Find all the other major personal finance stories of the week here
Tax filing will include a bunch of newer forms and also a new tax on long-term capital gains in excess of Rs 1 lakh.
Elsewhere, data shows that your bank might not be giving out the best mutual fund advice. Find this and all the other major personal finance stories of the week here.
The tax filing season
Given that the tax return filing time is well and truly upon us, it is time to get all our documents and statements in order.
There is a new complexity this time around. After the long-term capital gains tax on shares and equity funds kicked in from Budget 2018, this would be the first year when you would have to pay tax on gains in excess of Rs 1 lakh. The tax rate for LTCG in equity is 10 percent.
With the grandfathering clause available. If the gains on your equity investment are long-term, you would need not just the purchase price and sale prices, but also the price as on January 31, 2018, which the day prior to Budget announcement, which is grandfathered.
Apart from shares, take due care in finding out your tax liability on any SIP(systematic investment plan) or SWP(systematic withdrawal plan) sales that you may have made.
Fortunately, the registrars such as CAMS, Karvy and SBFS offer you a capital gains statement on all your mutual fund investments. These facilities can be availed online.
New forms: While on the subject of taxes, there have been numerous changes in forms and new fields that need to be populated in your income tax returns. Identifying the right ITR form and filling details such as bank account numbers, directorship of companies, overseas assets held have all been made mandatory.
Multiple salaries: If you changed jobs during the year, you will need to report all your salaries and pay the necessary taxes. Be careful not to make the mistake of taking deductions under various sections(80C, 80D etc.) in full twice in both your jobs. All details of salaries paid are captured in the form 26AS of the income tax website. The form 16 that your employers would give you contains a detail split of your salary.
Take the help of a professional if needed and file your taxes by July 31.
Banks not the best MF advisors
Now that the noise and rumble around the budget is over, it is time to get back to some basics of investing. Every one of us would have faced the situation of your friendly neighbourhood banker trying to push schemes down our throats. But is your bank the best mutual fund advisor and does your banker act in your best interest and suggest the best of schemes? Well, maybe not.
Banks have tended to push their group firms’ mutual fund schemes over those from other AMCs (asset management companies). This is borne out by data obtained from industry body AMFI on commissions that banks earn for selling mutual funds. A majority of the funds sold (in terms of value) and the commissions earned by banks come from pushing of own group schemes.
In other words, they deny you the opportunity of exploring better schemes and fund managers. This can hurt your goals.
Therefore, don’t blindly trust your friendly banker when he/she recommends mutual fund schemes. Go through all the options available in the market, understand the risks, study the performance record and later make informed choices.
Identifying shady companies
When the stock price of a company crashed by 90 percent, there is a tendency among some retail investors or traders to rush in and buy or even average at lower levels.
But what if the firm whose shares you purchased is on terminal decline and is in a financially irrecoverable state? What if the company is fraudulent?
There is help at hand in identifying such companies.
The basic financial factors such as high debt, long working capital cycles, lack of any dividend payment even in profitable years, limited promoter holdings and poor cashflows are giveaways. As an investor, you must try your best to weed out the poor names by using these parameters. This way, you won’t be left with a share that is not worth anything.
Financial security for the self-employed
The new generation is into entrepreneurship in a big way. So, while it is nice to be your own boss and run a business, due care must be taken to shore up your finances. More so if you have a seasonal or a cyclical business and have a fluctuating income stream.
With social security benefits such as provident fund, health and term covers that the salaried would get from their employers, you must take many steps to achieve financial security.
Start with building an emergency fund that would take you through any unexpected or unfortunate events. Buy health and term insurance policies for yourself and your family. Ensure that the term cover is large enough to cover all your expenses and liabilities, as you wouldn’t want your family to suffer in case of your absence. By assessing your income flow, opt for quarterly SIPs in mutual funds, if the monthly option is a bit taxing for you in case of erratic cash flows. Have separate bank accounts for self and your business, ideally a current account for your business. Take a salary from the business and restrict your expenses to fit that salary and do not postpone saving for your retirement. Save through the NPS(national pension system) as it is a low-cost avenue to saving for your retirement and offers tax benefits as well. You can also consider diversified equity funds for the long term.
New tax-saving fund coming
While there was nothing much for the middle class in the form of any tax reductions, the finance minister announced in her Budget speech that the government will launch its Central Public Sector Enterprises (CPSE) exchange-traded fund (ETF) in a tax-saving mutual fund scheme format.
The tax saving fund option is often referred to as an equity-linked saving scheme (ELSS). There is deduction under section 80C available for investments made in such schemes to the tune of Rs 1.5 lakh annually. There is a three-year lock-in for units of such funds. Right now, only mutual fund schemes offer ELSS schemes. Now, for the first time in India, even an ETF is expected to come in an ELSS format.
The CPSE ETF is an initiative by the government of India to divest its shareholding in select state-owned companies.
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