Factor in income, deductions when deciding tax regime

 

Factor in income, deductions when deciding tax regime

If you have significant deductible investments, the old regime could save you more money, but crunch the numbers

As a new financial year begins, expect your employer to reach out to you regarding choosing a tax regime for 2024-25, if they have not already. This decision is crucial. The choice of tax regime dictates how your income will be taxed. If you don’t make the right pick, you might end up losing money.

The new tax regime has become the default tax regime for individuals after the Finance Act, 2023, from the financial year 2023-24 onwards.

 

 The new regime

The new tax regime offers lower tax rates but with fewer deductions and exemptions. Here, taxpayers cannot claim various popular deductions under Sections 80C, 80D and 24. However, some deductions, such as standard deduction and family pension (those receiving a family pension can claim a deduction of Rs.15,000 or one-third of the pension, whichever is lower) remain available. This regime simplifies the tax structure and reduces the tax burden for many, especially those who do not have significant deductions under the old regime.

The benefit of a rebate under Section 87A is available to resident individuals opting for the new regime.

The maximum rate of surcharge is 25 per cent for taxpayers opting for the new tax regime, compared to the highest rate of 37 per cent applicable to taxpayers opting for the old regime.

 

Old regime: Who should stick to it?

Under the old regime, taxpayers can avail of various deductions and exemptions, such as those under Section 80C, 80D, house rent allowance, and the like, which can significantly reduce their taxable income. The old regime follows a system that taxpayers are accustomed to, with well-established rules and procedures. For taxpayers with significant investments and expenses eligible for deductions, the old regime may result in lower tax liabilities compared to the new regime.

 

New tax regime: Is it for you?

The decision to opt for the new tax regime will depend on the amount of exemptions and deductions an assesses can avail of.

This regime would be more suitable for young taxpayers as they do not have any historical claims. They will be able to pay taxes at lower slab rates under the new regime. Individuals with income above Rs. 7 lakh need to estimate their tax liability under the old regime after claiming deductions, and compare it with their tax liability under the new regime without the available deductions. They can then go for whichever regime requires them to pay lower tax.

 

Factor in breakeven point

The breakeven point is the amount where there is no difference in tax liability between the two regimes. We calculated the breakeven points for different situations to help taxpayers determine which option is more beneficial. For example, if an individual has no deductions available under the old tax regime, it would always be more beneficial for them to opt for the new tax regime.

Likewise, if a taxpayer avails of only Section 80C deduction, it would be beneficial for them to opt for the new tax regime. If you avail deductions under both Sections 80C and 80D, then the breakeven point is Rs. 8,25,000. It would be beneficial to opt for the new tax regime under Section 115BAC only if you have an income above this breakeven point. If you avail of deductions under Section 80C, Section 80D and Section 24 (interest on housing loans,) you should never go for the new tax regime.

 Switching option

Those with professional or business income can switch between the two regimes only once during their lifetime. Others can switch regimes yearly. To switch back to the old tax regime, submit Form 10-IEA while filling the tax return. You can switch between regimes even at the time of filling your return. 

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DISCLOSE LIFESTYLE, HEALTH CONDITIONS TO AVOID DENIAL OF CLAIM

 

DISCLOSE LIFESTYLE, HEALTH

CONDITIONS TO AVOID DENIAL OF

CLAIM

A Bengaluru-based District Consumer Disputes Redressed Commission recently ruled that alcohol consumption cannot be a ground for rejecting a health insurance claim.

Increasingly, policyholders are taking insurance companies to consumer courts. According to a media report, there were over 161,000 insurance-related cases pending in consumer courts in 2022.

Chief causes of claim rejection

Policy holders must be aware of the most common reasons for claim rejection and avoid making those mistakes. Experts say the chief reason is customers providing incorrect information.

This includes not disclosing your lifestyle habits, smoking and drinking patterns, and so on.

Even hiding or lying about past or present illnesses can result in a claim rejection. Non-disclosure of existing diseases at the time of purchasing the insurance policy is among the most common reasons.

Sometimes, customers make claims for diseases that have mandatory waiting periods or are permanently excluded from coverage. Fraudulent claims made by policyholders or by hospitals in collusion with policyholders are another reason., A health insurance policy comes with a sum insured, which is the maximum amount up to which a customer can be reimburse. Some policies specify sub-limits for ailments, which vary from one insurer to another. Be aware of these details, as a breach of these limits can result in claim rejection.

The insurance company might reject your claim if you do not pay your premiums on time. The same can happen if you file a claim a long time after you have undergone treatment. Inform the company about your hospitalisation immediately and file the claim within 15 days.

At times, an application from a claim may require the insured to provide additional documents within a specified time period.

Irdai’s rule

The Insurance Regulatory and Development Authority of India (Irdai) has mandated that an insurer cannot deny claim on the ground of misinformation by the policyholder if the policy has been renewed for eight consecutive years. These eight years are known as the moratorium period. They are given to the insurer to verify information about the insured. After this period, a claim can only be rejected in case of a fraudulent claim or if the illness falls under policy exclusion.

 

Exercise these precautions

A few proactive steps by the policyholder can reduce the chances of claim rejection. Be vigilant about the policy renewal date as most health insurance plans require annual renewal. Insures usually provide a 15-day grace period for renewal.

Be completely honest while providing information about your health condition and pre-existing ailments. If you acquire a new ailment during the policy term, inform the insurer about it at the time of renewal.

Availing of the complimentary annual health check-up provided by the insurer. This will ensure your insurer has complete knowledge of your health condition.

Maintain detailed records of all medical bills, prescriptions, and reports. These documents will be essential when filing a claim and can prevent rejection due to insufficient documentation.

Whenever feasible, customers should opt for treatment at a network hospital. Not only will they be able to avail of the cashless facility and better rates, the claim settlement process will also be simpler.

 

WHAT TO DO WHEN A CLAIM GETS REJECTED

ØOnce a claim has been denied, the policyholder has the option to ask the insurer to reconsider

ØThe insurer must notify the customer via email two to three times about the claim denial, and then wait for three-four weeks for the policyholder to apply for reconsideration

Ø  If the customer applies, the insurer can request extra documents for further verification

Ø  If the additional information is not provided, the claim will get rejected once again

ØIf the customer doesn’t apply, the window closes and the customer can’t complain about the rejection

 

 

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Section 54F Avoid capital gains tax on jewellery sale with house buy

 

Section 54F Avoid capital gains tax on jewellery sale with house buy

The house purchase must be via registered sale deed and within specified time limit

The Bengaluru Bench of the Income Tax Appellate Tribunal (ITAT) recently granted an exemption from long-term capital gains (LTCG) on the sale of inherited jewellery. This decision came after an assessing officer (AO) earlier denied the benefit under Section 54F of the Income-Tax Act, 1961, which permits taxpayers to claim an exemption on LTCG from the sale of capital assets other than a house property. If a taxpayer sells assets such as stocks, bonds, jewellery, or gold for a profit (long-term capital gains), they can avoid paying taxes on that profit by using the proceeds to purchase a new house.

The verdict

The ITAT affirmed that the exemption under Section 54F applies to capital gains from the sale of inherited gold and jewellery, provided the gains are reinvested in purchasing a residential house through a registered sale deed.

The Income-Tax (I-T) Department had challenged the veracity of the transaction involving the sale of inherited gold, questioning whether the assesses actually possessed such gold and labelling the entire transaction as a sham.

The ITAT rejected the AO’s decision. The tribunal concluded that the sale price of inherited jewellery cannot be taxed as income arising from ‘other sources’ but rather should be treated as a long-term capital asset inherited from the assesses mother-in-law.

Who is eligible?

The exemption under Section 54F is available to individual or Hindu Undivided Family (HUF) taxpayers who earn long-term capital gains (LTCG) from the sale of an asset other than residential property, provided they reinvest the gains in purchasing or constructing a new residential house in India. The taxpayer should not own more than one residential house, other than the new one, on the date of sale of the asset.

How much can be exempted?

If the costs of the new asset equals or exceeds the net consideration from the asset sold, the entire capital gains is exempt. However, if the cost of the new asset is less than the net consideration from the sold asset, proportionate exemption is granted. An amendment effective from April 1, 2024, has set the exemption limit at Rs 10 crore.

Taxation of inherited gold

In India, inheriting gold does not give rise to tax incidence. When you decide to sell the gold, you might be liable for capital gains tax depending on how long you have held it.

Taxation of inherited assets function similarly to that of acquired assets. The cost and date of acquisition of the inheritor are considered the same as of the original owner. The cost of acquisition for calculation capital gains is the cost to the original purchaser, adjusted for inflation, known as the indexed cost of acquisition. The nature of the gains (short-term or long-term) depends on the period for which the gold was held by the original owner and the inheritor combined.

Availing Section 54F benefit

Taxpayers seeking to save tax from the sale of gold (including inherited) should reinvest the capital gains into residential property to avail of Section 54F benefit.

Plan the purchases or construction of the new property ahead of the sale to comply with the time limits specified by Section 54F.

Some sellers may not be able to reinvest in a residential house within the time limit. For them, depositing the gains in the Capital Gains Account Scheme (CGAS) before filling the income tax return can offer a temporary solution for claiming the exemption. Sell the jewellery to large, well-known jewellers. Inform the jeweller that they should respond promptly to the I-T authorities if there are any questions in the future.

Maintain proper documentation. If you inherit a substantial amount of gold, the tax authorities might request proof of inheritance, such as a will or a partition deed.

 

 HOW SECTION 54F BENEFITS TAXPAYER: A CASE

• Priya inherited gold from her grandmother in January 2018, which the latter had bought in January 2000 for Rs 10 lakh , she sold it in January 2024 for Rs 50 lakh
• To calculate capital gains tax, the original purchase price was indexed for inflation (100 in 2000-01, 350 in 2023-24), the indexed cost came to Rs 35 lakh
• The long-term capital gain was Rs 15 lakh
• Priya’s tax liability on long-term capital gain @ 20% was Rs 3 lakh
• If Priya invests the entire net sale consideration (Rs 50 lakh) in purchasing a residential house, she can claim an exemption on the entire LTCG of Rs 15 lakh
• Under Section 54F, her Rs 15 lakh capital gain becomes non-taxable as she reinvested the sale proceeds in a residential property
• Doing so saves Priya the Rs 3 lakh tax liability

 

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Unhappy with your non-linked policy? Consider early surrender

 

Unhappy with your non-linked policy? Consider early surrender

But if you have held it for long, run the numbers; continuing may be prudent

In December 2023, the Insurance Regulatory and Development Authority of India (Irdai) issued an exposure draft on the surrender value of non-linked insurance policies. Had those proposals been implemented, they would have made surrendering of life insurance policies less painful for policyholders.

The guaranteed surrender value (GSV) rates that apply to non-linked policies from April, 2024 have not changed. The regulator has maintained the status quo on rates.

The revised surrender value guidelines issued by Irdai are a reiteration of the regulator’s intent to ensure that customers stay invested in life insurance policies for the long term.

These GSV rates are lined to holding period. If a policyholder surrenders his policy before it completes three years, the GSV will be lower than if he surrenders it between the fourth and the seventh policy year.

 

Insurer’s perspective

An insurance company creates long-term liabilities for itself upon selling non-linked, traditional plans (money-back and endowment). To meet them, it creates long-term assets by investing in long-tenure instruments, usually government securities and equities. When a customer surrenders the policy, the insurer has to unwind these investments and could have to take losses if interest rates are up or equity markets are not doing well. Insurers argue that making surrendering of policies painless and easy would lead to an asset-liability mismatch for insurers. 

With a significant portion of insurance plans invested in long-term assets such as long-term bonds and equities, immediate surrender would necessitate insurers to maintain more liquidity, requiring investment in short-term assets instead. This would ultimately impact the maturity returns of customers.

Higher surrender costs in the initial years deter the temptation to withdraw while ensuring that insurance providers are able to service these policies effectively without affecting their bottom line.

Insurers plan to modify their product mix. A separate set of products is expected to be launched with higher surrender values than the minimum required, which will cater to customers seeking higher liquidity, albeit with slightly lower maturity returns. 

 

 

Customers get a bad deal

The policyholder always takes a loss under this GSV regime. For however long a policy is held, the policyholder never gets the entire premium back, forget about a return on the total premium amount. They get 90 per cent of total premiums back even in the last couple of years of the policy term.

Insurers pay a special surrender value, but that is not guaranteed and depends on a host of factors.   

Financial advisors disagree with insurers’ argument about having to unwind long-term investments. The asset-liability mismatch argument does not hold since insurers create long-term assets based on their past experience of surrenders. Hence, there is no excess long-term investment that needs to be unwound.

Insurers also argue that it takes a lot of effort to sell a policy, due to which they have to pay high upfront commissions to agents. These costs need to be deducted when a policy is surrendered. Investment products from all other regulators have moved to trail commissions which in turn prevents mis-selling.

 

Issue of low persistency

Persistency ratio is the percentage of the total number of policies or premium amount that remains in force from inception to various periods. On average, after five years, the numbers of life insurance policies in force drops to around half.

A major reason for low persistency is mis-selling. When customers realize they have been sold an unsuitable policy, they exit. When an exit happens, whether early or late in the tenure, at no point does the insurer, agent, distributor or banc assurance partner suffer a loss. The only party that ends up paying a heavy price owing to the high surrender charges is the customer.

 

Enter with caution

Avoid mixing insurance and investment. Any product that pays a commission as high as 35 per cent in the first year to the agent or the distributor cannot be good for the customer.

Most traditional plans have an internal rate of return (IRR) between 4 and 6 per cent. These are low returns for a 20 to 30-year product.

The only class of customers who may perhaps invest in these plans is the financially non-savvy ones who have so far invested only in real estate and gold. Such customers are often afraid of losing money in the financial markets. For them the safety of insurance products is a big pull.

The rest, who are either financially savvy or have access to good advice, may avoid them.

 

When should you surrender?

Policyholders in the early part of the policy tenure, who feel they have made the wrong choice, should exit despite the considerable loss.

Policyholders must overcome the sunk cost fallacy and surrender these policies sooner rather than later.

If you have been in the policy for three to five years, take the loss and exit. Once you have crossed the seven-or 10-year mark, get and informed person to calculate the pros and cons. In many cases, it may make sense to continue servicing the policy.

SURRENDER VALUE: WHAT’S THE FUARANTEED PAYOUT?

Non-single premium policy

 Years of surrender                                               % of total premiums paid

2^nd                                                                                   30

3^rd                                                                                    35

4^th to 7^th                                                                          50

Within 2 years of Maturity                                             90

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MAKE CLAIMS EASIER: SHARE POLICY INFO, FILING INSTRUCTIONS WITH FAMILY

 

MAKE CLAIMS EASIER: SHARE POLICY INFO, FILING INSTRUCTIONS WITH FAMILY

In numerous instances, members are unaware of the policy’s existence, let alone its details

Life insurance policies sold through agents tend to have a higher rate of unclaimed funds compared to those sold via the banc assurance channel or digital platforms.

“Unclaimed life insurance funds refer to the death or survival benefits from policies that have not been claimed by beneficiaries or policyholders.

Policyholders and beneficiaries need to be proactive to avoid funds that belong to them from going unclaimed.

 

Why funds go unclaimed

Lack of awareness: If policyholders fail to share crucial details with their beneficiaries, it can hinder the claim process. “We have come across instances of families being unaware of the purchase of a life insurance policy.

Policies can remain unclaimed due to beneficiaries predeceasing the policyholder or the absence of a nominated beneficiary. Sometimes, the nomination is not filled or updated with the insurer.

Policyholders should update their mobile number, email address, bank details, and address with the insurer. “Updating beneficiaries’ contact details is crucial for the insurer to identify rightful beneficiaries in case of unforeseen events.

Forgotten policies: People with multiple policies may forget those purchased years ago or for small sums. “Since many policies have long tenures, sometimes extending up to 100 years, policyholders at times forget about certain policies.”

Know-your-customer (KYC) updates: Failure to update Know Your Customer (KYC) documents or bank details can also prevent policyholders or beneficiaries form claiming benefits. Sometimes, policyholders cannot be contracted due to change of address and other contact details due to, say, marriage, and relocation to a different place or abroad, or switch to non-resident status.

Claims not submitted: Policyholders and beneficiaries need to proactively initiate the claims process. “A significant portion of unclaimed funds arises due to policyholders failing to submit maturity claims or death claims.

Sometimes, claims are deemed non-payable due to disputes or other reasons.

Business insurance: In these policies, unclaimed funds can arise due to disputes among partners or the dissolution of partnership and companies. “Disputes may arise in Keyman insurance policies if employers or proposers refuse to pay.

Where are unclaimed funds parked: Insurers try to locate and notify beneficiaries through letters, phone calls, and other means of communication.  If no response is received within 12 months, the amount is classified as unclaimed. These funds are transferred to the “Unclaimed funds” account and invested in market-linked funds. “These funds are invested according to unclaimed fund regulations and are expected to earn 4 per cent or more per year.” When policyholders or nominees reach out, insurers pay them the death or maturity benefit. After 10 years unclaimed funds, are transferred to the Senior Citizens’ Welfare Fund (SCWF).

Checking for unclaimed funds: Policyholders or beneficiaries should search the insurer’s website for these funds. “Insurers are required to display information about unclaimed amounts of Rs 1000 or more on their websites.

Insurers offer online search facilities on their websites. “Individuals can search for outstanding claims using basic details such as the policyholder’s name, date of birth, policy number, and permanent account number. The customer support department of insurers also provides guidance.

 Policyholders or beneficiaries can also visit a branch. Insurers usually ask for bank details and KYC documents. “If a beneficiary reaches out for death benefit, their identity proof, policy document, and proof of relationship with the deceased are asked for”.

Prevent unclaimed funds from arising: Policyholders must maintain records of all their policies and keep their family members informed. “Share policy details, contact information, and instructions for filling claims.

Regularly review policies to assess changing needs, update beneficiary information, and ensure that policies remain active. “Regular reviews help policyholders stay informed about their coverage and minimize the risk of funds being left unclaimed.

Shahane emphasizes that nominee bank details are crucial for processing unclaimed amounts. Customers should update their NEFTs to ensure they can receive instant payments.

 

Ø  Insures must transfer unclaimed policyholder amounts that are over 10 years old to the Senior Citizens’ Welfare Fund (SCWF) by March 1 each year

Ø  Policyholders or beneficiaries can claim their dues within 25 years from the date of transfer from the insurer to the SCWF

Ø  According to Section 126 of the Finance Act, 2015, unclaimed funds will escheat (be taken over) to the central government if not claimed within 25 years.

 

 

 

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COMMIT TO MINIMUM 7-YEAR HORIZON AFTER RALLY IN GOLD

 

COMMIT TO MINIMUM 7-YEAR HORIZON AFTER RALLY IN GOLD

Gold scaled a new closing peak of Rs 65383 per 10 grams on March 11. The yellow metal has relied 17.8 per cent over the past year. While gold may remain volatile over the next few months, its prospects remain bright over the medium term.

 

What Sparked the rally

The rally in gold began towards the end of February, following the release of the Personal Consumption Expenditure (PCE) Price Index. This index aligned with expectations. Its release came on the heels of the January Consumer Price Index (CPI), which had exceeded expectations. The PCE price index mitigated concerns about inflation.

Other recent data has pointed to growing weakness in the US economy. Disappointing US ISM manufacturing and services data hinted at an economic slowdown. The latest US unemployment data also showed weakness in the labor market.

US interest rates may now be cut sooner. Earlier, the first rate cut was expected in June but now some market participants expect the first cut in May.

Positive drivers Fed policy, US economic concerns

The primary factor that will influence gold prices over the next 12 months is US Fed policy. US CPI inflation is gradually moving towards the Fed’s target of 2 per cent, supporting the case for rate cuts.

The US economy has so far managed to weather the impact of high interest rates sand tight credit conditions owing to fiscal spending and consumers running down their savings. Support from these factors may wane in 2024. A slowdown would prompt the Fed to lower interest rates. A non-yielding asset like gold becomes more attractive when global interest rates decrease. Historically gold and interest rates have been negatively correlated.

 

Geopolitical tensions: Tensions in the Middle East and the war between Russia and Ukraine are driving safe-haven demand for gold.

 

Central bank purchases : In 2023, central banks purchased 1037 tones of gold, according to World Gold Council data. This was only slightly less than the record purchases in 2022. This trend is expected to continue in 2024.

 

Elections : Numerous elections will take place this year, including in the US, India, and Europe. Political uncertainty could unsettle the equity markets and lead to gold buying.

Run up in equities : Equity markets, both globally and in India, have experienced significant rallies, leading to high valuations. Pullbacks may occur if earnings growth disappoints. Gold typically performs well during equity market corrections.

 

Physical demand : Despite high prices, countries like India and China have shown strong demand. The robust demand for physical gold is expected to support prices.

 

Inhibiting factors : If the US economy achieves a soft landing, wherein inflation decreases without significantly harming growth, and the Federal Reserve either postpones rate cuts or reduces the quantum of rate cuts, gold prices could experience a pullback. Investors should watch US economic indicators closely. Recent data have come in below estimates. Improvement in manufacturing and services PMI and labor market data could restrict upward price movement.

 

Expect near-term volatility

Experts expect gold to remain volatile over the next few months. Over the medium term, however, they are optimistic about the yellow metal’s prospects, considering the imminent turn in the US interest-rate cycle. Gold prices will remain elevated over the medium term as the yellow metal tends to perform well in a low interest rate scenario. Modi informs that his firm’s target for the year is Rs 69000 per 10 gram.  

 

Rebalance after run-up

Booking partial profits and rebalancing if allocation has exceeded 15 per cent. After the recent run-up, gold may experience price correction. New investors should stagger their purchases rather than buy lump-sum. Money suggests entering with a horizon of seven years or more.

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