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As the new financial year has already begun, people have started mulling over where to invest and how to save tax during this year. Here are the key tax changes which may impact your cash flows and investment decisions for FY2018-19.

Benjamin Franklin had rightly said that only two things are certain in this world – death and taxes. So, while there can’t be any escape from taxes, particularly if someone has taxable income, everyone tries to save as much tax as possible. As the new financial year has already begun, people have started mulling over where to invest and how to save tax during this year. However, saving the maximum tax is not possible without looking at the changes introduced in the Union Budget 2018. So, let us review the key tax changes which may impact your cash flows and investment decisions for the financial year 2018-19:

1. Standard Deduction for Salaried Individuals and Pensioners

The Finance Act, 2018 re-introduced standard deduction of up to Rs 40,000 for salaried taxpayers. Such deduction is allowed in lieu of the current transport allowance of Rs 19,200 (Rs 1,600 p.m.) and reimbursement of medical expenses of Rs 15,000 p.a. The net benefit for the employees already claiming a deduction for transport allowance and medical reimbursement will be Rs 5,800 (Rs 40,000 – Rs 19,200 – Rs 15,000).

“It is important to note here that pension received for past employment is also taxable as salary. Therefore, the benefit of standard deduction will also be available to pensioners. Till now pensioners were not allowed any exemption for transport allowance or medical reimbursement. Therefore, it will result in additional Rs 40,000 tax- free income for all pensioners,” says Chetan Chandak.

2. Enhanced deduction u/s 80D

Earlier, an individual was allowed a maximum deduction of up to Rs 30,000 in respect of expenditure incurred by him for the medical insurance for himself, his spouse or children. He was also allowed additional deduction of up to Rs 30,000 for the expense incurred for the medical insurance policy for his parents. The deduction of Rs 30,000 was restricted to max Rs 25,000 if the insured persons were less than 60 years of age.

“In case the assessee himself or his/her spouse or any of his/her parent was 80 years or more and was not covered under any insurance policy, then the deduction u/s 80D he/she was allowed to claim for the medical expenditure incurred on the health of such a person was Rs 30,000. The Budget 2018 extended this benefit to all senior citizens (i.e. 60 years and above),” says Chandak.

Also, this limit has now been increased to Rs 50,000 from the existing Rs 30,000 in case of all senior citizens (i.e. above 60 years). In a nutshell, an individual taxpayer can claim a maximum deduction of up to Rs 1 lakh under Section 80D if he or his family members and his parents are 60 years or above.

Further, in case of single premium health insurance policies which cover more than one year, the deduction shall be allowed on a proportionate basis for all those years for which health insurance coverage is provided, subject to the specified monetary limit.

3. Deduction limit under section 80DDB raised to Rs 1,00,000

This deduction u/s 80DDB is allowed to an individual or HUF taxpayer who pays for the medical treatment of critical illness for himself or any other family member. At present, this deduction is allowed up to Rs 80,000 for the very senior citizen, up to Rs 60,000 for the senior citizen, and Rs 40,000 in any other case.

The Budget 2018 has raised the limit of deduction under this section to Rs 1,00,000 for all senior citizens (i.e. any one above 60 years in age). There is no change in the deduction allowed for expenditure incurred in any other case. i.e. for person who is below 60 years of age.

4. Bank interest up to Rs 50,000 will be tax exempt for senior citizens

A new section 80TTB has been introduced from AY 2019-20 which allows deduction of up to Rs 50,000 to any senior citizen (above 60 years) having interest income from deposits with banks or post office or co-operative banks. Aggregate interest earned on saving deposits and fixed deposits will be eligible for deduction u/s 80TTB up to Rs 50,000.

“No deduction under section 80TTA shall be allowed to the senior citizens claiming the benefit u/s 80TTB starting AY2019-20. Further, the corresponding amendment has been proposed in section 194A to provide that no tax shall be deducted at source from payment of interest to a senior citizen up to Rs 50,000,” says Chandak.

5. Enhanced Tax Benefit on Gratuity

Gratuity received on retirement or on becoming incapacitated or on termination or any gratuity received by the widow of the deceased employee, children or dependents was till now exempt up to Rs 10,00,000 as per the recent changes in the Gratuity Act. This exemption will be enhanced to Rs 20,00,000. So the taxpayers who are going to retire or receive gratuity starting 1st April 2018 will be able to claim higher exemption.

6. NPS withdrawal exemption extended to non-employees

Any amount received by an employee from the National Pension System (NPS) either on closure or opting out from the scheme is exempt up to 40% of the total accumulated balance in his NPS account at the time of withdrawal. Till now this exemption was not available to non-employee account holders. The Budget 2018 has extended the said benefit to all NPS subscribers.

7. No capital gains tax if the variation in stamp value and the actual consideration is up to 5%

Earlier, if a taxpayer sold an immovable property for a consideration which was less than the value adopted by the Stamp authorities, then the stamp value was deemed as the actual sales consideration. “This treatment resulted in higher amount of capital gains even if the seller had not actually gained anything due to such higher stamp valuation. Further, such difference in the stamp value and the actual consideration disclosed by the parties was also taxed in the hands of the buyer. This resulted in hefty double taxation,” says Chandak.

In order to minimize hardship in case of genuine transactions, now no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration does not exceed 5% of the sale consideration.



New direct tax to benefit corporate and income tax payers

Businesses and low-income earners will stand to gain the most from the new direct tax code that the government is working on, two people familiar with the matter said.

The proposed direct tax code, the draft of which will be ready by July, will take forward the government’s agenda of lowering corporate tax rate to 25% for all businesses and seek to give further relief to individual income tax payers.

The idea is to moderate tax rates for assessees without squandering the recent gains in revenue growth and tax base. Therefore, the proposed tax rate cuts will be incremental over a period of time as compliance and revenue collections grow. Between fiscal 2014 and fiscal 2018, income tax returns filed have risen over 80% to 68.4 million.

The highest personal tax slab of 30% for individuals, will, however, stay at current level as it is considered among the lowest in the world, one of the two people cited above said on condition of anonymity. Relief to small taxpayers could prove to be electorally rewarding for the ruling National Democratic Alliance government as the country goes to polls next year.

The intention is to make businesses more competitive with a lower 25% corporate tax rate, the second of the two people cited above said on condition of anonymity.

Reducing corporate tax to make Indian firms more competitive has become a policy priority as nations such as the US and UK are wooing investments with lower tax rates.


new tax law to benefit taxpayers.

“In most advanced economies, individuals are taxed at a higher rate than companies to promote investments and job creation,” said Amit Maheshwary, partner, Ashok Maheshwary and Associates Llp.

The benefit of a lower corporate tax rate of 25% was first offered to companies with annual revenue less than Rs50 crore in the 2017-18 budget. It was extended to businesses with annual sales up to Rs250 crore in 2018-19. The direct tax code will spell out the roadmap for eventually extending the rate to all companies.

The new direct tax code will seek to further reduce tax evasion and improve compliance so that the ratio of direct tax to GDP goes up from the present level—5.9% in fiscal 2018 and a projected 6.1% in the current fiscal year—to at least 9% over the next three to four years.

There could be room for further improvement on this count eventually as the tax-to-GDP ratio of comparable economies (including state taxes) is about 24%, roughly half of which should be from direct taxes, said the first person cited earlier.

The two structural changes in recent years—demonetisation in November 2016 and the rollout of the goods and service tax (GST) in July 2017—have helped the government increase the number of direct tax payers. With increased cross-references between the tax return filings of both GST and corporate taxes, understating revenue is set to become more difficult for businesses.

Taxation of digital economy, reducing frivolous litigation and making the corporate tax rate more competitive are expected to be the focus areas of the new code, said Girish Vanvari, founder of advisory firm Transaction Square.

“Industry is also looking for certainty so that it can plan five years ahead. For instance, the 25% rate for industry was announced but it still comes with many riders and keeps out many companies,” said Riaz Thingna, director, Grant Thornton Advisory Pvt. Ltd.



Most investors want to make investments in such a way that they get sky-high returns as fast as possible without the risk of losing the principal amount.


And this is the reason why many investors are always on the lookout for top investment plans where they can double their money in few months or years with little or no risk.


However, it is a fact that investment products that give high returns with low risk do not exist. In reality, risk and returns are inversely related, i.e., higher the returns, higher is the risk, and vice versa.

So, while selecting an investment avenue, you have to match your own risk profile with the risks associated with the product before investing. There are some investments that carry high risk but have the potential to generate high inflation-adjusted returns than other asset class in the long term while some investments come with low-risk and therefore lower returns.

There are two buckets that investment products fall into - financial and non-financial assets. Financial assets can be divided into market-linked products (like stocks and mutual funds) and fixed income products (like Public Provident Fund, bank fixed deposits). Non-financial assets - most Indians invest via this mode - are the likes of gold and real estate.

Here is a look at the top 10 investment avenues Indians look at while savings for their financial goals.

Direct equity Investing in stocks may not be everyone's cup of tea as it's a volatile asset class and there is no guarantee of returns. Further, not only is it difficult to pick the right stock, timing your entry and exit is also not easy. The only silver lining is that over long periods, equity has been able to deliver higher than inflation-adjusted returns compared to all other asset classes.

At the same time, the risk of losing a considerable portion of capital is high unless one opts for stop-loss method to curtail losses. In stop-loss, one places an advance order to sell a stock at a specific price. To reduce the risk to certain extent, you could diversify across sectors and market capitalisations. Currently, the 1-, 3-, 5 year market returns are around 13 percent, 8 percent and 12.5 percent, respectively. To invest in direct equities, one needs to open a demat account.

Equity mutual funds Equity mutual funds predominantly invest in equity stocks. As per current Securities and Exchange Board of India (Sebi) Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65 percent of its assets in equities and equity-related instruments. An equity fund can be actively managed or passively managed.

In an actively traded fund, the returns are largely dependent on a fund manager's ability to generate returns. Index funds and exchange-traded fund (ETFs) are passively managed, and these track the underlying index. Equity schemes are categorised according to market-capitalisation or the sectors in which they invest. They are also categorised by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies). Currently, the 1-, 3-, 5-year market return is around 15 percent, 15 percent, and 20 percent, respectively. Read more about equity mutual funds.

Debt mutual funds Debt funds are ideal for investors who want steady returns. They are are less volatile and, hence, less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments. Currently, the 1-, 3-, 5-year market return is around 6.5 percent, 8 percent, and 7.5 percent, respectively.


National Pension System The National Pension System (NPS) is a long term retirement - focused investment product managed by the Pension Fund Regulatory and Development Authority (PFRDA). The minimum annual (April-March) contribution for an NPS Tier-1 account to remain active has been reduced from Rs 6,000 to Rs 1,000. It is a mix of equity, fixed deposits, corporate bonds, liquid funds and government funds, among others. Based on your risk appetite, you can decide how much of your money can be invested in equities through NPS. Currently, the 1-,3-,5-year market return for Fund option E is around 9.5 percent, 8.5 percent, and 11 percent, respectively. Read more about NPS.

Public Provident Fund The Public Provident Fund (PPF) is one product a lot of people turn to. Since the PPF has a long tenure of 15 years, the impact of compounding of tax-free interest is huge, especially in the later years. Further, since the interest earned and the principal invested is backed by sovereign guarantee, it makes it a safe investment. Read more about PPF.

Bank fixed deposit A bank fixed deposit (FD) is a safe choice for investing in India. Under the deposit insurance and credit guarantee corporation (DICGC) rules, each depositor in a bank is insured up to a maximum of Rs 1 lakh for both principal and interest amount. As per the need, one may opt for monthly, quarterly, half-yearly, yearly or cumulative interest option in them. The interest rate earned is added to one's income and is taxed as per one's income slab. Read more about bank fixed deposit.

Senior Citizens' Saving Scheme (SCSS) Probably the first choice of most retirees, the Senior Citizens' Saving Scheme (SCSS) is a must-have in their investment portfolios. As the name suggests, only senior citizens or early retirees can invest in this scheme. SCSS can be availed from a post office or a bank by anyone above 60. SCSS has a five-year tenure, which can be further extended by three years once the scheme matures. Currently, the interest rate that can be earned on SCSS is 8.3 per cent per annum, payable quarterly and is fully taxable. The upper investment limit is Rs 15 lakh, and one may open more than one account. Read more about Senior Citizens' Saving Scheme.

RBI Taxable Bonds The government has replaced the erstwhile 8 percent Savings (Taxable) Bonds 2003 with the 7.75 per cent Savings (Taxable) Bonds. These bonds come with a tenure of 5 years. The bonds are mandatorily issued in demat form and credited to the Bond Ledger Account (BLA) of the investor and a Certificate of Holding is given to the investor as proof of investment. Read more about RBI Taxable Bonds.

Real Estate The house that you live in is for self-consumption and should never be considered as an investment. If you do not intend to live in it, the second property you buy can be your investment.

The location of the property is the single most important factor that will determine the value of your property and also the rental that it can earn. Investments in real estate deliver returns in two ways - capital appreciation and rentals. However, unlike other asset classes, real estate is highly illiquid. The other big risk is with getting the necessary regulatory approvals, which has largely been addressed after coming of the real estate regulator. Read more about real estate.

Gold Possessing gold in the form of jewellery has its own concerns like safety and high cost. Then there's the 'making charges', which typically range between 6-14 per cent of the cost of gold (and may go as high as 25 percent in case of special designs). For those who would want to buy gold coins, there's still an option. One can also buy ingeniously minted coins. An alternate way of owning paper gold in a more cost-effective manner is through gold ETFs. Such investment (buying and selling) happens on a stock exchange (NSE or BSE) with gold as the underlying asset. Investing in Sovereign Gold Bonds is another option to own paper-gold. Read more about sovereign gold bonds.

What you should do Some of the above investments are fixed-income while others are market-linked. Both fixed-income and market-linked investments have a role to plan in the process of wealth creation. While market-linked investments help in navigating the volatility and in the process generate high real return, the fixed income investments help in preserving the accumulated wealth so as to meet the desired goal. For long-term goals, it is important to make the best use of both worlds. Have a judicious mix of investments keeping risk, taxation and time horizon in mind.

Source: Economic Times

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