Revised Direct Taxes Code 2010-A Critique on RDP-VRK100-21Jun2010

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On a cool Sunday evening, a Child walks on a beach with gay abandon. She starts to build a castle in the sand. She collects sand and arranges it into a big heap. She tries to mould it as per her imagination. After sometime, she completes the sand castle and she goes around the castle merrily – laughing, cheering and shouting.

This attracts some other people loitering on the beach. They come and start inspecting the castle. Some applaud it and some suggest little changes to the castle to make it more beautiful. First the child is confused about making the changes. At last, she obliges the onlookers’ advice and makes alterations with some tinkering to the minarets here and to the windows there.

Now, more onlookers start giving advice on making it look more wonderful. The child listens patiently to them and makes more alterations with her tender hands. Then a disaster strikes. The castle suddenly collapses due to too many alterations. Disappointed by it, the child walks home with a heavy heart.

Some of you may be wondering what this is all about! The above story sums up the predicament of the Government of India in bringing about several amendments to the Direct Taxes Code (DTC). It may be recalled that the Government had brought out a Revised Discussion Paper (RDP) on 15^th of June 2010 making certain changes to the draft DTC Bill which was released in August 2009. The Government has apparently messed up the whole issue of bringing a transparent DTC, which could have been understandable easily by ordinary persons; providing stability, equality and clarity; and without any distortions. This article provides a critical analysis of important issues in the DTC proposals.

The impact is explained with catchy photographs!

The article is organized on the following lines:

A critical analysis of the Capital Gains tax on shares

Why flip-flops are not good for the overall tax efficiency

Background to abolition of long-term capital gains in 2003/2004

Is 25 per cent Public Shareholding a joke?

Why it is a mixed bag for individuals and salaried class

A big climb down and dilution of reforms by the Government

The following important annexures are given at the end of this article: (A must-read for all investors, taxpayeers and market players)

Annexure I   : Difference between EEE and EET methods

Annexure II  : The Six Pack!

Annexure III : Types of tax exemptions that may be continued after DTC

Annexure IV : Types of tax exemptions that may be withdrawn after DTC

Abbreviations Used:

DDT-Dividend Distribution Tax	PFRDA-Pension Fund Regulatory and
DTC 2009-Direct Taxes Code  August 2009	Development Authority
EEE-Exempt, Exempt & Exempt	LTCG-Long-term capital gains
EET-Exempt, Exempt & Tax	PPF-Public Provident Fund
ELSS-Equity Linked Savings Scheme	RDP-Revised Discussion Paper of DTC
of the mutual funds	released by Govt on 15.6.2010
EPF-Employee Provident Fund	STCG-Short-term Capital Gains
GPF-Government Provident Fund	SCSS-Senior Citizen Savings Scheme
IT Act-Income Tax Act, 1961	STT-Securities Transaction Tax
LTC-Leave Travel Concession	MAT-Minimum Alternative Tax
NPS-New Pension System administered	ULIP-Unit Linked Insurance Plan of
by PFRDA	insurance companies
NSC-National Savings Certificate
PF-Provident Fund	VPF-Voluntary Provident Fund

Concept of DTC:

When it was conceived in August 2009, the proposed DTC is supposed to be a single code for all direct taxes, like, Income Tax, Corporation Tax, MAT, DDT, wealth tax, etc. Written in simple language and direct voice, the DTC is expected to be more transparent compared to the existing direct tax laws. It seeks to encourage simplification and aims for stable taxes and better tax compliance.

Some of the provisions, like the Minimum Alternative Tax (MAT) on gross assets, introduction of EET regime and removing several tax exemptions have not been received with enthusiasm by the affected people. After receiving several representations from various stakeholders, the Government on 15^th of June 2010 released a Revised Discussion Paper (RDP). This RDP has restored some tax exemptions for certain schemes bringing relief to several people. It has decided to continue with the existing system of taxing MAT on the basis of book profits.

Messy Capital Gains Tax!

However, in one area the Government has messed up a lot. That is capital gains. The RDP proposes to change the very definition of short-term capital gain (STCG) and long-term capital gain (LTCG). Long-term capital gain on listed equity shares and equity mutual funds are taxed at zero rate as of now. Now, the RDP proposes to introduce a system of including LTCG in one’s income and taxing LTCG at the tax rate applicable to the taxpayer, after adjusting the LTCG with a specified discount rate. The Government has said that the specified discount rate would be announced while introducing the DTC Bill in Parliament. This kind of flip-flop of LTCG relating to shares and mutual funds is detrimental to the long-term investments. Strangely, the Government seems to be encouraging

short-term gambling in equities rather than long-term investments.

Is 25 per cent Public Shareholding a joke?

The Government has recently come out with norms for making 25 per cent public shareholding compulsory in companies listed on stock exchanges. One fails to understand how the Government can increase the public shareholding to 25 per cent without encouraging long-term investments in shares and mutual funds.

When tax rates are changed frequently without any predictability, it changes the behaviour of investors and market players in a big way. Let us go back a little and see the amendments to LTCG relating to listed equity shares and equity mutual funds.

Taxes on STCG and LTCG before 2003:

Prior to 2003, STCG on shares was taxed at 30 per cent; and LTCG was taxed at 20 per cent with indexation benefits. There was no STT at that time.

UNION BUDGET 2003-04:

As per the Union Budget for 2003-04, long term capital gains (LTCG) on company equity shares (listed on any recognized stock exchange in India) was exempted from tax for shares acquired on or after March 1, 2003 but before March 1, 2004. This was made applicable from April 1, 2004 and was applicable for assessment year 2004-05 and for subsequent years. The intention of the then Government behind the tax exemption for LTCG on listed equity shares for a limited period was to “give incentive for investment in equity shares.”

The then finance minister, Yashwant Sinha, told the Parliament, during his budget speech in his own words:

“We need to improve the industrial sector and improve the equity markets”

“I am also committed to bringing the small investors back to the capital markets by restoring their confidence”

“In order to give a further fillip to the capital markets, it is proposed to exempt all long-term capital gains from tax for equity shares bought for a period of one year from March 1, 2003, and sold after a one year…”

UNION BUDGET 2004-05:

Now, you see P.Chidambaram’s, the then finance minister, spin on the rationale behind the abolition of LTCG while presenting the Budget 2004-05 to Parliament:

“Capital gains tax is another vexed issue… I’ve decided to make a beginning by revamping taxes on securities transactions…Our founding fathers wisely included entry 90 in the Union List in the seventh Schedule of the Constitution of India.

“Taking a cue from that entry, I propose to abolish the tax on long-term capital gains from securities transactions altogether. Instead, I propose to levy a small tax on transactions in securities on stock exchanges. The rate will be 0.15 per cent of the value of security. My calculation shows that the new tax regime will be a win-win situation for all concerned.”

This was done with a view to simplifying the tax structure on securities transactions, as per the Explanatory Memorandum to the Union Budget 2004-05. Accordingly, tax on LTCG was removed and tax on STCG was reduced to 10 per cent. And in the place of ‘nil tax’ on LTCG on securities transactions, a new tax called Securities Transaction Tax (STT) was introduced by P.Chidambaram.

Unfortunately, STT stays!:

When the tax on long-term capital gain was abolished by the then Finance Minister while presenting the Union Budget 2004-05, the FM introduced STT to fill the tax revenue gap caused by the abolition of LTCG. Unfortunately, the RDP says that STT will be revised suitably. Now, equity investors will have to pay both the STT and LTCG once DTC comes into force, which was not the case prior to the introduction of STT in 2004.

Current provisions:

As of now, STCG on shares is taxed at 15 per cent while LTCG is completely exempt from tax. And the RDP proposes to include STCG in one’s income and pay tax as per rate applicable to taxpayer; and LTCG will be given a specified discount rate and taxes as per taxpayer’s marginal tax rate. This is completely in contrast to what the previous finance ministers, Yashwant Sinha and P.Chidambaram had committed in Parliament while removing LTCG on shares.

Does it mean to say that as of now public participation in capital markets has improved compared to 2003/2004? Everyone in India knows that share of equities in India’s total savings is at a bare minimum of between 2 to 5 per cent.

To know more on the latest amendments given in RDP, just click:

http://ramakrishnavadlamudi.blogspot.in/2010/06/revised-direct-taxes-code-2010-impact.html

(In fact, the RDP does not use the words, short-term capital gain or long-term capital gain. For the sake of simplicity and better understanding, the words STCG and LTCG are used as they have been in existence for more than five decades.)

Sweet and Sour!

The Revised Discussion Paper is a kind of mixed bag for individuals and salaried class. The Government has now decided to provide tax exemption at the time of withdrawal (EEE method), even though for six types of investments only.

To know about the difference between EEE method, EET method and such eligible investments, see Annexures I to IV given at the end of this article.

Everything has a price. Take for example, the Indian public are very happy with the subsidy on petrol, diesel, LPG & kerosene. But, ultimately, the entire economy is paying the price for the subsidy as the subsidies are paid through the Union Budget! The cost of everything has to be paid by someone, i.e., the public.

In the original DTC, the Government had proposed to remove exemptions; while simultaneously reducing tax rates and increasing tax slabs. But due to public outcry, Government has now said it would restore certain tax exemptions. As the tax base comes down, the Government will not be in a position to reduce tax rates and increase tax slabs as proposed in the original DTC in August 2009. The net effect will be the same for public! (It may be recalled that it was proposed, in the draft DTC of August 2009, to increase the present exemption of Rs one lakh under Section 80C of the Income Tax Act to Rs three lakh and increase the tax slabs – up to Rs 10 lakh at 10 per cent; above Rs 10 lakh to Rs 25 lakh at 20 per cent; and above Rs 25 lakh at 30 per cent.)   

To know about the proposals of original draft DTC released in August 2009, just click: http://ramakrishnavadlamudi.blogspot.in/2009/12/direct-taxes-code-dtc-bill-2009-its.html

At this stage, it would be instructive to know the original objectives of the Government while drafting a Direct Taxes Code Bill in August 2009. They were:

1.    Providing stability: At present, the rates of taxes are stipulated in the Finance Act of the relevant year. Therefore, there is a certain degree of uncertainty and instability in the prevailing rates of taxes. Under the Code, all rates of taxes are proposed to be prescribed in the Direct Taxes Code itself thereby eliminating the need for an annual Finance Bill. The changes in the rates, if any, will be done through appropriate amendments to DTC brought before Parliament in the form of an Amendment Bill.

2.    All the direct taxes – income tax, corporation tax, dividend distribution tax, minimum alternative tax & wealth tax – were brought under a single code

3.    A very simple language was used in drafting the code so that an ordinary person also can understand the provisions of the law

4.    By reducing vagueness in the provisions, the Government aimed at reducing the scope for litigation between taxpayer and tax administration

It is very sad to read the contents of Revised Discussion Paper (RDP) released a week back. The Government has failed to provide clarity on many issues, like:

Ø     What will be tax rates and tax slabs

Ø     What is the specified discount rate for adjustment to LTCG on shares

Ø     No clarity what type of savings instruments would attract EET method

Ø     There is no reference as to whether principal paid toward instalments of loans taken for constructing a house property would be allowed tax deduction (The RDP has clarified that interest up to Rs 1.50 lakh would continue to be eligible for tax exemption).

Ø     The RDP has failed to indicate what the rate of MAT would be

The refrain now is that the legislature is the ultimate authority for deciding tax rates! It may be recalled that the original DTC 2009 had provided rates & slabs.

How to tweak your investments?

It appears that the RDP encourages tax evasion and avoidance and it does not bring any equity to the tax system. It fails to provide transparency and remove distortions in the present direct taxes regime.

There are various methods to protect our interests, in a legal manner, in relation to tax exemptions and liabilities. We need to show a little ingenuity and look for ways to protect our interests under the existing laws.

Let us hope that the Government would provide a reasonable transition period for investors and more clarity would exist when the real DTC Bill is presented in Parliament in the next few months.

Look at them with fresh pair of eyes!

Any direct taxes regime that is transparent, clear and simple to understand is very good for the economy as a whole. As taxpayers, we need to encourage any sincere attempts by the Government to clean up the existing messy laws. We shall be able to see the broader picture which will benefit the entire economy rather than a few individuals or smaller groups. Tax laws have to be amended keeping the ever changing economic and social environment in mind.

We need to look at the new Code with fresh eyes without any old baggage. Theoretically, the concept of EET, removal of all kinds of tax incentives/concessions, and clubbing all sums under taxable income, are sound and beneficial in the long-term. However, India is beset with its own set of peculiarities, lack of social security system, contradictions and problems as far as increasing tax base and administering taxes is concerned. We need to change our mindset – not only taxpayers, but also those in the tax administration and implementation.

To read other important document on Direct Taxes Code, just click:

http://ramakrishnavadlamudi.blogspot.in/2009/12/direct-taxes-code-impact-on-long-term.html

This explains why the Government seems to be encouraging PURE GAMBLING rather than providing incentives for long-term investments in equities.

To sum up:

The entire DTC exercise now looks very blurred!

Annexure I

WHAT IS THE DIFFERENCE BETWEEN EEE and EET METHOD?

The present system is called ‘EEE’ meaning investments enjoy benefits in three stages: 1). Exemption allowed at the time initial contribution, 2). Exemption through out the accumulation period, and 3). Exemption at the time of withdrawal. (EEE stands for Exempt, Exempt and Exempt).

It was proposed in the DTC 2009 that the EET method will apply for new contributions made after the commencement of the DTC. The DTC 2009 had proposed to shift to a new system called ‘EET’ whereby exemption would be allowed at the time of initial investment and accumulation period only; but the withdrawals will be included in the taxable income and taxed according to one’s tax slabs. (EET stands for Exempt, Exempt and Tax).

Annexure II

The Six Pack!

As the Revised Discussion Paper released on 15^th of June 2010, The Government will continue to provide EEE method of tax treatment to the following savings instruments:

Government Provident Fund

Recognised Provident Funds

Public Provident Fund Scheme

New Pension System (NPS) of the PFRDA #

Approved pure life insurance products *

Annuity schemes

   * There is a lot of confusion as the Government has not defined what an ‘approved pure life 

    insurance product’ is. Some experts believe that it refers to pure term insurance policies.

   # At present NPS is under EET method; after DTC it would be under EEE method

The above mentioned six instruments will continue to attract the current favourable tax treatment at all the three stages: 1. at the time of investment, 2. during the accumulation period, and 3. at the time of withdrawal. The investors can continue investments in the above six even after the DTC comes into force.

Annexure III

The following tax exemptions are likely to be continued even after DTC:

It is interpreted from the DTC Bill 2009 and RDP, that the Government in all likelihood will continue with the following exemptions and incentives:

A. DEDUCTIONS THAT WILL BE ALLOWED FOR SALARIED CLASS ON THEIR GROSS SALARY:

1. Professional tax paid

2. Transport allowance as per limits

3. Allowances incurred for official purposes

4. Compensation received under Voluntary Retirement Scheme

5. Gratuity received on retirement or upon death

6. Amount received on commutation of pension

B. DEDUCTIONS THAT MAY BE ALLOWED WHILE COMPUTING TOTAL INCOME:

As per the proposals of the draft DTC 2009 and the Revised Discussion Paper, the following deductions may be allowed for individuals/salaried class:

ü      Interest paid up to Rs 1.50 lakh per annum on housing loan for self-occupied property

ü      Tuition fee paid to a college/school in India for full-time education of two children of an individual/HUF is eligible for deduction

ü      An individual shall be allowed a deduction in respect of any amount actually paid by him in the financial year by way of interest on loan taken by him from any financial institution for the purpose of:

(a) pursuing his/her higher education; or

                  (b) higher education of his/her relatives.

ü      Health insurance premium of up to Rs 15,000 (Rs 20,000 for senior citizens) will be allowed as deduction for an individual/HUF. For health insurance on the health of his/her parents, an additional deduction of Rs 15,000 (Rs 20,000 if the parents are senior citizens) will be allowed .

ü      An individual will be allowed a deduction of up to Rs 40,000 (Rs 60,000 for senior citizens) for medical treatment of self or dependents

ü       An individual/HUF will be allowed a deduction of up to Rs 50,000 (Rs 1 lakh for severe disability) for medical treatment of a disabled dependant

ü      A person shall be allowed a deduction of up to 125% of donations made to laboratories and colleges engaged in scientific/statistical/social sciences research. A person shall be allowed a deduction of up to 100% of the donations made to PM National Relief Fund, CM Relief Fund, etc. And in other cases, 50% deduction is allowed for donations made to certain organisations.

ü      Dividends will not attract tax in the hands of the recipient if such dividend distributed by companies has suffered Dividend Distribution Tax (DDT) at the applicable rate. (The DTC 2009 has proposed to levy 15 per cent DDT.)

In the light of the overall tax exemptions, tax rates and tax slabs, the Government may change any of the above tax incentives/exemptions mentioned in part A and B above while presenting the DTC Bill 2009 in Parliament in the next few months.

As per Section 80C of IT Act, an individual or HUF is eligible to get tax exemption up to Rs one lakh per annum in certain notified savings instruments. The draft DTC Bill 2009 proposed to increase this limit to Rs three lakh per annum. However, the context has completely changed with the Government agreeing to continue with certain existing tax exemptions as per the Revised Discussion Paper. Now, one can safely assume that the Government will definitely not be in a position to provide a limit of Rs three lakh tax exemption.

Annexure IV

TAX DEDUCTIONS/INCENTIVES TO BE WITHDRAWN:

A careful reading of the provisions and the RDP and DTC 2009 indicate that the Government is most likely to withdraw the following existing tax exemptions being enjoyed by the taxpayers. One is forced to come to this conclusion because the Government has maintained a strange silence on these issues and these issues have not been mentioned either in the DTC 2009 or the RDP released on June 15, 2010. So, the important deductions that are most likely to be disallowed in future under proposed DTC could be:

o          Housing Loan instalments of up to Rs 1.00 lakh in a financial year and allowed as deduction under Section 80C of existing IT Act may not be allowed as deduction under the proposed DTC 2009

o          Contributions made to Equity Linked Savings Schemes of Mutual Funds

o          Notified Bank Time Deposits for a term of 5-years or more

o          Accrued Interest on NSCs

 

o          Contributions made under Unit Linked Insurance Policies

o          Under DTC, bonuses or sums received from life insurance policies may not be allowed for deduction in case: (1). Annual premium paid is more than five per cent of the sum assured; and (2). If the policy is surrendered before the maturity date (as per clause (a) of sub-section 3 of section 57 of DTC 2009

Note: 1. Capital Gains Savings Scheme will be scrapped..

          2. STT will continue along with LTCG on shares.

          3. Grandfathering Clause: In certain types of investments, only new contributions  

              on or after the commencement of the new Code will be subjected to EET

References:

1. Revised Discussion Paper released by Ministry of Finance, GOI

    dated June 15, 2010

2. Direct Taxes Code Bill and discussion paper released by Ministry of Finance,  

    GOI in August 2009

3. Newspapers

Photo courtesy: bing.com, bbc.com, AP and author.

Author’s Disclaimer: The author’s views are personal. The above article is written for information purpose only. Every care has been taken to provide authentic information as far as possible; however, the author is not responsible for any inadvertent discrepancies that may have crept in. Readers should consult their own certified tax consultants or experts to correctly interpret the provisions of tax laws or other matters.

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RETIREMENT PLANS WITH HIGHEST SAFETY FOR INDIANS-VRK100-03012010

RETIREMENT PLANS WITH HIGHEST SAFETY FOR INDIANS

Rama Krishna Vadlamudi, BOMBAY

January 3, 2010  


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There used to be a time when Senior Citizens would get a lot of support and care in a joint family set up. Now that India has become a dominating part of the so-called global village, there has been a definitive shift toward the concept of nuclear family, where the onus is on ‘me and my close family.’ However, the implications of this tectonic shift have not been fully felt in the Indian community so far, especially, among senior citizens. They are yet to accept the reality, which is a bit harsh for traditional people to digest in many an instance. In the light of this new/modern trend, there has been no corresponding change in the economic well-being or protection of senior citizens.

In view of the shift away from joint family concept to a nuclear family, youngsters in their 40s, 30s and even 20s and who have been earning good income need to set plan for their retirement in early part of their career, profession or business. This calls for a radical shift in their saving and investment habits. Now, let us examine the traditional retirement plans with guaranteed returns and tax saving embedded into them. (Another article is being written afresh analyzing the retirement plans available from insurance companies and mutual funds, which do not offer any guaranteed returns. You need to wait for a few more days to publish it on my SCRIBD pages at www.scribd.com/vrk100)

General Guidelines for Senior Citizens

Before we go deep into the minute details of the individual plans, let us know a bit about some basic principles behind retirement plans and the underlying idea behind them.

Start Early: It would be better to start planning for retirement well before the age of retirement. Starting early enables people to add a variety of schemes and avenues to their retirement plans. Keeping this in view, many life insurance companies are offering a variety of products to youngsters in their 30s and 40s with high monthly earnings.

Capital Protection: Protection of capital should be the paramount requirement for Senior Citizens. People in their golden years prefer safety and stability. As such, they try to put their money in government securities, post office savings, bank deposits and other low-risk instruments. So that, return of their hard-earned money is guaranteed at all times. Social and income security are the two most vital needs for senior citizens.

Diversification of investments: It would be better to spread their investments in different instruments depending on individual requirements. A variety of safe instruments for senior citizens are available.

Surety of regular/monthly income: Retirement plans should offer guaranteed and regular returns for investors so that they can have a stable, peaceful and enjoyable lifestyle even after retirement.

Liquidity: In retirement, liquidity of saving instruments is of utmost importance. Any savings product/instrument should be easily encashable so that investors can withdraw their money in case of financial emergencies arising out of unforeseen events, like, a medical treatment, etc.


INVESTMENTS SENIOR CITIZENS SHOULD AVOID:

The foremost need for Senior Citizens is protection of capital and guaranteed & regular income to take care of their daily needs. As such, it would be better if they avoid investing in equities and equity-linked investments (if one is extremely rich, he/she can dabble in equity investments, though). They should also avoid any investments that claim to offer ‘higher’ or ‘superior’ returns. In our country, there are a lot of sellers of financial products in the garb of ‘financial advisors.’ Such sellers are similar to ‘quack’ doctors who are available at every nook and corner of India. Seniors need to be wary of such sellers of financial products, which are sold to innocent people without explaining or analyzing the merits/demerits/suitability of such financial products to the specific needs of individuals.

Let us now discuss some schemes that offer low-risk and high-security features:

1. Senior Citizens Savings Scheme (SCSS) - 2004

FEATURES:

Eligibility: Senior citizens who are above 60 years of age are eligible for depositing in this scheme. Individuals who are more 55 years and have retired after voluntary retirement scheme are also eligible. Retired personnel of Defence Services are also eligible to invest irrespective of the age limits subject to certain conditions.

Amount: The minimum deposit is Rs 1,000 and the maximum amount is Rs 15 lakhs, in multiples of Rs 1,000.

Period: For five years, this can be extended by another three more years

Rate of Interest: Nine per cent per annum

Interest payment: Interest is paid quarterly on 30th June, 30th September, 31st December and 31st March.

Premature withdrawal: Investors can prematurely withdrawal the deposit. As such, the scheme provides high liquidity to investors. However, investors will have to bear a penalty depending on the period. For withdrawals after one year but before expiry of two years, penalty of 1.5 per cent of initial deposit will be levied. For withdrawals after two years, penalty of one per cent of initial deposit will be charged.

Tax benefits: This scheme is eligible for Section 80C (of Income Tax Act) benefit. Investments up to Rs one lakh in Senior Citizens Savings Scheme (As per Section 80C, a taxpayer is allowed a maximum deduction of Rs one lakh from his annual income for certain savings instruments, which include Senior Citizens Savings Scheme, National Savings Certificates, Insurance policies, Public Provident Fund and others)

Tax Deduction at Source (TDS): The interest income received under the scheme is fully taxable and is subject to TDS. However, TDS can be avoided by submitting Form 15-H (for Senior Citizens of age 65 years or more-Income Tax Act defines a senior citizen as a person of 65 years or more) or Form 15-G (for persons below the age of 65 years) as the case may be to post office/bank. This form may be given at the time of deposit itself. This is going to change with effect from April 1, 2010. From that date, all term deposit holders shall compulsorily quote their PAN (permanent account number); otherwise, TDS at much higher rate of 20 per cent or more will be deducted from interest payable irrespective of the interest amount due by banks/Financial institutions/NBFCs or companies.

Where to Deposit: Post Offices, 24 public sector banks and ICICI Bank. (Only designated branches of these banks are allowed to open these accounts)

Nomination: The facility is available

Joint Account: Single or joint accounts are allowed. Joint account can be held only with the spouse.

Non-eligibility: Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not eligible to invest in the scheme

Transfer: In case of change of residence, the depositor can transfer his account to another post office/bank


2. Post Office Monthly Income Scheme (POMIS)

FEATURES:

Eligibility: POMIS is available at post offices and only individuals are eligible to invest in the scheme

Amount: The minimum deposit is Rs 1,500 and the maximum amount is Rs 4.5 lakhs and Rs 9.00 lakh for single and joint accountholders

Period: For six years

Rate of Interest: Eight per cent per annum

Interest payment: Interest is paid monthly. Interest is credited directly every month to Savings Bank account maintained with the post office where the deposit is made. Interest received under the scheme is fully taxable in the hands of the depositor.

Bonus: Investments, made after December 8, 2007, will be eligible for a bonus of five per cent on the amount invested. The bonus will be paid upon maturity of the deposit

Premature withdrawal: Depositors can prematurely withdraw the deposit. As such, the scheme provides high liquidity to investors. However, investors will have to bear a penalty depending on the period. For withdrawals after one year but before expiry of three years, penalty of 2.0 per cent of initial deposit will be levied. For withdrawals after three years, penalty of 1 per cent of initial deposit will be charged.

Tax benefits: There are no tax benefits for deposits made under POMIS

Nomination: The facility is available

Joint Account: Single or joint accounts are allowed.


3. Five-Year Post Office Time Deposit (5-year POTD)

FEATURES:

Eligibility: Individuals are allowed to invest in the scheme. Single or Joint accounts are allowed.

Amount: The minimum deposit is Rs 200. And there is no upper limit.

Period: For five years

Rate of interest: 7.5 per cent for five-year Post Office Time Deposit

Interest Payment: Interest is payable on the basis of quarterly compounding, but interest is paid to the investor only annually. Interest received under the scheme is fully taxable in the hands of the depositor.

Premature Withdrawal: Up to six months from the date of investment, no premature withdrawal is allowed. If money is withdrawn between six months and less than one year from the date of investment, no interest will be paid on the deposit. If withdrawn after one year, interest will be paid at a rate 2% less than the rate applicable for the period for which the deposit has run

Tax Benefits: The five-year Post Office Time Deposit is eligible for tax benefits under Section 80C with an upper limit of up to Rs 1,00,000. (In addition to 5-year POTD, post offices offer 1-year, 2-year and 3-year time deposits with lesser interest rate compared to 5-year deposit. However, 1-year, 2-year and 3-year time deposits will not be eligible for Section 80C income tax benefits)

Nomination: The facility is available


4. Five-Year Bank Deposits (Tax Saver Schemes)

Several banks are offering Bank deposits with payment of monthly options. Banks also offer special fixed deposits of tenure of five years or more with tax benefits under Section 80C of the Income Tax Act. Banks offer interest rates ranging from 8% to 10% on these special fixed deposits. The full details will be available with the banks.

 

ALTERNATIVE IDEA

If one is prepared to take a little risk, one can think of pursuing an alternative idea.

The idea consists of two parts:

First part: Senior citizens can invest, say, Rs 3,00,000 in POMIS (Post Office Monthly Income Scheme-discussed above) and give a mandate to the post office to credit the monthly interest to their Savings Bank account with the particular post office. If they do not have an SB account with the post office, they can open a new SB account with the post office.

Second part: The initial investment of Rs 3,00,000 attracts an interest of Rs 1,950 (approx.) per month and it will be credited to the depositor’s SB account with the post office. This interest amount of Rs 1,950 can be invested every month regularly in a diversified equity mutual fund with a good and long-term track record. Otherwise, depositor can give an ECS-Debit instruction to a mutual fund so that the interest amount is debited from the savings bank account every month and re-invested in a particular scheme-chosen by the investor-by the mutual fund. (ECS-electronic clearing service-is provided in metros and tier-II cities)

RATIONALE: By investing in post office, one gets full protection of the capital as post office deposits are guaranteed by the Government of India. After protecting one’s capital, one can take a little risk and invest the monthly interest income into a well diversified equity mutual fund with a good and long-term track record. By investing in a well diversified equity mutual fund, one can be hopeful of getting 12 to 15 per cent over long periods of five or ten years. Here, the risk is limited to the extent of interest income while the capital is fully protected. After five or ten years, the senior citizen can pass on the mutual fund units to their heirs without attracting any capital gains tax. By bequeathing the mutual fund units to the inheritors, one gets the satisfaction of passing on good assets to their children/heirs.

Note: Please note to consult your Financial Advisor/Planner for full details before investment for latest modifications and suitability of the respective products to individual needs. For sophisticated investors, a plethora of schemes, like, liquid mutual funds, 8% RBI bonds (taxable) fixed maturity plans, company fixed deposits, structured products, monthly income plans from mutual funds, etc., are available. These details can be sourced from websites, books or investment advisors.

 

IMPORTANT NOTE:

GOLDEN YEARS: Retirement is more about how one spends his/her time in a more meaningful manner, rather than about savings or money. Retirement is more about psychological issues than financial issues. Money is also important, but retirees need to give more value to a life that is joyous, delightful and meaningful in their own way. In golden years, one gets plenty of time to pursue their special, passionate and well-established interests, which they could not fulfill during their working life. While some prefer to spend their time with little children, some remain active by providing a helping hand to the less privileged through teaching or training youngsters. Some would prefer to concentrate on voluntary or community-based activities. Many try to learn new languages and games and make new friends.

Our life expectancy has gone up of late, which means our non-earning retirement phase has increased from about 10 years to 20/25 years. So, nowadays, retirees are more in need of money after retirement. As such, many seniors, who are healthy and enjoy their work, opt to undertake part-time jobs, even after retirement, with a view to remaining active and supplementing their pensions. It would be better if people plan for their retirement well before so that they can take care of all their financial needs in a smooth manner. Developing non-work related interests early on one’s life is vital to prepare oneself for the retirement. As the concept of nuclear family has been on the rise, senior citizens need to brace themselves for facing a few harsh realities in post-retirement life.

TAILPIECE:

Question: “What is old age?”

Answer: “When we have ceased to wonder.”

 

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Annexure A: Personal Income Tax Slabs for FY 2009-10

For Women below age of 65 years #                  For resident individuals, HUFs, etc #

Total Annual Income (Rs.) Rate of Income Tax    Total Annual Income (Rs.) Rate of Income Tax

Up to 1,90,000                          NIL                            Up to 1,60,000                       NIL

1,90,001 to 3,00,000                 10%                          1,60,001 to 3,00,000              10%

3,00,001 to 5,00,000                 20%                         3,00,001 to 5,00,000              20%
  
5,00,001 and above                    30%                          5,00,001 and above                 30%

# For senior citizens of 65 years and above, the exemption limit is Rs 2.40 lakh

Cess for Education: At three per cent on income tax payable


Deductions allowed under Section 80 C (Aggregate amount of deduction under this section shall not exceed Rs one lakh) (Read with section 80CCE)

In 2005-06, section 80C replaced old section 88. Under section 80 C, individuals and HUFs are allowed deductions of up to a maximum Rs. 1,00,000/- from taxable income for payments and contributions as given below; without any sectoral caps.

1 Life Insurance premia. Annual premium of any policy shall not be more than 20 per cent of the sum assured.

2 Contribution to a recognised provident fund

3 Voluntary contribution by employee to a recognised provident fund

4 Contribution to Public Provident Fund account (PPF scheme allows interest on annual contributions of up to Rs 70,000 only)

5 Contribution by an employee to an approved superannuation fund

6 Contribution to National Savings Certificate (NSC) VIII issue

7 Interest accrued on NSC VIII issue during the current year except interest for the sixth year

8 Contribution to Unit Linked Insurance Plans

9 Contribution to annuity plan of a life insurance company

10 Equity Linked Savings Scheme (ELSS) of a mutual fund

11 Contribution to pension schemes of two mutual funds, namely Templeton India Pension Plan and UTI Retirement Benefit Pension Fund

12 Tuition fee paid to a college, school, etc, for education of any two children of an assessee. However, the eligible amount shall not include any payment towards any development fees or donation.

13 Instalments paid in a year towards Housing Loans

14 Bank fixed deposits for a period of not less than five years (wef April 1, 2006)

15 Deposits in a Senior Citizens Savings Scheme (SCSS) (wef April 1, 2007)

16 Sums deposited in a Five-year time deposit scheme of a Post Office (wef April 1, 2007)



SECTION 80CCC (Aggregate amount of deduction under this section shall not exceed Rs one lakh) (Read with Section 80CCE)

Section 80CCC allows for a deduction from income of an amount of Rs one lakh deposited by an individual towards any annuity plan of the Life Insurance Corporation or any other insurer for receiving pension. (Prior to April 1, 2006, only Rs 10,000 was allowed).



SECTION 80CCD (Aggregate amount of deduction under this section shall not exceed Rs one lakh) (Read with Section 80CCE)

Section 80CCD allows for a deduction in respect of contribution to New Pension System as notified by the Central Government. Individuals, including public/private sector employees and self-employed individuals, can avail this tax benefit. In respect of employees, the deduction shall not exceed 10 per cent of their salary. For employees, this section is applicable from January 1, 2004 and for self-employed individuals from April 1, 2008 (FY 2008-09).

SECTION 80CCE (VERY IMPORTANT – INTRODUCED IN 2005-06)

Section 80CCE states that the aggregate amount of deductions under section 80C, section 80CCC and section 80CCD shall not, in any case, exceed Rs one lakh

 

DEDUCTIONS THAT ARE ALLOWED IN ADDITION TO DEDUCTIONS

UNDER SECTIONS 80C, 80CCC & 80CCD

SEC. DETAILS OF THE SECTION DEDUC-TION Rs

80D Health insurance premium of the individual or family 15,000

In addition to above, health insurance cost of parents* 15,000

* If parents are senior citizens (65 years & above) (the parents need not be dependant on the assessee) 20,000

80DD Expenditure incurred for medical treatment of a disabled dependant (ordinary disability) # 50,000

For severe disability # 1,00,000

# pertains to deduction for maintenance (including medical treatment), training and rehabilitation of a handicapped dependant; or on the amount paid or deposited under a scheme of the Life Insurance Corporation of India or other insurance for maintenance of disabled dependant

80DDB Medical treatment of herself or a dependant 40,000

If the assessee is a senior citizen 60,000

80E Individuals can claim deduction for interest paid on loan taken for pursuing full-time education of her/his own or her/his relative (Note: Deduction can be claimed for eight years and education includes all fields of studies post-schooling) Actual amount paid

80G Donations paid to Prime Minister's National Relief Fund or such other approved funds 100% of donation

Donations paid to other funds/institutions 50% of donation

80U Deduction allowed to inviduals with permanent physical disability (including blindness) 50,000

In case of severe diability 75,000

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