Category: Personal Finance

What is Capital Gains Tax in India?

As a taxpayer and an investor, if you also feel frustrated understanding the tax implications on your investment and feel lost when understanding terms like long-term capital gains, short-term capital gains, tax calculations, exemptions on your profits, etc., then this blog is for you.

Before we delve into capital gain taxes in India, we need to understand capital gains, the different types of capital gains, how these gains are calculated, the exemptions you can claim on these gains, and the applicable tax rates. We’ll also discuss the key data points about the history of capital gain taxes and provide a detailed example to help you understand the concept better.

What is Capital Gains?

Capital gain is the gain or profit made by selling a capital asset. Capital assets include investment properties, stocks, bonds, homes, vehicles, jewellery, etc. The profits realized from selling these types of assets are called capital gains, and the taxes to be paid on these capital gains are called capital gains taxes.

Types of Capital Gains

Capital gains are of two types and their classification depends upon the time period the investor held the capital assets. We can classify capital gains into two categories based on holding periods of the capital asset:

Long Term Capital Gains (LTCG)
Short Term Capital Gains (STCG)

Classifying any capital gain into LTCG or STCG depends on the capital asset you are holding. The applicable tax rates are listed below:

Capital Gains Tax rates on different assets in India

In the table below, you can see the various financial asset classes and their respective tax structure:

Type of security	Holding Period for LTCG	LTCG Tax Rate	STCG Tax Rate
Listed equity shares	>1 year	10% of gains (Exemption amount is ₹1,00,000)	15% of gains orNormal slab rate if STT not paid
Unlisted Equity Shares	>2 years	20% with inflation indexation	Income Tax slab rate of individual
Equity-oriented mutual funds	>1 year	10% of gains (Exemption amount is ₹1,00,000)	15% of gains
Debt mutual funds	>3 years	Income Tax slab rate of individual	Income Tax slab rate of individual
Government and Corporate Bonds	>3 years	20% with inflation indexation	Income Tax slab rate of individual
Immovable Property	>2 years	20% with inflation indexation	Income Tax slab rate of individual
Movable Property	>3 years	20% with inflation indexation	Income Tax slab rate of individual

Capital Gains Tax Calculation

In this example, an investor bought 1000 shares of Tata Motors at Rs. 440 on 14 February 2023 for a total investment of Rs. 4,40,000. The share prices of Tata Motors have increased and are now trading at Rs. 994.

Now, we will consider two scenarios

1. Shares held for long term (More than a year)

Suppose the investor wishes to sell the shares of Tata Motors on 11 March 2024 at Rs. 1028. In this case, the investor has held the shares for more than a year and would be liable to pay long-term capital gains tax. The law states that the first Rs. 1,00,000 of the profit will be tax-exempt, and the rest of the capital gains will be taxed at 10%.

Long term capital gains = (1028 – 440 ) * 1000 = Rs. 5,88,000

Exemption = Rs. 1,00,000

Taxable capital gains = Rs. 5,88,000 – Rs. 1,00,000 = Rs. 4,88,000

Long term capital gains tax amount = 10% * 4,88,000 = Rs. 48,800

2. Shares held for short term (Less than a year)

Suppose the investor wishes to sell the shares of Tata Motors on 10 January 2024 at Rs. 808. In this case, the investor has held the share for less than a year and would be liable to pay short-term capital gains tax. The law states that short-term capital gains will be taxed at 15%.

Short term capital gains = (880 – 440) * 1000 = Rs. 4,40,000

Taxable capital gains = Rs. 4,40,000

Short term capital gains tax amount = 15% * 4,40,000 = Rs. 66,000

Exemptions Under Capital Gains

Various sections of the Income Tax Act give exemptions on their taxable gain to reduce their tax liability significantly. These exemptions with their respective sections are listed below:

Exemption under Section 54 E, 54 EA, 54 EB

Capital gains are exempt from taxes only if the following conditions are met:

Capital gains are tax-exempt if capital gains are reinvested in specific securities such as UTI units, government securities, government bonds, etc.
Proceeds must be reinvested within 6 months from the day when capital gains were realized.
If an individual decides to sell new securities before 36 months, the exemption previously offered is deducted from the cost of new securities to calculate the capital gains.

Exemption under Section 54EC

Capital gains are exempt from taxes only if the following conditions are met:

Investment of proceeds in specific assets of Rural Electrification Corporation or NHAI
Proceeds must be reinvested within 6 months from the day when capital gains were realized.
Capital gains cannot exceed the investment amount. If only a portion is reinvested, then only that amount is eligible for exemption.
Assets must be held for at least 36 months.

Exemption under Section 54EE

Capital gains earned on the transfer of long-term capital assets are exempted under this section if the following conditions are met:

Proceeds must be reinvested within 6 months from the day when capital gains were realized.
If an individual decides to sell new securities before 36 months, the exemption previously offered is deducted from the cost of new securities to calculate the capital gains.
If an individual takes out a loan against new securities before 36 months, it would be considered capital gains.
Investments should not exceed Rs. 50 Lakh in both the current and the following financial year.

Conclusion

Capital gains tax is a crucial source of tax revenue for the Government of India. These taxes may dramatically impact the investment decisions of the investor or capital asset owners. Understanding the concept of LTCG and STCG, along with the exemptions provided and tax rates imposed on various types of capital gains, can help an investor manage their investment more effectively. Whether you are a long-time investor or just starting your investment journey, keeping yourself informed about these taxes will ensure you make the most of your financial decisions. However, it is always advisable to consult your investment advisor before investing.

Frequently Asked Questions (FAQs)

Are capital gains taxable in India?
Yes, capital gains are taxable in India and are imposed on the sale of capital assets.
What are the two types of capital gains taxes?
Short-term capital gains (SCTG) tax and long-term capital gains (LTCG) tax are the two types of capital gains taxes.
Is it better to hold the asset for the long term rather than the short term?
It is better to hold the asset for the long term, as long-term capital gains are generally taxed at lower rates than gains earned in the short term.
How to avoid taxes on LTCG?
The Government of India grants various exemptions to avoid paying taxes on LTCG. The investor must fulfil certain conditions in order to take advantage of these exemptions.
What is the exemption amount for profits earned on selling listed shares?
An amount of Rs. 1,00,000 is exempt from LTCG tax on the sale of listed shares.

July 8, 2024

KYC Regulations Update: Comprehensive Guide

1.3 crore mutual fund accounts are on hold in India due to incomplete KYC, which means they cannot currently be used to buy or sell mutual funds. But why did this happen? This blog will answer all your questions regarding KYC and its issues.

KYC Regulations Overview

KYC stands for Know Your Customer. It is a set of regulations and procedures financial institutions, including mutual funds, use to verify customers’ identities and assess their risks. Verifying customers’ identities is a crucial measure to prevent fraudulent activities, money laundering, and the financing of terrorist activities. Financial institutions ensure that their customers are not engaging in business activities with criminals or suspicious individuals by verifying their identities.

It protects institutions from legal and financial risks linked with illegal activities, and KYC safeguards retail investments and reduces the chance of someone else accessing the investor’s account.

Changes in KYC Regulations by SEBI

Documents

The following documents are required when doing a KYC.

Proof of Identity (POI) – this could be your PAN card, Adhar card, Voter ID, or passport.

Proof of Address (POA) – this could be your Adhar card, utility bills, bank statements, etc.

Overview of Updated Regulations

The capital markets regulator, the Securities and Exchange Board of India (SEBI), has modified the roster of documents permissible for KYC compliance. These updated KYC regulations have been enforced since April 1, 2024. In its master circular, SEBI provided a list of valid documents for the POI and POA.

According to the circular, investors with outdated and inaccurate details will keep their mutual fund accounts on hold. These outdated documents mainly consist of older bank statements and utility bills.

However, SEBI has clarified that bank statements and utility bills issued within two months are still accepted as proof of address if other documents don’t contain an updated address.

Updated List of Permissible Documents

Here’s the list of documents that are now accepted as POI and POA,

The passport
The driving licences
Proof of possession of Aadhaar number
The Voter’s Identity Card issued by Election Commission of India
Job card issued by NREGA duly signed by an officer of the State Government
The letter issued by the National Population Register containing details of name and address
Any other document as notified by the Central Government in consultation with the Regulator

Furthermore, suppose the OVD (Official Valid Document) provided by the client does not contain an updated address. In that case, they must submit officially updated valid documents or e-documents within three months. The following documents are allowed to be submitted.

Utility bills (electricity, telephone, post-paid mobile phone, piped gas, water bill) that are not more than two months old.
Pension or family pension payment orders (PPOs) issued to retired employees by Government Departments or Public Sector Undertakings, if they contain the address.
Letter of allotment of accommodation from employer issued by state or central government departments, statutory or regulatory bodies, public sector undertakings, scheduled commercial banks, financial institutions, and listed companies

Additionally, SEBI has mandated registered intermediaries to regularly and systematically update all the documents and information about every client collected as part of the Customer Due Diligence (CDD) process.

How to Check KYC Status Online?

To check your KYC Status online, follow these steps

Visit any KYC Registration Agency (KRA), such as CDSL KRA, CAMS CRA, or CVL KRA.
Suppose you have selected CAMS KRA, click on transactions, and then choose KYC. A new web page will pop up.
Enter your PAN details, and the status will be displayed on the screen.

One of the 3 statuses will be displayed on the screen. The status decides your restrictions, if any. Here is a list of the KYC statuses and their implications.

Explanation of Various KYC Status

Validated KYC Status

This means that the issuing source has validated the investor-provided documents, and if the information is not modified, a mutual fund investor is allowed to invest readily in any scheme.

Registered/Verified KYC Status

This means that the documents provided by the person cannot be verified or confirmed by the issuing authority. This applies to investors who have provided other officially valid documents (OVDs) besides PAN or Adhaar, such as passports, voter ID cards, etc., to validate address and identity during the KYC.

If the KYC status is either ‘KYC registered’ or ‘KYC verified,’ it will not affect their current investments. However, if they wish to invest in a new mutual fund scheme, they are required to submit the KYC-related documents again. They can undergo a re-KYC process to transition to Validated KYC status.

KYC on Hold Status

The KYC status will be put on hold if the documents submitted at the time of the initial KYC are not official valid documents, such as voter ID cards, passports etc., but rather unofficial documents like bank statements, electricity bills, and utility bills. The issue may also arise if the investor’s mobile number and email ID still need to be validated.

All financial and non-financial transactions will be restricted until the required documents are submitted. This would impact the existing SIP transactions, redemption, etc.

Conclusion

A complete and up-to-date KYC is necessary for seamless access to your mutual fund account in India, as it protects the financial system from fraudulent activities. If your KYC needs to be completed, gather the essential documents to resolve the issue. A valid KYC status can help you avoid restrictions and participate actively in the Indian mutual fund market to achieve your financial goals.

Frequently Asked Questions (FAQs)

Is KYC mandatory for investing in mutual funds?
Yes, KYC is mandatory for all mutual fund investments in India.
What documents are needed for KYC?
Proof of Identity and Proof of Address are required to complete your KYC.
What will happen if my KYC status is on hold?
If your KYC status is on hold, your transactions will be restricted. However, all the restrictions will be lifted once you provide all the updated documents.
How can I complete my KYC?
You can do it online (eKYC) or offline by submitting documents at a KYC Registration Agency (KRA).
Can I still use my bank statement or utility bills for KYC?
Yes, SEBI has clarified that bank statements and utility bills issued within two months are still accepted as proof of address if other documents don’t contain an updated address.

July 3, 2024

Guide to Behavioral Finance: Definition, Biases, and Impact

Ever wondered why you tend to spend more freely with a credit card than with cash? Or why do you hesitate to sell a losing stock but quickly sell your winning holdings at a small profit?

Behavioral finance provides interesting insights into various financial puzzles. Unlike traditional finance, which assumes that investors are rational, behavioral finance recognizes the influential role that psychology plays in our financial decision-making.

What is Behavioral Finance?

Behavioral finance is a field of study that examines how psychology influences the financial decisions of investors and financial markets as a whole. In contrast, to traditional finance, which assumes investors act rationally depending on the available information, behavioral finance recognizes that emotions and biases can cloud judgment and lead to suboptimal choices.

It shows how psychological factors like overconfidence, herd mentality, loss aversion, etc. can affect an individual’s financial decisions. It challenges the efficient market hypothesis, which holds that markets are totally efficient and reflect all available information.

Evolution of Behavioral Finance

In 1912, George Selden’s groundbreaking book “Psychology of the Stock Market” laid the foundation for understanding the profound psychological elements present in the financial markets.

In 1979, the psychologists Amos Tversky and Daniel Kahneman presented their Prospect Theory, which effectively challenged the long-standing belief in rational decision-making. This theory sheds light on the interesting ways in which individuals perceive and prioritize gains and losses. This set the stage for behavioral finance.

In the 1980s, Richard Thaler, a well-known economist, teamed up with Tversky and Kahneman to implement ideas for the financial markets. During this period, important ideas like mental accounting and framing effects were developed.

Since the 2000s, behavioral finance has emerged as a well-established field, witnessing a surge in academic research, industry adoption, etc.

Role of Psychology in Behavioral Finance

Behavioral finance is all about the psychology of money. It is the core principle behind the field. Let’s see how psychology plays a major role in understanding financial decisions.

Mental Shortcuts: Our brain depends on mental shortcuts to efficiently process information. Biases stem from these shortcuts. For example, the availability bias leads us to assess the likelihood of events based on how easily we can recall them. This could lead to overreacting to news and neglecting historical trends.
Cognitive Bias: These are thinking patterns that can cause errors in judgement. Behavioral finance identifies and explains how biases such as overconfidence or anchoring bias can distort financial decisions.
Individual Differences: People have different personalities, risk tolerance, and financial goals. Understanding your own psychology is important for making sound financial decisions. Psychology helps us in a comprehensive understanding of these aspects and their impact on financial behavior.

Biases in Behavioral Finance

Biases play a central role in behavioral finance, greatly influencing the way investors make decisions. These biases are mental shortcuts that can lead to judgment errors in financial situations.

Let’s have a look at some of the common biases:

Loss Aversion: Loss aversion is when people feel the pain of losses more than the pleasure of gains. This can cause investors to keep holding losing stocks and sell winning stocks too early.
Overconfidence: Overconfidence is a common pitfall for investors, who tend to overestimate their knowledge and abilities, resulting in risky decision-making and an underestimation of potential losses or black swan events.
Anchoring Bias: Individuals have a tendency to rely excessively on the initial information they come across when making decisions. This could pose a problem in investing. For instance, an investor is fixated on a stock’s initial price and fails to consider evolving market conditions.
Herd Mentality: Herd mentality refers to the natural inclination to follow the crowd. Investors often make decisions based on the actions of others, rather than their own analysis. This can lead to bubbles and crashes.
Confirmation Bias: Confirmation bias is the tendency to search for information that supports our preconceived notions while disregarding conflicting information. This can cause investors to ignore potential risks or miss out on great opportunities.
Disposition Effect: People tend to sell investments that have made money quickly and keep those that have lost money for a long time. This can hinder returns because winning stocks often have more potential for growth.
Framing Bias: The presentation of information has a profound impact on our perception. For instance, an investment presented with a “90% chance of success” may appear more appealing than one described as having a “10% chance of failure.”
Status Quo Bias: Most individuals generally tend to cling to the status quo and shy away from making any alterations. This can result in a lack of momentum in investment decisions, even when a change could yield better decisions.
Mental Accounting: People often separate their money into different categories and treat them in different ways. For instance, you are more likely to spend your bonus amount than money you have been saving for years. This can result in unplanned expenses.

Impact of Behavioral Finance

On Individuals

Improved Decision-Making: Identifying biases allows investors to make better decisions and avoid expensive errors. Creating a strategy that takes into account risk tolerance and objectives can help minimize the impact of emotions such as fear and greed.
Reduced Risk: Behavioral finance helps recognize biases that lead to risky behavior, like overconfidence leading to excessive investment in volatile assets. Investors can use diversification and disciplined investing strategies to lessen risk.
Awareness: Understanding behavioral biases empowers individuals to take control of their financial decisions. They can become more critical of financial information and avoid falling prey to biases that exploit emotional triggers.

On Market

Market Volatility: Behavioral tendencies can indeed contribute to market fluctuations. Herding and panic selling make crashes worse, while overconfidence creates bubbles.
Market Anomalies: Behavioral finance helps explain market anomalies, such as calendar effects or seasonal trends, that cannot be fully explained by traditional finance.
Investors protection: Regulators can use behavioral finance insights to create policies that protect investors from making emotional or biased decisions.

Conclusion

In summation, behavioral finance focuses on the role of human behaviour in making financial decisions. It challenges the idea of rational investors and recognizes how psychology affects our financial choices.

Behavioral finance is not a miracle solution that guarantees financial success. However, incorporating these principles into your investment strategy can help you become an informed and mindful investor. Remember that the goal is not to get rid of emotions, but to be aware of how they can affect our financial decisions and to make choices that support long-term goals.

Frequently Asked Questions (FAQs)

What is Behavioral Finance?
It studies how psychology influences financial decisions, acknowledging we are not always rational.
How do emotions affect investing?
Emotions play a significant role in investing; for example, fear can lead to panic selling, while greed can make you chase risky investments.
How can I be a more mindful investor?
You can educate yourself on biases and how they might influence you. Consider your emotions and goals before making decisions.
Is there a way to overcome biases?
Not entirely, but by being aware of the biases, you can take steps to mitigate their influence.
Does behavioral finance replace traditional finance?
No, it contemplates it. Traditional finance focuses on market data, while behavioral finance considers the human element.

July 1, 2024

National Pension System (NPS): Should You Invest?

The National Pension System, or NPS, is an effort of the Indian government that aims to give Indian citizens retirement benefits. It encourages people to invest regularly during their working term for retirement.

Earlier, it was called the National Pension Scheme. In this scheme, you invest a lumpsum or fixed amount of money every month. Then, at your retirement, you can withdraw up to 60% of the accumulated amount, and the rest 40% you will receive in monthly payments. However, if the accumulated amount is equal to or less than INR 5 lakh, then the depositor can withdraw the entire amount at the time of retirement.

What is National Pension Scheme

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which comes under the jurisdiction of the Ministry of Finance, Government of India.

Under NPS, individual savings are pooled into a pension fund and invested by professional fund managers according to the approved investment guidelines. On behalf of investors, the PFRDA-regulated pension fund managers invest the fund across diversified portfolios, including equity, corporate debt, government bonds, and alternative investments. When subscribers open an NPS, they are issued a unique Permanent Retirement Account Number (PRAN) by a Central Record Keeping Agencies(CRA). The PRAN is mandatory to make contributions to Tier I and Tier II NPS accounts. These are long-term saving options, backed by the Government of India. Though it is a market-based plan, it is safe as it is regulated and cost-effective.

Features of NPS

The main objective of the NPS is to provide old-age pensions to the citizens of India. Initially, the NPS was solely available to employees of the central government; however, PFRDA opened it up to all Indian citizens.
It is regulated by PFRDA, which the government of India established.
The contribution made by the investor during their work life is invested under different asset classes.
Investment in NPS provides various tax benefits under the Income Tax Act.
Contribution to NPS provides flexibility as an investment can be made every month.

Types of NPS Accounts

Under the National Pension Scheme, there are two types of accounts:

Tier 1
Tier 2

Let’s analyze both of the NPS accounts.

Tier 1 Account

A Tier 1 account serves as a primary account with tax advantages. To keep this account operational, an investor must contribute at least INR 1,000 a year.

Furter, the investments in a tier 1 account are locked until you turn sixty. Partial withdrawals, however, are permissible in certain circumstances, such as life-threatening diseases, etc.

Tier 2 Account

It is not mandatory for an individual to register for a Tier 2 account; withdrawals from tier 2 accounts are flexible. However, to open a Tier 2 account, you must first have a Tier 1 account. Although this account offers cheaper account maintenance fees, it does not provide the same tax benefits as a tier 1 account. We will discuss the tax benefits of NPS later in this blog.

Particulars	Tier – 1	Tier – 2
Tax Benefits	Available	Not available
Premature Withdrawal	Not available	Available
At Maturity	Investors can withdraw up to 60% of the accumulated amount, and the remaining 40% will be received in an annuity plan.	Annuity plan is not available in this. Investors can withdraw the entire amount.

The Asset class of NPS

The amount pooled from the investors under NPS is invested among 4 different asset classes.

Equity – In this, your money is invested in market-linked securities. They are volatile in the short run but generally give higher returns as compared to other asset classes.
Government Securities – Under this, the amount is invested into fixed-income securities issued by the government of India which carry the lowest risk.
Corporate Debt – This asset class carries a moderate amount of risk and invests in securities issued by corporate houses such as bonds, certificate of deposits, etc.
Alternative Investment Fund – Under an AIF, the pooled amount is invested into REITs (Real estate investment trusts, InvITs (Infrastructure investment trusts), and MBS (mortgage-backed securities), etc.

Choice of Asset class in NPS.

Investors have two options available to choose between asset classes in NPS

Active Choice – You can create your portfolio through active asset class selection, so if you’re ready to take on more risk and are seeking greater returns, you can choose equity as a major asset class, up to a maximum of 75% until you’re 50 years old.
Auto Choice – It provides you with the ability to automatically allocate your portfolio if you are unfamiliar with the idea of asset classes. Whereby your investment will expand in a less risky asset class as you age.

Tax Benefits of NPS

Investors contributing to the NPS are entitled to receive certain tax deductions. Let’s have a look at it:

Under Section 80CCD(1), subject to a maximum of INR 1.5 lakhs, the employee can avail of a Tax deduction of up to 10% of their pay (Basic + DA).
Tax deduction of up to INR 50,000 under Section 80CCD(1B) for employees; this deduction is over and above the INR 1.5 lakhs deduction under Section 80CCD(1).
Under Section 80CCD(2), the Employer’s contribution towards the Tier -1 NPS account of an employee is eligible for a tax deduction of up to 10% of pay (Basic + DA) or 14% of salary if such a contribution is made by the Central Government.
Self-employed people can claim a tax deduction of up to 20% of gross income under Section 80CCD(1), subject to a total limit of INR 1.5 lakhs under Section 80CCE.

Pension Funds under NPS

As of May 2024, there are 11 pension fund managers registered under PFRDA under the Equity Tier 1 category, the names and performance of which are mentioned below:

Pension Fund	CAGR (3Years)	CAGR (5 Years)	CAGR (Since Inception)
Aditya Birla Sun Life Pension Management Ltd.	17.82%	15.96%	14.51%
Axis Pension Fund Management Limited	NA	NA	20.21%
HDFC Pension Management Co. Ltd.	18.14%	16.37%	15.68%
ICICI Pru. Pension Fund Mgmt Co. Ltd.	19.63%	16.70%	13.37%
Kotak Mahindra Pension Fund Ltd.	19.08%	16.63%	12.65%
LIC Pension Fund Ltd.	18.83%	15.79%	13.89%
Max Life Pension Fund Management Limited	NA	NA	17.77%
SBI Pension Funds Pvt. Ltd	17.78%	15.17%	11.70%
Tata Pension Management Pvt. Ltd.	NA	NA	23.19%
UTI Retirement Solutions Ltd.	19.18%	15.94%	13.18%
DSP Pension Fund Managers Private Limited	NA	NA	5.55%

Eligibility for NPS

There are 4 kinds of eligibility criteria under the NPS model.

All Citizen Model – All Indian citizens, whether they are residents or not, as well as foreign nationals between the ages of 18 and 70, are eligible to subscribe to the NPS under this model. However, individuals of Indian descent and Hindu Undivided Families are not eligible.
Central Government – The central government employees who have joined their services after 1 Jan 2004 except for the armed forces need to mandatorily join NPS.
State Government – Employees of state government and union territories are covered under NPS.
Corporate Model – The corporates established under the Companies Act 2013, cooperative societies, partnership firms, trusts, etc. if registered with PFRDA, then they are eligible to open your NPS account.

Why is NPS a good retirement choice?

Backed by the Government of India: The NPS is a government savings scheme. NPS is a market-linked investment product specifically focused on retirement solutions and comes with a lock-in of 60 years of an individual’s age.
Cost Effective: It is one of the lowest-cost retirement products.
Well-regulated and Transparent: NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which protects investors.
Risk & Safety: NPS is market-linked and a bit risky, but PFRDA strictly regulates it, so there is almost no chance of malpractice.
Returns: NPS can give up to 9% -12%.
Tax Benefits: NPS provides a total tax benefit of up to Rs. 2 lakhs under Section 80C and Section 80CCD.
Flexible Investment alternatives: A saving option where individuals can decide the contribution amount and when to contribute.
Disciplined Saving Approach: It’s a systematic saving plan to fund retirement expenses, promote financial discipline, and prepare people for retirement.
Professional Fund Management: Professional fund managers with sound investing knowledge handle the pooled investments.

How to Check the Balance in an NPS Account?

First, a subscriber must go to the CRA website and enter their login information, such as their assigned ID and PRAN number, to access their NPS account. After logging in, go to the holding option under the transact section.

In addition, the government-launched UMANG (Unified Mobile Application for New-age Governance) platform, which makes it easier for you to monitor your NPS contribution.

Conclusion

National Pension System or NPS is an option for people who want to plan their retirement and are searching for peace of mind throughout their retirement years by having the security of a regular income governed by government agencies. The ability to invest in NPS every month gives you the freedom to build up a sizeable sum by the time you retire.

However, as we always advise, before making any investing decisions, research thoroughly and consult with your financial advisor.

Frequently Asked Questions (FAQs)

Do I earn fixed returns on NPS?
No, returns under NPS are based on market links.
Who Is Not Eligible For NPS?
Hindu undivided families and persons of Indian origin are not eligible to subscribe to NPS. NPS is an individual pension account and cannot be opened on behalf of a third person.
What is the rate of return of NPS?
The rate of return in NPS is market-linked. The past trends have been in the range of 9% to 12% per annum.
What is the NPS lock-in period for the Tier I Account?
The lock-in period is three years for National Pension System (NPS) Tier I Account.
Can I invest in NPS without a job?
Yes. Individuals who are self-employed or unemployed can invest in NPS. The National Pension System is open for all Indian Citizens who fall between the age bracket of 18 and 70 years of age.
What are the disadvantages of NPS?
One of the principal negative aspects of the National Pension Scheme (NPS) is the compulsory necessity to use a portion of the corpus to buy an annuity when one retires. It restricts subscriber’s freedom to manage their retirement assets.
Can I change my pension fund manager in NPS?
Yes, you can change your pension fund manager once in a financial year.
What is a PRAN in NPS?
PRAN or Permanent Retirement Account Number is a 12-digit number that is allocated to every person enrolled in the NPS.

July 1, 2024

What is Inflation? Meaning, Types, & Risks

Inflation is a difficult concept but we’ll try to explain it with an example: Have you ever visited a supermarket to get groceries and discovered that the number of things you could buy earlier cannot be bought with the same amount of money today? This phenomenon is called ‘Inflation’.

This blog will explore inflation’s causes, effects, and other aspects.

What is Inflation?

Expressed as a percentage, inflation is the rise in the cost of goods and services. As commodity prices rise, money’s purchasing power declines.

Let’s understand with the help of an example – when you go to the store and ask for a packet of one liter milk, you will be charged 55 INR instead of the 50 INR you used to pay two years ago. This 5 INR rise is the result of inflation over time.

Types of Inflation

Inflation in the economy can take many different forms, some of which are listed below:

Creeping Inflation – This kind of inflation, which is the mildest of all, is necessary to keep the economy growing.
Walking Inflation – This indicates concern because the inflation rate is typically higher than the rate of creeping inflation.
Galloping Inflation – The prices of products and commodities rise quickly under this inflationary environment, usually at a pace higher than 10%.
Hyperinflation – Hyperinflation is extremely worrisome as it constitutes an ever increasing rate of inflation. This is where prices for goods and commodities increase by more than 50% in a month. Political unrest and high currency depreciation are the usual causes of extreme inflation.

Causes of Inflation

The following are the primary causes of inflation:

High amounts of money in circulation in the economy leads to an unexpected rise in demand for goods and services, resulting in the prices rising.
High amounts of government investment and spending also leads to inflation.
Rising raw material costs have the potential to drive prices upward.
The costs of products and services also rise in response to government tax increases.

Measures to Control Inflation

The government uses a variety of monetary and non-monetary tools to control inflation, some of which are listed below:

Monetary Measures

A nation’s central bank can raise interest rates, which increases the cost of loans and reduces consumer spending on goods and services.
The Reserve Bank can ask the banks to increase their reserves, which decreases the supply of money in the market, leading to a reduction in money flow.
The Reserve Bank can also sell government securities to pull money out of the hands of the investors, in order to reduce the money supply.

Fiscal Measures

The government can reduce spending on several initiatives, which lower the demand for commodities.
The government can raise taxes on businesses and individuals, which lower people’s disposable income.

Other Measures

The government can also lower inflation by increasing the production of goods and services.
Importing commodities that are in limited supply domestically can also assist in reducing inflation.
Additionally, they can regulate pricing by imposing a price cap on necessities.

Cases of High Inflations in India

1990 – The Indian Rupee depreciated in the early 1990s due to economic liberalization and a budget deficit, which led to a high inflation of 13–14% in India. The administration has since implemented several policies aimed at stabilizing the economy.

2008 – Worldwide economic uncertainty caused commodity prices to rise, leading the inflation to rise to 10% to 12%. To control the same, the Reserve Bank of India and the Indian government have since implemented a number of steps.

2012-13 – Global commodities prices surged in 2012–2013 due to the economic downturn, which led to significant budget deficits. Around 10% inflation was experienced at the time, which put more pressure on the federal government to enact various inflation control measures.

Risks of High Inflation

Lower purchasing power results from inflation, which mostly affects middle-class or fixed-income individuals.
Businesses find it challenging to grow as a result of rising prices.
An increase in inflation widens income inequality.

Cases of Low Inflations in India

2014-15 – Global commodity prices, including those of oil, fell throughout the 2014–15 year. During that time, the RBI concentrated on raising inflation, which was around 4-5% at the time.

2000 – Early in 2000, the government’s fiscal conditions were preserved and inflation rates stayed between three and four percent because of steady economic conditions that led to an increase in agricultural productivity.

Cons of Low Inflation

Deflationary pressures on the economy arise when inflation is excessively low, leading consumers to believe that prices will fall in the future.
A low rate of inflation merely indicates that there will be fewer economic activities, which will result in reduced company profits.
A lower rate of inflation will result in less tax revenue for the government, which will restrict spending.

Conclusion

To sum up, inflation is more than just a fair increase in the price of things; it also has a dynamic effect and can be detrimental to people since it reduces their purchasing power. Hence, it is your responsibility as an investor to keep up with the inflation rate and manage your investments properly.

Frequently Asked Questions (FAQs)

Is Inflation good or bad for the economy?
A low and contained rate of inflation is seen to stimulate economic activity and growth and a high rate of inflation reduces purchasing power and impedes economic expansion.
Why do we need inflation to run the economy?
A controlled rate of inflation promotes GDP growth, economic activity, and production in the economy.
What causes a rise in the inflation rate?
A nation’s per capita income rises in response to rising employment and wage rates. This, in turn, raises consumer disposable income, which in turn raises demand for commodities in society and ultimately drives up inflation.
What is the meaning of inflation?
Simply put, inflation is the rise in commodity prices and the decline in the purchasing power of money.
What are the methods to control inflation?
The government can implement various methods to control inflation, including fiscal and monetary methods.

June 29, 2024

Sources of Revenue and Expenditures of the Government of India

We put in a lot of effort to make money, but a significant amount is taken in taxes each year, which not many know how the government uses to carry out its mandate.

This blog will provide you with a thorough description of the government’s funding sources and expenditures.

Surplus and Deficit

The government gets money from various sources and uses it for the good of the people. In the situation of a fiscal deficit, its expenses exceed its income and in case of a surplus, its income exceeds its expenditures.

Sources of Government Revenue

There are several categories through which the government’s revenue streams can be separated:

Direct Tax

This tax is generally levied on the income of individual or corporate houses. The liability to pay this tax cannot be shifted to anyone else. The tax is usually based on income or earnings.

The various sources of government revenue through direct taxes are as follows-

Income Tax: This tax is imposed on the individual’s income, which can come from various sources depending on the person, including earnings, salaries, rent, and business profits. Income tax is one of the main sources of government funding. The income tax slab is used as the basis for calculation.
Corporate Tax: This applies to corporate houses based on their earnings in a specific year. This tax heavily affects the country’s long-term growth prospects as a low corporate tax would invite more companies into the country, while a high corporate tax would repel them.
Capital Gain Tax: This tax is levied on the profit individuals or companies earn on selling capital assets like equity, debt, real estate, etc.
Property Tax: This is levied on property owned by an individual and calculated based on its value and area.

Indirect Tax

The final buyer of products and services is ultimately responsible for paying taxes under this source of government funding. The price of the goods usually includes this tax. The following are the different indirect tax sources:

GST, or Goods and Service Tax: It is a tax imposed when goods and services are sold. It was implemented in 2017 to replace several levies with one unified tax.
Custom Duty: Importers of goods are liable to pay this tax whenever they import goods from other countries.
Excise Duty: The government of India has majorly removed this tax but it is still levied on various goods such as petrol and diesel.

Non-Tax Revenue

The non-tax revenue sources of the government are mentioned below:

Interest receipt: The government receives interest on investments made in public sector undertakings; this includes earnings from dividends.
Petroleum License: This source includes revenue from petroleum licenses given to companies; it generally contains royalties or profit shares generated from oil exploration.
Communication Fees: This includes the license fees paid by Telecom companies to the Department of Telecommunication.

Now, let’s understand how the government uses this revenue.

Government Expenditure

The expenditure of government can be categorized into 2 broad parts:

Capital Expenditure

This investment is made to improve infrastructure, increase economic activity, and produce assets. The government spends money on capital projects in the following ways:

Developing roadways, railways, and airports.
Spending on defense equipment, such as purchasing weapons and other military equipment.
The government infuses capital into various public sector companies to assist with sustenance.
The government provides loans to various state and union territories.

Revenue Expenditure

These costs don’t produce any assets. They are seen as regular outlays made by the government for the regular operation of the economy and government. The government spends on the following areas:

Interest on the debt owned by the government.
Salaries of government employees.
Additional services provided by the government such as ration, subsidies, etc.
Providing pensions to retired employees.

Conclusion

Though taxes are always seen as a burden, they help stimulate economic growth in the long run. Without their presence, it would be impossible to run the economy. Hence, it is also your responsibility as a taxpayer to know exactly how your taxes will be utilized to build the nation’s infrastructure, healthcare system, and educational system.

Frequently Asked Questions (FAQs)

How does the government earn money?
Government-imposed direct and indirect taxes generate the largest portion of revenue. They originate from income tax, corporate tax, and GST.
What is the fiscal deficit in the economy?
Fiscal deficit is the term used to describe the situation in which the government’s revenue is less than its outlays.
How does a government spend their money?
The government uses its funds for public welfare programs and providing basic services, like healthcare and education, to its residents. In addition, the government spends its funds to settle debt from earlier borrowing periods.
What is the purpose of the government budget?
The major objective of the government’s preparation of a budget is to allocate the available resources in the best possible manner to every sector and develop the economy.
What are the items included in the government’s revenue expenditure?
The government’s revenue expenditure includes payment of salaries of government employees, payment of pensions, and interest payment on the borrowings made by the government.

June 28, 2024

What is Securities Transaction Tax (STT)?

Do you regularly trade in the stock market and worry about the many taxes that the Indian government has put in place and how they are reducing your return? Fear not—we’ve got you covered.

In today’s blog, we will discuss one such tax, the “Securities Transaction Tax.”

Overview of Securities Transaction Tax (STT)

The Indian government levies this type of tax on the buying and selling of shares, mutual funds with an equity focus, and derivatives that are exchanged on the Indian stock exchange. This tax, which is levied on the transaction value and applies to both share buyers and sellers, increases the transaction cost. The Securities Transaction Tax Act (STT Act) regulates this type of direct taxation. Unlisted shares sold through an IPO or other offer for sale to the public are likewise subject to this tax.

History of Securities Transaction Tax

P. Chidambaram, a former finance minister, instituted this tax in 2004. It is levied based on the value of securities, as the name implies (excluding commodities and cash). After numerous brokers and trading members protested this charge, the government was compelled to lower the STT tax in 2013.

Meaning of Securities

The term “Securities” has been defined under the Securities Contracts (Regulation) Act and includes the following:

Shares, scripts, bonds, and other marketable securities.
Derivatives instruments.
Government securities of an equity nature.
Units of equity-oriented mutual funds.

Features of STT

The tax rate varies based on the type of security and the type of transaction. For instance, the tax rate differs for delivery-based and intraday transactions.
It is calculated as a fixed percentage of the transaction value.
STT is levied on both buy and sell transactions.
Depositories and exchanges collect it at the point of transaction and automatically deduct it during the settlement process.
STT is a source of revenue for governments.

Securities Transaction Tax Rate

The tax rates of STT for different types of transactions and securities are as follows-

Purchase of Shares – In the case of delivery-based purchases of equity shares, the rate of STT is 0.1% and is paid by the purchaser at a price on which equity shares are purchased.
Sale of Shares – In the case of the delivery-based sale of equity shares, there is a similar tax rate of 0.1%, but the seller pays it at a price at which equity shares are sold. On an intraday basis, the applicable tax rate is 0.025%.
Equity Mutual Funds – In this case, units of an equity-oriented mutual fund sold outside of the delivery or transfer on a recognised stock exchange, the tax rate is 0.025% and is paid by the seller at a price on which equity share or units is sold. In a delivery-based sale, the seller pays 0.0001% of the price at which the unit was sold.
Derivative Options – While selling option securities, 0.0625% of the value of option premium is to be paid as tax by the seller.
Derivative Futures – In the case of the sale of futures in securities, the applicable tax is 0.0125% of the price at which such futures contracts are traded.
Exchange Traded Funds – In the case of exchange-traded funds, the applicable tax rate is 0.001% and is paid by the seller at the price at which units are sold.
Unlisted Shares – When unlisted shares, such as IPOs, are sold and later listed on a stock exchange, the tax rate is 0.2%, and the seller must pay it at the price at which the units are sold.

Example of Securities Transaction Tax

Assume that a trader has purchased 500 shares for INR 20 apiece, for a total of INR 10,000 and on the same day (intraday), they sold the same for INR 30. Then, in that case, the applicable STT rate will be 0.025%.

So, the STT will be based on the average price of the intraday trades. Here, the average price comes out to be 25 (average of 20 and 30), and the STT is around 0.025%*25*500 = INR 3.125

The applicable STT rate for futures is 0.0125%. If a trader purchases five lots of Nifty futures at INR 23000 each and sells them for INR 23010, with the Nifty lot size being 25, the STT will be determined as follows:

STT for this transaction will be approximately 0.0125%*23010*25*5 = INR 359.35

Impact of Securities Transaction Tax on Investors

This tax has a significant impact on investors in India; let us understand how.

Transaction Cost – The applicable STT rate increases the cost of trading, eventually leading to a decline in investors’ returns, especially for those who trade frequently.
Liquidity – As the STT will increase the transaction cost and decrease the trader’s profit, some investors prefer to stay away from the market and look for some other investment option, which will impact the market volume.
Investment strategies – This can impact the investment strategy as market participants may shift to long-term investing rather than short-term trades.
Net Return – The net return earned by the investor will reduce because of STT.

Conclusion

In summary, the government charges a securities transaction tax on all transactions, including the purchase of stocks, mutual funds, derivatives, and other financial instruments on stock exchanges. Without a doubt, these taxes reduce your net return, but there is no getting around the fact that the Indian government depends heavily on them.

Frequently Asked Questions (FAQs)

Is the Securities Transaction Tax a direct tax or indirect tax?
The STT is a direct tax levied on the purchase and sale of equity and equity-related instruments listed on Indian Stock Exchanges.
Is there any way to avoid paying STT on transactions?
No, if you made any purchase or sale of equity shares or mutual fund units, it will automatically be deducted.
What is the difference between Capital gain tax and Securities Transaction Tax?
STT is a kind of direct tax applicable at the time of transaction made in securities, whereas capital gain tax is levied on the profit arising on the sale of assets.
In which year was the Securities Transaction Tax introduced in India?
STT was introduced in 2004 by former finance minister P. Chidambaram.
Is STT applicable on both buy and sell?
Yes, STT is applicable to both buying and selling securities listed on Indian Stock Exchanges.

June 26, 2024

What Is The Difference Between TDS and TCS?

Have you ever received any income from investments and realized it was slightly less than anticipated? Did you discover that a charge was added to your account while paying bills that needed clarification? If so, don’t worry; we’ll cover such hidden charges. Read the blog to learn the distinctions between Tax Deducted at Source (TDS) and Tax Collected at Source (TCS).

Overview of Tax Deducted at Source

TDS or Tax Deducted at Source is an indirect tax charged on the amount a recipient receives as income. In this method of collecting tax, the payer deducts a specific tax percentage on the income earned by the payee, and the deduction is made at the time of payment. The deducted amount is then paid to the government on behalf of the payee.

It applies to various incomes, such as salaries, interest, professional fees, rent, etc. The rate of TDS depends on the nature of income as the rate can differ for different types of income.

Features of TDS

It applies to various types of payments such as interest earned, salaries, dividends, etc.
The tax deductor provides a TDS certificate in which the details like income, and tax deducted are mentioned.
The deductor is required to file the return periodically, if the deductor is not able to file the return they will be liable to pay penalties.
The tax rate depends on various incomes; for example, the TDS rate for salary income can differ from the TDS rate on interest income.

Examples of TDS

Let’s say a company hires a professional freelancer and provides him with a monthly compensation of INR 1,00,000. The tax rate provided under the Income Tax Act under section 194J to deduct TDS on professional service is 10%. Hence, the TDS amount will be 10% of INR 1 Lakh, which comes to 10,000, and the final payment received by the professional will be 90,000 after the deduction of TDS.

In this case, the company must deposit INR 10,000 with the government authorities.

Overview of Tax Collected at Source

TCS is a method through which the seller collects a specific tax amount from the purchaser of goods at the point of sale, and the collected tax is then deposited with the income tax authorities. It comes under the goods listed under section 206C of the Income Tax Act 1961.

This tax exists on specific transactions like purchasing alcohol, selling motor vehicles above a particular value, selling overseas tour packages, etc. The tax rates depend upon the nature and type of goods and services. The collector of tax provides a TCS certificate to the buyer which has the details like the amount of tax collected and deposited with the government.

Features of TCS

This tax is collected by the seller from the buyer of goods and services.
It applies only to specific goods, not to all goods.
It generally charges a flat rate on the value of goods and the rate is fixed by the government.
The seller of the goods must deposit the tax to the concerned branches of the authorized banks.

Example of TCS

Let’s suppose a scrap dealer who is engaged in selling scraps to manufacturing companies sold scrap material for INR 1,00,000. The applicable TCS rate is 1% on the sale of scrap. Then the TCS amount will come to 1000, calculated as 1% of 1 Lakh. Therefore, the seller needs to collect a total of 1,01,000 from the manufacturing company and then deposit 1,000 to the government as the TCS amount.

Differences Between TDS and TCS

Particulars	TDS	TCS
Duration	TDS is collected when the payment is due or made.	TCS is collected at the time of sale.
Deducted By	Companies or Individuals making the payment.	Businesses or individuals selling the goods and services.
Section	It is governed by Sections 192 to 196D of the Income Tax Act 1961.	It is covered under section 206 C of the Income Tax Act 1961.
Applicability	Applies to incomes such as salaries, interest, commissions, etc.	It applies to the sale of certain specified goods.
Forms for filing returns	The returns are filed quarterly on forms 24Q and 26Q.	It is filled on form 27EQ.
Date of Payment of Tax to Government	The due date for depositing TDS is the 7^th of every month and returns are to be submitted quarterly.	TCS should be deposited within 10 days from the end of the month of supply to the government credit.

Consequences of Not Depositing TDS or TCS

The deductor or the collector of the taxes will face legal consequences if they fail to deposit TDS or TCS collected on time. The Income Tax Act makes it mandatory to pay an interest of 1.5% per month in case of non-deduction of TDS or late payment of TDS, and for TCS, the penalty rate is 1%.

Conclusion

On a concluding note, understanding the concept of TDS and TCS is essential for individuals and business houses, as it is suggested that you track all your taxes. If any excess taxes have been deducted from your income, you can get a refund while filing an income tax return. On the other hand, if you have collected the TCS amount, you must deposit the tax with the concerned authorities. Also, you should consult with your tax advisor or consultant when filing income tax returns.

Frequently Asked Questions (FAQs)

What is the time limit for a TDS refund?
Generally, the TDS will be refunded within 3 to 6 months. It also depends on whether you have completed e-verification or not.
When are TDS and TCS applicable?
TDS is applicable to different incomes such as salary, interest, rent commission, etc., whereas TCS is applicable to the sale of goods such as scrap, tendu leaves, timber, etc.
What is the due date for depositing Tax Deducted at Source (TDS)?
The due date for depositing TDS is the 7th of next month, in which the TDS is deducted, and the March due date is April 30th.
How do I verify the deducted TDS on my behalf?
To verify the details of TDS, you can visit the e-filling portal of income tax, and there, you can find Form 26AS, which has all the relevant details.
What are the consequences for not deducting TDS or not collecting TCS?
Any failure to deduct or collect TDS or TCS will lead to penalties and even prosecution in a few cases.

June 26, 2024

Top 10 Tax Saving Instruments in India

Even when you put much effort into earning your money, paying taxes might be uncomfortable. However, you can access various financial tools to invest, lower your tax liability, and retain a larger portion of your earnings.

This blog will explain the various tax-saving options and how they work.

Best Tax Saving Instruments in India

It is an investment product carefully chosen to lower the investor’s tax obligations. By investing in these tax-saving strategies, you can reduce the amount of tax you owe by reducing your taxable income.

There are numerous ways to save taxes, a few of which are included below:

1. Equity Linked Savings Scheme (ELSS)

You can deduct up to 1.5 lakhs from your taxes under Section 80C when investing in mutual funds under the ELSS category. Since the fund manager must allocate at least 80% of total assets to equity-related instruments, the returns offered by this type of mutual fund depend on the market. There is a three year lock-in period on this scheme. You can invest a minimum of INR 500 in this category.

2. Public Provident Fund (PPF)

One of the most popular tax-saving options for investors is PPF. It has a statutory lock-in duration of 15 years and is backed by the Indian government. The government announces the interest rate investors would earn on this product every quarter. This rate is fixed for the duration of the quarter. Investors have less liquidity because of the required lock-in time.

3. Senior Citizen Savings Scheme (SCSS)

The post office offers this product for elderly persons (those over 60) or retired. Under Section 80C, tax benefits are up to 1.5 lakh INR. An elderly person may invest a maximum of INR 30 lakh. The central government sets the interest rate that must be paid on it. Interest received under this plan is subject to taxation based on the taxpayer’s applicable slab.

4. Sukanya Samriddhi Account

This program aims to improve the welfare of Indian girls. It is especially popular with people who want to ensure their daughter’s financial future, as this scheme is backed by the government. Under this program, guardians may open accounts in the names of minor females under the age of ten. A family may open up to two accounts. The government modifies the interest rate under this program every quarter.

5. Tax Saver Fixed Deposit

Banks offer Tax-saving fixed deposits and provide benefits under Section 80C, and investors can claim tax deductions up to 1.5 Lakhs under this investment option. This product comes with a mandatory lock-in period of 5 years. The interest earned can be taxed per the investor’s tax slab.

6. National Pension Scheme (NPS)

NPS is a defined benefit plan supported by the Indian government and overseen by the Pension Fund Regulatory and Development Authority (PFRDA). Under this approach, a person can open Tier 1 and Tier 2 accounts. However, only contributions made through a Tier 1 account are eligible for the Section 80C tax deduction. In addition, there is a 50000 INR extra deduction available under Section 80CCD(1B).

7. Unit Link Insurance Plan (ULIP)

This investment product gives you the advantage of investment returns and life insurance coverage in a single product. Part of the premium will go towards providing life insurance coverage and the remainder will be invested in market-linked securities. Usually, this product has a five year lock-in period. The investor can select the fund that best suits their risk tolerance.

8. Life Insurance

A Section 80C tax deduction is available for paying insurance premiums to cover an individual’s life. In the sad event of the policyholder’s death, life insurance offers financial protection to the individual because the sum assured would be paid to the nominee. The death benefit earned under this insurance product is tax-exempt under Section 10(10D).

9. National Savings Certificates (NSC)

The Indian government is making this investment scheme available through post offices nationwide. The Indian government also sets the interest rate under this, compounded annually and due at maturity. Under this initiative, a minimum investment of INR 1000 can be made. It has a five year lock-in period. It is popular among investors who cannot afford to take financial risks because it is supported by the Indian government.

10. Capital Guaranteed Plan

It’s an investing plan that provides both money preservation and growth. Investors might benefit from this product by knowing their capital will be shielded from market fluctuations. This is a low-risk investing alternative. You may deduct the amount of your investment from taxes under Section 80C.

Differences Between Various Tax Saving Instruments

Product	Returns	Lock in (Period)
Equity Linked Saving Scheme (ELSS)	Market-oriented	3 Years
Unit Linked Insurance Plan (ULIP)	Market-oriented	5 Years
Public Provident Fund (PPF)	Fixed interest (Decided by the government)	15 Years
Senior Citizen Savings Scheme (SCSS)	Fixed interest (Decided by the government)	5 Years
Sukanya Samridhi Yojna	Fixed Interest (Decided by Government)	21 Years
National Pension Scheme (NPS)	Market Linked	Till 60 years of age.
Life Insurance	Fixed Sum Assured	Depends on Scheme
National Savings Certificate (NSC)	Fixed Interest Rate (Decided by Government)	5 Years
Fixed Deposit	Fixed Interest (Decided by financial institution)	5 Years
Capital Guaranteed Plan	Market Linked	5 Years

Which Product Should an Investor Choose?

The market offers a wide range of investment possibilities to save taxes under Section 80C; however, all investment products that provide a tax benefit have a mandatory lock-in term, which reduces the investor’s liquidity. Because every product has advantages and disadvantages, an investor’s risk tolerance and investing objectives are the primary determinants of choosing the best investment.

Conclusion

Finally, you are aware of the several types of tax-saving options. Since each instrument has unique characteristics, the optimal choice will rely on the investor’s investment goal and risk tolerance. However, you should speak with your tax counselor before choosing one.

Frequently Asked Questions (FAQs)

What is the maximum deduction I can get under Section 80C?
150000 is the maximum deduction one can claim under Section 80C.
Can I invest in multiple tax-saving instruments in a financial year?
Yes, you can invest in multiple tax savings instruments in a financial year, but you can claim a maximum deduction of INR 150000 in a financial year under Section 80C.
How does Section 80C help us in saving tax?
Various financial instruments are available under Section 80C for investing purposes, allowing you to claim annual deductions of up to 1.5 lakhs.
Which tax-saving instrument has a minimum lock-in period?
Equity-linked savings schemes have the lowest lock-in period of 3 years.
What is the mandatory lock-in period for public provident funds?
The mandatory lock-in period for public provident funds is 15 years.

June 20, 2024

What is Pledging of Shares?

At one point or another, we may find ourselves in a situation where we require a certain amount of capital. A common solution to this is borrowing a loan by pledging an asset for the monetary requirement.

Property, home, car, deposits, etc., are the most popular collateral options for getting a loan. But have you heard about pledging shares? Yes, you heard it right; most investors and promoters use this practice to collect funds. Let us learn more about its regulatory implications, requirements, advantages, and disadvantages.

What is Pledging of Shares?

Share Pledging is an agreement in which one uses existing shareholdings as collateral to raise funds for one’s investing needs for a specified period. In this process, a shareholder (the pledgor) uses their shares as security credit, also called collateral margin, to borrow against them.

The pledged stocks don’t leave the borrower’s demat account during the tenure of the borrowing. Instead, a pledge is marked on behalf of the broker under a separate demat account labelled ‘TMCM – Client Securities Margin Pledge Account’ for this purpose (TMCM stands for Trading Member Clearing Member). The broker then re-pledges these securities in favour of the Clearing Corporation and obtains margins.

If the pledgor fails to meet the loan obligations, the pledgee has the right to sell the pledged shares to recover the outstanding amount.

How Much Amount Can One Borrow Against the Shares?

Knowing that the value of shares is volatile, it is obvious to get the question of the amount of funds one can raise by putting the shares as collateral. Fluctuations in the market value of pledged shares affect the collateral’s value. Investors must ensure the collateral value meets the minimum agreed upon in the contract. When the shares’ value drops below the minimum level, the borrower must provide more shares or pay cash to cover the shortfall.

According to RBI regulations, a loan-to-value (LTV) ratio of 50% must always be maintained when lending based on a stock pledge.

First, shareholders or promoters approach a financial institution to express their intent to pledge their shares to get a loan. To determine the loan amount, the lender assesses the shares’ quality, liquidity, and volatility.
Upon approval, both parties enter into a formal pledge agreement. This document has details of the terms and conditions, including the loan amount, interest rate, tenure, and conditions under which the lender can sell the shares.
Lenders typically do not provide loans equal to the full value of the pledged shares. They apply a margin, popularly known as a “haircut“, which is a percentage reduction from the market value of the shares. It serves as a buffer in case the stock price drops.
Once the loan is repaid, the investor can request the lender to release the pledge, regaining complete control over their shares.
If the borrower defaults or the share price falls below a certain threshold, the lender can sell the pledged shares in the open market to recover their dues.

Imagine a public company, XYZ Industries. You have 1,000 shares of this company worth ₹50,000. The share has been constantly performing well, and you don’t want to sell it. However, you need ₹40,000 for your new project.

You approach a financial institution and pledge 1,000 of your shares (worth ₹50,000) to get a loan of ₹40,000. The bank agrees to lend you ₹40,000, but they keep all 1,000 shares as security.

Who Can Pledge Shares?

Promoters are typically the founders or the company’s primary owners who have a significant stake in it. They often pledge shares to raise capital for business expansion and personal needs or to finance new projects without diluting their ownership in the company.
Institutional Investors include entities like mutual funds, insurance companies, and pension funds that hold large shares in various companies. They can pledge shares to raise short-term liquidity or to leverage their investment positions.
Individual Shareholders who own company shares, not necessarily in large quantities. Individual shareholders can pledge shares to meet financial needs.
Companies that hold shares of other companies as part of their investment portfolio. Companies might pledge these shares to raise funds for working capital, debt repayment, or strategic investments.

The following are some benefits of Share Pledging:

Share pledging allows shareholders to access funds without selling their shares, which is useful for personal or business financial needs.
Shareholders retain ownership and voting rights by pledging shares instead of selling them.
Shareholders can leverage their holdings to obtain loans for further investment or expansion, potentially enhancing returns.
Pledged shares can be released once the loan is repaid, offering a flexible financing option without permanent loss of ownership.

The following are some limitations of Share Pledging:

If the borrower fails to repay the loan, the lender can sell the pledged shares, resulting in a loss of control.
The value of pledged shares is subject to market fluctuations, which can lead to additional collateral demands or share sales by the lender if prices drop significantly.
Loans obtained through share pledging come with high interest and fees.

Conclusion

Following a structured approach, pledging shares is viable for stakeholders seeking liquidity without selling their holdings. While keeping shares as collateral, one has to pay an interest rate on the loan. Thus, getting good shareholding returns will be a good option to mitigate this interest expense. Understanding share market indicators and trends is essential to making an informed decision.

Frequently Asked Questions (FAQs)

How does share pledging impact the voting rights of shareholders?
While pledged shares usually retain voting rights, lenders may impose conditions restricting the pledger’s ability to vote on certain critical issues to protect their interests.
What is the limitation of pledging shares?
If the borrower fails to repay the loan, the lender can sell the pledged shares, resulting in a loss of control.
How does pledging shares affect the investor’s ability to raise future capital?
Pledging a substantial number of shares can signal financial instability, potentially making it more difficult for the investor to raise future capital.
Are there any tax implications for pledging shares?
The act of pledging shares does not have direct tax implications, but any income generated from the loan or interest payments may have tax consequences, depending on applicable tax laws.
Does share pledging influence the company’s corporate governance practices?
Extensive share pledging by promoters can raise concerns about corporate governance, especially regarding transparency, risk management practices, and aligning management’s interests with those of minority shareholders.

June 19, 2024

Category: Personal Finance

What is Capital Gains?

Types of Capital Gains

Capital Gains Tax rates on different assets in India

Capital Gains Tax Calculation

1. Shares held for long term (More than a year)

2. Shares held for short term (Less than a year)

Exemptions Under Capital Gains

Conclusion

Frequently Asked Questions (FAQs)

Are capital gains taxable in India?

What are the two types of capital gains taxes?

Is it better to hold the asset for the long term rather than the short term?

How to avoid taxes on LTCG?

What is the exemption amount for profits earned on selling listed shares?

KYC Regulations Overview

Changes in KYC Regulations by SEBI

Documents

Overview of Updated Regulations

Updated List of Permissible Documents

How to Check KYC Status Online?

Explanation of Various KYC Status

Validated KYC Status

Registered/Verified KYC Status

KYC on Hold Status

Conclusion

Frequently Asked Questions (FAQs)

Is KYC mandatory for investing in mutual funds?

What documents are needed for KYC?

What will happen if my KYC status is on hold?

How can I complete my KYC?

Can I still use my bank statement or utility bills for KYC?

What is Behavioral Finance?

Evolution of Behavioral Finance

Role of Psychology in Behavioral Finance

Biases in Behavioral Finance

Impact of Behavioral Finance

On Individuals

On Market

Conclusion

Frequently Asked Questions (FAQs)

What is Behavioral Finance?

How do emotions affect investing?

How can I be a more mindful investor?

Is there a way to overcome biases?

Does behavioral finance replace traditional finance?

What is National Pension Scheme

Features of NPS

Types of NPS Accounts

Tier 1 Account

Tier 2 Account

The Asset class of NPS

Choice of Asset class in NPS.

Tax Benefits of NPS

Pension Funds under NPS

Eligibility for NPS

Why is NPS a good retirement choice?

How to Check the Balance in an NPS Account?

Conclusion

Frequently Asked Questions (FAQs)

Do I earn fixed returns on NPS?

Who Is Not Eligible For NPS?

What is the rate of return of NPS?

What is the NPS lock-in period for the Tier I Account?

Can I invest in NPS without a job?

What are the disadvantages of NPS?

Can I change my pension fund manager in NPS?

What is a PRAN in NPS?

What is Inflation?

Types of Inflation

Causes of Inflation

Measures to Control Inflation

Monetary Measures

Fiscal Measures

Other Measures

Cases of High Inflations in India

Risks of High Inflation

Cases of Low Inflations in India

Cons of Low Inflation

Conclusion