Choose wisely – Annuity options for retirement

ideal retirement image

The hard-earned retirement corpus secured in accounts such as the NPS, PPF, and/or the EPF is the final nest egg for public or private sector individuals who retire after a few decades of continuous service. While certain central government retirees are eligible for pension and lumpsum fund benefits, almost all the private sector employees are not entitled to a pension from their employers and have to fall back on lumpsum (defined contribution plan) corpuses.

As a result, the post-retirement monthly expenditures of the family, most often, depends on corpus inwards from such accounts. There are two important considerations for such corpus inward for individuals – Safety and return on such corpus since this impacts the amount of derived pension on the same for the rest of the life.

Upon retirement, most individuals rely on traditional plans such as a combination of fixed deposits, Sr Citizen savings Schemes and/or plain vanilla Savings accounts to create cash flows for longer duration and this raises several risks of the safety of corpus, interest rate risk and thereby risk of variability of periodic cash flows and the possibility of hardships during retirement years.

Annuities – Should be the first choice for retirement corpus

Annuities should be the preferred choice for retired individuals; however, this product is not very popular due to lack of awareness, perceived lower rate of returns and liquidity issues. Annuities offer the best hedge against the variability of cash flows, against interest rate risks and consistent cash flows for most of the living life.

Today annuities offer a wide range of choices which were not available 5-10 years ago. Flexibility, market comparable rate of return, and wide range of options are available from over half dozen annuity service providers. Besides this, regulations and oversight of annuity providers make this product extremely safe as compared to other market-linked products.

A quick glance of the variety of options from annuity service providers is summarized as below.

Table 1: Choose the option wisely
Annuity for life Annuity for life with return of purchase price on death Annuity payable for life with 100% annuity payable to spouse on death of annuitant Annuity for life with a provision for 100% of the annuity payable to the spouse of the annuitant for life on death of the annuitant, with return of purchase price on the death of last survivor Annuity payments would be made to the annuitant and his/ her spouse throughout their lifetime. Thereafter, these pay-outs would be made to the subscriber’s mother and after her, to the father. On death of the father, the purchase price would be refunded to the annuitant’s child/ nominee.
Source: NPSTRUST.org.in

 

Which option makes sense?

This depends upon a variety of factor and the retired individual’s objective, dependents, and other personal factors. For instance, for couples with no dependents the easiest choice would be to choose option 1: Annuity for life. Here, they are likely to enjoy higher cash flows or put in lower corpus to enjoy required cash flows. The standard of living could be higher for such couples since this option pays the highest pension as compared with other plans across annuity service providers. Options #2 and #3 might suit retired couple with legal heir (children / grandchildren) where they might want to gift such corpus earned.

Option #4 & #5 could severely impact the current cash flow for the retired individual since the objective is to return the corpus. Unless there is adequate liquidity and other assets these options defeat the very purpose of buying an annuity and therefore can be avoided.

Lessons from the CoVID 19 Lockdown

The CoVID19 pandemic and the consequent lockdown has brought in a humbling experience to many of us, including individuals and/or businesses thought to be foolproof of themselves given their indispensable nature of product or services. Barring food and dailies (groceries) none of the presumed basic services needed to mankind have become affected adversely. Alas, none has been spared. The neighborhood barber/salon or the cobbler who mends shoes right up to liquor barons (barring regulatory risk) and would have thought to be proof from any eventuality have faced different levels of threat during this pandemic. India’s service economy which is almost 2/3rd of the GDP has taken a massive hit. At the business and at individual levels, the lessons the current crisis has have been of very basic nature. On the principles of “risk management” most of the lessons that this crisis offers are rudimentary. A quick look at basic lessons from this crisis.
Cash is King
We need to write this title in large and bold font in our minds and actions. Cash if the blood of any business and a key element of an individual’s personal financial wellbeing. Without enough cash businesses freeze or worse, go bankrupt. Without cash, an individual’s household can face immense hardship and probably make or break the family and household. The current crisis has brought out this basic element of money management to the fore. Many businesses (large and small) and individuals all are strapped for cash during these times, however, people who had planned for crisis level reserve for cash would emerge out of this crisis stronger and would be able to grab opportunities crisis’ bring after they pass. So, what is the lesson from this crisis to us all? Keeping reserve or emergency cash/liquidity, always, is as basic as it should be. For a business, 3-4 months of cash burn should be available to tide over during such unforeseen times, and similarly for individuals, 4-6 months cash for expenses should always be kept at call. People who followed this golden rule will find it easier to tide over the current situation without much hassle.
Health is Wealth
This again is as basic as one can understand. Health is not acquired without effort. To remain healthy – physically and mentally, individuals must put effort into eating good food, resting enough, and working out physically. Similarly, for mental health, individuals require attainment of inner peace, sound conscience, and a positive attitude. All the above is easy to attain if the practice of working towards it is regular and not when the crisis is on the horizon. The second aspect of health is a risk. The first part was risk mitigation by doing many things as explained earlier, the second and the most important part is risk transfer. Despite all the care and work on your health, it could be possible that your health is compromised due to reasons beyond your control; risk transfer helps you to cover health failure without any financial damage. The best form of risk transfer is “health insurance”. And to plan for the same when there is time is again a basic thing to do. Individuals should be prepared to pay a small cost to cover himself/herself and family from any health eventuality. The health risk is real. Recognize and prepare for the same without delay.
Multi-tasking is underrated
The CoVID19 crisis has taught this one thing – one more time. Specialists are overrated and generalists are underrated. The crisis has been easy for generalists. Everyone who depended on a specialist for everything from household chores, outsourcings kitchen (and cooking), and technical staff and many more things, have been rendered faced with a big handicap. People who could easily mold and become a self-service oriented person are having a relatively easier life during this crisis. Multi-tasking on the home front or office front should be the way forward. Cooking, housekeeping, fixing the small things, doing office duties with minimal help and above all ability to learn quickly – technical as well as basic stuff is the key to ever remain relevant. The faster one learns this the better prepared he/she is for the current and future crisis.
Upskilling has no age bar
Why is it that suddenly everyone is rushing to get enrolled for the online course? That is because nobody knows what kind of skills the world would demand, in 2021. People are rushing to upskill/upgrade their knowledge for the fear of being left out once the world re-opens. While that might sound a good thing to do, upskilling and staying relevant is a continuous process. It does not start during the crisis and ends when the world is normal. Leaning a new skill does not have an age bar. To stay productive and relevant an individual must repeatedly upskill and upgrade continuously. This way, the person would be the sought-after individual when the normalcy returns. Corporate / businesses are looking at human talent that is ready and easy to plug/play during difficult times. Upskilling/upgrading requires time and an individual should set the same aside regularly and not just when crisis hits the horizon.

FAQs on EMI Moratorium – Most questions answered

The EMI Holiday package announced by RBI on account of CoVID19 has raised many questions with respect to applicability, coverage, eligibility, and impact.   We answer the basic questions through the FAQs that are put together which cover most of the doubts regarding these. 

  • Is moratorium compulsory or optional; what loans are it applicable to?

The moratorium is optional both for the borrower and the financial institution(lender).  ie The lender can choose to offer this option to its clients. The borrower can also choose to avail of the option if it is offered by the lender from whom the loan is taken.  

This is applicable for all kinds of credit facilities such as retail loans, Home Loans, Business Loans, Cards and Farmer Loans, term loans, and working capital loans of any size and duration and applicable both for individuals and businesses.

  • What is meant by moratorium?

A moratorium is temporary postponement of payment of interest/ principal/installments (and is not a waiver) for the period from Mar 01, 2020, to May 31, 2020. Interest will continue to be payable on all amount(s) for which payment is being postponed pursuant to the Moratorium.

  • For what period can the moratorium be granted?

A moratorium may be granted up to a period of three months for all amounts falling due between Mar 01 and May 31, 2020.

  • Is the moratorium on principal or interest or both?

The moratorium can be offered for below payments due during the moratorium period:

  1. Principal and/or interest component
  2. Bullet repayment
  3. Equated Monthly Instalments ( EMIs)
  4. Credit Card dues
  • Will the interest accrue during the moratorium period?

Yes, lenders will charge interest during the moratorium period as per the relevant terms and conditions of the loan agreement between the lender and borrower/s.   

  • How can you opt for the moratorium?

For most PSU lenders, there is blanket access to the moratorium, and it applies to all loans irrespective of size/category/sector. For private lenders, it would be prudent to get in touch with the respective client relationship manager/branch/phone banking/mobile banking/internet banking etc. and communicate your preference since this is NOT a default option and needs to be availed categorically. Failing which, there is a chance that the deduction of EMI would go through on the scheduled date set.

  • What is the interest charging mechanism for retail term loans such as Home Loans, Personal Loans, Consumer Durable Loans, Two-Wheeler Loans, Auto Loans?

The accrued interest would be added to the principal amount which will increase the residual tenure of the loan except in cases where extension of tenure is not possible in which case the EMI amount will increase. Please refer to the terms and conditions in the loan agreement for further details.

Illustration: Mr Ravi availed of a home mortgage on Mar 01, 2020 amounting to Rs one crore with a loan tenure of 240 months at an interest rate of 7.5%. If Mr. Ravi wants to avail of a moratorium of installment of Rs 89,972 which is due on Apr 01, 2020, then the interest for the month of March amounting to Rs 75,000 will be added to the principal amount and the outstanding principal amount on Apr 01, 2020, will become Rs 10,075,000. The interest will be computed on an outstanding principal. Similarly, the interest for the month of April which is payable on May 01, 2020, of Rs 75,562 will be added to the opening principal on May 01, 2020, which will be Rs 10,150,562. The interest will again be computed on the outstanding principal. In this case Mr Ravi’s tenure will increase from 240 months to 250 months considering the unchanged rate of interest and installment amount during this period.  To reduce this, Mr Ravi can choose to prepay part of the loan when normalcy returns to his cash flows, based on the prepayment clauses in his agreement.

  • How will interest be charged and recovered for SME / MSME / Businesses which use cash credit/ overdraft facilities? 

The accrued interest will be due and payable immediately after the end of the moratorium, and interest keeps accruing for this moratorium period.

  • Will there be late payment charges/ default interest/ additional interest for the deferred installments during the moratorium period?

No late payment charges/ default interest/ additional interest shall be levied during the moratorium period has to be charged during this period as specified by RBI.

  • Can the borrower make payments in between the Moratorium period?

This option to defer payments on loans is a relief granted to borrowers due to disruption caused due to the unprecedented outbreak of COVID-19. However, the borrower has the option to continue scheduled payments during this moratorium; or avail of the benefit of the Moratorium.

  • Will the seeking of Moratorium by the borrower have an impact on their credit/bureau score?

The moratorium on payments will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs)/credit bureau by the Bank. Hence, there will be no adverse impact on the credit history of the borrowers. This is specifically for this moratorium period only.

  • If the borrowers have enough balance in the accounts and installment is due, will the lender debit the EMI during this period?

Yes, if you have NOT opted in for the moratorium, then the normal EMI dates would apply and the deduction would occur as per the loan schedule.  It may be noted that some banks are offering moratorium as a default, hence, it is advisable to check with the communication from the bank. However, if one has opted for the moratorium, then the EMI would not be deducted even if there is sufficient balance for the EMI. 

  • Does the borrower need to submit any documents for availing this Moratorium? 

For PSU lenders the default option is the borrowers would get this moratorium irrespective of which category he belongs to. For borrowers of private lenders, the borrowers would get instructions from his/her respective lender on what needs to be done. Currently, the paperwork is limited to communicating the choice of option to the lender via – email /phone banking/internet banking or branch banking.

  • Does it make sense to continue to pay the EMIs rather than availing of the moratorium? 

Yes, if there is NO pressing need or shortage of cash flow then it makes sense to continue to pay as per schedule. This way you save on the additional interest that would be charged on the amount outstanding.

  • What happens to payments due and made or defaulted in March 2020 

If the payment has been made during the 1st March 2020 – 31st March 2020 period, then the borrower will effectively get two months of the moratorium period. If there has been a default due to cash flow issues or any other reason, then you would now get protection against any penalty/charges that might be due or have been deducted. And effectively such borrower would get the 3-month moratorium period. 

  • What happens to loans/credit facility started in March or April 2020?

The borrowers of all classes, old and new are eligible to avail of this moratorium; however, different lenders might have different rules, so it might be good to check with your lender on their policy with respect to the same.

  • If the borrower has multiple borrowing facilities within the same lender of different lenders, can he/she get a blanket moratorium? 

The borrower needs to specifically select and mention every facility that he/she has availed from the lender or in case of multiple lenders, then the borrower will need to communicate/opt with all such lenders.

EMI Loan Calculator and Impact Assessment

Your Checklist On Taxes For The Financial Year End!

We are just a few days to go before this financial year (2019-20) comes to a close. Though you have time till July 31st, 2020 to file your income tax returns, there are a number of activities that you need to do by March 31st, 2020 to claim the benefits in this assessment year (AY 2020 – 21). The finance minister came out with a series of extensions in dates till June 30th, 2020; but this is restricted mainly to tax saving investments.   Thus, you may have a bit of a breather on your tax saving investments.  Here is a checklist of items that you should go through to make sure that you have availed all the tax benefits available under different provisions of the Income Tax Act.

 

  • Set off your capital gains for the year with the losses:  If you do have capital gains for the year upto January 2020 when markets were relatively buoyant, you would have a number of stocks or even mutual funds that would be showing losses.  You can book some losses and set off the capital gains. You would want to optimise your capital gains in a difficult year. Do check if you have exit loads on your mutual funds before booking the losses.  This needs to be executed by March 31 for one to avail of the benefit.
  • Section 80C: You can claim deduction of up to Rs 1.5 lakhs from your gross taxable income by investing in schemes eligible u/s 80C. These schemes are EPF, VPF, PPF, NSC, tax saver bank FDs, life insurance premiums, mutual fund ELSS etc. Tax payers who are not getting a salaried income and not having PF and other tax saving investments must make sure that they avail maximum benefits. Senior citizens and parents of girl children can claim deductions by investing in Senior Citizens Savings Scheme and Sukanya Samruddhi Yojana subject to the overall Rs 1.5 lakhs 80C limit. Investors paying home loan EMIs can claim deduction for principal payments made during the financial year. Benefit extended till June 30th.
  • Section 80D (Medical insurance): You can claim Rs 25,000 of additional deduction for medical insurance premiums for yourself and your family (seni or citizens can claim up to Rs 50,000). You can claim a further deduction of Rs 25,000 for medical insurance premiums of dependent parents (Rs 30,000 if your parents are senior citizens).  Benefit extended till June 30th.
  • Section 80CCD (NPS): You claim additional Rs 50,000 deduction, over and above Section 80C limit of Rs 1.5 lakhs, by investing in National Pension Scheme. You can claim total deduction of Rs 2 lakhs by investing Rs 1.5 lakhs u/s 80C and Rs 50,000 in NPS. Benefit extended till June 30th.
  • Section 24 (Interest payment on home loan): You can claim up to Rs 2 lakhs deduction for interest payments in your home loan EMI for self-occupied house. If you are paying home loan EMIs for a let out house, the loss is restricted to Rs 2 lakhs in a financial year.
  • Section 80E (Interest payment on higher education loan): If you have taken loan for your, spouse or children’s higher education, then the entire interest payment can be claimed as deduction from your gross taxable income.
  • Section 80G (donations to charities): Donation made to tax exempt charities is allowed to be claimed as deduction at the rate of 50% or 100% (of the contributed amount) depending on the charity and as per approval granted by prescribed income tax authorities.

 

  • Check your surcharge bracket:  You maybe able to claim exemptions/deductions and set off your losses to reduce your net income to below the surcharge brackets (Rs 50 lakh / 1 Cr / 2 Cr / 5 Cr) if your income is on the border.  Plan before March 31st, because only tax saving investments are extended till June 30th.

 

  • Pay Advance Tax by March 31st: Tax payers who have income from other sources (e.g. rent, FD interest, capital gains etc) should make sure that they pay advance tax by March 31st, 2020. If you have worked in two different companies, you are likely to have to pay additional taxes for the year when you consolidate the two form 16s. If do not pay Advance Tax on time, you will have to pay interest @ of 0.75% per month of delayed tax payment (reduced from 1% per month for the period upto June 30th), even if you file your IT returns on time. For example, if your tax obligation over and above tax deducted at source (TDS) on March 31st is Rs 5 lakhs, you will have to pay Rs 16,250 as interest if you are filing your ITR and paying tax on July 31st

Summary

You can save a lot of money in taxes by availing the benefits available under different provisions of Income Tax Act. In this article, we have shared with you a checklist of items that you should review and make sure that you get maximum benefits. In addition to the tax savings avenues shared in this article, there may be other depending on your specific situations. If you need help with your tax planning feel free to email us at contactus@righthorizons.com .

The Ultimate Secret Of FINANCIAL PLANNING

We all knows the game called Kahn Banger Crorepati 

Show Host – Amithab bachan !  

And crorepati cheque has taken by only one women in India I.e Binita Jain

She won final cheque in episode and is planning to utilise the winning amount to set up a dental clinic for her son.

Do You know KBC ?

KBC( Kaun Banega Carorepati)   was launched for the first time in July,2000. It is a  show which provides  healthy entertainment and also helps in enhancing knowledge. 

Every one loves to be their in hot seat and try to ans all the Questions and get the big cheque from the hands of film star

Now let u also know this one more person who withdrawn Rs 2.3Cr   with a small investment like 1 lakh now his bank got 230 times more from what he just invested.


Hey Woman! Take Charge Of Your Finances To Be Truly Independent

Take charge of your finances

Some Facts and Stats

  • Lack of sufficient funds and home responsibilities largely come in the way of women’s aspirations to start their own business/venture as per a study conducted by Nielsen for biscuit major Britannia.
  • A whopping 4% of women do not have a medical cover as per a survey conducted by Economic Times. Many separate studies across Indian states and cities have shown that women are wary of investing in the equity market.
  • On the positive side,
    • The number of Indian women investing in mutual fund schemes and stocks is on a rising trend which is a good sign.
    • 27% of the stock market investors are women.

 

Indian women have come a long way in terms of education, independence and self-identity. But the tendency to leave financial decisions in the hands of the men in their lives – son, husband, father is still quite prevalent. Though this has been changing, it is important that more women take charge of their financial life as there are many indicators that women are good investors – Why?

  • Indian women are historically and culturally well-versed with saving. Women save more and therefore can invest more.
  • Women are more risk-averse as compared to men. Therefore they perform in-depth research before investing their money. They stay away from risky products.
  • Women have more self-control. They are less prone to impulsive trading and over trading. Overtrading usually results in reduced performance portfolio.

 

But on the other hand, there are certain weaknesses that are inherent in women investors –

  • They are very conservative investors and this can lead to reduced overall portfolio returns.
  • On an average, women earn less. They also take breaks in their career. This leads to lesser funds available for investment. Since there is a smaller kitty, they prefer to invest in debt products which are secure but give less returns
  • They are busy with too many responsibilities of family and work that they do not find time to manage their finances.
  • Women are not part of discussions related to financial matters in social realm as some feel they do not know anything. Sometimes they are not included as it is assumed they do not know much. These discussions are sometimes closed men’s clubs or informal networks; which are not easy to get into.
  • Women are hesitant to ask for raises in salaries. They underplay their skills and achievements while negotiating for a pay package.
  • Women let emotions rule and end up helping friends and family financially without considering the dent it would do to their financial portfolio. It is of course good to help others in need but not at the cost of putting yourself in financial peril.

 

Women  have to play to their strengths and overcome their weaknesses and gain financial independence. Here are some steps that you can take to get involved in matters of personal finance –

  1. Get involved in the finances of the household by managing a budget. It is the simple task of tracking income expenses and savings. You will get an idea of how much is the monthly expenditure and if you can cut back on some expenses.
  2. Read up on personal finance. There are many personal finance websites and books that can be referred to.
  3. Start investing small amounts in different financial products with the guidance of an experienced investor or financial planner to understand how investments work, the returns and tax implications and tax saving opportunities.
  4. Set up financial goals and work towards achieving them. You will be really proud of yourself when you achieve it and gain confidence in financial matters.

 

Make your financial resolutions this Women’s Day to be truly independent

Key takeaways:

  • Women need to participate actively in financial matters. 
  • Personal financial freedom should be every woman’s goal.

 

This women’s day, Right Horizons offers a FREE financial planning session for women at Dialogues cafe, JP Nagar on March 9th, 3-5pm. To register, write to us at contactus@righthorizons.in or 9845399780.

Review Your Portfolio Before Investment Decisions In A Bear Market

Vinay’s portfolio has taken quite a beating. He had purchased YES Bank at a price of around Rs. 450 per share about 8-9 months back. Today the share is hovering around Rs. 168. Sintex Plastics, which he had purchased in December 2017, has lost about 60% of its value. His portfolios largely comprised of midcap stocks, have lost 40-60% value from their peak. His stock portfolio was doing very well at one point, based on which he significantly increased his investments into stocks. Now, he is unsure as to what to do. Should he buy more of the stocks that he has so that his costs can be averaged?

The stock market has seen quite a few crashes this year. It is highly volatile these days and in a bear phase. The mid and small cap indices lost between 25-35% in a short period. In a bear market, confidence is low and stock prices are not rangebound. They can swing wildly.

In case you are in such a dilemma, here are some action points to bear in mind before making a random or emotional decision –

Review and Adjust Your Portfolio

Its ideal to book profits on your portfolio and hold some cash for deployment on market falls.  You may still want to review the stocks and equity mutual funds in your portfolio so as to remove the duds. You might want to let go of the duds in your portfolio by taking advantage of bear market rallies.

If you have stocks that were bought because of tips, recommendations or just to make quick profits, review them and sell off those that do not seem to have the potential for giving good returns in the long run.  Look to buy good stocks that can gain strongly on a market recovery.

Avoid Panic Selling

Some of us panic and sell off stocks the moment we see that they are losing value. That may not be the best course of action for all stocks. It is not a good idea to exit quality stocks with a good long-term record and good cash flow, , especially at points when they have fallen sharply and their valuations become attractive again.

Don’t Miss Out On Buying Low

Averaging is a smart investment strategy, especially for diversified mutual funds and exchange-traded funds. Systematic Transfer Plans are good to supplement your SIPs when markets have fallen; and you are unable to predict the bottom of markets, but you know it is somewhere around the corner.

Most investors become too fearful on large market falls and miss out the opportunity of buying stocks at their best prices.  Keep in mind that the news flow is likely to very negative at such points.  At the same time, don’t fall into the trap of getting in too early. You can add more of blue chip stocks, high quality funds and ETFs when the prices are down.

Be Practical

If you don’t have the time or find it difficult to track individual stock and the market environment, stick to mutual funds. Seek professional advice if required.  Understand your portfolio, risk tolerance and risk capacity, so that you do not make any hasty decisions that you might regret later on. Work on a disciplined investment style that suits you.

It is difficult to time the market. So investors have to be patient and keep the right investment perspective before making decisions.

In the current market scenario, the prices have fallen quite a bit. It may be time to take some positions slowly. For example, one can invest in blue chip equity funds such as Mirae India Equity and Aditya Birla Sunlife Frontline funds in a phased manner, especially on corrections. One can use a combination of lump sum investment and SIPs to average the costs. When the markets move upward, they can sell off some positions and use that money to invest in debt instruments.

Key Takeaways

    • Understand your risk tolerance; Use an investment style that suits you
    • When markets are volatile, review your portfolio and sell off the bad quality stocks
    • Don’t Panic . Take advantage of market volatility
    • Stay Invested for the long term in fundamentally good stocks, mutual funds and ETFs. Increase allocations on lareger market falls.

Tax Rebate upto Rs 5 lakh: The real story

 

 

Ever since Interim Budget 2019, there is some confusion on whether there is income tax relief given to all citizens or not. Some people are convinced there is an income tax relief for all. Others say they have read or heard news reports about tax rebate relief.

For a common man with limited financial knowledge, all this can be very confusing. So, let us clear that confusion once and for all. The Budget has allowed individuals with taxable income up to Rs 5 lakh to get full tax rebate and so they pay zero tax. Read on to know more.

Tax slabs unchanged

There is no change in the income tax slabs. You must understand what is the difference between taxable income and total/gross income. Gross income includes all of the income a person has received during a financial year. This amount is not explicitly exempt from taxation. On the other hand, taxable income is the amount of income that is actually subject to taxation, after all deductions or exemptions. So, typically taxable income will be lower than gross/total income.

For a person aged below 60 years, up to Rs 2.5 lakh of their taxable income is not taxed.

Income between Rs 2.5 lakh to Rs 5 lakh is taxed at 5% of total income exceeding Rs 2.5 lakh. This tax comes to a maximum of Rs 12,500.

Income between Rs 5 lakh to Rs 10 lakh is taxed as at 20% of total income exceeding Rs 5 lakh.

Income above Rs 10 lakh is taxed at 30% of total income over Rs 10 lakh.

In the Interim Budget, these tax slabs remain the same. However, the Budget has allowed individuals with taxable income up to Rs 5 lakh to get full tax rebate under section 87A of the Income Tax Act.

Do remember for senior citizens aged 60 years and above but below 80 years, income up to Rs 3 lakh is exempt from tax. Income up to Rs 5 lakh is exempt from tax for super senior citizens (ie. aged 80 years and above).

Tax rebate is not tax cut for all

What does full tax rebate for those with taxable income of Rs 5 lakh mean? Read the example below.

Let us assume you, a person below 60 years, has a taxable income of Rs 5 lakh. As per income tax slabs, you fall in two slabs.

First, your income up to Rs 2.5 lakh is not taxed.

Second, the excess amount above Rs 2.5 lakh is taxed at 5% of the exceeding amount. Since your taxable income is Rs 5 lakh, this means you have Rs 2.5 lakh extra over the zero tax-slab.

At 5% income tax rate, the tax liability comes to Rs 12,500. However, the full tax rebate of up to Rs 12,500 given in the latest budget means you will also pay no tax!

But what if your taxable income is Rs 5.5 lakh or Rs 6 lakh or more? The moment your taxable income crosses Rs 5 lakh, then the rebate is not applicable for you.

If your taxable income is Rs 5.5 lakh, for example, your gross tax liability shoots up to Rs 23,400. For somebody with taxable income of Rs 6 lakh, the tax rises further to Rs 33,800.

In essence, all this means your tax liability rises sharply once you cross Rs 5 lakh taxable income zone. For earning just Rs 50,000 more than Rs 5 lakh (taxable income of Rs 5.5 lakh), your tax liability is nearly 47% on the extra Rs 50,000 income.

Importance of tax-planning

Under the new income tax rules, it becomes highly important to plan taxes properly and carefully. A small mistake can cost a lot as you can understand.

Not just the pay structure, full focus and attention needs to be given to tax planning.

Those in the marginal area (just above Rs 5 lakh taxable income) should use all the tax deductions available. This is so that such individuals are not taxed more just because they forgot to claim exemptions, or were not aware of how to lower tax dues.

So, try to consult a good financial planner and prepare your tax blue-print for this year and beyond.

Reach us at 9845399780 or contactus@righthorizons.in

Visit www.righthorizons.com

How to be tax-free with Income up to Rs 10 lakh

 

The Interim Budget 2019 may not have directly touched the income tax slab rates, but a small tweak in income tax rebate is virtually doing the job for many. Salaried employees earning up to Rs 10 lakh in a year can escape paying tax if they use some of the investment and expense related deductions available. In the same breath, non-salaried individuals earning Rs 9.5 lakh do not have to pay a single paisa in income tax. All this is possible because full tax rebate has been given for taxpayers having taxable income of Rs 5 lakh. This means if your total income is more than Rs 5 lakh, all you have to do is to claim deductions so as to bring the taxable income to Rs 5 lakh or below. Read on to know more.

No more taxes

Apart from hiking standard deduction to Rs 50,000 a year, The government has not made any extra income tax deduction related announcements in Interim Budget 2019. By smartly using the norms, all of your income can be made tax-free. Of course, some might argue that claiming Rs 5 lakh as deductions out of Rs 10 lakh income is difficult. Dear friends, life is an art of possibilities. If you know there is a way, you can always succeed.

Before the Budget, taxable income up to Rs 2.5 lakh attracted no tax while taxable income falling between RS 2.5 lakh to Rs 5 lakh attracted 5% tax. In simple terms this means that if your taxable income was Rs 5 lakh, you paid tax on the Rs 2.5 lakh beyond the zero-tax income.

This 5% of Rs 2.5 lakh translated into Rs 12500 and was your income tax liability. The Interim Budget 2019 has given 100% rebate on up to Rs 12500 amount. So, there will be no tax liability for you.

How do individuals earning more than Rs 5 lakh take advantage of the situation? It is easy. If you have a salary income of Rs 10 lakh, you need to claim deductions worth Rs 5 lakh and bring your taxable income part to Rs 5 lakh.

Deduction game

Assume your salary income is Rs 10 lakh. You can make a deduction of up to Rs 2 lakh for interest paid on housing loan for self-occupied property under Section 24. This will reduce your taxable income from Rs 10 lakh to Rs 8 lakh.

Then, there is maximum Rs 1.5 lakh deduction for investments made under Section 80C (like principal paid on housing loan, insurance premium, ELSS, PPF etc.). This brings your taxable income from Rs 8 lakh to Rs 6.5 lakh.

The Interim Budget 2019 has increased the standard deduction for salaried persons to Rs 50,000 (increased from Rs 40,000 earlier). Using this standard deduction, your taxable income falls from Rs 6.5 lakh to Rs 6 lakh.

To encourage National Pension System (NPS), the income tax norms allow us to claim a maximum and separate deduction under Section 80CCD(1B) for additional investment in NPS of Rs 50,000. This when claimed will bring your taxable income from Rs 6 lakh to Rs 5.5 lakh.

Each and every nook

Lastly, you can claim Rs 25,000 medical insurance premium for self & spouse and Rs 25,000 mediclaim premium for your dependent parents. The combined Rs 50,000 premium (under Section 80D)when deduced from your taxable income of Rs 5.5 lakh brings it to the magic figure of Rs 5 lakh.

The process will be similar for non-salaried persons but they will not able to claim the Rs 50,000 standard deduction (available for salaried only). Thus, non-salaried with Rs 9.5 lakh in the above example will pay zero tax.

Below is a a table that shows your example of a salaried person (below 60 years of age).

A) Gross Income – Rs 10,00,000

B) Deductions

i) Deduction for Interest on Housing loan for self-occupied property – sec 24        – Rs 200,000

ii) Deduction – Section 80C (Insurance premium /Principal on housing loan / ELSS / NPS /) – Rs 150,000

iii) Standard Deduction for salaried – Rs 50,000

iv) Deduction under Section 80CCD(1B) – Additional investment in NPS – Rs 50,000

v) Deduction under Section 80D – Mediclaim – Rs 25,000

vi) Deduction for parents (senior citizens Mediclaim) – Rs 25,000

C) Taxable income (A minus B) – Rs 500,000

D) Income tax payable (5% of amount between Rs 2.5 lakh to Rs 5 lakh) – Rs 12500

E) Rebate under section 87A – Rs 12500

F) Net tax payable- Rs 0 (zero)

Do remember that many salaried and non salaried persons can also other deductions available under the Income Tax Act. For instance, interest paid during a financial year on an education loan is allowed as deduction for individuals from the total income under Section 80E. The deduction is provided only for the interest part of the EMI. There is no limit on the maximum amount that is allowed as deduction. If you are paying education loan interest, you can claim the maximum amount per financial year. If the amount is Rs 5 lakh per year, you will not have to do any other investments to come to zero-tax club.

Likewise, taxpayers can use the Section 80G of the Indian Income Tax Act that allows you tax deduction on donations made to any charitable organization. The various donations specified in section 80G are eligible for a deduction of up to either 100% or 50% with or without restriction, as provided in Section 80G.

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