Category: Personal Finance

Equitas Small Finance Bank FDs: Attractive short-term option

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Following the RBI’s sharp 75 basis point (bps) cut in March and another 40 bps cut in May, the repo rate has come down from 5.15 per cent at the start of 2020 to 4 per cent now.

In tandem, large commercial banks have slashed their deposit rates by 70-160 bps in the last year or so.

With rates at historical lows, those depending on bank fixed deposits (FDs) such as senior citizens have been left with fewer options than ever before. Small finance banks (SFBs), too, have cut their deposit rates by 100-150 bps the pastyear. Still, SFBs offer higher rates than others.

Attractive rates

FDs from Equitas Small Finance Bank are worth considering. Equitas SFB is offering 6.75 per cent per annum on its one-year to 18-month deposits. For senior citizens, the rate is 7.25 per cent per annum, that is, an extra 0.50 percentage points.

For similar one- to two-year deposits, public sector banks offer rates of 4.9-5.3 per cent and most private sector banks offer less than 6.75 per cent. Senior citizens get an additional 0.50 percentage points on these rates from most banks.

Given the current low rates, investors are better off putting their money in shorter-tenure deposits so that they don’t lose out on better returns once the rate cycle starts turning up.

Hence, one-year FDs are a good option now. While you can opt for deposits of below one year, too, the interest rates on these are lower.

Better rates apart, FDs with SFBs (like with other banks) are covered under the Deposit Insurance and Credit Guarantee Corporation’s (DICGC) deposit insurance cover of ₹ 5 lakh per bank. Fixed deposits with NBFCs, some of which have attractive rates, too, can be riskier and are not covered by DICGC.

Apart from booking an FD in person at the bank branch, investors can also book one online on Equitas SFB’s website. But the maximum deposit amount allowed online is ₹ 90,000 and you can choose a tenure of only between seven and 365 days.

The bank charges a penal rate of 1 per cent on FDs closed prematurely. There is no penalty for premature closure of deposits (under ₹2 crore) that have completed over 180 days. Premature withdrawal in case of death of the primary holder, too, is not penalised.

Healthy financials

Apart from good rates, the bank’s healthy financials also lend comfort. Equitas SFB commenced operations as a SFB in September 2016. It came out with an initial public offering in October 2020.

Equitas SFB has a well-diversified loan portfolio and is into micro- finance, small business loans and vehicle finance.

Nearly 67 per cent of the bank’s loan book of ₹16,530 crore as of September-end 2020 was towards clients in South India (largely Tamil Nadu).

As of September-end 2020, the bank’s gross NPAs (non-performing assets) were 2.48 per cent, down from 2.68 per cent in June-end. Its tier 1 CRAR (capital adequacy ratio) of 20.16 per cent as of September 2020 is well above the minimum regulatory requirement.

Impacted by Covid-19, many SFBs saw their collection efficiencies deteriorate. With an easing of lockdown restrictions, Equitas SFB has seen its collections improve across many loan segments (excluding vehicle finance). The bank’s overall collection efficiency has gone up from 49 per cent in June 2020 to over 94 per cent in October 2020.

With the moratorium ending on 30 August, customers accounting for 94 per cent of the bank’s advances paid their EMIs during at least September or October (or both).

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Your taxes – The Hindu BusinessLine

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I bought Nippon India Tax Saver Fund (ELSS)- dividend payout– on January 13, 2015 at the NAV of ₹24.0624 and redeemed on October 10, 2020 at the NAV of ₹15.3412. The NAV of the scheme on January 31, 2018 was ₹24.9089. How to calculate LTCG/LTCL in this case.

– C.Visalakshi

As per Section 112A of the Income Tax Act,1961 (the Act), long-term capital gain (LTCG) in excess of ₹1,00,000 earned from sale of listed equity shares/equity-oriented fund /unit of business trust (qualifying assets) on which securities transaction tax has been paid shall be subject to income tax at the rate of 10 per cent. Surcharge (if any) and health and education cesses at 4 per cent shall apply additionally.

Where the qualifying assets are purchased before January 31, 2018, the cost of acquisition shall be the higher of the following:

· actual cost of acquisition; or

· lower of (i) fair market value (FMV) of such share on 31 January 2018 (highest quoted price) or (ii) full value of consideration as a result of transfer.

Based on the above as actual cost of acquisition is higher, cost of acquisition for the purpose of computing LTCG shall be ₹ 24.0624. Accordingly, there shall be Long term capital loss (LTCL) of ₹ 8.7212 per unit.

I am an employee of a State government PSU and am retiring in seven months. My employer is deducting TDS on terminal earned leave surrender (ELS). It is understood that Central government PSU employees have complete exemption on terminal ELS. Can I claim refund of this TDS?

–Anil Thekkutt

As per section 17(1) of Income-Tax Act,1961 (the Act), salary includes any payment received by an employee in respect of any period of leave not availed of by him. Further, as per Section 10(10AA)(i) of the Act, any payment received by a Central Government or State Government employee as the cash equivalent of the leave salary in respect of the earned leave at the time of his retirement or separation (whether on superannuation or otherwise) shall be exempt from income tax.

In view of the above provision, as the terminal earned leave is surrendered during your service period, i.e., before retirement, the same shall be taxed under the head ‘Salaries’ under the Act and TDS refund cannot be claimed while filing your tax return in India.

The writer is Partner, Deloitte India

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Tips for buying a good health cover

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The Covid-19 pandemic has taught people the importance of insurance . If one falls sick and is in need of hospitalisation, not having an adequate health insurance plan can impact your finances . Also, the financial setback that comes with pre-hospitalisation costs, OPD expenses, medicines, diagnostic tests, etc. can be avoided if one has a comprehensive health insurance plan. Here’s a checklist on choosing a health insurance cover:

Extent of coverage

One should choose a policy that covers not just hospitalisation, but also related medical costs, together with outpatient treatments and check-ups. Besides, check for policies that boost sum insured for every claim-free year. Also, there are policies that increase the sum insured every year even if there is a claim. These features will help you be in tune with rise in future medical treatment and hospitalisation costs.

Be sure to check exclusions, specific waiting periods, conditions for pre-existing diseases as well as other things such as number of daycare procedures included or specific benefits like maternity, depending on one’s life stage.

Disease-wise sub-limits

Different plans will have specific limits on the benefits that can be claimed. These can vary from a limit on sum insured for specific diseases or limits on amounts payable towards certain medical expenses. This is termed as sub-limit. So, an insurance plan with a sub-limit will impact one’s out of pocket expenses, as a policy holder will have to bear the expenses. Thus, it is advisable to opt for a plan with no disease-wise sub-limits.

Take note that hospital charges are linked to the type of room or the room rent you have taken. It is important to check the room rent and ICU sub-limits of various health plans before finalising on one. Generally, sub-limits in the plan makes the insurance policy look cheaper.

Restoration benefits

You may claim for an illness and, God forbid, there could be multiple unrelated illnesses or injury that require you to get hospitalised.

Restoration cover restores the sum insured any number of times under the policy (for unrelated illness/injury) to additional 100 per cent in a policy year. This is provided the existing sum insured, including cumulative bonus, is insufficient to settle a claim.

Ease of claim process

Select insurers whose claims processing service is fast and accurate.

A simplified claim filing process can help you to conveniently access digitally and on phone for expeditious cashless and reimbursement claims settlement

Network of hospitals

Check the network of hospitals under the policy that offers cashless facility and the proximity to one’s neighbourhood. In case one travels frequently, check hospital network across the country so that a policyholder can continue to get treated from his/her preferred choice of hospital.

Critical illness cover

With non-communicable diseases, including cancer, cardiovascular diseases, stroke and diabetes on the rise, it is always prudent to choose a health policy that could help cover critical illnesses. However, this comes with a price and the decision needs to be made based on its affordability.

It’s also important to look for additional benefits and riders such as cumulative bonus booster and rewards for healthy lifestyle, among several other factors.

These tips can come in handy while investing in a health insurance plan that is comprehensive and best-suited for one’s family. After all, an economical and comprehensive health insurance plan is much better than inflated medical bills.

The writer is MD & CEO ManipalCigna Health Insurance Company Limited

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What NRIs selling a house must know

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If you live and work abroad and the pandemic has wrecked your finances, one fall-back option you could consider is selling a house you may have invested in, back home. However, this is easier said than done.

Selling a house is a big-ticket transaction with tax implications. And if you are a non-resident Indian, living and filing taxes in a foreign country, then the hassles are manifold.

Tax deduction

When a property that is being sold is owned by an NRI, the buyer is required to deduct tax (TDS – tax deducted at source) at 20 per cent, plus surcharge and cess. For example, if the sale price is ₹50 lakh, ₹10 lakh will be paid as tax by the buyer on your behalf. If the property was purchased for say, ₹35 lakh, the capital gains is only ₹15 lakhs, on which tax is applicable (long-term or short-term, based on how long the property was held). The actual tax owed may be much less; file your tax return at year- end and claim the extra amount paid.

To avoid this problem, you can get a certificate from the Income-Tax Department for deducting the amount that would be closer to the actual tax rather than based on the TDS deduction. You need to apply for a certificate to withhold less, using Form 13 application. The required documents are purchase deed of the property (which gives the price), income-tax filing details for the last three years, sale agreement giving the price and an affidavit.

If you want to re-invest capital gain to save on tax, apply for Tax Exemption Certificate. For this, you need to show proof of reinvestment – this may be allotment letter or payment receipt if buying a new house or affidavit stating that you will invest in capital gains bonds under Section 54EC.

“It takes 30-45 days to get the certificate. You must give this to the buyer, so he can deduct TDS accordingly”, says Venkat Krishnamurthy, Chartered Accountant, V. Ramaratnam & Company.

Checking payment

One other complication is ensuring that the buyer indeed has made the payment that was deducted to the tax authority. The payment made against your PAN will appear on your 26AS form and you can claim this as tax paid when you file your income tax return. But there are cases where the buyer fails to pay for various reasons. For instance, the buyer needs to have a Tax Deduction Account Number (TAN) issued by the Income-Tax Department. Most individuals may not have one and one needs to budget 15 days to get it. So, it is advisable to plan for this ahead to not create a bottleneck in closing the deal. The buyer then pays the TDS and files TDS returns, within the due dates for the period.

If the payment is not made, the tax liability is still the onus of the seller, says Venkat Krishnamurthy. So, instead of finding it out late, you can require that the buyer makes the TDS payments and shares the receipts when the sale is closing, he suggested.

Also read:

Tax planning

You also need to think about tax-saving options more holistically, considering the requirements in India and the country where you file taxes. In general, you are required to pay tax on the gains in India and in your country of residence. And if the other country may consider and give credit for taxes paid in India.

For example, reinvesting the gains to buy a new property – six months before to or within two years of the transaction – can save on tax in India. But this may not be the rule in the other country; and you would be liable to pay tax, negating any benefit.

Currency repatriation

If you want to take the money from the sale to a foreign country.. Forms 15CA and 15CB must be certified by a CA and filed online, to give information such as capital gains and tax dues paid.

There are certain restrictions to consider. One, if the property was bought while you were in India, you must have held the property for 10 years before the amount can be repatriated. If not, you need to wait. In case of inherited property, there is no lock-in period.

You can show proof of inheritance and tax clearance certificates and transfer funds.

You can repatriate up to $1 million per financial year from your NRO account, plus foreign funds, if any, used for the purchase.

The author is an independent financial consultant

 

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You don’t need to declare purchase of property

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I bought a flat (first-time home-buyer) in August 2019 for ₹58 lakh. I have taken a home loan of ₹40 lakh, with my wife as co-applicant. I paid the remaining ₹18 lakh, registration, TDS and other charges by liquidating some FDs and using the amount that I got from family members. Neither I occupy the flat nor have I rented it out. My wife and I have already utilised the ₹1.5 lakh (deduction) under Section 80C. I have claimed HRA, with my rent as ₹ 17,500 per month for financial year 2019-2020.

1. Under which section can I claim rebate? Is it Section 80EEA?

2. Do I need to declare that I bought a flat along with my wife? If yes, under what section? Do both of us need to disclose it individually?

3. Do I need to declare the money I got from my /my wife’s FD and from family members? If yes, under what section?

4. My wife has already filed ITR-1, without any of the above declarations on the online portal. How do I rectify it ? Which items do I consider for rectifying her filing of returns?

-Shashi

I understand that you purchased the property in August 2019 along with your wife as co-owner of the propertyThe property was not rented out during the year, ie, FY 2019-20 and you do not own any other property in your name or in joint name. In light of the above, please find my responses to your queries:

1. We have provided below a list of few illustrative deduction / exemptions (limited to the facts in your queries) that may be claimed by you and your wife:

U/s 80C of the Income Tax Act: The repayment of principal component and stamp duty paid on registration can be claimed as deduction up to a maximum of ₹1.5 lakh

U/s 80EEA of the I-T Act: Interest payment on the housing loan can be claimed as deduction up to a maximum of ₹1.5 lakh upon fulfilling the following conditions:

i. The loan has been sanctioned during the period April 1, 2019, to March 31, 2020

ii. The stamp duty value of the property does not exceed ₹ 45 lakh

iii. The taxpayer does not own any residential house property on the date of sanction of the loan

iv. The taxpayer doesn’t claim any other exemption/ deduction in respect of such interest payment in any other section (including Section 24(b) as mentioned below)

U/s 24(b) of the I-T Act: Deduction of interest payment on housing loan can be claimed as deduction from house property income. In case the property is not rented out and is self-occupied, such deduction can be still claimed. In such cases, the deduction would result in loss and such loss can be set off against income of the taxpayer from any other sources, except capital gains (Loss under house property to be restricted to a maximum of ₹ 2 lakh). In such a case, deduction u/s 80EEA shall not be available).

2. Purchase of property is not required to be declared at the time of filing of tax return. However, in case you claim deduction u/s 24(b) of the I-T Act, reporting would be required in Schedule ‘HP’ of the ITR form. However, if your total income exceeds ₹50 lakh, the property would be required to be reported as an asset in Schedule ‘AL’ of ITR form.

3. There is no specific requirement to report liquidation of fixed deposits (though interest incomes are to be taxed). Loan obtained from relatives are to be reported as Liabilities Corresponding to Asset in case you have a reporting requirement in Schedule ‘AL’ of the ITR form.

4. Your wife may file a revised return u/s 139(5) of the I-T Act for AY 2020-21, the due date for which is March 31, 2021. Aforesaid items can be considered in the revised return of income.

The writer is a practising chartered accountant

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Buy home below circle rate without tax burden

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On November 12, the Finance Minister announced some income-tax relief for home developers and buyers. The differential between the circle rate and the agreement value – to sidestep tax under Section 43CA and Section 56(2)(x) of the Income -Tax Act – was increased from 10 per cent to 20 per cent. The benefit of this increased differential is available for primary sale of residential units of value up to ₹2 crore from November 12, 2020 to June 30, 2021.

What and how?

In general, the government frowns upon property transactions happening at rates below the circle rates (stamp duty value) fixed by it because this could be a way to evade income taxes.

So, it taxes the differential amount, in the hands of both the developer who sells the property at below the circle rate and the buyer who purchases it. Say, the circle rate of a property is ₹100 while the property transaction happens at ₹70. Here, ₹30 will be taxed in the hands of the developer as business income under Section 43CA, and ₹30 will also be taxed in the hands of the property buyer as income from other sources under Section 56(2)(x).

Now, over the years, the government has provided some concessions on this tax – acknowledging that sometimes property transactions do happen below circle rates due to fall in market rates or delay in reducing circle rates. So, in Budget 2018, a safe harbour threshold of 5 per cent was given. That is, if the transaction value was, say ₹100, while the circle rate was up to ₹105, tax would not be applied on the difference.

Then, in Budget 2020, the threshold was increased to 10 per cent. This has now been increased further to 20 per cent. So, if the transaction value is ₹100 while the circle rate is up to ₹120, tax would not be applied on the difference as it is within the 20 per cent of the transaction value.

Here’s another example, if the circle rate of a house is ₹50 lakh and a developer sells it to a buyer at ₹ 40 lakh, the safe harbour threshold of 20 per cent will not be available, as the difference (₹10 lakh) is 25 per cent of the transaction value (₹ 40 lakh). In this case, both the developer and buyer will have to pay tax on the difference of ₹10 lakh.

Had the transaction value been ₹42 lakh and the circle rate ₹50 lakh, the safe harbour threshold of 20 per cent would have been available since the difference (₹8 lakh) – 19 per cent – is within the limit of 20 per cent of transaction value (₹42 lakh). In this case, both the developer and the buyer will not have to pay tax on the difference of ₹8 lakh.

The economic slowdown has pulled down property prices. The increase in threshold from 10 per cent to 20 per cent eases a tax disincentive that could have prevented transactions at market rates much lower than circle rates.

Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, says, “With the increase in circle rate in a few States such as Maharashtra despite zero or negative movement in the market rates, it was challenging for the developers to sell the properties below the circle rates as income-tax rules tax such transactions both in the hands of the buyers and the developers. The threshold increase relief will provide a breather to developers and buyers for the time being.”

If and buts

Note that the increase in differential threshold is only for some property transactions. One, it is only on sale of residential units. It is not available on sale of commercial property or land. Two, it is only on primary sale – that is, from a developer to a buyer. It is not available on re-sale of houses. Three, it is only on sale of houses with value up to ₹2 crore. Four, it is a limited period offer – up to June 30, 2021. After this date, it’s back to the original threshold of 10 per cent.

For the others – sellers and buyers of land, commercial property, costly homes, resale homes, etc –the threshold of 10 per cent continues.

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How to spot a shaky bank

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The perception that commercial banks will never be allowed to fail has led many depositors to invest their money in banks with the highest interest rates, paying little attention to their business or financials. But the Yes Bank and Lakshmi Vilas Bank episodes remind us that even if the Reserve Bank of India (RBI) steps in to bail out a distressed commercial bank, the process is not pain-free for depositors.

In the case of Lakshmi Vilas Bank (LVB), RBI has capped deposit withdrawals at ₹ 25000 for a 30-day period, while a merger is in the works. If you’re keen to avoid such episodes with your bank deposits in future, how do you spot the trouble signs in a bank?

Financial checks

Growth and profits in the banking business are fuelled mainly by leverage. For every ₹ 100 of assets in a bank’s balance sheet, it may have just ₹ 4 of its own capital, with deposits and borrowings making up the rest. This is what makes banks particularly fragile entities that can be tripped up by defaults, delays in loan repayments or funding constraints.

Four financial ratios can alert you early to brewing trouble. The first is the capital adequacy or capital to risk weighted assets (CRAR) ratio, which measures the amount of its own and supplementary capital held by a bank for every rupee of loans advanced by it.

A sub-set of this is the Tier I CRAR, which represents the bank’s permanent capital consisting of equity, reserves and other capital against which losses can be set off. Indian banks are required to maintain a minimum CRAR of 10.875 per cent and Tier I CRAR of 8.875 per cent. LVB had a CRAR of just 0.17 per cent as of June 2020, with a negative Tier I CRAR. SBI, in contrast, had a CRAR of 14.87 per cent and Tier 1 CRAR of 12.10 per cent as of September 30, 2020.

Then, there’s the quantum of doubtful loans in the bank’s books, as measured by its NPA (Non-performing asset) ratio. The gross NPA ratio measures the proportion of loans given out that are overdue for over 90 days.

The net NPA ratio measures bad loans after the bank has made provisions. Broadly, gross and net NPA ratios that are below 5 per cent signal reasonable health, but trends in this ratio are more important to watch. A more than 0.5 percentage point quarterly jump in the NPA ratio suggests problems escalating.

Leverage ratio captures the extent of a bank’s Tier I capital to its total loans. The RBI allows banks to run with a ratio of 3.5-4 per cent, but a ratio above 5 is a comfortable number. HDFC Bank boasted a leverage ratio of 10.71 per cent in September 2020 quarter.

To gauge if a bank has enough cash to meet its near-term dues, the Liquidity Coverage Ratio, or LCR, is your guide. Measured as the high-quality liquid assets held by the bank against its dues over the next 30 days, the higher this ratio is above 100 per cent the better placed it is on liquidity. LVB was comfortable on this score with an LCR of 294 per cent in June 2020.

These ratios are readily available for every scheduled commercial bank on a quarterly basis, in the document ‘Basel III-Pillar 3’ disclosures on the bank’s website.

RBI actions

If RBI believes that a bank is walking a tightrope on indicators such as NPAs, CRAR or return on assets, it can immediately subject it to Prompt Corrective Action (PCA). During PCA, RBI can impose a variety of business restrictions on a bank, induct new management, replace Board members or even merge it with another. Most PCA measures impact a bank’s financials and growth plans, until afresh capital infusion helps them pull out of PCA.

Indian Overseas Bank, Central Bank of India, UCO Bank and United Bank of India are under the RBI’s PCA framework. LVB was put under RBI’s PCA framework in September 2019. Depositors need to worry more about private sector banks being under PCA than public sector banks, as the latter can be quickly bailed out by the Government infusing new capital, while private banks will need to find bona fide investors.

Management churn

If a bank you’re invested with sees a string of top management exits before their term is done, it could be an indication of governance issues. The RBI actions to replace or remove the bank’s CEO or Board members or to supersede the Board are a red rag and provide early warning of suspected governance issues. Skirmishes between key shareholder factions or churn on top appointees are trouble signs, too.

LVB saw shareholders voting out the re-appointment of its MD and CEO along with a clutch of directors in its recent AGM. Yes Bank saw RBI refuse another term to its founder and a string of independent director exits before the moratorium.

Stock prices

When a bank share suffers a precipitous drop or trades at a fraction of reported book value, your antennae should be up for likely problems. A bank share trading at a fraction of its book value could mean that the stock market is under-valuing a good business. But more often, it could mean that it is sceptical about the reported value of the bank’s book. Stock markets, after all, were ahead of rating agencies in spotting problems at stressed NBFCs; they may not be far off the mark with banks.

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Financial planning: Striking a work-life balance

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Sundar, aged 39, under stress due to his employment, was desperate to quit. His wife, Nandini, aged 37, was not earning.

. Sundar wanted to set aside an emergency fund for medical needs. He also wanted to gradually liquidate a few investments to support his expenses till he got employed in a relatively less-stress job. He also was inclined to venture on his own as an alternative.

Sundar wanted to protect his commitment towards the education of his son, aged 11. . His net worth and annual cash flows are mentioned in the accompanying tables.

Goals

After a detailed discussion, the goals were redefined as follows. An emergency fund of ₹16 lakh was to be maintained. The housing loan was to be foreclosed in the next 5- 7 years. Sundar also wanted to accumulate ₹ 30 lakh at current cost for his son’s education that would fall due in 2026; at 10 per cent inflation, the cost worked out to about ₹ 53 lakh.

Sundar wanted to retire at his age of 50. The life expectancy for him and his spouse was up to age 90. The retirement expenses were found to be ₹40,000 a month. Considering 6 per cent inflation over the years, it amounted to about ₹76,000 a month at age 50; this warranted a corpus of ₹ 2.91 crore at retirement.

As Sundar wanted to settle in his home town, we suggested that he dispose both the houses in Bengaluru. With the proceeds, he could buy a farmland and a house in his home town for a comfortable retired life.

In addition to the retirement corpus, Sundar wanted to build a wealth corpus of ₹2 crore to provide for his travel, health and other needs post retirement.

We assessed Sundar’s risk profile as ‘growth- oriented’. His current asset allocation was almost equally split between equity and debt including his RSU (restricted stock units) holdings.

He was saving regularly in a ratio of 60:40 in equity and debt. We recommended the same allocation ratio for his future savings and investments.

Recommendations

We advised Sundar to tag ₹16 lakh of his fixed deposits as his emergency fund. Another ₹ 2 lakh can be tagged as a fund towards career growth. We recommended that Sundar invest ₹8 lakh and tag his current mutual fund holdings of ₹7 lakh to his son’s education. This would fetch him a corpus of about ₹ 26.5 lakh in six years. He was advised to invest ₹ 30,000 per month to manage the deficit — staying with large cap funds for the equity allocation and short -term funds for the debt allocation. Sundar could expect to generate a corpus of ₹ 2.2 crore from his current holdings of EPF (Employees’ Provident Fund), PPF (Public Provident Fund) and RSU and his regular contribution to PF and PPF. To fund the deficit in the retirement corpus, we advised him to invest ₹ 31,000 per month in 70:30 allocation in equity (using a combination of large- and mid-cap funds) and debt (through National Pension System).

Sundar had been investing ₹50,000 per month in his RSU through his voluntary savings and RSU allotments every year. As he did not plan to continue with the current employer, we recommended not to tag such savings. We advised him to increase his loan repayment by ₹ 25,000 per month. This will help him close his housing loan in 5.5 years, and save interest cost of about ₹ 10 lakh as well.

Sundar would have to invest about ₹10 lakh per annum to get another ₹ 2 crore as wealth corpus at his retirement. He was not in a position to commit this amount now. But with his earning potential, he would be able to invest later. The loan repayment and his son’s school fees will stop after six years. This should also help him accumulate the desired corpus.

We also advised Sundar to opt for ₹1.5 crore pure term life insurance for himself and ₹10 lakh health insurance for his family immediately.

Sundar’s disciplined savings and investments over the years made it possible to achieve his desired work-life balance.

The writer is an investment advisor registered with SEBI and Co-founder of Chamomile Investment Consultants, Chennai

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Your Taxes – The Hindu BusinessLine

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It was mentioned in Business Line dated September 21, 2020 that if an individual transfers an amount (or gives interest- free loan) to his wife, the income earned on the same will be added to the income of the individual. What if a karta of an HUF transfers an amount (or gives interest-free loan) to his wife or parents? How is the income earned on that amount treated?

MG Suraj

As per Section 56(2)(x) of the Income Tax Act, any sum of money received in excess of ₹ 50,000 (without consideration/for inadequate consideration) is taxable, except where the donor is a relative or where the money is received in specified circumstances.

Under the I-T Act, as the term ‘relative’ does not include ‘HUF’ (Hindu Undivided Family), it appears that the gift received by individual HUF members (in excess of specified limits) from the HUF shall be chargeable to tax in the hands of individual members.

However, there are Tribunal rulings pronounced in the past, wherein such gifts have been treated as tax-free in the hands of the members on the premise that HUF is a group of relatives and, therefore, any amount received is a gift from the relative and is not taxable

There ought not be any tax implications on providing interest- free loan by karta (HUF) to his spouse, provided it can be established as a genuine transaction supported by adequate documentation.

The interest income earned on the money transferred to your wife’s account from the HUF shall be taxed in the hands of your wife only as the clubbing provisions are not applicable in case of HUF.

Further, if your parents are not members of your HUF, transfer of amount by way of gift from your HUF to your parents shall be covered under 56(2)(x) of the I-T Act and, accordingly, the whole aggregate sum of money received by your parents in a financial year (FY) shall be taxable in their hands as income from other sources, if the aggregate sum of money received exceeds ₹50,000 in a financial year. Further, the interest earned on such sum of money is taxable in their hands.

You may note that as per Section 10(2) of the I-T Act, any sum paid out from the income of the HUF to its members is exempt from tax. For the purpose of the above, we have assumed that payment is out of corpus of the HUF and not from its income.

I had invested in an FD in a Bengaluru-based cooperative bank and earned interest of ₹3.5 lakh in FY2019-20. Upon maturity of the FD, the interest and principal amount was credited to my savings bank a/c with the said bank. But unfortunately, the bank was sealed by the RBI due to some fraud committed there and huge NPA, and no business is being transacted by the bank. The RBI has also set a limit on withdrawals of not more than ₹1 lakh. Revival of bank is progressing. I want clarifications on a few points as I want to file ITR for FY2019-20 and pay tax. As my SB a/c is limited, is there any relief given to taxpayers, viz the above circumstances as I am unable to withdraw my money to pay tax. Can I file ITR without paying tax? Can I defer the tax payment?

HS Muralidhar

An individual can file tax return with tax liability and subsequently discharge the taxes.

Until FY2015-16, tax return filed with outstanding liability was regarded as defective return. With the amendment to tax laws, effective FY2016-17, filing tax return with tax payable is not regarded as defective return.

However, the taxpayer should be mindful that he would be regarded as assesse-in-default and thus may be subject to penal consequences besides interest implications.

Hence, it is recommended to discharge the taxes first before filing the tax return.

However, in case you choose to pay the taxes post filing of your tax return, such taxes, along with applicable interest, will have to be settled at a later date.

The due date of filing income tax return for FY2019-2020 is December 31, 2020. In the event the tax return is not filed within the said date, belated return can be filed on or before March, 2021, with additional interest and late payment fees.

Besides this, losses (except house property loss) cannot be carried forward if the return is not filed within the due date.

The writer is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in

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Save Smart: Initiate your kid into the world of banking this Children’s Day

Personal Finance

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How to go about managing one’s finances is a topic that is seldom dealt with in school. But if you are keen on teaching your kids about money matters , it’s never too early. Most parents often start this exercise with small change ( pocket money) to expose their children to the world of money. This helps kids get used to a regular source of income, with which they can learn to plan and save for their minor expenses.

The good old way is to have kids save their pocket money in a piggy bank. But a better, modern idea could be opening savings account in a bank for your children. This way the child is exposed to banking and terms such as interest at an early age, something that can stand her in good stead. With every credit of interest on the savings account, the child also gets to learn the concept of simple/compound interest, and thus the growth benefit of saving money with a bank.

Eligibility

Parent’s/guardians can open a bank account in the name of a minor child soon after she is born. Predictably, the upper age limit is usually 18 years (with most banks) , beyond which the account can be converted into a normal savings account (by completing certain additional account opening formalities).

You can either open a savings account for your kids, where you (parent or guardian) are a joint holder, or it can be solely in the name of your child. SBI’s PehlaKadam and ICICI Bank’s Young Stars savings accounts, for instance, require parents to be joint holders. However, children can be the sole holders of their savings account through SBI’s PehliUdaan (for children aged 15 to 18 years) and ICICI Bank’s Smart Star savings account (for children aged above 10 years).

For those of you who are apprehensive about younger kids dealing with a savings account all by themselves, you can consider some banks such as Axis Bank (Future Stars Savings Account), where the children’s savings accounts can be fully managed by the guardian, until they attain 10 years of age.

Most banks require parents or guardians to also open another savings account with the same bank, if they don’t have it already.

Interest rates and charges

In most cases, banks pay rates of interest on children’s accounts, similar to other savings accounts (currently in the range of 2.7 to 7 per cent per annum). While higher returns offered by a few banks may lure you, it is advisable to not limit your choices based on interest rate offered alone. Be mindful of factors such as initial deposit, charges on non-maintenance of monthly average balances, withdrawal limits, etc, if any.

For instance, an initial deposit of ₹25,000 is required to open a minor account with IDFC FIRST Bank. HDFC Bank requires minors to maintain an average monthly balance of ₹5,000, in their Kids Advantage Account, failing which the bank charges ₹150-300 till such time the balance is restored to the required level. ICICI Bank too mandates a minimum monthly average balance of ₹2,500/ 5,000 be maintained in their Young Star/ Super Star Savings account (basic variants), respectively. The penalty for non-maintainence of minimum balance can be up to ₹250, in the case of ICICI Bank. SBI’s PehliUdaan on the other hand, has zero minimum balance requirement, while a maximum of ₹ 10 lakh can be maintained in the kid’s account.

Akin to other savings account holders, minors (aged 10 years and above) too get the benefits of cheque book, ATM card, mobile and internet banking services, etc. The withdrawal limits and parental controls however, vary widely across banks.

For instance, for HDFC Bank’s Kids Advantage account holders, ATM/ debit card will be issued in the child’s name with the permission of the parent. The bank has set limits at ₹2,500 for withdrawals and ₹10,000 at merchant locations per day.

In the case of SBI, withdrawal/POS (point of sales) limit is set at ₹ 5,000. Similarly, the limits on mobile banking and internet banking transactions are set at ₹ 2,000 and ₹ 5,000 per day, respectively.

Parental controls

Most of the banks offering ATM/debit card facilities allow the child to spend without restrictions on use. The risk is that there could be misuse of the cards and internet PINs, or that the kid may herself spend frivolously, given the liberal limits.

Most banks permit parents or guardians to only view the transactions on the internet banking service or get alerts via SMS in some other cases. Some banks though allow parents/ guardians to personalise the limits on their child’s debit card– for instance, Citibank Junior Account and AU kids Account by AU Small Finance Bank. More conservative parents are better off opting for banks that offer guardian operated minor accounts, where transactions executed by kids, mandatorily require the consent of a guardian.

Added advantages

Some banks also offer other perks on minor savings accounts. SBI, for instance, on both PehlaKadam and PehliUdaan, offers auto sweep FD (fixed deposit) facility and an option of setting up one standing instruction for RD (recurring deposit). The bank also offers personal accident insurance cover (offered by SBI General) and Smart Scholar —a market-linked child plan offered by SBI Life. Besides, in the PehlaKadam account, parents/guardians can get overdraft against fixed deposits, subject to certain conditions.

HDFC Bank’s Kids Advantage account offers free education insurance cover of ₹ 1 lakh, upon death of parents/guardians, by accident.

You can use these extras ( for instance, auto sweep facilities and insurance) to introduce your child to the next leg of money matters – that is investments and insurance. But do keep in mind that for tax purposes, the child’s income on such investments, coupled with the interest on the savings account would, in most cases (if child’s total income exceeds ₹ 1,500 in any year), be clubbed with the income of the parent earning higher total income .

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