Tag: SCSS

Tax query: Does inheritance attract income tax?

Personal Finance

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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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India Post Payments Bank app: The good, the bad and the ugly

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Post office savings schemes such as recurring deposit (RD), public provident fund (PPF) and Sukanya Smariddhi Scheme (SSY) require annual minimum/periodical contribution towards the account. An app from India Post Payments Bank (IPPB) enables investors to do online processing of such transactions instantly. Here’s a snapshot of features, pros and cons of this mobile app, which is available both on the android and iOS platforms.

Features

The on-boarding process is fairly simple if you have a KYC (know your customer)-compliant savings account with IPPB already. If you do not have such account, you can open an account too on the app using PAN, Aadhaar and registered mobile number. Note that savings account with IPPB is not the same as post office savings bank (POSB) account.

Once the IPPB account is created,the app can be used to transfer sums to your post office schemes, namely RD, PPF and SSY. The app only enables transfer and not creation of account under these schemes.

Money to this IPPB account can be transferred just like you transfer money to any other bank account. The online methods include transferring through net-banking or digital UPI payment apps such as PhonePe. One can also send money to the IPPB account from your POSB account.

Transfer to the respective post office schemes can be made by selecting the investment product displayed under the ‘post office services’ in the app. The app asks for the account number of the scheme you are investing into and your customer id with the post office.

IPPB send a notification after every successful payment transfer.

Generally, post office customers are allowed to take a loan against some of the schemes such as RD and PPF investments subject to certain conditions. The IPPB app enables users to make repayments in the case of loans taken against your recurring deposit.

Pros and cons

It is common practice that we open an account in a particular post office and then move places or towns. With PPF and SSY being long-term products, this app helps overcome the disability of having to be present in the same location or depend on agents to make the contribution.

However, IPPB app is not the only route. Payments to RD/PPF opened at post office (barring SSY) can also be made using net-banking facility provided by India Post on your POSB account. If you have opened investments in these small savings schemes with banks instead of the post office, you won’t have any problem as you can do the transfer at the click of the mouse sitting wherever you want.

One aspect in which the app stands out is user interface. On selecting a particular investment product, it displays the minimum and maximum annual limits and deposits already made by you in the current year clearly. This, along with transaction history, helps users keep a track of their investments, and avoid breaching the prescribed limits..

Further, you need not worry about maintaining any balance in the IPPB savings account since there is no minimum balance requirement.

Not allowing fund transfers to other schemes such as NSC and SCSS is a drawback of the app. Also, as mentioned, one cannot open/close the SSA, PPF or RD accounts using the app. No option to check the cumulative balance in these post office schemes is also a disappointment.

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Lock into the Post-Office Senior Citizens Savings Scheme

Personal Finance

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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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