Category: Personal Finance

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

Difference Between TDS and TCS Explained with Examples

To improve tax compliance and ensure timely revenue collection, the government has implemented mechanisms like TDS (Tax Deducted at Source) and TCS (Tax Collected at Source). While both serve the broader purpose of collecting taxes at the source of income or transaction, they differ significantly in terms of process, rates, and applicability. However, many taxpayers often find it confusing to distinguish between the two.

In this blog, we will discuss TDS and TCS, usage and the main difference between the two are explained in detail.

TDS Full Form and Meaning

TDS i.e. Tax Deducted at Source is a tax deduction process in which tax is deducted for the government at the time of making payment to a person. Its purpose is to make tax collection timely and transparent. TDS is used when the amount of payment exceeds a fixed limit, such as salary, rent, interest or professional fees.

When and why is TDS deducted?

When a payment is above the fixed limit, the person making the payment deducts TDS on it so that the government can get the tax in advance.

Who deducts TDS?

The person or organization who is making the payment (such as a company, employer or businessman) is responsible for deducting TDS.

In which cases is TDS applicable?

TDS is usually applicable on salary, bank interest, rent, contracting, professional fees, commission etc.

TCS Full Form and Meaning

TCS i.e. Tax Collected at Source is a process in which the seller collects tax from the customer on the sale of a particular good or service. This tax is later deposited to the government. TCS is applicable only on some selected goods and transactions such as the sale of scrap, liquor, wood, motor vehicle or foreign tour package.

When and why is TCS collected?

When a seller sells an item on which TCS is applicable, he collects tax from the customer at a fixed rate so that the government can get the tax on the sale in advance.

Who collects TCS?

The trader or company by which the goods or services are being sold collects TCS from the customer.

On which transactions is TCS applicable?

TCS is mainly applicable on transactions like scrap, minerals, wood, vehicles (above ₹ 10 lakh), and international travel.

Key Differences Between TDS and TCS

Particulars	TDS	TCS
Full Form	Tax Deducted at Source	Tax Collected at Source
Nature of Transaction	Deducted by payer when a payment is being made	Collected by seller when goods or services are sold
Applicable On	Payments like salary, rent, interest, contractor fees, commission, etc.	Sale of goods like alcohol, scrap, minerals, motor vehicles, foreign remittance, etc.
Who is Responsible	The person/entity making the payment (Deductor)	The seller or collector who receives payment (Collector)
When is it Deducted/Collected	At the time of making the payment	At the time of receiving the sale amount
Applicable Sections (Examples)	Section 192 (salary), 194C (contractor), 194J (professional fees), etc.	Section 206C (scrap, liquor), 206C(1H) (sale of goods), 206C(1G) (overseas tour/remittance)
Threshold Limit	Varies as per section; e.g., TDS on salary applies as per income slab; 194C: ₹30,000 per contract	Varies; e.g., TCS under 206C(1H) applies if sales exceed ₹50 lakh per buyer in a financial year
Deposit Due Date	7th of the following month	7th of the following month
Return Filing	Quarterly TDS returns (Form 24Q/26Q/27Q)	Quarterly TCS returns (Form 27EQ)
Reflects in Form	Appears in Form 26AS and AIS of the deductee	Also appears in Form 26AS and AIS of the buyer
Can Be Claimed in ITR?	Yes, as tax credit or refund	Yes, as tax credit or refund
Penalty for Non-Compliance	Non-deduction of TDS: 1% per monthLate payment of TDS: 1.5% per monthTCS non-compliance: 1% per month (increasing to 1.5% from April 1, 2025)	Interest @1% per month, late fee u/s 234E, and penalty under 271H

Key TDS Sections (FY 2025–26)

Section	Type of payment	TDS Rate	Threshold Limit
192	Salary	As per income tax slab	No threshold (applies on full income)
194C	Contract/Work Order	1% (Individual), 2% (Company)	₹30,000 per contract or ₹1,00,000 per year
194J	Professional/Technical Fees	10%	₹50,000 per year
194H	Commission/Brokerage	2%	₹20,000 per year
194I	Rent Land/Building	10%	Monthly rent > ₹50,000 AND annual > ₹6 lakh (for non-individuals)
194I	Rent Machinery/Plant	2%	₹2,40,000 per year
194IB	Rent (by Individual/HUF)	5%	₹50,000 per month
194A	Bank/Post Office Interest	10%	General limit: ₹10,000 (increased from ₹5,000)For senior citizens: ₹1,00,000 (increased from ₹50,000)Others: ₹50,000 (increased from ₹40,000)
194T	Partner’s Commission/Remuneration	10%	₹20,000 per year

Key TCS Sections (FY 2025–26)

Section	Transaction Type	TCS Rate	Threshold Limit
206C(1)	Sale of alcohol, tendu leaves, timber, scrap, etc.	Varies (usually 1%–5%)	No threshold
206C(1F)	Sale of motor vehicle > ₹10 lakh	1%	Vehicle value above ₹10,00,000
206C(1G)	Overseas remittance under LRS	5% / 20%*	₹10 lakh per financial year
206C(1G)	Foreign travel package	5%	No threshold

Due Dates for TDS and TCS Payment & Filing

The government has set clear deadlines to ensure timely collection of TDS and TCS and return filing. Delays attract both late fees and penalties.

Last date for monthly payment :

Payment of TDS and TCS: By 7th of every month, on deduction/recovery of the previous month.
For the month of March: The payment deadline is by 30th April.

Last Date for Filing Quarterly Returns:

Quarterly	Last date for filing TDS / TCS returns
April – June	31st July
July – September	31 October
October – December	31 January
January – March	31st May

Late fees and penalties:

Late fee of ₹200 per day (Section 234E)
Penalty up to ₹10,000 (Section 271H), if wilfully not filed or wrong return is filed.

TDS vs TCS with Real-Life Examples

The annual salary of an employee is ₹12,00,000. The company has to deduct TDS from the salary as per the new tax slabs as given below:

Applicable Slabs under New Regime :

₹0 – ₹4,00,000 = 0%
₹4,00,001 – ₹8,00,000 = 5%
₹8,00,001 – ₹12,00,000 = 10%

TDS Calculation Breakdown :

₹0-₹4 lakh = ₹0 tax
5% on ₹4-8 lakh = ₹20,000
10% on ₹8 -12 lakh = ₹40,000
Total TDS = ₹60,000 (over the whole year)

The company deducts ₹5,000 every month and deposits it to the government.

Example of TCS (Luxury Car Purchase) : Suppose a person is purchasing a new car worth ₹15,00,000. As per section 206C(1F) of the Income Tax Act, 1% TCS is levied on sale of motor vehicles above ₹10 lakh.

Vehicle Price = ₹15,00,000
TCS Rate = 1%
TCS = 1% of ₹15,00,000 = ₹15,000

This ₹15,000 will be added separately to the showroom bill and deposited to the government as Tax Collected at Source. This amount will also be reflected in the customer’s Form 26AS and can be claimed in ITR.

Impact on Taxpayers: TDS and TCS in ITR Filing

When an individual makes a transaction related to salary, interest, professional fees or any big purchase, TDS or TCS is deducted/collected on it. All this information is automatically reflected in Form 26AS and AIS (Annual Information Statement).

Details of TDS and TCS in Form 26AS

Form 26AS is an annual tax statement that records TDS deducted or TCS collected from any source. It is a required document to claim tax credit while filing returns.

How to get a refund or adjustment?

If the total tax liability at the end of the year is less than the TDS deducted or TCS collected, then the individual has the right to claim refund. This can be done easily through an online process during ITR.

Why is PAN linking necessary?

All TDS and TCS entries are linked to PAN. If PAN is not linked properly, the information in Form 26AS will not be updated and there may be problems in claiming tax credit in ITR.

Conclusion

Both TDS and TCS are tax collection instruments that help the government get timely revenue. Understanding them not only helps taxpayers file correct ITR but also makes refund claims, document verification and future planning easier. If their records are maintained properly, many tax-related problems can be avoided. Therefore, it is very important for every taxpayer to keep the information related to TDS and TCS updated and correct.

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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 is the basic difference between TDS and TCS?
TDS is deducted by the payer at the time of making payment, while TCS is collected by the seller at the time of sale.
How is TCS shown in income tax records?
TCS entries are visible in Form 26AS and AIS.
What is the TDS rate on salary in 2025?
In the new tax system, TDS ranges from 0% to 30% on salary depending on the slab.
On which transactions is TCS applicable?
TCS is levied on transactions such as luxury cars, scrap, tour packages and foreign remittances.

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.

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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

How to Improve Your Credit Score?

Have you ever been denied a loan because of your credit score? Or are you someone whose credit score is below 700? A bad credit score can hold you back from reaching your financial goals. But the good news is, you can take control and improve it!

In today’s blog, we will tell you the secrets to boost your credit score and uncover a world of financial opportunities.

Credit Score – An Overview

A credit score is a numerical indicator that reflects how likely you are to repay a loan on time (individual creditworthiness). It is based on your credit history, bill payments, current debt, and how long you’ve had credit accounts open. Lenders use credit scores to decide whether to approve your requests for loans and credit cards and what interest rates you will be charged. In general, the higher your credit score, the better your creditworthiness.

Credit Information Companies (CICs)

In India, credit scores are provided by credit information companies (CICs) licensed and regulated by the Reserve Bank of India (RBI). These CCIs collect and maintain credit information from several lenders and generate your credit report and score.

Below mentioned are the four major Credit Information Companies in India.

TransUnion CIBIL – it is the most prominent CIC in India and maintains the widely used CIBIL score. It was formerly known as the Credit Information Bureau. The company provides services to MSMEs, corporate, individual, and financial clients. It also serves banks, financial institutions, non-bank financial businesses (NBFCs), home finance companies, microfinance companies, and insurance companies in India.
Experian Credit – this is another major credit information company operating in India. It entered India in 2006 as a joint venture with Federal Bank, Punjab National Bank, Axis Bank, Magna Finance, and Union Bank of India. Experian Credit provides nationwide coverage with a database of more than 430 million loan records and has signed up more than 5,000 banking and financial organizations nationwide as members.
Equifax – Equifax is a major player in the world of credit information and is considered one of the ‘Big Three’ credit bureaus alongside Experian and TransUnion. They collect and analyse data on consumers and businesses, providing credit reports, analytics and other credit-related information to several companies. Retailers, utilities, government agencies, financial institutions, and other businesses are among the many industries they target with their solutions.
CRIF High Mark – CRIF High Mark is India’s leading credit information company, licensed and regulated by the Reserve Bank of India. It provides credit information, analytics, and scoring solutions to many clients, including banks, NBFCs, insurance companies, and more.

Factors that Affect Credit Score

Numerous factors affect the credit score of individuals; some of them are:

Credit Utilization Ratio: This compares your credit card balances to your total credit limits. It is the ratio of used credit to the total credit available. A lower ratio (~below 30%) is considered good.
Payment History: This is the most impactful factor on your credit score. It reflects how timely you have made past payments on loans and credit cards. A consistent history of on-time payments is important.
Credit Mix: This refers to your various credit accounts, such as credit cards, mortgages, or instalment loans. Having a healthy mix demonstrates responsible credit management.
Length of credit history: The longer your credit history, the better it shows lenders you have a track record of managing credit over time.

Additionally, internal credit models are statistical models developed and used by lenders. These models analyse borrower data to assess creditworthiness and predict the likelihood of loan repayment.

Lenders collect data on their borrowers, such as loan history, demographics, income, and other alternative data sources. Statistical techniques, such as logistic regression, discriminant analysis, survival analysis, etc., are used to analyse the data and predict defaults.

While statistical methods remain important, the credit scoring landscape is evolving. Machine learning algorithms, particularly random forests, gradient boosting, and deep neural networks, are increasingly used to predict default rates. Therefore, it is essential to maintain a healthy outlook across all possible factors to have a good credit score.

How to Boost Your Credit Score?

There are several techniques you can implement to improve your credit score.

Pay your bills on time, as this is the single most important factor in your credit score. Late payments can seriously damage your score. You can set up auto payments or reminders to help you track your bills.
Keep your credit card under-utilised. Ideally, you should aim to keep your credit utilization ratio below 30%. This shows that you are staying within your credit limit and that you can manage your credit responsibly.
Review your credit report regularly for errors because mistakes on your credit report can bring your score down. You can get a free credit report from the three major credit bureaus. If you find any errors, be sure to dispute them with the credit bureau.
Do not apply for too much credit at once. Whenever you apply for credit, a hard inquiry is placed on your credit report. These inquiries can affect your score for a short period. So, avoid applying for multiple credit cards or loans in a short period.
A secured credit card can be a good way to start building credit if you have bad credit or no credit history. With a secured credit card, you make a deposit that becomes your credit limit. Your credit score will improve as you use the card and make your payments on time.

Conclusion

Credit scores are a numerical representation of your creditworthiness, and building a good credit score takes time and effort, but the rewards are significant. Not only will you qualify for better interest rates, but you will also establish yourself as a reliable borrower. Understanding how credit scores are evaluated and their influencing factors is vital for your financial well-being.

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Frequently Asked Questions (FAQs)

What is a credit score?
A credit score is a numerical figure reflecting how likely you are to repay a loan on time based on your credit history.
What affects my credit score?
Multiple factors affect credit score, like payment history, credit card balances, credit mix, and length of credit history.
Who uses credit scores?
Lenders use credit scores to decide on loan approvals and interest rates.
Can I get a free credit report?
Yes, the major credit bureaus/CICs provide free credit reports.
What is a good credit score?
Generally, a CIBIL score above 750 is considered good in India.

May 31, 2024

Best Places To Park Your Short Term Money

We put in a lot of effort at work to earn money, and thus, it’s only natural to be able to access that money at a moment’s notice.

We make long-term investments to achieve long-term goals, but what about your immediate financial needs? This blog will explore the best ways of investing your extra cash so that you can earn some extra money!

Liquid Investments – Overview

Liquid investments are financial assets that can be quickly and readily converted into cash. They are integral to financial independence as they allow you to respond to unforeseen events without damaging your long-term financial investments.

A popular rule of thumb is that an individual should have a contingency reserve in the form of liquid money equal to six times their monthly expenses. This reserve allows the individual to be secure during financial emergencies and helps mitigate financial risks.

Investment Avenues

In the universe of finance, there are various options where you can park your liquid money and earn some return on it. Some of them are mentioned below.

Banks Savings Account

It is regarded as the easiest and safest place to park your short-term funds. Investing money into this vehicle can yield upto 4-5% annual nominal return (dependent on bank rates). It is appropriate for investors who prioritize liquidity as it is considered equivalent to hard cash.

Savings accounts are also extremely safe due to the DICGC (Deposit Insurance and Credit Guarantee Corporation) insurance of upto 5 lakhs. New investors with unstable incomes are drawn to this investment opportunity due to its high liquidity and safety.

Bank Name	Interest Rate
HDFC Bank Savings Account	Up to 3.5%
Axis Bank Savings Account	Up to 3.5%
Kotak Mahindra Bank Savings Account	Up to 4%
State Bank of India Savings Account	Up to 2.7%
Punjab National Bank Savings Account	Up to 3%

(As of 29th May 2024)

Bank Fixed Deposits

If you allow a lock-in period, bank-fixed deposits are a good alternative to savings accounts. Bank FDs often yield returns 2-3% higher than bank savings accounts. This higher interest rate comes at the cost of a lock-in period. A prepayment penalty can be enforced if you withdraw the funds from this investment during the tenure of the FD.

The interest rates offered depend on the length of the investment. Generally, the longer the term, the higher the rate.

Did you know?

Smaller and newer banks offer higher rates for fixed deposits than larger banks to increase their market size.

Bank Name	Interest Rate
HDFC Bank Savings Account	3% – 7%
Axis Bank Savings Account	3% – 7.4%
Kotak Mahindra Bank Savings Account	2.75% – 7.4%
State Bank of India Savings Account	3.5% – 6.25%
Punjab National Bank Savings Account	3.5% – 6.25%

(As of 29th May 2024)

Short-Term Debt Funds

A “Debt Fund” is a mutual fund based on the debt asset class. Typically, your money is invested in fixed-income instruments like short-term bonds, money market securities, and debentures. Mutual funds in the debt category typically give better returns than FDs. They are appropriate for investors who want to invest their money for a period of six months to one year. However, since they are traded on the market, debt funds experience significant volatility, but the risk is lower than a corresponding equity fund.

Scheme Name	2020	2021	2022	2023
ICICI Pru Short-Term Gr	10.65%	3.88%	4.66%	7.40%
HDFC Short-Term Debt Gr	10.96%	3.86%	3.53%	7.14%
UTI Short Duration Fund Dir Gr	10.97%	9.04%	4.41%	7.59%
Nippon India Short-Term Gr	9.48%	4.42%	3.20%	6.82%
ABSL Short Term Gr Reg	11.06%	3.84%	4.19%	6.90%

Arbitrage Funds

Arbitrage funds are a type of hybrid mutual fund that uses futures, a form of derivative investment, to generate returns similar to debt funds. This is how it works: the fund manager buys shares using your money and sells them later. The difference in prices (known as the spread) between the stock and its future contract creates a return. On average, these funds are able to generate returns between 4% and 8% annually.

Scheme Name	2020	2021	2022	2023
Kotak Equity Arbitrage Gr	4.33%	3.96%	3.42%	7.38%
Edelweiss Arbitrage Gr	5.25%	4.58%	5.11%	7.89%
Axis Arbitrage Gr	4.91%	4.61%	4.95%	7.68%
HDFC Arbitrage Gr	4.30%	4.17%	4.73%	7.78%
Invesco India Arbitrage Gr	5.02%	4.15%	5.85%	8.07%

Liquid Mutual Fund

Liquid mutual funds invest in treasury bills, corporate papers, and other money market instruments. These assets are called money market securities since they have zero to low risk and a maximum maturity of one year. With a return of 4% to 7%, the liquid fund provides a marginally better yield than a bank savings account. Since liquid funds are linked to market risk, investors may experience portfolio volatility during unusual circumstances; hence, returns on these products cannot be guaranteed.

Scheme Name	2020	2021	2022	2023
Axis Liquid Gr	4.33%	3.36%	4.95%	7.13%
ABSL Liquid Retail Gr	4.40%	3.38%	4.95%	7.19%
ICICI Pru Liquid Gr	4.39%	3.35%	4.85%	7.08%
HDFC Liquid Gr	4.11%	3.21%	4.77%	6.95%
Edelweiss Liquid Reg Gr	4.12%	3.23%	4.66%	6.85%

Conclusion

Investing your liquid money is extremely important. However, many factors need to be considered before choosing one investment vehicle. Therefore, it is advisable to consult a financial advisor before making such decisions.

Frequently Asked Questions (FAQs)

Are Liquid funds better than Bank Fixed deposits?
Investment in liquid funds offers higher returns than bank fixed deposits but also carries market risk.
What is the meaning of Liquid investments?
Liquid investments can be converted into cash immediately without a significant loss in value.
Why is a Liquid fund better than a Savings account?
Generally, liquid funds offer a slightly better return than a savings bank account because a liquid fund invests your capital in money market instruments, which typically yields better returns.
How does an Arbitrage fund work?
Arbitrage funds profit from the price difference between the derivative and cash segments of the market by simultaneously buying and selling securities in both markets.
What is the taxation on an Arbitrage fund?
Arbitrage funds attract equity taxation; if the holdings are sold within one year, they are taxed as short-term capital gain, attracting a 15% tax on profit. However, if sold after one year, they are considered long-term capital gain, attracting a tax rate of 10% over and above one lakh of profit.

May 30, 2024

Types Of Taxes In India: Direct Tax And Indirect Tax

Taxes are an inevitable part of our daily lives. No matter how hard you try, nobody can escape them. Hence, we should all at least understand their nuances to navigate our lives without any hurdles.

This blog will explain the complexities of the different types of taxes in India by breaking them down into easy-to-understand concepts.

Taxation in India

Taxes are obligatory charges or levies that the government imposes on individuals, businesses, and other entities to fund government expenditures.

The Indian taxation system has a three-tier structure, with taxes imposed by the central, state, and local municipal governments. Below is an outline of the two primary categories of taxes in India.

Direct Taxes

These are levied directly on an individual’s or company’s income. The person or entity on whom the tax is levied bears the burden of paying it. Some common types of direct taxes are explained below.

1. Income Tax

Income Tax is a tax levied by governments on the income generated by businesses and individuals. The imposition of income tax applies to a wide range of income sources, such as wages, salaries, investments, business profits, and even capital gains.

India has a progressive income tax system, which means people with higher incomes pay more of their income in taxes. Income is divided into 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 his situation.

2. Capital Gains Tax

Capital Gains Tax is a levy imposed on the profit you earn from selling capital assets like stocks, real estate, or other investments.

When you sell a capital asset for more than its purchase price, you realise a capital gain, which the government taxes.

There are two types of Capital Gains Tax in India,

Short-term Capital Gains (STCG) – The STCG applies to assets held for less than one year. The short-term Tax rate for equity and equity-oriented mutual funds is subject to 15%.
Long-term Capital Gains (LTCG) – The LTCG generally applies to assets held for one year or more, although the holding period can vary depending on the asset. The LTCG tax rate is typically 20% on most assets. For LTCG on equity and units of equity-oriented mutual funds exceeding INR 1 lakh in a financial year, a concessional tax rate of 10% applies without the indexation benefit.

3. Corporate Tax

A Corporate Tax is imposed on a company’s profits. It is a substantial source of income for the government and is used to fund public projects and social programs. India provides a tiered corporate tax structure with varying rates based on the type of company and specific conditions. The corporate tax rate generally varies between 20% and 40% in India, depending on the company’s particulars.

4. Property Tax

Property tax is a levy imposed by the municipal corporation or local government real estate property. It is a revenue stream utilised to finance civic services and facilitate infrastructure development.

Indirect Taxes

Indirect taxes are levied on the consumption of goods and services. These taxes are usually hidden in the price we pay for a good or service. The burden of indirect taxes falls on the final consumer buying goods and services. Some types of indirect taxes are explained below:

1. Goods & Services Tax (GST)

GST is a comprehensive indirect tax levied on the supply of most goods and services in India. It replaced a variety of taxes that both the central and state governments previously imposed.

Introduced in July 2017, GST aims to streamline the indirect tax system in India by bringing several taxes under one umbrella. It also fosters transparency since it is imposed at the point of sale and displayed on the invoice. GST has multiple tax slabs ranging from 0% (exempt goods) to 28% (luxury goods).

2. Customs Duty

Custom duty is a tax levied by the Indian government on goods imported into the country. It is a fee that an individual pays to bring goods from overseas.

The individual or entity acting as the importer of goods brought into India bears the responsibility of paying the customs duty. The importer, in certain instances, may choose to transfer this cost to the consumer by incorporating it into the ultimate price of the product.

3. Excise Duty

Before the implementation of the GST in July 2017, excise duty held significant prominence as a historical tax in India. However, following the introduction of GST, the excise duty levy for most goods has been discontinued.

However, some products still attract excise duty. These include cigarettes, LPG, Beer, Electricity, Petrol, and Kerosene.

Uses of Taxes

We know that the government allocates the tax revenue it collects to finance a multitude of public services and programs that provide substantial benefits to the nation as a whole. However, the details of these expenditures still remain largely unknown. Here is a quick overview of the government’s spending.

Public Services

Education – government schools, colleges and universities.
Healthcare – public hospitals and clinics that offer subsidized medical care.
Law and Order – police forces, courts, fire departments, and emergency services.

Subsidies – essential goods and services like food, fuel, and fertilisers are subsidised to make them more affordable for low-income families.
Social Security Programs – schemes like pensions for the elderly and disabled provide a safety net.
Essential Services – a significant portion goes towards funding essential services like Defence and Infrastructure development.

Conclusion

Understanding the intricacies of Indian tax allows individuals to make well-informed financial choices. Whether you are a salaried professional trying to navigate through tax brackets, a business owner in the process of exploring deductions, or simply someone who wants to be more tax-savvy, having a solid understanding of these concepts will greatly benefit you in the long run.

Frequently Asked Questions (FAQs)

What are the two main types of taxes in India?
India has two major types of taxes – direct taxes levied on your income and indirect taxes included in the price of goods and services.
Are there any tax benefits or deductions available?
Yes, there can be exemptions and deductions to reduce your tax liability. You can explore options for investments, medical expenses, etc., as defined under different sections of the Income Tax Act.
What happens if I don’t pay my taxes on time in India?
Penalties and interest can be imposed on delayed payment of taxes.
Where can I get help with filing my taxes?
Tax professionals like chartered accountants can assist you with filing your tax returns.
Do I need to pay customs duty?
Yes, if you import goods from abroad. However, the tax amount will depend on the type of good, its value, and the country of origin.

May 30, 2024

Category: Personal 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

Frequently Asked Questions (FAQs)

Is Inflation good or bad for the economy?

Why do we need inflation to run the economy?

What causes a rise in the inflation rate?

What is the meaning of inflation?

What are the methods to control inflation?

Surplus and Deficit

Sources of Government Revenue

Direct Tax

Indirect Tax

Non-Tax Revenue

Government Expenditure

Capital Expenditure

Revenue Expenditure

Conclusion

Frequently Asked Questions (FAQs)

How does the government earn money?

What is the fiscal deficit in the economy?

How does a government spend their money?

What is the purpose of the government budget?

What are the items included in the government’s revenue expenditure?

Overview of Securities Transaction Tax (STT)

History of Securities Transaction Tax

Meaning of Securities

Features of STT

Securities Transaction Tax Rate

Example of Securities Transaction Tax

Impact of Securities Transaction Tax on Investors

Conclusion

Frequently Asked Questions (FAQs)

Is the Securities Transaction Tax a direct tax or indirect tax?

Is there any way to avoid paying STT on transactions?

What is the difference between Capital gain tax and Securities Transaction Tax?

In which year was the Securities Transaction Tax introduced in India?

Is STT applicable on both buy and sell?

TDS Full Form and Meaning

TCS Full Form and Meaning

Key Differences Between TDS and TCS

Key TDS Sections (FY 2025–26)

Key TCS Sections (FY 2025–26)

Due Dates for TDS and TCS Payment & Filing

TDS vs TCS with Real-Life Examples

Impact on Taxpayers: TDS and TCS in ITR Filing

Conclusion

Frequently Asked Questions (FAQs)