What is a recession? What causes recession?

Do you remember the financial crisis of 2007? It caused global economic chaos and an extended period of an economic slowdown. Well, that phase in the global economy was a phase of recession. So what is a recession and what causes it? Let us learn more about it.

 

Let us first understand, What is recession?

A recession is when the GDP growth rate of a country is negative for two consecutive quarters or more. It  is a significant economic downturn spread across the economy that lasts more than a few quarters.

Although an economy can show signs of weakening months before a recession begins, the process of determining whether a country is in a true recession (or not) often takes time. A recession is short, but its impact can be long-lasting. It is based on key economic indicators like manufacturing data, decline in incomes, employment levels etc.,

So during the period of recession, the economic performance of the entire country stagnates. Businesses across the country will suffer the effects of the recession. The government too will be helpless to an extent. Take for example the global recession of 2007-2008. It started due to the housing market fiasco in the USA, but the global economy suffered and its adverse effects were seen in India as well.

What causes a recession?

There are many theories as to what may cause an economy to go into an economic slowdown. Some factors have been identified that may cause an economic slowdown in a country that ultimately results in a recession. Let us take a look at some such factors.

Economic shocks. An unpredictable event that causes widespread economic disruption, such as a natural disaster or a terrorist attack. The latest example is the recent COVID-19 outbreak.

Loss of consumer confidence. When consumers worry about the state of the economy, they slow their spending and keep whatever money they can. Because close to 70% of GDP depends on consumer spending, the entire economy can drastically slow.

High interest rates. High interest rates makes it expensive for consumers to buy houses, cars and other large purchases. Companies reduce their spending and growth plans because the cost of financing is too high. The economy shrinks. We saw this in 1980 in the USA, when the rates were raised to battle stagflation. But instead, this resulted in a recession.

Deflation. The opposite of inflation, deflation means product and asset prices fall because of a large drop in demand. This encourages the consumer to wait until the prices to reduce further. This can cause a recession in the economy.

Housing Crisis: When the prices of houses fall the owners start losing equity. They can not pay their mortgages or take second mortgages on their homes. This may lead to foreclosure. This was the cause of the Great Recession of 2007.

Falling Wages: When the wages and salaries of workers do not increase with the same level as the inflation in the economy, the purchasing power of the public will reduce. He will not be able to afford the same goods and services that he used to. This can cause an economic slowdown.

Economic Scandals and Frauds: Sometimes banks, large corporations, and even government institutions employ questionable practices and illegal activities to boost profitability. When such schemes and scandals are exposed, the entire economy suffers. Take for example the current financial scandal of Sahara.

Stock Market: In a bear market, investors will pull money out of the stock market. This will drain capital out of the businesses and cause an economic slowdown. Crashes in the stock market are very harmful to the economy.

How Does a Recession Affect Me?

You may lose your job during a recession, as unemployment levels rise. Not only are you more likely to lose your current job, it becomes much harder to find a job replacement since more people are out of work. People who keep their jobs may see cuts to pay and benefits, and struggle to negotiate future pay raises.

Investments in stocks, bonds, real estate and other assets can lose money in a recession, reducing your savings and upsetting your plans for retirement. Even worse, if you can’t pay your bills due to job loss, you may face the prospect of losing your home and other property.

Business owners make fewer sales during a recession, and may even be forced into bankruptcy. The government tries to support businesses during these tough times, like with the PPP during the coronavirus crisis, but it’s hard to keep everyone afloat during a severe downturn.

With more people unable to pay their bills during a recession, lenders tighten standards for mortgages, car loans and other types of financing. You need a better credit score or a larger down payment to qualify for a loan that would be the case during more normal economic times.

Wealth Cafe advice:

Recessions are unavoidable and can be hard to predict. So even in times of healthy economic growth, it is good to be prepared for an economic downturn. Preparing for a rainy day now can save you trouble down the life.  Here are some ways you can prepare your finances for the possibility of a recession:

  1. Make sure you have an emergency fund of at least 6-7 months of your salary 
  2. Live within your means. Spending more than you make is never good.
  3. Limit your existing debt. You should not have an EMI of more than 30% of your income.
  4. Diversify your portfolio and plan an asset allocation based on your risk tolerance. You can use this risk calculator- https://financial.wealthcafe.in/risk-calculator/ 

 

Check out our course NM101: Maximise your savings - to learn how to manage your money and get started with savings.

 

Also, please note that we are not indicating or moving towards recession currently. There are many things that are happening around us and the world. We are opening back after COVID 19 lockdowns and there is a supply demand mismatch, but every industry and everyone is working towards making things better. Invest as per your allocation and goals and keep a tab of the overall macro market.

Money tips - 11/11/2021

Difference between NPS and EPF - which one should you opt for?

In Indian scenario, NPS (National Pension Scheme) and EPF (Employees Provident Fund) are two viable options for ensuring a financial cover in the absence of a regular income or as a corpus that can be used in times of need. 

However, not investing in the right instrument can mean you are losing out on the potential returns of your investment. For instance, while EPFO invests predominantly in debt instruments, investing in NPS promises higher returns over the long term.

Find out how they differ from one another:

Criteria National Pension Scheme Employee Provident Fund
A/C opening Mandatory only for government employees Mandatory for every establishment employing more than 20 or more employees
Eligibility Age: 18-65 (Indians + NRI) - can be opened by anyone Only for salaried Individuals
Investment It is a market-linked product. Its performance depends on the equity and debt market The Central Board fixes the interest rate for the year - government debt investment. 
Tax Benefit Tax deduction of INR 2 lakhs under section 80C and  CCD You can avail tax deduction of INR 1.5 lakhs under section 80C
Fund Manager Liberty of choosing your fund manager Do not have the liberty of choosing a fund manager. The funds are invested by EPFO
Min Investment 500/ year 12% of salary per month or 1800, which can be increased voluntarily. 
Max investment Unlimited Unlimited (however, taxability varies)
Return 8%-15% ( depending upon which funds you are investing your money in) 8.5% (Interest as on September 1, 2020)
Lock in period & Extension Age: 60

Extension: 70

 Age: 58

Extension: 60
Premature Withdrawal Partial withdrawals can be made up to 25% of the subscriber’s savings, but only after the 10th year of subscription. Partial withdrawal is allowed after 5 years of EPF when you fulfill certain conditions such as buying a new house, marriage, child education, sickness, death, etc. 
Withdrawal You will get 60% of the corpus and 40% will be invested in an annuity for a monthly pension.

Read here- to know more

 You will get the entire corpus after retirement.
Expense Ratio 0.01% (also varies - it is  not fixed) 0% (No expense ratio)
Risk Low risk (Market Dependent) No-Risk
Employer Contribution Can be done Employees along with the employers both contribute 12% of the employee’s basic wages towards EPS

Let’s assume, two friends Sanjay and Yogesh started saving for their retirement in 2021. Both of them are 23-years-old and want to retire at 60. Also, they plan to continue this investment until 2058, at the time of retirement. However, Sanjay has invested in NPS and Yogesh in PPF.

NPS vs PPF: Difference in the retirement corpus
Sanjay Yogesh
Investment Product picked NPS EPF
Average annual return 12.90% (Growth profile) 8.5%
Investment amount every month INR 10000 (10% of Basic salary & DA) INR 12,000 (12% of Basic salary & DA)
Investment time period 37 years 37 years
Investment in 37 years INR 44.4 lakhs INR 53.28 lakhs
Retirement corpus Lump-sum value: INR 7.33 crore

Annuity Value: INR 4.89 crore

 INR 1.44 crore

NPS is devised as a pension scheme. So, you get to withdraw 60 percent of your accumulated corpus at retirement without paying any taxes. The remaining 40 percent must be converted into an annuity instrument (from an insurance company) and get monthly payments.

The primary reason for the difference in their corpus is the power of compounding. Since the last few years, the interest rate for EPF has been decreasing. At the same time, there are chances that NPS can give you more returns in the future (where the equity markets perform well) w.r.t a higher risk of the equity exposure in NPS. So, while they reach their retirement age, there is a probability that this difference might increase further. 

Wealth Cafe Advice

Opting for EPF or NPS is a matter of choice based on specific needs and projected requirements. Both come with their set of merits and demerits. Subscribers at an early age or with risk-bearing capacity should subscribe to NPS and opt for equity allocation based on their risk profile to accumulate large corpuses targeted to fund retirement needs. Where you believe your risk-taking capacity is not very high and you will find it difficult to manage NPS post-retirement - EPF has always been a classic option for your investments. 

However, in both scenarios, investors should not touch their retirement corpus for other financial goals. You should always mark these investments only for retirement.

To know more about EPF and NPS you can read the following articles:

Uncategorized - 11/02/2021

Things to note about HRA and FAQ of HRA

Many times, people have to move to a different city in order to work. In such cases, they may end up paying rent for accommodation. Organizations often compensate employees for this expenditure by paying them a house rent allowance over and above their basic pay. This is usually a part of the salary structure. However, HRA is eligible for income tax exemption and can be a great way to reduce your taxable income.

Quest 1. What if I have a Home Loan as well? Can I claim a deduction on home loan interest?"

Ans. Yes. HRA has no bearing on your home loan interest deduction. Both can be claimed simultaneously. 

Read this article for more details- Can I claim Tax Benefit on both HRA & Home Loan?

Quest 2. “My employer doesn’t provide me with HRA? Am I losing out on saving tax?”

Ans. Not at all. If you are making payments towards rent for any furnished or unfurnished accommodation occupied by you for your residence, but do not receive HRA from your employer, you can claim a deduction under section 80GG.

However, certain conditions must be fulfilled to claim this deduction:

  • You are self-employed or salaried
  • You have not received HRA at any time during the year for which you are claiming 80GG
  • You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.

In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. That other property would be deemed to be ‘let out to claim the deduction under section 80GG.

Quest 3. “So how do I claim the Section 80GG deduction?”

Ans. The least of the amounts below will be considered as the deduction under this section:

  • Rs 5,000 per month
  • 25% of Adjusted Total Income
  • Actual Rent less 10% of Adjusted Total Income

Adjusted Total Income means Total Income less long term capital gain and short term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).

Quest 4. “I am living with my parents. How do I claim the HRA deduction?”

Ans. Let’s understand this through a case: Ms. Sonam works at an MNC in Bangalore. Her company provides her with a house rent allowance. But she doesn’t live in rented accommodation; she lives with her parents instead. How can she make use of this allowance?

Sonam can pay rent to her parents and claim the allowance, provided they own the place they currently live in. All Sonam has to do is enter into a rental agreement with her parents and transfer money to them every month.

This way Sonam can make a nice gesture and give something back to her parents, and also save some tax.

Important: Sonam’s parents will have to show the rent she paid in their income tax returns. But as a family, they will save up. They can generate their Rent Receipts.

Ques 5. “I have forgotten to submit rent receipts to my employer. How can I claim the HRA tax benefit now?”

Ans. The good news is that HRA can be claimed directly on your income tax returns. . All you have to do is manually calculate the HRA tax exemption and then report this as an expense under Section 10(13A) in ITR1. You will also need to declare this in Form 16 - Part B. You will then be able to claim a refund of tax that has been deducted in excess.

Ques 6. Can the maintenance charges that I pay for my apartment be included for HRA tax exemption?

Ans. No. HRA deductions are allowed only for rent payment. Maintenance charges, electricity charges, utility payments, etc. are not included.

Ques 7. Can a self-employed taxpayer claim HRA?

Ans. No, a self-employed individual cannot claim HRA exemption under the Income Tax Act, 1961. A salaried individual having an HRA component in their salary structure can claim HRA exemption under Section 10 (13A) of the Income Tax Act.

Crackdown on tax evaders

Submitting fake rent receipts has been one of the most common ways for individuals to reduce their taxes, despite it being unethical. However, the new rules put in place by the Income Tax Appellate Tribunal (ITAT) are expected to change all this. Assessing officers can question individuals and ask them for additional documentation if they feel the rent receipts provided are not adequate proof. This is just one of several measures that the government has put in place to curb instances of tax evasion and black money.

Failing to comply with these rules and providing fake rent receipts is considered fraud, and could result in serious consequences.

 

So, ensure you are well versed with the tax filing process and that you have all the necessary documentation in place for filing returns. It will make the entire process smoother and quicker for you. 

Uncategorized - 10/29/2021

What is an allowance? What are the types of allowance?

Taxpayers are usually aware of deductions under Section 80C of the Income Tax Act or for which they are eligible. However, it is noticed that taxpayers are unaware of the taxability of allowances and the exemptions available under different sources of income.

If you think that your entire salary is liable to taxes, then that is not true. Your overall package, often known as CTC, comprises many allowances. 

While your basic salary is fully taxable, there are other benefits offered to the employees in the form of allowances and prerequisites. These allowances are offered to employees for the expenses they bear during work. There are three types of allowances:

  • Fully-taxable allowances

The fully taxable allowances are not exempted from Income Tax. You have to pay the full tax applicable to these allowances.

  • Potentially taxable allowances

The partially taxable allowances are exempted from the Income Tax to a limit.

  • Fully Exempt allowances

The non-taxable allowances are exempted from the Income Tax fully. But, these are usually offered to government employees.

Let’s see how these allowances can impact your take-home salary.

Fully-taxable allowances Potentially taxable allowances Fully Exempt allowances
Basic Salary House Rent Allowance Food Allowance
Dearness Allowance Leave Travel Allowance Children education allowance
Special Allowance Car Maintenance Allowance Conveyance Allowance
Overtime Allowance Daily Allowance
Bonus Academic and Research Allowance

 

Wealth cafe Advice

As soon a person joins an organization, s/he is provided with the breakup of the fixed salary and allowances. However, most of the time individuals are ignorant about taxation. But allowances can help employees save taxes provided they are placed in the salary intelligently.

Salary restructuring is not possible in every organization, but if possible, employees should try to include allowances that are non-taxable or are partially taxable in nature. This way they can reduce the tax liability to some extent.

Thus, one should take note that through intelligent planning one can use allowances to save taxes and reduce the tax outflow.

Uncategorized - 10/29/2021

What is Form 16/Form 16A - How does it help?

A TDS certificate is a document issued by the deductor to the deductee. Here, the deductor is someone who deducts tax at the source of the payment, while the deductee is the person who receives the tax-deducted payment.

However, there are two types of TDS certificates issued by the deductor -

  1. Form 16: It is issued by an employer to all its employees, incorporating details of the tax deductions made by the employer in the given financial year.
  2. Form 16A: It is issued in all other cases besides salary.

To under these two certificates, consider the following example -

  • Mr. Hemant works as a salaried employee at a reputed company in Mumbai. The tax deductions of his salary are at 15 percent. The company will thus provide him with Form 16 describing the amount of salary paid to him and the tax deducted from it.
  • In another case, if Mr. Hemant was a working professional who receives professional fees from a company that is subjected to TDS, then he will be provided with Form 16A.

How can you use Form 16 to your advantage?

  1. Help in filing Income Tax Return
  2. Proof of Income
  3. Document stating how your tax was computed and check any anomalies
  4. One place document to see all your tax-saving investments
  5. Loan assessment and approval
  6. Visa issuance
  7. On switching jobs: Helps the next employer compute your tax liabilities on the basis of what your previous employer has already deducted
  8. Since it is a document of the tax credit, you can check for any overpaid taxes, which will help you in claiming refunds. 

FAQs on Form 16

1. How is Form 16 generated?

The TDS CPC is responsible for the generation of Form 16 on the basis of the quarterly TDS and TCS statements processing. A deductor will be required to raise a request for the same on the TRACES website.

2. When are the due dates for the issuance of Form 16 and Form 16A certificates?

Form 16 is issued annually and is supposed to be issued by the 31st of May. On the other hand, Form 16A is issued quarterly and is issued within 15 days from the due date of furnishing the statement of tax deducted at source as per rule 31A.

3. Can I get a duplicate Form 16 certificate if I misplace the original one?

Yes, you have to get in touch with your deductor to get the duplicate certificate issued

4. If I am a pensioner, who will issue my Form 16?

If you are a pensioner, the bank through which you are receiving your pension will issue Form 16. Your previous employer will not be issuing Form 16 in this case.

5. Can I download my Form 16 certificate without enrolling myself on the TRACES website?

No, you have to be a registered user on the TRACES website to be able to download your Form 16 and Form 16A.

6. How can I get Form 16?

You will need to contact your employer in order to receive Form 16 are an employer, it is compulsory for you to issue Form 16 to employees. 

 

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    Uncategorized - 10/29/2021

    TDS Rate Chart for AY 2021-22 and FY 2020-21

    Due to the Covid-19 situation, the rates of TDS on payments made to resident Indians have been reduced by 25% for the period starting from 14th May 2020 to 31st March 2021. However, there shall be no reduction in rates, where tax is required to be deducted or collected at a higher rate due to non-furnishing of PAN/Aadhaar.

    The following tables list the various TDS rates applicable to resident and non-resident payments as well as TDS rates on domestic and foreign companies in India. Any person paying income is responsible to deduct tax at source and depositing TDS within the stipulated due date.

     

    Section Nature of payment Threshold Limit Applicable from 01/04/2020 to 13/05/2020 Applicable from 14/05/2020 to 31/03/2021
          Resident Non-resident * Resident Non-resident *
        Rs.  TDS Rate (%) TDS Rate (%) TDS Rate (%) TDS Rate (%)
    192 Salaries - Normal slab rate Normal slab rate Normal slab rate Normal slab rate
    192A Premature withdrawal from EPF 50000 10 10 10 10
    194 Dividends 5000 10 - 7.5 -
    194A Interest (Banking co., co-operative society engaged in banking, post office) 40000 10 - 7.5 -
    194D Insurance commission

    - Other than Company

    - Company

    		 15000  

    5

    10

    		  

    -

    -

    		  

    3.75

    10

    		  

    -

    -
    194F Repurchase units by MFs - 20 20 15 20
    194H Commission/Brokerage 15000 5 - 3.75 -
    194I Rent of - Plant/Machinery /Equipment

    - Land and Building/Furniture & Fixture

    		 240000 2

    10

    		 -

    -

    		 1.5

    7.5

    		 -

    -
    194IA Transfer of certain immovable property other than agricultural land 50 lakh 1 - 0.75 -
    194IB Rent by Individual/HUF 50000 per month 5 - 3.75 -
    194J Professional Fees 30000 10 - 7.5 -
    194J Technical Fees (w.e.f. 01.04.2020) 30000 2 - 1.5 -
    194N Payment of a certain amount in cash 1 Crore 2 2 2 2
    195 Income of Investment made by an NRI - - 20 - 20
    195 Long-term capital gain

    - Under Section - 115E/

    112(1)(c)(iii)/112A

    - Any Other Gains

    		 -  

     

    -

    -

    		  

     

    10

    20

    		  

     

    -

    -

    		  

     

    10

    20
    195 Short-term capital gain - 111A - - 15 - 15
    195 Royalty - - 10 - 10
    195 Fees for technical services - - 10 - 10
    195 Interest income payable by Govt./Indian concern (other than section 194LB or 194LC) - - 20 - 20
    195 Any Other Income - Other than Company

                     - Company

    		 - -

     

    -

    		 30

     

    40

    		 -

     

    -

    		 30

     

    40
    196A Income in respect –

    - of units of a Mutual Fund specified under clause (23D) of section 10; or

    - from the specified company referred to in the Explanation to clause (35) of section 10

    		 - - 20 - 20

    * TDS rate shall be increased by applicable surcharge and Health & Education Cess.

    Note: In case of non-furnishing of PAN/Aadhaar by deductee, TDS will be charged at a normal rate or 20% (5% in case of section 194-O), whichever is higher.

    TCS Rate Chart for F.Y. 2020-21 (A.Y: 2021-22)

     

    Note: In case of non-furnishing of PAN/Aadhaar by collectee, TCS will be charged at twice of the normal rate applicable or 5% {1% in case of sale of any goods (given in the last point) of the value exceeding 50 Lacs}, whichever is higher.

     

    In case you are confused about TDS Return Filing, feel free to consult the experts at Wealthcafe.

    Uncategorized - 10/29/2021

    All about Tax Deducted at Source (TDS)

    An individual can earn income from various sources. Income tax is a direct tax that they need to pay, depending on which tax bracket their total income falls in. According to the Indian tax system, Tax Deducted at Source (TDS) is an essential term in taxation that has a significant bearing on the taxpayers. It is a means of collecting income tax by the government and offers convenience to the deductee as it is deducted automatically.  

    What is TDS?

    The TDS full form is Tax Deducted at Source (TDS). The system was introduced by the Income Tax Department of India. In this, people who are responsible for making payments like salary, commission, professional fees, interest, or rent are liable to deduct a specified percent of tax before making the full payment. In simple words, the system allows tax deduction right at the source.

    To understand the TDS better, consider the following example.

    Assume that the nature of payment is professional fees on which the rate specified for TDS is 10 percent (To know more - click here). An ABC organization pays INR 50,000 as professional fees to Ms. XYZ. In this case, the ABC organization is liable to deduct INR 5000 and make a net payment of INR 45,000 to Ms. XYZ. The INR 5000 deducted by the company will be deposited directly to the credit of the government.

    What are the rules for Tax Deducted at Source?

    There are rules concerning not just income tax return filing but also concerning TDS. If an individual or organization meets these rules adequately, they will be able to avoid penalties, fees, or interest. The main rules related to TDS are:

    1. One of the first essential rules is that Tax Deducted at Source needs to be deducted at the time when the payment either gets due or when the actual amount is made, whichever is earlier
    2. Delay in deduction of TDS will attract interest @ 1% per month until the tax is deducted [2]
    3. Every person, whether an employer or otherwise, needs to credit the tax deducted to the government’s account by the 7th day of the following month
    4. In case of late or non-payment of TDS, an interest @ 1.5% per month will be levied until the tax has not been deposited

    How to apply for a TDS refund?

    A major misconception that many individuals have is that an excess TDS refund is different from that of an income tax refund. However, according to the Indian Tax System, there is only one type of return that you claim at the time of filing your annual income tax return.

    For filing your TDS refund, it is compulsory to quote bank account details such as account number and IFSC code. Failing to do so will not generate a valid file for you. In case if someone deducts more tax than he should have deducted, then there will be an income tax refund, which can be claimed upon the filing of the annual income tax return (ITR).

    For example, you own a transport agency, and yours is a proprietorship firm. You presented an invoice for Rs. 20,000/- and the person paying freight paid you a net amount of Rs. 19,600/- (after deducting tax of Rs. 1,000/- @ 2% under section 194C). In this case, the tax will be deducted at 2% instead of 1% and hence deducted excess TDS by Rs. 200/-. This excess TDS of Rs. 200 will arise as a refund in the income tax return, according to the Income Tax Act, 1961.

    Ensure Proper TDS Deduction

    Tax Deducted at Source is an essential legal obligation for everyone earning an income. It ensures that there is no tax evasion as it is levied at the source itself. Every employer, as well as individuals, should give proper attention to meeting with this deduction. It is because non-filing or late filing of Tax Deducted at Source will attract penalties and fines.

    Along with being aware of how to file ITR, Individuals at their end should share proper documentation with the employer as well as check online for any updates in TDS provisions. It will ensure that your employer makes the right Tax Deducted at Source declaration from your salary income.

    Wealthcafe Advice

    There is only a single refund i.e. Income Tax Refund which is an excess of tax already paid by way of TDS, TCS, advance tax or self-assessment tax less tax on your total income. You can get a refund of additional tax only after filing your income tax return for that particular year.

    In other words, there is no other method to get a refund other than by filing an Income Tax Return.

    Income Tax / Tax - 10/29/2021

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