Investment options will not only help you with saving taxes but also help you grow your money.

• Life insurance premium.
• Tax Saving
• Fixed Deposit.
• Principal repayment is taken from banks or financial institutions for the purchase or construction of the house.
• amount invested as well as interest accrued in National Savings Certificates (NSC).
• Sukanya Sam Riddhi Yojana: This scheme offers an average interest of 8.4%, with a lock-in till the girl child reaches age 21, although partial withdrawal is allowed when she reaches 18 years.
• PPF: PPF offers an average interest rate of 7.10 % with a lock-in period of 5 years. The tax benefits and capital safety are more in favor of PPF.
• ELSS: An equity-linked saving scheme (ELSS) offers an average interest of 12–15% with a lock-in period of 3 years. It is certainly an option for better returns. It depends on whether you have an appetite for market volatility or not.

Deductions U/S 80D:

Deduction in respect of Medical Insurance Premium, Central Government Health Scheme, Preventive Health Check-Up & Medical Expenditure in any mode other than cash.

• Payment for preventive health check-ups can be made in cash. Such aggregate payment cannot exceed 5,000/-
• In case both the individual taxpayer and their parents are aged more than 60 years, for whom the medical benefits have been taken, the maximum deduction that can be availed under this section is Rs 1,00,000.
• A HUF can claim a deduction for a medical insurance premium paid for any of the members of the HUF. This deduction will be Rs 25,000 if the member insured is less than 60 years of age and will be Rs 50,000 if the member insured is 60 years of age or more.

Deductions U/S 80E: 

Deduction for Interest on Education Loan for Higher Studies to INDIVIDUAL for the education of self, spouse, children, or any student for whom an individual is a legal guardian.

If you have taken an education loan and are repaying it, then the interest paid on that education loan is allowed as a deduction from the total income.

The loan should be taken from any bank, financial institution, or any approved charitable institution.

Deduction allowed will be the amount of total interest paid for 8 consecutive years, starting from the year in which you start repaying the loan or until the interest is fully repaid, whichever is earlier.

Deductions U/S 80G:

Deduction for donations towards social causes up to either 100% or 50%, with or without restriction. (The donations above Rs 2,000/-should be made in any mode other than cash to qualify for an 80G deduction).

Deductions U/S 80TTA:

Maximum of 10,000 (Deduction against interest income from your savings account with a bank, co-operative society, or post office).

Deductions U/S 80TTB-Maximum 50,000 (Deductions with respect to interest income from deposits held by senior citizens will be allowed. [No further deduction under section 80TTA shall be allowed.”

For more information, reach us at support@prudentwealth.in

Written by: Radhika Agarwal

Team, MyGoalMySip.

Read Next: PW Insider: July 2022 Edition

The World Bank recently trimmed its global forecasts for 2022, warning that “Omicron-driven economic disruptions”, among other factors, would cause growth to “decelerate markedly” this year. Likely, we do not expect any tax breaks or tax cuts, nor any changes in the tax slab. The fiscal balance of the government has deteriorated due to the consecutive occurrence of Covid. Therefore, in such turbulent conditions, an action to lower tax rates would lead to further disruption in the Government finances.

However, it has been reported that in the 2019 budget, the government intends to boost the standard deduction limit available to salaried people (which is currently set at 50,000) and retirees by 30-35 percent. Many countries like the US, UK, Canada, Ireland, etc., have introduced certain tax breaks on Covid-19 related medical expenditure (like medical supplies, testing kits, etc.) and work from home expenditure, including home office set-up. However, no such deduction/exemption has been introduced in India and in the budget yet. As a result, raising the standard deduction limit would give individuals more financial flexibility in incurring the previously stated expenses.

A separate deduction capped up to ₹1,00,000 or the actual expenditure incurred by the taxpayer for self or family, whichever is lower, may be considered to be introduced as there is no specific section that covers Covid treatment. Also, a bill was expected to be presented during the winter session of parliament to regulate cryptocurrencies. It was not, however, introduced, and it is now expected that the government would take up this bill during the budget session and decide whether or not it is taxable.

A separate deduction of at least 1.5 lakh for education savings would be a great move in terms of saving for children’s higher education. Furthermore, the section 80C deduction for education expenses (including tuition fees) can be carved out, and a separate deduction for the above-mentioned objective.

Enhancement of deduction of interest on housing loans may be expected to boost the Government’s initiative of affordable housing from 2,00,000 p.a. to 5,00,000 p.a. Attractive economics and push by governments have already increased the demand for electronic vehicles substantially. However, the absence of financing options in the Commercial EV category, which is predicted to be a key growth vertical, remains the biggest issue. To curb this, Government is expected to extend subsidies and provide exemptions on loans for EVs. Additionally, to boost the start-up ecosystem, the entrepreneurs look forward to liberal tax benefits and lower interest in the capital.

Because the new Covid variant Omicron is spreading at a quicker rate, the government is expected to re-impose certain covid-related restrictions, hampering economic activity and causing supply chain and logistics disruptions. Thus, it is unlikely that the GST rates will be reduced; rather, more items and services will be included under the ambit of GST.

The pandemic has also led to an increase in the requirement for better health infrastructure setups. The expenditure in this sector has also risen ten-fold. The government is expected to take steps that would make treatment affordable for the masses.

We would need to sit back and wait until the mystery box opens and then see whether these expectations turn into reality.

Written by: CA Sourav Agarwal

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A derivative means an instrument whose value is derived based on the underlying asset. It has no value of its own. Derivatives of stocks and indices can be traded on Indian stock exchanges. Common derivatives include futures contracts, forwards, options, and swaps.

Tax Treatment of Derivatives:

Derivatives can be taxed under the head Income from Business & Profession or Income from other sources depending on the fact whether the assessee is a trader or an investor.

How to Determine Turnover of Derivatives?

Mr. Ram has entered into the following transactions during the FY. 2020-21 on BSE and summary of transactions are as under:

Calculation of Turnover and profit in accordance with Income Tax provisions read with ICAI guidance note:

Audit Applicability:

Income from derivatives is subject to tax audit only if turnover is more than Rs 1 crore. Alternatively, one may opt to be governed on a presumptive basis. If the turnover from derivative transactions is less than Rs 2 crore. In such a case, income is taxed at a flat rate of 6% of turnover (or 8% of turnover if an electronic clearing system is not used),  and there is no requirement for audit. Since turnover in the case of Ram is below the prescribed threshold, there is no requirement for a tax audit.

Written by: CA Keshav Agarwal

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Mr. Joy advises him that he should make a plan for countryside holidays this weekend, so he can break free from routine life and enjoy a little, thereby reducing stress.

After his last call, Mr. Happy calls his other long-time friend Mr. Calm and discusses with him, the same routine life and stressful work.

Mr. Calm suggests that he should meditate a little in, the early morning before going to his work so that he can reduce his stress and feel peaceful all day long.

If we carefully look, then we find that both the friends have suggested options for reducing stress to Mr. Happy, but each one has a different approach.

It may be because of bias towards a particular type of trait & behavior, i.e., Mr. Joy is an extrovert & loves to socialize a lot, whereas Mr. Calm is a religious & peace-driven person.

In the same way, in the Investment world, we Investors show biases to a particular type of mentality, which is also known as Behavioural Biases, which leads to our Investment decisions.

Today we shall discuss some of them. Starting with:

Loss aversion: 

Meaning:

Averse means “having a strong dislike of”. We, as Investors, are Loss averse investors rather than Risk-averse investors. Loss aversion is a bias toward avoiding losses over seeking gains. i.e, We as Investors are more sensitive towards our losses than we are towards the equivalent amount of gains we make. 

For example, let’s say that Mr. A bought 6 shares of Paytm @Rs. 500 each totaling Rs. 3,000.

Now, let’s take 2 scenarios:

1. The next day the shares went from Rs. 500 to Rs 600. He gains Rs. 600 (Rs 100 * 6), or,
2. The next day the shares fell to Rs. 400. He loses Rs. 600. 

Here Mr. A will be more upset over the Rs. 100 per share lost in Scenario (b) then he is happy over the same Rs. 100 per share he gained in Scenario (a) i.e Upset> Happiness, for the same Rs. 100.

The learning here is Mr. A is willing to risk his Rs. 3,000 but he is afraid of loss, which implies that he doesn’t dislike risk but he dislikes losses.

Impact on Investing:

Often we hear that people don’t like to invest in the stock market or other asset classes, and their reason is “Share Market bohot risky hai”, which is true. But what they don’t understand is that by eliminating all risks, they are foregoing their probability of gains also. Loss aversion causes us to avoid small risks even when they’re probably worth it. This is why many people save money in their bank accounts rather than invest, even though inflation will erode the value of their savings, while many investments when held for long enough, pay off.

How to deal with it:

Start small even if you dislike risk. Don’t rely on emotions. Even if Rs. 500 is put in several stocks, it can give better returns than Saving Bank accounts. The BIGGEST risk is NOT taking risks.

Overconfidence bias:

Meaning:

Overconfidence bias is the tendency to see ourselves as better than we actually are. Where we are of the view that whatever we think is true and will happen.

Impact on Investing:

The problem with the overconfidence bias is that it makes an investor overestimate their abilities and knowledge. 

For example, often when we invest in a stock, some investors do their research which may be an hour of reading about some news about a particular sector, or about the stock in which we are considering investing. Based on that we may conclude that it will go up by some amount in the next 2 days (say) and we buy it. Often we may incur losses, and then we end up saying that the “Stock market is a gamble”. 

If we just think for a second that our one hour of research may mean nothing compared to the research a Portfolio manager or Investor or even a trader (sitting in front of the screen, the whole time during market hours) does and is going to put thousands and millions of Rupees into a stock. He may have far better quality & quantity of information than we as Retail investors have access to. Ultimately we over-assume our abilities and become a gambler ourselves.

How to deal with it:

For a novice investor, you may consider passive investing i.e., buy and hold the stock strategies, with a long-term perspective or, you may consult Retail Wealth managers (such as Prudent Wealth).

Herd behavior bias:

Meaning:

Herd behavior bias is when investors follow others rather than making their own rational decisions based on financial data. In other words when Investors move in herds of Sheep and are driven by a common behavior rather than rational judgment.

For example, often we have seen investors investing in a stock, just because their friend has bought the same stock or, they read that some ace Investor (say Mr. Rakesh Jhunjhunwala) has bought a particular stock, and they often sell a stock just because Some mutual fund has offloaded their position in that stock.

Impact on Investing:

We don’t understand that herd behavior can backfire, it can lead to financial bubbles, such as the popular Harshad Mehta scam of 1992. We don’t know the intention of the person we are following, and in the event of a crash, he may have access to better strategies to cut losses, than we have.

How to deal with it:

Don’t fall prey to the stocks promoted via SMS/Calls or by some random Internet forum. Always check for the companies fundamentals before investing your hard-earned money.

Written by: CA Dhiraj Kejriwal

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Team, MyGoalMySip.

What is the Annual Information Statement?

Up until now, Form 26AS served as a consolidated annual tax statement which included details of any TDS that might have been deducted and deposited on your behalf, Advance or Self-Assessment Tax paid, as well as records of high-value transactions that you may have made.

The Annual Information Statement on the other hand includes many more categories of information like securities & mutual fund transactions, interests, dividends, foreign remittance information, and more. The reported information has been processed to remove duplicate information. It may contain any other transaction-related information that may be available with the Income Tax Department. Taxpayers will be able to download the AIS in JSON, PDF, and CSV format.

Form 26AS will continue to be available on the TRACES portal until the AIS is validated and is completely operational.

Features of Annual Information Statement:

1. Taxpayers can submit online feedback on AIS. If the taxpayer feels that any incorrect information has crept in, they can submit that feedback online. Taxpayers can also submit the feedback offline via AIS utility.
2.  A Simplified Taxpayer Information Summary (TIS) will also be provided to each taxpayer. This will show the summary of a taxpayer’s income as per ITD. If the taxpayer changes any information on the AIS, the derived information in the TIS will get updated in real-time. With the help of TIS, taxpayers can:
   • Tally their security transactions with the broker statement.
   • Cross verify the dividends that they have received in the bank. An account with what is mentioned in AIS.
   • Access information related to refund or demand for the previous year’s ITR.

What does this mean for taxpayers?

Taxpayers need to carefully check all the transactions reflected in the AIS and make necessary amends (if any) because this information will be vital for filing ITR.

In case of any mismatch in the TDS/TCS details displayed on Form 26AS and AIS – at present, it is recommended to follow Form 26AS available on TRACES.

How to view AIS?

Users can access the AIS by clicking the link “Annual Information Statement (AIS) under the “Services” tab of the new Income Tax Portal. Taxpayers need to check and verify the information shown in the AIS and make amends (if necessary) before filing ITR for the current tax season. However, if the ITR has already been filed and some information has not been included or has been wrongly included, the return may be revised to reflect the correct information. 

Written by: CA Rithm Choudhury

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To avail benefit the below conditions needs to be fulfilled:

• If you are purchasing a house, it should be made within a period of 1 year before or 2 years after the date of transfer, or if construction is done then the construction should be completed within a period of three years.
• You can own one residential house on the date of transfer of the long-term capital assets, which means you can own two houses, one existing and the other one you are planning to buy or construct.
• You cannot purchase an additional residential house within a period of one year from the date of transfer of the long-term capital asset, or construct an additional residential house within a period of three years from the date of transfer.
• The house purchased or constructed cannot be transferred for three years from the date of purchase or construction.

Example: Ram sold gold in FY 2019-20 for Rs. 20,00,000. It was purchased in FY 2012-13 for Rs. 6,00,000. And Ram purchased his second house property for Rs. 40,00,000 in FY 2019-20. Ram will be able to claim deduction under section 54F as follows:

Written by: CA Shiwangi Agarwal

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Read Next: Benefits extended under the Income-tax Act, 1961 for promoting education.

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The Government of India [“GOI”] has been trying to enhance the quality of education since the time of independence. It has introduced various programs, campaigns, aid to free of cost education, mid-day meal, granted scholarships, various other incentives to eradicate the illiteracy rate from the society.

Moreover, to promote a higher literacy rate for the education of children and youth in India, it has also granted various tax benefits to the individuals in lieu of the same. In this regard, the GOI has extended benefits by way of providing allowances and tax exemption benefits on incurring expenditure for the purpose of education.

The various exemptions and allowances under the Income-tax Act, 1961 [“the Act”] w.r.t promoting the education is given in the pictorial diagram below :

In accordance with the above, we understand that expenditure incurred for the above purpose can be claimed as an allowance or exemption from the taxable income of the person. Hence, it is now imperative to understand who can avail such deductions/ exemption, what are the eligibility criteria for claiming the benefits, if there are any limitations or restrictions also, etc. Let’s understand this in detail in the table below:

Notwithstanding the above, while claiming a deduction under section 80C of the Act, one must take a note of the below points:

1. A deduction is not available towards payment made for school fees of self, spouse, brother or sister, father or mother, or any other relative.
2. Tuition fees will not include development fees, donation or charity, Private Coaching center, other expenses such as hostel expenses, mess charges, library charges, or similar payments and transport fees.
3. Fees paid to a foreign university situated outside India are not eligible for this deduction.
4. A deduction is available only for full-time education courses that include a nursery school, creches, and playschools.
5. A deduction can also be claimed by a divorced parent or unmarried person i.e., an adopted Child’s school fees are also eligible for deduction.
6. The maximum deduction on payments made towards tuition fees can be claimed for up to Rs 1.5 lakh together with the deduction with respect to insurance, provident fund, pension, etc. in a financial year.

Deduction under section 80E of the Act on repayment of interest on education loan:

Separately, where an individual has taken a loan from any financial institution or any approved charitable institution for the purpose of pursuing his higher education or for the purpose of higher education of his relative, then the deduction can be claimed under section 80E of the Act for the repayment of interest on education loan. In this regard, the following points are to be taken under consideration for the purpose of claiming deduction under the aforesaid section:

A deduction shall be allowed for –

a) 8 Assessment Year(s); or

b) Assessment Year in which the interest paid in full; whichever is earlier.

• A deduction is allowed only if an education loan is taken for a spouse, children of that individual, or the student for whom the individual is the legal guardian.

Disclaimer:

The above article is based on the literal interpretation of the Act and does not address any specific issues emanating from the aforesaid sections of the Act.

Written by: CA Bhumika Singh

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Read Next: How can you plan for your children’s education?

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The rates of Capital Gains Taxation of Mutual Funds in summarized below:

Taxation of Capital Gains on SIPs.

Let us understand this with the help of a simple illustration.

Mr. A purchases a certain number of mutual fund units through every SIP installment. The redemption of these units is processed on a first-in-first-out basis. He invested in an equity fund through a SIP for one year and later decided to redeem his entire investment after 13 months.

In this case, the units purchased in the first month through the SIP are held for the long-term (over one year) and Mr. A realized long-term capital gains on these units. If the long-term capital gains are less than 1 lakh, then he need not have to pay any tax.

However, Mr. A made short-term capital gains on the units purchased through the SIPs from the second month onwards. These gains are taxed at a flat rate of 15% irrespective of his income tax slab. He will have to pay the applicable cess and surcharge on it.

Conclusion: The longer you hold your investments, the more tax efficient it is.

Written by: CA Sourav Agarwal

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Focused funds are a category that includes a smaller range of mutual funds’ investments in inventories. With this investment scheme, instead of a diverse mix of stock positions, funds are concentrated on the limited variance from only a few sectors. 

These funds mainly hold positions in approximately 20-30 companies, whereas other funds hold positions in more than 100 companies. Their mandate to choose a limited number of companies to purchase inventories is also called the “best idea funds.” The main objective of these funds is to generate maximum profits through investments in high-performance assets. 

What is the objective of Focused Fund? 

One of the main advantages of investing in common mutual funds is to promote capital investment diversity. The majority of mutual funds invest in many companies that have pre-determined weights to save investors from the difficulty of selecting each security. Now, while this diversification helps investors to maximize returns while minimizing risks and volatility, they can also experience certain disadvantages on the other side. 

Investments in various industries and enterprises, for example, may also be reduced because not all companies can simultaneously outperform. Targeted mutual funds primarily aim to distribute their holdings across a small number of carefully investigated capital and debt funds. While these funds don’t offer the advantages of diversifying funds, they rely on the perks of careful research into stocks. 

Returns are therefore deemed more volatile from these funds. They are riskier than mutual funds that invest in a wide range of inventories but also deliver higher returns. Alternatively, they are also called “concentrated funds” or “under-diversified funds.” 

Taxation: 

The taxes on these funds are similar to the tax consequences of mutual funds. For example, these funds can invest for a limited number of companies in tax-saving equity, non-tax saving equity funds, debt funds, SIPs, etc. The tax consequences for each investment are as follows: 

• In terms of equity funds: Taxation of focused equity funds is subject to short-term or long-term capital gains. In that case, the equity funds exceed Rs. 1 lakh in long-term capital gains or LTCGs; they are subject to 10 percent tax. Now the fiscal saving capital funds have a 36-month lock-in period, which puts all profits in the long run. They are therefore known as equity saving funds. The short-term capital gains or STCG shall be taxed at 15% if units have been redeemed before 1 year is completed. 
• In terms of debt funds: Long-term debt fund capital gains are taxed at 20% after indexation. Indexation involves inflationary growth over the period between the purchase of funds and sales. 

Who can invest in Focused Funds? 

Investments in focused equity funds are typically intended for veteran and high-risk investors. Because the funds are considered to be more volatile, investors should not invest in them if they are seeking safe investment options. 

However, these funds should gain more momentum in the future, despite the risks they present. They can help investors maximize their investment gains by promising higher returns than other mutual funds. Furthermore, these funds are much more effective in bringing high returns to investors because they invest only in several carefully chosen schemes. 

Pros of Focused Funds: 

• Very well investigated investments: Fund managers have thoroughly selected investor research companies before they can deliver maximum returns for them. The company’s in-depth evaluations benefit investors to a considerable extent. 
• Higher returns: Although these investments are high risk, they can deliver maximum profit. Investors can maximize capital gains more effectively with focused mutual funds. 
• Analyzes mutual fund limits: As mutual funds do not separate businesses and sectors, they can reduce returns by investing in inadequate inventories. With the focused funds, however, investment is limited to the selective firms’ stocks and therefore dismisses the restriction of mutual funds. 

Check out our YouTube video for more information!

Read Next: “What is goal-based investing and why is it so important?“

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The word “financial freedom” is one that we hear a lot these days. Everyone has a different understanding of the same. Some argue that it’s about getting what you want and when you want it; having no debt; being self-sufficient, or simply being wealthy. 

These are honestly some vague responses. Though we spend a lot of time talking about it but the truth is we barely have an idea about what it means. 

In this blog, we’ll talk about financial freedom and a step-by-step plan for achieving it quickly. 

The first question is, what exactly is financial freedom? 

Having enough residual income to cover your living expenses is the definition of financial freedom. It’s not about being wealthy or having a lot of money; it’s about having enough to meet your expenditures so you can spend your time doing things you enjoy rather than doing anything solely to get money. It is only possible if you are prepared for it. All you need is a little money management. 

Here are the 5 steps you need to follow to achieve financial freedom: 

1. Keep your spending to a reasonable level: 

   You must plan your finances, keep track of your income and expenses, make a budget, develop a savings habit, invest with consistency, and avoid debt. Debt is a significant barrier to financial freedom. The worst type is credit card debt, which has interest rates ranging from 30 to 40 percent. Avoid using credit cards and develop a debt repayment strategy to pay off your current bills. It should be done even before you begin investing. 

2. Follow 50:30:20 Rule for income allocation:

    According to the thumb rule, a person should devote 50% of his or her income to “needs,” or compulsory expenses, 30% to “wants,” or domestic spending, and 20% to investment goals or savings. When it comes to saving money, you must build a habit of saving. “Pay yourself first” is one of the most successful saving strategies. Paying yourself first involves setting aside a specific amount of money for savings each time you are paid before spending any of it. For example, if you invest Rs. 10,000 per month for 20 years, with an average interest rate of 13%. 

3. Increase your investment:

    To reach your objectives, you must invest. It’ll help you fulfill your ambitions. You are also saving and building a corpus for the bad days by making investments. Besides, making regular investments, and increasing them annually pushes you to set aside money regularly, which helps you develop financial discipline over time. For example, you can build a massive corpus of 2 crores if you increase your investment by only 10% annually. 

4. Plan your Taxes and Insurance: 

   To pay the least amount of taxes on your income, you must save taxes and take advantage of any available discounts. As far as your insurances are concerned, you only need two insurances, one, a life insurance for your life cover between 10x – 20x of your income; two, a health insurance for your health depending on your life stage. 

5. Review your financials periodically:

    You must evaluate your financials on a regular basis; you can update it annually, quarterly, or at any other time according to your convenience. You only have to be consistent about it; the more consistent you are, the more financially secure you will be. This will help you in identifying unnecessary expenses, investment performance, portfolio rebalancing, and many other things which will help you achieve financial success. 

Last but not least, “it’s never too early”, you’ve heard before, and you’ll hear it again. Begin investing as soon as possible, even if it’s in small amounts or installments, and let compounding work its wonders. When planning your monthly budget, using a goal-based approach will help in determining how much money should go towards each investment. It can save you a lot of money while also relieving you of unnecessary financial stress. 

There is nothing more important than investing in yourself; the more you put in yourself, the better you will become. Reading good books, meeting new people, and developing skills will certainly help you come up with fresh ideas that will assist you in accomplishing your life goals or pushing you towards a more successful life. 

Also, never compare yourself to your peers. They are living their lives, and you are living yours. Don’t get tempted to do what they are doing and, try to avoid the impulse to do the same. 

To know more, watch our YouTube video!

Read Next: “Market Capitalization.”

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