July 2013 ~ Vardhman Insure Finvest Blog Powered By Wealth Smart Planners

How variation in interest rates alters the returns in debt funds

2:25:00 AM

How variation in interest rates alters the returns in debt funds ET SPECIAL Every time there is a fall in the net asset value (NAV) of debt funds, there is renewed panic. The simple question in the investor's mind is: if there is no default and the fund is receiving its interest income, how and why should the NAV fall? A drop in the NAV of a debt fund can trigger alarm and lead to a precipitous closure for some, as happened in...

Know Your Client (KYC)

12:36:00 AM

Know Your Customer (KYC) Effective January 01, 2011, KYC has been made mandatory for all category of investors who wish to invest in the schemes of Mutual Fund irrespective of investment amount for all transactions. What is the Regulation? Securities and Exchange Board of India (SEBI) has issued guidelines under The Prevention...

What is Systematic Transfer Plan (STP)?

12:06:00 AM

What is Systematic Transfer Plan (STP)? Equity fund investment has the potential of wealth creation through capital appreciation, whereas debt fund investment accounts for consistent returns in the long run. Investor risk appetite plays an important role while choosing between the two and unpredictable nature of equity fund returns normally pulls investors away from them. What if some investor wants best of both worlds i.e. wealth creation and...

What is Systematic Investment Plan or SIP?

11:48:00 PM

What is Systematic Investment Plan or SIP? SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a Mutual Fund by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in an Mutual...

Things to keep in mind before selling a mutual fund

11:23:00 PM

Things to keep in mind before selling a mutual fund If your mutual fund is yielding a lower return than you anticipated and is consistently performing badly than you may be tempted to cash in your fund units and invest your money elsewhere. The rate of return on other funds may look enticing but you should be careful as there are both pros and cons to the redemption of your mutual fund units. The first thing you need to understand...

Filing of IT Returns Online

11:35:00 AM home

Filing of IT Returns Online Online transactions are fast catching up in India with almost all transactions being permitted online. Now you can buy life insurance, health insurance, apply for a loan and pay most of your bills including EB bills online. Yes, India is fast catching up with the West, where online is the order of the day for many years. What about filing of IT returns online? Yes, filing of IT returns online...

Prevention is better than cure”, it applies to investment planning too.

7:59:00 PM

Important Points to Keep in Mind during Investment Planning Investment planning is one of the most important steps in investment process, both for new as well as seasoned investors. Before beginning the investment journey, one should clearly outline the objectives and goals one wants to achieve while investing. Most of the seasoned investors are already aware of the nuances, but few...

Don’t miss these incomes while filing tax returns

8:11:00 PM home

Don’t miss these incomes while filing tax returns With the tax filing season just in, you may have started compiling information to fill your returns or pay additional tax. If you are filing through a CA, chances are that your auditor will ensure that you have paid your taxes (called self-assessment tax), wherever applicable, on income that did not suffer TDS. But if you are filing your own returns, online or offline, ensure...

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How variation in interest rates alters the returns in debt funds

ET SPECIAL

Every time there is a fall in the net asset value (NAV) of debt funds, there is renewed panic. The simple question in the investor's mind is: if there is no default and the fund is receiving its interest income, how and why should the NAV fall? A drop in the NAV of a debt fund can trigger alarm and lead to a precipitous closure for some, as happened in 2008. The market risks in mutual funds are not widely understood, leading to accusations that these should have been avoided somehow.

Investing in a debt fund is quite different from doing so in a bond or fixed deposit. In the case of a fixed deposit, the investor agrees to an unrealistic freeze in rupee return, in exchange for convenience and simplicity. The government no longer determines interest rates in oureconomy, nor are they dictated by powerful institutions. We have transitioned to a market for interest rates, and this market enables money to be lent and borrowed based on the needs and views of a large number of participants.

In such a market place, there are only prices and clearing. There is no right and wrong. If a borrower is willing to pay 8% for a year, and a lender agrees to it, the exchange of money is cleared at the agreed rate. The borrower needs the money; the lender has the money. The market just brings them together and enables the clearing. Alternatively, the borrower might be in the market today believing that the rates are set to rise and, therefore, wanting to borrow today; the lender might be in the market with a view that rates are set to fall and, therefore, eager to lend. We will never know the motivations, nor will we be able to identify why rates move up or down. At the end of the day, as long as everyone keeps their promise, we have a market where rates are determined efficiently and fairly.

When an investor chooses a bank deposit, he does not select the market. This is the reason he settles for a 4% rate on his savings bank account, while the bank itself would be lending its surplus balance for 8% in the call market. The bank is in the market for overnight funds, lending and borrowing as needed, while the saving bank depositor is standing out, content with a fixed rate. The market does not matter to this simple investor. He may get a lower or a higher rate. He is happy with a fixed rate and unwilling to look beyond.

What happens when such an investor chooses a debt fund? He simply steps into the market place for borrowing and lending. In this market, the rates change dynamically based on demand and supply and the views of various players. What is in the market is what he gets. This investor makes 9% on his liquid fund, when the money market rates are high; he makes 4% on his gilt funds, when the interest rates have risen; he makes 12% on his income fund, when credit spreads fall; and he makes 16% on his short-term fund, when rates correct sharply. Mutual funds are subject to market risk.

A debt fund also pools in money and creates a portfolio much like an equity fund, except that it buys debt securities issued by governments, banks and companies. If a five-year bond is issued at an interest of 10%, and the fund buys it, it earns this interest just like any other investor. However, since a debt fund is an open-ended product in which investors can come and go as they please, it accounts for the interest income on a daily basis. Therefore, the NAV of all debt funds will hold a component that represents this steady accrual income.

This income will come to the debt fund unless there is a default. However, if the interest rates in the market move up to 11%, while this bond continues to pay 10%, you cannot have a market where the same good (same issuer, same structure, same rating, same tenor) has two prices. The old bond is less valuable since it pays lesser than the current market rate of 11%. Its price falls. The NAV has to correct for this new value. This is the market risk in debt funds.

Why do the interest rates change? In the normal course, if market participants expect inflation to change, they will modify their expectations for rates. Or if they desperately need money, they will offer a high rate, as they do in March every year. Or, they may seek a different rate given their preferences arising from their own balance sheets. These changes are anticipated, tracked and acted upon by market participants and reflect in prices.

The rates can sometimes change unexpectedly. Last week, the RBI decided to curb speculative positions that may be abetting the rupee's depreciation against the dollar. It wanted to make the rupee scarce, to arrest its slide. A 2% hike in bank rates and in marginal standing facilities was announced. This hurt liquidity in the market and, in response, the rates went up sharply.

What happened to debt funds? They were holding bonds and debt instruments, including money market instruments that were issued at historical rates. The RBI action also precipitated a change in market expectations, where players began to think that the RBI would increase the policy rates too. An increase in market rates meant that the value of debt securities in the portfolio of debt funds fell. A debt fund's steady accrued income of, say, 2p a day (that is 7.4% a year), may not be enough to cover steep changes in the value of bonds arising from variations in interest rates. However, the steadiness of 2p will also ensure that these losses are recovered over time. The funds with longer tenors have too many cash flows in the future and, therefore, correct more when the interest rates increase. The shorter tenor funds typically correct less when the rates change. However, if the change is both unexpected and steep, as happened on 15 July, the correction is significant. Some investors will continue to dislike market risks and seek deposits; others will take the ups and down in their stride as long as they know the pricing is fair. Each to his own.

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Know Your Client (KYC)

Know Your Customer (KYC)

Effective January 01, 2011, KYC has been made mandatory for all category of investors who wish to invest in the schemes of Mutual Fund irrespective of investment amount for all transactions.

What is the Regulation?

Securities and Exchange Board of India (SEBI) has issued guidelines under The Prevention of Money Laundering Act, 2002 (PMLA) which requires Mutual Funds to follow enhanced Know Your Customer (KYC) norms.

What is the Prevention of Money Laundering Act (PMLA)?

The Prevention of Money Laundering Act, 2002 ("PMLA") created under the aegis of Financial Action Task Force ("FATF") forms the core of the legal framework put in place by India to combat money laundering required to be followed by banking companies, financial institutions and intermediaries by administering KYC and other reporting requirements such as suspicious transactions reporting, etc.

What is KYC?

KYC is an acronym for "Know Your Customer", a term commonly used for Customer Identification Process. SEBI has prescribed certain requirements relating to KYC norms for Financial Institutions and Financial Intermediaries including Mutual Funds to 'know' their clients. This entails In-Person Verification (IPV), verification of identity and address, financial status, occupation and such other personal information as may be prescribed by guidelines, rules and regulation.

TO SUMMARIZE:

Step 1 Download and Fill-up the revised KYC form (effective January 01, 2012)

For Individuals : Please Click here for (New) KYC Form

For Non-Individuals : Please Click here for (New) KYC Form

Step 2 Attach the following documents:

For Individuals and Non-Individuals:

Documents evidencing Proof of Identity and Proof of Address

(List of requisite KYC documents for individuals and non-individuals are mentioned in the revised KYC Application Form)

Step 3 In-Person Verification (IPV):

Complete IPV from any of the following:

· NISM/AMFI certified distributors who are KYD compliant

Step 4 Submit the KYC form along with necessary documents At our office.

Please Note:

Please download (See attach file) and print the KYC Details Form both sides on A4 SIZE PAPER i.e front and back on same paper.

Fill in the information as mentioned above in Sections of the Form with black pen. Complete IPV by producing your original ID, Pan Card, Proof of Address ,with a copy of documents on A4 Page (Self Attested) for verification and submit the Form .

· Investor(s) must note that KYC compliance is mandatory at the time of submission of each subscription request with the designated Official Points of Acceptance.

· Applications by investors without valid KYC are liable to be rejected.

· We strongly recommend all our Investors to be KYC Compliant by completing the KYC formalities, in accordance with applicable KYC rules in force from time to time, at the earliest so they can continue to invest with us smoothly.

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What is Systematic Transfer Plan (STP)?

Equity fund investment has the potential of wealth creation through capital appreciation, whereas debt fund investment accounts for consistent returns in the long run. Investor risk appetite plays an important role while choosing between the two and unpredictable nature of equity fund returns normally pulls investors away from them. What if some investor wants best of both worlds i.e. wealth creation and consistency at the same time? This has been made possible by the fund houses, as they have introduced the Systematic Transfer Plan (STP) concept.

Through STP, investors can invest lump sum amount in schemes with stable returns i.e. debt funds and ascertain small exposure in equity schemes, so as to maximize the chances of wealth creation in long run. STP operates via investment of a lump sum amount in a debt scheme (100% debt or with very less equity exposure) and specifying a predefined sum to be invested in any equity schemes of the same AMC at regular intervals. The switching can be in reverse fashion also, depending upon the market scenario. This is in a way similar to SIP(Systematic Investment Plan), resulting in lower risk and higher return.

What is STP?

Systematic Transfer Plan (STP) enables investors to periodically switch mutual fund investments from one scheme to another. First scheme from which money is transferred is called the ‘Source’ scheme and the scheme to which money is transferred is the ‘Target’ scheme. Both source and target schemes should be of the same Asset Management Company. On the date specified by the investor, the amount chosen is transferred from source scheme to target scheme of investor’s choice. This automatic switching repeats itself at pre specified frequencies till the tenure ends.

Benefits of STP

Concepts of SIP and SWP (Systematic Withdrawal Plan) were introduced basically to minimize the risk of timing the market and maximize the return at the same time. Systematic transfer plan functionally is a combination of SIP and SWP, which has following benefits:

· Optimum balance of risk and return - STP ensures consistent return with capital appreciation potential, which is not possible if investment in either debt or equity scheme is done. Individually, debt funds lack capital appreciation potential while equity funds returns are unpredictable in nature.

· Investment Cost Averaging - As mentioned earlier, STP is equivalent to SIP + SWP, hence you keep on buying more number of less costly units and less number of more costly units. This ultimately lowers your cost resulting in enhanced returns.

· Portfolio Re balancing – Investing through STP automatically rebalances portfolio between debt and equity. If your portfolio is debt heavy, STP keeps on allocating more money towards equity funds and vice versa.

Best Time to Invest through STP

There are basically two modes by which you invest in STP.

First case - Source fund is a debt fund and target fund is an equity fund. In this case, investment through STP is recommended when equity market is trading around its peak and future uptrend doesn't seem likely. In this way, you get to buy equity fund at cheaper valuation in future.

Second case - Source fund is an equity fund and the target fund is a debt fund. In this case, investment through STP is recommended when equity market is trading around its bottom and future downtrend doesn't seem likely. In this way you keep on booking profit in equity fund as the market goes up and at the same time your money gets invested in a debt fund with more consistent returns in future.

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What is Systematic Investment Plan or SIP?

SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a Mutual Fund by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in an Mutual Fund. Thus, you can invest in an Mutual Fund without altering your other financial liabilities. It is imperative to understand the concept of rupee cost averaging and the power of compounding to better appreciate the working of SIP's.

SIP has brought mutual funds within the reach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs 1,000 on a regular basis in place of making a heavy, one-time investment.

While making small investments through SIP may not seem appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you handsome returns. A monthly SIP of Rs 1000 at the rate of 9% would grow to Rs 6.69 lakh in 10 years, Rs 17.83 lakh in 30 years and Rs 44.20 lakh in 40 years.

Even for the cash-rich, SIPs reduces the chance of investing at the wrong time and losing their sleep over a wrong investment decision. However, the true benefit of an SIP is derived by investing at lower levels. Other benefits include:

1. Discipline
The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not affect your monthly disposable income. You will also find it easier to part with a few hundreds every month, rather than set aside a large sum for investing in one shot.

2. Power of compounding
Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. Let's explain this with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, A had built a corpus of Rs 12.23 lakh while person B's corpus was only Rs 7.89 lakh. For this example, a rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end-corpus. That difference is due to the effect of compounding. The longer the (compounding) period, the higher the returns.

Now, instead of investing Rs 10,000 each year, suppose A invested Rs 50,000 after every five years, starting at the age of 35. The total amount invested, thus remains the same -- Rs 3 lakh. However, when he is 60, his corpus will be Rs 10.43 lakh. Again, he loses the advantage of compounding in the early years.

3. Rupee cost averaging
This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smooth-en out the market's ups and downs and reduce the risks of investing in volatile markets.

People who invest through SIP's capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.

4. Convenience
This is a very convenient way of investing. You have to just submit cheques along with the filled up enrollment form. The mutual fund will deposit the cheques on the requested date and credit the units to one's account and will send the confirmation for the same.

5. Other advantages
· The entry or exit loads on SIP investments are lesser.
· Capital gains, wherever applicable, are taxed on a first-in, first-out basis.

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Things to keep in mind before selling a mutual fund

Things to keep in mind before selling a mutual fund

If your mutual fund is yielding a lower return than you anticipated and is consistently performing badly than you may be tempted to cash in your fund units and invest your money elsewhere. The rate of return on other funds may look enticing but you should be careful as there are both pros and cons to the redemption of your mutual fund units.

The first thing you need to understand is that mutual funds are not same as stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with the market. Stocks are driven by the "buy low, sell high" rationale, which explains why, in a falling stock market, many investors panic and quickly dump all of their stock-oriented assets.

Mutual funds on the other hand are not single entities; they are portfolios of financial instruments, such as stocks and bonds, chosen by a portfolio or fund manager in accordance with the fund's strategy. An advantage of this portfolio of assets is diversification. There are many types of mutual funds, and their degrees of diversification vary with each of them. Sector funds, for instance, will have the least diversification, while balanced funds will have the most. Within all mutual funds, however, the decline of one or a few of the stocks can be offset by other assets within the portfolio that are either holding steady or increasing in value.

Because mutual funds are diverse portfolios rather than single entities, relying only on market timing to sell your fund may be a useless strategy since a fund's portfolio may represent different kinds of markets. Also, because mutual funds are geared toward long-term returns, a rate of return that is lower than anticipated during the first year is not necessarily a sign to sell.

The following are the situations when you should consider selling a fund, though it is always not necessary but these are situations in which you should at least raise a red flag:

Change in a Fund's Manager

When you put your money into a fund, you are putting a certain amount of trust into the fund manager's expertise and knowledge, which you hope will lead to an outstanding return on an investment that suits your investment goals. If your quarterly or annual report indicates that your fund has a new manager, pay attention. The prospectus should indicate the reason for the change in manager. If the prospectus states that the fund's goal will remain the same, it may be a good idea to watch the fund's returns over the next year. For further peace of mind, you could also research the new manager's previous experience and performance.

Change in Strategy

If you researched your fund before investing in it, you most likely invested in a fund that accurately reflects your financial goals. If your fund manager suddenly starts to invest in financial instruments that do not reflect the mutual fund's original goals, you may want to re-evaluate the fund you are holding.

Consistent Underperformance

This can be tricky since the definition of "underperformance" differs from investor to investor. If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations. However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.

When Your Personal Investment Portfolio Changes

Besides changes in the mutual fund itself, other changes in your personal portfolio may require you to redeem your mutual fund units and transfer your money into a more suitable portfolio. For example you may have need to rebalance your portfolio or you may need a tax break to offset realized capital gains of your other investments and for that you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.

When Selling Your Fund following are the factors you should take care of:

When you are cashing-in your mutual fund units, there are a couple of factors to consider that may affect your return:

Exit loads - If you are an investor who holds a fund that charges a back-end load, the total you receive when redeeming your units will be affected. If your fund has a back-end load, charges will be deducted from your total redemption value. For many funds, back-end loads tend to be higher when you liquidate your units earlier rather than later, so you need to determine if liquidating your units now is optimal.

Tax consequences - If your mutual fund has realized significant capital gains in the past, you may be subject to capital gains taxes if the fund is held within a taxable account. When you redeem units of a fund that has a value greater than the total cost, you will have a taxable gain. So you should check before redeeming your units whether it makes sense after taking taxes into consideration.

Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager. So if your fund is performing badly consistently than you can consider selling it.

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Filing of IT Returns Online

Online transactions are fast catching up in India with almost all transactions being permitted online. Now you can buy life insurance, health insurance, apply for a loan and pay most of your bills including EB bills online. Yes, India is fast catching up with the West, where online is the order of the day for many years.

What about filing of IT returns online?

Yes, filing of IT returns online is allowed for the past many years in India and is fast catching up now. From the Assessment Year 2012-13, filing of IT returns online was compulsory, if the income exceeded 10 Lakhs. About 1.6 crore tax payers filed the IT returns online last year.

The government is planning to make filing of IT returns online mandatory for taxpayers with a taxable income above Rs. 5 lakhs.

Is filing of IT returns online so complicated?

No. In fact, it is very user-friendly. Please go through the steps outlined below. You can complete the whole process in few simple steps:

Visit www.incometaxindiaefiling.gov.in and register yourself using your PAN number.
Download the relevant Excel spreadsheet from the download menu.
Fill the details using Form 16 issued by your employer and other details. Save the XML file generated by the software.
Using the `Calculate Tax’ tab, calculate the tax payable. If there is a tax liability, pay it and enter the challan details.
Confirm the details by clicking the `validate’ tab.
Generate the XML file.
Click on `Submit return’ and upload the XML file.
You will be asked whether you wish to sign digitally or not. Answer ‘yes’ or ‘no’.
You can see the message of successful filing of your IT returns on the screen and can download the acknowledgement.

10. You will get your acknowledgement by email also. Print the acknowledgement form ITR-V.

11. Sign the ITR-V in blue ink and send it to the ‘Income Tax Department – CPC, Post Bag No. 1, Electronic City Post Office, Bengaluru – 560 100, Karnataka’ by ‘Speed Post’ or Ordinary Post within 120 days of uploading your Returns.

12. You will get a mail confirmation, once the IT department receives your ITR–V. If you are not getting the confirmation, send the ITR–V again.

Before proceeding for filing of IT returns online, keep the following items handy:

Form 16 issued by your employer
Details of Section 80 C tax benefits
Any other income like dividend, bank interest, etc.

It is not a complicated exercise, as you think. If you are net savvy, you can do all this by yourself. Otherwise, there are many portals which will help you in filing your IT returns online by charging a nominal fee.

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Prevention is better than cure”, it applies to investment planning too.

Important Points to Keep in Mind during Investment Planning

Investment planning is one of the most important steps in investment process, both for new as well as seasoned investors. Before beginning the investment journey, one should clearly outline the objectives and goals one wants to achieve while investing. Most of the seasoned investors are already aware of the nuances, but few important concerns which new investors need to address are related to return expectation, risk appetite, liquidity, inflation and taxation. In this article, we will try to understand the implications of these variables on investment decision process.

Return Expectation and Risk Appetite

We invest in an asset because it has earning potential and earning will come in the form of returns. Different asset classes have different earning potential together with the risk attached to it. Thumb rule is “High Return High Risk” /“Low Return Low Risk”. In simple terms, what it means is, you need to invest in high risk assets if you want high returns and vice versa. Now the question is how to identify a correct mix of risk and return. Answer to this question lies in the historical risk and return attached to a particular asset class. This data is freely available and you just need to google it. It’s recommended to peg your figures around historical data so as to avoid disappointment in future. Remember, whatever may be your risk appetite; capital preservation is of paramount importance as this capital will be generating future returns for you.

Liquidity and Transaction Fees

While planning investment and choosing asset class, liquidity (how fast the asset can be exchanged with cash) aspect should be properly considered together with the transaction cost. For example, even though real estate/land is a high return asset class, it’s highly illiquid. It comes with a baggage of high transaction cost and due diligence issues. Asset class with high liquidity and low transaction costs is considered a better investment. Equity/gold ETF investment scores above property investment from liquidity perspective.

Inflation

This is the toughest enemy you would face while investment planning and asset allocation. Persistently high inflation (around 7%) now a days, has made savings deposit, fixed deposit and PPF investments highly unattractive. Returns in these investments are around 4% to 8% which barely covers inflation. At the end, you are gaining nothing out of these investments as your purchasing power remains the same. It’s recommended to place a part of your investment corpus in asset classes which act as hedge against inflation, like equities and gold. Investment option for Moderate investors, as it will mitigate risk of inflation up to a certain extent.

Tax Implication

No one can escape tax demon. If we know this reality, then it sounds prudent to take it into consideration while planning for investments. There are some asset classes which are tax exempt and for others, there are ways to invest so as to minimize tax burden. As, for example, equity as an asset class is not tax exempt, but if you invest for long term i.e. more than one year, your capital gains are tax exempt.

Conclusion

Investment planning points mentioned above should be properly addressed, as ignoring any of them will eat away your returns in future. Remember the famous saying “Prevention is better than cure”, it applies to investment planning too.

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Don’t miss these incomes while filing tax returns

With the tax filing season just in, you may have started compiling information to fill your returns or pay additional tax.

If you are filing through a CA, chances are that your auditor will ensure that you have paid your taxes (called self-assessment tax), wherever applicable, on income that did not suffer TDS.

But if you are filing your own returns, online or offline, ensure that you take in to account all your income and pay self-assessment tax if any.

A tax return, without payment of self-assessment tax can be treated as defective soon. A proposal to amend the tax laws to this effect was mooted in March.

What you can miss

If your bank or an NBFC had deducted TDS on your fixed deposit, then you would remember to disclose the income and also the tax deducted while preparing the returns. But many a time, income for which TDS was not deducted would escape your purview. Here are some such examples:

1. Interest income on fixed deposits if TDS is not deducted

Your annual interest income from a bank deposit may be lower than Rs 10,000 (Rs 5000 for company deposits) and as a result, the bank may not have deducted tax. But this does not make the income ‘tax free’. You would have to add them to your ‘income from other sources’ while doing your returns.

In case of recurring deposits with banks, no TDS is deducted, irrespective of the quantum of the interest. But the interest income is taxable. Yes, there is always the running debate of whether tax has to be paid on accrual basis or on receipt, when the deposit matures.

Popular expert opinion is that you may follow one of these (as no TDS is deducted) but paying tax on accrual helps spread the burden (instead of paying it in one go in the year of maturity). Also, sometimes disclosing the income in one shot, on deposit maturity, may even push you to the next higher tax bracket (if you are in the 10% or 20%).

2. Interest income on savings bank

Interest income on your savings bank accounts is exempt up to Rs 10,000 a year. Anything over this will be taxable. As your bank is not going to deduct TDS, do remember to include this income while computing your self-assessment tax.

3. Interest income on cumulative deposits

You may be holding a cumulative deposit that is maturing after a couple of years but your bank or company may have already deducted TDS on it. Besides intimation from the bank/company, you will actually see this in your 26AS Tax credit statement (available for you to view through your bank account or in the Income tax website).

It may be better for you to disclose the respective income in the year in which such TDS is deducted, to make it easier to correlate.

4. Interest income from bonds/debentures

If you have been holding infrastructure bonds that you bought a couple of years ago, remember only the principal amount would have received tax deduction. Interest payout from such bond is a taxable income. Again, if these did not suffer TDS, you may miss them out in your calculations. Do search through your bank statements or intimation from the company on interest credited for the year.
But remember, interest on tax-free bonds (such as the NHAI bonds) is exempt from tax.

5. Capital gains on mutual funds and equities

If you redeemed a debt fund or Fixed maturity Plan (FMP) in 2012-13, check if you have made any capital gain. If so, do take them in to account in your tax filing. Add them to your total income if the gain is short term (less than one year) or calculate the profits with indexation/without indexation (whichever is beneficial to you) and apply 10% or 20% (with indexation) as the case may be to compute tax.

Summary of your capital gains.

If you sold your shares within one year of purchase, it attracts short-term capital gains tax. Check your brokerage account to know such transactions.Do classification of your short-term and long-term gains.

Remember to pay your self-assessment tax, if the total tax calculated falls short of the tax paid by you so far either by way of TDS (deducted by employer, banks or companies) or advance tax. This may prevent any penalty/interest being shelled out by you later.

Category: home

How variation in interest rates alters the returns in debt funds

Know Your Client (KYC)

What is Systematic Transfer Plan (STP)?

What is Systematic Investment Plan or SIP?

Things to keep in mind before selling a mutual fund

Filing of IT Returns Online

Prevention is better than cure”, it applies to investment planning too.

Don’t miss these incomes while filing tax returns

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How variation in interest rates alters the returns in debt funds

How variation in interest rates alters the returns in debt funds

Know Your Client (KYC)

What is Systematic Transfer Plan (STP)?

What is Systematic Investment Plan or SIP?

Things to keep in mind before selling a mutual fund

Filing of IT Returns Online

Filing of IT Returns Online

What about filing of IT returns online?

Is filing of IT returns online so complicated?

Prevention is better than cure”, it applies to investment planning too.

Don’t miss these incomes while filing tax returns

Don’t miss these incomes while filing tax returns

But if you are filing your own returns, online or offline, ensure that you take in to account all your income and pay self-assessment tax if any.

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How variation in interest rates alters the returns in debt funds

Filing of IT Returns Online

What about filing of IT returns online?

Is filing of IT returns online so complicated?

Don’t miss these incomes while filing tax returns

But if you are filing your own returns, online or offline, ensure that you take in to account all your income and pay self-assessment tax if any.

What you can miss

Archive Blog

Pages