Category: Personal Finance

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

RIAs vs MFDs: Who Is Better?

People have many goals in life, like getting married, having children, buying a dream home, etc. However, nobody knows how to properly plan for such events. This is where investment advisors come in, helping you with thorough financial planning. The problem is, many people confuse SEBI’s Registered Investment Advisors (RIAs) with Mutual Fund Distributors (MFDs).

Keep on reading; all your queries related to this will be cleared.

Mutual Fund Distributors

Mutual fund distributors, or MFDs, are individuals or businesses registered with the Association of Mutual Funds in India (AMFI) who serve as a middleman between asset management firms and investors seeking to purchase mutual funds.

An MFD offers an investment strategy tailored to your risk tolerance and has relationships with several asset management firms. They don’t charge their clients fees; instead, mutual fund firms pay them compensation for introducing investors to their products.

Duties of Mutual Fund Distributors

Assessment of the risk profile of the client and suggesting the best mutual funds.
MFD educates the investors about the various mutual fund schemes, their investment objective, and the risk associated with the fund.
They facilitate the investor’s completion of the necessary formalities to make them eligible for buying and selling mutual funds.
They also provide all the required support, such as portfolio reviews, market updates, etc.

Eligibility of a Mutual Fund Distributors

The applicant must be above 18 years.
To obtain the license from AMFI, the applicant must pass the NISM Series VA Mutual Fund Distributor Exam conducted by the National Institute of Securities Market (NISM).
The minimum qualification must be class 10th or 12th with three years of diploma.
Every corporate mutual fund distributor employee must be NISM VA certified.
After obtaining the license, they are provided an ARN number.

Registered Investment Advisors

According to the Investment Advisor Regulation of 2013, RIAs are financial advisors registered with the Securities Exchange Boards of India (SEBI) as individuals or companies. This registration enables them to provide investment advice to their clients. The only two fee models available to RIAs are fixed fees and asset under management or asset under advisory-based variable costs, as per the most recent change to the RIA Regulation by SEBI in 2020.

Duties of RIAs

The fiduciary duty of RIA is to act in clients’ best interest, which means they provide advice and recommendations that are solely aimed at benefiting the client without any conflict of interest.
They also provide a detailed document in which all the details related to fees, services, etc., are mentioned before entering into a contract with the client.
RIAs provide periodic reports to their client related to their investment performance.
4.The recommendations provided by the RIAs are aligned with the client’s risk profile and financial goals.
RIAs are required to follow all compliance orders issued by the relevant authorities and maintain the required filings.

Eligibility of RIAs

SEBI mandates few specific educational qualifications to become an RIA, such as a post-graduation degree from a recognized university.
The applicant must have at least five years of experience in providing financial advisory services.
The applicants must acquire a necessary certificate recognized by SEBI, named NISM Investment Advisor, for the Level 1 and Level 2 exams or a certified financial planner certificate.
If you are registering as an individual advisor, you must have a net worth of INR 5 Lakhs; if you are registering as a corporate investment advisor, you must have a minimum net worth of INR 50 lakhs is required.
After meeting all the eligibility criteria and completing the process, the SEBI issues an RIA number to the applicants, which acts as a unique identification number.

Difference between MFD & RIA

The significant differences between MFD & RIA are defined in the below mentioned table:

Particulars	MFD	RIA
Services	Provide facilities to investors relating to execution of mutual funds transactions, following the compliances related to KYC, etc.	RIAs provide advice and guidance on a client’s investment portfolio, tax planning, etc.
Tie-up	MFDs collaborate with all the mutual fund companies.	They do not have any particular connection with any mutual fund providers, as they provide only investment advice.
Revenue	Their major revenue comes from commissions from the asset management company in which their clients make investment.	They generate their revenue from advisory fees charged to their clients.
Regulations	MFDs are regulated by AMFI and SEBI.	RIAs are regulated only by SEBI.
Minimum Investment / Fees	MFDs do not set minimum investment criteria; these are set up by the mutual fund schemes in which they want to invest.	RIA may have some minimum fees based on the value of investors’ portfolios. This varies from advisor to advisor.

Conclusion

An MFD is a better alternative if you are starting to invest, have a small portfolio, and want a simple approach to mutual funds. On the other hand, if you have a larger portfolio, several intricate financial goals, and want complete financial planning, you should consider a SEBI Registered Investment Advisor.

In summation, a mutual fund distributor is a better resource for investors seeking advice and direction specific to their mutual fund investments. However, if a person has more complicated financial needs and needs help with estate planning, tax planning, etc., they should consider consulting with a Registered Investment Advisor (RIA).

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Frequently Asked Questions (FAQs)

Can MFD charge fees from their investors?
MFDs can earn only a commission from AMCs in which their clients invest.
How does RIA make money?
Usually, RIA charges fees based on the percentage of assets or fixed annual fees fromtheir clients for advising them on various financial aspects.
For comprehensive financial planning, whom should I approach?
If you are looking for comprehensive financial planning, you should contact a SEBI Registered Investment Advisor, who is licensed by SEBI to do such work.
What are the minimum fees for taking services from a SEBI RIA?
There is no minimum prescribed limit for taking services from a SEBI RIA as it varies from an investment advisor. However, the SEBI has two types of fees: the first one should not exceed 2.5% of assets under advice or a fee not exceeding INR 1.25 Lakhs per year.
Which certification exam must you pass to become a Mutual Fund Distributor?
NISM conducts an exam called NISM VA (Mutual Fund Distributor), which must be cleared to become an MFD.

May 27, 2024

Buying vs Renting: Which Is The Better Choice?

The majority of people in India live in rented homes, yet many aspire to own their own homes someday. They start saving early in their careers or seek home loans to make this dream a reality. However, due to the interest costs associated with these loans, they often postpone their plans and continue with renting.

Now the question is buying your dream house worth it? In this blog, we will discuss whether you should rent or purchase a home.

Buying a House

Purchasing a home is like realizing a dream. It is where you raise your family, create memories, and take pride in owning it. However, nowadays, the cost of buying your dream home can burn a big hole in your wallet. In India, it is common to assume that a home is a sign of well-being and stability within the family.

Pros of Buying a House

Building an Asset – The amount that you will be using for paying rent can be utilized towards paying some part of the home loan EMI and it will create an asset for life.
Tax Benefit – If you have a home loan, you can claim a deduction of up to INR 2 lakhs on the interest paid under section 24 for a self-occupied house and INR 1.5 lakhs under section 80C on the principal amount.
Permanent Resident – You do not need to worry about moving houses if the landlord wants you to leave, as you are the proud owner of your own home.
Emotional Security – Having your own house provides you with mental peace and stability as you can keep it as you want.

Cons of Buying a House

Expensive – Buying a house can be costlier than renting a house in most of the cases, as the down payment to purchase the house is very high. Along with this, you will have to bear the cost of monthly EMI.
Illiquid Asset – Real estate is often considered the most illiquid form of asset, which means if you need money, you cannot immediately sell your house.
Other expenses – If you purchase a house, you will be piled up with the EMI burden along with it; you will have to pay additional costs such as house taxes, water taxes, maintenance costs, etc.
Relocation – If you are looking to relocate to a newer location or you are transferred to some other location, then in that case it will get difficult for you to sell your house and shift to another house.

Renting a House

It means living in a home owned by someone else and giving the landlord a monthly rent payment. The owner of the property will give you the house in exchange for rent through a formal agreement that specifies the monthly rent and the length of time he/she will rent the property to you.

A house’s suitability for rental depends on a variety of aspects, including the number of bedrooms, preferred location, amenities, and budget.

Pros of Renting a house

Lower financial burden – Paying monthly rent will have less impact on your pocket as rent will be lower than your home EMIs.
Down Payment – If you are going for a rented house, then you are not required to make any large down payments initially. In renting, you are just required to provide only a security deposit which can vary from 1 – 6 months.
No additional cost – While living in a rented house, you don’t need to worry about paying property taxes, repair bills, maintenance costs, etc.
Easy to relocate – In case if you are into such kind of jobs in which transfer is frequent then relocating is much easier in the case of a rented house.
Flexibility of location – You can easily decide where do you want to live depending on proximity to your workplace or school, reducing your transportation costs.

Cons of Renting a house

Rise in Rent – The landlords generally increase the rent on an annual basis, but they can do so anytime in between.
No Tax Benefits – Paying rent will not fetch you any tax benefits. However, one can claim an HRA deduction.
Expense after retirement – If you are not able to buy a house while you are in your earning stage of life, then you might face a financial crunch after retirement as you will not have any source of income.
No Modifications – Even if you love to decorate your house, then you have no choice but to make any structural change without the approval of the landlord.
No emotional security – Owning your own home provides peace of mind and stability, freeing you from the worries of a landlord potentially asking you to move out. If you rent a house, you’ll miss this peace.

Tax Benefit of Housing Loan

Deduction of Principal Amount Repayment – You can deduct up to INR 1.5 lakhs from your primary amount paid each financial year under section 80C of the Income Tax Act. The highest deduction that can be made is INR 1.5 lakhs, regardless of the total principal that you pay over a year.
Deduction on Interest Paid – For self-occupied property, an individual may deduct up to INR 200,000 in interest each financial year.

Which is right for you?

The answer to this question is very individualized and depends on a person’s unique circumstances, including their financial situation and life aspirations. Renting is a less expensive choice that allows you to move about more easily than buying, even if buying a property might be a smart investment due to its high cost. Therefore, a person must weigh all the advantages and disadvantages before choosing to buy or rent.

Conclusion

There will always be debates about whether it is better to rent or buy a home. Some people think buying a house is a smart option since they will feel proud to own it. Some, however, will choose to rent a home as they lack the funds to buy a new one.

In summary, if you are financially stable, buying a home can be a good option. However, if you are not, taking on loan payments and other debts might lead to financial difficulty, making renting a more suitable choice. Further, it is advisable to consult your financial advisor before making a decision, as buying a home is a long-term commitment.

Frequently Asked Questions

What are the tax implications of renting vs buying a house?
Living in a rented house does not offer any tax benefits, although salaried individuals can claim an HRA deduction for the rent they pay.On the other hand, homeowners are eligible for deductions on their home loans.
I am a 25-year-old individual who got a new job with a salary of around INR 50,000 per month. Should I buy a home or live in a rented house?
As you have just started your career therefore, there are various other goals in your life which you are required to fulfill. Buying a house is a long-term commitment, hence you should consider all the expenses of buying a house or consider living in a rented house.
What financial factors are to be considered before deciding on renting and buying?
One must consider financial factors like upfront cost, loans, EMIs, property taxes, insurance and maintenance, and potential appreciation in the value of the property, etc.
I want to customize my home, should I go for renting or buying?
Owning a house allows you to personalize things the way you want, which you cannot do easily in a rented house as every time you need permission from the landlord.
Does buying a house create wealth in the long run?
If you are buying a piece of land, the value of it will generally appreciate over some time, but there are several other costs that comes with owning a house such as property taxes, and EMIs of the house. Therefore, one must consider all the factors before purchasing a home.

May 22, 2024

RBI Action On Kotak Mahindra Bank: Should You Invest?

You must have watched in the news that India’s central bank, the Reserve Bank of India (RBI), has taken action against Kotak Mahindra Bank. And if you have a Kotak Bank account, you must be concerned about what will happen to your savings.

Don’t worry—we’ve answered all your questions; simply read the blog to clarify the uncertainties.

Overview of Kotak Mahindra Bank

Kotak Mahindra Bank’s origins date back to 1985, when Uday Kotak started Capital Management Finance as an investment and financial services company. Later, in 1986, Anand Mahindra and his father, Harish Mahindra, invested in the company and renamed it Kotak Mahindra Bank. The company initially offered lease and hire-purchase services, as well as bill discounting. In 2003, it was India’s first non-banking financial institution (NBFC) to receive a commercial banking license from the RBI.

Further, in 2017, Kotak Mahindra Bank launched the Kotak 811 platform – India’s first full-service digital banking platform.

Did you know?

Kotak’s 811 draws its name from 8-11-2016, the day when the government announced demonetization in India. According to Uday Kotak, it was the day that changed India.

The Problem with Kotak Bank

The RBI audits all banks to ensure every bank maintains its online systems properly. The audit of Kotak Mahindra Bank has been ongoing for the past two years. In 2022 and 2023, the bank was found to have too many errors in its IT risk management and infrastructure, which could lead to data leakage. Despite many warnings from the RBI, the bank failed to address the matter promptly.

Then, on April 15, 2024, there was a system outage caused by an issue with their IT system, which harmed customers by preventing them from using UPI payment, debit cards, and so on.

The Reserve Bank of India imposed stern action on Kotak Mahindra Bank on April 24, 2024, by making a press release and prohibiting them from issuing new credit cards and onboarding new customers via digital channels. However, clients can open new accounts with the bank by visiting their branch, and there is no impact to the existing customers.

Further, The RBI will appoint an independent firm to audit the Kotak Mahindra Bank’s IT systems. The limitations will be released only when the bank resolves the concerns discovered during the audit.

Clarification by Kotak Mahindra Bank

Kotak Mahindra Bank published a statement following the RBI’s limitations. The Bank’s management wants to reassure their existing customers of uninterrupted services, including credit card, mobile, and net banking. They also said that their branches continue to welcome and onboard new customers, providing them with all the bank’s services other than the issuance of new credit cards..

Impact on the Stock Price

The following day, on April 25, 2024, the stock price of Kotak Mahindra Bank fell by around 11% due to this news. The company’s market capitalization fell by INR 10,225 crore in one day. On April 25, 2024, the company’s share price reached a 52-week low of INR 1,602 per share. Following this descent, Axis Bank became the 4th largest bank in India in terms of market capitalization, and Kotak Bank slipped to 5th rank..

According to the report issued by the National Payments Corporation of India (NPCI) in March 2024, Kotak Mahindra Bank is ranked 9th on the UPI remitter list, with a total volume of 703.56 million, of which 93.66% is approved.

Should you worry if you have an account in Kotak Bank?

If you have a bank account with Kotak Bank, then you don’t have to worry because you can continue using their bank account as usual. All services, including credit cards, will work uninterruptedly.

However, to open a new bank account with Kotak Mahindra Bank online or apply for a new credit card, you must wait until the bank restores its IT infrastructure and receives RBI approval to re-launch those services. Meanwhile, one can open a new account with the bank by visiting a physical branch.

Analyst’s view on Kotak Mahindra Bank

According to S&P Global, Kotak Mahindra Bank’s credit card portfolio expanded 52% yearly as of December 2023, compared to 19% loan growth.

This step may hamper the credit card business and cause the bank to rely more heavily on physical branches, harming credit growth and profitability. However, when it comes to the physical branches, as of March 2024, the bank has only 1,948 branches, which is significantly less than its competitors. In contrast, Axis Bank has 5,100+ branches, and HDFC Bank has 8,000+ branches.

Limitations on accounts opening digitally coupled with a smaller number of physical branches will hamper growth for Kotak Bank at least in short run. Many analysts and brokerage houses anticipate that the bank will take around one year to address the RBI’s IT related concerns.

Can RBI take action on any bank?

According to Section 35A of the Financial Regulation Act guidelines, the RBI can intervene if a bank is not operating efficiently or is caught in wrongdoing. It can take action in the public’s best interests, such as keeping the financial system clean and digital transactions running smoothly.

Conclusion

The RBI’s action on Kotak Mahindra Bank is in the interest of account holders, as the RBI does not want the customers to suffer in any way, whether in terms of service or data security. However, from an investor’s perspective, you must assess the numerous parameters associated with the company’s business plan. It is recommended that you contact your financial advisor before making any investment decisions.

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Frequently Asked Questions (FAQs)

What was the RBI’s action on Kotak Mahindra Bank?
The RBI has observed severe deficiencies in its IT system, which can lead to data leaks and scams and make its customers suffer. Therefore, in view of the interests of customers, the RBI has taken action by stopping the bank from issuing new credit cards and opening new bank accounts through online mode.
When was Kotak 811 launched?
Kotak Mahindra Bank launched the Kotak 811 platform in 2017.
Is it safe to keep my money in Kotak Mahindra Bank?
Yes, it is safe to keep your money in Kotak Mahindra Bank just like any other Scheduled Commercial Bank in India. The RBI has observed IT infrastructure-related issues that are not related to the company’s liquidity or creditworthiness.
Who is the founder of Kotak Mahindra Bank?
Mr. Uday Kotak founded the Kotak Mahindra Bank in 1985.
Should I invest in Kotak Mahindra Bank shares after the RBI action?
The RBI’s action on Kotak Mahindra Bank will impact its profitability because it cannot onboard new customers digitally. Hence, an investor should consider all the risk parameters and future growth before making any investment decision.

May 17, 2024

Inheritance Tax: Past, Progression, And Controversy

Have you ever thought what happens to your money after you are gone? In India, inheritance has traditionally been a way to transfer wealth across generations. But what about the tax implications?

In this blog, we will explore the history of inheritance tax, find out why it was eventually removed, and the ongoing debate about its potential return.

What Is Inheritance Tax

Inheritance Tax, also known as death duty in some regions, is a levy on assets or money that someone inherits after a person dies.

However, there is a subtle difference between inheritance tax and estate tax. Inheritance Tax is a tax on the value of the inheritance received by the beneficiary. In contrast, the estate tax is a tax on the total value of a deceased person’s estate before it is given to their heirs.

The objectives of the Inheritance Tax vary across countries, including generating government revenue, redistributing wealth, and preventing wealth concentration within families.

The tax is paid by the person who inherits the assets, and the amount of tax depends on the value of the inheritance and the relationship between the beneficiary and the deceased. Close relatives often get tax exemptions that lower their tax burden. Tax rates differ depending on the country and can be as high as 40%.

India does not currently have an inheritance tax. And if we talk about developed nations such as USA, there is no federal inheritance tax exists, although certain states impose their own. For example, states in USA such as Pennsylvania and New Jersey have inheritance taxes that apply to a broader range of wealth, irrespective of the federal threshold.

Did you Know?

Japan has the highest inheritance tax rate, i.e., 40%.

Evolution of Inheritance Tax

Inheritance taxes have roots in ancient civilizations such as Egypt and Rome. In the US, these taxes were introduced during the Civil War to raise revenue but were revoked soon after.

The 19th and 20th centuries saw a sharp increase in inheritance taxes globally, and many countries, including the US, implemented them to address wealth concentration and raise revenue.

However, inheritance taxes gradually lost favour among the government because some countries found them challenging to manage, while others considered them a barrier to investment and creating wealth.

From 1953 to 1985, India had an inheritance tax called the Estate Duty, introduced under the Estate Duty Act of 1953. However, India abolished its inheritance tax in 1985.

Why was the Inheritance Tax abolished in India?

The estate duty in India was introduced to reduce wealth inequality. It functioned like a progressive tax. People inheriting smaller estates were not subject to taxation. In contrast, those inheriting substantial wealth were liable to pay a higher percentage, with rates reaching as high as 85% for the largest estates.

For your reference, a progressive tax is a tax system in which the tax rate increases as the taxable income increases. In simpler terms, the more you earn, the higher the percentage of your income you pay in taxes, which is determined by the tax brackets.

The tax rate you pay depends on which bracket you fall into. Suppose you have an income within the 22% bracket. You will only pay 22% tax on the portion of your income that falls within the bracket, and for any income exceeding that amount, you might pay a higher rate according to the next tax bracket.

Despite its good intentions, the Estate Duty fell short for several reasons:

Many estates were not taxed because of a high threshold for consumption.
People started looking for methods to avoid paying taxes, such as concealing assets or engaging in benami property transactions.

Furthermore, discussions about reintroducing have emerged in recent years, which is fuelled by the following reasons:

The gap between rich and poor is widening, and some argue that inheritance tax helps redistribute wealth.
Many developed countries have the concept of inheritance tax, and some consider it a standard wealth management tool.
Taxing inheritances can generate revenue for the government, which can be used to create social programs that help those in need.

The Ongoing Debate

Sam Pitroda, the president of the India Overseas Congress, has caused trouble for the Congress party with his controversial comments about the inheritance tax. His remarks have been the subject of debates and intense criticism.

He caused controversy by advocating for an inheritance tax as a means of wealth distribution, citing its implementation in America. He stated that there is an inheritance tax in America where 45% of a $100 million estate goes to the children and 55% goes to the government.

Two national political parties in India, i.e., the Congress and the BJP, are arguing over the statement made by Sam Pitroda. However, the former clarified that the statements did not represent the party’s official stance and accused the BJP of trying to gain political advantage and divert attention during ongoing Lok Sabha elections.

Conclusion

To sum it up, India’s story with inheritance tax is one of a brief implementation, abolition, and a recent resurgence in debate. While there is no inheritance tax currently, the conversation surrounding its return highlights the complexities of managing wealth inequality and the government’s revenue. The future of this tax remains uncertain. We will have to wait and see how this exciting story plays out.

Frequently Asked Questions (FAQs)

Does India have an inheritance tax?
As of April 2024, India does not have a national inheritance tax.
Why is inheritance tax being discussed again?
Growing wealth inequality and aligning it with global trends are common discussion topics.
What are the arguments in favour of inheritance tax?
Common arguments include reducing inequality, ensuring fairness, and aligning with global trends.
Would I be liable to pay for the money I inherit?
Not directly, but you might pay tax on any income the inherited asset generates.
Should inheritance tax be brought back?
That is a matter of debate. You can consider listening to both sides’ arguments and then shape your own perspective on this.

May 17, 2024

Category: Personal Finance

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TDS vs TCS with Real-Life Examples

Impact on Taxpayers: TDS and TCS in ITR Filing

Conclusion

Frequently Asked Questions (FAQs)

What is the time limit for a TDS refund?

When are TDS and TCS applicable?

What is the due date for depositing Tax Deducted at Source (TDS)?

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1. Equity Linked Savings Scheme (ELSS)

2. Public Provident Fund (PPF)

3. Senior Citizen Savings Scheme (SCSS)

4. Sukanya Samriddhi Account

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7. Unit Link Insurance Plan (ULIP)

8. Life Insurance

9. National Savings Certificates (NSC)

10. Capital Guaranteed Plan

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Conclusion

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Example of Share Pledging

Who Can Pledge Shares?

Advantages of Share Pledging

Disadvantages of Share Pledging

Conclusion

Frequently Asked Questions (FAQs)

How does share pledging impact the voting rights of shareholders?

What is the limitation of pledging shares?

How does pledging shares affect the investor’s ability to raise future capital?

Are there any tax implications for pledging shares?

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What is a credit score?

What affects my credit score?

Who uses credit scores?

Can I get a free credit report?

What is a good credit score?

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Short-Term Debt Funds

Arbitrage Funds

Liquid Mutual Fund

Conclusion

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Are Liquid funds better than Bank Fixed deposits?

What is the meaning of Liquid investments?

Why is a Liquid fund better than a Savings account?

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What is the taxation on an Arbitrage fund?

Taxation in India