Category: Personal Finance

Budget 2024: Explainer On Changes In SIP Taxation

The Mutual fund industry of India is currently valued at $0.66 trillion and is expected to grow to $1.61 trillion by 2029 in terms of assets under management (AUM). Investors are offered two modes of investment in mutual funds: Lumpsum and SIP. The calculation of taxes payable on lump sum investments is pretty straightforward, but what about SIP investments, which are a more popular way of investing among the general public?

In this blog, we will discuss the changes in STCG and LTCG tax introduced in the Budget 2024, process of calculating taxes on SIP and the impact of tax rate changes.

What is Capital Gains Tax?

It is a tax applicable to the profits earned from the sale of a capital asset. When you sell an asset at a price higher than initial buying price, you earn capital gains. In case of mutual funds, allotment is done based on the NAV.

For example – You bought one unit of a mutual fund having NAV of 100. Your total buying was 1*100 = INR 100. Now, after some time, you sold this one unit at 150. So, you earned 50*1= INR 50, i.e., capital gains.

It can be of two types based on the holding period of the asset:

Long term capital gains tax is the tax applicable to the profits earned upon selling the asset after a certain time period.
Short term capital gains tax is the tax applicable to the profits earned upon selling the asset before a certain period of time.

The time period for equity or equity oriented mutual funds is one year, which means STCG will apply if the holding period is less than a year and LTCG if the holding period exceeds one year. Keep in mind that the time period for distinction between long term and short term varies for different assets. However, in this blog we will only deal with equity mutual funds for easy understanding.

BUDGET 2024 Update

Currently, in LTCG in equity, there is no tax till the income of one lakh; post this limit, a 10% tax is applicable without indexation benefit. In the case of STCG, there is a flat 15% tax on gains without indexation benefit.

The budget introduced by the Government of India proposed the following changes:

LTCG for equity and equity-related instruments has been hiked from 10% to 12.5% and exemption limit has also been raised from INR 1,00,000 to INR 1,25,000

STCG for equity and equity-related instruments has been hiked from 15% to 20%

How Will the SIPs Be Taxed?

SIP or Systematic Investment Plan is a type of investment plan in which an investor invests small amounts periodically instead of a lump sum investment. Each installment of a SIP is considered as a separate investment for tax purposes due to which the holding period of each installment will be different from one another. Let’s understand how the SIPs will be taxed with the help of an example.

Suppose Rohan started a monthly SIP of INR 1,00,000 in an equity mutual fund for 2 years, starting from 1 Aug 2024 till 1 July 2026. On 1 Aug 2024, with an SIP amount of 1,00,000 he purchased 1,000 units with an NAV of 100 (1,00,000 INR /100 NAV = 1,000 units). With each SIP, he accumulated certain units of the mutual fund.

So, after 24 months, i.e. 1 July 2026, his total value of the portfolio is app. INR 30 lakhs (investment amount = 24 lakhs, profit = 6 lakhs). Now, on 2 July 2026, he wants to sell the entire mutual fund units with an NAV of 142.

Remember that, for calculation of capital gains, we use the First-in First-out (FIFO) method, i.e., the units which are purchased first assume to be sold first. As installments were invested at different points in time, we need to separate LTCG and STCG. The gains earned during the first 12 months will be termed as long term capital gains as one year is completed and gains earned in the last 12 months will be termed as short term capital gains because they are redeemed before completing one year.

Have a look at the table below:

Sl. No.	Date	SIP Amount	NAV	Units	Capital Gain	Holding Period (Months)	STCG	LTCG
1	01-Aug-24	1,00,000	100	1,000	42,000	23	–	42,000
2	01-Sep-24	1,00,000	105	952	35,238	22	–	35,238
3	01-Oct-24	1,00,000	98	1,020	44,898	21	–	44,898
4	01-Nov-24	1,00,000	106	943	33,962	20	–	33,962
5	01-Dec-24	1,00,000	103	971	37,864	19	–	37,864
6	01-Jan-25	1,00,000	105	952	35,238	18	–	35,238
7	01-Feb-25	1,00,000	109	917	30,275	17	–	30,275
8	01-Mar-25	1,00,000	107	935	32,710	16	–	32,710
9	01-Apr-25	1,00,000	111	901	27,928	15	–	27,928
10	01-May-25	1,00,000	104	962	36,538	14	–	36,538
11	01-Jun-25	1,00,000	112	893	26,786	13	–	26,786
12	01-Jul-25	1,00,000	107	935	32,710	12	–	32,710
13	01-Aug-25	1,00,000	99	1,010	43,434	11	43,434	–
14	01-Sep-25	1,00,000	108	928	31,725	10	31,725	–
15	01-Oct-25	1,00,000	118	847	20,339	9	20,339	–
16	01-Nov-25	1,00,000	119	840	19,328	8	19,328	–
17	01-Dec-25	1,00,000	121	826	17,355	7	17,355	–
18	01-Jan-26	1,00,000	124	806	14,516	6	14,516	–
19	01-Feb-26	1,00,000	134	746	5,970	5	5,970	–
20	01-Mar-26	1,00,000	132	758	7,576	4	7,576	–
21	01-Apr-26	1,00,000	127	787	11,811	3	11,811	–
22	01-May-26	1,00,000	135	741	5,185	2	5,185	–
23	01-Jun-26	1,00,000	135	741	5,185	1	5,185	–
24	01-Jul-26	1,00,000	140	714	1,426	0	1,426	–
	Total	24,00,000		21,127	6,00,000		1,83,852	4,16,148

He sold the entire holding with an applicable NAV of 142 on 2 July 2026, which earned him INR 6 lakhs as capital gains. Here,

Short term capital gains = INR 1,83,852
Long term capital gains = INR 4,16,148

Tax Calculation

Now, we will calculate the tax on the capital gains made by him.

Based on tax rates before Budget 2024:

LTCG after deduction = INR 4,16,148 – INR 1,00,000 = INR 3,16,148

LTCG tax rate = 10%

LTCG taxes = 10% * 3,16,148 = INR 31,615

STCG tax rate = 15%

STCG taxes = 15% of 1,83,852 = INR 27,578

Total taxes payable = INR 31,615 + INR 27,578 = INR 59,193

Based on tax rates proposed in Budget 2024:

LTCG after deduction = INR 4,16,148 – INR 1,25,000 = INR 2,91,148

LTCG tax rate = 12.5%

LTCG taxes = 12.5% * 2,91,148 = INR 36,394.

STCG tax rate = 20%

STCG taxes = 20% of 1,83,852 = INR 36,770.

Total taxes payable = INR 36,394 + INR 36,770 = INR 73,164

Particulars	Tax payable as per earlier rates	Tax payable as per new rates	Difference
STCG Tax	27,578	36,770	9,192
LTCG Tax	31,615	36,394	4,779
Total Tax Liability	59,913	73,164	13,251

From the above example, it is clearly visible that Rohan incurs a greater income tax liability due to the hike in capital gains tax rate introduced in Budget 2024.

Conclusion

Many new investors prefer starting their mutual fund journey through a Systematic Investment Plan (SIP) as it is the most popular investment method in equity mutual funds. However, understanding the taxation of returns earned is crucial.

The Budget 2024 has introduced changes to capital gains tax rates, resulting in higher tax liabilities for investors. It is important to understand the impact of the recent hike in Short term capital gains (STCG) and Long term capital gains (LTCG) rates. It is recommended to get in touch with your tax advisor for more detailed insights and calculations.

Frequently Asked Questions (FAQs)

What are the changes introduced in Budget 2024 in relation to capital gains tax?
In Budget 2024, the LTCG tax has been hiked from 10% to 12.5% and STCG tax increased from 15% to 20%.
What are the two types of capital gains?
Long term capital gains (LTCG) and short term capital gains (STCG) are the two types of capital gains.
How much capital gains are tax-free?
As per the Budget 2024, in the case of LTCG in equity, there is no tax till the income of 1.25 lakhs; post this limit, a 12.5% tax is applicable without indexation benefit.
Is the amount of tax automatically deducted from the profit?
The tax is not automatically deducted, investors must compute their gain and pay tax at the time of filing income tax return.
How can an investor invest in mutual funds?
Investors can invest in mutual funds either through SIP route or lump sum investment.

August 1, 2024

Budget 2024: F&O Trading Gets More Expensive?

Futures & Options (F&O) trading is no walk in the park—it can take years to become profitable. And with various charges and taxes eating into your profits, it’s a bit of a negative sum game. Now, the Indian government has hiked the Securities Transaction Tax (STT) in the Union budget of 2024-25. But what exactly is STT, and what is the motive behind this increase?

In this blog, we will discuss the changes introduced in the Budget 2024-25 regarding the Securities & Transaction Taxes and explore what it means for traders.

What is Securities Transaction Tax (STT)?

Securities Transaction Tax (STT) is a form of direct tax charged on the buying and selling of securities listed on the stock exchanges, i.e. NSE and BSE in India. It increases the transaction cost for the market participants and reduces overall returns. It was introduced in 2004 by P. Chidambaram, former finance minister. It has the following features:

STT is calculated as a percentage of the transaction value.
The rate is different for different assets.
STT is a source of revenue for the government.
STT is collected by stock exchanges, i.e., NSE and BSE and then subsequently paid to the central government.

Did you know?

In 2013, brokers and trading members protested against the STT, and the government was forced to lower the taxation rate of STT.

Impact of STT

The STT significantly affects investors and traders in the following ways:

Transaction Cost – The imposed STT rate elevates the cost of trading, which ultimately reduces net profit, particularly for active traders who trade frequently.
Liquidity – As the STT increases trading costs and lowers profits, some traders might avoid the market and seek alternative investment options, affecting the overall market volume.
Investment Strategies – Taxes such as STT may influence investment strategies, prompting market participants to favor long-term investments over short-term trades.

Important updates from Budget 2024-25

The Budget 2024 introduced changes in Securities & Transaction Tax rates applicable to the F&O segment. Experts believe that the STT hike aims to discourage retail traders from engaging in speculative activity in the F&O segment. The changes introduced are:

STT applicable on the futures increased from 0.0125% to 0.02%
STT applicable on the options premium increased from 0.0625% to 0.1%

Impact of STT hike on F&O Traders

Let’s understand the impact of change in STT rates on Futures & Options (F&O) trading.

Impact on Futures

Let’s suppose a trader buys 5 lots (1 lot = 25 qty.) of Nifty futures at INR 24,000 and sells it for INR 24,050; then the calculation of STT will be:

As per previous STT rate: The previous STT rate for futures was 0.0125%, which was applicable on the sell side of the transaction. In the above example, the 5 lots of Nifty futures were sold for 24,050, and the STT for this transaction would be:

STT = 0.0125% * 24,050 * 25 * 5 = INR 375.78

As per revised STT rate: The new STT rate for futures is hiked from 0.0125% to 0.02%. Based on the changes introduced in Budget 2024-25, the STT on the transaction would be:

STT = 0.02% * 24,050 * 25 * 5 = INR 601.25

So, the increase in the STT rate has increased the tax liability and decreased the net profit.

Impact on Options

Suppose Nifty is trading at 24,000, and the trader sells 10 lots of call options with a strike price of 24,200 for a premium of INR 60.

– 1 Lot size of Nifty = 25

– Total premium received = 25*10*60 = INR 15,000

For Options, the STT will be calculated as a percentage of the option premium shorted by the trader or the intrinsic value of long options that are exercised. In our example, the trader has initiated a short position, so the calculation of STT is as follows:

As per previous STT rate: The previous STT rate for options was 0.0625%, applicable to the option premium received from the short positions.

STT = 0.0625% * 15,000 = INR 9.375

As per revised STT rate: The new STT rate for options is hiked from 0.0625% to 0.1%. Based on the changes introduced in Budget 2024, the STT would be:

STT = 0.1% * 15,000 = INR 15

From the above case, we can conclude that due to an increase in the STT rate, the trader is liable to pay more in taxes, and thus, returns are reduced.

Views of SEBI on the F&O Trading

The Securities and Exchange Board of India regulates the financial markets in India and aims to protect the interests of market participants, i.e. the investors and traders. In recent years, there has been a sharp rise in the participation of retailers in the F&O trading. In Q1 2024, 84% of all equity options traded globally were on Indian exchanges, i.e., the NSE and BSE, up from just 15% a decade ago.

According to a study conducted by the SEBI in 2023, 9 out of 10 retail traders lose money in the F&O trading of equity segment with an average loss of INR 50,000. The worst part is the majority of these losses are incurred by those who cannot afford to lose. Now, the SEBI is worried about this and is looking to curb the speculation activity happening in the F&O segment.

In order to protect retail traders, the SEBI formed an expert panel led by G Padmanabhan, former Reserve Bank of India Executive Director. Some of the measures suggested are:

Proposal to increase the minimum lot size from INR 5 lakh to INR 25 lakh.
Increase in upfront margin requirements.
Increased monitoring of intraday position limits.
Decreasing the number of strike prices for option contracts.
Limiting weekly options to one expiry per exchange per week.

The expert panel has presented the above measures, and the SEBI is quite serious regarding this and may come up with a consultation paper in the coming months.

Read Also: What To Expect In The Budget 2024?

Conclusion

Securities Transaction Tax (STT) is one of the taxes imposed based on the transaction value of securities. It reduces the net return for the market participants, i.e., Traders and Investors.

In Budget 2024-25, the STT rates for the F&O segment have been increased from 0.0125% to 0.02% for futures and from 0.0625% to 0.1% for options premium. This hike is anticipated to affect market behaviour significantly. Experts suggest that the aim of this increase is to curb speculative trading in the F&O segment.

Frequently Asked Questions (FAQs)

What is STT?
The Securities Transaction Tax (STT) is a form of direct tax charged on the buying and selling of securities. It is levied as a percentage of the transaction value.
What are the changes introduced in Budget 2024-25 related to STT?
The STT was hiked for both futures and options segment. For futures, the STT has been increased from 0.0125% to 0.02%, and for the options premium, the STT has been increased from 0.0625% to 0.1%.
When was STT introduced in India?
In India, the Securities Transaction Tax (STT) was introduced in 2004 by Finance Minister P. Chidambaram.
Why is SEBI worried about rise of retail participation in the F&O segment?
According to a study conducted by the SEBI in 2023, 9 out of 10 individual traders lose money in equity F&O trading, and the concerning part is most of the losses occur by those who can’t afford to lose. This is why the SEBI aims to reduce retail participation in the F&O segment.
Who regulates financial markets in India?
The Securities and Exchange Board of India (SEBI) regulates the financial markets in India.

July 25, 2024

Budget 2024-25: How Will New Tax Slabs Benefit The Middle Class?

The Government of India introduced the Union budget for the 2024-25 on July 23, 2024. It was the first budget of the third term of the Modi Government. The budget featured a wide array of changes to achieve economic development targets.

For the middle class, some of the key features of the budget are introduction of new tax slabs under the new regime, hike in the standard deduction limit, etc.

In this blog, we will discuss the changes introduced in Budget 2024 for the general public, i.e., the new tax slabs and standard deduction.

What is Income Tax and the Slab Rates?

Income tax is the direct tax which is imposed on income or profits earned by individuals and corporations. It is a major source of revenue for the government; in fact, almost 19% of the govt. revenue comes from Income tax only in FY 23-24. This 19% covers Corporation Tax (CIT) and Personal Income Tax (PIT) including Securities Transaction Tax (STT).

India has a progressive income tax system, which means people with higher incomes pay more of their income in taxes. Income is divided into different slabs, each with a specific tax rate.

Additionally, India offers two tax regimes: the old tax regime and the new tax regime. The new regime offers a lower tax rate but comes with fewer deductions. An individual can choose the regime that best suits their situation.

In the union budget of 2024-25, the govt. has revised the tax slabs under the new tax regime. Keep in mind that there is no modification in slabs of the old tax regime. Let’s have a look at the existing slabs of new tax regime:

Income Tax Slab (in INR)	Income Tax Rate (%)
Up to 3,00,000	0
3,00,001 – 6,00,000	5%
6,00,001 – 9,00,000	10%
9,00,001 – 12,00,000	15%
12,00,001 – 15,00,000	20%
15,00,001 and above	30%

Slab Rates Proposed in Budget 2024-25

The income tax slab rates for the new tax regime proposed in Budget 2024-25 are:

Income Tax Slab (in INR)	Income Tax Rate (%)
Up to 3,00,000	0
3,00,001 – 7,00,000	5%
7,00,001 – 10,00,000	10%
10,00,001 – 12,00,000	15%
12,00,001 – 15,00,000	20%
15,00,001 and above	30%

Did you know?

Finance Minister Nirmala Sitharaman made history on 23 July 2024, by presenting her seventh consecutive budget—six annual budgets and one interim budget. No other finance minister in India’s history has reached this milestone. This achievement surpasses the previous record held by former Finance Minister Morarji Desai, who presented six budgets in a row.

What is Standard Deduction?

In the Income Tax Act, we have certain exemptions and deductions to reduce our tax liability. Deductions are provisions that allow an individual to reduce his/her income and, thus, reduce the tax liability.

Standard deduction is one of the most popular deductions claimed by individuals. It is a flat deduction that an individual can subtract from the total salary or pension received in a given financial year. Remember that the standard deduction is not available for business income.

An important change regarding the standard deduction under the new tax regime was announced in the Budget 2024-25. The limit was hiked from INR 50,000 to INR 75,000. Similarly, for family pensioners, the deduction has been increased from INR 15,000 to INR 25,000.

How Much Tax Can You Save?

Now the main question arrives: how much can an individual actually save because of the above-mentioned changes? Let’s have an analysis on this.

We will calculate the income tax based on the new slab rates and the slab rates prior to the Budget 2024-25. Suppose Raman works in an MNC and earns INR 13,50,000 from salary in a given financial year. Considering he has no other source of income, let’s calculate his tax liability based on existing and revised slab rates of new tax regime:

Based on the existing slab rates (prior to Budget 2024-25)

Salaried Income = INR 13,50,000

Net Income after standard deduction of INR 50,000 = INR 13,00,000

Tax Calculation

Slab (INR)	Income Tax Rate	Income Tax (INR)
Up to 3,00,000	0%	0
3,00,001 to 6,00,000	5%	15,000
6,00,001 to 9,00,000	10%	30,000
9,00,001 to 12,00,000	15%	45,000
12,00,001 to 13,00,000	20%	20,000

Total tax payable as per the existing slabs of new tax regime is INR 1,10,000.

Based on New Slab Rates (announced in Budget 2024-25)

Salaried Income = INR 13,50,000

Income after Standard Deduction of INR 75,000 = INR 12,75,000

Tax Calculation

Slab (INR)	Income Tax Rate	Income Tax (INR)
Up to 3,00,000	0%	0
3,00,001 to 7,00,000	5%	20,000
7,00,001 to 10,00,000	10%	30,000
10,00,001 to 12,00,000	15%	30,000
12,00,001 to 12,75,000	20%	15,000

Total tax payable as per latest slabs of the new tax regime is INR 95,000.

So, in our example, if an individual is earning INR 13.5 lakhs from salary, then he or she can save INR 15,000 in taxes based on the revised tax slabs under new tax regime.

Conclusion

In summation, the tax slab rate changes for new tax regime introduced in Budget 2024, along with an increase in the standard deduction, will result in increased tax savings for the middle class. The reduced tax liability will result in a rise in disposable income, resulting in an increase in consumption and ultimately end up in boosting the growth of the Indian economy.

However, you must be wondering why the government has announced these changes. If people pay less tax, doesn’t that mean the government earns less? The answer to this is not that simple. There are a few changes announced in the Budget 2024-25 which are not beneficial for the general public. For example, there’s an increase in the Short-Term and Long-Term Capital Gains tax rates, removal of the indexation benefit for real estate, etc. We’ll discuss these changes in more detail in another blog.

Frequently Asked Questions (FAQs)

What is Income Tax?
Income tax is the tax imposed on the income or profits earned by individuals and businesses. It is a direct tax and a major source of revenue for the government.
What is standard deduction?
A standard deduction is a flat deduction that an individual can subtract from the total salary or pension earned in a given financial year.
In which regime are the changes introduced in Budget 24-25?
The govt. introduced changes in slab rates of the new tax regime in the Union budget of 2024-25.
What are the changes introduced with respect to the standard deduction in Budget 2024-25?
The standard deduction has been hiked from INR 50,000 to INR 75,000 for salaried individuals and from INR 15,000 to INR 25,000 for family pensioners.
What will be the impact of increased standard deduction for the middle class?
An increase in the standard deduction will result in higher tax savings and higher disposable income.

July 25, 2024

Semiconductor Industry in India

The tiny chips in electronic devices that often go unnoticed are an important part of the contemporary world. Semiconductors are the powerful brains that drive everything from the smartphones in our pockets to the ground-breaking artificial intelligence revolutionizing several industries. With India’s increasing prominence in the global semiconductor industry, it is important to know the steps taken by the Government of India to make India a global hub of the semiconductor industry.

In today’s blog, we will explore the semiconductor industry in India, the India Semiconductor mission, factors that favor the semiconductor industry, and its future outlook.

Overview of the Semiconductor Industry in India

The Indian semiconductor market is experiencing strong growth and is expected to grow at 17.10% CAGR between 2024 and 2028 due to its growing population, rising disposable incomes, etc. India aims to become a global leader in the semiconductor industry, with its domestic semiconductor consumption projected to exceed $80 billion by 2028. This industry is fiercely competitive, with major players from countries like the United States, China, South Korea, and Taiwan dominating the market.

The Indian Government wants to boost the semiconductor industry with the ‘Make in India’ campaign and has also announced plans to establish semiconductor fabrication plants in the country.

India Semiconductor Mission (ISM)

Indian Semiconductor Mission is a specialized and independent business division of Digital India Corporation (DIC). The aim of the mission is to make India self-reliant in terms of semiconductors.

The mission received an allocation of INR 76,000 crore for the establishment of three semiconductor units. The approved three semiconductor units are:

Semiconductor Fabrication plant: Tata Electronics Private Limited (“TEPL”) will collaborate with Powerchip Semiconductor Manufacturing Corp (PSMC), Taiwan, to set up a semiconductor fabrication unit in Gujarat. PSMC is well known for its logic and memory foundry segments and has six semiconductor foundries in Taiwan. The fabrication plant will have a capacity of 50,000 wafer starts per month (WSPM).

Semiconductor ATMP unit in Assam: Tata Semiconductor Assembly and Test Pvt Ltd. (“TSAT”) will set up a semiconductor ATMP (Assembly, Test, Marking and Packaging) unit in Assam. The unit is developing indigenous advanced semiconductor packaging technologies and will have a capacity of 48 million semiconductor chips per day.
Semiconductor ATMP unit for specialized chips: CG Power will partner with Renesas Electronics Corporation, Japan, and Stars Microelectronics, Thailand, to set up a semiconductor unit in Gujarat. Renesas is a market leader in developing specialized chips and operates 12 semiconductor facilities. The unit will have a capacity of 15 million semiconductor chips per day.

The chips developed in the above three units will have applications in various industries, such as electric vehicles, consumer electronics, mobile phones, etc. Moreover, these units will generate 20,000 direct jobs and about 60,000 indirect jobs.

Favorable Factors for the Semiconductor Industry in India

There are numerous factors that will help India to become a global leader in the semiconductor industry. Some of these factors are:

Skilled Workforce: India has a large workforce in the fields of Science, Technology, Engineering, and Mathematics (STEM), which is required for semiconductor design, manufacturing, etc.
Cost Advantage: Companies are investing in India due to the lower cost of production. Moreover, the location of India is also a benefit as it is close to major semiconductor markets in Asia, which reduces transportation costs.
Global supply chain diversification: Until now, the semiconductor industry has been concentrated in a few countries, which makes the industry prone to concentration risk and can result in supply shocks. The development of the semiconductor industry in India will reduce the concentration risk.
Government support: The government of India has launched ISM and has introduced favorable policies.

Future Outlook of Semiconductor Industry

The future of the semiconductor industry looks bright due to the following reasons:

The demand for semiconductors in AI and ML applications is projected to experience substantial growth.
IoT (Internet of Things) devices, including smartphones, industrial automation, and healthcare, will boost demand for semiconductors.
The rollout of 5G networks is fuelling the need for advanced semiconductors in mobile devices, base stations, and IoT applications.
The growth of renewable energy sources, such as solar and wind power, will drive the demand for semiconductors used in energy conversion and storage systems.

Conclusion

To summarize, the semiconductor industry has a lot of growth potential and is an exciting and dynamic space. The Government of India has identified this opportunity and launched the India Semiconductor Mission to make India a semiconductor hub in the future. Many foreign companies have partnered with Indian firms to set up facilities in India. Moreover, factors such as lower cost of production, skilled workforce, strategic location, and favorable government policies will help the semiconductor industry grow in India.

Frequently Asked Questions (FAQs)

What are Semiconductors?
A semiconductor is a material with electrical conductivity ranging between that of an insulator and a conductor and has unique electronic properties.
What are the favorable factors for the semiconductor industry in India?
Lower cost of production, skilled workforce, and government support are a few factors that support the growth of the semiconductor industry in India.
What is ISM?
ISM refers to the India Semiconductor Mission, which was launched by the Government of India.
What is the expected growth rate of the semiconductor industry in India?
The Indian semiconductor industry is expected to grow at a CAGR of 17.10% between 2024 and 2028.
Which foreign companies are collaborating with Indian firms to establish semiconductor units in India?
Powerchip Semiconductor Manufacturing Corp (PSMC), Renesas Electronics Corporation, and Stars Microelectronics are a few prominent companies collaborating with Indian firms to establish semiconductor manufacturing facilities.

July 23, 2024

What is National Company Law Tribunal?

When there is a dispute between two people, they appear in court and lay out their case. The judge passes a judgment based on the law. However, have you ever considered what a corporation would do if there were a dispute with another corporation? The National Company Law Tribunal (NCLT) has been established to settle disputes between companies.

In this blog, we will explore NCLT in detail and understand its functions.

What is NCLT?

The Companies Act of 2013 established the National Company Law Tribunal, or NCLT, as a special court to handle business-related disputes. NCLT doesn’t handle criminal cases for violations of the Companies Act. The NCLT has several benches around the nation and, thus, provides a simpler way for corporations to resolve their problems.

The Justice Eradi Committee recommended the creation of the National Corporate Law Tribunal as a quasi-judicial entity to handle insolvencies and malpractices of Indian companies. The tribunal was established on 1 June 2016 under Section 408 of the Companies Act, 2013.

Objective of NCLT

NCLT plays an important role in protecting the rights of all stakeholders and aims to achieve the following objectives:

Its primary goal is to resolve disputes involving companies through its numerous benches across India.
NCLT assists businesses in streamlining their insolvency procedures.
NCLT protects the rights of all stakeholders and promotes a business-friendly environment.
It ensures restructuring processes follow the regulations and are in the interest of stakeholders.

Functions of NCLT

The major tasks performed by NCLT are as follows:

Registration of Companies: The NCLT is authorized to settle disputes about company registration. It has the authority to cancel a company’s registration at any moment and hold members accountable for not meeting legal requirements.
Class action: It prevents companies from engaging in activities outside the Memorandum of Association (MOA) and Article of Association (AOA). A class action can be filed against both private and public companies.
Transfer of Shares: The NCLT handles complaints about company shares and securities transfers. NCLT intervenes if a company refuses to transfer securities.
Deposits: Since the NCLT was established, they have handled all deposit-related matters. Disgruntled depositors now have the option to sue the corporation and seek compensation for any acts that affect their rights as depositors.
Investigation: Based on the application of 100 members, the NCLT has the complete authority to look into any matter about the corporation. An individual can also convince NCLT to look into the matter even if they have no connection to the business. An investigation can be launched in India or around the globe.
Asset Freezing: According to section 221 of the Companies Act of 2013, the NCLT is authorized to freeze the company’s assets and can initiate investigations.
Conversion of Company’s Status: Sections 13 to 18 of the Indian Companies Act 2013 state that a company may only change from a public limited company to a private limited company after the NCLT’s approval. In addition, section 459 of the Companies Act 2013 permits the NCLT to impose further requirements.

Benches of NCLT

The NCLT operates across India through its various benches –

National Company Law Tribunal (NCLT) Benches	Jurisdiction
NCLT Ahmedabad Bench	State of GujaratUnion Territory of Daman and DiuUnion Territory of Dadra and Nagar Haveli
NCLT Allahabad Bench	State of Uttar PradeshState of Uttarakhand
NCLT Amaravati Bench	State of Andhra Pradesh
NCLT Bengaluru Bench	State of Karnataka
NCLT Chandigarh Bench	State of HaryanaState of PunjabState of Jammu and KashmirState of Himachal PradeshUnion Territory of Chandigarh
NCLT Chennai Bench	State of Tamil NaduUnion Territory of Puducherry
NCLT Cuttack Bench	State of OdishaState of Chhattisgarh
NCLT Delhi Bench	Union Territory of Delhi
NCLT Principal Bench	Union Territory of Delhi
NCLT Guwahati Bench	State of Arunachal PradeshState of AssamState of ManipurState of MizoramState of MeghalayaState of NagalandState of SikkimState of Tripura
NCLT Hyderabad Bench	State of Telangana
NCLT Indore Bench	State of Madhya Pradesh
NCLT Jaipur Branch	State of Rajasthan
NCLT Kochi Bench	State of KeralaUnion Territory of Lakshadweep
NCLT Kolkata Branch	State of West BengalState of BiharState of JharkhandUnion Territory of Andaman and Nicobar Islands
NCLT Mumbai Bench	State of GoaState of Maharashtra

Advantages of NCLT

The advantages of NCLT are as follows:

It serves as a specialized court for corporate disputes, which results in quick resolution of the disputes.
NCLT consists of judicial and technical members to give a fair judgment on the dispute.
It has multiple branches and helps reduce the time to resolve disputes.
NCLT encourages better corporate governance and protects stakeholder’s interests.

Conclusion

In conclusion, the National Company Law Tribunal was established on 1 June 2016 to settle business-related conflicts like insolvency and other corporate concerns. It has various branches across the country, resulting in quick dispute resolution. It helps businesses by giving them a better working environment and also safeguards the interests of the stakeholders. However, the decisions of NCLT can be challenged in the National Company Law Appellate Tribunal, which can be further appealed in the Supreme Court of India.

Frequently Asked Questions (FAQs)

What is NCLT?
National Company Law Tribunal, or NCLT, is a specialized court that handles various company-related disputes.
What does NCLT stand for in financial terms?
NCLT refers to the “National Company Law Tribunal”.
Where is the headquarters of NCLT?
Although the NCLT’s main office is in New Delhi, it has other benches all over India.
What is the difference between a court and a tribunal?
A court is a part of the conventional Indian judicial system and resolves criminal and civil cases. In contrast, a tribunal is regarded as an organization with the authority to function as a court on cases of special matters, such as issues linked to companies.
Can I file an appeal against the NCLT decision?
A challenge to any NCLT ruling may be made through the National Company Law Appellate Tribunal.
Who is the president of the National Company Law Tribunal?
Shri Ramalingam Sudhakar is the current president of the National Company Law Tribunal.

July 19, 2024

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

Category: Personal Finance

What is Capital Gains Tax?

BUDGET 2024 Update

How Will the SIPs Be Taxed?

Tax Calculation

Conclusion

Frequently Asked Questions (FAQs)

What are the changes introduced in Budget 2024 in relation to capital gains tax?

What are the two types of capital gains?

How much capital gains are tax-free?

Is the amount of tax automatically deducted from the profit?

How can an investor invest in mutual funds?

What is Securities Transaction Tax (STT)?

Impact of STT

Important updates from Budget 2024-25

Impact on Futures

Impact on Options

Views of SEBI on the F&O Trading

Conclusion

Frequently Asked Questions (FAQs)

What is STT?

What are the changes introduced in Budget 2024-25 related to STT?

When was STT introduced in India?

Why is SEBI worried about rise of retail participation in the F&O segment?

Who regulates financial markets in India?

What is Income Tax and the Slab Rates?

Slab Rates Proposed in Budget 2024-25

What is Standard Deduction?

How Much Tax Can You Save?

Conclusion

Frequently Asked Questions (FAQs)

What is Income Tax?

What is standard deduction?

In which regime are the changes introduced in Budget 24-25?

What are the changes introduced with respect to the standard deduction in Budget 2024-25?

What will be the impact of increased standard deduction for the middle class?

Overview of the Semiconductor Industry in India

India Semiconductor Mission (ISM)

Favorable Factors for the Semiconductor Industry in India

Future Outlook of Semiconductor Industry

Conclusion

Frequently Asked Questions (FAQs)

What are Semiconductors?

What are the favorable factors for the semiconductor industry in India?

What is ISM?

What is the expected growth rate of the semiconductor industry in India?

Which foreign companies are collaborating with Indian firms to establish semiconductor units in India?

What is NCLT?

Objective of NCLT

Functions of NCLT

Benches of NCLT

Advantages of NCLT

Conclusion

Frequently Asked Questions (FAQs)

What is NCLT?

What does NCLT stand for in financial terms?

Where is the headquarters of NCLT?

What is the difference between a court and a tribunal?

Can I file an appeal against the NCLT decision?

Who is the president of the National Company Law Tribunal?

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?