemption?To claim full exemption all Capital Gains must be invested in new houseTo claim full exemption entire sale receipt must be invested in new house
Any LimitNo such conditionsShould not own more than one residential house at the time of sale of the original asset

We have explained all 3 sections – Section 54, Section 54EC and Section 54F which can be used to save long term capital gains tax on property. 

 

 

apartment-architecture-balcony-building-129494-min

Can I claim Tax Benefit on both HRA & Home Loan?

Can I claim Tax Benefit for both HRA & Home Loan? – A question which is often asked by many tax payers. This is mainly because many employers do not allow both tax benefits together in certain situations. Unfortunately this is NOT the right thing to do.

 

Both HRA and Home Loan Interest tax sections are unrelated. You claim tax benefit on HRA (House Rent Allowance) under section 10(13A) while the tax benefit on payment of interest on home loan comes under section 24(b). However there can be issues if both the sections are used together with the intent of tax evasion.

 

We can have four situations for people claiming HRA & Home Loan tax benefit.

  1. Rented house in place of employment and own house in different city
  2. Own flat in city of employment and stay on rented house in same city
  3. Own flat in city of employment and stay with parents/siblings in the same city and pay them rent
  4. Rented house in different city and own house at place of employment

 

  1. Rented house in place of employment and own house in different city

This is a very easy situation to handle. You can easily claim tax benefit on both and NO employer has issue with this arrangement.

  1. Own flat in city of employment and stay on rented house in same city

This is tricky situation. The first logical question which comes to mind is why would any person owning house in the same city stay on rent? Most employers have issue with this arrangement and may not give tax benefit on both HRA & Home Loan.

 

But legally you can claim tax benefit on both if you can give a valid reason for this arrangement. The reasons can be its more convenient to stay. For e.g. your flat is on the outskirts with almost negligible public transport, you might not want to live there and rather stay close to your place of employment. The other reason could be the owned house is smaller for the size of family.There are misconceptions that there should be minimum distance between two houses. All this is myth! All you need a genuine reason to stay on rent.

 

Also if you move to your new owned house in the middle of financial year, its a genuine thing to do and you can claim HRA for the period you stayed on rent and house loan benefit for the entire year. In case your employer is not ready to give tax benefit on both – you can claim HRA tax benefit from employer and claim tax benefit on Home Loan while filing your Income Tax return. 

The other question is should the owned house be assumed to have notional rent? The answer is No. If you receive actual rent then show, only then you need to pay tax on that.

3. Own flat in city of employment and stay with parents/siblings in the same city and pay them rent

The situation is similar as discussed above with the difference being your landlord or landlady is your close relative like parents/siblings. Any such rental transaction is full with suspicion and so you should be very careful if you use this for tax saving. You must do the following:

  1. Actually pay the rent through Cheque/ECS etc. and receiver should give rent receipt for the same.
  2. The landlord/lady should show this rent as “income from house property” and pay taxes on the same.

There have been cases where rent paid to close relatives have been denied tax benefit by income tax department as there was NO evidence of actual transaction. So stay careful.

4. Rented house in different city and own house at place of employment

There may be case where you have rented a place where your spouse/parents stay (in a different city) while you own a house at the city of your employment and stay there. In this case you cannot claim HRA tax benefit as HRA is paid for staying on rent for purpose of employment. However you can easily claim home loan tax benefit.

1

Why do people ‘NOT’ consider financial education ‘ Important’?

Hi fellow investors!

A very dear friend visited me for lunch recently, and we had a nice afternoon chat. It was such a relief to see a new face to talk to and eat with. He also happens to be the Marketing Executive for another education company and we got talking about Wealth Cafe and why we conduct money workshops and teach financial education.

The most important discussion we had was around 'WHY' so many people don't consider financial education or money as a priority, and my usual long phone conversations with Harsh Vardhan Dawar (Founder & Director of Wealth Cafe) also majorly revolve around the 'WHY' and 'HOW' of Financial education, I thought it would be interesting to share the same with you this week.

Why it is important yet difficult to study about managing your OWN Money & Investments?

 


1. Money takes time to grow!


It does and we have always said it. When you buy chocolate, you get to enjoy it within 10 seconds of you purchasing it, whereas when you invest, you may finally enjoy its fruits only after years. Your Fixed Deposit of 10,000 becomes 10,600 after 1 year. 365 days. 8,760 hours. It takes time and it requires the investor to wait for it to grow. 

Remember - Don't wait to Invest, Invest, and Wait.


2. Not a part of our dinner table discussions or school gang chats


Do you talk to your family about where you should invest your money or have your parents discussed it with you over dinner? If you have, then it's amazing, but most families don't have this discussion. Also, when we're hanging out with our friends we almost never talk about investments, savings, or goals (we may have mentioned the economy and stock market but not concrete discussions on how you can plan your finance). 

#letschangethedialogue. 


3.  Money matters 


For most of us, money is important until we have enough to buy and do what we want to do at the moment or maybe in the near future. Many of us are at a phase where we want to earn more and work (job/freelance) for it is the only option. Money matters a lot but only to the extent where it adds comfort to our present life. 

We generally don't tend to ponder over questions like 'Will I have enough when I retire?' or 'Can I quit my job to start something of my own?'


4. Money is boring


Well, I have to face this, I love reading and talking about money and investments, but for a person without a financial background, it may not be as exciting. Not many people are pumped about getting up from their beds and reading about the nuances of Mutual funds or FDs. It is akin to researching the bacteria that caused you the toothache.

But if you love yourself, you go to be on top of your health and wealth. Either learn about it or have an expert take care of it for you.


5. Not a priority


While my friend and I were having this long discussion, I asked him if he had ever taken the effort to educate himself about money matters, and surprisingly, his answer was no!  He said that there was never enough time for him to sort his finances or read up about it. Work always kept him busy and Alas! this is the most important reason.

If any of these reasons are blocking you or holding you back, let's work on it together. 

When you work hard your entire life to make money, you can work a little to make your money work hard for you. It's all about prioritizing.

 

The important subject of Money Management is not taught at any level of school or college in India which is why the financial literacy of India is at a meager 2%. Without proper knowledge about financial products, one cannot make the right decision with respect to investments. At Wealth Café, we are working on doing that, our everyday effort is to make finance simple for you :).

Here's wishing that you also start taking that small effort to make your own money a priority for you.

Where you think any of your friend or family could benefit from this, please do share via email or Facebook :)

Disclaimer -  The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.  



accounting-administration-books-business-267582

Examples of your old & new tax regime FY 2020-21 (AY 2021-22)

Old vs New: A Comparison For Different Slabs

Taxpayers with annual income between RS.5 lakhs to Rs.10 lakhs are taxed at 20%, under the old regime. And in the new regime, they will be taxed at half that rate i.e. 10%. Also, those with an annual income of Rs.7.5 lakhs to Rs.10 lakhs will have to pay 15% income tax.

However, if the taxpayer is benefiting from exemptions and his net tax payable is less, he/she can choose to continue with the old tax regime.

OLD RATES (with exemptions)ANNUAL INCOMENEW RATE (without exemptions)
NilUp to Rs.2.5 lakhsNil
5%Rs.2.5 – 5 lakh5%
20%Rs.5 – 7.5 lakh10%
Rs. 7.5 – 10 lakh15%
30%Rs. 10-12.5 lakh20%
Rs. 12.5-15 lakh25%
Rs. 15 and above30%

Let’s take an example, a person’s annual income comes to Rs.6 lakhs. If he goes by the new rates, he will have to pay Rs.60,000. (some of the exemptions allowed in the new tax regime may be beneficial)

If he chooses the old rates, he can deduct Rs.1.5 lakhs under Sec 80C. His taxable income now is Rs.4.5 lakhs.  A simple preview of how much does the tax amount come to under different slabs with old and new tax regime will help you take the right call.

Before we begin, please note the following:-

  • The maximum amount of each of the exemptions is used here for calculation purposes.
  • Not everyone might invest in the same manner to save tax. If a person is not benefiting from the exemptions, he/she can choose the new regime.
  • The calculations made are for understanding purposes. Take advice from experts as the filing process for different assessment years may differ.
  • There are more exemptions an individual can benefit from, than the ones taken here for calculation.

For Annual Income Up To Rs.2.5 Lakhs 

  • No tax for Individuals, HUF below the age of 60 years.
  • For senior citizens, no tax up to Rs. 3,00,000.

Under old and the new scheme.

For Annual Income Up To Rs.5 Lakhs

  • For senior citizens: Rs.3,00,000 to Rs.500000 – 5%
  • Under Sec 87A, individuals with total income (after deductions) that do not exceed Rs.5 lakhs can claim a rebate of Rs.12,500.
Annual Income of Rs.5,00,000 (without exemption)
Old RegimeNew Regime
Income tax slabTax Rate (%)Tax (Rs.)Tax RateTax (Rs.)
Up to Rs. 2,50,0000000
250001 – 500000512500512500
(-) Rebate-12500-12500
Tax Payable00

For Annual Income Up To Rs 7.5 Lakhs

Annual Income of Rs.7,50,000 (without exemption)
Old RegimeNew Regime
Income tax slabTax RateTax (Rs.)Tax RateTax (Rs.)
Up to Rs. 2,50,0000000
250001 – 500000512500512500
500001 – 75000020500001025000
Sum6250037500
Health and Education cess4250041500
Tax Payable6500039000

 

Annual Income of Rs.7,50,000 (with exemption)
Annual Income750000
Exemptions u/s 80C-150000
u/s 80CCD(1B)-50000
u/s 80D-50000
HRA-10000
Taxable Income4,90,000
Old RegimeNew Regime
Income tax slabTax RateTax (Rs.)Tax RateTax (Rs.)
Up to Rs.2,50,0000000
250001 – 500000512500512500
500001 – 750000001025000
(-) Rebate-12500
Sum037500
health and education cess4041500
Tax Payable039000

For Annual Income Up To Rs.10 Lakhs

Annual Income of Rs.10,00,000 (without exemption)
Old RegimeNew Regime
Income tax slabTax RateTax (Rs.)Tax RateTax (Rs.)
Up to Rs.2,50,0000000
250001 – 500000512500512500
500001 – 75000020500001025000
750001 – 100000020500001537500
Sum11250075000
Health and education cess4450043000
Tax Payable1,17,00078,000

 

Annual Income of Rs.10,00,000 (with exemption)
Annual Income10,00,000
Exemptions u/s 80C-1,50,000
u/s 80CCD(1B)-50,000
u/s 80D-75,000
Taxable Income7,25,000
Old RegimeNew Regime
Income tax slabTax RateTax (Rs.)Tax RateTax (Rs.)
Up to Rs.2,50,0000000
250001 – 500000512500512500
500001 – 75000020500001025000
750001 – 1000000001537500
Sum6250075000
health and education cess4250043000
Tax Payable65,00078,000

For Annual Income Up to Rs 12.5 Lakhs

Annual Income of Rs.12,50,000 (without exemption)
Old RegimeNew Regime
Income tax slabTax RateTax (Rs.)Tax RateTax (Rs.)
Up to Rs.2,50,0000000
250001 – 500000512500512500
500001 – 75000020500001025000
750001 – 100000020500001537500
1000001 – 125000030750002050000
Sum187500125000
Health and education cess4750045000
195000
Annual Income of Rs.12,50,000 (with exemption)
Annual Income1250000
Exemptions u/s 80C-150000
u/s 80CCD(1B)-50000
u/s 80D-75000
Taxable Income-975000
Old RegimeNew Regime
Income tax slabTax RateTax (Rs.)Tax RateTax (Rs.)
Up to Rs.2,50,0000000
250001 – 500000512500512500
500001 – 75000020500001025000
750001 – 100000020500001537500
1000001 – 1250000002050000
Sum112500125000
Health and education cess4450045000
Tax Payable117000130000

For Annual Income Up To Rs 15 Lakhs

Annual Income of Rs.15,00,000 (without exemption)
Old RegimeNew Regime
Income tax slabTax RateTax (Rs.)Tax RateTax (Rs.)
Up to Rs.2,50,0000000
250001 – 500000512500512500
500001 – 75000020500001025000
750001 – 100000020500001537500
1000001 – 125000030750002050000
1250001 – 150000030750002562500
Sum262500187500
Health and education cess41050047500
273000195000

 

Annual Income of Rs.15,00,000 (with exemption)
Annual Income1500000
Exemptions u/s 80C-150000
u/s 80CCD(1B)-50000
u/s 80D-75000
Taxable Income-1225000
Old RegimeNew Regime
Income tax slabTax RateTax (Rs.)Tax RateTax (Rs.)
Up to Rs.2,50,0000000
250001 – 500000512500512500
500001 – 75000020500001025000
750001 – 100000020500001537500
1000001 – 125000030750002050000
1250001 – 1500000002562500
Sum187500187500
Health and education cess4750047500
Tax payable1,95,0001,95,000

 



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