Sunday, 27 March 2016

Crorepati farmers: tax them please!

This year's (2016) budget has been termed as a pro-rural budget which has an ambitious plan of doubling the farmer's income by year 2022. Almost everybody would agree that these steps were long due in a country where agriculture is one of the most important industries. Today, India ranks second worldwide in farm output. Agriculture and allied sectors like forestry and fisheries accounted for 13.7% of the GDP (gross domestic product) in 2013 and about 50% of the workforce.

And also let's not forget the plight of the farmers where

  • Farmers are committing suicide as they are not able to recover even their initial investments and plunging into debt.
  • Forced to deal with the 'middle man'.
  • End up receiving meager (leaking) subsidies.

It is an established fact that farmers in India are in poor condition with very low income. Going by that fact, it was very much surprising to know that we also have a section of farmers who are earning in Crores and not paying any taxes.

Agricultural income is tax exempt

In India agricultural income is exempt from tax and it is not even added to your taxable income if you have income from other sources. Some people are taking advantage of this exemption.

CBDT (Central Board of Direct Taxes) enquiry

Drawing reference from the PIL in Patna high court CBDT has asked its officials to verify the genuineness of agricultural income claims exceeding Rs 1 crore made by taxpayers in their income-tax (I-T) returns.

As per TOI report, tax exemption on agricultural income, as declared by taxpayers in their IT returns filed up to November 2014 in the financial year 2013-14 was Rs. 9,338 crore.

Source : http://timesofindia.indiatimes.com/business/india-business/As-crorepati-farmers-mushroom-tax-officials-go-digging-for-evasion/articleshow/51377186.cms

News Nation has made even higher claims -

"The channel got hold of an RTI reply which throws light on the dark world of corruption and fraud in agriculture sector. In 2011-12 nearly 6.50 lakh farmers earned Rs 2 thousand lakh crore (approx) which was much more than the annual GDP of the entire country."

Source : http://www.newsnation.in/article/121125-news-nation-disclosure-on-blackmoney-kharabpati-farmers-take-agriculture-route-t.html

This information gives rise to a very vallid question

  • Is it a good policy to keep all agricultural income as tax free?
  • What is the problem in applying the income tax slabs as applicable to other sectors, be applicable to agricultural income too?

If a person has multiple sources of income, one being Agricultural Income, then that person has an undue advantage as all of that agricultural income will be tax free. It is not a far-fetched notion but a very realistic scenario. Now-a-days with the vast changes and improvements across all industries and sectors in India, we see many people moving to the cities from villages and pursuing the career of their choice. And most of them still hold-on to their agricultural lands with income being generated from it. Does it make sense to let them have all that income as tax-free?

Contrast it to a person who is living in the city and having a day job and he/ she also works part time in the evening to get some extra income. He/ She is supposed to pay tax on the total income whether it has single or multiple sources. Is that not being unfair?

It can be argued that agriculture is fraught with uncertainties and should be handled differently, with maybe, some special concessions. As in India, the famers depend mostly on the Monsoons. But the uncertainty is evident in every Sector. May not be one dependent on the Nature.
Let's say a middle class salaried person buys a house availing a loan of 35Lakhs from a Bank and he/ she loses the job in next 6 months. So, this job is also an uncertainty. Nobody can take his/ her job for granted or secure it forever.

Same holds true for a Business too. A business is always on an uncertain footing. You don't make profits (or losses) all the time that you are in a business. Yet, businessmen are supposed to pay taxes.
In fact any govt. Trying to do anything for the businessmen will be demonized and hounded as a pro-business, pro-rich Government. It will, for sure, have to suffer the unending taunts and tags from not only the Opposition but from almost everyone else too.

So, would it not be a rational move to bring rich farmers in the tax ambit too. Instead of making it totally tax-free, the Govt. can maybe create separate slabs for Agricultural income. Like, let's say up to 7.5 lakhs is tax free if it is completely from agricultural income and the rest is taxable.

That's all for this topic Crorepati farmers: tax them please!. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Tuesday, 22 March 2016

Post Office Monthly Income Scheme

Most of the people, mostly in urban areas, if asked about money and post office will think of money order or at most National Saving Certificate(NSC). But Indian post offices provide a lot of other options to invest your money.

Apart from banks; Public Provident Fund, Sukanaya Samriddhi Yojana account and KVP can be opened in post offices too.

There are other investment schemes too which are specific to post office like NSC, Senior Citizen Savings Scheme (SCSS) account, Monthly Income Scheme (MIS) account. This post is to give information about Monthly Income Scheme.

Post Office Monthly Income Scheme

Monthly Income Scheme an investment scheme from Indian Post provides fixed monthly income at the given rate of interest (8.4% in FY 2015-16, 7.8% from April 1, 2016). It is a good scheme for risk-averse investors who want fixed income free from any fluctuations.

It is ideally suited for senior citizens and retired people who have got some lump-sum amount after retirement. A portion of that amount can be invested in monthly income scheme to get monthly payments. You have to compare it with quarterly interest paying fixed deposits to see which gives better return.

Opening Monthly Income Scheme (MIS) account

Account may be opened by individual. Joint account is also permitted and can be opened by two or three adults. In case of joint account all joint account holders have equal share in each joint account.

Also single account can be converted into Joint and Vice Versa.

Account can be opened by cash/cheque and in case of cheque the date of realization of cheque in Govt. account shall be date of opening of account.

Required documents

At the time of opening POMIS you need to submit -

  • Filled account opening form (provided by post office where you are opening the account).
  • Copy of the address proof and identity proof like (passport/PAN card/ration card/voter identity card).
  • Two passport size photographs.

You need to take the originals with you for verification.

Eligibility for opening MIS account

Monthly income scheme is only for Resident Indians, NRIs can't invest in it.

Account can be opened in the name of minor and a minor of 10 years and above age can open and operate the account.

Minor after attaining majority has to apply for conversion of the account in his name.

Minimum and maximum limit on investment

Investment should be in multiples of INR 1500/- with maximum investment limit as INR 4.5 lakhs in single account and INR 9 lakhs in joint account.

Remember that an individual can invest maximum INR 4.5 lakh in MIS (including his share in joint accounts)

For calculation of share of an individual in joint account, each joint holder have equal share in each joint account.

Interest rate

As per recent announcement from 1-4-2016, interest rate is going to be 7.8% per annum payable monthly.

Till 31-03-2015, interest rate is 8.40% per annum payable monthly.

So let's see an example with the interest rate as 7.8%.

If you have invested Rs. 1,50,000 (Rs. 1.5 Lakhs) in the POMIS then with annual interest rate as 7.8% annual interest income is - Rs. 11,700

So monthly pay-out would be - Rs. 975

With interest rate as 8.4% it was Rs. 1050.

Interest can be drawn through auto credit into savings account standing at same post office, through PDCs or ECS./In case of MIS accounts standing at CBS (Core Banking Solution) Post offices, monthly interest can be credited into savings account standing at any CBS Post offices.

Tax on MIS

Post office monthly income scheme is not eligible for deduction under Sec 80C.

Also note that amount received as monthly income from this scheme will be added to your income and taxed according to the slab you fall in.

Point to note here -

  • If you are not withdrawing the monthly pay-outs, that amount does not yield any interest.
  • There is no TDS on the Post Office MIS, as mentioned above interest income is taxable in your hands.

Maturity

Maturity period is 5 year.

Pre-mature closure

Can be prematurely en-cashed after one year, rule is as

  • After one year but before 3 years at the discount of 2% of the deposit
  • and
  • After 3 years at the discount of 1% of the deposit.

Here discount means deduction from the deposit.

Transferable

Account can be transferred from one post office to another.

Nomination Facility

Nomination facility is available at the time of opening the MIS account. You can also do the nomination after opening of account.

Bonus

Giving bonus at the time of maturity is discontinued.

There was a bonus of 5% on principal amount at the time of maturity of MIS accounts opened on or after 8- 12-07 and up to 30-11-2011. No bonus is payable on the deposits made on or after 1-12-2011.

That's all for this topic Post Office Monthly Income Scheme. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Thursday, 10 March 2016

Bank fixed deposits in India

Bank fixed deposits also known as term deposit are one of the oldest and one of the most favoured investment avenue and why shouldn't it be that way?

  • FDs provide flexibility in term of duration you have option from 7 days till 10 years.
  • Interest rate is guaranteed for the tenure of the deposit, it won't fluctuate. So no risk of ups and downs.
  • FDs can be broken in between of course with some penalty.
  • FDs also provide rebate under Sec 80 C, provided fixed deposit is for 5 years.

Reading all this any reader may think with all these benefits and ease of opening (yeah Online!) and closing why should anybody even bother about any other mode of investment?

Well with all these benefits the FDs lack the most important punch, return on your investments. FDs come under ETE (if it's a tax saver 5 year FD) or TTE so taxes take the substantial part of your returns if you come under any of the income tax slabs.

That is one and most important reason you should look for other investment options like Public Provident Fund, Sukanya Samriddhi Yojana, National Pension Scheme if you're averse to the risk and Mutual Funds and stocks if you can take some risk.

How to open a FD

Any individual, Hindu undivided family even private/public limited companies and societies are eligible to open a FD with a bank. Here I'll concentrate more on procedure for individuals and HUF.

For individuals procedure for opening a FD is similar to opening a saving account. You need to furnish residential/ID proof.

Just like joint accounts you can have joint fixed deposit account too.

Identity proof

  • Passport
  • PAN card
  • Voter ID card
  • Driving licence
  • Government ID card
  • Photo ration card
  • Senior citizen ID card

Address proof

  • Passport
  • Telephone bill
  • Electricity bill
  • Bank Statement with Cheque
  • Certificate/ ID card issued by Post office

Online facility - If you already have an account with the bank where you want to do a fixed deposit you can also do it online.

FD receipt

If you are not opening a FD online you will get a FD receipt from the branch which you need to carry when your fixed deposit matures.

In case it has been opened online many banks just send a receipt by email.

How interest is calculated

Right now (FY 2015-16) most of the commercial banks are offering interests in the range 7-8% annually but the interest on term deposits is mainly calculated on the quarterly basis.

If you have opted for the quarterly pay-out then that interest is deposited to your account. If the interest is reinvested then the interest is compunded to the principal amount on a quarterly basis.

In case of monthly deposit scheme, the interest shall be calculated for the quarter and paid monthly at discounted rate over the Standard FD Rate.

Please check with your bank for the prevailing interest rate and the interest pay-outs.

As example - If you have deposited a sum of Rs. 10,000 for 2 years at the annual interest rate of 7% then the interest will compounded quarterly for this period.

Compounded amount = principal x (1 +r/n)nt 

Where n is the frequency when the interest will be compounded, in this cases it is quarterly so it is 4 times in a year.

T is the time period which is 2 in this case.

So calculation is -

10000 x (1 + 0.07/4)8 = 11488.82

Thus interest earned = 11488.82 - 10000
                     = 1488.82 Rs.

Interest rate for senior citizens

Fixed deposit interest rate for senior citizens (60 years & above) is generally 0.25-0.5% higher than what is offered to others.

So if general rate of interest offered for 1 year FD is 7.75% then senior citizen will get interest rate of 8.25% for the same FD.

Deduction under Sec 80C

Tax saver FD meaning FD for the tenure of 5 year or more is eligible for exemption under Sec 80C. Since maximum amount for deduction is 1.5 lakhs in a fiscal year now so that is the maximum amount you can claim under Sec 80C for a tax saver fixed deposit.

If you have opened a tax saver fixed deposit then there is a lock in for 5 years.

In the case of joint deposits, the Tax benefit under 80C will be available only to the first holder of the deposit.

Liquidating fixed deposit

Due to some emergency if you want to break your fixed deposit and withdraw the money before the FD matures it can be done with some riders.

In case you break your FD the interest rate calculated will be lower of -

  • The base rate for the original/contracted tenure for which the deposit has been booked.
  • The base rate applicable for the tenure for which the deposit has been in force with the Bank.

As exp if you booked a FD for say 3 years and interest rate for it was 8% but break it after one year. If for one year the prevailing interest rate is 6% then that is the interest rate you'll get for you FD as you are actually keeping it for one year rather than the originally planned 3 years.

On top of that there is also a penalty of 0-1% depending on the bank. So, in case your bank is levying a 1% penalty on the pre-mature withdrawals of the FD then your interest rate becomes 5%. So the formula for calculating pre-mature withdrawal of FD is -

Interest rate for liquidating FD before it matures = prevailing interest rate for the tenure FD is actually kept - penalty percentage

Tax deduction at source(TDS)

Interest earned on FD is taxable. That interest should be added to your regular income and taxed according to the income tax slab you fall into.

Apart from that tax on the interest, income on the FD should be deducted at source (Bank in this case) @10% if the interest income from FD in a year is more than Rs. 10,000 (If PAN details are not submitted to the bank then TDS will be 20%).

So if there is a TDS on your FD (you can check 26AS for the same) then at the time of filing your tax return you have to provide all those details like actual interest earned, TDS already done and based on your slab if even after the tax deducted at source your liability is more you need to pay those as taxes.

As exp. Suppose you have a FD of Rs. 2 lakh @ 8% interest rate, which means in a year your interest earned is Rs. 16,000 (calculating using Simple Interest just for simplicity). Since it is more than Rs. 10,000 so TDS @10% will be done. That means bank will deduct Rs. 1600 as TDS.

Now if you come under 30% tax slab, on this interest income you need to pay tax of Rs. 4800. Since 1600 is already deducted you are liable to pay Rs.3200 more as taxes.

Form 15G/15H - In case your annual income is less than any tax slabs then you need to tell the bank not to deduct any TDS. For that you need to fill and submit form 15H if you are a senior citizen or 15G if you are not a senior citizen.

Loan against FD

As an alternative to breaking your FD in case of some emergency you can also take loan against your FD. Loan against fixed deposit is given in the form of an overdraft against your deposited amount.

Depending on the bank you may get 70%-90% of the value of your FD as loan. Interest charged on the loan is usually 2-3% more than the term deposit rate.

The tenure of the loan is same as the remaining tenure of the FD on renewable basis. Loan amount can be repaid in EMIs or as lump sum, you have to get that information from bank.

Note that your FD will continue to earn interest in that period. But you cannot close FD if you have taken loan against it though renewal can be done.

Nomination facility

It is always better to use nomination facility as it facilitates faster and easier release of funds without insistence on Succession Certificate /Probate of Will.

Nomination facility is available for bank fixed deposits. Nomination can be made in favour of one person only. It can be cancelled or changed subsequently by the depositors.

Nomination in the favour of the minor is permitted but in that case another individual (who is not a minor himself) has to be appointed who can receive the amount of the deposit on behalf of the nominee.

That's all for this topic Bank fixed deposits in India. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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>>>Go to Fixed Income Options page