Look at a time frame of at least three years for equity investments

Look at a time frame of at least three years for equity investments
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First Published: Tue, Jun 24 2008. 11 49 PM IST

Illustration by Debajyoti Datta/ Mint
Illustration by Debajyoti Datta/ Mint
Updated: Tue, Jun 24 2008. 11 49 PM IST
Tax Queries
I have a PPF account and plan to open another one with my wife, to save on tax. Can I do this? Also, can I take a loan against my PPF?
—RAJEEV PRABHAKAR
Illustration by Debajyoti Datta/ Mint
A public provident fund (PPF) account can be opened in one’s own name or in the name of a minor if you are the guardian. Joint PPF accounts are not allowed. As per rules laid down by the government, one individual can have only one PPF account in his name and, if at any stage, it is detected that a person has more than one account, a accounts other than the first one will be closed and the principal will be refunded. However, no interest will be paid on these accounts.
You can take a loan against your PPF account after the first year and latest by the end of the fifth year. After the fifth year, you will be eligible for the partial withdrawal facility. The loan amount can be a maximum of 25% of the amount of your credit at the end of the financial year immediately preceding the year in which you apply for the loan. The loan is repayable in a maximum of 36 instalments. One is not eligible for a fresh loan unless the loan already taken is repaid.
I purchased 2,000 equity shares of an unlisted company on 15 June 1997 for Rs40,000. During the financial year (FY) ending 31 March 2000, the company issued bonus shares in the proportion of 1:1 and during FY02, issued rights shares in the ratio of one share per two shares held. The price of the rights shares was Rs18 per share. In FY03, the company again issued bonus shares in the ratio of 1:1. The current market value of the shares is Rs80. What will my tax liability be if I sell all my shares during the current financial year?
—JIGNESH PATEL
After the acquisition of the rights shares and allotment of bonus shares, you are at present holding 12,000 shares. For computing your total cost of shares, the cost of initial shares will be taken on their face value, that is Rs40,000. The cost of 2,000 and 6,000 bonus shares issued during the financial years ending 31 March 2000 and 2003, respectively, is nil, and the total cost of 2,000 rights shares issued in FY03 is Rs36,000. Therefore, the total cost of acquisition of 12,000 shares is Rs76,000.
Although your entire gain on sale of these shares will be long-term capital gains, tax has to be computed individually for each type of share because the shares were allotted to you on different dates. For unlisted shares, since no securities transaction tax is payable, the long-term capital gain is taxable. You will, however, have an option to pay income tax at the rate of 10% on the gains made (that is, on the difference between sale and purchase).
You can also claim indexation on the cost of shares and pay tax at the rate of 20% on the gain computed by reducing the indexed cost of acquisition from the sale consideration.
My wife had applied for a flat in a housing society as they were giving priority to women applicants. My wife is a homemaker and doesn’t have her own income. So I had given her Rs3 lakh as registration money. She was allotted the flat, which cost Rs30 lakh. We sold the flat for Rs50 lakh, and paid Rs27 lakh to the housing society. Will the profit be taxable in my name or my wife’s? All transactions took place within a year.
—VIJAY GULIA
When the total income of an assessee is calculated, all the income that the individual’s spouse gets directly or indirectly from the assets transferred directly or indirectly to the spouse by the individual, other than for adequate consideration, are added to the assessee’s income. This is according to section 64(1) of the Income-tax Act, 1961. In your case, since your wife is not into any gainful employment, she applied for the flat by using your funds. Therefore, the amount of capital gain earned in the transaction will be taxed in your hands. Further, since you held the capital asset for less than three years, the gain of Rs20 lakh will be termed short-term capital gain and will be taxed at the normal rate applicable in your case.
MF Queries
Please give your opinion on ICICI Focused Equity Fund.
—‘MUTUMIBOCHOUBA’
Prudential ICICI Focused Equity Fund is a large-cap-oriented fund that invests in 20 large-cap companies out of the top 200 companies based on market capitalization. It offers nothing new to the investor in terms of an investment proposition. There are funds in the same space, such as Sundaram BNP Paribas Select Focus and Kotak 30, among others, which are variations of the same theme and have given a good performance.
The concentrated nature of the portfolio will work in the fund’s favour even if a few of the stocks perform well. The flip side is that the negative impact, too, will be high. The fund’s performance remains to be seen. In the meantime, it is better to invest in funds that have demonstrated their ability to generate good returns.
I am planning to invest Rs1-1.2 lakh in mutual funds for one or one-and-a-half years. I have selected a few schemes. Should I invest the whole amount at one go in a specific fund, or should I distribute my funds? I am looking at maximum equity exposure but with safety to a certain extent. I want 20-30% returns in a year. Also, where can I find the direct branches of these MF companies to avoid charges on entry load?
—KARIM TALWARIYA
Some funds that you could look at are Birla Sun Life Equity, HDFC Equity (equity diversified), ICICI Prudential Infrastructure (equity thematic), Reliance Diversified Power (sectoral), Birla Sun Life Tax Relief 96 (ELSS), DSP ML Balanced and HDFC Prudence (hybrid funds). However, your time horizon is not suitable for equity investment. You must look at a time frame of at least three years to allow the volatility in the markets to smoothen out. Your expectation of 20-30% annual returns over the next one year may be unrealistic given the micro- and macro-economic conditions.
You must use the systematic investment plan (SIP) route over a one-time investment to take advantage of cost averaging. Avoid the entry load by submitting your application directly at the offices of the mutual fund house, official points of acceptance or authorized investor service centres. The details of these are available in the Key Information Memorandum that accompanies every application form. You can also invest online on the website of the mutual fund.
Which fund is better—Principal MIP Plus or Escorts Opportunity Fund-Monthly Payout? Escorts declared 1.6% dividend in October.
—WILLIAM ALMEIDA
It depends on what sort of fund you are looking to invest in. Escorts has a high exposure to equity and is a highly volatile fund. Even in the dynamic fund category, there are other funds that have done better than Escorts Opportunity Fund. If regular income is your requirement, then Principal MIP Plus is a very good scheme to invest in. It takes only a small exposure to equity and is suitable for investors with a low risk profile.
If I invest Rs10,000 in an ELSS this year and save tax under section 80C, do I need to add this amount to my total taxable income three years later when I redeem the units? Also, is it better to invest in established funds that have high net asset values (NAVs) (such as HDFC Equity) or in new fund offers (NFOs)? Will the returns be the same if the markets go up?
—K.C. GANGULY
Your gains on redemption of units from the ELSS will be exempt from tax since it will be long-term capital gain. There is no tax incidence at redemption. The choice of funds for investment should depend upon their suitability for your needs. While comparing funds, look at their performance and the way their portfolio is managed to understand the risks associated with them. The level of NAV is not relevant.
Look at funds that have past performance to evaluate. NFOs should be considered if they provide a new proposition or investment opportunity that is not adequately met by existing funds.
Has the Securities and Exchange Board of India allowed Morgan Stanley Growth Funds to convert to being open-ended? I want to redeem some units.
—AISWARYA PUNNATH
The fund house has applied for conversion of the Morgan Stanley Growth fund into an open-ended fund. Once the regulatory aspects of this are taken care of, units of the scheme can be redeemed from the fund house at the current applicable NAV. Till then, the units will continue to be traded on the stock exchange.
I am two years away from retirement and wish to switch over slowly from direct equity and diversified mutual funds to balanced and debt funds. I wish to know the following: Is long-term capital gain from equity-oriented mutual funds (65% in shares) tax-free? Does any dividend distribution tax (DDT) have to be paid by the MF or me? What are the similar tax provisions for debt funds and monthly income plans (MIPs)?
—RAHUL KRISHNA AGARWAL
Any long-term capital gains made on investments in equity-oriented mutual funds are exempt from tax. Equity funds do not pay DDT, and any dividends received by you from equity funds are also exempt from tax. Dividends from debt funds and MIPs are similarly exempt from tax in the hands of the investor. However, the fund pays DDT of 12.5% (plus surcharge and education cess). Short-term capital gains from these funds will be taxed at the marginal rate of taxation applicable to the investor while long-term capital gain is taxed at 10% (20% if the gains are indexed).
For questions and comments, write to moneymatters@livemint.com
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First Published: Tue, Jun 24 2008. 11 49 PM IST
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