Friday, January 10, 2014

Prajna Capital

Prajna Capital

Tax Treatment of Inflation-Linked Bonds

Posted: 10 Jan 2014 03:56 AM PST

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Call 0 94 8300 8300 (India)
 

 

Last week the Reserve Bank of India announced the launch of the much- awaited Indexed National Savings SecuritiesCumulative (IINSS- C) bonds. These bonds will be available between December 23 and 31, 2013. They were announced in the Union Budget 2013- 14 as the kind of securities to protect savings from inflation.

The face value of the bond increases in line with an inflation index while a small interest rate is paid on the face value.

What does this mean? To put it simply, whatever the investor gains from the higher face value is compensation for inflation.

The interest rate paid is the actual income. At the end of the term the entire accumulated amount is added to an investor's income and taxed at the applicable tax slab rate.

Salient features of the IINSS- C bonds

Bonds issued by the government pay interest at a rate linked to the consumer inflation rate.

The rate of interest comprises 1) a fixed rate of 1.5 per cent and 2) an "inflation" rate based on the Consumer Price Index ( CPI), compounded half yearly.

Minimum investment of ₹ 5,000; face value of a bond is ₹ 100.

Maximum investment of ₹ 5 lakh per annum per applicant. Tenure of the bond is 10 years. Interest income is taxable. Must be declared and tax paid even if it is compounded. Only for individuals, HUFs, and charitable trusts. Not for NRIs. However, they can be nominated by a bond holder. Not for companies and financial institutions.

Credit risk is very low as this is backed by the government. Re- investment risk is very low because the interest is compounded, and one does not have to find other investment avenues for re- investing the returns.

Redemption of the bonds after three years, except for senior citizens, who can redeem after a year. The early- redemption penalty is high. One can redeem only a few days before the coupon rates. That would happen once every six months. The penalty for early redemption is half the last coupon paid.

When inflation is high, the penalty too is high.

How is interest calculated?

The investor receives an inflation rate ( according to the CPI) plus 1.5 per cent per year. When an investor purchases a bond, the base inflation index is the one three months earlier. Interest is calculated every six months as below: Interest = percentage change in the CPI for the last six months +0.75 per cent ( at 1.5 per cent per year) In the past one year CPI has hovered around 10 per cent. So the return in such a scenario would be inflation plus 1.5 per cent, that is, 11.5 per cent. Not bad for someone who does not have to pay taxes, or falls within the lower tax bracket. The interest payout has a minimum value of 1.5 per cent. This means that even if inflation is negative, one would still get at least 1.5 per cent return on investment in such bonds.

Tax treatment

The interest is added to the principal ( the compounding concept), and taxed under the head "Income from other sources", not as capital gains even though the entire amount is received on maturity. Like National Savings Certificates, you must declare the interest every year as income and pay tax on it even though the money is not actually received as cash in your account. These bonds do not fall within the list of deductions under Sec 80C. The interest would be subject to the income tax slab rate applicable to you.

Should you invest?

If the inflation- compensating part had been capital gains, it could have benefited from indexation. The IINSS has a high rate of return as inflation is high, but has the disadvantage as well as of a long lock- in period of 10 years. Early redemption is available only after three years on payment of apenalty. Also there's a cap of ₹ 5 lakh per investor.

Other options:

Tax-Free Bonds such as those of NTPC offer 8.66 per cent ( tax free) on a 10- year tenure, with the possibility of selling early in the market. Public Provident Fund also offers 8.7 per cent taxfree interest though with a lockin of 15 years. Liquid funds and Fixed Maturity Plans also offer 9per cent returns post- tax if held for a year or more. But this is not guaranteed over 10 years.

Clearly, from the calculation the IINSS is not attractive to retail investors in the higher tax- bracket or for senior citizens, who look for regular income. If the CPI falls, the returns slide proportionately.

In that case, investing in taxfree bonds is far better. Also, companies that are permitted to issue tax free bonds are public sector undertakings, which are all highly rated companies. With good-credit-rated bonds, one has much better returns, net of tax, annually, with much lower risk.

 

For further information on the topic you can CONTACT Prajna Capital on 94 8300 8300 by leaving a missed call.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

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These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

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These Application Forms can be used for buying regular mutual funds also

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  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

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Most Banks Fail to Push RBI’s CPI-linked Bonds

Posted: 10 Jan 2014 03:07 AM PST

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Call 0 94 8300 8300 (India)
 

Investing in Inflation-Indexed National Savings Securities

Reserve Bank of India governor Raghuram Rajan may be trying his best to provide fair returns to savers through bonds linked to the consumer price index (CPI), but the message does not appear to have travelled across the banking system with many staff at branches remaining ignorant of the product.


Acheck at some branches of State Bank of India, ICICI Bank and Axis Bank in Mumbai, Kolkata and Chennai suggests that they are not marketing the so-called Inflation-Indexed National Savings Securities–Cumulative. In fact, some bank employees are not even aware of the existence of such a bond. Although most staff are not selling the product to customers walking into their branches, some banks such as HDFC Bank, ICICI Bank, and Axis Bank are offering an option to download application forms either from their websites or through their online securities trading platform.


HDFC Bank, which had 3,251 branches as of September 30 across the country, has designated about 200 branches to sell these bonds. "There are around 200 coordinating branches through which we are selling those (retail) bonds. If applications come from other branches, they are routed through (the designated branches.


E-mails sent to ICICI Bank and Axis Bank seeking comments on the matter remained unanswered. A chief general manager at SBI declined to comment.


CPI-linked bonds are seen as one of the revolutionary moves initiated by the central bank to entice savers to invest in financial instruments instead of gold, after heavy imports of the yellow metal drove the country's current account deficit wider and pushed the rupee lower. Thegovernment had to put several curbs on gold imports as the rupee fell to an all-time low against the dollar in late August.


Retail investors can buy CPI-linked bonds from banks and subscriptions, which opened on December 23, will close on December 31. The actual demand for the bonds will be known only after the issue closes.


The central bank is doing its bit to market these bonds. "We have issued print advertisements in 14 languages. We are promoting (the bonds) through FM radio channels all over India," an RBI spokesperson said.


Banks, faced with slowing deposit growth and having many other financial instruments to market, do not find promoting the CPI-linked bonds as lucrative since the central bank does not pay any commission.


For this kind of products, a majority of bank-branch officials remain ignorant as it did not fetch any fee. Sometimes customers appear to be more knowledgeable than bank officials.


Also, there are competing products in the market which provide better returns adjusted for taxation, and a fixed rate of return for nearly two decades. For example, if retail inflation, or CPI, is at 9%, an investor will earn an interest of 10.5% (which includes a fixed 1.5% given over the CPI rate). So, the actual interest amounts to . 10.50 on an investment of . 100. Now, an investor in the highest tax brackets (30.9%) will pay a tax of . 3.24 on the interest income. Hence, the tax-free interest income comes to . 7.26, or 7.26%, which is less compared with the tax-free returns of bonds floated by state-owned India Infrastructure Finance Co and Housing and Urban Development Corp (in the range of 8-9%).

For further information on the topic you can CONTACT Prajna Capital on 94 8300 8300 by leaving a missed call.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund


Invest in Tax Saving Mutual Funds Download Any Application Forms
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National Savings Certificate (NSC) – Tax Saving

Posted: 10 Jan 2014 01:16 AM PST

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94 8300 8300

 

 

 

NSC offers assured returns and tax benefits. If planned well, one can create a regular income stream using this instrument

 

The National Savings Certificate (NSC) is a popular and safe small savings instrument that combines tax-savings with guaranteed returns. This scheme is backed by the government, and is one of the safest investment options available at post-offices. The distribution reach of post office has added to the popularity of this scheme and is much sought after across all investing class. Savings in this product is risk free because of the government-backing. Certificates can be bought from any head post office or general post office.

 

The NSC is not inflation protected, which means whenever inflation is above the current guaranteed interest; the deposit earns no real returns. However, when the inflation rate is below the guaranteed interest, it does manage a positive real rate of return.

 

The interest rate on the NSC is guaranteed. Currently the interest rate on NSC is 8.6 per cent on the 5-year option and 8.9 per cent per annum on the 10-year option compounded half yearly. The interest rates in this scheme will be notified before April 1 of that year, and is aligned with G-Sec rates of similar maturity, with a spread of 0.25 per cent on the 5-year option and 0.5 per cent on the ten year option.

The NSC is liquid, despite the 5- and 10-year stipulated lock-in. The liquidity is offered in the form of loans and withdrawals subject to conditions. The amount and rate at which the loan is permitted depends on the lending institution.

 

Premature encashment of the certificate is also allowed. Certificates are encashable at any post office in India provided one has obtained transfer of the certificate to the desired post office. If certificate is encashed within one year from the date of issue, only the face value of the certificate is payable. If the certificate is encashed after completing one year but before the end of three years from the date of issuing the certificate, an amount equivalent to the face value of the certificate together with simple interest is payable.

 

Certificates are transferable from one person to another person before maturity. It also offers the facility of purchase or payment to the holder of power of attorney.

 

Tax implications
The sum invested in the 5-year NSC is eligible for tax deduction under Section 80C up to the Rs 1 lakh limit stipulated in a financial year including the accrued interest on existing certificates. The interest earned on NSC on a yearly basis is added to the total income under the head 'Income from other sources' and the same can be claimed as deduction under Section 80C, making the interest tax-free. But if the accrued interest is not taxed every year on an accrual basis then the entire income is taxable on maturity. Interest income is taxable but no TDS certificate is issued.

Maturity proceeds not drawn are eligible to post office savings account interest for a maximum period of two years.

 

How to buy
Once you have decided on the sum that you wish to invest:
* You need to fill the NSC application form available at the post office
* Carry original identity proof for verification at the time of buying
* You can buy the certificate with cash, cheque or demand draft drawn in favour of the postmaster of the post office from where the NSC is being bought
* Choose a nominee and get a witness signature to complete the formalities when buying the certificate

 

Eligibility:
You need to be a Resident Indian to buy these certificates

 

Entry age:
No age is specified for account opening

 

Investments:
Minimum of Rs 100 per annum. Certificates are available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000

 

Interest:
8.6 per cent compounded half yearly on 5-year tenure and 8.9 per cent compounded half yearly on 10-year tenure

 

Tenure:
5 and 10 years

 

Account holding categories:
Individual, Joint snd Minor through the guardian

 

Risks associated with loss or mutilation of certificate exists, for which a duplicate certificate can be issued on furnishing an indemnity bond in a format prescribed by the post office.

For further information on the topic you can CONTACT Prajna Capital on 94 8300 8300 by leaving a missed call.

 

 

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

 

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

 

Best Performing Mutual Funds

    1. Largecap Funds             Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds         Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
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C. Mid and SmallCap Funds          Invest Online

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2.       Franklin India Smaller Companies

E. Sector Funds          Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds      Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

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      2. ICICI Prudential Regular Gold Savings Fund
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1. Birla Sun Life International Equity Plan A

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5. Motilal Oswal MOSt Shares NASDAQ-100 ETF



Invest in Tax Saving Mutual Funds Download Any Application Forms
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