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

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile  9868944340

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

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile  9868944340

Resolve inaccuracies in AIS promptly with status update tool

 

            Resolve inaccuracies in AIS promptly with status update tool

The income-tax (I-T) department has added a new feature to the Annual Information Statement (AIS). Through this new feature, taxpayers can view the status of information verification process. This real-time status update feature in AIS enhances taxpayer convenience and transparency.

What is AIS?

AIS is a comprehensive report that captures a taxpayer’s financial transactions throughout a financial year. It includes detailed information like salary, interest from savings accounts, dividends, capital gains etc. It also has details of tax deductions, investments, and expenditures, including high-value transactions such as property purchases and large cash deposits.

AIS aims to provide tax-payers with a consolidated view of their financial activities, ensuring greater transparency and aiding in accurate filling of tax return. AIS’s new real-time feedback mechanism allows taxpayers to dispute any information that may have been filed incorrectly by the reporting agencies. It shows whether the feedback has been shared with the reporting source, the date it was shared, the date the source responded, and the source’s response. This feature enhances transparency and helps tax-payers know if their feedback has been addressed and if any corrections are needed.

This feature can help avoid controversies on amounts reported by taxpayers in their respective tax returns.

 

Difference between AIS and Form 26AS

Form 26AS can be called a subset of AIS. While AIS and Form 26AS seem similar, they are different in that the former is a record of all the significant transactions reported by the reporting agencies. The latter is a record of incomes earned on which taxes have been deducted by the payers and deposited to the credit of the payee’s PAN.

 

Errors to watch out for in AIS

In AIS, data from various sources, including brokers, banks, and financial institutions is compiled. This diversity of data sources can lead to discrepancies, inaccurate reporting, or duplication.

Duplicate entries are common. Transactions might be reported multiple times. Ensure each transaction is accounted for only once.

Verify that the amounts reported in AIS match your actual financial records. In the past, there have been instances where the interest from a joint savings account has been reflected in the AIS of both taxpayers. There have also been instances of duplicate entries for dividends, interests.

Transactions are at times misreported. Ensure that transactions are classified correctly and not reported under incorrect categories. Also check for financial activities that are missing from AIS but are relevant to tax fillings.

Cross-check the information provided in AIS with other financial documents to identify any discrepancies. These include Form 16 (for salaried individuals), Form 16A (for TDS on income other than salary), Form 16B (for TDS on sale of property). Reconciling financial transaction information with AIS before filing ITR will help taxpayers avoid inquiries from the I-T Department. The information contained in AIS at times forms the basis of the notices issued by the I-T Department, resulting in tax demands.

 

AIS and ITR filling

To ensure smooth and error-free tax filing starting early, verifying documents thoroughly, and seeking professional assistance if needed.

Be proactive. Address any issues identified in AIS immediately. Make a timely confirmation. Utilise the real-time status feature to confirm transactions promptly, avoiding last-minute issues during ITR filing. Regular monitoring.    

Check your AIS throughout the financial year to stay updated on your financial transactions and tax liabilities. If a tax-payer finds any discrepancy after filing the tax return, they should revise it based on correct information.

 

Your guide to three new ITR-3 utilities

The income-tax (I-T) department has released tools to help you file your ITR-3 form easily in three different ways-Online, offline (Java), and Excel-based. These are available on the I-T e-filing portal under the “Downloads” section.

ONLINE

Let’s you fill out information page by page. Most data are pre-filled based on previous filings.

Benefits: Saves time, is convenient and efficient. Ideal for taxpayers who want a streamlined process.

 

OFFLINE (JAVA)

You can download the software and fill out the information within the downloaded programme.

Benefits: Easier than online filing if you prefer a software interface. Ideal for those with complex tax situations.

 

EXCEL UTILITY

You can download the Excel spreadsheet and fill out the information in its different tabs.

Benefits: You can save your progress and come back later. Ideal for users more comfortable with the Microsoft excel interface than the Java utility.

 

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com

Email: pmgiia26.com Mobile  9868944340

 

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. 

For More Details: Pooja Manoj Gupta, visit www.giia26.com

Email: pmgiia26.com Mobile  9868944340

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

 

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile  9868944340

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

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com

 Email: pmgiia26.com Mobile  9868944340