You cannot predict what is there waiting for you in the future. There are always lots of uncertainties and causalities coming up for you in the future and you are always unaware about it. These uncertainties cause a drastic financial crisis to your family and closed ones. You can help your loved ones by planning for your and their future and apply for a term insurance plan. Choosing the best term insurance plan for you can be a tiring task and that you must be well aware of the needs and requirements of your family at the present times and the future.
1.What is Term Insurance?
2.Why buying a term insurance is important?
3.Who should buy term insurance?
4.What is the right time to buy term insurance?
5.How much term insurance to buy?
Related Article – Top Secrets to Choose the Best Term Insurance Plan
6.What should be the policy term?
7.What is covered under term insurance plan?
8.What are riders?
9.What are the tax benefits of term insurance?
10.Can I atleast get my premiums back on completion of tenure?
11.Can I have 2 or more term plans?
A term plan is the purest form of life insurance. It not just ensures your family’s financial security but also gives an option to protect them from critical illnesses. In today’s video, we have answered the most commonly asked question: What should be the policy term? Can I have 2 or more term plans? What is the right time to buy term insurance? and many more.
To get started with personalized Automated financial planning visit – http://bit.ly/Financial-Planning-Tool
Saving taxes is everyone’s predominant motto when it comes to investments. Thankfully, the Income Tax Act 1961, has allowed various types of investment avenues to be exempt from the purview of income tax. If you choose these avenues for investment, you can earn tax exemptions and deductions on the amount you invest, the returns generated and the benefit you get.
When it comes to insurance too, you can earn income tax exemptions. Both in the case of life insurance and health insurance plans, tax exemptions are available. Let’s explore how –
Related Article: Retirement through Equity Linked Savings Scheme
Life insurance and tax benefits
Premiums and tax benefits
The premiums paid for a life insurance policy are tax-free under Section 80C. The premium is deducted from your gross total income and, thus, lowers your taxable income. The maximum limit which you can claim as an exemption is Rs.1.5 lakhs. The premium can be paid for a policy taken by yourself, your spouse, and your children’s life.
Furthermore, the premium that you pay should not be more than 10% of the sum assured of the life insurance policy. So, if your policy is for Rs.5 lakhs, your premium should be Rs.50,000 or less to be eligible for tax exemption.
One thing which you should remember is that your premiums would be allowed as exemptions only if you hold your life insurance policy for a specified tenure. ULIP plans should be held for at least 5 years while other life insurance plans should be held for at least 3 years. If you do not hold the plans for these specified durations, the exemption allowed would be reversed back in the year you surrender the plans.
For premiums paid towards a pension plan, Section 80CCC would be applicable for claiming an exemption. The limit and other exemption conditions would be the same.
Policy proceeds and tax benefit
The maturity benefit or the death benefit which you receive is also tax-free in your hands. These benefits would not attract any tax under Section 10 (10D). Furthermore, there is no upper limit on the number of benefits that qualify for tax-exemption. Any amount you receive would be tax-free given the premium paid is below 10% of the sum assured. If the premium exceeds 10% of the sum assured, the entire maturity benefit would be taxable in your hands. The death benefit, however, would not be taxed even if the premium is above 10% of the sum assured.
Related Article: Unheard Facts of Budget 2021
Annuity/pension plan proceeds and tax benefit
Under pension plans, whether traditional or ULIPs (Unit Linked Insurance Policy), the tax treatment of the policy proceeds is different. You have the facility of withdrawing 1/3rd of the proceeds in cash when the plan vests. This withdrawal is called commutation of pension and it is tax-free under Section 10(10A). However, the remaining 2/3rd portion of the policy proceeds, which are paid as annuities, are taxable in your hands. The annuity pay-outs you receive would be taxable at your income tax slab rate in the year in which you receive the pay-outs.
Health insurance and tax benefits
Health insurance plans also provide tax relief for the premiums that you pay. Health insurance premiums are exempted from tax under Section 80D. You can avail a maximum of Rs.1,00,000 as an exemption from health insurance premiums. Here’s how –
|If you buy a policy covering you and/or your family||You can claim a maximum exemption of Rs. 25,000|
|If you are above 60 years of age and buy a policy covering you and/or your family||You can claim a maximum exemption of Rs. 50,000|
|If you buy two policies – one covering you and/or your family and another covering your dependent parents||You can claim an exemption of Rs. 25,000 (for the policy on your family)+ Rs. 25,000 (for the policy on dependent parents) – Rs. 50,000 (total)|
|If you buy two policies – one covering you and/or your family and another covering your dependent parents and your dependent parents are above 60 years of age||You can claim an exemption of Rs. 25,000 (for the policy on your family)+ Rs. 50,000 (for the policy on dependent parents who are senior citizens) – Rs. 75,000 (total)|
|If you are above 60 years of age and your dependent parents are also above 60 years of age and you buy two policies – one covering you and/or your family and another covering your dependent parents||You can claim an exemption of Rs. 50,000 (as you are a senior citizen)+ Rs. 50,000 (for the policy on dependent parents who are senior citizens) – Rs. 1,00,000 (total)|
So, both life and health insurance plans provide you tax relief. While the premiums for both these plans reduce your taxable income, the policy proceeds of life insurance plans give you tax-free returns too. So, the next time you are investing in an insurance policy, know its tax implication.
House Rent Allowance Vs Home Loan
Taxpayers would like to know their entitlement to deductions towards the payments for housing accommodation and their entitlement for house rent exemption.
Tax Benefit on House Rent Allowance
An allowance that is provided by an employer to the employee to cover the expenses of the accommodation rent which the employee may incur for his housing purpose is known as House Rent Allowance (HRA). The House Rent Allowance which is waged by the employer to the employee is taxable under the head of “Income from Salaries”
As per the Income Tax Act of India, the employee/assessed is exempted from paying income tax return online that’s why House Rent Allowance has picked up such a great amount of significance in the late years.
Formula = HRA received – (less) Exempt = Taxable Amount.
Tax Benefit on Home loans
Under section 80C of the Income Tax Act, the maximum deduction allowed for the repayment of the principal amount of home loan is Rs. 1.5 lakh. Deduction under section 80C also includes investments done in the PPF Account, Equity Oriented Mutual funds, Tax Saving Fixed Deposits, National Savings Certificate, etc. subject to the maximum of Rs. 1.5 lakhs.
Besides this, there are stamp duty and registration charges that one can claim under the aforementioned section. Though, the claim can only take place in the year in which the payment has been made.
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Paying taxes is a duty of every citizen of this country. A part of our hard earned income is returned to the Income Tax Department of India. However, we all desire to save up the most of the money we earn for personal needs or any future emergencies. There are many smart ways to do that. Some do it by investing in mutual funds and other schemes available in the market, while many of us try and invest in real estate properties and the like. This article will talk about one such investment scheme which will let you save on your tax returns as well as secure a good future for your loved ones. This is a government initiative known as the Sukanya Samriddhi Yojana scheme.
This money investing plan is meant to secure the future of any girl child. It was introduced in 2015 by the Union Government led by Prime Minister Narendra Modi. This is a small savings scheme that is a part of the Beti Bachao Beti Padhao Movement initiated by the government. This is supposed to bring women to the forefront of the social and economic progress of the country.
We also know that female foeticide is a practice in our country. This Sukanya samriddhi yojana aims to control, and eventually eradicate such practices. The idea of this plan is to invest Rs 1.5 lakh every year for fifteen straight years. At the end of it, your daughter, or the recipient, will receive a lump sum once she turns 21 years old. However, the beneficiary listed should be less than ten years old when you start investing in the Sukanya Samriddhi Yojana.
There are three main tax benefits of investing in sukanya samriddhi yojana scheme:
- Firstly, no tax will be applicable on the amount of money you invest
- Neither will any tax be levied on the interests you earn or the money you withdraw in the end
- Based on your income slab, you can invest anything starting from Rs 250 a year to Rs 1.5 lakh every year. You can calculate and adjust your tax slabs and requirements accordingly.
The money will be handed over only to the girl child once she turns 21. This will not only help her to have her own sense of independence, but also help her to plan her life from there onwards and move towards higher education or help to fund her own marriage and other needs. However, part of the money can be withdrawn once your daughter turns eighteen, based on education needs. The rest can be withdrawn in the financial year succeeding that year. The best part of sukanya samriddhi yojana is that it offers complete tax benefit on the savings amount you deposit every year.
This is a tax exemption offered by the government to encourage parents of girl children to save for their daughter’s secure future. Like other tax saving schemes and provident funds available, the Sukanya Samriddhi Yojana is also applicable to tax deduction under Section 80C of the Income Tax Act. As specified above, the interests earned from this will also be exempted from tax. You end up getting the best of both worlds, firstly, saving up due to the lucrative tax benefits and securing your daughter’s future.
There are just a few guidelines which one has to follow.
1. The sukanya samriddhi account can be opened by either a parent or a legal guardian.
2.As specified above, the account holder must be below ten years old when the account is made.
3.One can only hold one of such accounts in this plan. Having more than one account is not allowed. You can open up more than one account on behalf of your other girl child, but not more than that.
4.You can also keep on depositing for a period of up to fifteen years from the date you open the respective accounts.
As you can understand, this is a very good way to invest your hard earned money and save taxes at the same time. The best part of this plan is the secure life you help your child build for herself. She can use this money to further her higher education or any other personal need, including marriage.
Related Article : Different 80C Options You Are Completely Unaware Off
Now, let us try and understand the investment and interest rates for the Sukanya Samriddhi Yojana. At present, the rate of interest is calculated at 7.6% per annum. This is actually the highest rate of interest offered by any of the government-sponsored schemes that encourage investing in small savings methods. This rate changes every year. We would advise you to check up the current rate before investing.
Where to open the account?
Most public sector or nationalized banks are at your service to help you open the account from there. You might even opt for other mutual funds or liquid investments that are available in the market. However, considering this sukanya samriddhi Yojana might be the better choice for you. Why?
Firstly, the high rate of interest sets the bench. More than that, this is a government initiative where no risks are involved unlike mutual funds which have varying risk levels attached to them.
Secondly, everything is very easy to process. In fact, most nationalized banks have the facility to help you open an account for your daughter if you wish to deposit in this small savings scheme.
Thirdly, and most importantly, you get to save a lot on taxes because of the tax exemptions mentioned in the Income Tax Act. So go ahead and consider investing in the Sukanya Samriddhi Yojana!
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Income tax is always a complicated subject. It’s difficult to understand for a layman. For a salaried person understanding complicated and confusing tax terminology is a nightmare. Through this article we will make your life simple and make you understand tax jargon in an easier manner. In today’s article we will discuss about the basic difference between Exemption, Deduction and Rebate.
Is an amount which is part of your total income but it’s exempt from tax. It means while calculating taxable income some sources of earning is exempt. For example u/s. 10(10D) maturity proceeds of Life Insurance policy is exempt from taxes. In this case while calculating taxable income we will not include life insurance maturity proceeds. In simple term, Tax exemption means tax free sources of earning. It’s advisable to include more and more of exempt sources of earning which will help us to reduce taxable income and in turn tax liability.
Few of the popular example to understand Exemption are
- From salary income based on specific calculation House Rent allowance (HRA) is exempt
- Gratuity received on retirement from employer is also exempt upto a specific amount
- Maturity proceed from PPF account is exempt
It is an amount invested or expenditure allowed under specific section to be reduced from total taxable income. For example, if we invest in 5 year tax saving Bank FD, the investment amount is allowed to be deducted from total taxable income. Amount paid towards mediclaim policies for self and dependents is allowed to be deducted from total income.
Few of the popular example to understand deduction are
- U/s. 80C – Investment or expenditure upto 1.5 lacs p.a. is allowed as deduction from total income. For e.g. Investment in ELSS Scheme of Mutual funds or expenditure towards school tuition fees for two kids are eligible expenses for 80C.
- U/s. 80D – Payments for medical insurance premium for self & dependent and for dependent parents is allowed as deduction from total income.
- U/s. 80DD – Expenditure towards medical treatment of disabled dependent is allowed as deduction from total income upto a specific amount.
It is a different concept all together. Tax Rebate is an amount which is deducted from total tax payable.Unlike deductions which are reduced from total income, Tax rebate is an amount which is deducted directly from your taxes.
An individual can claim rebate of Rs 12500 if he has taxable income less than Rs 5 Lacs. In this case Rs.12500 is reduced from total tax payable before education cess.
To conclude, All three are an important tools for tax planning. Understanding of these three tax terminology will help us to increase tax free income and know tax deductible investment / expenditure. Exemption and Deduction will reduce taxes indirectly. While tax rebate will help us to reduce tax liability directly.
Form 26AS is a consolidated annual statement which has tax credit related information. This statement contains detailed information on tax deducted from the income received by the taxpayer as well as tax paid (challans) in the nature of advance or self-assessment tax. This statement will also contain refund details if any pertaining to the PAN of the taxpayer. This is a very important supporting document which needs to be verified before Income Tax Return Filing. This article will explain the importance and will also explain how to interpret the 26AS statement.
Why the need for Form 26AS?
- It is better known as Tax Credit Statement which sums up every tax credit in the form of TDS and TCS.
- It also displays taxes paid by the taxpayer as “Self- Assessment Tax” and “Advance Tax”
- 26 AS also contains the refund paid out by the Income tax department and hence allows for verification of refunds.
- As this statement combines every tax credit and tax paid as well as refunds paid out to the taxpayer Hence, it facilitates compact supporting document for return filing.
- It also allows convenient and easier return processing.
Every taxpayer considers the TDS certificates as full and final proof for TDS deduction and would continue to file the return of income on the basis of such certificates. However, Form 26AS is conclusive proof of TDS, TCS, and taxes paid. If any TDS certificate is issued manually and such TDS is not shown in Form 26AS then it would mean that the tax deductor has either not paid the TDS to government treasury or has defaulted or wrong filed TDS Return. This would help taxpayers as the Income Tax Department will correlate the data from TDS Returns for Refund processing and if Form 26AS is not considered, it would unnecessarily delay the refunds.
Sometimes the taxpayer may even miss out the incomes (like interest on FD since it accumulates till maturity). In such cases, the Form 26AS will display the TDS deducted by the banks or financial institutions, which needs to be reported in return of income
Understanding Form 26 AS
Form 26AS is divided into 9 sections which are explained as below
- Part A :- Part A of Form 26AS contains TDS details with respect to tax deducted from the income earned or received by the taxpayer. This part will segregate the TDS based on the type of income (head of income) and nature in which it is earned. These subsections are based on sections under which TDS has been booked and deducted and paid to the Treasury of government. So if a taxpayer earns interest income and salary income, then Part A of Form 26AS will be segregated into section 192B (for TDS on salary) and section 194A (for TDS on interest)
- Part A1 :- This part contains the details of the income on which TDS is not deducted as a result of the submission of Form 15G or 15H. When any taxpayer submits Form 15G or 15H, it is considered as evidence which will lead to no TDS on income received by the taxpayer. For e.g. if any taxpayer submits Form 15G or 15H to the bank, then the bank shall not deduct tax under section 194A on interest income received and earned by the taxpayer. Entries appearing herein are the result of TDS return filed by the Tax Deductor. Hence, if there is TDS mismatch (between TDS certificate and Form 26AS) or no TDS (due to non-filing or wrong filing of TDS returns), then the Tax Deductor will have to revise and rectify the TDS return to render appropriate tax credit.
- Part A2 :- This part is specifically dedicated to TDS on sale of immovable property under section 194-IA. This section under Form 26AS requires the buyer to deduct and pay the TDS under section 194-IA on the consideration received on sale of immovable property.
- Part B :-This part holds the details of TCS (Tax Collected at Source) based on PAN of the taxpayer. TCS is applicable on certain goods like Scrap, Alcoholic Liquor etc. In such cases, TCS is collected and paid to the government treasury by the seller (one who receives money) rather than buyer (as in case of TDS). If you sell these goods and are required to collect TCS then this section will have entries for transactions for which you have collected TCs and filed TCS return.
- Part C :- This part will hold the details of taxes paid by the taxpayer in the nature of Self-Assessment Tax and Advance Tax. This section will show the challan details through which the tax was paid by the taxpayer. Challan details will have break up of tax paid (into tax, cess etc.), BSR code, date of deposit, Challan Serial Number etc. which should be filled in the Return of Income as present in Form 26AS.
- Part D : – This part will contain the details of the refund paid to the taxpayer in relation to return of income filed. Refund details will have Assessment year, Mode of Payment, Refund amount, Interest on the refund, date of payment etc. This will help you verify whether you have actually received the refund and if not you can sort it out with the assessing officer.
- Part E: – This part is concerned with AIR (Annual Information Return) transactions based on the PAN of the taxpayer. There are various high-value transactions which are required to be reported in the AIR return by Mutual Fund Companies, banks etc. Such transactions will be traced from AIR returns filed by these Mutual Fund companies etc. based on PAN and will be displayed in Form 26AS.
- Part F : – This part is concerned with TDS on immovable property under section 194-IA but for a buyer of the property. This would mean that entries will appear here only if there has been the sale of immovable property and where the TDS has been deducted and paid to the government treasury by the taxpayer.
- Part G: – This part deals with TDS defaults in the nature of
- Wrong deduction
- Short deduction
- Delayed deposit of TDS
- No deposit of TDS etc.
This part will have details of TDS short payment, interest leviable thereof (due to delay), late filing fees etc. This will not include demands raised by the assessing officer.
We hope that now you must have understood all the components of form 26AS. You may download your form 26AS from the income tax website and file your returns accordingly. Alternatively, if you feel it a little complicated you may get in touch with our Tax experts at Minty who will guide you and make this process easier for you.
Tax planning refers to the sum of all activities which help in bringing down the overall tax liability and adding up to your savings. The ultimate goal of a tax planning drive is to create an estimate of your total holdings and make wise financial choices by accounting for all exclusions, exemptions, allowances, deductions etc.
A little bit of tax planning today can be of considerable help in adding to your savings bundle in days to come. Today, we are going to discuss the basic principles of tax savings which can be of exceptional help for all beginners whether they belong to the salaried or non-salaried category.
1. Age factor
Age has a big role to play in deciding on the choice of financial instruments as younger people are mapped against riskier options. As a prudent tax planning principle, you need to opt for market-linked tax saving funds such as ELSS, NPS and ULIP.
On the other hand, if you are middle aged and risk appetite is low then you should opt for low risk investments such as Endowment policies, 5 year Fixed Deposit etc.
The willingness to take risk remains high amongst young investors and they can also be seen opting for home loans during this phase as the repayment tenure is pretty long. It is also imperative to note here that starting with investments early and continuing the same for a longer tenure can help in mitigating short term fluctuations.
2. Goal based Factor
The tax planning exercise is also considerably influenced by the financial goals of an individual. If you are planning on retiring within the next 5 years, then your tax saving investment portfolio needs to be less inclined towards the market-linked tax saving options. The main reason behind this is that you are pretty close to your goal and all sources of regular income is bound to cease soon.
On the other hand, if you have a significant number of years left for your retirement, then the maximum amount of funds should be allocated towards equity linked investments and less towards debt options.
3. Risk Appetite
Willingness of risk taking usually bears a direct relationship with our income level. Individuals having sufficient annual gross total income can segregate a lion’s share of their funds towards investment in equity oriented schemes. These funds have higher growth potential which in turn can add up to your corpus. Tax saving investments providing assured returns are advised to risk averse investors. They can easily go ahead with 5-year bank deposits, PPF, NSC, Senior Citizens Savings Scheme and 5-year post office deposit.
A maximum of INR 150,000 can be claimed as deduction u/s 80C by investing the same in a variety of instruments ranging from fixed deposits to public provident funds. Donations made on philanthropic grounds to charity like the National Relief Fund can also be claimed as deduction u/s 80G of IT Act. Various organisations have been pre-specified by the Finance Ministry to which donations can be made by a taxpayer for enjoying tax deductions. However, it is imperative to note here that only cash and cheque donations are eligible for deduction under this section of Income Tax Act.
Your tax planning needs to be in sync with your overall financial planning. You should thus ask yourself whether a particular tax planning tool can assist you with the fulfilment of financial goals. You also need to enquire if it coincides with your desired asset allotment after considering your investment perspective and risk appetite. Instances are not rare when the accompanying lock-in period of a particular financial instrument ends up causing an acute liquidity crisis for the investor.
A proper analysis needs to be carried out between the risk and rewards associated with investing in a particular instrument. Equity Linked Savings Scheme is usually suggested to young investors who can bear the instability of the equity market. They also have a small lock-in period of just three years for catering to your liquidity needs which might arise suddenly.
Savings and investment can be boosted up easily either by increasing your income or cutting down on expenses. Whether you are on the brim of retirement or a fresher who has just started with his work tenure with a big MNC, savings remains to be the ultimate goal during all stages of our life. Contrary to popular belief, even 100 INR saved today can go a long way in adding to your corpus if invested properly. Today, we are going to take you through some expert recommended tips for hiking up your savings, boosting up income, reducing debt and investing wisely.
Savings refer to that part of our monthly income which is left after paying back all expenses. But this needs to be computed the other way around. You should first keep a portion of your income aside before deciding on the things to do with the rest. For example, if you are earning Rs.40,000 then first keep aside around Rs.10,000 for investments and then manage your expenses in balance 30,000. This way you will be more disciplined towards savings. For achieving this, you can opt for automatic transfers to an investment or savings account directly.
Creating A Buffer For Rainy Days
The first priority of all individuals should be to create a fund for rainy days. This serves as the basis of creating a sound financial plan. Once you have accumulated enough to mitigate about three to six months of expenses, you can shift your focus to future savings and debt reduction.
But for benefitting the most out of the same, you need to decide on the type of expenses which can be classified as emergencies. For starters, job loss or a major illness can be considered as a true emergency. Infrequent expenses such as purchasing a new car cannot be classified under the head of an emergency although you also need to save for the same.
Save More By Spending Less
You can trim down your expenses in a variety of ways be it by cutting down on the consumption of the daily premium coffee or multiple online channel subscriptions. But while cutting back on the spending, you need to ensure that it doesn’t get spent on any other unimportant avenue. If you are not sure about investing the money, then you can make a pending payment or simply transfer the fund to your savings account.
Bid Adieu To Expensive Habits
If your day just doesn’t start without a Frappuccino from Starbucks and maybe a costly dine-out at posh restaurants on weekends, then it’s time to cut down on the same. Apart from the obvious health benefits of starting your day with a home-made black coffee and ending it by munching on house cooked food, these small steps taken can inflict great differences in your ultimate savings figure at the end of the fiscal. Once you direct this money towards other sources having higher potential, such as paying off bank debt, you can free up your money faster. This in turn can be redirected towards further investment. You can make a list of all the debts which need to be paid back and start with the ones having the smallest balances or the highest interest rates.
Unleash Your Creative Potential To Increase Earnings
You can increase your regular income by either selling off redundant things or maybe getting a part-time job for utilising the time you otherwise spend lazing around during lockdown. Taking up full time work can seem burdensome especially when you are working round the clock for the weekdays. It is thus advisable to take up short term projects which can align you towards a specific savings goal. You can also generate extra cash for savings by selling off artifacts and belongings you no longer require such as collectables, designer clothing, jewellery, musical instruments etc.
Proper Asset Allocation
While some investments rank high in the department of volatility, others are comparatively tame on the risk-reward scale. Younger people are advised to proceed with aggressive investment options whereas older people approaching their retirement age should stick to the conservative avenues. A direct correlation exists between risk and return. Thus, if a particular investment house is promising you sky-high returns with equity linked funds, then you should also be adequately prepared to suffice the bloodshed if the market crashes.
Baby Steps Towards Savings
If savings seems like a difficult challenge for you, then you should start off with smaller targets of maybe 100 or 500 INR daily. Once you have saved adequately and spent it for realising a particular aim, you can continue with further savings so that you can slowly meet all your debts. If you feel that your savings are not sufficient for meeting long-term investment and major purchases, then your standard of living is definitely higher than what it ought to be. Such a scenario makes it necessary to make major adjustments such as shifting to more affordable housing or even trading your new car for cheaper public transportation.
Sticking To An Investment Plan
Steady investors who wish to diversify their portfolio should actually shift their attention towards purchasing more shares whenever the stock market takes a dip. You need to review your investment strategy on timely intervals and remain unperturbed by newspaper headlines during the allocation of funds. The ultimate aim here should be to continue with the investment pattern irrespective of what the newspapers are hinting at.
Seeking Out Help
Investors often feel confused about which stocks to select and how to optimally balance their portfolio. In such a case, they can readily seek out the assistance of trained professionals. Contrary to popular misconception, financial advice is not earmarked against the wealthy strata of our society. It can benefit everyone who wishes to increase their savings and safeguard themselves from the uncertainties of the future.
Read More :- Financial Planning – A Need not a Choice
It is impossible to create a promising future unless you learn the means of prudent investment and judicious savings. Money has a big role to play in regulating the flow of our lives. While it serves as an essential wealth creating tool on one hand, it also acts as a transaction instrument which can satisfy our present requirements. Proper financial planning empowers individuals in meeting their ultimate goal by creating a trade-off in between current and future consumption along with other variables such as savings and investment.
HUF or Hindu Undivided Family is a unique taxable entity which is existing only in India. This entity is taxed independently from its members. This entity can be created by Hindus as well as by Sikhs, Jains and Buddhists also. Let’s see how it can be advantageous from a taxation perspective.
How to create HUF
- The moment you are married, HUF is automatically created, however, it should consist of at least one male.
- It includes wives and unmarried as well as married daughters.
- It has assets which are either acquired as a gift or through WILL or as an ancestral property or property contributed to the common pool by members of HUF.
- HUF should be registered in its name and should have a legal deed. It is better if the HUF has its PAN number as well as a bank account.
Section 80 deduction
Salaried people are always fascinated about this section because it is where they can save tax. You may be surprised to hear that HUF can as well claim this deduction. However, it is better to invest in Life Insurance policies (on HUF member’s life) or bank fixed deposits. This leads to additional deduction of Rs.1,50,000. This is particularly beneficial for those individuals who have already exhausted their section 80C deduction.
Similar treatment for other deductions under section 80 like section 80D (mediclaim), 80G (donations to charity institutions etc.) and even section 80DDB (for deduction for payment for medical treatment of specific diseases or ailments etc.)
Section 24 benefit
Planning to buy a second home? Why not take it on the name of your HUF? There are two benefits for that – one is that you can make your HUF liable for the rental income taxability and another that the HUF can as well claim section 24 deduction for interest on housing loan for Rs.2,00,000 (Self Occupied Property) and for any amount (for let out or deemed let out property). And, HUF will also be able to claim standard deduction on the rental income received.
And, of course this interest deduction for housing loan is in addition to the interest on housing loan claimed by the family member or Karta.
Where the HUF owns the house and you and your family reside in that house, then you can also avail of the HRA exemption by taking rent receipts. This would result in two-way benefits as below.
- First, it will exempt your HRA to the extent as prescribed under the Act
- As the house is in the name of the HUF, it can claim deduction under section 24 for interest on housing loan as well as standard deduction also, since it is receiving rental income from you.
Low Tax Incidence Incomes
Incomes such as short term capital gains are taxed at a lower tax rate of 15%, which means that if the HUF earns taxable gains below the threshold, then only marginal income will be taxed at this rate. Also, it would be better to trade in the name of HUF, especially if you have large trading volume, since there would be tax on dividends if it crosses Rs.10 lakhs.
Gifts can be obtained by the HUF, where the tax liability arises when such gifts exceed Rs.50,000, unless such gift is received from the relatives. By this way, any karta or coparceners can manage their tax liability with respect to gifts by routing these gifts in the name of HUF.
Note: Karta is a person who is the head of a HUF. He is the one who is the senior-most male member of the family. Co-parceners on the other hand are the other members.
Points To Be Remembered
- HUF will need to file a return of income every year, considering every income which is received on its name. However, there is a clubbing provision that would hold the Karta liable for all the income which is diverted to HUF with an intention to evade tax.
- Any asset which is contributed to the HUF will be treated as a common asset and the asset owner must renounce the ownership in the name of HUF. Hence, if the previous owner wishes to sell such an asset, then it cannot be done so without the consensus of all HUF members.
- Any addition to the family by birth or marriage will add a member to HUF. Hence, it may be very difficult to manage such a large HUF, while keeping appropriate records of assets and funds contributed to HUF and by HUF.
- Shutting down the HUF is a difficult process and hence it is impossible to proceed with unless all the HUF coparceners agree to the partition.
- Where there is no male member, female member can become karta, but its tax aspects are still in debate.
- If any member of Karta transfers any property to HUF without any sufficient consideration, then it will be clubbed in the hands of such transferor.
- Where any woman has any wealth which she brought in from her maiden home, the income from the same would not be taxable as income of HUF, rather in hands of such wealth owners.
Seeking out the assistance of financial advisors for investment advice seems like the easy way out while dealing with financial troubles. However, the real problem starts while gauging whether your advisor is actually taking care of your corpus. You might face several questions while dealing with the same. Are your friends and relatives doing better than you? Has your portfolio showcased much growth? These are some common questions which might trouble you while thinking about the viability of experts handling your finances.
Financial markets do not perform equally well every year and the current year is one such year which reported record losses for most investors. However, if you are facing difficulty in accepting the loss experienced, then your advisor might not have correctly gauged your risk bearing capability. This is why you ended up taking more risk than what you could normally accept.
The blunders committed by financial experts become less prominent in those years when the financial market showcases a booming pattern. Investors also do not scrutinize the performance of advisors as long as they keep on making money every year. Today we are going to talk about some common pointers which you need to consider for determining the efficacy of investment advice imparted by your advisor.
- Risk Bearing Capacity
Investors usually get to gauge their risk bearing capacity only when the markets crash. Such downfalls cause most of the investors to report loss figures. But the ones who are left stunned by the rhetoric decline in their portfolio are the ones who had been taking more risk than what they ideally should.
It is the duty of your financial advisor to assess your risk bearing capability on a yearly basis. This needs to form an extremely crucial part of the annual review of your portfolio carried out by your financial advisor. Such a review can either take the shape of a short quiz or discussions conducted regarding the changes in financial standing during a particular financial fiscal.
Childbirth, marriage, death, divorce, job loss and higher education of children are some such factors which deeply impact the risk bearing ability of an investor. Although as an investor, it is your duty to educate your financial advisor about such developments, the reverse also holds true.
Various mutual fund companies have started operating as investment advisors and in most cases, they refer to their own products while designing a client portfolio. Such forms of conflicted advice might be detrimental for clients in the long run. You should thus ensure that you are working with an advisor whose core business is just investment advisory services and not asset management, banking, accounting or insurance.
- Acting As A Fiduciary
Your financial advisor should actually act as a fiduciary thus taking all decisions on your behalf and for your betterment. But in most cases, investors do not have a clear understanding about the concept of fiduciary. Such advisors are under obligation of law to pay greater importance to your interests. Advisors working as representatives of banks, brokerage firms and insurance companies do not act as fiduciaries while advising their clients. This is why they provide advice which might even prove to be detrimental for their clients.
Non-fiduciary advisors on the other hand might recommend proprietary investment products which may not always be in the best interest of end customers. Thus, it becomes very difficult to analyse whether or not your financial advisor is acting as a fiduciary. In such a scenario, you can easily confirm the same by mailing a written request to your advisor. You should accept just written responses as vocal explanations to such complex topics are regarded as null and void. Your financial advisor is also under obligation to specifically spell out his or her fiduciary responsibilities in the contract signed at the very beginning of the investment tenure.
- All Inclusive Advice
Your financial advisor should consider all the other investments held by you as well as your spouse before recommending any particular addition to and deletion from your portfolio. The main intent behind this is avoiding over or under allocation of a particular asset class in your portfolio. Having a balanced mix helps an investor in making the most of his accumulated funds by effectively buffering from all associated risks. If you decide to have separate advisors for dealing with your and your spouse’s finances, then it is necessary to have effective communication amongst them.
- Clear Illustration Of The Process
It becomes easy for investors if a prudent, thorough and easily understandable process is demonstrated by the investment advisor before surfacing the various forms of investment options. The reports sent to them should contain a clear picture of the performance analysis and risk involved in the same. This needs to be prepared in an easily understandable manner which can be gauged easily by end customers and in the way in which it was intended by the financial advisor in the first place.
You can enquire your financial consultant about the viability of recommendations made by them and whether or not they are receiving any additional commission for referring the same. The purchase and sale of investment made by you should not be processed under any form of urgency and you can take as much time as required for evaluating the recommendations.
Read More :- How to check if your Financial Planning is on track
At the end of the day, a certain level of trust needs to develop on your advisor. In spite of that, you should also exercise prudence in every single step to determine the efficacy of the funds suggested by these advisors for betterment of your financial standing. Getting the backing of a financial advisor who possesses adequate degrees in the fields of economics, finance and investment can also be of great help in such a scenario.
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