Large Cap funds

August 28, 2008

Hello,I’m a long term investor with a perspective of at least 10 years. How many Large Cap funds should one have? Sundaram Select Focus, DSP Top100, HDFC Top 200 & Birla Frontline Equity – should one have all these 4 Large Cap Funds or any 1, 2 or3? My Portfolio comprises 2 Large Cap Funds – Sundaram Select Focus & DSP Top100 (out of total no. of 6 funds). If I add HDFC Top 200 & Birla Frontline Equity to my Large Cap funds, wouldn’t it be like buying the same shares; bcoz the FMs of these Funds might have bought almost similar shares. Kindly advise.
Long Term Investor

Dear friend, Normally an investor should have following break up in terms of total no. of MF plans.
3 Large cap
1 Mid cap
2 Multicap, diversified, opportunity
1 sectoral
1 balanced
1 speciality fund (here i mean gold funds or global funds to reduce over all risk).
total 8-9 funds r sufficient in any portfolio for a long term growth. the large cap funds should form the core of ur portfolio, hence the over all exposure to this category should be around 50-60%
Mid cap 10%
Multicap – 15-20%
Sectoral – 5-10% but zero before 3-4 years of retirement.
Balanced – initially zero if investors age is in 20s & should increase with age & by the time the person retires, it should be around 40%.
Speciality – 10% of ur initial portfolio.
Plz. note i have not used the word Ideal, as nothing can be ideal for everybody. U may take ur own break up & invest accordingly to reach ur goal post.



Tax treatment of Debt MFs & FMPs for NRI

August 27, 2008

Dear AshalPls help me with this.You seem to be a GURU in taxation.I am a NRI want to invest in DEBT/FMPs.Pls advise the Tax on STCG ( 30%) & LTCG (20%) whether will be deducted at source.Since I am a NRI, I dont have resident income, so in that case can i File IT return and claim refund for the STCG & LTCG amount if interest income is less than the taxable income. Pls advise.

Dear friend, I’m not a guru on Tax matters. The TAX guru is respected Subhash Lakhotiaji. For ur query – As u r NRI, in case of ur investment in DEBT/FMPs, the MFs ‘ll applied the TDS & ‘ll issue the Form 16A for the same. As u don’t have any other resident indian income (salary, rent, interest etc.), first u can claim the zero tax exemption limit of 1.5L even if there is any more income from STCGs of debt/FMPs, u can still sat off ur 80C investment against such income. To claim ur refund, yes u ‘ll have to file ur returns.



Income Tax On Fixed Deposite

August 27, 2008

Dear Sir,I am salaried person of a PSU and Tax payer in the bracket of 30%.I want to invest Rs 50000/- in fixed deposite in view of increased interest rates.However, to save the tax on the interest earned on proposed Fixed deposite, i want to buy it in the name of my spouse who is a house wife and have PAN Card.So i am planning to buy the FD in her name for a period of one year and submit her IT return as individual.I request you to kindly advise me whether it is allowed as per Income Tax Act.Regards Sanjeev

Dear friend, As u told, u r in 30% Tax slab, I assume to avoid Tax on FD interest, u r planning to invest in ur wife’s name. My dear friend Tax evasion is not legal. My dear friend, u can’t avoid it, as the income generated from any cash amount gifted to spouse, ‘ll be clubbed with income of original person whose money was it, Under clubbing of income provisions of Section 64. If u do want to take benefit of high interest rates with low tax on it, plz. invest in FMPs (Fixed maturity plans) of MFs of duration 1Y & more.Due to indexation benefit, ur net tax liability on gains from such FMPs ‘ll be far less than what u ‘ll pay as tax on bank FD interest.
Ashal …

Date for calculating Capital Gains

August 27, 2008

Dear Ashal, Kindly inform that from which date is the purchase of my flat considered valid. From the time of booking, from the time of registration or from the date of possession letter received. As this shall help me calculate whether it will be a short term or long term capital gain as the time from when I booked the flat to the time I will receive possession is spread on 3 yrs gap.Thanks….Jas

Dear jasper, Although i don`t have right now with me the exact details of some recent judgements of Honourable Supreme Court & various High courts (In terms of Case Nos., year of J`ment, respondents etc.), the moot point of all such j`ments was, The rights of ownership `ll be calculated from the date of making considerable & adequate payment to purchase the property (normally it relates with the date of registration of property). In such j`ments, the h`ble courts observed that, during prolonged delay of possession (for any reason), The rights over the property were with the purchaser & delay of actual possession was simply the delay in actual use of property not delay in its ownership.So u may consider ur date of registration for capital gains purpose.


HUF formation

August 27, 2008

QuestionI have a small family with my wife and a daughter. I wish to know whether i can form a HUF or not? Also how can i create capital in the HUF – if by gift proceeds from near and dear ones, what will be the tax implications for the same?

Answer – Dear Friend, No matter ur child is a daughter or a son, Ur HUF was already formed by the day u married. What u r asking for, “I wish to know whether i can form a HUF or not?” is simply to form capital in ur HUF.

As HUF is a virtual Tax identity, there can’t be any blood relatives of an HUF. Hence zero Tax on Gifts received from Blood relatives can’t be claimed. For first year, as no capital is there, no income ‘ll accrue to HUF, hence in first year, u may receive a maximum of 2.5L Rs. as gift from ur near & dear ones. out of this 2.5L Rs. invest in 80C instruments, mainly ELSS to get money early as lowest lock in period is there of 3 years. After investing in ELSS, ur HUF’s net taxable income ‘ll be 1.5L Rs. only in the current FY. It ‘ll be fully tax-free.For every following year, receive Cash gifts only upto the limit that HUF’s total income from other taxable sources & gift remains under 2.5L Rs.

One interesting part is, ur HUF may receive gifts in kinds of any valuation from ur near & dear ones. For example u open a demat acct. in ur HUF’s name. Now ur relatives & friends gift ur HUF, Eq. shares worth of 20L Rs. under gift. Ur HUF may sell these shares immediately to have liquid cash. The most interesting part of this, “Gift in Kind” strategy is ur HUF can claim tax free LTCGs for these Eq. shares, if the total holding period of these shares including original holder’s (the doner) holding period is more than 1 year & shares r sold thru Stock exchanges & STT is paid on sell.I hope the above info may be of ur help.



How to get a TAX FREE Pension

August 19, 2008

Now a days a lot of young males & females are investing in Pension Plans offerd by almost all Insurance Cos. in India with a target to save enough for their sunset years. Once they are retired from their jobs, the accumulated corpus ‘ll provide the handsome pension, as the TV commercials of these Insurance cos. showcase.

If life is so simple, then there should not be any problem on earth. The basic problem with all such pension plans & investors who are investing in these plans, neither the plan providers (read Ins. cos.) are giving full details nor the customers (investors) are aware regarding their future – 1. What ‘ll be the accumulated corpus?

2. what ‘ll be the appx. returns (read pension)?

3. What is tax treatment of pension?

4. till how much time, the pension ‘ll be given?………

Not many people give serious thought on these aspects. The most cruicial part of retirement planning thru these pension plans is – people are not aware, How the income tax liability/applicability ‘ll impact their over all pension.

1. Premature Withdraw – If due to any reason, the person, wants to premature withdraw of this pension plan, the surrender amount ‘ll be added to the taxable income from all other sources in the Financial Year of Receipt of such surrender value.

2. Start of Pension – At the time of start of pension (also known as vesting age in Insurance Cos.), The investor may withdraw a max. 1/3rd amount of her/his accumulated corpus till date as Tax free Cash commutation. Balance ‘ll be used for pension generation. As per IRDA guidelines, the investor has option to put remaining amount with any Ins. co. which is offering max. pension on this corpus.

Normally people prefer to start pension @ age of 60 years. Now comes the most interesting part of taxation on pension plans. Whatever amount received as pension ‘ll be added to the income from all other sources in the relevent financial year & taxed accordingly. At the same time, the cash commuted part (if opted for) ‘ll also be invested in safe avenues like SCSS, Bank FDs, PO schemes, Etc. The interest earned from such investment as already taxable. Hence the total pension generated from accumulated corpus as well as interest income from CASH COMMUTED part is taxable.

Now comes the question – How we can manage to avoid such income tax on our pension?

If an Investor, wants to invest in UNIT Linked Pension Plans (ULPP) to receive pension, it is better to invest in whole life ULIP or at least age 75 ULIPs. The investor should note here that money received from Life Insurance policies are tax free under section 10 (10) (D) as per current indian tax law. So once the investor reaches the age of 60 (the noraml retirement age) s/he may start withdrwaing tax free pension from ULIP in the form of partial withdraw.

As already mentioned these withdrawls ‘ll be tax free. the added advantage in case of ULIPs as replacement of ULPP is, one can plan her/his withdraw according to need whereas in case of ULPP, a fixed sum ‘ll be given no matter, ur actual requirement is less or more than it.

While selecting ULIP as pension plan, always try to invest in the ULIPs which offers lowest cover multiple say 5X or 10X of ur annual prem. & the same time plz. don’t overlook the other aspects of ULIPs. Fund management charges, policy admin charges, Prem. allocation charges etc.
Hence make a wise call & if u r really interested to invest for ur pension, invest in a whole life or age 75 ULIP to get a “TAX FREE PENSION.”

Equity Investments: Tax Impact

August 15, 2008

“Equity and efficiency are complimentary, not contradictory…“ – Dr. Manmohan Singh

Equity investments can be in the form of direct investments through equity shares or indirectly through mutual funds. Balanced funds with equity exposure above 65% in Indian companies traded on a stock exchange are treated as equity from a taxation standpoint.

Dividend Distributed

Apart from capital appreciation, one can also earn returns by means of dividend declared by the company/fund. These dividends are tax-free in the hands of the investor, and there is no dividend distribution tax either on “Equity“ mutual funds as per the definition above. This is so because when companies declare dividends, there is a dividend distribution tax that is paid by the company. This has no impact on the investor.

Securities Transaction Tax (STT)

The point which is often ignored is STT that is applicable on purchase/sale of equity shares, units of equity oriented mutual fund (delivery based) at 0.125%. For non-delivery based sale, 0.025% is applicable on transactions, sale of derivatives/options would attract 0.017% STT. Hence, they do not escape from the ambit of taxes irrespective of the holding period.

Computing Date of Holding – Special Scenarios

Shares acquired as a gift

Where one has been gifted equity, the period for which the shares were held by the previous owner (the person who gave the gift) is to be included in the holding period. The cost of the shares incurred by the donor of the gift is considered to be cost of benefactor of gift.

Shares acquired as inheritance

Where one has inherited equity, then the period for such shares will be from the date of transfer (to the one who has inherited the equity). The purchase cost will be the Fair Market Value (FMV) as on the Date of Transfer.

Rights shares

For right shares, the period of holding will be computed from the date of allotment of the shares. The amount actually paid for purchase of the rights shares is taken as cost of the shares.

Bonus shares

When one receives bonus shares, the period of holding is computed from the date of allotment of the bonus shares. Cost of bonus shares is taken as nil.

Shares listed Overseas

Shares listed overseas and mutual funds investing in overseas stock (with Indian traded equity shares composition 65%

Capital Losses

Since long-term capital gains earned on equity investments are tax-free, long-term capital losses incurred on equity investment cannot be set off to reduce taxable capital gains.

Short-term capital losses incurred on equity investment can be set off against any capital gain (long-term or short-term). If in the current year there is no taxable capital gain to set off the loss against, one can carry forward this loss for 8 years and set it off against future taxable capital gains.

Plan well- you can now reduce the taxes on your capital gains from equities.