What is an SIP and how does it work? Please suggest a few good ELSS schemes.
Systematic investment plan (SIP) is a facility that most mutual funds (MF) offer to their investors. Here, you invest a fixed sum (as low as Rs500) at periodic intervals (monthly or quarterly) in your chosen scheme.
SIP makes sense if you have a regular income. SIPs work best in a volatile equity market. They buy more units when the NAV is low and less units when the NAV is high. This way, your cost prices are averaged out (also known as rupee-cost averaging).
Some good ELSS schemes would be Sundaram BNP Paribas Tax Saver, HDFC Tax Saver for less aggressive investors and Principal Tax Savings and Birla Sun Life Tax Relief 96 for aggressive investors.
I am 26, and want to invest 50% of my income in mutual funds. I wish to invest the remaining amount in low-risk instruments such as HDFC MIP and Principal MIP. Is this a good investment strategy? For stable returns from low-risk instruments, should I go for an MIP or liquid funds?
When you say you want to invest 50% of your income in MFs, we assume you mean equity schemes. Schemes such as HDFC MIP and Principal MIP are also MF schemes; monthly income plans, to be specific. How much money you want to distribute among equity schemes and less risky instruments depends on how much risk you want to take.
As equity schemes invest in the equity markets, they have the potential to earn higher returns, but also carry higher risk. Research has shown that equities outperform all other asset classes in the long run. As you are only 26, and have a lifetime ahead of you, you may increase your allocation to equity schemes provided your income levels and contingency reserves are comfortable enough for you to take higher risks. If you want to build a decent retirement corpus, equity is the best route.
If you desire 11-15% returns from a low-to-medium risk product, the monthly income plans (MIP) are the way to go. Invest in the growth option if you want capital appreciation; take the dividend option if you want some sort of regular income. Avoid liquid funds for investment purposes. Liquid funds are the least risky MF schemes and are meant only for temporary parking of money.
I want to change my mutual fund broker. I wrote a letter to ICICI Prudential requesting this. To my surprise, they declined my request, stating that I would need an NOC from the previous broker. However, my previous broker is delaying the matter and thus my investments are suffering. Can I take some legal action against ICICI Prudential for disregarding my instructions?
Although the Association of Mutual Funds of India (Amfi) has directed all MFs to stop asking for a no-objection certificate (NOC), the reality—as you experienced yourself—is that many MFs do not follow this rule. They still insist on an NOC. The reason why this rule is not followed strictly is that it is an Amfi guideline. Amfi is merely a trade body, not a regulator. For it to become a law, the Securities and Exchange Board of India needs to issue this guideline.
In light of these circumstances, you may not have a strong legal case against the MF. However, please consult your lawyer or a consumer rights activist for clarity on legal matters. What you can do is write a letter to Amfi (www.amfiindia.com) and Sebi (www.sebi.gov.in) about how you are facing inconvenience due to the callous attitude of the MF and your agent.
I want to invest Rs1,000 a month in SBI Magnum Balanced Fund and Rs500 in SBI Magnum Tax Gain Scheme 93. Is it a good investment for a period of three-five years?
Yes, they are good investments for the amount you want to invest. Continue with your plans. Remember, each instalment in SBI Magnum Tax Gain Scheme 93 will be subject to a three-year lock-in period.
Can I claim tax deduction on housing loans taken for two properties in the same financial year? If yes, what is the limit? Will the deduction apply if the loan is taken from different institutions?
Yes, you can claim deduction for repayment of the principal component of the loan under section 80C in respect of both the houses in the same financial year, subject to the overall limit of Rs1 lakh. This deduction is allowed even if you take the loans from two separate institutions. Repayment of the interest component can be claimed under the head of income from house property. For the self-occupied house, the limit is up to a maximum amount of Rs1.50 lakh for the rented house, there is no limit, that is, actual amount of interest paid during the financial year can be claimed as a deduction from the rental income. For claiming these deductions, you need to obtain certificates from the bank/ financial institutions from whom you have taken the home loan, stating the amount of principal and interest component paid.
I have a salary account with ICICI Bank in Gurgaon that I have not been using for quite some time. Eight months back, I deposited a cheque worth Rs6,000 issued by the income-tax department from Kerala. It has not been credited yet. What do I do?
—PRADEEP NAIR, KOCHI
You need to contact the bank branch to know the status of the cheque deposited. There can be two reasons for non-credit of the cheque to your account. First, your account is inactive for some reason and the bank could not process the cheque. Second, the cheque was returned by the income-tax department’s banker for some reason. In both cases, the cheque should be lying in the bank. After collecting the cheque, you need to get it revalidated from the income-tax office.
I sold my house recently for Rs6 lakh. Do I have to show this income as capital gains? If yes, what is the amount to be invested in it?
Profit from sale of house property is taxable under the head of capital gains. In case you sold your house within three years of purchase, the gain made on its sale shall be termed a short-term capital gain and taxed at the normal rates applicable to an individual. Also, no deduction is allowed for reinvestment of sale proceeds or profit in a new residential house.
In case you owned the house for more than three years, the profit on sale of property shall be long-term capital gain. For calculating the long-term capital gain, the cost of the house property is indexed as per the cost inflation indices declared by the government.
Long-term capital gain is taxed at a flat rate of 20% irrespective of the income slab. In case of long-term gains tax, you also have the option of investing the amount of gain in another residential property, or in tax-saving bonds, to avoid paying capital gains tax. The amount of tax will depend on the classification of gain, purchase cost and your income slab.
In January, I got a bonus of Rs1.2 lakh from my employer, which relates to the year 2006. Which year will be applicable for calculating tax—2006 or 2008?
Bonus received by an employee is treated as a part of salary income and is chargeable under the head salaries when it becomes due from an employer or is paid to him in the year, though not due to him in that year.
Therefore, if you did not include bonus in your salary income for the year 2006, the bonus paid by your employer in January 2008 shall be chargeable to income tax in the current financial year at the normal rates of income tax. However, you are entitled to claim relief of income tax under section 89(1) if your tax liability for the year increases this year because of addition of bonus than it would have been in the year 2006, if you had received bonus during that year.
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