SMART MONEY INDIA

All you need to know about ASBA - Application Supported by Blocked Amount

noreply@blogger.com (Smart Money India) — Thu, 24 Sep 2009 09:59:00 +0000

ASBA means “Application Supported by Blocked amount”. ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed. In case of rights issue his application money shall be debited from the bank account after the receipt of instruction from the registrars.
It is a supplementary process of applying in initial public offers (IPO), right issues and follow on public offers (FPO) made through book building route and co‐exists with the current process of retail investors using cheque as a mode of payment and submitting applications.
An individual investor can apply through ASBA process in a public issue through book building route provided he / she:
1. is a “Resident Retail Individual Investor” i.e. applying for shares/ securities up to Rs 1,00,000/‐
2. is bidding at cut‐off, with single option as to the number of shares bid for;
3. is applying through blocking of funds in a bank account with the SCSB;
4. has agreed not to revise his/her bid;
5. is not bidding under any of the reserved categories.
Applying through ASBA process has the following advantages:
1. The investor need not pay the application money by cheque rather the investor submits ASBA which accompanies an authorization to block the bank account to the extent of the application money.
2. The investor does not have to bother about refunds, as in ASBA only that much money which is required for allotment of securities, is taken from the bank account only when his application is selected for allotment after the basis of allotment is finalized.
3. The investor continues to earn interest on the application money as the same remains in the bank account.
ASBA is applicable to only book‐built public issues which provide for a uniform payment option to the retail individual investors. On pilot basis, SEBI has enabled ASBA in few selected rights issues.
Applications can be made either online or via physical forms. Some of the brokerages as Kotak, ICICI Direct, etc have provided option to apply through ASBA via their online trading platforms. For investors applying through physical form, they need to use a separate form which will have “BID CUM ASBA FORM” printed on the top right corner.
ASBA applications has to be submitted with designed branches of Self Certified Syndicate Banks (SCSBs). SCSB is a bank which is recognized as a bank capable of providing ASBA services to investors. Names of such banks would appear in the list available in website of SEBI.
http://www.sebi.gov.in/Index.jsp?contentDisp=SCSB
ASBA bids can be withdrawn. During the bidding period you can approach the same bank to which you had submitted the ASBA and request for withdrawal through a duly signed letter citing your application number. After the bid closure period, you may send your withdrawal request to the Registrars, who will cancel your bid and instruct SCSB to unblock the application money in the bank account after the finalization of basis of allotment.

ASBA process in brief:

An ASBA investor shall submit an ASBA physically or electronically through the internet banking facility, to the SCSB with whom the bank account to be blocked, is maintained.
The SCSB shall then block the application money in the bank account specified in the ASBA, on the basis of an authorisation to this effect given by the account holder in the ASBA.
The application money shall remain blocked in the bank account till finalisation of the basis of allotment in the issue or till withdrawal/ failure of the issue or till withdrawal/ rejection of the application, as the case may be.
The application data shall thereafter be uploaded by the SCSB in the electronic bidding system through a web enabled interface provided by the Stock Exchanges.
Once the basis of allotment is finalized, the Registrar to the Issue shall send an appropriate request to the SCSB for unblocking the relevant bank accounts and for transferring the requisite amount to the issuer’s account.
In case of withdrawal/ failure of the issue, the amount shall be unblocked by the SCSB on receipt of information from the pre-issue merchant bankers.

Withdrawal of IPO Application Post Issue Closure

noreply@blogger.com (Smart Money India) — Sun, 20 Sep 2009 09:30:00 +0000

Yes, withdrawal of Initial Public Offer (IPO) application can be done even after the issue closure!

It is quite commonly known that in book built issues applicants can revise or withdraw their bids till the issue closure date. However not many investors know that they can cancel their application even after the issue closure date. In a book-built issue the applicants can withdraw their applications anytime before allotment of shares/securities by the company. Investors have the right to withdraw application before finalization of allotment even if the application money has been realized by the company.

Issue of securities in an IPO is, inter alia, governed by SEBI (Disclosures and Investors Protection) Guidelines, 2002 - popularly known as SEBI DIP Guidelines, which provides that an applicant can withdraw applications in a public issue. However, note as per the SEBI DIP Guidelines, Qualified Institutional Bidders (QIBs) are not allowed to withdraw their bid after the closure of the bid. This rule is to prevent any possible manipulation of the IPO subscription by the QIBs. For example, Cairn India IPO in 2006 saw many QIBs withdrawing bids on the last day of the issue. While the bid withdrawal was done by QIBs before the IPO closure, which is well within the guidelines, but this was not viewed very positively by the SEBI, which called for data regarding their subscription from the merchant bankers of the issue. SEBI’s action was guided by the fact that Retail investors often look at instititutional investment details of an IPO before deciding to apply for the same and they could get mislead by the intial QIB rush.

Some of the IPOs which have seen withdrawal of applications by retailers and HNI categories post closure but before allotment of shares are Purvankara Projects, Deccan Airlines, Cairn India, Housing Development Infrastructure Limited, IVR Prime, KPR Mills, SVPCL, etc.

Check your Demat Account Holding Statement

noreply@blogger.com (Smart Money India) — Sun, 23 Aug 2009 18:00:00 +0000

After depositing a cheque in the bank account, we normally check the account statement to ensure funds have been credited to the account. But how often do we check our demat account statement, to check whether the purchased shares have been credited to the demat account. Please read on to find out why you should be doing that.

Shares are kept in the dematerialized or electronic form in two depositories – National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Depositories receive shares through Depository Participants (DP) and not directly from investors. DPs are registered with the Securities Exchange Board of India (SEBI) and acts as agents for depositories. To trade in shares, you need to have two accounts – a trading account with a share broker and a demat account with a DP.

You can have these two accounts with different entity, but it is advisable to keep trading and depository accounts with the same entity to avoid settlement issues. If depository account is with a different entity, for every sale transaction you need to submit Transfer Instruction For Delivery (TIFD) slip to your DP for transferring shares from your demat account to the brokers demat account for the purpose of settlement. Depositing TIFD timely is critical since if adequate number of shares are not delivered, exchange will auction your shares. Thus operationally it is much better if both the trading account and demat account are with the same entity.

However please ensure that your broker is transferring the purchased shares from the common pool account to your demat account post settlement and pay out. Normally it is assumed that once the payment for the shares purchased has been made, the shares would automatically be transferred to your demat account. In most of the cases this is true but it could be possible that the purchased shares are not transferred to the investors demat account in timely manner and kept by the broker in the common pool account and utilized for the purpose of margin requirement of other clients.

It’s like the bank not crediting the cheque proceeds to your account but keeping the same in their own account. Not having your shares in your demat account could have several implications. You are unnecessarily exposed to several risks. Your shares could be utilized by the broker for delivery obligation of another client, without you knowing about the same. This is like your broker lending your shares to a third party without your knowledge. Your broker could be utilizing your shares for his margin requirement with the exchange, then you are exposed to the risk of your shares getting sold by the exchange in case of extreme fall in the market and the broker being unable to furnish additional margin to the exchange in time. Another implication could be that you will not receive dividend and other corporate action benefits for the shares kept in the brokers common pool account. Instead your broker will get the same. So please ensure that the purchased shares are promptly transferred by your broker from the common pool account to your demat account.

While some of the DPs send the account holding statement on a periodic basis (quarterly or monthly), some of the DPs do not send the physical account holding statement. Investors can avail of online access to their demat account or subscribe to SMS based alerts to get automatic alert for any debit or credit of shares. Both CDSL and NSDL provide both online internet access and SMS based alerts facility. Important links for SMS alerts and online access facility are given below.

Online access

https://www.cdslindia.com/register/MyEasi.jsp

https://speed-e.nsdl.com/

https://speed-e.nsdl.com/SecureWeb/HomeLogin.jsp

SMS Alert

http://www.cdslindia.com/whatsnew/SMSAlert.html

https://nsdl.co.in/smsalert_nsdl.doc

Charges on Closure of Demat Account

noreply@blogger.com (Smart Money India) — Thu, 18 Jun 2009 05:19:00 +0000

Shares are kept in the dematerialized or electronic form in two depositories – National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Depositories receive shares through Depository Participants (DP) and not directly from investors. DPs are registered with the Securities Exchange Board of India (SEBI) and acts as agents for depositories. To trade in shares, you need to have two accounts – a trading account with a share broker and a demat account with a DP.

Investors are free to change their DP if they are not satisfied with the service provided by the DP, or the DP is not prompt with settlement of shares bought or sold or the charges are high, or for any other reason whatsoever.

To close a Depository Account, application has to be submitted in the prescribed format, which can be taken from the DP. NSDL has prescribed closure request format vide Annexure Q of the NSDL business rules.
https://nsdl.co.in/publications/nsdlbusrules.php

Closure request can also be given in a plain paper provided it contains all the required details and the following is ensured:
1. The request letter must contain all details that are specified in the Application for Closing an Account (Annexure Q).
2. The Client must submit duly signed delivery instruction form(s) (Annexure L) for transferring the securities, if any.
3. All the account holder(s) must sign the request.
https://nsdl.co.in/business/cr2002dec18_49.php

All unused Transfer Instruction For Delivery (TIFD) slips has to be submitted along with the closure request.

A demat account can be closed only if there are no securities in it. In case you are holding any shares in the demat account, same has to be first transferred to your new demat account with the new DP, which has to be mentioned in the closure request form.

SEBI has vide circular No. MRD/DoP/Dep/Cir-22/05 dated November 09, 2005 advised that with effect from January 09, 2006, no charges shall be levied by a depository on DP and consequently, by a DP on a Beneficiary Owner (BO) when a BO transfers all the securities lying in his account to another branch of the same DP or to another DP of the same depository or another depository, provided the BO Account/s at transferee DP and at transferor DP are one and the same, i.e. identical in all respects.
http://www.sebi.gov.in/circulars/2005/cir222005.html

In case the BO Account at transferor DP is a joint account, the BO account at transferee DP should also be a joint account in the same sequence of ownership.

Transfer charges will be waived if accounts of transferee DP and transferor DP are the same, i.e., identical in all respects. To avail of the waiver, a Client Master List (CML) for the target account needs to be submitted along with the closure form.

All other transfer of securities consequent to closure of account, not fulfilling the above-stated criteria, would be treated like any other transaction and charged as per the schedule of charges agreed upon between the BO and the DP.

Fixed Deposit Maturity Value Calculator

noreply@blogger.com (Smart Money India) — Thu, 16 Apr 2009 18:16:00 +0000

Fixed Deposit as an Investment Option

Fixed Deposits have traditionally been one of the most safe investment option preferred by people with low risk appetite. Generally fixed deposits are offered by banks, but fixed deposit can also be offered by certain Non-Banking Finance Companies (NBFC) and other companies. However before putting in money in any non-bank fixed deposit, where interest rates offered are typically higher than bank fixed deposits, one should be very careful about the credit quality of the company where fixed deposit is placed.

Fixed deposit or Term deposit is a very simple investment product. As the name denotes it provides a fixed return, i.e. interest on the amount of investment. The interest is calculated and credited periodically depending on the compounding period.

What is compounding period?

Compounding period refers to the frequency with which the interest is calculated and credited to the fixed deposit amount. For example, if compounding of interest is monthly, interest for fixed deposit is calculated on a monthly basis and added to the principal amount. Thus interest for second month is calculated on the principal amount and interest for first month. Similarly interest for third month is calculated on the principal amount and interest for initial two months.

Let's see an example to understand this better. Suppose we have to calculate maturity amount of Rs. 100,000 fixed deposit for 3 months with interest rate of 12% compounded monthly. Interest for 1st month is calculated on Rs. 100,000 at 12%, which comes to Rs. 1,000. Fixed deposit principal amount at the end of 1st month becomes Rs. 101,000. Thus interest for 2nd month is calculated on Rs. 101,000, which comes to Rs. 1,010. Similarly interest for 3rd month is calculated on Rs. 102,010, which comes to Rs. 1,020.10. Thus maturity amount for 3 month deposit comes to Rs. 103,030.10.

Why is compounding period important?

This question is best answered by adding a variation to the previous example. Suppose in the example above, instead of interest being compounded monthly, it is compounded on a quarterly basis, let’s see the impact on final maturity value of the fixed deposit. Interest for 3 months comes to Rs. 3,000 and final maturity value of fixed deposit is Rs. 103,000. Note the final maturity value has declined when the compounding period has been increased. Thus we can say shorter the compounding period, higher is the effective return on fixed deposit. Reason is simple and intuitive. Shorter compounding period means interest on fixed deposit is calculated more frequently and added to the outstanding principal amount for the purpose of interest calculation for the next compounding period. This translates into more interest income on interest, which effectively is the essence of compounding.

Note that in India, interest on bank fixed deposits is normally compounded on a quarterly basis.

Fixed Deposit as Tax Saving Investment option

Investment in Fixed deposits with scheduled bank for minimum tenor of 5 years qualifies for deduction under Section 80C.

Fixed Deposit Maturity Value Calculator

Use the following Fixed Deposit Calculator for calculating the maturity amount of Fixed Deposit under various compounding options, viz. Yearly, Half-yearly, Quarterly, Monthly, Daily and without any compounding.

You can also use the Calculator for finding the Fixed Deposit amount required for realising the desired maturity amount.

DOWNLOAD FIXED DEPOSIT CALCULATOR

Medical / Health Insurance Premium - Mediclaim deduction under Section 80D

noreply@blogger.com (Smart Money India) — Tue, 17 Mar 2009 12:35:00 +0000

Section 80D of the Income Tax Act provides for deduction of Health Insurance premium or Medical Insurance premium or Mediclaim premium from Gross Total Income. Just like Life Insurance premium payment can help you save tax under Section 80C, even Medical Insurance premium payment can also help you save tax under Section 80D.

Note that the Income Tax benefit available for Medical Insurance premium under Section 80D is separate and distinct from the tax benefits available under Section 80C. To know more about section 80C deductions, please read “Saving Income Tax through Smart Tax Planning – Guide to Section 80C Deductions”.

Eligible Assessees

Individuals and Hindu Undivided Family (HUF) only.

Scope

Mediclaim premium paid under:

Medical insurance scheme of General Insurance Corporation approved by the Central Government, or
Any other insurer approved by the Insurance Regulatory & Development Authority (IRDA).

Coverage

For an Individual: Premium paid for insuring the health of the Individual, Spouse, Parents and dependant Children. Note the criterion of being dependant on the assessee is applicable only for Children. Thus Mediclaim premium paid for covering health of spouse or parents would be available regardless of whether or not they are dependant on the assessee. (Note prior to 1st April 2009, deduction for Mediclaim premium paid for parents was allowed only if the parent was dependant on the assessee).

For a HUF: Premium paid for insuring the health of any member of the family.

Payment from Taxable Income

Mediclaim premium has to be paid from taxable income of that year to claim deduction u/s 80D. Premium should not be paid from savings or gifts received.

Mode of Payment

The premium may be paid by any mode of payment other than cash. Note prior to 1st April 2009, premium payment was required to be done only by cheque. Credit card or other online payment mechanism where not allowed. Now all payment modes except cash payment are accepted.

Deduction

For Individual

Basic deduction: Mediclaim premium paid for Self, Spouse or dependant children. Maximum deduction Rs 15,000. In case any of the persons specified above is a senior citizen (i.e. 65 years or more as of end of the year) and Mediclaim Insurance premium is paid for such senior citizen, deduction amount is enhanced to Rs. 20,000.
Additional deduction: Mediclaim premium paid for parents. Maximum deduction Rs 15,000. In case any of the parents covered by the Mediclaim policy is a senior citizen, deduction amount is enhanced to Rs. 20,000.

For HUF

Mediclaim premium paid for any member of the HUF. Maximum deduction Rs 15,000. In case any member of the HUF covered by the Mediclaim policy is a senior citizen, deduction amount is enhanced to Rs. 20,000.

Let us now understand the implications with the help of examples:

Example 1

Mr. Anil furnishes the following information relating to premium on Mediclaim policy paid by cheque:

For self (age 40 years) - Rs. 12,000
For spouse (age 36 years) - Rs. 10,000
For father (age 68 years) - Rs. 17,000
For dependent mother-in-law (age 66 years) - Rs. 15,000

What is amount of deduction allowed under Section 80 D of the Income Tax Act?

Mr. Anil paid total of Rs. 22,000 for self and spouse. Since neither of them are Senior citizen, basic deduction under Section 80D is Rs. 15,000 (premium paid Rs. 22,000 or Rs.15,000 whichever is less).

Mr. Anil also paid Rs. 17,000 for his father, which is eligible for additional deduction. Since his father is senior citizen, deduction under Section 80D is Rs. 17,000 (premium paid Rs. 17,000 or Rs.20,000 whichever is less).

Thus total deduction under Section 80D comes to Rs. 32,000.

Note that Section 80D does not cover relatives other than Spouse, Children and Parents, so the premium paid by Mr. Anil for his dependent mother-in-law isn’t eligible for deduction. However, his wife can, from her taxable income, pay the premium for her mother’s health plan and claim deduction under Section 80D for the same.

Example 2

An individual assessee pays through credit card during the previous year health insurance premium as under:

Rs. 12,000 to keep in force an insurance policy on his health and on the health of his wife and children
Rs. 17,000 to keep in force an insurance policy on the health of his parents.

Under the proposed new provisions, he will be allowed a deduction of Rs. 27,000 (Rs. 12,000 + Rs. 15,000) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of Rs. 29,000 (Rs. 12,000 + Rs. 17,000). Whether the parents are dependent or not, is not a consideration for deciding the deduction under Section 80D.

SMI TAX PLANNING TIPS

Make the premium payment from your taxable income. Mediclaim insurance premium should be out of income chargeable to income tax, meaning if payment is made from income exempted from income tax than deduction will not available. If payment is done from a Loan or Gift, then also deduction is not available.

Mediclaim policy for Brother or Sister? In case you need to pay Mediclaim insurance premium for your brother or sister, do not make the premium payment from your account. Take Mediclaim policy for Brother or sister in your Hindu Undivided Family (HUF) Income Tax file. If you are taking a floater policy, then don’t add your brother or sister in the floater policy if you are making the premium payment. Include your brother and sister in the Mediclaim policy where the premium payment is done by the HUF. This will ensure that HUF would be eligible for the deduction under Section 80D.

Floater Mediclaim policy. Unique policies have been devised today by various insurance companies to suit the requirements of families. The family floater plan is the best example of such plans. This helps you and your family enjoy coverage under one single policy. For example, if you purchase a 3 lakhs health insurance policy, every member of your family can avail of the entire sum insured during medical requirements. Pay the Mediclaim premium for floater policy for your family from the Income Tax file where the deduction would have maximum tax savings. Let me explain by way of an example. Suppose your taxable income is greater than Rs. 1,000,000 and your spouse has taxable income of Rs 200,000. Medical insurance premium for the floater policy is Rs 10,000. If the premium is paid by your spouse, deduction under Section 80D is Rs 10,000. Note applicable Income Tax rate for your spouse is 10% plus 3% Education Cess. Thus reduction in tax liability due to this deduction of Rs 10,000 is equal to 10,000 * 10.30% = Rs. 1,030. On the other hand applicable Income Tax rate for you is 30% plus 10% Surcharge plus 3% Education Cess. Thus if the premium payment is made by you, deduction available is same at Rs 10,000 but the effective saving in tax liability is 10,000 * 33.99% = Rs. 3,399.

Don’t make premium payment by cash. No deduction under Section 80D is allowed where the Mediclaim premium is paid in Cash. You can make the payment in any other mode like cheque, draft, credit card, online banking, etc.

Let your spouse pay the Mediclaim premium for your in-laws. In case you are also taking care of healthcare need of your in-laws, make sure the premium payment for Mediclaim policy is done by your spouse. You will not get any deduction under Section 80D for Mediclaim premium for your in-laws. But if your spouse is making the payment, Section 80D deduction is available since your spouse would be making payment for his / her parents which is allowable under Section 80D. Please note your spouse has to make the payment from his / her taxable income.

One policy, Two claimants. If part payment is done by you and part payment by the parent, both can claim deduction to the extent of their contribution, subject to maximum allowed. Thus for example, if cost of insurance on the health of the parents is Rs 30,000, out of which Rs 17,000 is paid (by any non-cash mode) by the son and Rs 13,000 by the father (who is a senior citizen), out of their respective taxable income, the son will get a deduction of Rs 17,000 and the father will get a deduction of Rs 13,000.

Unit-linked Health Insurance Plans. Some of the insurance companies have launched unit linked health insurance plan which work akin to Unit Linked Life Insurance plans. Portion of the premium for unit linked health insurance plan would go for covering the health insurance cost and balance would be invested in funds chosen by the person insured. For example LIC, has launched “Health Plus” and Tata AIG has launched “Tata AIG Life InvestAssure Health”. As per the current tax rules, premiums paid in respect of morbidity are eligible for tax deduction under Section 80D of the Income Tax Act. The balance of premium is eligible to tax deduction under Section 80C, provided the annual premium during the year does not exceed 20% of the sum assured.

Appendix: Section 80D of the Income Tax Act

Deduction in respect of medical insurance premium.

80D. (1) In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted such sum, as specified in sub-section (2) or sub-section (3), payment of which is made by any mode, other than cash, in the previous year out of his income chargeable to tax.

(2) Where the assessee is an individual, the sum referred to in sub-section (1) shall be the
aggregate of the following, namely:—

(a) the whole of the amount paid to effect or to keep in force an insurance on the health of the assessee or his family as does not exceed in the aggregate fifteen thousand rupees; and

(b) the whole of the amount paid to effect or to keep in force an insurance on the health of the parent or parents of the assessee as does not exceed in the aggregate fifteen thousand rupees.

Explanation.–For the purposes of clause (a), “family” means the spouse and dependant children of the assessee.

(3) Where the assessee is a Hindu undivided family, the sum referred to in sub-section (1) shall be the whole of the amount paid to effect or to keep in force an insurance on the health of any member of that Hindu undivided family as does not exceed in the aggregate fifteen thousand rupees.

(4) Where the sum specified in clause (a) or clause (b) of sub-section (2) or in sub-section (3) is paid to effect or keep in force an insurance on the health of any person specified therein, and who is a senior citizen, the provisions of this section shall have effect as if for the words “fifteen thousand rupees”, the words “twenty thousand rupees” had been substituted.

Explanation.— For the purposes of this sub-section, “senior citizen” means an individual resident in India who is of the age of sixty-five years or more at any time during the relevant previous year.

(5) The insurance referred to in this section shall be in accordance with a scheme made in this behalf by—

(a) the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 and approved by the Central Government in this behalf; or

(b) any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999.

Medical Expenses Allowance vs. Medical Expenses Reimbursement

noreply@blogger.com (Smart Money India) — Sat, 07 Mar 2009 11:51:00 +0000

"What's in a name? That which we call a rose
By any other name would smell as sweet."

- William Shakespeare, "Romeo and Juliet"

But sometimes a name can make a lot of difference. For example whether you are in receipt of Medical Allowance or Medical Reimbursement from your employer, will make lot of difference to your tax liability. Let’s understand by way of an example.

Mr. Smart is getting Medical Expenses Reimbursement from his employer to the extent of Rs. 15,000 every year. On the other hand, Mr. Fool is in receipt of Medical Expenses Allowance of Rs. 15,000 every year from his employer. As per provisions of the Income Tax Act, Mr. Smart will not have to pay any tax on the Medical Expenses Reimbursement, while the Medical Expenses Allowance will be fully taxable for Mr. Fool. Let’s understand in more details.

Medical Expenses Allowance

As a general principle under the Income Tax Act, any Allowance received by an employee is fully taxable unless specifically exempted. Thus for example House Rent Allowance is exempt only to the extent specified in Section 10(13A). There is no specific exemption for Medical Allowance, thus it is fully taxable and will be added to Income of the Employee and taxed at the applicable Income Tax Rates. Thus if a fixed allowance is received by an employee for the discharge of medical expenses, it is a taxable perquisite. Hence, an employee should avoid the receipt of an allowance for medical expenses but should rather take medical reimbursement, so that it is tax-free.

Medical Expenses Reimbursement

Reimbursement of medical expenses actually incurred by an employee for his medical treatment or the treatment of any member of his family upto Rs. 15,000 per annum is not treated as a taxable perquisite as per Clause (v) of the Proviso to Section 17 (2) of the Income Tax Act. Family is defined to mean Spouse or Children of the Individual or any of dependant relatives being Parents, Brother or Sister. Note there is no requirement for Spouse or Children to be dependant on the individual, but Parents, Brother or Sister should be dependant on the individual. Thus Medical Expenses Reimbursement of expense actually incurred by an employee upto Rs. 15,000 per year is completely tax free. Note deduction under Section 80D for Mediclaim Insurance policy is over and above Medical Expenses Reimbursement being discussed here.

Typically if the employee fails to submit valid medical bills for the entire entitlement amount of Rs. 15,000 then the balance amount is paid by the company in the last month of the financial year (i.e. March) as a taxable amount. Thus to the extent medical bills are not submitted, Medical Expenses Reimbursement received from the employer would be taxable. For example an employee is entitled to Medical Expenses Reimbursement of Rs. 15,000 every year, but is able submit medical bills only for Rs. 10,000 for the year. In this case the company would pay Rs. 10,000 as Medical Expenses Reimbursement, which is not taxable. The balance amount of Rs. 5,000 would be paid in the last month and would be taxable.

SMI Tax Planning Tips

Most of the companies do have Medical Expenses Reimbursement as part of compensation package. However in case your Salary package doesn’t include this component, then it would be prudent from tax-planning perspective to get Medical Expenses reimbursement included. Most often employer is more concerned about the overall compensation payable to the employee and would not be too bothered about how the overall amount is structured. Thus whether the Rs. 15,000 is paid as Special Allowance or Medical Expenses Reimbursement, would hardly have any impact on the employer but can lead to some tax savings for the employee.

Instead of fixed Medical Allowance, always opt for reimbursement of Medical Expenses. For claiming reimbursement, you will be required to submit valid medical bills to your Employer. Some companies, instead of taking actual physical medical bills from the employees, just take declaration to the effect that the employee has actually incurred medical expense for self or family. In this case the Employee is required to maintain the actual medical bills and may be required to present the same to the Income Tax authorities in case of any scrutiny of the Income Tax Return.

Interest on Education Loan - Tax Planning Guide to deduction under Section 80E

noreply@blogger.com (Smart Money India) — Sun, 01 Mar 2009 00:23:00 +0000

For an Individual tax payer, Income Tax Act provides for deduction of interest paid on tow types of loans – Home Loan and Education Loan. Section 80E of the Income Tax Act provides for deduction of interest paid on Education or Study loan taken for higher education (See the appendix for full text of Section 80E).

Note that the Income Tax benefit available for Education Loan under Section 80E is separate and distinct from the tax benefits available under section 80C. To know more about section 80C deductions, please read “Saving Income Tax through Smart Tax Planning – Guide to Section 80C Deductions”.

Following are the salient features of deduction on interest on Education Loan under Section 80E:

Deduction can be claimed only by Individuals

HUF and other assessee cannot claim Section 80E deduction. Moreover deduction can be claimed by an individual only if the loan has been taken in his name. Thus no deduction is available to an Individual if the loan is taken by any relative, say father, brother or spouse. In this case deduction will be available to the person who has taken the loan, provided that the Individual who is going for higher education is either a spouse or children of the Individual taking the Education Loan (more on this point below).

Loan from Banks

Education Loan should have been taken from a Bank in India (including Indian branches of foreign banks). Loans from notified financial institutions (currently only HDFC is notified) and approved charitable institution are also eligible for Section 80E deduction.

No deduction would be available if the loan is taken from a Bank outside India. For example if you take Education Loan from Bank of America, New York branch for MBA study in Harvard (or in any institution in India for that matter) – no deduction would be available under Section 80E. However if you take a loan from Citibank, New Delhi branch for MBA education in IIM Ahmedabad, deduction would be available under Section 80E.

No deduction under Section 80E would be available if the Education Loan taken from employer, family or friends.

Loan should be taken for Higher Education

Higher education means full-time studies for:

Graduate or Post-graduate course in Engineering, Medicine, or Management, or
Post-graduate course in Applied sciences or Pure sciences including Mathematics and Statistics.

Note tax benefit is not available for part-time courses.

There is no condition that higher education should be done in India. Thus deduction is available even when the loan is taken for full-time higher education in the above areas outside India.

The loan should be for pursuing higher studies means its includes loan taken not only for tuition or college fees only but other incidental expenses for pursuing such studies like hostel charges, transport charges, etc.

Higher education of Self or Relative

Loan should have been taken for full-time higher education of self or relative. Relative is defined to mean the spouse and children of the individual. Thus Education Loan taken for the higher education of brother or sister or father would not be eligible for deduction under Section 80E. Note prior to 1st April 2008, deduction was permissible only for the purpose of education of Self. Education Loan taken for the higher education of Spouse or Children has been added to the purview of Section 80E with effect from Assessment Year 2009-10 pertaining to Previous Year 2008-09.

If an individual takes Education Loan for higher education of spouse or children, the tax benefit in form of Section 80E deduction is available to the individual only – not spouse or the children.

Repayment from Taxable Income

The repayment should be out of income chargeable to income tax, meaning if repayment is made from income exempted from income tax than deduction will not available. If repayment is done from another Loan or Gift, then also deduction is not available.

Deduction only for Interest

There is no deduction allowed under Section 80E for principal repayment of Education Loan. Note prior to 1st April 2006, both interest and principal repayment were eligible for deduction (but with an overall limit of Rs. 40,000 per annum). Currently Section 80E deduction is available only for the interest payment. (In order to calculate Principal and Interest component of Education Loan repayment, please download excel based calculator – Loan Amortisation Schedule)

No ceiling on the amount of deduction

There is no ceiling for deduction under Section 80E. Note prior to 1st April 2006, there was a ceiling of Rs. 40,000 for deduction under Section 80E. Currently the entire amount of interest paid in the year is eligible for deduction.

Deduction for Eight years

Deduction under Section 80E is available for 8 years or until the loan is repaid fully, whichever is earlier. First year starts from the year in which interest payment starts. Thus if the loan repayment stretches beyond 8 years, no benefit is available from 9th year onwards. Note it is not compulsory to complete the higher education before deductions can be claimed under Section 80E.

SMI TAX PLANNING TIPS

Should you avail Education Loan if you have surplus funds available? This is interesting consideration and the answer would depend on how the surplus funds are invested. As long as the tax adjusted return from surplus funds is greater than the tax adjusted cost of the loan, it is better to avail Education Loan. What do I mean? Okay, let me explain by way of an example.

Suppose you need Rs. 100,000 for higher education and have two options to finance the same. You can avail Education Loan at 12% p.a. or you can are utilize your fixed deposit which is earning 9% p.a. Assuming you fall in the highest tax bracket (see the Income tax Rates) effective tax rate including surcharge and education cess is 33.99%. Since the interest on Education Loan is deductible under Section 80E and you save tax on the deduction, tax adjusted cost of Education Loan is 12% * (1 – 33.99%) = 7.92%. As long as you can generate tax adjusted return greater than 7.92%, it is advisable to go for Education Loan. In this example Fixed deposit interest is taxed at 33.99% and the tax adjusted return is 9% * (1 – 33.99%) = 5.94%. Thus if you intend to make a normal fixed deposit with the surplus funds, then taking Education Loan is not advisable since tax adjusted cost of 7.92% is greater than tax adjusted return of 5.94%. However if we assume that you make a 5-year Tax Saving fixed deposit under Section 80C (or for that matter any other investment allowed under Section 80C), then there is an additional deduction of Rs. 100,000 from the taxable income which means a tax savings of Rs 33,990. Thus to calculate effective return from the surplus funds, we have to consider tax adjusted interest income from fixed deposit plus the tax savings on the investment under Section 80C. After tax interest income is Rs 9,000 * (1 – 33.99%) = Rs 5,941. Tax saving under Section 80C is Rs. 33,990. Thus total return = Rs. 39,931, which translates to effective tax adjusted return from the surplus funds of 39.93%

However if you read carefully, there is one flaw in the argument above. The above logic is valid only if the individual would not be able to make Section 80C investment, if the Rs. 100,000 surplus funds are utilized for higher education. But if you have enough surplus funds or income to make the Section 80C investment, regardless of how you finance higher education, then it would logically incorrect to consider the tax benefit of Section 80C investment while evaluating whether or not to avail Education Loan. In such a scenario, where Section 80C investment has already been made, we should compare only the after tax return from surplus funds with the tax adjusted cost of the loan. One option could be to invest the surplus in such a way that the returns are tax free. For example if we assume that the Rs. 100,000 is invested in Debt Mutual Fund or Liquid Mutual Fund with Dividend Reinvestment mode, returns would be tax free. If these investments are expected to deliver returns greater than tax adjusted cost of the Education Loan (i.e. 7.82% in our example), it is still advisable to avail Education Loan.

Start interest payment only after you start earning. While Principal repayment is typically always deferred till completion of Education, most of the banks provide option to either pay interest starting immediately from disbursement or defer interest payment also till completion of Education. Logic is since the individual is not expected to have any income source prior to completion of education, moratorium is provided for both principal and interest till few months after completion of higher education. From tax planning perspective, it is recommended to defer both principal and interest payment till you start earning. The 8 year clock for claiming deduction under Section 80E starts ticking from the year in which interest payment starts, and not from the year in which education is completed. If you start making interest payment during the education period, in the initial years when your education is getting completed, you might not have any taxable income to claim Section 80E deduction. Note that interest on Education Loan paid in a particular year can be claimed as a deduction only that year, not later. Thus to maximize tax savings on deduction under Section 80E, it is always better to go for option to defer interest payment till completion of education.

Take loan in your name for your spouse or children’s education and start paying interest immediately. This suggestion is exactly opposite of what I told you just in the last point. But note the difference. In the first case you have taken loan for your own Education. Thus you are not expected to have taxable income till you complete your education. However in this example we are talking about scenario where you have availed Education Loan for the higher education of your spouse or children. Thus better to start paying interest immediately and start availing deduction immediately since it will reduce your tax liability immediately. There is no sense in delaying the deduction benefit if you are in tax paying bracket.

Take Education Loan for maximum possible amount. Education Loan is permissible for pursuing higher studies, means its includes loan can be taken not only for tuition or college fees only but other incidental expenses for pursuing such studies like hostel charges, transport charges, etc. Higher loan amount would mean higher interest amount which would be deductible from taxable income under Section 80E of the Income Tax Act. Remember, there is no upper limit on the amount of deduction allowed for interest payment on Education Loan under Section 80E.

Take the Loan from a Bank in India - Not from Family, Friend or Employer. Deduction under Section 80E is available only when the Education Loan is availed from a Bank in India (Loan from approved charitable institution also allowed). So do not take a loan from your family, friend or employer, as the interest paid on such loan would not qualify for Section 80E deduction.

Repay the Education Loan in 8 years. If possible, structure a ballooning repayment structure. Interest deduction under Section 80E is allowed over 8 years, beginning from the year in which interest payment starts. Thus repaying the loan in less than 8 years would mean you will forgo possible deduction from taxable income. A ballooning structure, where higher principal repayment happens in later years would ensure more interest payment and hence deduction. However, it is doubtful if the bank providing the loan would agree to a ballooning structure, since the average maturity of the loan under such a structure would be higher than a normal amortising loan for same tenor, which will make the loan more risky from debt-servicing perspective. However if an option to structure a ballooning repayment structure is available, it would be advisable to go for the same.

Appendix: Section 80E of the Income Tax Act

Deduction in respect of interest on loan taken for higher education.

(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, any amount paid by him in the previous year, out of his income chargeable to tax, by way of interest on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education or for the purpose of higher education of his relative.

(2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest referred to in sub-section (1) is paid by the assessee in full, whichever is earlier.

(3) For the purposes of this section,

(a) approved charitable institution means an institution specified in, or, as the case may be, an institution established for charitable purposes and approved by the prescribed authority under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G;

(b) financial institution means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;

(c) higher education means full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics;

(d) initial assessment year means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan.

(e) relative, in relation to an individual, means the spouse and children of that individual.

Saving Income Tax through Smart Tax Planning – Guide to Section 80C Deductions

noreply@blogger.com (Smart Money India) — Tue, 17 Feb 2009 13:11:00 +0000

Are you looking to save some tax? Your first port of call should be Section 80C of the Income Tax Act. Section 80C provides for deduction from Gross Total Income for certain eligible investments and payments. Key points to note:

Applicable only for Individuals and Hindu Undivided Family (HUF).
Actual payment should have been made to claim Section 80C deduction. Additionally the payment should be made from taxable income of the year in which deduction is being claimed.
Maximum deduction under Section 80C is Rs 100,000. Deduction can be claimed for any of the payment or investment. There is no sub-limit for any of the available options.
Section 80C replaces the erstwhile Section 88 with more or less the same investment mix available in Section 88 but with a major change in the method of providing a tax benefit. While Section 88 provided for Rebate on Income Tax payable, Section 80C provides for deduction from the Gross Total Income.

Eligible Investment / Payment under Section 80C

Employee Provident Fund (EPF): Salaried individuals are compulsorily required to contribute minimum 12% of the Basic Salary to EPF. This amount is deducted from monthly payroll. Employer is also required to make a matching contribution towards Employees retirement kitty. Employer has to contribute 8.33% of Basic Salary towards Employee Pension Scheme (EPS) and balance 3.67% towards EPF (for the purpose of Employer contribution to EPS, basic Salary is restricted to maximum Rs 6500 per month, i.e. maximum contribution to EPS is Rs 541 per month and balance of Employer’s 12% contribution will go into EPF). For the purpose of Section 80C deduction, Employee’s own contribution towards EPF is eligible. Note Employer’s Contribution to EPF is not eligible for Section 80C deduction.

Voluntary Provident Fund: Employee is free to voluntarily make contribution to EPF over and above 12% of Salary as required by law. This voluntary contribution by an individual towards EPF is also eligible for Section 80C deduction.

Public Provident Fund (PPF):

Contribution made by an individual to PPF account is eligible for Section 80C deduction. Contribution to PPF account of spouse and children also eligible.
HUF can contribute to PPF account of any member of the HUF.
PPF account can be opened with Post office and select branches of State Bank of India, other PSU banks and even some Private banks.
Minimum deposit is Rs. 500 and Maximum is Rs. 70,000 in a financial year (1st April to 31st March). One deposit with a minimum amount of Rs.500 is mandatory each financial year.
Lock-in for 15 years. Partial withdrawal after 7 years allowed.

Pension Funds: Contribution towards Pension Funds is EPF is eligible for Section 80C deduction. Note Section 80CCC which restricted Pension Fund contribution to Rs. 10,000 is not applicable with effect from 1st April 2006.

Superannuation fund: Contribution to approved superannuation fund is eligible for Section 80C deduction.

Deferred Annuity:

Payment in respect to non-commutable deferred annuity plan taken in the name of self, spouse or child is eligible for Section 80C deduction.
Deferred annuity deducted from Government employee, subject to maximum of 20% of salary is also eligible.

Life Insurance Premium:

Life insurance premium paid for yourself, your spouse or your children.
HUF can claim Section 80C deduction in respect of premium paid for insuring life of any member thereof.
Life insurance premium paid by an individual towards insuring life of his parents (father / mother) or in-laws or brother / sister is not eligible.
If there is more than one policy, aggregate amount of premium paid will be eligible for deduction. Also it is not compulsory to have the insurance policy from Life Insurance Corporation (LIC), even insurance bought from private players is allowed.
If policy is surrendered within 2 years of commencement, no deduction in respect of the Insurance premium paid is allowed. Moreover the aggregate amount of the deductions allowed in respect of such policy in the preceding years is added to the income.

Unit Linked Insurance Policy (ULIP):

Premium paid for ULIP is eligible.
Maximum premium eligible is restricted to 20% of sum assured.
If policy is surrendered within 5 years of commencement, no deduction in respect of the premium paid is allowed. Moreover the aggregate amount of the deductions allowed in respect of such policy in the preceding years is added to the income of the year in which policy is surrendered.

Equity Linked Savings Scheme (ELSS):

Contribution to Mutual Fund schemes notified under Section 10(23D) of the Income Tax Act (normally referred to as ELSS Mutual Fund Schemes or Tax Saving Mutual Fund Schemes) is eligible.
Investment in ELSS has a lock-in period of 3 years. Pre-mature withdrawals is not allowed under any circumstance.

Home Loan Principal Repayment: The principal component of the Equated Monthly Installment (EMI) is eligible for Section 80C deductions. Follow the link to download an Excel based model to calculate Principal and Interest component of the EMI, i.e. EMI Amortization Schedule. Also note, if the Home is sold within 5 years from the end of the financial year in which possession of such property is obtained, no deduction in respect of the principal repayment is allowed. Moreover the aggregate amount of the deductions allowed in respect of principal repayments in the preceding years is added to the income of the year in which the Home is sold.

Other Home Related payments:

Stamp duty, registration fee and other expenses for the purpose of transfer eligible.
Admission fee, cost of share and initial deposit not eligible.
Cost of any addition or repair after issue of completion certificate or after the house property has been occupied or been let out is not eligible.

National Savings Certificate (NSC): The amount invested in National Savings Certificate (NSC) can be included in Section 80C deduction.

Infrastructure Bonds: Investment in bonds issued by specified Infrastructure companies is also eligible for Section 80C deductions. Note in the erstwhile Section 88, Rs. 30,000 was required to be invested exclusively in Infrastructure bonds. This provision is not applicable anymore and investment in Infrastructure bonds is just one of the various options available for the purpose of Section 80C deduction.

Bank Term Deposits: Term deposits with scheduled bank for minimum tenor of 5 years.

Term deposit with Post Office: Minimum tenor 5 years.

NABARD Bonds: Investment in notified bonds issued by National Bank for Agriculture and Rural Development (NABARD) is also eligible for Section 80C deduction.

Senior Citizens Savings Scheme: Deposits in an account under the Senior Citizens Savings Scheme Rules is also eligible for Section 80C deduction.

Tuition fees:

Deduction available only to Individual assesses and not HUF.
Tuition fees paid for the purpose of full-time education of your children (maximum two children).
Tuition fees for Self or Spouse not eligible.
Tuition fees must be paid to any university, college, school or other educational institution situated within India.
Development fees or donation not eligible.

Conclusion

As can be seen from above, there is considerable amount of flexibility an individual / HUF has in terms of deciding where to invest in order to claim Section 80C deduction. While where to invest would essentially vary across people depending on their financial goals, risk appetite, etc, as a general rule one can look at the following investment options in terms of preference:

EPF: For Salaried individuals EPF investment happens automatically and compulsorily.
Home Loan Principal Repayment: If you have taken Home Loan and are paying EMI, principal component of the EMI is automatically eligible.
Life Insurance: Every individual should have adequate amount of Life Insurance coverage. Term Policy which is pure risk cover is recommended as the premium payable for required insurance amount is less and more importantly it helps in segregating insurance from investment.
ELSS / PPF: Whatever balance amount is left can be invested in ELSS or PPF depending on the risk appetite of the individual. While PPF would provide stable and assured returns, ELSS is expected to provide higher return over a longer investment horizon. In case of non-salaried individuals since there is no EPF investment, some allocation to PPF is highly recommended. For relatively younger individuals (I don’t know how to define this term, but let’s say individual below the age of 45 years) greater allocation to ELSS is advisable since equity as an asset class has traditionally provided highest return over a long investment horizon. Even within ELSS, it would be strongly recommended to go for Systematic Investment Plan (SIP), as it would help in spreading the investment over a period of time. Follow the link to download an Excel based model to calculate the value of Mutual Fund SIP Investment over a period of time, i.e. Mutual Fund SIP Calculator.

To conclude, while there is no “one size fits all” solution, key is for an individual to match his financial goals with the varied investment options available for claiming the Rs 100,000 deduction under Section 80C.

Tips on Effective Credit Card Usage

noreply@blogger.com (Smart Money India) — Thu, 12 Feb 2009 14:15:00 +0000

No don’t worry, this is not another spiel on how you should use credit card within your income limits. This is neither a guide on how you should not overburden your finances by splurging on credit cards as if there is no tomorrow. Certain level of financial prudence is assumed on the part of the card user. Then what exactly is the theme of this article?

Well this article is about how to use credit card most effectively or efficiently. In other words how to extract the most out of your credit card – WITHOUT paying any charges. I repeat, WITHOUT paying any charges. Am also including some practical tips gained by using multiple credit cards over the years.

First and foremost, NEVER regard your credit card as a financing mechanism. Use it just for operational convenience and “float” enjoyment. By float I mean “Free money”. Now what do I mean by Free Money. Let me explain by way of an example. Suppose you want to buy a LCD TV for Rs 50,000. Broadly speaking, you have two options. First, pay upfront by cash or debit card. Second, make your payment by credit card. Remember, you should not be using credit card if you do not have the Rs 50,000 needed to buy the LCD TV. Do not swipe the card without thinking how you will repay the credit card company. That is recipe for disaster. Now assuming you have the Rs 50,000 lying in your savings bank account, you have to decide between swiping the debit card or credit card. If you swipe the debit card, there is an instant debit to your account and your savings bank account balance goes down by Rs 50,000. However if you swipe the credit card, payment has to be made only after 20 to 50 days depending upon the billing date and due date. Thus for this interim period you enjoy the money without any cost. This is what I will call “Free Money”. Now what can you do with this free money. You can keep it in savings account, but that will give you only 3.5% interest. You can create a Fixed Deposit or you can invest this money in a liquid mutual fund. Whatever you do with this money and whatever return you generate is essentially without any cost. Great option, if you are one of those who believe risk less “free money” is always welcome.
Milton Friedman, Nobel-prize winning economist, once famously quoted, “There is no such thing as a free lunch”. So if the credit card company is providing you with free credit for 20 to 50 days, it would be recovering it some way or the other. Okay agreed that the card company would have other revenue streams, like the collection charges it levies on the card accepting merchants, but for the time being let’s restrict our argument to credit card issuer’s revenue from the card swiping consumers. So assuming most of the consumers pay up within the due date, the card company has to recover the required revenues from card consumers, from the set of consumers who are using credit card as financing mechanism. In effect it means that the credit card issuer has to charge high interest rates and charges from their financing customers. And believe me, this is exactly what they do. Starting from huge late payment charges to interest at exorbitant rates. This brings us to our next rule. Never miss a payment date. You will get killed in the late payment charges and interest costs. In India most of the credit card companies charge interest at anywhere from 18% to 60% per annum!!

Keep track of the due date, which is the date by which the credit card outstanding should be paid off in order to avoid late payment charges and interest cost. Always pay couple of days before the due date. If you paying by a cheque, keep in mind the cheque clearance time. Basically, don’t give a chance to the credit card issuer to claim your payment was received after the due date.

Also keep track of the billing date, which is the date on which every month the credit card issuer generates your bill. How exactly will knowing the billing date going to help? Well let’s assume you maintain multiple credit cards, each with different billing dates. Use the credit card where the billing date has just gone. This will ensure you enjoy maximum interest free period. For example you have ICICI Bank credit card with billing date 9th of every month and due date 30th of same month. You also have HSBC credit card with billing date 19th of every month and due date 10th of next month. Thus if you have to use credit card on 15th July 2008, it is advisable to use the credit card where the billing date has just gone. Thus use ICICI Bank credit card and enjoy interest free credit period of 46 days (from 15th July 2008 to 30th August 2008). Instead if you swipe HSBC Card, you get interest free credit period of only 26 days (from 15th July 2008 to 10th August 2008).

Avail attractive Balance Transfer offers. Time and again credit card issuers keep coming with Free Balance Transfer offers. In a typical Balance Transfer, on the due date for making bill payment, instead of directly making the payment, you get one of your other card issuer to clear you outstanding. Normally the card issuer who is paying off your outstanding will start charging interest immediately. Let me explain through an example. Suppose you hold American Express (Amex) and State Bank of India (SBI) Credit Cards. There is an outstanding of Rs 100,000 on the Amex credit card. On the due date instead of making the payment directly to Amex, you request SBI for a balance transfer. SBI will prepare and send you a draft / pay order of Rs 100,000 payable to Amex, which you deposit with Amex. Thus your dues to Amex are paid off and the outstanding balance gets transferred to SBI. Typically SBI will charge a processing fee and interest from the date of balance transfer. At times, in order to promote their credit card, issuers keep coming with free balance transfer scheme, wherein no interest is charged on balance transfers for some period of time. For example SBI may have a scheme where for 90 day balance transfer, no interest is charged for initial 45 days. There may be a small processing fee which also is waived off in some cases. Now in such cases what you need to do is do a balance transfer to SBI and end of 45 days you pay off SBI. This way you don’t have to pay any financing charges to SBI and you end up enjoying “free money” for another 45 days.

Never default with any credit card company. This is very important. Do not tarnish your credit history. With the establishment of Credit Information Bureau India Limited (CIBIL), your entire credit history is recorded and available to your future lenders. If you have any dispute with credit card issuer, talk to them and try to arrive at a mutually acceptable resolution. Request for waiver of charges citing your usage history and past payment track record. Most of the times if your past usage is regular and payment record clean, the card issuer will waive off the charges, if they are nominal in amount. Remember the card issuer is also earning money every time you swipe the card, through the amount they charge from the merchants. If the card issuer is unwilling to waive or reduce the entire charges / interest cost, assess if the charges / interest cost have been validly levied. For example if you actually forgot to pay the credit card bill on due date and have been slapped late payment charges and financing charges, you should pay the same and clear your dues. Do not just ignore the bill and leave the credit card issuer to put your account in default.

Be careful, Taxmen is watching. Overall usage of credit card should be for amount which is commensurate with your declared sources of income. Tax authorities are very closely monitoring credit card usage and picking up cases where credit card usage and declared sources of income doesn’t seem to tell the same story. Credit card issuers are required by law to submit Annual Information Return (AIR) with the name and Permanent Account (PAN) number of all credit card customers whose annual usage exceeds Rs 200,000. This information is collected by Income Tax department and digitized in the Tax Information Network (TIN). Now the Income Tax department has all the information at the click of a button regarding credit card users with their PAN numbers.

Avoid transactions over net on unknown websites. Ideally use Virtual Credit Card for online transactions. Some of the banks have recently started offering VCC, which does not have any plastic existence but can only be viewed online and can be used only for online transactions. Key details of the VCC like the card number, expiry date, etc. are visible online. The initial credit limit of VCC is normally set at Re.1 and the user can increase the VCC limit online, within the overall limit of the primary card. Some of the banks which are offering VCC in India are ICICI Bank, HDFC Bank, Kotak Mahindra Bank, etc.

Avoid transactions at too many petrol pumps through credit cards. Use your credit card only at reputed petrol pumps. There have been too many fraud cases recently where the petrol pump employees have copied credit card and Card Verification value (CVV) numbers and used the cards to make illegal airline ticket purchases online.

Redeem reward points in time. At times reward points have validity upto a particular time. For example reward points may expire every 2 years, i.e. reward points must be utilized within 2 year of earning the same. Preferably choose the credit card where reward points can be converted into cash. For example Deutsche Bank credit card allows users to adjust convert reward points against any card outstanding, effectively meaning reward points are converted to cash.

Charges other than Brokerage for Stock Exchange Transactions

noreply@blogger.com (Smart Money India) — Tue, 10 Feb 2009 13:05:00 +0000

Are you a day trader or active trader? One of the most pertinent question you should ask yourself is - What is your trading cost? Simple question, but not so simple answer. Did you just say - “30 paisa for Delivery and 3 paisa for F&O”. Wait, have you considered all the charges you are paying for executing trades on stock exchange. Quite often you recall and consider only your brokerage cost. But there are so many other charges which are levied on Stock exchange transactions apart from brokerage.

Take Check out the contract note and examine. You will see the following charges in addition to Brokerage charges – Securities Transaction Tax (STT), Stamp Duty and Other Charges. In most of the cases the break up of “Other Charges” is not provided, but note it consists of Transaction Charges and SEBI Turnover Charges. Then there is also Service Tax which is levied on all the charges except STT.

More often than not, when you are taking close intra-day trading calls, where the margins are wafer thin, you should have complete grasp of what your costs are going to be for a particular trade. These additional cost can become the difference between a winning trade and losing trade. Please see below detailed information on statutory charges on stock exchange transactions, other than Brokerage charges.

Securities Transaction Tax (STT)

Equity Delivery Transactions
Purchase: 0.125% of Turnover i.e. (Number of Shares * Price)
Sell: 0.125% of Turnover i.e. (Number of Shares * Price)

Equity Intra-day Transactions
Purchase: NIL
Sell: 0.025% of Turnover i.e. (Number of Shares * Price)

Future Transactions
Purchase: NIL
Sell: 0.017% of Turnover i.e. (Number of Lots * Lot Size * Price)

Option Transactions
Purchase: NIL at the time of purchase of option. However the purchaser has to pay 0.125% of the Settlement Price i.e. (Number of Lots * Lot Size * Strike Price), in case of option exercise
Sell: 0.017% of Premium

For more details on STT, please see this earlier post.

Transaction Charges

Equity Delivery Transactions
Purchase: 0.0035% of turnover in NSE and 0.0034% of Turnover in BSE
Sell: 0.0035% of turnover in NSE and 0.0034% of Turnover in BSE

Equity Intra-day Transactions
Purchase: 0.0035% of Turnover in NSE and 0.0034% of Turnover in BSE
Sell: 0.0035% of Turnover in NSE and 0.0034% of Turnover in BSE

Future Transactions
Purchase: 0.002% of Turnover i.e. (Number of Lots * Lot Size * Price)
Sell: 0.002% of Turnover i.e. (Number of Lots * Lot Size * Price)

Option Transactions
Purchase: 0.05% of Premium
Sell: 0.05% of Premium

SEBI Turnover Charges

Equity Delivery Transactions
Purchase: NIL
Sell: NIL

Equity Intra-day Transactions
Purchase: NIL
Sell: NIL

Future Transactions
Purchase: 0.0002% of Turnover i.e. (Number of Lots * Lot Size * Price)
Sell: 0.0002% of Turnover i.e. (Number of Lots * Lot Size * Price)

Option Transactions
Purchase: 0.0002% of Premium
Sell: 0.0002% of Notional Value in case of exercise or assignment

Stamp Duty

Equity Delivery Transactions
Purchase: 0.01% of Turnover. Turnover usually taken in multiple of Rs 5000
Sell: 0.01% of Turnover. Turnover usually taken in multiple of Rs 5000

Equity Intra-day Transactions
Purchase: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
Sell: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000

Future Transactions
Purchase: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
Sell: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000

Option Transactions
Purchase: 0.002% of Premium
Sell: 0.002% of Notional Value in case of exercise or assignment

Service Tax

Service Tax, Surcharge and Education Cess are applicable on Brokerage, Transaction Charges, SEBI Turnover Charges and Stamp Duty. Note Service Tax, Surcharge and Education Cess are not applicable on Securities Transaction Tax (STT).

Quick summary of Charges other than Brokerage, for Stock exchange transactions

Charges	Equity Delivery	Equity Intra-day	Futures	Options
Securities Transactions Tax	0.125% of Turnover	0.025% of Turnover on SELL transactions	0.017% of Turnover on SELL transactions	0.017% of Option Premium on SELL transactions and 0.125% of Settlement Value where Option is exercised
Transaction Charges	0.0034% of Turnover in BSE and 0.0035% of Turnover in NSE	0.0034% of Turnover in BSE and 0.0035% of Turnover in NSE	0.002% of Turnover	0.05% of Premium
SEBI Turnover Charges	NIL	NIL	0.0002% of Turnover and closeout	0.0002% of Premium and Notional valuefor Exercise / Assignment
Stamp Duty	0.01% of Turnover	0.002%of Turnover	0.002% of Turnover and closeout	0.002% of Premium and Notional value for Exercise / Assignment

Detailed summary of Other Charges with Service Tax

Product	Transaction	Rate	ServiceTax	Effective Rate	Charged on
Securities Transaction Tax (STT)
Equity Delivery	Purchase	0.125%	-	0.125%	Turnover
Equity Delivery	Sell	0.125%	-	0.125%	Turnover
Equity Intra-day	Purchase	-	-	-
Equity Intra-day	Sell	0.025%	-	0.025%	Turnover
Future	Purchase	-	-	-
Future	Sell	0.017%	-	0.017%	Turnover
Option	Purchase	0.125%	-	0.125%	Settlement price, on exercise
Option	Sell	0.017%	-	0.017%	Premium

Transaction Charges
Equity Delivery	Purchase	0.0035%	12.36%	0.0039326%	Turnover
Equity Delivery	Sell	0.0035%	12.36%	0.0039326%	Turnover
Equity Intra-day	Purchase	0.0035%	12.36%	0.0039326%	Turnover
Equity Intra-day	Sell	0.0035%	12.36%	0.0039326%	Turnover
Future	Purchase	0.0020%	12.36%	0.0022472%	Turnover
Future	Sell	0.0020%	12.36%	0.0022472%	Turnover
Option	Purchase	0.0500%	12.36%	0.0561800%	Premium
Option	Sell	0.0500%	12.36%	0.0561800%	Premium

SEBI Turnover Charges
Equity Delivery	Purchase	-	-	-	Turnover
Equity Delivery	Sell	-	-	-	Turnover
Equity Intra-day	Purchase	-	-	-	Turnover
Equity Intra-day	Sell	-	-	-	Turnover
Future	Purchase	0.0002%	12.36%	0.00022472%	Turnover
Future	Sell	0.0002%	12.36%	0.00022472%	Turnover
Option	Purchase	0.0002%	12.36%	0.00022472%	Premium and Notional value for Exercise / Assignment
Option	Sell	0.0002%	12.36%	0.00022472%	Premium and Notional value for Exercise / Assignment

Stamp Duty
Equity Delivery	Purchase	0.010%	12.36%	0.0112360%	Turnover, in 5000 multiple
Equity Delivery	Sell	0.010%	12.36%	0.0112360%	Turnover, in 5000 multiple
Equity Intra-day	Purchase	0.002%	12.36%	0.0022472%	Turnover, in 5000 multiple
Equity Intra-day	Sell	0.002%	12.36%	0.0022472%	Turnover, in 5000 multiple
Future	Purchase	0.002%	12.36%	0.0022472%	Turnover, in 5000 multiple
Future	Sell	0.002%	12.36%	0.0022472%	Turnover, in 5000 multiple
Option	Purchase	0.002%	12.36%	0.0022472%	Turnover, in 5000 multiple
Option	Sell	0.002%	12.36%	0.0022472%	Turnover, in 5000 multiple

Non-Resident Indian (NRI) – Different type of Bank Accounts

noreply@blogger.com (Smart Money India) — Tue, 10 Feb 2009 10:45:00 +0000

Just became a Non-Resident Indian (NRI)? One of the first practical issues you face is regarding your bank accounts in India. What kind of bank account can be maintained and operated – NRO / NRE / FCNR account? Note that NRI for the purpose of bank accounts is as per FEMA definition.

NRIs / PIOs / OCBs are permitted to open bank accounts in India out of funds remitted from abroad, foreign exchange brought in from abroad or out of funds legitimately due to them in India, with an authorised dealer. Such accounts can be opened with banks specially authorised by the Reserve Bank in this behalf. NRIs can open and operate the following five types of Bank accounts.

1. Ordinary Non-Resident Rupee Accounts (NRO Accounts)

These are Rupee denominated non-repatriable accounts and can be in the form of savings, current recurring or fixed deposits. These accounts can be opened jointly with residents in India. When an Indian National / PIO resident in India leaves for taking up employment, etc. outside the country, his bank account in India gets designated as NRO account.

The deposits can be used to make all legitimate payments in rupees. Interest income, from NRO accounts is taxable. Interest income, net of taxes is reportable. NRO account can be funded through any of the following sources:

By proceeds of foreign exchange remittance from abroad through banking channels in an approved manner
By proceeds of foreign currency notes and traveler cheques brought into India by the non-resident while on a temporary visit to India
By transfer from an existing non-resident account in the name of the same person
By funds from a local source representing bonafide transactions in rupees

Conditions regarding repatriation of balances in NRO accounts:

Repatriation is allowed up to US dollars 1 million per calendar year for any purpose from the balances in NRO accounts subject to payment of applicable taxes
Limit of US dollars 1 million includes sale proceeds of immovable properties held by NRIs / PIOs for a period of 10 years
In case a property is sold after being held for less than 10 years, remittance can be made if the sale proceeds have been held by the NRI/PIO for the balance period

Please refer to the Master Circular on NRO account from RBI website through link below:

http://rbidocs.rbi.org.in/rdocs/notification/PDFs/85341.pdf

2. Non-Resident (External) Rupee Accounts (NRE Accounts)

NRIs, PIOs, OCBs are eligible to open NRE Accounts. These are rupee denominated accounts and can be in the form of savings, current, recurring or fixed deposit accounts. Accounts can be opened by remittance of funds in free foreign exchange. Foreign exchange brought in legally, repatriable incomes of the account holder, etc. can be credited to the account. Joint operation with other NRIs/PIOs is permitted. Power of attorney can be granted to residents for operation of accounts.

The deposits can be used for all legitimate purposes. The balance in the account is freely repatriable. Interest lying to the credit of NRE accounts is exempt from tax in the hands of the NRI. Funds held in NRE accounts may be freely transferred to FCNR accounts of the same account holder. Likewise, funds held in FCNR accounts may be transferred to NRE accounts of the same account holders.

Immediately upon return of the account holder to India and on his becoming a resident in India, NRE Account will be re-designated as Resident Rupee Account or converted to RFC account as per the option of the account holder. However, if the account holder is only on a short visit to India, the account will continue to be treated as NRE account.

The initial deposit in NRE account can be made in any of the following manners:

By proceeds of foreign exchange remittances from abroad through banking channels in an approved manner
By proceeds of foreign currency notes and traveler cheques brought into India by the non-resident while on a temporary visit to India
By transfer from an existing NRE Account of the same person

3. Foreign Currency (Non –Resident) Accounts (Banks) (FCNR (B) Accounts)

NRIs / PIOs / OCBs are permitted to open such accounts in US Dollars, Sterling Pounds, Australian Dollars, Canadian Dollars, Japanese Yen and Euro. The account may be opened only in the form of term deposit for any of the following maturity periods; (a) one year and above but less than two years, (ii) two years and above but less than three years, (iii) three years and above but less than four years, (iv) four years and above but less than five years, and (v) five years.

Interest income is tax free in the hands of NRI until he maintains a non-resident status or a resident but not ordinarily resident status under the Indian tax laws. Money lying in FCNR (B) accounts can also be utilised for local disbursements including payment for exports from India, repatriation of funds abroad and for making investments in India, as per foreign investment guidelines.

4. Non-Resident (Non-Repatriable) Rupee Deposit Accounts (NRNR Accounts)

NRIs / PIOs / OCBs, other non-resident Individuals/entities are permitted to open these accounts by transfer of freely convertible foreign currency funds from abroad, or from NRE / FCNR accounts. Non-residents can open joint accounts with other Non-Residents (except Pakistan and Bangladeshi nationals) or resident close relatives in India. Deposits can be held jointly with a resident. Deposits can be for a period from 6 months to 3 years, and can be renewed further. Accounts may also be opened by transfer of funds from the existing NRE/FCNR accounts of the non-resident accounts holders.

The principal is non-repatriable; interest can be repatriated. There is no income tax on the interest. Accounts under the Non-Resident (Non-Repatriable) Rupee Deposit Scheme may be opened in Indian rupees out of the funds in freely convertible foreign exchange transferred for the purpose to India in an approved manner from the country of residence of the prospective non-resident account holder or from any other country. Transfer of funds from the existing NRE / FCNR Accounts of the non-resident account holder may also open accounts.

5. Non-Resident (Special) Rupee Accounts with banks in India

NRIs/PIOs presently have the facility of maintaining bank accounts and undertaking financial transactions in India subject to certain exchange control regulations.

In order to simplify the procedures and to provide greater freedom to NRIs/PIOs for putting through financial transactions in India, NRIs and PIOs are now permitted to open bank accounts in India, which will be at par with rupee accounts, maintained by residents. They can now open Non-Resident (Special) Rupee Accounts with banks in India which will have the same facilities and restrictions as are applicable to rupee accounts maintained in India by residents relating to repatriation of funds held in these accounts and/or income/interest earned on them. The procedure for opening such accounts is the same as that of domestic accounts of resident individuals. The existing facilities for NRIs / PIOs to maintain and operate NRO, NRE and FCNR accounts also continues. The repatriation facilities available under these accounts will continue as before.

Given below is comparison between NRO, NRE and FCNR (B) accounts:

Accounts and features	NRO	NRE	FCNR(B)
Purpose of Account	To park Indian earnings like rent, Indian salary, dividend etc	To park overseas savings remitted to India after converting to INR	To park overseas savings without converting into INR
Who can open an account	Any person resident outside India (other than a person resident in Nepal and Bhutan). Individuals / entities of Bangladesh/ Pakistan nationality / ownership as well as erstwhile OCBs require prior approval of RBI)	NRIs(individuals / entities of Bangladesh/ Pakistan nationality/ ownership require prior approval of RBI)	NRIs (individuals /entities of Bangladesh/ Pakistan nationality/ ownership require prior approval of RBI)
Nomination	Permitted	Permitted	Permitted
Currency in which account is denominated	Indian Rupees	Indian Rupees	Pound Sterling, US Dollar, Japanese Yen, Euro, Canadian Dollar and Australian Dollar
Account Types	Savings Bank Account Fixed Deposit Current Account	Savings Bank Account Fixed Deposit Current Account	Fixed Deposit
Joint Holding	Both with resident / non-resident	Only with NRIs	Only with NRIs
Tax deducted at source	Subject to tax deducted at source	Exempt from tax deducted at source	Exempt from tax deducted at source
Repatriation of Principal	The principal amount is not repatriable and can be used only for local payments. Funds up to USD 1 million (or equivalent) per financial year can be repatriated out of the balance held in NRO accounts for theeducation of your children, for medical expenses for your family and you, etc	Freely Repatriable	Freely Repatriable
Repatriation of Interest	Freely Repatriable	Freely Repatriable	Freely Repatriable
Period for fixed deposits	As applicable to resident accounts.	At the discretion of the bank	For terms not less than 1 year and not more than 5 years.
Rate of Interest	Banks are free to determine interest rates for term deposits.	Subject to cap : FixedDeposits : LIBOR/ SWAP rates + 175 bps (w.e.f. Nov 15,2008), as on the last working day of the previous month, for US Dollar of corresponding maturities. Savings Bank Account Interest rate shall be at the rate applicable to domestic savings account	Subject to cap : LIBOR/ SWAP rates + 100 basis points (w.e.f. Nov 15,2008) for the respective currency / corresponding maturities.
Operations by Power of Attorney in favour of a resident by the non-resident account holder	Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the accountholder himself through normal banking channels.	Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels.	Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the accountholder himself through normal banking channels.
Loans a. In India i) to the Account holder ii) to Third Parties	Permitted Permitted	Permitted up to Rs.20 lakhs Permitted up to Rs.20 lakhs	Permitted up to Rs.20 lakhs Permitted up to Rs.20 lakhs
b.Abroad i) to the Accountholder ii) to Third Parties	Not Permitted Not Permitted	Permitted $ Permitted $	Permitted $ Permitted $
c.Foreign Currency Loans in India i) to the Account holder ii) to Third Parties	NotPermitted Not Permitted	Not Permitted Not Permitted	Permitted up to Rs.20 lakhs Not Permitted
Purpose of Loan a.In India i) to the Account holder	Personal requirement and / or business purpose *	i) Personal purposes or for carrying on business activities. * ii) Direct investment in India on non-repatriation basis by way of contribution to the capital ofIndian firms / companies iii) Acquisition of flat / house in India for his own residential use. (Please refer to para 6(a) of Sch.1 toFEMA 5)	i)Personal purposes or for carrying on business activities. * ii)Direct investment in India on non-repatriation basis by way of contribution to the capital ofIndian firms / companies iii)Acquisition of flat / house in India for his own residential use. (Please refer to para 9 of Sch. 2 to FEMA5)
ii) to Third Party	Personal requirement and / or business purpose *	Fund based and / or non-fund based facilities for personal purposes or for carrying on business activities *. (Please refer to para 6(b) of Sch. 1to FEMA 5)	Fund based and / or non-fund based facilities for personal purposes or for carrying on business activities *. (Please refer to para 9 of Sch. 2 toFEMA 5).
b. Abroad To the account holder and Third Party	Not permitted.	Fund based and / or non-fund based facilities for bonafide purposes.	Fund based and / or non-fund based facilities for bonafide purposes.

* The loans cannot be utilised for the purpose of re-lending or for carrying on agriculture or plantation activities or for investment in real estate business.

Non-Resident Indian (NRI) - Definition under Income Tax and FEMA. Tax Implication of Residency

noreply@blogger.com (Smart Money India) — Sat, 07 Feb 2009 05:51:00 +0000

"To be, or not to be, that is the question" – thus pondered Shakespeare in Hamlet. Well there isn’t really a choice we have “To be, or not to be” Resident or Non-Resident, but for a person moving outside India or traveling frequently to India, residency is of paramount importance, since that is what determines what Income is taxable and also what sort of bank accounts he can open and operate.

Who is a Non-Resident Indian?

An Indian abroad is popularly known as Non-Resident Indian (NRI). NRI is legally defined under the Income Tax Act, 1961 and the Foreign Exchange Management Act, 1999 (FEMA) for applicability of respective laws.

NRI as per FEMA

NRI is defined under FEMA as a person resident outside India who is either a citizen of India or is a Person of Indian Origin (PIO).

PIO means a citizen of any country other than Bangladesh or Pakistan,

who at any time held Indian Passport, or
who or either of whose parents or any of the grand parents was a citizen of India under Constitution of India or under Indian Citizenship Act, 1955, or
who is spouse of an Indian citizen or spouse of person referred to in 1 and 2 above

"Person resident outside India" is defined indirectly to mean a person who is not resident in India. “Person resident in India” is a person residing in India for more than 182 days in the Preceding Financial Year. Preceding Financial Year means the financial year, which ended on the last 31st of March. Thus for example, as on 11th June 2007, the Preceding Financial Year would be “2006-07”. FEMA also excludes person moving out of India for employment or business from category of Resident. Similarly it also excludes a person coming as tourist / visitor from the category of Resident. Let’s see the detailed definition below:

“Person resident in India” means:

Person Resident in India for more than 182 days during the course of Preceding Financial Year but excludes :

a. A person who has gone out of India or who stays outside India :
i. for employment outside India; or
ii. for carrying on a business or vocation outside India; or
iii. for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

b. A person who has come to India or stays in India for any purpose other than :
i. for employment in India, or
ii. for carrying a business or vocation in India, or
iii. for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
Any person or body corporate registered or incorporated in India;
An Office, Branch or Agency in India owned or controlled by a person resident outside India;
An Office, Branch or Agency in India owned or controlled by a person resident in India.

The definition under FEMA is explained in simple terms for individuals hereunder.

The residential status of a person leaving India shall be determined as under:
If a person leaves India for the purpose of employment, business or for any other purpose that indicates his intention to stay outside India for an uncertain period, then he becomes a non-resident from the day he leaves India for such purpose.
The residential status of a person returning to India will be determined us under:
If a person comes to India for the purpose of employment, business or for any other purpose that indicates his intention to stay in India for an uncertain period; then he becomes a resident from the day he comes to India for such purpose.

As per the definition there is also a requirement of physical stay for more than 182 days in India in the Preceding Financial Year. But there is some confusion whether this requirement is necessary condition for being classified as Resident. Important to see extract of FAQ given on RBI website:

http://www.rbi.org.in/scripts/FAQView.aspx?Id=33

“Q.37. What is meant by a person resident in India ?

A.37. Under FEMA, a person resident in India is defined as a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year (April-March) and who has come to or stays in India either for taking up employment, carrying on business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In other words, to be treated as `a person resident in India' under FEMA, a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of the purpose / intention of stay.”

If we take the interpretation of above (although FAQ cannot be regarded as rule of law), it would appear that a resident is a person who:

Spends more than 182 days in India during the Preceding Financial Year AND
Does not fall in either (a) or (b) in the definition above.

Point (a) excludes from the definition of FEMA resident those who meet (1) and then go abroad for an indefinite period, say for employment. Point (b) excludes from the definition of FEMA resident those who meet (1), but have come to India as visitors/ tourists to India with a definite plan to return abroad.

However the above interpretation doesn’t seem to logically gel with the intent of the legislation and also the definition of “Person Resident in India” as given under erstwhile FERA. Let us consider a person who returns to India on 1st Nov 2008 to retire and live in India for an indefinite period. In the Preceding Financial Year, i.e. period from 1st April 2007 to 31st March 2008, he was not present in India for 183 days. Hence he would be classified as Non-Resident even though he should be classified as Resident as per clause (b) in the definition, since he has returned to India to stay for an uncertain period. Going by the earlier interpretation, he would be classified as Resident only from 1st April 2010, since on that day he would satisfy the condition of 183 day stay in India in the Preceding Financial Year, i.e. period from 1st April 2008 to 31st March 2009. This definitely is not the intent of the clause since a person should actually be classified as Resident from the day he returns to India to stay for an uncertain period.

Thus in order to make a definition of a person resident in India workable one has to look first at the exceptions given in clauses (a) and (b) and if the person is not falling under either of them, then look at his physical presence in India during the preceding financial year. The flowchart below provides a good basis to determine Residency status of a person under FEMA.

Difference between Resident definition under Income Tax and FEMA

"Financial Year" is not defined under FEMA, but by convention it is assumed to refer to 1st April to 31st March
Income-tax Act requires physical presence of 182 days or more, whereas, FEMA requires 183 days or more
Income-tax Act considers the physical presence of a person in the Current Financial Year, whereas FEMA considers physical presence of a person in the Preceding Financial Year

NRI as per Income Tax Act

Income Tax Act has not directly defined NRI. Section 6 contains detailed criteria of who is considered as Resident in India and provides that anyone who doesn’t meet these criteria is Non-Resident.

The status of a person as a resident or non-resident depends on his period of stay in India. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March (known as previous year under the Income-tax Act).

Resident

An individual will be treated as a Resident in India in any previous year if he/she is in India for:

Atleast 182 days in that year, OR
Atleast 365 days during 4 years preceding that year AND atleast 60 days in that year.

An individual who does not satisfy both the conditions as mentioned above will be treated as "non-resident" in that previous year.

Definition of Resident is relaxed by dropping Condition 2 given above (i.e. only Condition 1 is applicable), for the following cases:

An Indian citizen who leaves India in any year for the purpose of employment outside India or as a crew member of an Indian ship,
An Indian citizen or a person of Indian origin who resides outside India and who comes on a visit to India. Note that a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.

Following examples will make the rules more clear:

Amit leaves India for the first time on 1st August, 2006 and remains out of India in the remaining part of the financial year. His period of stay in India in the previous year 2006-07, being less than 182 days, he is not a resident for that year.
Anita leaves India in December 2006 and continues to remain abroad in the remaining part of the financial year. Her period of stay in India being more than 182 days, she will be a 'resident' in the previous year 2006-07.
Rahul leaves India in 2003. In the financial year 2003-04 to 2006-07 he visited India several times and the total period of stay during these 4 years was 400 days. During the financial year 2007-08, he came to India for total period of 180 days. Although his stay in India in the financial year 2007-08 is less than 182 days, he becomes a ‘resident’ by virtue of the fact that his stay in the preceding 4 years was more than 365 days and he was in India for more than 60 days in the year under consideration.
In the above examples, if Rahul was a member of the crew of an Indian ship or a citizen of India or a person of Indian origin, he would not have become a 'resident' for the year 2007-08 since his period of stay in India in that year was less than 182 days.

“Resident and Ordinarily Resident” & “Resident but not Ordinarily Resident”

A person Resident in India is further classified as “Resident and Ordinarily Resident” if BOTH the following conditions are satisfied:

Resident in India for 9 out of 10 years preceding that year, AND
In India for atleast 730 days during 7 years preceding that year

If any one of the above conditions is not satisfied, the person is classified as “Resident but not Ordinarily Resident”

Points to Note

A Hindu Undivided Family (HUF), firm or other association of persons is Non-Resident if control and management of its affairs is situated wholly outside India
A company is said to be resident in India in any previous year, if it is an Indian company; or the control and management of its affairs is situated wholly in India
Every other person is said to be Non-resident in India if control and management of his affairs is situated wholly outside India
If a person is resident in India in respect of any source of income, he shall be deemed to be resident in India in respect of each of his other sources of income

Residency and Taxable Income

Based on the residential status of a tax payer and the place where the income is earned, the income that is included in the total income is as under:-

Residential status	Nature of Income taxable
Resident and Ordinarily Resident	All Income whether earned in India or outside India, which means the world income is taxable in case of a resident
Resident but not Ordinarily Resident	All income earned in India and all income earned outside India if the same is derived from a business which is controlled in India or from a profession which is set up in India
Non Resident	All income earned in India. Income outside India is not liable to tax

A person who is non-resident is liable to tax on that income only which is earned by him in India. Income is earned in India if -

It is directly or indirectly received in India; or
It accrues in India or the law construes it as having accrued in India.

The following are some of the instances when the law construes and income to have accrued in India:-

Income from business arising through any business connection in India;
Income from property if such property is situated in India;
Income from any asset or source if such asset or source is in India;
Income from salaries if the services are rendered in India. In such cases salary for rest period or leave period will be regarded as earned in India if it forms part of service contract,.
Income from salaries payable by the Government to a citizen of India even though the services are rendered outside India;
Income from dividend paid by an Indian company even if the same is paid outside India;
Income by way of interest payable by Government or by any other person in certain circumstances ;
Income by way of Royalty if payable by the Government or by any other person in certain circumstances;
Income by way of fees for technical services if such fees is payable by the Government or by any other person in certain circumstances.

The following income even though appearing to be arising in India are construed as not arising in India:-

If a non-resident running a news agency or publishing newspapers, magazines etc. earns income from activities confined to the collection of news and views in India for transmission outside India, such income is not considered to have arisen in India.
In the case of a non-resident, no income shall be considered to have arisen in India if it arises from operations which are confined to the shooting of any cinematography film. This applies to the following types of non-residents:-
a. individual who is not a citizen of India; or
b. firm which does not have any partner who is a citizen of India or who is resident in India; or
c. company which does not have any shareholder who is resident in India.

Flat Interest Rate vs Effective Interest Rate or Diminishing / Reducing Balance Rate

noreply@blogger.com (Smart Money India) — Fri, 06 Feb 2009 12:20:00 +0000

Beware of Flat Rate of Interest!!

What exactly does Flat Interest Rate mean?

Well to explain it simply, when you take a loan for a particular tenor, you need to not only repay the principal amount within that tenor but also pay the interest on the loan. How the bank/ financier calculate the interest is very important. ‘X% p.a.’ charged on Flat basis is certainly not same as ‘X% p.a.’ charged on Reducing / Diminishing Balance (also referred to as Effective Interest Rate).

Flat Rate of Interest basically means that interest is charged on the full amount of the loan throughout its entire loan tenor. Thus the flat rate does not take account of the fact that periodic repayments, which include both interest and principal, gradually reduce the outstanding loan amount. Consequently the Effective Interest Rate is considerably higher than the nominal Flat Rate initially quoted.

For instance: If you take a loan of Rs 100,000 with a flat rate of interest of 10% p.a. for 5 years, then you would pay Rs 20,000 (principal repayment @ 100,000 / 5) + Rs 10,000 (interest @10% of 100,000) = Rs 30,000 every year or Rs 2,500 per month. Over the tenure of the loan, you would end up paying Rs 150,000 (2,500 * 12 * 5). Thus in this example, monthly EMI of Rs 2,500 translates to an Effective Interest Rate of 17.27% p.a.

What's Reducing / Diminishing Balance Rate?

In Reducing / Diminishing Balance Rate method, interest is calculated every month on the outstanding loan balance as reduced by the principal repayment every month. EMI payment every month contains interest payable for the outstanding loan amount for the month plus principal repayment. On every EMI payment, outstanding loan amount reduces by the amount of principal repayment. Thus interest for next month is calculated only on the outstanding loan amount as reduced by the principal repayment this month.

For example, if instead of 10% p.a. flat rate (in the above example), interest is charged at 10% p.a. reducing balance rate, EMI amount would be Rs 2,124.70 (please see earlier post on EMI Calculator). You would pay Rs 833.33 as interest in the first month and Rs 1,291.37 (2,124.70 – 833.33) would be Principal Repayment. For next month interest will be charged only on reduced principal, i.e. 100,000 less 1,291.37 = 98,708.63. Interest for second month would be Rs 822.57 (98,708.63 * 10% / 12) and principal repayment would be Rs 1,302.13 (2,124.70 – 822.57). Thus over the tenure of the loan, you would end up paying Rs 127,482 (2,124.70 * 12 * 5).

Now that you have understood the difference between Flat Interest Rate and Effective Interest Rate, click here if you want to calculate Effective Interest Rate or Flat Interest Rate for given EMI amount.

Effective Interest Rate for a given Flat Rate of Interest

If you just got a home loan or auto loan offer at flat rate of interest which looks attractive, before jumping at the same, please see the actual Effective Interest Rate or Diminishing Balance Rate you are being quoted. Use the link below to download an excel sheet to calculate Effective Interest Rate for a given Flat Interest Rate. This excel sheet not only converts Flat Interest Rate to Effective Interest Rate (or Diminishing Balance Interest Rate or Reducing Balance Interest Rate or Annualized Percentage Rate), but also calculates the EMI as per Flat Interest Rate and EMI as per Reducing / Diminishing Balance Interest Rate for the quoted rate.

FLAT RATE TO EFFECTIVE RATE

Effective Interest Rate or Flat Interest Rate for given EMI Amount

noreply@blogger.com (Smart Money India) — Thu, 05 Feb 2009 12:23:00 +0000

Got a personal loan or car loan offer from bank of Rs 400,000 for 5 years and Equated Monthly Instalment (EMI) of Rs 11,000? Wondering what is the interest rate bank is charging?

Use the link below to download an excel sheet to calculate annual Effective Interest Rate (or Reducing / Diminishing Balance Interest Rate) and Flat Interest Rate for a given loan amount, tenor and EMI amount.

INTEREST RATE FOR GIVEN EMI

All about Securities Transaction Tax (STT)

noreply@blogger.com (Smart Money India) — Fri, 30 Jan 2009 18:14:00 +0000

Securities Transaction Tax (STT) is the tax payable on the value of taxable securities transaction. STT was introduced in India by the 2004 budget and is applicable with effect from 1st October 2004.

What all is covered by Securities?
Securities definition is as per section 2(h) of the Securities Contracts (Regulation) Act, 1956, but for our purpose, let’s just simply say Securities mean Equity Shares and Equity Derivatives (i.e. Futures and Options). Full definition of Securities is given in Appendix, for information.

What are taxable transactions?
Purchase and Sale of securities through a recognised stock exchange in India. STT is not applicable on off-market transactions.

What rate is STT payable?
STT is applicable at different rates depending upon the security (whether equity or derivative) and the transaction (whether purchase or sell). Current STT rates are given below. Note that Service Tax, Surcharge and Education Cess are not applicable on STT.

STT applicable for Equity Transactions
Delivery Transactions
Purchase: 0.125% of Turnover i.e. (Number of Shares * Price)
Sell: 0.125% of Turnover i.e. (Number of Shares * Price)

Intra-day Transactions
Purchase: NIL
Sell: 0.025% of Turnover i.e. (Number of Shares * Price)

STT applicable for Derivative Transactions
Future Transactions
Purchase: NIL
Sell: 0.017% of Turnover i.e. (Number of Lots * Lot Size * Price)

Option Transactions
Purchase: NIL at the time of purchase of option. However the purchaser has to pay 0.125% of the Settlement Price i.e. (Number of Lots * Lot Size * Strike Price), in case of option exercise
Sell: 0.017% of Premium

Summary of the STT rates is given in the table below:

Product	Transaction	STT rate	Charged on
Equity-Delivery	Purchase	0.125%	Turnover
Equity-Delivery	Sell	0.125%	Turnover
Equity-Intraday	Purchase	-	-
Equity-Intraday	Sell	0.025%	Turnover
Future	Purchase	-	-
Future	Sell	0.017%	Turnover
Option	Purchase	0.125%	Settlement price, on exercise
Option	Sell	0.017%	Premium

Now that you have understood how STT is calculated, click here to understand more about charges other than brokerage and STT levied on stock exchange transactions.

Income Tax and STT
Taxation of profit or loss from securities transactions depends on whether the activity of purchasing and selling of shares / derivatives is classified as investment activity or business activity. Treatment of STT also depends upon whether the income from these securities transactions are included under the head “Income from Capital Gains” or under the head ‘Profits and Gains of Business or Profession’.

Scenario 1: ‘Income from Capital Gains’

This refers to the scenario where the assessee is either Salaried or is engaged in some other business or profession and trading in securities is not the main line of business. In such cases gains or losses from securities transactions are taxed under the head “Income from Capital Gains”. Gains or losses are subject to Short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG) tax depending upon the period of holding, i.e., if the holding period is less than 1 year, gains are classified as STCG and if the holding period is equal to or greater than 1 year, gains are classified as LTCG. Any equity share, which has been sold through a recognised stock exchange and on which STT has been paid, is entitled to exemption from LTCG under Section 10 (38) of the Act. Similarly, in case of STCG of such shares, the gains shall be taxed only at 15%, plus surcharge and education cess under section 111A of the Act.

Important points to note:

STCG and LTCG rates of 15% and NIL are available only if the specified security is sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange in India, will not be covered
The purchase of the specified securities could be through any mode and need not be through a recognised stock exchange
The exemption is not available to transactions where STT has not been paid
Since LTCG is exempt, Long Term Capital Loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse
As per section 40(a)(ib) of the Income tax Act, STT cannot be claimed as an expense in computing the income chargeable under Capital Gains

Scenario 2: ‘Profits and Gains of Business or Profession’

This refers to the scenario where main business of the assessee is trading in securities. In such cases the gains or losses are classified as business income, which is taxed at the regular rate of income-tax. STT paid in respect of taxable securities transactions entered into in the course of business shall be allowed as deduction under section 36 of the Income-tax Act. Until 31st March 2008, the amount of STT paid was allowed as rebate under section 88E of the Income-tax Act. However, with effect from 1st April 2008, rebate available under section 88E has been discontinued.

Appendix
“Securities” is defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, to include:
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ii) derivative;
(iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(iv) security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(v) Government securities;
(vi) such other instruments as declared by the Central Government; and
(vii) rights or interest in securities.

Income Tax Rates

noreply@blogger.com (Smart Money India) — Wed, 21 Jan 2009 07:02:00 +0000

Income Tax Rates for Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI) :

Assessment Year 2009-10, Relevant to Financial Year 2008-09

For Individuals below 65 years age, other than Woman Assessees:

Upto 150,000	Nil
150,000 to 300,000	10% of the amount exceeding 150,000
300,000 to 500,000	Rs.15,000 + 20% of the amount exceeding 300,000
500,000 & above	Rs.55,000 + 30% of the amount exceeding 500,000

For Woman Assessees below 65 years:

Upto 180,000	Nil
180,000 to 300,000	10% of the amount exceeding 180,000
300,000 to 500,000	Rs.12,000 + 20% of the amount exceeding 300,000
500,000 & above	Rs.52,000 + 30% of the amount exceeding 500,000

For Individuals aged 65 years and above:

Upto 225,000	Nil
225,000 to 300,000	10% of the amount exceeding 225,000
300,000 to 500,000	Rs.7,500+ 20% of the amount exceeding 300,000
500,000 & above	Rs.47,500 + 30% of the amount exceeding 500,000

Surcharge on Income Tax: 10% if the total taxable income exceeds Rs.1,000,000

Education Cess: 3% of Income Tax plus Surcharge

Assessment Year 2008-09, Relevant to Financial Year 2007-08

For Individuals below 65 years age, other than Woman Assessees:

Upto 110,000	Nil
110,000 to 150,000	10% of the amount exceeding 110,000
150,000 to 250,000	Rs.4,000 + 20% of the amount exceeding 150,000
250,000 & above	Rs.24,000 + 30% of the amount exceeding 250,000

For Woman Assessees below 65 years:

Upto 145,000	Nil
145,000 to 150,000	10% of the amount exceeding 145,000
150,000 to 250,000	Rs.500 + 20% of the amount exceeding 150,000
250,000 & above	Rs.20,500 + 30% of the amount exceeding 250,000

For Individuals aged 65 years and above:

Upto 195,000	Nil
195,000 to 250,000	20% of the amount exceeding 195,000
250,000 & above	Rs.11,000 + 30% of the amount exceeding 250,000

Surcharge on Income Tax: 10% if the total taxable income exceeds Rs.1,000,000

Education Cess: 3% of Income Tax plus Surcharge

Assessment Year 2007-08, Relevant to Financial Year 2006-07

For Individuals below 65 years age, other than Woman Assessees:

Upto 100,000	Nil
100,000 to 150,000	10% of the amount exceeding 100,000
150,000 to 250,000	Rs.5,000 + 20% of the amount exceeding 150,000
250,000 & above	Rs.25,000 + 30% of the amount exceeding 250,000

For Woman Assessees below 65 years:

Upto 135,000	Nil
135,000 to 150,000	10% of the amount exceeding 135,000
150,000 to 250,000	Rs.1,500 + 20% of the amount exceeding 150,000
250,000 & above	Rs.21,500 + 30% of the amount exceeding 250,000

For Individuals aged 65 years and above:

Upto 185,000	Nil
185,000 to 250,000	20% of the amount exceeding 185,000
250,000 & above	Rs.13,000 + 30% of the amount exceeding 250,000

Surcharge on Income Tax: 10% if the total taxable income exceeds Rs.1,000,000

Education Cess: 2% of Income Tax plus Surcharge

Mutual Fund SIP Calculator

noreply@blogger.com (Smart Money India) — Mon, 19 Jan 2009 14:06:00 +0000

Mutual Fund investment through SIP (Systematic Investment Plan) is undoubtedly one of the best avenues available for retail investors to take long term equity exposure. You can use this excel based calculator to calculate the final fund value of SIP under different scenarios. This gives a good indicator of the power of compounding.

Mutual Fund SIP Calculator has two sections. In the top section the variable is expected return per annum and it gives a chart of final fund value for different tenor scenarios for various SIP amounts. In the bottom section the variable is SIP tenor in years and it gives a chart of final fund value for different return scenarios for various SIP amounts. For each scenario the original investment amount and Multiplier, i.e. Final fund value divided by Investment, is also shown.

DOWNLOAD MUTUAL FUND SIP CALCULATOR

Loan EMI Amortisation Schedule

noreply@blogger.com (Smart Money India) — Sat, 17 Jan 2009 08:03:00 +0000

Confused how the banks calculate the amortisation schedule? How each EMI is broken into interest recovery and principal repayment. Use the link below to download a Microsoft Excel file which can be used to calculate Amortisation Schedule for your Home Loan, Auto Loan or Personal Loan. Also see the Annual and Monthly summary Loan Statement alongwith calculation for tax savings on interest deduction upto Rs 150,000 for Home Loan.

EMI CALCULATOR WITH AMORTISATION SCHEDULE

Loan EMI Calculator

noreply@blogger.com (Smart Money India) — Fri, 16 Jan 2009 08:51:00 +0000

Use the link below to download a Microsoft Excel file which can be used to calculate Equated Monthly Instalment for your Home Loan, Auto Loan or Personal Loan. Click here to download EMI Calculator with Loan Amortisation Schedule.

EMI CALCULATOR

All you wanted to know about House Rent Allowance (HRA)

noreply@blogger.com (Smart Money India) — Thu, 15 Jan 2009 12:42:00 +0000

House Rent Allowance (HRA) is generally paid as component of salary package. This allowance is given by an employer to an employee to meet the cost of renting an accommodation. Section 10(13A) of the Income Tax Act provides for exemption of HRA based on certain rules. In order to claim HRA exemption, the following basic conditions should be met:

1. You should be staying in a rented accommodation.
2. The house should not be owned by you or your wife.
3. You should be paying the rent.

What is the exemption amount?

Minimum of the following three is exempt:
1. Actual HRA received
2. Rent paid minus 10% of Salary
3. 50% of salary if you live in Mumbai, Delhi, Kolkata or Chennai, otherwise 40% of Salary

Salary means Basic Salary + Dearness Allowance + Commission based on a fixed percentage of turnover achieved by employee. Most of the private sector companies don’t have the last two components in the salary package.

Simple example:

Basic Salary: Rs 30,000 per month, i.e. Rs 360,000 for the year
HRA: Rs 10,000 per month, i.e. Rs 120,000 for the year
Rent paid: Rs 8,000 per month, i.e. Rs 96,000 for the year (House in Chennai)

HRA exemption:

HRA received: Rs 120,000
Exempt: Minimum of following,
1. Actual HRA: Rs 120,000
2. Rent less 10% of Salary: Rs 96,000 – (10% of 360,000): Rs 60,000
3. 50% of Salary: Rs 180,000

Thus Rs 60,000 HRA is exempt and balance Rs 60,000 HRA is taxable.
Thus out of Rs 480,000 Salary package; Rs 420,000 is taxable and Rs 60,000 is exempt (For the time being let’s ignore all other exemptions under Income Tax Act).

SMI Tax Planning Tips:

1. Negotiate Salary Package

When negotiating Salary package try to make HRA component 50% of Basic Salary. For example your employer is willing to pay Rs 600,000 Salary for the year. You can structure it as Rs 500,000 Basic + Rs 100,000 HRA OR Rs 400,000 Basic + Rs 200,000 HRA. It would be better to go for the second option since maximum HRA exemption is limited to 50% of Basic. HRA of more than 50% of Basic and you will get stuck in Rule 3, i.e. 50% of Salary.
Disclaimer: This would at times be not in your hand and many companies would have their own criteria about how much HRA would be. Next tip is more practical

2. “Ideal Rent”

“Decide” on the “Ideal Rent” amount for the “Rent Receipt” you need to submit to your employer. Follow the simple formula:

Ideal Rent = HRA + 10% of Salary

Thus Rent for example above would be Rs 10,000 + (10% of 30,000) = Rs 13,000 per month, i.e. Rs 156,000 per annum

Quick Re-calculation of our example:

HRA received: Rs 120,000
Exempt: Minimum of following,
1. Actual HRA: Rs 120,000
2. Rent less 10% of Salary: Rs 156,000 – (10% of 360,000): Rs 120,000
3. 50% of Salary: Rs 180,000

Thus entire Rs 120,000 HRA is exempt.
Thus out of Rs 480,000 Salary package; Rs 360,000 is taxable and Rs 120,000 is exempt. That’s a neat saving of tax on Rs 60,000 compared to first scenario!!

Note: If the tip 1 is also implemented, Salary Package of Rs 480,000 is negotiated as Rs 320,000 as Basic Salary and Rs 160,000 as HRA.

“Ideal Annual Rent” is Rs 160,000 + (10% of 320,000) = Rs 192,000. Exemption as under:

HRA received: Rs 160,000
Exempt: Minimum of following,
1. Actual HRA: Rs 160,000
2. Rent less 10% of Salary: Rs 192,000 – (10% of 320,000): Rs 160,000
3. 50% of Salary: Rs 160,000

Thus entire Rs 160,000 HRA is exempt.
Thus out of Rs 480,000 Salary package; Rs 320,000 is taxable and Rs 160,000 is exempt. That’s a neat saving of tax on Rs 100,000 compared to first scenario!!

3. Staying with your Parents?

Paying rent to family to claim exemption. It would be advisable for the landlord, in this case your parent, to declare this income in his/ her personal Income Tax return. This will prevent any litigation in the future. However paying rent to spouse is not advisable.

4. Taken a Housing Loan?

Can you claim both deduction for Interest on Home Loan u/s 24(1) and HRA u/s 10(13A)? YES and NO.

If the own property and rented property are in different cities, both exemption can be claimed. For example you have property in Kolkata where your parents reside and you work in Mumbai and stay in rented apartment. You can claim both deduction for Interest on Home Loan and HRA. Note the owned property should be self-occupied and should not have been rented out. In that case deduction for Interest on Home Loan is not available.

If the own property and rented property are in same cities, both exemption cannot normally be claimed. However you can still claim both exemptions if you can proof that the owned property is far off from your work place and you stay in rented house near to your office. For example Loan is taken for house in Borivali and you stay in rented house in Colaba and your office is in Fort area in Mumbai, you can claim both exemptions. Again note the owned property should be self-occupied and should not have been rented out. In that case deduction for Interest on Home Loan is not available.