Why one should file tax return?

Why one should file tax return?

Team Crawfin/ Harshal Jawale, CFP^CM

We as financial advisors frequently come across investors who feel filling tax returns is not necessary since taxes are already paid by the employer. We here discuss why it is important to file your tax returns every year without fail.

1.       Birth of TDS and its role in tax filling

TDS meaning tax deducted at source was introduced so that taxman can get each and every entry of your income; from employer for salary or from bank in respect of interest income. Today TDS is deducted from every income at a rate of 10% and this tax is paid to taxman on behalf of you while actual tax liability (rate ranging from NIL to 30%) is left to be assessed for you. One may view his tax credits from form 26AS and confirm tax payment made by employer or bank. Hence note every income where TDS is deducted is already been notified to taxman.

2.       Penalty on late tax filling

In the current year previous year is 2011-12, assessment year is 2012-13 and it ends on 31/03/2013. There is no liability for late filing of income tax return up to 31.03.2013 and after that assessing officer (AO) can impose a penalty of 5000, and that is also his power which he may or may not exercise after giving due hearing to the assessee. If there is tax due after deducting advance tax, TDS and self assessment tax then interest will be applicable @1% per month.

3.       Loss on Tax Refund amount

An individual is expected to maintain records of income for 7 years by the tax department. Let us say if one has not filled tax return for this year but in next year if he faces a situation where tax is cut more than estimated and he seeks tax refund. Please note in such a case assessing officer will slap a notice first to file this year tax return with penalty and only then take the case of next year refund in hand. One may expect such notice for any of the 7 years before this year irrespective of refund-like issue.

4.       Re-assessment of old tax filling

The Income Tax Officer (ITO) has the power to re-assess / reopen cases where he believes that income has escaped assessment. Such power is vested with the ITO up to 7 years from the end of the financial year subject to certain income criteria. This means that even if you have not included certain income in a particular year, the ITO could possibly re-open your case & get you to pay the tax on the same in any future years. The ITO is empowered to levy a penalty on you, which could be up to 3 times the tax that was evaded by such concealment of income.

5.       ITR – V acknowledgment of tax filling

It is one of the pre-requisite documents for passing of loan from bank or while completing employment related visa formalities.

“Wealthy Investments need Healthy Methods”

Investing in Fixed Deposits - Banks

Investing in Fixed Deposits - Banks

Source - Team Crawfin/ Harshal Jawale, CFP^CM

 

Most investors today are refraining to invest into equities and are looking to increase exposure to fixed deposits. Though it is sensible to lock in surplus funds at higher interest rate which may be just peaking out, here we lists few things that you must know before investing into fixed income options –

1. Fixed deposits are not completely safe

Before this recession investors used to think that fixed deposits are the safest option. Banks all over the world of all sizes when forced to shut down, we realized that even FDs are not safe. In fact when banks go bust we may even loose principal amount (forget returns).  In India we may not have faced such situation (thanks to RBI) except some co-operative banks but then such situation always come as a surprise. We also have Deposit Insurance and Credit Guarantee Corporation (DICGC) that insures deposits of up to Rs 1 lakh per customer across all branches of a particular bank.

2. Premature withdrawal attracts penalty

We often tend to book FD for higher duration because it offers 25-50 bps (0.25%-0.5%) extra. But we also need to note that if we happen to break FD before maturity then bank usually slap 100 bps penalty lowering our effective return. So most advisors recommend us to book FD for shorter duration and then renew. We disagree with this, as it may sound fit in theory but in practice it doesn’t work. We always recommend our investors to book FD for 3-5 years (tenure that offer highest interest rate). This is a tenure where usually investor has clear idea of his fund requirement plus we often seen that money just lies into saving account for many months. Instead we believe it is better to book FD for higher duration and then be ready to break FD if need arises. This also ensures higher interest rate earned which may not be available at the time of renewal.

3. TDS is just an interim tax

As per present income tax guidelines, banks are required to deduct tax at source (TDS) on deposits if the total interest earned on all your fixed deposits in a bank is more than Rs.10,000 in a financial year. However, the depositors can claim the credit for such TDS in their income tax returns.

In case of resident individual and HUF, for a payments upto Rs. 10 lacs, TDS is  deducted at a rate of 10.3% (including education cess). But this is not the complete tax liability against the returns earned. We need to include this interest income into our total income and pay tax according to our tax bracket. So if you fall in 30% tax bracket i.e. total income above INR 10 lakh/pa then you must pay remaining 20% (tax liability-TDS) tax amount before tax filling every year.

4.       Form 15G & 15H

The form 15G and 15H are submitted to banks by depositors who DO NOT want TDS be deducted from their interest earned on fixed deposits.  A person who is below 65 years can file the Form 15 G. In order to be eligible to furnish Form 15G, the non-senior citizen investor needs to fulfill the following two conditions:

§  The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil; and

§  The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab

A person of 65 years or more is eligible to file Form 15 H This form can be submitted by senior citizen only if tax on estimated income of the senior citizen is NIL.

5.       Flexi Fixed Deposit

Flexi-deposits are similar to savings accounts. The only difference is that on the basis of your regular cash needs, you could set a limit and instruct the bank to transfer the balance of your idle money to the term deposit.

This may be the best option to park funds as it provides liquidity plus term deposit interest rate. But they fail to realize that the term deposit rate which never shown clearly by the banks is actually rate for 90 days which is often 5%.  According to us it is still a good product but only for short term where liquidity is preferred over return. This cannot be replacement to fixed deposit.

          “Wealthy Investment needs Healthy Methods”

Consumers do not understand what financial planning is and, due to which, they don't value it

Interview: How financial planning is gaining importance in today's world April 10, 2012 Noel Maye, CEO, Financial Planning Standards Board, USA, talks to Tanvi Varma about the intricacies of financial planning in India and current standards of the advisory industry.

Source – Money Today

What are your views on the current state of awareness on financial planning in India? Do you see a rise in awareness levels with a rise in the wealth quotient? 

Awareness of financial planning in India is low, but this is pretty consistent with the state of awareness in a lot of other countries where we have our programs. Consumers do not understand what financial planning is and, due to which, they don't value it. 

The key element to a financial planning certification is financial literacy, which makes it important to improve overall literacy levels. As wealth increases it tends to change the mindset. When consumers are in a state of subsistence, wherein they live on a day-to-day basis, it is hard to plan your finances. As wealth increases you have something you need to protect or multiply.

While awareness levels are currently low, we are seeing an improvement globally, including in India. Consumers are living longer and in retirement than as part of the work force. Regulators and governments are pulling away from guaranteed pensions and employers are pulling away from offering lifetime employment. Consumers now need to take on the responsibility (of creating wealth).

Do you think that the need for financial planning in India is different compared with other countries, especially the developed world? 

Culturally, in India, the structure of a family is usually strong and extended. This means it is not uncommon for Indians to be involved in taking care of their parents, grandparents, their children's education or marriage and so on. 

To accomplish this, one needs to have an extended financial plan. This adds a measure of complexity and needs to be factored in by a financial planner, unlike in western culture or anywhere else where the planner only deals with a particular client's individual issues.

Typically, problems and approaches are common everywhere and markets tend to evolve. Markets that were focused on transaction or product selling, where individuals went to different people for different needs, are now seeing a shift to wanting a one-stop solution provider, someone who can plan your whole life and give you a solution in its entirety. Increased responsibility and complexity leads to this change.

Things are better when you have professional help. In 2008, people lost a lot of their wealth and realised they did not want to undertake this journey (of planning their finances) on their own. During this period, certified financial planners (CFPs) gave feedback that their clients stayed the course that had planned for them. 

Education and trust helps in developing this. Investors understand that volatility will come and that risk exists but they still want to stay invested, now more than ever. India was known to be a saving country. 

Earlier investors wanted tangibility, to be able to invest into things they could see and so they invested in gold, real estate etc. Now, there has been a shift in mindset to investing in stocks, bonds, mutual funds and so on.

Do you feel there is a need to strengthen long-term financial security of in India? 

Yes, it is very important to create retirement funds. Because India does not have social security in place yet, you are in a better position to understand financial planning (for retirement). 

Europe has a very solid social security system in place and yet, with governments going into debt, what has been telegraphed to consumers is that they may not be able to fulfill all obligations. The US has also indicated that while social security is there and the government will pay a small part of retirement income, they might need something more for financial security.

Even with such systems in place, these have not been designed to cover all your needs or designed to protect you from impoverishment. People want to maintain a lifestyle during retirement - commensurate or better than what they have had during their working life. Whatever the social security structure, it is never enough; you must take care of yourself.

If we look at the Australian model they have superannuation, while in America it is called the 401K. Individuals, while they are earning steadily, contribute to their retirement with pre-tax dollars and there is a matching investment made by their employers. The notion of letting people save pre tax for retirement is what motivates them. 

In the US and Australia, it is money that was never part of their salary that is being put into the retirement fund and so they won't miss it (while they are working). Given the opportunity to save pre tax and with access to financial advice, one can improve one's financial well being.

Since the primary role of the board is to raise standards of financial planning, how important do you think is the need for the board to work in tandem with financial regulators in India? 

There already is a relationship between FPSB and regulators. The whole of United Kingdom has one regulator, the Financial Services Authority, while India has five or six dominant regulators and the United States has about 200, which includes state securities regulators, state insurance regulators and federal regulators.

The regulator's function is straightforward, to set a barrier that people must pass to get into the financial advisory space, but it is set sufficiently low so that you don't deny people livelihood. 

FPSB sets professional standards for those who wish to practice at a higher level with more experience and qualification. Regulators are here to see that people follow the norms. We have seen a shift in approach by regulators globally. In the past it used to be a rule-based approach and then there was a shift to a principles-based approach, where they will give you general guidance but trust you to get it right. 

However, post the global financial crisis, the pendulum has swung. Regulators are back with consumer protection-whether consumers are protected, how they are protected, are advisors competent and assessed, is the remuneration adequately disclosed etc. So while we create standards for profession, regulators create barriers to entry and other norms.

Are certification standards different in different parts of the world? 

All our CFP certifications have the same standards and frameworks. FPSB India, for instance, takes global frameworks and localizes it so that it covers Indian products, laws and regulations and delivers financial planning within that context. So, we have global standards but local programmes.

Why do you think there is a greater need for financial planning for women, who are increasingly entering the workforce? 

Yes, (reports show that) women live longer than men and so statistically she will need retirement income for a longer time. This makes financial planning for retirement more important for women. Also, women usually have to leave the workforce to have children, which means they are bound to miss promotion opportunities. Hence, at the same age, they're earning comparatively lower than men. This means they are at a different position and have different pension benefits on retirement.

Do you feel that entry norms to act as independent financial advisors or brokers should be strengthened to reduce mis-selling? 

We have an exam for entry, which tests competency and also a registration process. Several of our affiliates have been approached by governments to manage the examination process and registration for the broad advisory community. 

We need to know who is in the field, whether they are qualified and if there is someone who can hold them accountable. We are one of the few organisations the CFP certification can be taken away.

There is a lot of contention on the appropriate pricing structure for providing financial planning services. What is your opinion? 

People have always paid for financial advice and products, they just didn't know it. Commissions and charges were built in. People will not pay for something they don't value and they will always pay for value. If consumers believe that the financial planner's advice will be useful in securing their finances, why wouldn't they pay for it? 

It is like going to a doctor for professional advice, you go to him because he is qualified to practice medicine and can give you a diagnosis that addresses your ailment. You are willing to pay for this advice as you see value in it.

Once investors start seeing financial planning as a professional engagement and an advisor as someone offering a service of value, they will pay. Of course, pricing will differ based on the advisor's experience, qualification, the levels of service and so on.

All banks must issue savings account passbook: RBI

The Reserve Bank on Friday directed all banks to offer the passbook facility, without any charges, to all customers with savings account .

"It has come to our notice that some banks are not issuing pass books to their savings banks account holders (individuals) and only issue a computer generated account statement even when the customer desires pass book facility.

"Banks are, therefore, advised to strictly adhere to the instructions...," the Reserve Bank of India (RBI) said in a notification.

Under the existing rules, banks are expected to offer pass book facility to all individual savings banks account holders.

In case banks offer the facility of sending statement of account and the customer chooses it, banks must issue that on monthly basis.

At present, some of the private sector banks do not provide the pass book facility. Meanwhile, in another notification, RBI has asked banks to ensure that demand drafts of Rs 20,000 and above are issued with account payee crossing.

"Instruments with account payee crossing are required to be credited to the payee's account and not paid in cash over the counter. However, some unscrupulous elements use demand drafts without any crossing for transfer of money as an alternative to settlement through cash," RBI said.

In view of concerns raised, it said, RBI reiterates that banks shall strictly adhere to the instructions and not collect account payee cheques for any person other than the payee constituent.

Banks may note that the above prohibition and relaxation shall also extend to drafts, pay orders and bankers' cheques, RBI notification said.

Exposure to bank stocks begins to hurt LIC badly

Source – Business Line

Life Insurance Corporation of India bought 1.584 crore shares of Punjab National Bank at Rs 1,003.69 each last week. By Friday, the last trading day of the week, the stock slipped to Rs 926, a decline of about 8.4 per cent.

LIC has not been very fortunate in its decision to buy the shares of 12 other public sector banks last week either. The shares which LIC agreed to buy or has already bought, lost between 0.8 per cent and 8.4 per cent of their value.

BIG LOSS

Such mark-to-market losses have cost LIC roughly around Rs 423 crore. Taken together with the price at which it bought the shares of ONGC, the total loss works out to Rs 1,800 crore.

While the latest new premium collection figures are not available, such losses work out to almost 9 per cent of new premium collected by LIC until November 2011.

LIC is confident about its investment in the oil major, the single largest cause of its mark-to-market losses. “We have no regrets about the ONGC issue as we are a long-term investor. The oil company has sound fundamentals,” said an official from LIC.

According to an insurance analyst with a domestic brokerage, these are all ‘safe' investments. “Do you think, ONGC will quote below Rs 300 forever?” he retorted, adding all these companies had sound fundamentals and there was nothing wrong in giving some ‘premium' to buy these shares in bulk.

However, as Mr Shriram Subramanian, Founder and Managing Director at InGovern Research Services Pvt Ltd, in which Mr Mohandas Pai, the former whole-time director of Infosys and a shareholder activist, is an investor, said, “The larger problem is that LIC is adhering to the dictates of the Government to subscribe to the preferential allotments of PSU banks. Earlier, it was the Government which would recapitalise the shares, but now because of the fiscal deficit, they are pushing LIC to recapitalise the shares. This is not the correct precedent.”

The preferential allotment has skewed LIC's portfolio and would increase the risk of the portfolio, said Mr Subramaniam. “The insurance major is an investor of large resource and not (an investor) of last resort. It being an investor of the ‘last resort' as in the case of ONGC is being replicated here as well,” he added.

Banks are raising funds to meet their Capital Adequacy Ratio, while in the case of ONGC, the Government raised funds by selling five per cent stake in the company to meet its disinvestment target.

Source – Team Crawfin/ Harshal Jawale, CFP

With LIC making investments not best in favor of its investors but in favor of Government, we expect LIC investors will not be getting returns at par with other insurers/mutual funds. Although this has been trend for decades but we found that in recent years troubled government has been asking too much from LIC. Substantial portion (88%) of ONGC share that were offered was purchased by LIC at a price that found no takers.

ELSS better investment option than PPF, NSC: Crisil

Source - Moneycontrol

Investments in an Equity-Linked Savings Scheme (ELSS) of a mutual fund have yielded higher returns compared to other instruments like PPF and NSC in the last few years, a report by Crisil has said.

"Our analysis shows that ELSS gave 26% and 22% annualised returns over three and 10 years, respectively, vis-a-vis 8-9% offered by traditional tax saving investment products such as public provident fund (PPF) and national savings certificates (NSC)," Crisil said.

Crisil added that interest on employees provident fund (EPF) for 2011-12 was slashed to 8.25% from 9.5% in the previous year and thus ELSS can act as a strong alternative to investors.

Though the traditional debt products are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns in the long run.

The PPF accounts fetched 8.12% over the last 10 years and in the similar period, the NSC gave an interest of 9.10%. The average inflation over the past 10 years stood at 6.05%.

"ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed the Nifty 500 across three and 10 years. With average inflation around 7% over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14%, which is significantly higher than returns offered by other tax saving products," Crisil's senior director Mukesh Agarwal said.

The rating agency, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.

"Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns.

Further, investors must choose funds that have performed well both in good and bad times," Crisil head for Funds and Fixed Income Research Jiju Vidyadharan said.

It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.

Era of Tax Saving Infra bond is over

Source – Team CrawFin/ Harshal Jawale, CFP^CM

Just recently Indian individuals realized the importance of option of tax saving through infra bonds over and above INR 1 Lakh u/s 80C. After many failed attempts by many infra companies in the past to complete the subscription, investors were starting to invest into Tax saving Infra bonds. But budget 2012 played a spoilsport to this instrument. Section 80CCF under which investor used to claim INR 20,000 extra deduction is no more available from April 1, 2012. There is no mention in Finance Bill 2012 or not even in DTC which may be introduced from April 1, 2013.

After deletion of this clause there will be INR 6180 loss of tax for 30% tax slab and INR 4120 for 20 % slab and INR 2060 loss for 10% slab. As individual tax payer it reduces his/her ability to avail investment linked deductions from R1.2 lakh to R1 lakh.

Read - I-Strategy, a no brainer idea that helps you make wise investments only on http://crawfin.blogspot.in/2011/11/i-strategy-no-brainer-investment-idea.html#comment-form