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The following question was asked by Shashaank in the comment section of the post: 8 tax considerations to know before investing in property.

I have around 15 lacks in hand...is buying property with added loan the best decision, i pay around 40k income tax per annum apart from declaring 1 lack under 80c.My age is 25 and i am open to any other kind of investment.

Here’s the reply:

Shashaank,

Yours is a typical case of the classic dilemma (to buy or not to buy a house) faced by every young men with a bank balance of a few lakh rupees. Conventional advice is to buy a home early in life. But as usual I can only offer unconventional wisdom.

From what I can gather from your comment, all you have is Rs 15 lakh and you want to invest the entire savings to buy a house and financing the balance with a home loan. May be you think that property is a great investment (amazing returns without any accompanied risk) or, it might be that you want to avail tax breaks available on the housing loan in addition to saving rent (rent is a waste of money!) or probably the temptation is due to current low rates of interest (teaser rates) available on home loans.

Please don’t make such a mistake. You’re very young and I don’t think you should be in such a hurry to buy a house. Following points needs consideration before you arrive at a decision:

1. Return on property investments: A lot of people remain under the impression that property is a great investment just because land is the only asset with a limited supply on the earth and till we’re able to discover another habitable planet, the land prices can go only in upward direction.

Another related wider misconception is that property investment is lot easier (just approach a property dealer) and safer (no downside risk) than other asset classes like equities and mutual funds.

May be that they have never heard of US housing bubble. Understand that property as an asset class behaves in similar fashion to other asset classes like equities, gold and commodities. Put another way, real-estate market also moves in cycles (boom-and-bust) just like stock markets (what goes up must come down!).

2. Tax breaks on home loans will no more be available in future if DTC (direct tax code) is implemented in its current form.

3. Interest is an additional cost borne by you. Further, there are lots of other indirect costs associated with buying a house e.g., brokerage, loan processing fees, stamp duty and registration, municipal taxes, maintenance charges, repair charges, loan insurance charges and house insurance charges which significantly impact your true cost of ownership of a house.

4. Unlike other asset classes investing in property has long term implications.

5. Real estate is the most illiquid asset. Ask yourself following questions: What if there’s an emergent need for funds in the future? What if there is another recession and a salary cut? Or, what if you face a job crisis in future due to any other reason? What if there’s a significant drop in the real estate prices and the lender invokes “Depreciation of security” clause? What if interest rates rise and there is downturn in property prices at the same time? What if you have to change the city due to transfer or change of job?

6. You’ve not mentioned the value of the house and / or the amount of borrowing you’re planning. But let me tell you that excessive debt is not good. It is considered risky to borrow money to invest in stocks but not in property. Why? Isn’t it a case of financial leverage when we borrow money to invest in property? Don’t we also say that companies with debt on their balance sheets are more risky than the others? The point to note is that excessive leverage is bad irrespective of the purpose.

It is better to finance an asset out of your current savings rather than future income. Do you know the main cause behind US subprime crises? Although banks are ready to finance even up to 80-85% of the property value (in fact, lenders often encourage you to go for the maximum possible loan amount), it is always prudent to restrict your debt exposure to lowest possible level, in any case not more than 40-50% of the value of the asset and 50% of your net monthly savings (your take home pay less your monthly expenses). The purpose is to continue savings and investing to meet other financial goals and also keep a buffer for unexpected expenses & life style inflation.

Furthermore, as almost all banks and hosing finance companies are currently offering teaser loans so one has to also keep a safety margin for the imminent future increase in the EMI. So first understand how much loan you can really afford over a period of 20-30 years? You can calculate your loan affordability (& not eligibility) based on the maximum EMI you can afford to pay (as discussed in the previous paragraph) assuming a rate of interest around 2-3% more than the rate you are currently offered by using Loan affordability calculator.


No doubt, it is the dream nurtured by every young man to own his own house at the earliest. But as the above analysis shows it is better not to make this most important investment decision in a hurry and take adequate safeguards to reduce the likelihood of decision backfiring on you later.

Finally, it’s not about real estate vs. equities. In other words, the point of discussion is not whether investing in real estate is better than equities / other asset classes or vice versa. These are both different asset classes having their own pros & cons. The point is one should first have some investments in other asset classes, then buy a house for living (& not investing) as per your needs (& not wants), and after that even if you got some extra money, you might think of investing in real estate.

So Shashaank, first have some comfortable savings level. Your first priority should be to build a healthy investment portfolio by investing in debt (PF, PPF, NSC, Bonds, NCDs, Debt funds), equity (direct investing / diversified equity funds, index funds, ETFs) and gold based on your financial goals, risk profile and time horizon and then after some years you can go for your dream house. Remember—Buy in haste, repent in leisure.

In a nutshell, buy a right house at the right time and for the right purpose.

Do you agree? Please don’t forget to tell me about your decision.


Also see:

1. Housing Loan Queries
2. Why do you need a savings plan?

Read more

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Bank fixed deposits (FDs) are favorite choice for parking your funds due to safety of capital and assured / guaranteed returns. Other reasons for their popularity are familiarity and dependability.

No doubt, bank FDs are best for parking your short-term temporary cash. For long term investment one has to take a call based on the interest rate scenario. But solely relying on FDs is not a prudent choice due to plethora of other debt / fixed income instruments available for investment.

However, if you’re already investing in fixed deposits (FDs) of banks or would like to invest in future you should at least be aware of certain tips and tricks to make the most of your money invested in fixed deposits.

Fixed Deposits (FDs) of banks are no more a passive investment instrument which didn’t require a much thought. There is a lot of scope for planning while investing in them.

How to Invest in Fixed Deposits: Practical Tips
Here’s a list of a few tips to know while investing in bank fixed deposits:

1.Have an on-line bank account
Know that in this era of online banking, you’re no more required to walk into a branch to open a FD. With the net banking facility offered by banks, investing in FDs is quick, simple and hassle free. You can do it sitting at your home or office.

Once you sign-up for net-banking, operating your bank accounts including investing in FDs becomes quite easy and convenient.

2.Have multiple Bank Accounts
Second, it is very important that you should have bank accounts in at least 2-3 different banks due to following reasons:

i). To avoid TDS
It can help you avoid TDS provisions. TDS @ 10% is applicable on bank FDs if the total interest earned during the year exceeds Rs 10,000 per bank branch.

ii). To take advantage of differential interest rates among banks
Usually, there is some variation in FD rates across different banks. But sometimes the interest rates can vary a great deal between different banks for deposits of similar tenure.

iii). To increase the insurance coverage of your bank deposits
Suppose you’re having around Rs 6 lakh in a single bank held across various accounts such as saving deposits, fixed deposits or recurring deposits. Now, instead of relying on just one bank, if you spread your deposits across say, 3 banks, your insurance coverage will also triple (i.e., increase from Rs 1 lakh to Rs 3 lakh).

No doubt having multiple banks is a very good idea; however, please don’t go overboard and open too many accounts. Have at the most 3 accounts because the more the number of accounts, more the complexity and it can become a hassle to operate and manage them in the long term.


3. Don’t let your money idle away in saving / current accounts
Minimum tenure of bank FDs is usually 7 days. Although, usually rate of interest offered on deposits for 7-14 days and 15-29 days is less than 3.5% which is offered on savings bank account, still it makes sense to transfer the excess funds to FDs rather than letting them lying down idle in saving or current account. Why?

Let’s say you receive a credit of Rs 2 lakh in your saving account on, say, 5th of the month, but you’re going to require the funds before the end of the month (assuming there are no more credits in your account during the month). So, although the amount gets deposited in your savings account before the 10th but since it won’t be there in your account till the last date of month, you won’t receive any interest on it. So the better alternative is to transfer the funds to a fixed deposit account. Suppose, you require the funds on, say, 26th of the month, here you can open a FD for 20/21 days. Let’s further assume that your bank offers you an interest rate of 3% on this FD. So, earning an extra amount of Rs 329 in a month on Rs 2 lakh is not a bad idea, if you’ve to spend just 2 minutes for it. And depending upon the idle money lying in your savings account, this can be even greater.

Similarly, money idling in your current account should be invested in short term deposits because there is no interest on the balance lying in a current account.

However, you won’t be required to do this financial jugglery for saving accounts from next financial year (i.e., w.e.f. 1st April, 2010) as per RBI circular issued in April 2009.

4. Consider Recurring FDs
If you’re a regular investor in FDs, you should also contemplate investing in bank recurring deposits because they offer many advantages over regular FDs: investment in smaller denomination, no TDS, and disciplined investing. Recurring deposits of banks are like Systematic Investment Plan (SIP) of mutual funds.


For other tips about investing in bank fixed deposits, wait for part-2.


Also see:

1. Interesting Interest Information about Bank FDs
2. Taxation of Interest on Bank FDs
3. Bank FDs of a Deceased Person

Read more

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Few days back, an anonymous reader asked me the following question (see: 4 unknown facts about term plans):

Can I take two to three term insurance policy say one from sbi, second one
can be from birla and third can be from hdfc??Is it advisable to do so?

Contrary to the usual advice—that it is always better to split your life insurance cover into two or more policies as it imparts flexibility to your insurance cover so that if in future your insurance requirement decline, you can make a safe exit from one of the policy and thereby save considerable premium—this post is going to prove otherwise:

Why single policy with a higher sum assured is better than two or more policies?

Let’s assume you are 35 years old and have decided to buy a term insurance plan of Rs 40 lakh for 25 years. But you’re not able to decide whether to go for a single term plan or buy two policies by splitting the coverage in the ratio, say, 50: 50 (i.e., each policy of Rs 20 lakh) , or approximately 60:40 (first policy 25 lakh and second policy for 15 lakh), or around 70:30 (first term plan 30 lakh and second term plan for 10 lakh) so that if need arises (i.e., your life insurance coverage requirement declines in future) you can make a exit from one of the policy.

So you decide to evaluate which choice among the following four is most suitable:

Case 1: Single term plan of Rs 40 lakh
Case 2: 1st term plan of Rs 30 lakh and 2nd of Rs 10 lakh
Case 3: 1st term plan of Rs 25 lakh and 2nd of Rs 15 lakh
Case 4: Two term plans of Rs 20 lakh each

Further let’s assume you’ve decided to buy a term plan either from HDFC or ICICI. Please note that ICICI life insurance companies offer you two variants of the term insurance plan. While ICICI Pru Pure Protect Classic provides coverage up to 24.99 lakh, ICICI Pru Pure Protect Elite takes care of coverage beyond 25 lakh.

Notes:
1. The premium figures are as per Bimadeals.com (I hope the premium rates are correct. Anyhow, even if not correct or if there is any future change in the premium, should not significantly affect the crux of the analysis).

2. I’ve only considered one case study assuming three different scenarios; there could be numerous permutations and combinations. So, you can do the same exercise according to your specific needs. For example, if you would like to opt for 15 years for second term plan instead of 20 years considered in the above example, the entire calculation will change.

3. Time value of money is ignored.

4. There are three scenarios: zoho sheet 1 covers first two and sheet 2 covers the third one.



What do we observe?

Scenario-1:All the policies are continued till maturity
Splitting the policy involves extra cost as follows:

a. Single term plan of Rs 40 lakh --> NIL
b. 1st term plan of Rs 30 lakh & 2nd of Rs 10 lakh --> HDFC—Rs 34,550; ICICI— Rs 27,100
c. 1st term plan of Rs 25 lakh & 2nd of Rs 15 lakh --> HDFC—Rs 49,750; ICICI— Rs 40,650
d. Two term plans of Rs 20 lakh each --> HDFC—Rs 49,750; ICICI— Rs 1,08,400

This extra cost is involved if you don’t make a premature exit (as planned) and both the policy run for the entire tenure of 25 years.

Scenario-2:Decision to exit second Policy (i.e. lower value policy) is taken after 20 Yrs
Now let’s consider another scenario where after 20 yrs you feel that your life insurance need is reduced and decide to make an exit from the lower value policy while the higher one will go for entire 25 years.

Extra Cost involved:

a. Single term plan of Rs 40 lakh --> NIL
b. 1st term plan of Rs 30 lakh & 2nd of Rs 10 lakh --> HDFC—Rs16,345; ICICI— Rs 5,300
c. 1st term plan of Rs 25 lakh & 2nd of Rs 15 lakh --> HDFC—Rs 22,855; ICICI— Rs 7,950
d. Two term plans of Rs 20 lakh each --> HDFC—Rs 14,165; ICICI— Rs 64,800

So even if you give up one of the policy and reduce your risk coverage, you end up paying more premium. In other words, here also buying one consolidated term plan scores over splitting the term plan.

Scenario-3: Decision to exit second policy after 20 years made right at the purchase stage.
Further there can one more scenario where you’re sure right at the time of buying the policy that the lower value policy is required only for 20 years (so buy it only for 20 years instead of 25 years) while the higher one will go for the entire 25 years. Now let’s see does it make any difference and help you save premium outgo:

Extra Cost / (Savings) involved:

a. Single term plan of Rs 40 lakh --> NIL
b. 1st term plan of Rs 30 lakh & 2nd of Rs 10 lakh --> HDFC—Rs 8,425; ICICI— (Rs 3,300 )
c. 1st term plan of Rs 25 lakh & 2nd of Rs 15 lakh --> HDFC—Rs 10,975; ICICI— (Rs 4,950)
d. Two term plans of Rs 20 lakh each --> HDFC—(Rs 1,675) ; ICICI— Rs 47,600

Here also you pay more in 3 out of six cases while there is very negligible saving in other three.

Finally before wrapping up the discussion, let us consider one more possibility. What if the policyholder die (please don’t mind) after, say, 22 years? The nominee will receive the following insurance proceeds:

Case--------Scenario 1----Scenario 2-----Scenario 3
1. ---------- 40 lakh--------40 lakh---------40 lakh
2. ---------- 40 lakh--------30 lakh----------30 lakh
3. ---------- 40 lakh--------25 lakh----------25 lakh
4. ---------- 40 lakh--------20 lakh----------20 lakh

I hope you got the point.

Further, please also note the following points:

1. It is always better to be over-insured than under-insured.

2. More the number of policies, more the hassles (documentation, premium payment, filing claims).

3. A life insurance with a sum assured of 40 lakh will provide coverage of just 12.47 lakh in real terms (assuming a nominal inflation rate of 6%) after 20 years. In other words, the real worth of Rs 40 lakh after 20 years will be equivalent to Rs 12.47 lakh in today’s money if the average rise in prices of goods & services is 6%.Put another way, after 20 years the real worth of your policy would be roughly 1/3rd at inflation rate of 6%, 1/4th at 7% and around 1/5th at 8% respectively. Do you still need to lower your coverage any further?

The point worth noting is that there won’t be any need to scale down your insurance cover in future. Inflation automatically takes care of it.

The above discussion proves that in majority of cases single policy (pure term plan) with higher sum assured is better than two or more individual policies. Put another way, splitting your life insurance cover (with or without splitting the tenure) doesn’t work.

What do you think? Do you agree? Do you already have multiple policies? Or, were you thinking of splitting your life insurance cover? Please share your views.


Also see:

1. Most amazing fact about life insurance
2. 4 Things you don’t Know about term plans
3. Term insurance plans - FAQs

Read more

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I’ve already covered Pubic Provident Fund (PPF) in my earlier write ups. But there are still certain operational issues left unanswered. So this post is going to be your guide to PPF investing by answering almost every possible question about PPF. Here’s the list of commonly asked questions (FAQs) about PPF:

PPF Investing

Q-1: How much interest do I earn by investing in PPF scheme?
Ans: Since the year 2003-04, the rate of interest on PPF saving scheme is 8% p.a. compounded annually.

Q-2: How does PPF stand vis-à-vis NSC?
Ans: Investing in PPF certainly scores over investing in NSC. For more details see: Which is better between the PPF and the NSC?

Q-3: How can I make the most of my PPF account? What are the considerations to be kept in mind while investing in PPF?
Ans: There are certain tips and tricks you can use to make the most of your PPF account such as opening PPF account at the earliest, investing on regular basis rather than waiting till the end of the year, and investing before 5th of every month. For more of such tips see: 10 Practical Tips for investing in PPF.

Q-4: How do I calculate the interest on PPF?
Ans: Use PPF interest Calculator to calculate your PPF interest and maturity value.

Q-5: Why should I invest in PPF?
Ans: You must invest in a PPF because it is the best debt option after PF:

1. 8% p.a. tax-free returns in addition to section 80C deduction on deposits.

2. Option to invest regularly for long term and can be continued indefinitely even after maturity

3. Highest safety as it is a government- backed saving scheme.

4. Can’t be attached by any court.

5. Flexibility to invest varying amounts. You’re allowed to deposit in lump sum or in installments. Further, you can vary amount of installments as per your convenience and it is not necessary to deposit every month.


Making Contributions in PPF Account

Q-6: What is the maximum ceiling on deposit in PPF?
Ans: As per Section 80C of Income Tax --> no ceiling
As per PPF Rules --> Rs 70,000

Q-7: How many numbers of times can I make deposits in PPF account during a year?
Ans: You can deposit money in your PPF account either in lump sum or in installments which need not be of same amount. However, total number of deposits during a financial year can’t exceed twelve.

Q-8: Am I required to deposit money in my PPF account every year? What if I don’t?
Ans: Yes, a minimum deposit of Rs 500 is required every year. If you don’t, then your account will become inoperative.


PPF: Tax Benefits

Q-9: What are the tax benefits available on PPF scheme?
Ans: There are two benefits: first when you deposit money in your PPF account, you get entitled for tax deduction u/s 80C and as a result your taxable income stands reduced to that extent. The second tax benefit is that the interest earned on your PPF deposits is completely exempt from tax.

Q-10: Is it possible to avail Rs 1 lakh deduction under section 80C though we’re allowed to deposit maximum of Rs 70,000 under PPF rules?
Ans: Actually under the IT Act, there is no limit and even under PPF rules Rs 70,000 limit is meant for self a/c and minor a/c. It doesn’t include the contribution to the a/c of spouse and major children.

In other words, as per PPF rules, the total deposit in your own account and in the account of your minor child can’t exceed Rs 70,000 in a FY. But PPF rules doesn’t bar you from making additional deposit beyond the limit of Rs 70,000 in the account of your spouse or your major children and accordingly you can claim Rs 1 lakh tax deduction u/s 80C of IT Act.

Q-11: Who can claim section 80C benefit: the person in whose name the PPF a/c stands or the person who deposits money in the PPF account?
Ans: The person who makes the contribution to PPF is entitled for tax benefit. For example, if you invest your money in the PPF account of your spouse, you’ll be entitled to claim section 80C deduction instead of your spouse.

Q-12: Can I contribute to the PPF account of my parent’s and claim section 80C tax benefit?
Ans: No, you’re not allowed to claim tax benefits on the contribution made by you in the PPF account of your mother or father.

Q-13: Is it possible to avail section 80C benefit without making deposits in the PPF account?
Ans: Yes, but only from 7th financial year onwards. The trick is to make partial withdrawals (as mentioned below) and redeposit it in your PPF account.


PPF: Account Opening

Q-14: Is PAN compulsory to open a PPF account?
Ans: No, PAN is not compulsory.

Q-15: Can I open a joint PPF account?
Ans: No, joint PPF accounts are not allowed.

Q-16: Can I open a PPF account in the name of a minor?
Ans: Yes, if you’re a guardian.


PPF: Loans / Withdrawals before Maturity

Q-17: When can I start making partial withdrawals / loans from PPF?
Ans: Loan facility is available from 3rd year to 6th year. From 7th year onwards, you’re allowed to make partial withdrawals. Also note that once you become eligible for withdrawals, no loans are allowed.

The basic difference between the two is that unlike withdrawal facility, loan carries interest and is to be repaid.

Q-18: What is the process for applying for loans and partial withdrawals?
Ans: To avail loans you’ve to fill Form D and for making partial withdrawal from your PPF account, you’ve required to fill up Form C.Further the application should be accompanied with the passbook.

Q-19: How much can I borrow from PPF?
Ans: The amount of loan can’t exceed 25% of the balance at the end of 2nd immediately preceding year. For example, if you apply for loan in 4th financial year, then the maximum amount of loan you can avail is restricted to 25% of the balance at the end of 2nd FY.

Q-20: How much can I withdraw borrow from PPF?
Ans: You’re allowed to make one withdrawal each year after completion of six financial years (i.e., from the beginning of 7th FY). The amount of withdrawal can’t exceed

a.) 50% of the balance at the end of the 4th immediately preceding year, or
b.) 50% of the balance at the end of the immediately preceding year

which ever is lower.

Further, the amount of withdrawal gets reduced by the outstanding loan amount, if any.

For example, if the account was opened in 2004-2005 the first withdrawal can be made during 2010-2011. The amount of withdrawal will be the lower of:

i. 50% of the balance as on March 31, 2007, or
ii. 50% of the balance as on March 31, 2010

Q-21: Can I close the account before maturity?
Ans: No, the premature closure of PPF account is allowed only in case of death.

However there is an exception. Premature closure can be considered after the expiry of 5 years in case of genuine hardship .


PPF: Account Operation

Q-22: How can I change the nomination in my PPF Account?
Ans: By filling up Form F, you can apply for change of nomination in your PPF account.

Q-23: Can PPF account be transferred from one post-office / bank to another?
Ans: Yes, it is possible to transfer from one post office to another or one bank branch to another bank branch. Transfer from Post office to bank & vice versa is also possible. Finally inter bank transfer is also possible.

Q-24: My PPF account is currently inoperative? How do I reactivate it?
Ans: To revive and regularize your PPF account, you'll have to deposit Rs 500 for every year of non-payment along with a penalty of Rs 50 for each year of default.

Q-25: What if I don’t reactivate it?
Ans:The balance in your PPF account will continue to earn interest and repayment of the subscription with interest will be made to you on maturity. In other words, the restrictions are as follows:

1. You can neither apply for a loan nor for a premature withdrawal.
2. Before making any further investment, you’ll have to reactivate it.

Q-26: I’m the nominee of the PPF account of my spouse who expired recently? Can I continue to operate the account?
Ans: No, nominees are not allowed to operate the account of deceased subscriber. The account needs to be closed by submitting Form G together with proof of death.

However, as the account is closed on demand by the nominee, it continues to earn interest till the date of closure.

Q-27: What is the procedure to close the account if the deceased account holder forgot to make a nomination?
Ans: If balance is more than Rs 1 lakh, succession certificate is required.
But if the balance is up to Rs 1 lakh, it can be claimed by legal heirs by filing Form G along with i) a letter of indemnity, ii) an affidavit, iii) a letter of disclaimer on affidavit, iv) a death certificate.

Q-28: What if the minor attains majority before the maturity of PPF account?
Ans: Ex-minor will have to take over the operation of the PPF account by registering his signature (attested by the guardian).


PPF: Post Maturity Operation

Q-29: Can I continue to remain invested after the maturity period?
Ans: Yes, you can continue to remain invested after the initial maturity period of 16years. There are two options available:

-With further subscriptions: This option can be exercised only in writing and in a block of 5 years.

-Without further subscriptions: No conditions attached and no intimation required.

Q-30: How many maximum numbers of extensions are possible after the initial maturity of 16 years?
A: There is no limit imposed on the number of extensions. The only restriction is that every extension is for a block of 5 years in case of continuation with further subscriptions.

Q-31: Can I further invest during the extension period of 5 years?
Ans: Yes, provided you have exercised the option in writing by submitting Form H.

Q-32: What is the time limit of submission of Form H?
Ans: Form H is required to be submitted within a period of one year from the date of maturity.

Q-33: Can I make withdrawals during the period of extension?
Ans: In case you’ve exercised the option to continue the account with further subscriptions, you’re allowed to make one withdrawal per year but the total amount of withdrawal during the 5 year period can’t exceed 60% of the balance in your PPF account at the beginning of each extended period.

On the other hand, if you continue the account without subscription, then there’s no maximum limit imposed on the amount of withdrawal. You can withdraw even the entire amount. The only restriction is that only one withdrawal is allowed in a financial year.


PPF: NRIs

Q-34: I’m a NRI. Can I open a PPF account?
Ans: No, a non-resident Indian (NRI) is not allowed to open a PPF account.

Q-35: I opened a PPF account while I was a resident India. Subsequently, I attained the status of an NRI while the scheme is yet to mature. Now Can I operate it and make further investments?
Ans: Yes, an NRI can continue to make the deposits in the PPF account (which was opened while he was resident Indian) till the maturity.

Q-36: Can a NRI extend the term of his PPF account?
Ans: No, once the PPF account matures, NRI can’t make further extensions. In other words, post-maturity extension is not allowed to NRIs.

In next part, i'll explain the impact of DTC on your PPF investments.


Also see:

1. Salary TDS: FAQs
2. 10 Tips to Invest in PPF
3. Is PPF better than NSC?

Read more

Photo by gramola2three

This is part three of tax planning for non-resident Indians (NRIs). After determining residential status, the next part of NRIs taxation is determining the taxable income under Indian Income Act, 1961. Thus, this post is about how to determine the taxable income of NRI under the IT Act.

Calculating Taxable Income of NRI

1.Only Indian income taxable unlike taxation of global income in case of resident individuals
The major difference between the tax on the income of resident Indians and non-resident Indians is that a non-resident pays tax only on ‘Indian Income’ and his foreign income (income earned and received outside India) is totally exempt from income tax in India.

Indian income means income which accrues /arises (or deemed to accrue or arise) in India OR which is received (or deemed to be received in India) though it accrues/arises outside India and is taxable in the hands of non-resident.

Put simply, in order to qualify as ‘foreign income’, it should satisfy both the conditions: accrue or arise (or deemed to accrue or arise) outside India AND received (or deemed to be received) outside India.


2.Heads of Income
Like resident Indians, non-resident Indians are also required to calculate the taxable income separately under five different heads. These ‘heads of Income’ are

1. Income from Salary
2. Income from house property
3. Income from business / Profession
4. Income from Capital Gains
5. Income from Other sources


3. Exempt / Tax-free Income
In addition to incomes such as agricultural income, dividend income and specified capital gains (e.g. long term capital gains u/s 10(38) arising out of sale of equity shares on stock-exchange on which STT is paid and also LTCG on sale of mutual fund units) which are exempt in case of all tax payers, there are certain other incomes which are exempt only in the hands of NRIs. The two most common incomes exempt in the hands of NRIs are as follows:

a.) Interest income of NRIs from NRE accounts is exempt from income tax u/s 10(4) of IT Act, 1961.

b.) Interest payable by a scheduled bank on FCNR deposits is also exempt u/s 10(15) of IT Act, 1961.


4. Availability of various deductions (Tax Saving Options for NRIs)
NRIs are allowed following deductions under the IT Act, 1961:

a. Home Loan Interest Deduction u/s 24: NRIs are eligible to avail home loan interest deduction u/s 24(b) for the interest portion of the EMI paid towards the repayment of home loans. The deduction for principal part of the EMI is available u/s 80C.

b. Savings Deduction u/s 80C, 80CCC & 80CCD: Available. For details about various tax saving options and investment avenues available u/s 80C, see Section 80C Tax Saving Avenues. However, following investments are not allowed:

i.) NRIs not allowed to open a PPF account. An existing PPF account can be continued till maturity.

ii.) NRIs are also barred from investing in National Saving Certificates (NSC), Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits (POTD). Existing investments (i.e., those that were purchased before becoming an NRI) can be continued till maturity.

c. Health Insurance Premium Deduction u/s 80D
Non-residents Indians can also claim deduction under section 80D for premium paid on mediclaim / health insurance policy of self and family (Rs 15,000 / Rs 20,000 as the case may be) and another Rs 15,000 (Rs 20,000 if either of parents is a senior citizen) premium paid to insure the health of parents.

d. Other Deductions u/s 80
There are many other deductions available to resident Indians under section 80. Let’s see whether NRIs also qualify for these deductions:

i.) Deduction for medical treatment of disabled dependent u/s 80DD: Not available
ii). Deduction for medical treatment of certain specified ailments u/s 80DDB: Not available

iii). Deduction for interest paid on educational loan u/s 80E: Available

iv). Deduction u/s 80G for certain specified donations: Available

v). Deduction u/s 80U for a handicapped person: Not available

For details about the various deductions u/s 80D to 80U, you can see ‘Other Tax Deductions Available u/s 80’. And also understand various conditions & restrictions imposed under section 80 before availing these deductions.

In next part, I’ll discuss about how to calculate the tax on NRI income under Indian tax laws


Also Read:

1. NRIs tax planning – An introduction
2. How to determine the residential status
3. Residential status of returning NRIs

Read more

Photo by lumaxart

Enough of life insurance! For a change let’s shift our focus to banking.

To operate our personal finances, every one of us deals with banks on day-to-day basis. So let’s see how much you know about the way banks operate and manage their business.

This money teaser should be easier to answer as compared to life insurance riddle because banking business is quite simple in comparison to business of life insurance which involves so many intricacies (After all designing Smart & Innovative insurance products takes a lot of time and effort). Moreover, the questions doesn’t relate to complex banking terms such as asset-liability mismatch, SLR & CRR, BPLR, NPAs, Basel II norms, risk management, repo and reverse-repo.

So here we go fishing in the troubled banking waters:


This time try to think inside the box!!

Q-1: Why do the lenders quote flat rate of interest instead of reducing balance rate?

Q-2: Why do the banks charge pre-payment penalty?

Q-3: Why do banks continue to offer you personal loans while your savings and FD accounts are overflowing with cash?

Q-4: Why do banks offer teaser loans (fixed-cum-floating-rate schemes with artificially low interest rate in the initial fixed period)?

Q-5: What makes the banks sure that despite teaser loans being similar to sub-prime mortgage, these won’t lead to large scale default in future?

Q-6: Why do banks offer lower rates to potential customers as compared to the current customers?

Q-7: Why the banks have shifted focus from corporate lending to retail lending?

Q-8: Finally, what is the definition of retail banking?


Answers will be published in another post.

Best of Luck!


Also see:

1. Money Teaser #2: Life Insurance
2. Answers to Money Teaser #2

Read more

Photo by Stefan Baudy

I’ve seen people visiting various online forums for their tax queries and getting answers that are either incomplete or incorrect. The most commonly asked questions relates to TDS and taxation of salary income. So, to start with, here I’m making an attempt to answer all your queries relating to tax deduction at source (TDS) on your salary income.

TDS Salary: FAQs

Manner of TDS Deduction

Q-1: Whether TDS is to be deducted from the beginning of the financial year? Or, can it be deducted during the last few months of the FY?
Ans: TDS from salary income should be deducted uniformly throughout the year starting from the month of April based on the projected salary for the whole year and considering the savings declaration (no specified format) given by the employee. In subsequent months, adjustments can be done for any changes in salary or tax savings plan of employees.


Q-2: Can I request my employer to deduct TDS on my other income also?
Ans: Yes, if you submit the particulars of your any other income (including loss on house property) in plain paper [Earlier Form 12C was prescribed but since 2003 it is not required], employer is bound to deduct TDS on it. Anyhow, the particulars to be mentioned on the declaration are exactly in the same format as earlier Form 12C.

Please note that in case of loss from house property, detailed computation has to be enclosed. Further for claiming tax benefits on home loan [interest u/s 24(b) & principal repayment u/s 80C], a certificate from the lender specifying the amount of interest paid / payable during the financial year also needs to be furnished.


Q-3: Whether TDS is also to be deducted on the non-cash benefits provided to the employees?
Ans: Yes, from the current financial year (FY 2009-10) tax burden on fringe benefits / perks has again been shifted back to the employees (the FBT stands abolished). So all the non-cash benefits provided by the employer (e.g. official car, ESOPs, company owned or leased accommodation, gift vouchers, interest free or concessional loans, club membership etc) will have to be taken into account for the purpose of tax deduction at source from salary. The valuation of these perquisites will be as per the CBDT notification issued in December 2009.


Q-4: What if due to an error the employer deducts TDS in excess?
Ans: According to section 192(3) of the IT Act, any excess or shortfall can be adjusted subsequently but within the same financial year. In other words, excess / shortfall TDS of one financial year can’t be carried forward for adjustment in subsequent financial year.

The other point worth noting is that there is no bar on inter-employee adjustment i.e., if there’s a excess deduction on account of one employee and short deduction from the salary of other employee, those can be adjusted.


Exemptions and Deductions

Q-5: What if my employer doesn’t allow HRA exemption while calculating TDS on salaries?
Ans: If in fact you are residing in a rented accommodation and paying rent, I don’t think any employer will refuse deduction on account of HRA. Only in a very exceptional case, employer will refuse HRA deduction against rent paid by you. In such an eventuality, you can always claim it while filing your return of income and receive tax refund.

Many more such frequently asked questions regarding claiming HRA deduction are answered in Tips & FAQs for claiming HRA Exemption.


Q-6: Can an employer allow both the tax concessions: HRA as well as Home loan tax benefits while calculating TDS from salary?
Ans: Yes, indeed! As long as you’re eligible for both, employer should not have any objection in allowing both: HRA exemption u/s 10 (13A) as well as tax benefit on a/c of repayment of housing loan [interest u/s 24(b) and principal repayment u/s 80 of the IT Act 1961].

There are many possible scenarios where you can claim HRA along with housing loan tax benefits.


Q-7: Whether employer can insist on travel proof for allowing LTC exemption while calculating TDS on salary?
Ans: Yes, of course employer can insist on production of documentary evidence to satisfy regarding the genuineness of the LTA claim. Mere submission of a declaration for the purpose of claiming LTA / LTC exemption u/s 10(5) of the IT Act, 1961 is not enough.

Though in a judgement delivered in 2009, the Supreme Court exempted the employers from collecting travel bills to allow LTA / LTC exemption to employees while calculating TDS on salaries; however, most employers still demand it.


Q-8: Whether employer can allow 80G deduction while calculating TDS from salary income?
Ans: Employer is not allowed to take into account section 80G deduction in respect of donations made for charitable purposes while calculating TDS on salaries. However, DDO may allow (after due verification) the donations made to specified funds (such as Rajiv Gandhi Foundation and National Defense Fund) as specified in CBDT circular no 9 /2008.

UPDATE (01/02/10): As per the latest salary TDS notification issued in Jan 2010 by the CBDT (Circular no 1/2010 dated 11th Jan 2010), there are two conditions for allowing 80G deduction by the employer:

1. Donation is made to any of the three specified funds: Prime Minister’s National Relief Fund, Chief Minister’s Relief Fund, or Lieutenant Governor’s Relief Fund.

2. Donation is made through the employer.

For all other donations, tax benefit will have to be claimed by you in the return of income.


Q-9: Section 80DD allows a fixed deduction Rs 50,000 / Rs 75,000 irrespective of the amount of expenditure incurred on the medical treatment of handicapped dependent. However, my employer doesn’t agree and he is only allowing the actual expenditure incurred by me?
Ans: Law is law no matter how illogical or absurd it is. Logic dictates that either there should be allowed a fixed deduction without any stipulation as to the actual incurring of the expenditure and in case it is made dependent on actual incurring of expenditure then the expense actually incurred should be allowed subject to a maximum limit.

It doesn’t make sense to make the deduction / exemption conditional on incurring of the expenditure but allowing a fixed amount irrespective of the actual expenditure incurred. In simple words, it is highly illogical to allow a fixed tax deduction of, say, Rs 75,000 irrespective of whether you spend Rs 100 or Rs 60,000 but disallow it if you don’t incur any expenditure.

But understand that law is not what it should be but what it is. So, your employer shouldn’t have any objection in allowing you the fixed deduction of Rs 50,000 / Rs 75,000 (as applicable) allowed u/s section 80DD so long as you’re incurring any expenditure on account of medical treatment of your handicapped dependent (even Rs 1 will do).


Q-10: What are the various investments allowed for the purpose of tax savings?
Ans: For complete list of various tax savings investments and expenses allowed under section 80C, see: Section 80C Tax Saving Avenues & Investment Options. For mediclaim / health insurance premium and other expenses allowed while calculating taxable income, see: List of Other Deductions allowed u/s 80


Q-11: Do we have to submit the original proofs for claiming exemptions and deductions?
Ans: No, you can submit self-attested photocopies of all the documentary evidence / proofs (e.g., rent receipts, ELSS account statement, life insurance premium receipt, school fee receipt etc) required by the employer for the purpose of allowing you various deductions and exemptions.

However, for the purpose of verification your employer might ask you to show the originals also. But remember original can be required only for verification and not for submission, so don’t forget to get them back and file in your tax file for future reference and any query from tax authorities.


Change of Employment: Form 12B

Q-12: For an employee joining in the middle of a FY, is it the responsibility of employer to ask for salary details of previous employment? In other words, is it mandatory for the current employer to deduct TDS on salary income received from previous employer? Can the employer force the employee to submit the information for TDS purpose? Or, is it at the total discretion of the employee? Can the current employer adjust if there any shortfall or excess TDS deducted by previous employer?
Ans: According to section 192, it is the option / discretion of the employee whether or not to file Form No 12B. The current employer can’t insist on filing of Form No 12B. If the employee chooses not to file, then employers’ obligation is limited to compute TDS on salary payable by him.

If Form 12B is filed, then current employer can deduct the TDS on salary paid by previous employer (in case no TDS was deducted by previous employer). And if the TDS was deducted by previous employer, any excess or shortfall can also be adjusted.

It is always in the interest of an employee to furnish such details because otherwise there can be duplication of exemptions and deductions and there can be a shortfall in tax deduction and as a result the employee would become liable to deposit advance tax.


Q-13: Who’s responsible for filling up the Form 12B: My previous employer or me?
Ans: It is the responsibility of the employee to fill the declaration in Form No 12B and also attach Form 16, if any, issued by your previous employer. It is required to be filled up even if there was no TDS deducted by your previous employer due to the salary being less than the basic exemption limit. It is quite possible that after combining your current and previous salary, your total salary income exceeds the maximum amount not chargeable to tax.


Q-14: How to fill Form No. 12B for giving it to my current employer so that income (and tax already deducted thereon, if any) from my previous employment can be considered for the purpose of TDS from my current salary income?
Ans: Fill up Form 12B based on the Form 16 (if TDS deducted) or on the basis of salary certificate (if no TDS deducted or pending issuance of form 16) issued by your previous employer. You can also take the help of your salary slips. In case of any difficulty, you can take guidance from your previous or current employer.


Q-15: Can my current employer still refuse to deduct TDS on my previous salary once I submit Form 12B?
Ans: No, once you submit Form 12B, it becomes the obligation of the employer to deduct TDS on your consolidated salary after accounting for TDS deducted (if any) by your previous employer.


Issue of Form 16

Q-16: What is Form 16? What’s the difference between Form 16 & Form 16A?
Ans: Form 16 is the Tax Deduction Certificate issued by an employer to his employee against the income tax deducted from his salary. On the other hand Form 16A is issued by organizations against TDS deduction from certain payments made to contractors, service providers, professionals and certain other payments like rentals, interest etc. For example, bank issues you Form 16A against TDS deducted on FD interest.


Q-17: What if my employer or previous employer doesn’t issue me a TDS certificate?
Ans: Now a days you don’t need to submit any documents with your IT return as these are annexure-less. But, although Form 16 is not required to be attached with return of income but still it is the duty of employer to furnish it to the employee. It is required because

a. It shows your salary income (various components are shown separately). In its absence it might not be possible for you to calculate tax on your salary income (particularly if no salary slips are issued at the time of payment of salaries)

b. It shows the details of TDS deducted by your employer which is also required to be mentioned in the Tax Return.

c. You’ve to show it to the income tax authorities if asked for at the time of assessment.

As per section 203, TDS certificate in form no 16 is required to be furnished by the employer to the employee within one month of the close of the financial year. But you don’t have any remedy against your employer if he refuses to issue you the TDS certificate although he is accountable to the tax authorities.

Therefore, the only option left to you if the employer doesn’t issue the certificate is to register yourself on http://www.tin-nsdl.com/ and get the TDS status as shown in Consolidated Tax Credit Statement (Form no 26AS) from that site. Based on this online statement, you can file your return.


Q-18: Is it compulsory to issue TDS certificates even in case of an employee where no TDS is deducted due to the total income falling below the maximum exemption limit on account of various deductions allowed u/s 80C?
Ans: No, it’s not! There is no obligation on the employer to issue Form 16 in case tax is not deducted by virtue of claims of exemptions and deductions.


Q-19: Is the TDS amount shown in my Form-16 final figure of my tax liability?
Ans: No, the tax shown by your employer on the form 16 is not the final figure of your tax liability. Your actual tax liability may differ on account of following reasons:

i). You might have other income (loss) from other sources of income: Income from house property (rental income), business income, capital gains (e.g., profit / loss on sale of shares or mutual fund units) other income (interest on your savings bank account or FDs).

ii). Your employer might have made excess / short deduction of tax at source from your salary income by not considering any, exemption / deduction or inadvertently allowing any deduction in excess.

It’s your responsibility to show the actual tax on your total income while filing your tax return which might differ from the TDS figure shown in Form 16.


I hope the above discussion answers most of your questions regarding TDS on salary income and there’s no more any need for you to visit various online forums for your tax queries on salary.

Still, if any question is left unanswered, just let me know.


Also see:

1. Section 80C Tax Planning – 10 Tips
2. Income Tax Calculator: FY 2009-10
3. How to Calculate Your Taxable Income

Read more