Income Tax and Financial Decisions

December 16, 2018

What gave me the idea to write down this blog post? The recent announcement by Govt. of India that NPS is now EEE. Before going more into my post, let’s understand what actually happened in case of NPS? As per earlier rules, at the age of 60, whatever corpus you were having, below were the rules for utilization of corpus.

  1. Mandatory purchase of ANNUITY from minimum 40% to maximum 100% of corpus. Annuity itself is to be purchased from Life insurers, operating in India. This ANNUITY is fully TAXABLE.
  2. 40% corpus can be withdrawn Tax free.
  3. 20% corpus can be withdrawn but it’s Taxable

The proposed change is not for Point no. 1 and 2 above. Only Point 3 above. Now this 20% withdrawal is also Tax free. So that’s your E-E-E in NPS.

I recently asked to group members of our facebook group – asan ideas for wealth. Barring EPF (along with VPF component), PPF, Sukanya Samridhi Yojna and interest from Tax free bonds, which other investment instrument has unlimited tax-free income? Point to be noted, Bundled insurance policies were not considered as these are not pure investment instrument. The correct answer is None. Till last FY (2017-2018), the LTCG from Direct Equity and Equity MFs (where STT is paid) was tax-free, without any limit, but this route has been blocked now.

Now, few of you may ask – What do you want to convey? As that Professor asked in movie 3 Idiots – Kehna kya chahte ho? Here it goes.

We, the average retail investors, put too much attention on INCOME TAX and the instruments, where the income MUST BE TAX FREE. The budget announcement of LTCG from Equity is not accepted well by the investor community. Let me remind you – Before Introduction of STT (securities transaction tax) in October 2004, by the Govt of that time, the LTCG from Equity was fully taxable. It was having dual Tax rates – either flat 10% or Indexed gains at 20%. The tax payer was allowed to opt any one of the rates, where the tax rate is favorable.

If the Equity LTCG was taxable, why it was made Tax free? Look closely. It was not tax-free from October 2004 to 31st March 2018. Govt charged the STT at a very small rate and let us enjoy the major part of gains. Why? At that time in 2004, not many of us were investing in Equity. Those were investing, were not reporting properly. The Govt was not having requisite infrastructure in place to track down each and every individual transaction. So Govt went into a compromise and allowed the very small rate of STT to be applied at source (Stock Exchanges or AMCs), on transactions. This way, Govt. was able to capture all the transactions happening in Stock exchanges and AMCs. In parallel, KYC norms, linking of PAN, CBS in banks and the very Income Tax department’s own infrastructure were prepared. Once all things become ready, it was not the question of WHY? It was, WHEN? the Govt. bite the bullet and announced the reintroduction of Tax on LTCG from Equity.

In parallel to above, Govt has blocked/tried several other routes of either tax-free income or tax evasion. Sample this –

  1. Earlier Dividend income from Direct Equity was tax-free without any limit. Now Dividend Income more than Rs. 1000000 (in words Ten Lakh) is taxable at flat rate of 10%.
  2. First through Direct Tax Code in August 2009 and later on in Budget 2016, Govt tried to make EPF and PPF Taxable.
  3. 1% TDS on Property deals, where property value is more than Rs. 5000000 (in words Fifty Lakh) since 2013
  4. Restricting Home loan interest benefit on rented properties to just Rs. 200000 (in words Two Lakh)
  5. Mandatory linking of PAN with almost all Financial Transactions

You, the blog readers can point out several other measures.

What’s TAX FREE today, we can’t take it granted to remain TAX FREE forever. Today EPF/PPF/SSY are tax-free. The tax-free bonds are not issued fresh, hence these are now already not a new source for fresh money input to earn tax-free income in future continuously.

So my dear friends, stop cribbing about addition of Income Tax on old tax-free instruments or not getting new instruments. Be flexible. Just imagine, if EPF is merged into NPS, what’ll you do? If investment in PPF is restricted for those earning income above a cut off point (NRIs can’t invest in PPF already)? If Inheritance is made Taxable?

What is way forward? Start creating multiple Tax identities within family, within rules and legal frame-work. Those of you, who are already earning higher Tax rate primary income, should focus on HOW TO SHIFT SECONDARY INCOME TO SOME ONE ELSE’S NAME in the family.

Important point – I’m asking to do Tax Avoidance and not asking you to go for Tax Evasion. Remember the TAX AVOIDANCE is known as TAX PLANNING and allowed within the rule book. TAX EVASION  is not allowed.

IMPORTANT POINT- When you people read the word GOVT – you associate this with the sitting or representing face of the chair (be it Prime Minister or Finance Minister). If you look closely in all the information provided above, you’ll notice a pattern, irrespective of who sit in that chair, the whole system, the administration, the machinery, is moving in ONE SINGLE DIRECTION – MAKE EACH AND EVERYTHING TAXABLE. To me, the Govt is always the system, the administration, the machinery, the mechanism and of course the Babus (the bureaucrats, who are actually running the show).
Please do tell me, how are you planning to become flexible and future shock proof your portfolios from the impact of INCOME TAX? I’m waiting for your replies.

P.S. – Please stay away from making any political comments in favor of or against one political party/thought process or other side.

Advertisements