Tag: PMVVY

Tax Query: How to get TDS certificate from mutual funds?

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I have a few doubts with respect to my ITR for FY 2020-21 i.e. current AY 2021-22. I have invested ₹20,000 in Templeton India Equity Income Fund in 2006 under NFO. Since then periodical dividends declared under the scheme are getting credited to my savings a/c through ECS regularly and are accounted for in my ITR returns of the respective financial years. Since the Finance Act 2020 is modified and the dividends are now taxable in the hands of investors, the mutual fund has deducted TDS and paid the balance of the dividend to my savings account. Since I have not received Form 16 A for the TDS made by the mutual fund, I have sent a mail to the RTA of the MF. Initially, they have asked for a self-attested copy of my PAN card which I have provided to them. Now the RTA has replied that my PAN was not registered in FY2020-21 with them and was registered subsequently and hence, they are unable to fetch the TDS certificate for the FY2020-21. Since, the TDS was deducted on the dividend amount paid to me, kindly inform me how I can obtain TDS certificate and show them in my returns.

I also request you to kindly inform me how to show them in the current ITR in the absence of Form 16A.

Further, I am a retired pensioner and an amount of ₹15 lakh is invested in PMVVY Scheme and am receiving quarterly amount. Please clarify under what head should the amount be shown. Apart from my pension, during the year I have incomes including interest on bank deposits, dividend income from shares and MFs, interest income from NCDs, sovereign gold bonds, savings bank A/c, infra bonds, interest on NHAI tax-free bonds and short term & long-term capital gains. I have one self-occupied house property. My total income during the year is less than ₹50 lakh and I do not have any agriculture income. In the light of the above, I request you to kindly inform me which ITR return I have to file?

Rama Krishna

Dividend shall be taxable under the head ‘Income From Other Sources’ (IFOS) as per the Act. If your PAN is available with brokerage company/fund manager, the taxes deducted would be reported in your Form 26AS based on which the TDS credit can be claimed in the tax return. Where the company has not deposited the TDS/filed the TDS return, due to absence of your PAN details, you are required to complete the KYC formalities and provide the scanned copy of PAN to enable them to do the needful.

Pension income earned from Prime Minister Vaya Vandana Yojana Scheme (PMVVY) of LIC of India is fully taxable and shall be reported under the head IFOS. Please be informed that bank interest, dividend income from shares/mutual funds, interest income from infrastructure bonds, NCDs and sovereign gold bonds shall be taxable under the head IFOS. Short term capital gain/long term capital gain on sale of shares needs to be reported under the head capital gains.

Considering your income pattern, you are required to file ITR 2 for the FY 2020-21.

In the issue dated September 5, 2021, you have mentioned that if money is gifted to relatives, any interest earned out of that will be taxed in the hands of the recipient only. In a similar manner If shares allotted in an IPO are gifted to spouse, and if they are sold within a period of one year, will the short term capital gain be taxed in the hands of the recipient of the gift? If yes, what sort of record should be kept?

Niranjan

Your spouse is not required to pay any tax on receiving shares from you as a gift. However, Section 64(1)(iv) of the Act provides for clubbing of income in the hands of the transferor when assets are transferred for inadequate consideration. Providing gifts to your spouse would amount to transfer for inadequate consideration. Accordingly, any gains arising from sale of such shares is taxable in your hands. Besides documentation evidencing cost of acquisition of shares, sale consideration, selling expenses, etc., and documentation related to gift (like gift deed) needs to be kept on record.

The writer is Partner, Deloitte India

Send your queries to taxtalk@thehindu.co.in

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Tax query: Does inheritance attract income tax?

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My wife has received some money being the second holder in an FD with her mother (now deceased). The FD maturity amount is to be shared with all her brothers and sisters, as per the legal heir certificate (there is no will). As of now, the bank has deleted the name of the first holder on submitting the death certificate. How does she account for these amounts? Already a portion was shared but the entire TDS isn’t being shown in her name.

HH BernardAs per the provisions of Section 56(2)(x) of the Income-tax Act, 1961 (‘the Act’), a sum of money received by way of inheritance should not be considered as taxable in the hands of the recipient. Thus, money received by your wife as legal heir of her mother shall not be taxable in her hands. Her share of such receipt will be required to be considered by her as an exempt income and accordingly reported while filing her tax return for the subject year. Regarding claim of TDS, your wife will be required to claim credit of her share of proportionate TDS in her hands along with proportionate share of interest income, and the balance TDS (for siblings’ share) will be required to be passed on to respective siblings. Such bifurcation must be appropriately reported in your wife’s income-tax return form (under TDS schedule) for the financial year in which tax has been deducted.

My father-in-law (78 years) is a retired government official earning a monthly pension from Central Government. Is he eligible to invest under PMVVYor SCSS? What are the tax benefits/liabilities, if any, subject to his eligibility?

Ashim Sanyal

The primary eligibility criteria for both the schemes mentioned by you i.e. Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizen Savings Scheme (SCSS), is that the individual opening the account should be 60 years of age or more. The schemes do not have any restriction on the maximum entry age or for retired central government employees. NRIs/ HUFs are not eligible for SCSS. As your father-in-law is 78 years of age and assuming he is a resident in India (pre-requisite for SCSS), he shall be eligible to invest in both the scheme.

Both schemes do not provide any tax benefits at the time of making investments. The pension received from the scheme shall also be taxable in the recipient’s hand at applicable slab rates, as ‘Income from Other Sources’.

I have invested around ₹4 lakh in some mutual fund schemes, all being regular plans with dividend options. They have deducted tax on the dividend amounts paid during financial year 2020-2021. Will the mutual funds issue Form 16A and will the details of taxes deducted and remitted to the Government be reflected in Form 26AS of the tax department? Also, can I claim refund of the tax so deducted on filing my return of income? Please clarify.

J R Ravindranath

As per section 194K of the Income-tax Act, 1961, any person, making payment of dividend from mutual funds, shall at the time of credit of such income or at the time of making payment (exceeding ₹5,000), whichever is earlier, shall deduct tax at source (TDS) at 10 per cent. The deductor is required to file the details of such TDS in quarterly withholding tax statement (Form 26Q) and TDS certificate (in Form 16A) is required to be issued by the deductor within prescribed timelines. Details of such income and corresponding TDS shall reflect in your Form 26AS for FY 2020-21. You can file an income tax return and show your dividend income as also any other income which needs to be declared. Basis your taxable income and resultant tax payable, you can claim credit for TDS on dividend and claim a refund, if any.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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Lock into the Post-Office Senior Citizens Savings Scheme

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For senior citizens looking for the safest fixed income option with a regular pay out, the Post-Office Senior Citizens Saving Scheme (SCSS) is a good bet at 7.4 per cent. The scheme comes with a lock-in period of five years and allows seniors above 60 to deposit up to ₹15 lakh. Leading banks such as SBI and HDFC Bank — considered safe — are offering seniors interest of 5.8-6.2 per cent per annum on deposits of similar tenure.

Though the current interest rate offered on the PM Vaya Vandhana Yojana is the same 7.4 per cent as that of SCSS, the policy term of ten years for PMVVY is a drawback. Today, we may be closer to the bottom in the rate cycle. But don’t lose sleep over whether locking into the investment for longer tenure could result in opportunity loss if the rates start moving up. The current premium for SCSS returns over leading banks is at least 120 basis points. So it may take quite sometime for FDs to catch up. Besides, SCSS allows pre-mature withdrawal with a penalty of 1 per cent after two years, in case you want to move out.

Investment and interest from SCSS is eligible for tax benefits under sec 80C and 80 TTB (up to ₹ 50,000 interest per annum) respectively, which sweeten the deal.

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Is PMVVY better than other senior citizen schemes

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The relentless fall in India’s interest rates over the last six years has been hard on retirees and regular income seekers. For seniors, exploring special government schemes before bank deposits or debt mutual funds makes a lot of sense, as they offer superior returns with high safety. We take stock of the modified Pradhan Mantri Vaya Vandana Yojana (PMVVY) and stack it up against competing avenues.

Features

PMVVY is a guaranteed pension scheme offered exclusively by the LIC. Open only to individuals who have completed 60 years, it promises regular pension payments at a monthly, quarterly, half yearly or yearly frequency in return for an upfront investment (called a purchase price).

This scheme which was set to expire in March 2020, was modified and extended upto 31 March, 2023. The scheme’s return has been aligned to that on the post office Senior Citizen’s Savings scheme, with a cap of 7.75 per cent. For FY21, the return is 7.4 per cent. It will be revised in FY22 and FY23 if SCSS rates change. If you invest before March 31, 2021, your return will be 7.4 per cent for the entire 10 years.

While this is due for reset on April 1, it appears unlikely that it will be hiked, given the premium over market interest rates.

PMVVY sets minimum and maximum limits on your investment at ₹1.56 lakh and ₹15 lakh respectively. If you’ve invested in the earlier version of PMVVY, you won’t be allowed to invest more than ₹15 lakh in both versions put together. The scheme guarantees pension payouts for 10 years, with a return of principal at maturity. Should the investor die within 10 years, beneficiaries will get back principal. Premature exit with a 2 per cent penalty on principal is allowed in case of critical or terminal illness of self or spouse. Investors can avail of loans (up to 75 per cent of the investment). The scheme enjoys no tax benefits, except for GST exemption on principal.

How it compares

To Immediate annuity plans: LIC and other insurers offer immediate annuity plans- where you can get a lifelong pension against a lump sum upfront investment. The PMVVY offers better pension rates than them. A 60-year old buying LIC’s Jeevan Akshay VII, for instance, will receive an annual pension of ₹71,210 under the return of purchase price option versus ₹76,600 under PMVVY. Under Jeevan Shanti, where he needs to defer his pension by a year, he would receive ₹54,900.

For those seeking liquidity, the PMVVY’s 10-year lock-in may seem more palatable than the lifelong lock-ins of other immediate annuity plans. PMVVY waives GST while immediate annuity plans levy it at 1.8 per cent of the purchase price.

The PMVVY however does suffer from some negatives. The ₹15 lakh cap on total investments restricts your monthly pension to ₹9,250. PMVVY offers the same pension rate for all subscribers above 60. In other immediate annuity plans, pension rates rise substantially with age. Under Jeevan Akshay VII, a 70-year-old can take home 30 per cent more pension than a 60-year old with an identical purchase price.

To Senior Citizens Savings Scheme: The SCSS from India Post allows seniors above 60 to deposit upto ₹15 lakh with a guaranteed quarterly payout at 7.4 per cent per annum. Those above 55 who have taken VRS or have retired can park retirement proceeds in the scheme. Interest rates on SCSS are reset quarterly by the Government. The scheme carries a 5 year lock-in, with initial investments eligible for section 80C benefits. The interest is taxable. The scheme allows premature withdrawal but with a penalty.

When you are investing close to the bottom of a rate cycle like now, SCSS with a 5-year lock-in can help you secure better rates more quickly than PMVVY.

PMVVY is also constrained by the cap of 7.75 per cent on rates. SCSS’ facility to withdraw without any conditions attached is a big plus for seniors looking to take out money for emergency needs or to switch to better rates after one year.

The 80C benefit can help seniors meet their tax saving goals along with securing regular income.

SCSS does not offer a monthly pension option and does not facilitate loans. However, incomes from both SCSS and PMVVY are liable to tax at your slab rate.

To bank deposits: One-to-five year deposits with leading banks today offer rates of 5-5.5 per cent. Small finance banks offer 7-7.5 per cent. But PMVVY is safer than small finance banks as it is LIC and government-backed. You can also get predictable pension payouts for 10 years without worrying about rate moves.

In a rising rate scenario, parking in upto 1 year bank deposits can help you benefit quickly from higher rates.

But given the gap between the present PMVVY rate of 7.4 per cent and deposit rates of leading banks, it may be some time before deposit rates catch up.

Therefore decide between PMVVY and bank deposits based on the 10 year lock-in.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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How a senior citizen can generate more income amid low interest rates

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Mr Ramesh is 70 years old. He is retired and has no financial dependents. He has been a very conservative investor and has never invested beyond bank fixed deposits, provident fund or insurance policies.

His total portfolio is about ₹1 crore. From this portfolio, he has maximised investments in Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizen Savings Scheme (SCSS). He has invested ₹15 lakh in each of these schemes. The remainder of his portfolio (₹70 lakh) is in bank fixed deposits.

The SCSS and PMVVY schemes give him an annual interest income of about ₹2.25 lakh per annum. His requirement is about ₹50,000 per month or ₹6 lakh per annum.

Until now, the interest rate from bank fixed deposits was comfortable enough to bridge the deficit amount (about ₹3.75 lakh). In fact, Ramesh was able to save some money from his interest income, which was also helping his portfolio grow. He hoped this slow growth in portfolio could at least match the inflation in expenses to some extent.

The bank fixed deposit rates have gone down in the recent past. This means his bank fixed deposits will be renewed at lower interest rates, resulting in reduction of income.

Ramesh is worried that he may not be able to sustain on such low interest income and his portfolio may start depleting. Smaller portfolio means lesser income and greater deficit, which needs to be funded by breaking fixed deposits. This can become a self-reinforcing cycle and his portfolio can deplete fast.

Ramesh is looking for a high-income product with low risk.

Recommendations

Let’s look at the options.

Ramesh can go with corporate fixed deposits that may offer a higher rate of interest than bank fixed deposits, but he is not comfortable with credit risk of corporate fixed deposits. Debt mutual funds won’t suit him for the same reason. Moreover, at his level of income, tax efficiency of debt funds does not come into picture either.

Another option is to go with potentially higher-return products such as equity funds, but such products come with higher risk of capital loss. Moreover, since Ramesh needs to withdraw from this portfolio, adverse market movements can make rupee-cost-averaging work against him. Thus, at his age and with his risk appetite, this may not be a good choice. Also, Ramesh is not comfortable with this option.

A third alternative is to open bank fixed deposits with newer banks that are offering a higher rate of interest, but Ramesh is not comfortable with this option either.

Given this background, in our opinion, Ramesh must explore purchasing an immediate annuity plan without ‘return of purchase price’. In this variant of annuity plans, the insurer does not return the investment amount or the purchase price to the investor’s family in the event of investor demise. Thus, the insurance company can afford to pay a much higher rate of interest.

For instance, even during these times of low interest rates, the annuity rate for a 70-year-old will be 10-10.5 per cent pa. To cover the deficit of ₹3.5 lakh, Ramesh would need to invest only ₹35 lakh. And this interest rate is guaranteed for life.

When his PMVVY and SCSS mature, this money can either be put back into the respective schemes or into an immediate annuity plan. The immediate annuity plan without return of purchase price will likely generate much higher income than PMVVY and SCSS, at his age.

In fact, the annuity rate for a variant without return of purchase price increases with age. Hence, the annuity rate for the entry age of 75 will be much higher than the annuity rate for the entry age of 70.

To counter inflation, Ramesh can stagger annuity purchases for small amounts in the future.

The caveat with an annuity plan without return of purchase price is that, in the event of early demise, it might look like a waste of money. His family won’t get anything. Therefore, this approach would have been a problem if he had financial dependents or if he wanted to leave this money as legacy. Since he does not have such limitations, an annuity plan without return of purchase price is a good way to maximise income at very low risk.

He will also lose access to this money. This could have been a problem, but he has investments outside of this annuity plan, too.

Another point to note is that GST at 1.8 per cent of the purchase price will be applicable. So, that has to be taken into account while arriving at the purchase price, based on the annuity requirement.

Since Ramesh does not have to worry about income generation now, the remaining ₹35 lakh (₹70 lakh minus ₹35 lakh) can be invested freely. He can consider keeping a portion of this money as an emergency fund. He can even take some risk with this money for growth and build legacy for his family.

Alternatively, he can simply put the remaining ₹35 lakh in bank fixed deposits. His portfolio will gradually keep growing. As his income requirements grow, he can take some money out of FDs and buy an annuity plan to bridge the income deficit.

The writer is a SEBI-registered investment advisor at personalfinanceplan.in

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