Ensure donations claimed in tax returns match Form 10BE figures

 

Ensure donations claimed in tax returns match Form 10BE figures

Retain Form 10BE and related documents for at least 4 years to validate Section 80G claims

 

 

If you have donated to eligible trusts and institutions qualifying for tax benefits under Section 80G, you must obtain Form 10BE from them. Previously, donors only needed to provide a receipt from the recipient organisation as proof. From 2022-2023 (FY23), the donor must provide Form 10BE which should be obtained from the done organisation before May 31.

 

The background

Section 80G was amended to mandate approved organisations to submit Form 10BD to the Income-Tax (I-T) Department. To streamline the process of verification of donations received by charitable organisations approved under Section 80G of the I-T Act with the deduction for donations claimed by donors in their respective income-tax returns (ITRs) Section 80G of the I-T Act, 1961, was amended in 2020 to mitigate the risk of bogus donation claims by taxpayers.

 

Section 80G certified

Some institutions, which have the Section 80G certificate, are eligible to receive donations under the tax laws. Essentially, it allows them to accept contributions for which donors can claim deductions. While you might receive a copy (receipt) for your records, it’s not the document you need for claiming tax benefit.

 

Understanding 10BD

It is a statement that contains all the details of the donations received by an institution. The form electronically captures details about the donors, the type of donation, and the amount donated. The recipient institution must file this form electronically using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC) by May 31 following the financial year in which the donations were received.

If no donation is received during a financial year, Form 10BD doesn’t need to be filed. Form 10BD enables the government and the I-T Department to verify the accuracy of donation claims. Upon electronic filling, this form gets reflected in the donor’s Form 26AS.

 

Understanding Form 10BE

After the amendment, the recipient institution must report donor-related information via Form 10BD and issue a donation certificate (Form 10BE) to the donor.

To avail of these deductions, individuals need to receive a certificate of donation in Form 10BE from the charitable institution. This serves as proof of the donation. The last date for issuing Form 10BE for a particular financial year is typically May 31 of the assessment year immediately following the financial year in which the donation was made. This allows individuals to include the donation details in their income tax return (ITR) filling for that assessment year.

The donee organisation must download Form 10BE from the tax portal and issue a certificate to the donor.   

 

What should you do?

Donors should follow up with the donee institutions if they do not receive the certificate in Form 10BE by the due date. Donors should ensure that the donation amount claimed by them under Section 80G of the I-T Act in their respective ITRs matches with the aggregate donations reflected in Form 10BE issued to them for the relevant period by the respective charitable organisations.

Take this matter seriously. If there’s a discrepancy between the deduction claimed under Section 80G in your ITR and Form 10BE issued by donees, the tax authorities may launch scrutiny proceeding. Donors should ensure they have proper documentation and proofs to support the total donations claimed in their ITR’s.

Enter the information in Form 10BE into the specified fields in schedule 80G, including the institution’s name, registration number, and donation amount.

Additionally, for your records and documentation, retain copies of donation receipts (Form 10BE) and relevant documents like bank statements for at least four years after filing your return for claiming deductions under Section 80G.

 

MUST- KNOW FACTS ABOUT SECTION 80G

• Section 80G deduction is allowed form gross total income
• Under section 80G of the Income – Tax (I-T) Act, 1961, taxpayers can claim deductions on donations made to certain charitable institutions
• The deduction can range from 50% to 100% of the donated amount, without any qualifying limit
• The donation must be in the form of money: Donations in the form of goods or services are not eligible for this deduction
• Only taxpayers who opt for the old tax regime while filling ITR can claim this deduction; taxpayers who have chosen the new tax regime are not entitled to this benefit

 

 

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LEAVE TRAVEL ALLOWANCE

 

LEAVE TRAVEL ALLOWANCE

Multipoint trip: Tax break is on cost of direct travel to farthest place

The last date for submission of investment proofs for availing tax deductions for the financial year (FY) 2023-24 is March 31, 2024. If your office’s human resource personnel have asked for them, remember to submit your proofs for Leave Travel Allowance (LTA) tax benefit, too, if you qualify.

The Income-Tax (I-T) Act, 1961, offers various tax exemptions to both public-and private-sector salaried workers. One key exemption is the LTA, designed to cover travel expenses incurred by employees during their leave.

“LTA is a part of an employee’s salary structure and qualifies for income-tax exemption under Section 10(5). This unique feature allows salaried employees to deduct the LTA from their taxable income, resulting in potential tax savings.

“The allowance is exempt from tax to the extent of actual expenditure incurred for journeys undertaken in India by the individual and their family. Any unutilised amount is taxable as a perquisite in the hands of the employee.”

 

Who can claim LTA?

The tax exemption under LTA can only be availed by the employee and their immediate family members (including spouse, children, wholly or mainly dependent siblings or parents).  “Only those individuals are eligible to claim this allowance who have LTA as a part of their salary package. And the benefit can only be claimed if the employee has actually gone on leave and travelled.

 

Conditions for claiming LTA

LTA can be claimed only for domestic travel and is available for two journeys within a block of four years. Any unused LTA from a block can be claimed in the first year of the next block. It expired if not claimed within that timeframe. The current block is 2022-2025 (i.e., January 1, 2022, to December 31, 2025).

Exemption can be claimed only for one trip in a calendar year. “Exemption is only on actual travel costs, excluding lodging, food and other incidental expenses.

The exemption is not for the entire expenditure but up to the extent of LTA provided by the employer.

 

Multi-destination journeys

Specific rules apply if the employee travels to multiple destinations during a vacation. “If an employee travels to different places during a single vacation, the exemption can only be availed for the eligible travel cost from the place of origin to the farthest place visited during that vacation by the shortest possible route.”

Most economical mode eligible

The I-T Act imposes a restriction on the class of travel for which you can avail LTA. “The most economical mode of travel (bus, train, or air) is considered for exemption for your specific journey.”

The idea is that the tax benefit should not cover luxury or higher-cost options. For air travel, the eligible amount is the economy class airfare of the national carrier (Air India) for the shortest route to the destination.

For rail travel, the AC first-class fare by the shortest route to the destination is eligible.

If the destination is not connected by rail, the fare of any other mode of public transport is considered. If public transport is not available, then AC first class rail fare for the distance to the destination by the shortest route is considered (as if the journey was undertaken by rail).

 

Maintain proofs

While children are eligible, that LTA tax exemption cannot be availed for more than two children born after October 1, 1998.

“An individual should maintain a logbook and should have tickets and other proof of travel.

Remember, if a journey includes a segment outside India, it cannot be considered as travel within India, even if it starts and ends in India, and is not eligible for LTA benefit. 

 

LTA BENEFITS

Claim the right amount

•  This exemption is available only on actual travel costs, i.e. the air, rail or bus fare     incurred by the employee
•  No expenses such as local conveyance, sightseeing, hotel accommodation, food are   eligible for this exemption
•  The exemption is also limited to LTA provided by the employer
•   For example, if LTA granted by the employer is Rs 30,000, and the actual travel cost incurred by the employee is Rs 20,000, then only Rs 20,000 will be available as an exemption and the balance of Rs 10,000 will be included in taxable salary income

 

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RESTARTING STALLED VEHICLE IN FLOODED AREA MAGNIFIES DAMAGE

 

Restarting stalled vehicle in flooded area magnifies damage

In such areas, engine protection, zero depreciation, and roadside assistance riders are must-haves

Engine and gearbox protection

A comprehensive motor insurance policy includes a third-party (TP) cover and an own-damage (OD) cover. While a TP cover, which is mandatory, covers your against liabilities arising due to damage to a third person, the OD cover offers protection against damage to the vehicle caused by natural and manmade disaster. To offer adequate protection against flooding, a comprehensive policy needs to be supplemented with multiple riders.

Flooding can cause the engine to stall. When this happens, people often turn on the ignition repeatedly to restart the car. This allows water to get into the engine and causes it to seize up permanently. A comprehensive policy will not cover this damage, caused not by an impact but by an act of the driver. Hence, you need to buy an engine protection cover.

Zero depreciation

Many parts of the engine or body may have to be replaced during repairs. A comprehensive policy will not reimburse the full cost of those parts.

Depreciation is applied based on the car’s age. A 50 per cent depreciation could be applied to a five-year-old vehicle.

To avoid paying out of your pocket, you need a zero depreciation cover. It allows the total cost of the car’s damaged parts to be claimed, without any depreciation being applied based on age or type of part.

Roadside assistance cover

If the road you are travelling on is waterlogged do not try to cross it. If your engine stalls in a waterlogged area, do not try to restart it. Exit the car and call for your vehicle to be towed.

 

Consumables cover

During repairs after flooding, consumables like engine oil and gear oil may have to be replenished. The cost of such consumables can easily mount to Rs 2000-5000. Buying this cover can help you avoid this cost.

 

Once the car gets submerged

Once your vehicle gets flooded, exit it along with the other passengers. Doing so can cause severe damage to the vehicle’s electrical and mechanical systems, which might damage the car and could void your insurance coverage.

Instead of trying to start the vehicle yourself, you should arrange to have it towed to a workshop.

Take photographs or videos of the submerged vehicle at the site to document the extent of damage. Once the water has receded, disconnect the battery power.

Next, notify your insurer. Policyholders should not delay claim intimation.

The insurer will then appoint a surveyor. The surveyor will inspect your car and assess the damage. Once the assessment is ready, the garage can be asked to start repair work.

Have the vehicle taken to a network garage, if one is available nearby. The insurer will directly settle the bill with the garage, and the insured will only need to pay any deductible or non-covered expenses, if applicable.

If no network garage is available, you will have to pay the bills and submit them to the insurer. The documents you need to submit include photos (of the submerged car), a copy of the policy, and anything else the insurer requests.

The insurer will reimburse the covered expenses after reviewing the documents. One should not start repairs without the insurer’s approval as this can affect the claims process.

Finally, exercise patience. Their firm’s claims department has set up a special cell at their Egmore office in Chennai. Other insurers would have done the same. Nonetheless, with garages and insurers witnessing a surge of customers, there could be some delay in claim settlement and repairs.

 

 

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RETIREMENT PLANNING FOR SELF-EMPLOYED

RETIREMENT PLANNING FOR 

SELF-EMPLOYED

In EPF’s absence, invest in NPS, PPF, and mutual fund SIPs

Instead of reinvesting all surpluses in business, invest a part in accumulating a retirement corpus

The Covid-19 pandemic has made people more aware of the need to save aggressively for retirement. Around 67 per cent of respondents in PGIM India Mutual Fund Retirement Readiness Survey 2023 (which covered 3,009 people in nine metro and six non-metro cities) said they have a retirement strategy in place, compared to 49 per cent in 2020.

The self-employed, however, were found lagging in their retirement planning and preparedness. Of the respondents who mentioned they do not need a financial plan, 40 per cent reside in Tier-I cities, have an income between Rs 50,000 and Rs 75,000, are aged between 51 and 60 years, and are mostly self-employed.

Different mindsets

The self-employed differ from salaried individuals in their attitude towards retirement planning.

Salaried individuals tend to worry more about external events like economic slowdown, inflation, stability of job and income, etc. The self-employed tend to be more impulsive in their spending habits. These characteristics affect their retirement preparedness.

 

Diverse requirements

The self-employed have irregular incomes. Their cash flows tend to fluctuate. This has an enormous impact on their ability to save. A salaried person has more control over cash flows.

The self-employed also lack access to employer-sponsored retirement plans. They do not have access to the mandatory Employee’s Provident Fund (EPF) and hence need to save for retirement on their own.

 

Underestimating lifespan, corpus needed

Many self-employed individuals follow a do-it-yourself (DIY) plan and end up making a hash of it. They would be better off contacting a financial advisor. Some underestimate their life expectancy and the corpus required during retirement. The underestimation of how long their retirement savings need to last results in many outliving their corpus.

Another mistake is not diversifying their retirement portfolio. They often invest all their eggs in one basket. 

Many begin to save for retirements vary late. Many self-employed also do not have a fixed retirement age in mind and hence to not have a synchronised financial plan for retirement and estate distribution.

 Some don’t establish an emergency fund. When a financial crisis strikes, they use up their retirement corpus.  The self-employed are also prone to taking loans and hence retire with debts. They then deplete their savings to repay their loans.

 

 

 

What you should do

Start early so that your savings get time to compound. Maintain a Chinese wall between business and personal income.

Drawing a fixed salary from the business and investing a part of it in retirement fund.

Self-employed professionals may be tempted to reinvest the majority of their savings into their business when they see better prospects. They should diversify away from their business by investing in liquid assets like mutual funds.

The self-employed should invest in the National Pension System (NPS), a government-backed, low-cost retirement avenue where they can choose the mix of debt and equity that is right for them. At maturity, a part of the corpus must be invested in annuities, so that they can receive a life-long pension. Public Provident Fund (PPF) should also be considered.

Systematic investment plans of mutual funds should be harnessed during the wealth accumulation stage. The tax efficiency and flexibility of a Systematic Withdrawal Plan (SWP) remains unmatched in the withdrawal phase.

Buy Keyman insurance to ensure the business is not impacted by a sudden mishap. Business persons should also consider Married Women’s Protection (MWP) Insurance to protect their families from creditors. 

 

 

OPTIONS IN PPF ON COMPLETION OF 15 YEARS

I. CLOSE ACCOUNT                                                          

§  Close the account, withdraw accumulated corpus tax- free

II. EXTEND BY FIVE YEARS WITHOUT CONTRIBUTION

      (DEFAULT OPTION)

§  If the investor does not express explicit consent to withdraw, or continue with contribution within one year of maturity, the account gets automatically extended without-contribution

§  Once extended using this option, one cannot ever go back to With-contribution mode

§  Corpus continues to earn interest

§  One withdrawal per financial year is allowed. Can withdraw even the full amount

III.  EXTEND BY FICE YEARS WITH CONTRIBUTION

§  Need to specify within one year of maturity or the end of the five-year extension period by submitting Form H, otherwise default option applies

§  Requires fresh contribution each year, minimum annual contribution is Rs 500

§  One withdrawal per financial year. Withdrawal capped at 60% of the account balance at the start of the extension period

 

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REDUCE RISK IN SMALL, MIDCAP FUNDS WITH ASSET ALLOCATION

 

WHAT STRESS TESTS MEAN FOR YOU

Reduce risk in small, midcap funds with asset allocation

The results of the stress tests conducted by mutual funds houses in their mid and smallcap funds show that liquidity risk is higher in the latter category.

While the bulk of midcap funds that have declared their results will be able to liquidate 25 per cent of their portfolio within three days, only about half of the smallcap funds will be able to do the same.

Higher awareness

One positive outcome of the stress test is the increased awareness.

It has raised awareness at least among some investors that liquidity can be a concern in the mid and smallcap segment during times of stress. Wealth adds that having access to regular data on liquidity will make investors more conscious of this risk.

Methodology issues

Some experts have pointed to a couple of issues with the methodology employed to calculate the time for portfolio liquidation. One, funds are permitted to exclude the bottom 20 per cent of the least liquid stocks in their portfolios from calculations. This has the potential to skew results.

Another point of concern is the assumption that liquidity improves during volatile periods. Fund houses are allowed to assume a threefold spike in trading volumes during such times. Experts say in reality, trading volumes tend to dry up in such times. 

Should liquidity affect fund selection?

When selecting a fund, investors should focus primarily on consistency of performance and quality of holdings. Using any metric, such as liquidity, in isolation to evaluate a fund can lead to poor decisions. Investors have committed this error in the past with expense ratio and risk –o-meter.

Prime Investor

Instead of making binary decisions based on this criterion, investors may give some weight to it in their fund selection methodology.

Some experts believe AUM size could become an important criterion in the future.

With test results showing that most larger-sized funds take longer to liquidate their portfolios, it may be prudent to stick to funds having a smaller AUM, especially in the smallcap space.

 

Control what you can

Direct stock investors can choose not to go with illiquid stocks. Fund investors, however, will find it difficult to address liquidity risk at the fund level. When they invest in a fund, they must trust their fund manager to take calculated risks (including liquidity risk) to achieve the desired returns.

Investors can best manage liquidity (and other market) risks in small and midcap funds through their strategic asset allocation.

Based on risk appetite, ensure that your investment in small and midcap funds does not exceed 15 to 30 per cent of your equity portfolio.

Points out that fund liquidity is not within the investor’s control and can improve or worsen after they have invested. Avoid kneejerk reactions like exiting a fund if there is a spike.

Rebalance your portfolio regularly to maintain small and midcap exposure within the decided limits. 

Invest in small and midcap funds with a horizon of seven years or more so that you are not affected by intermittent spikes in volatility.

Act based on your own liquidity needs. When you are one or two years away from a goal, liquidate the required amount from equity funds and park it in debt instruments to meet your requirements.

Create an emergency fund using debt funds so that you don’t have to sell your equity holdings during a market downturn.

Studies done by him have shown that most active smallcap and midcap funds struggle to consistently beat the Nifty Midcap 150 index. Investors (especially new once) uncomfortable with the high liquidity risk in smallcap funs may avoid the category altogether. Those keen on midcap exposure should consider investing in a Nifty Next 50 index fund.

This index has a risk-reward profile similar to that of a midcap index but has relatively better liquidity.  

 

 

 

LIQUIDITY CRITERION : KEY CAVEATS

Ø Some funds require more days to liquidate their portfolios due to their larger assets under management, not necessarily because their holdings are less liquid

Ø Liquidity is influenced by a smallcap fund’s allocation to smallcap stocks: Some hold the bare minimum required (65 per cent) and are more liquid while others hold more (and are less liquid)

Ø Low liquidity doesn’t always mean poor fundamentals (quality stock can be illiquid due to high promoter holding)

Ø Smallcap fund managers seek to generate alpha by investing in undiscovered gems, which usually have low liquidity

Ø Excess focus on portfolio liquidity could make smallcap fund managers overly cautious, affecting the return generation potential of their funds

 

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