Thursday, November 4, 2010

Will your Nominee get the money on your death ?

Did you think that your nominee is the person, who will get all the money legally from your Life Insurance Policy and Mutual funds investments? Ha! That is exactly what you’d think if you aren’t aware of the legal aspects. We assume a lot of things which sounds like they’re obvious, but are not true from the legal point of view. Today, we’ll concentrate on nominations in financial products.

Nominee in Insurance , mutual funds

For whom are we earning? For whom are we investing? Who, do we want to leave all our wealth to, in case something happens to us? It might be your children, your spouse, parents, siblings etc., or just a subset of these. You also might want to exclude some people from your list fo beneficiaries!. So you think you will nominate person X in your Insurance Policy, and when you are dead and gone, all the money goes to person X and he/she becomes the sole owner? You’re wrong, dude ! It doesn’t work that way. Let’s see how it actually does!

What is a nominee ?

According to law, a nominee is a trustee not the owner of the assets. In other words, he is only a caretaker of your assets. The nominee will only hold your money/asset as a trustee and will be legally bound to transfer it to the legal heirs. For most investments, a legal heir is entitled to the deceased’s assets. For instance, Section 39 of the Insurance Act says the appointed nominee will be paid, though he may not be the legal heir. The nominee, in turn, is supposed to hold the proceeds in trust and the legal heir can claim the money.

A legal heir will be the one whose is mentioned in the will. However, if a will is not made, then the legal heirs of the assets are decided according to the succession laws, where the structure is predefined on who gets how much. For example, if a man during his lifetime executes a will. In the will, he mentions his wife and children as legal heirs, then after his death, his wife and children are the legal owners of his assets. It is essential that one needs to execute a will. It is the ultimate source of truth and replaces the succession law. Nominee can also be one of the legal heirs.

Important

  • Mention the Full Name, Address, age, relationship to yourself of the nominee.
  • Do not write the nomination in favour of “wife” and “children” as a class. Give their specific names and particulars existing at that moment.
  • If the nominee is a minor, appoint a person who is a major as an appointee giving his full name, age, address and relationship to the nominee.

Why is the concept of nominee ?

So you might be wondering, if the nominee does not become the sole owner, why does such a concept of “nominee” exist at all? It’s pretty simple. When you die, you want to make sure that the Insurance company, Mutual fund or your shares should at least get out of the companies and go to someone you trust, and who can further help, in process of passing it to your legal heirs.

Otherwise, if a person dies and hasn’t nominated anyone, your legal heirs will have to go through the process of producing all kind of certificates like death certificates, proof of relation etc., not to mention that the whole process is really cumbersome! (For each legal entity! The insurance company, the mutual funds, for the shares, for the real estate..) . So, to simplify, if a nominee exists, these hassles don’t happen, since the company is bound to transfer all your money or assets to the nominee.The company the goes out of scene & then, it’s between nominee and legal heirs.

Example of Nomination

Ajay was 58 years old who died recently in an accident. As his children were settled, he wanted to make sure that his wife is the sole owner of all the monetary assets. This includes his insurance policy and mutual funds. So during his lifetime, he nominated his wife as a nominee in his term insurance policy and mutual funds investments. However, after Ajay’s death things didn’t turn up the way he wanted. The reason being Ajay did not leave a will. Though his wife was the nominee in all his movable assets, as per the law, his wife, along with children, were the legal heirs and all of them had equal right to Ajay’s assets.

One simple step which could have saved the situation was that Ajay should have made a will which clearly stated that only his wife was entitled to get all the money and not his children.

Nomination in Life Insurance

A policyholder can appoint multiple nominees and can also specify their shares in the policy proceeds. Nomination in life insurance has one limitation, as insurance policies are bought to secure your financial dependents, your first choice of nominee has to be your family members. In case you want to nominate a non-family member like a friend or third party, you will have to show/PROVE the insurance company that there is some insurable interest for the person. This happens because of a Clause called PRINCIPAL OF INSURABLE INTEREST in insurance. Note that provision of nomination in life insurance is related to Section 39 of the Insurance Act. Note that as per LIC website

Nomination is a right conferred on the holder of a Policy of Life Assurance on his own life to appoint a person/s to receive policy moneys in the event of the policy becoming a claim by the assured’s death. The Nominee does not get any other benefit except to receive the policy moneys on the death of the Life Assured. A nomination may be changed or cancelled by the life assured whenever he likes without the consent of the Nominee.

Make sure, you have a nominee for your policy for easy settlement of the claim, if you do not have any nominee mentioned in the policy, it can turn out to be a disaster for your dependents to get a claim.

Nomination in Mutual funds

In case of mutual funds, you can nominate up to three people, who can be registered at the time of purchasing the units. While filling in the application form, there is a provision to fill in the nomination details. Even a minor can be a nominee, provided the guardian is specified in the nomination form. You can also change nomination later by filling up a form which is available on the mutual fund company website. Nomination in mutual funds is at folio level and all units in the folio will be transferred to the nominee(s). If an investor makes a further investment in the same folio, the nomination is applicable to the new units also. A non-resident Indian can be a nominee, subject to the exchange control regulations in force from time to time.

Nomination in Shares

Quiz for you :) . Now you know what a nominee means and who actually gets the money. So if there is a husband H, with wife W and nephew N, and he has nominated his nephew N to be the nominee of his shares in demat account, who will have the legal right to own the shares after husband’s death? If you answer is wife, you are wrong in this case! In case of stocks, it does not work the usual way, if a will does not exist.

In the verdict, Justice Roshan Dalvi struck down a petition filed by Harsha Nitin Kokate, who was seeking permission to sell some shares held by her late husband. The Court noted that as she was not the nominee, she had no ownership rights over the shares. Ms KokaThe’s lawyer had argued that as she was the heir of her husband who had died intestate (without a will), she should have ownership rights of the shares, and be able to do anything with them as she wished. In this case, Ms Kokate’s husband had nominated his nephew in favour of the shares. Justice Dalvi however noted that under the provisions of the Companies Act and the Depositories Act, Acts which govern the transfer of shares, the role of a nominee was different.

“A reading of Section 109(A) of the Companies Act and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed, as has been done in this case.”

Source : Moneylife

It means that if you have not written a will, anyone who has been nominated by you for your shares will be the ultimate owner of those stocks, The succession laws on inheritance will not be applicable but in case, you have made a will, that will be the source of truth.

Nomination in PPF

Let me give you some shock first. If you have Rs 10 lakh in your Public Provident Fund (PPF) account and you have not nominated anyone for your PPF account, your legal heirs will get maximum of Rs1 lakh only! Yes, it’s so important to have a nominee, now you get it :) . You can nominate one or more persons as nominee in PPF. Form F can be used to change or cancel a nomination for PPF. Also note that you cannot nominate anyone if you open an account for a minor.

Nomination in Saving/Current/FD/RD Account in Banks

FD’s also come with nomination facility. While opening a new account, there is a column for nomination in the same form and you should fill it. You can nominate two persons with first and second option. Note that in case you have not done any nomination till now, you should request Form No DA-1 from your Bank which is used to assign a nominee in future. (Examples of ICICI Bank , HDFC Bank , Canara Bank) . In the same way to change/cancel the nomination you need to fill up Form no DA-2. Read about Corporate Fixed Deposits

As per a famous case, A Bench of Justices Aftab Alam and R M Lodha in an order said that the money lying deposited in the account of the original depositor should be distributed among the claimants in accordance with the Succession Act of the respective community and the nominee cannot claim any absolute right over it.

Section 45ZA(2)(Banking Regulation Act) merely put the nominee in the shoes of the depositor after his death and clothes him with the exclusive right to receive the money lying in the account.It gives him all the rights of the depositors so far as the depositors’s account is concerned. But it by no stretch of imagination make the nominee the owner of the money lying in the account,” the Bench observed.

Conclusion

Now you know! Taking Personal finance for granted can be fatal :) Just investing knowledge, isn’t enough to have a great financial life. You also need to be well versed with basic legal aspects and make sure you carry out all due arrangement . Nomination is one important aspect you should seriously consider, when checking for the financial products you have bought or plan to buy in future. Mistakes in Personal Finance

Its important to make sure that your loved one’s do not face legal issues and only say and think lovely thoughts about you when you are not around, rather than crib & grumble :)


My Thanks are due to Mr. Manish of jagoinvestor for this great article

- Ramesh Bhat K, CEO., Aniram


Thursday, July 1, 2010

The New Direct Tax Code - Decoded

WHY THE DIRECT TAX CODE IS INTRODUCED?

After passage of the Income Tax act in 1961, it has been amended every year. Tax administrators, chartered accountants and tax payers have raised concerns several times about the complex structure of the Income Tax Act, particularly because of the numerous amendments, frequent policy changes due to changing economic environment and complexity in the market etc.

So the Direct Tax Code (DTC) seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, dividend distribution tax, Capital Gain Tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system. The code aims to bring all direct taxes under a single law, to facilitate easy understanding, reduced the scope of litigation, more flexibility, reduction or elimination of regulatory functions and last but not the least provision of stability.

The article showcases how the DTC will impact the income pattern, tax structure as well as wealth generation for individuals and companies.

KEY HIGHLIGHTS

Revised tax structure for Individuals, Women and Senior Citizens

Medical facilities

Monetary limits for medical facilities/reimbursement provided by an employer to its employees would be enhanced.

Tax Deductions

In the first draft of DTC, the deduction available in respect of interest on loans for higher education, investment in equity-linked savings schemes, repayment of housing loan, and investment in pension plans, etc., have been capped at a maximum of Rs 3 lakh. However, there are discussions going on about whether to increase the limit or leave it as it is at Rs 1 lakh. The final figure of permissible deduction will be known only once the code is placed for final discussion in parliament.

Wealth Tax

Wealth tax will be payable by all individuals, Hindu Undivided Families (HUFs) and private discretionary trusts. The assets chargeable to wealth-tax shall mean all assets, including financial assets (that is aimed at bringing about an element of equity when assets are transferred across generation in a country that levies no inheritance tax) and deemed assets, as reduced by exempted assets. Exempted assets include stock in trade, a single residential house or a plot of land etc.

In the first draft of the direct tax code, it was proposed that the net wealth of an individual or HUF in excess of Rs. 50 crores shall be subject to wealth-tax at the rate of 0.25%. However in the revised draft code, the government has decided that the threshold limit. the tax rate as well as weather financial asset should be included or not will be revealed to the public when the bill is presented in the parliament.

Deduction for Charity

The deductions allowed for contribution towards charitable purposes may not be available once the DTC comes into force.

Saving Schemes

It has been proposed to provide the Exempt- Exempt – Exempt (EEE) method of taxation for:

  • Government Provident Fund (GPF)
  • Public Provident Fund (PPF)
  • Recognised Provident Funds (RPFs) and
  • The pension scheme administered by Pension Fund Regulatory and Development Authority (like the New Pension Scheme) and
  • Approved pure life insurance products and Annuity schemes

Under this method, the first E in EET means that the contributions towards certain savings products are deductible from taxable income, the second E represents that the accumulation from the investment are exempt, and also, all withdrawals at any time are exempt from tax in case of the third E.

However other saving schemes such as ULIP (Unit Linked Insurance Plans) and ELSS (Equity Linked Saving Scheme) would come under Exempt – Exempt – Tax status i.e., they would be taxed at maturity.

However, investments made, before the date of commencement of the DTC, in instruments which enjoy EEE method of taxation under the current law (for e.g., ULIPs), would continue to be eligible for EEE method of tax treatment for the full duration of the financial instrument.

Real Estate

In case of any one house property, which has not been let out, an individual or HUF will be eligible for deduction on account of interest on capital borrowed for acquisition or construction of such house property (subject to a ceiling of Rs. 1.5 lakh per annum) from the gross total income. The overall limit of deduction for savings will be calibrated accordingly.

Change in definition of Short Term and Long Term

The appreciation in the property value held for less than a year will be classified as short-term gain and the profit will be added to the investor’s income. When held for more than a year, the property value can be indexed but the profit gets added to investor’s income and he has to pay tax at the marginal tax rate.

For e.g.: Suppose a investor gains Rs 1 lakh through sale of property and he is in the highest marginal tax bracket (i.e., 30%). So, he would pay Rs 30,000 as tax if property is held for less than 1 year. But if the property is held for more than one year, the value of the property will be recalculated based on inflation index.

The tax laws remain the same as regards the gain accrued, after deducting the sale proceeds for index value of property, will be added to investor’s income and taxed at the marginal tax rate of 30% (currently, capital appreciation is taxed at 20% irrespective of income slab.)

For the Individual Investor

With measures like revised tax structure, increase in deduction limit and medical facilities, individuals will be left with more disposable income which in turn will lead to more saving, spending and investments. Continuation of EEE on few saving schemes will also motivate individuals to save for long term. The big relief for home loan borrowers is the continuation of the tax deduction of Rs 1.5L and also if the property is held for more than 1 year will be classified as long term.

Change in the definition for calculating time period

The time period will be calculated from the end of financial year in which the asset is acquired. In case, an asset is acquired on 2 April 2011, the asset needs to be held till 1 April 2013 to qualify as long-term holding. So, the effective holding period will be 24 months. Simply put, investment during 1 April 2011 to 31 March 2012 needs to be held till beginning of next financial year i.e., 1 April 2013 to claim long-term capital gain.

Capital Gains on Equity or Equity Oriented MF investments for period longer than 1 Year

Capital gains arising from transfer of an investment asset, being equity shares of a company listed on a recognized stock exchange or units of an equity oriented fund, which are held for more than one year, shall be computed after allowing a deduction at a specified percentage of capital gains without any indexation. This adjusted capital gain will be included in the total income of the taxpayer and will be taxed at the applicable rate. The loss arising on transfer of such asset held for more than one year will be scaled down in a similar manner. But the specified rate of deduction is yet to be decided.

Let’s say if the capital gains comes to Rs.100, for tax calculation purposes it would stand reduced to Rs.50 (if the specified deduction rate is 50 percent). This capital gain amount of Rs. 50 after deduction would then be included in the taxpayer’s total income and taxed at the applicable rate. So if investor is under 10% tax bracket then he would pay tax of Rs 5 (10% on Rs 50). Similarly, if the investor incurs loss of Rs 100 in a transaction, he would be able to claim loss only up to specified percentage in the above case which is Rs 50.

Capital gains on other assets held for more than one year

The base date for calculating cost of acquisition will now be shifted from 1 April 1981 to 1 April 2000. As a result, all capital gains between 1 April 1981 and 31 March 2000 will not be liable to tax.

Capital gains on assets held for less than one year

The capital gain arising from transfer of any investment asset held for less than one year from the end of the financial year in which it is acquired will be computed without any specified deduction or indexation. It will be included in the total income and will be taxed at the applicable rate.

Securities Transaction Tax

STT is to be retained and calibrated based on the revised taxation regime for capital gains and flow of funds to the capital market. The retention of STT is not very lucrative.

Impact on Investor

The revision in capital gain tax will relieve the long-term investor. But scaling down the capital loss by specified percentage will motivate an investor to hold on to their losing position for long which can be detrimental to their overall asset allocation. Because of the behavioral trait of loss aversion, people hold on to their losing position for long and now, with new ruling of DTC that only partial loss can be set off against full loss, investor will prefer to hold and wait for markets to rise and reach breakeven even though the investment may not be suitable to their investment needs.

Minimum Alternative Tax

The basis of calculating MAT will be on book profit of the company. As a result, a loss making company will not be liable to pay MAT.

Corporate Taxes

Profits from both Domestic and Foreign company will be taxed at the rate of 25%. However, foreign companies would be required to supplement their corporate tax liability by a branch profits tax of 15% on branch profits (that is, total income, as reduced by the corporate tax).

Note: Surcharge is applicable if total income is in excess of Rs 1 crore. The prevailing dividend distribution tax (DDT) at 15% is sought to be continued in respect of dividends distributed by domestic companies.

Impact on Corporate

Reduction in corporate tax and reinstatement of MAT on book profit is good for corporate sector.

SUMMARY

CONCLUSION

Overall, we believe that DTC will be a beneficial for the growing middle class in India. The disposable income with individuals will increase and in turn benefit the economy. The apprehension of DTC with regards to removal of tax exemption on interest of housing property is removed in the revised draft letter. As mentioned above, the exemption up to Rs. 1.5 lakh is allowed which should cheer the home owners and new home buyers. In addition, the concern on charging of capital gain tax on complete gains has also been revised, and now it will be charged only at a specified percentage of capital gains. However, it is a dampener for investor because in current tax regime long-term capital gain on equity and equity oriented instrument is totally exempt. Overall, the finance ministry is taking steps to promote consumption which could lead to strong growth for economy. Clarity is yet to emerge on few of the existing saving schemes, whether they will remain status quo or will have the EET status.

The bill will be introduced in monsoon session and we have to wait and watch in what form it will be implemented.

Saturday, January 23, 2010

Income tax time - - -

How to Miss your Income Tax Returns (ITR) Deadline and Still Enjoy


This is a guest article written by
Mr. Rishabh Parakh who is a Chartered Accountant and Director at Money Plant Consulting (Money Plant Consulting is a premier outsourcing & a financial services provider which aims to offer solutions for all your financial needs and queries.)

Did you miss your deadline of filing the tax return by 31st July? Most of us pay the taxes before the deadline of 31st Mar, but when it comes to filing the return we are lazy people and many times we make mistakes in hurry. However very less people know that even If you have missed the deadline to file your Income Tax Returns, there is no need to panic, as when it comes to filing of your income tax returns, tax laws are not so stringent. In this article, tax implication will be explained considering all the scenarios . You being a salaried person may have missed the filing return if you have an income on which all the taxes have been deducted or have been deposited by way of advance tax, no need to panic. There should be no additional penalty or interest for not filing the return by July 31, 2009, provided you act now. You still have the time to file your return of income for the assessment year 2009-10 till March 31-2011.
See the basics of
how tax is calculated.

Rules

· However, persons who have any Business or Capital loss to be carried forward may have a cause to worry as the said loss would not be allowed to be carried forward to next year if the return of income is not filed before the due date.

· If you still have any outstanding taxes to be paid (after deducting TDS and Advance taxes paid, if any) you would be liable to pay simple interest @ 1% per month or part of the month, on the tax payable commencing from the date following the due date till the date of filing the return.

Some Basics

· TDS : TDS is tax deducted at Source , Generally Employers deduct our taxes in advance and pay to govt in advance .TDS in detail

· Previous Year : Previous Year means the year when we earn Income .

· Assessment Year : Assessment year is the year when we actually pay tax for the income earned for previous year .

· Example : So if we earn income in year Apr-2008 to Mar-2009 , 2008-09 is our Previous Year and 2009-10 is our assessment year .

Incase you have still not planned your taxes , here is a small guide for quick tax planning .

The Implications of not filing the income tax return on time and the steps to correct the situation

Scenario 1# You do not have outstanding tax liability

“In case you have already paid your taxes before 31 March, 2009, but could not file the return within the due date, you may file a return at any time before the end of one year from the relevant assessment year, simply put; for the financial year 2008-09 return can be filed at any time before 31st March 2011, however you may invite a tax penalty of Rs 5,000 u/s 271F of income tax act even if all your taxes have been paid if the same return is furnished after 31st March, 2010.

Scenario 2# You do have some Outstanding Tax liability

If you do need to pay any balance tax, there is some financial implication. The basic principle remains the same: The income tax return for a given assessment year can be filed any time till the end of that assessment year without any penalty. If it is filed after the end of the assessment year, there may be a lump-sum penalty of Rs. 5,000. On top of this, there is a penalty of 1% per month on the net tax payable u/s 234A.

Example:

Say, your income tax liability for the year is Rs. 40,000. You have TDS (Tax Deducted at Source) of Rs. 20,000, and you have paid an advance tax of Rs. 6,000. Thus, the remaining tax payable by you is:

Net Tax Payable = Income tax liability for the year – TDS – Advance tax paid

= Rs. 40,000 – Rs. 20,000 – Rs. 6,000
= Rs. 14,000.

Now there are two cases, which we have to consider

Case 1: File income tax return before the end of assessment year

Say you file your income tax return on 17th September, 2009. In this case, you would be filing your return 2 months late (partial months are considered as full months).

Final Amount = Net Tax Payable + Interest for 2 months at the rate of 1% per month Amount payable ,

= Rs. 14,000 + (2% of Rs. 14,000)
= Rs. 14,000 + Rs. 280
= Rs. 14,280

Case 2: File income tax return after the end of assessment year

Say you file your income tax return on 4th June, 2010. In this case, you would be filing your return 11 months late (partial months are considered as full months). On top of this, you would be filing the income tax return after the end of the assessment year for which you are filing the return. So, in this case,

Final Amount = Net Tax Payable + Interest for 11 months at the rate of 1% per month + Lump sum penalty of Rs. 5,000

= Rs. 14,000 + (11% of Rs. 14,000) + Rs. 5,000
= Rs. 14,000 + Rs. 1540 + Rs. 5,000
= Rs. 20540

Save some tax by understanding Income clubbing provisions of Income tax

Additional Scenario

You have losses that you need to carry forward . This applies irrespective of whether you have any net tax payable or not. If you do not file the income tax return for a year by the due date, a loss for that year can not be carried forward. The only exception to this rule is loss from house property – this loss can be carried forward even if the IT return is not filed in time. Thus, if you have a loss from any of the heads of income (except for the head “Income from house property”), and you file your income tax return late, you would not be able to carry forward your losses. Thus, you would lose the benefit of set off of these losses against the income of the next year.

Conclusion

Not filing a return on time does have financial implications, especially if you have a net income tax payable and / or if you have losses to be carried forward. This can really hurt especially if the losses to be carried forward are significant. Therefore, your best option is to ensure that you file the income tax return by the deadline.”Better late than never” is the best policy when it comes to income tax return filing.

Notes from Manish :

Disadvantages of filing a late return

As per Income Tax Department of India : “Aa tax return may be furnished any time before the expiry of two years from the end of the financial year in which the income was earned’. This means that if you earned your income during FY 2009-10, you may file a belated return anytime before 31st March, 2012 ” . But there are some disadvantages if you dont file your returns on time . They are

· You will not be able to carry forward your Business loss (Speculation or otherwise) , capital loss , loss due to owning and maintaining of race horses.

· Loss of Interest on refund : You may loose interest on refund u/s 244A specially in case if you are claiming a Major amount as refund.

· You cannot revise your return.

NOTE: Dear Friends the above article does not meant to encourage people for filing late return but only to make taxpayers aware about the provision of IT act and help them taking informed decision.

Comments , Please let us know if you learned something different from this article . Do you feel knowing these tax rules will help you in filing your taxes?