Query corner

TAX

How will the Direct Taxes Code (DTC) affect the tax status of unit-linked insurance plans (Ulips)? Will the existing Ulips continue to qualify for tax incentives under the new regime? -Prakash Gokhale, New Delhi
According to the revised DTC, Ulips may not be eligible for tax saving under Section 80C. So, the premium paid for such plans will not be tax deductible. Only the premium paid for pure term insurance policies and annuity schemes is likely to qualify.

The amount received from an insurance policy will be exempt only if the following conditions are fulfilled: a) the premium is less than 5% of the sum assured and b) the amount is received on maturity of the policy or on death.

If you withdraw money from an existing Ulip before it has matured, the amount will be taxable. There might be some changes to this proposal, according to which an investment made before 1 April 2011 may not be taxed. So do not take a hasty decision before the final DTC is implemented.

For the financial year 2009-10, I was supposed to pay a tax of Rs 1,68,428, of which Rs 1,44,700 was deducted at source by my employer. Of the balance Rs 23,728, I could pay only Rs 10,260 by 31 March 2010. I would like to pay the balance Rs 13,468 now along with the applicable penalty/interest. How can I file my returns? Which are the forms I require and can I do so online? -Vijay, Delhi
Along with the balance tax of Rs 13,468, you will have to pay an interest of Rs 2,792 under Section 234A/B/C. If you file the return after 31 December 2010, you will have to pay a higher interest. After 31 March 2011, the penalty for late filing will be Rs 5,000.

You need to file the ITR on the basis of your source of income. Use ITR 1 if you have salary income, and ITR 2, if you also earn rental income from property. However, if you have business or professional income in addition to the above two, you will have to use ITR 4. You can file your returns online through various tax Websites such as taxspanner.com.

I have inherited some mutual fund units, which were purchased four years ago. Do I need to pay the securities transaction tax (STT)? Will I have to pay short-term capital gains tax if I redeem the units within a year of having inherited these? -Mahesh, Mumbai

You don't have to pay the STT as there is no sale or purchase of units. It will be considered long-term capital gain as the tenure will be calculated from the date of purchase. So the four-year holding period will be included. There is no tax on long-term capital gains.

INVESTING

I was employed with a firm for six years, till April 2009, after which I started my own business. Should I withdraw the money from the Employees' Provident Fund (EPF) account and invest it in some other avenue or is it better to hold it for a few years? -Alok Gupta, Bengaluru
You can withdraw the amount as there will be no further contribution to your EPF account. Also, the Employees' Provident Fund Organisation is planning to stop giving returns on accounts that have been idle for more than three years.

You can invest the money in instruments that deliver higher returns, such as diversified equity mutual funds. This will help build a corpus that can enable you to expand your business or you could put the money in a combination of investment avenues for your retirement fund.

I am 38 years old and have a monthly take-home salary of Rs 49,000. How much should I save and in which instruments? -Ranjana Biswas, Kolkata
If you are married and have children, you should first buy adequate insurance. Opt for a 20-year term plan worth Rs 50 lakh, for which you will have to pay an annual premium of Rs 12,000-20,000, depending on the plan. This works out to less than Rs 2,000 a month.

The next step is to calculate the funds you require for your retirement. If you want a corpus of about Rs 1 crore after 20 years, you will have to invest nearly Rs 20,000 a month in financial instruments that give annualised returns of at least 10%.

We are assuming an inflation rate of 6%. As your investment period is long, you can afford to take risks and invest in equity mutual funds. However, a part of your savings can be put in less risky instruments, such as the Public Provident Fund, National Savings Certificate and bank fixed deposits.

You can also enhance your savings by reducing the tax outgo. This can be done by investing up to Rs 1 lakh in tax-saving options such as tuition fee for children, pension funds, home loan repayment of the principal amount, etc, under Section 80C.

You can claim up to Rs 1.5 lakh as annual interest paid on home loan for a self-occupied property. You can also save tax under Section 80CCF by investing Rs 20,000 in infrastructure bonds. Deduction of up to Rs 15,000 for medical insurance premium can be claimed for self, spouse and kids, besides an additional Rs 5,000 for dependent senior citizens.

I am 35 years old and have been investing Rs 2,000 per month in Sundaram BNP Paribas Tax Saver fund. A friend has suggested that I invest in the National Pension System (NPS) instead. Which is the better option? If the NPS is good, why have so few people opted for it? -Sandeep Kumar, Amritsar
In the case of Sundaram BNP Paribas Tax Saver fund, the return on investment, convenience and transparency are higher compared with those in the NPS. However, the latter has lower fund charges and is less risky. The NPS is not being sold aggressively by brokerage houses and agents as the commission is less. The low awareness could be one of the reasons for its poor sales.

Taxspanner.com will answer queries on tax; Antony Jacob, CEO of Apollo Munich, will deal with health insurance, and Anil Rego, CEO, Right Horizons, will tackle financial planning issues. Log on to www.moneytoday.in to submit your questions.

HOME LOAN

I live with my parents, who are retired and want to build another floor in the house. Can I take a home loan for the construction even though the house is registered in my parents' names? -Sudhir Krishna, Kochi
Yes, you can take a loan for extending or renovating the house. However, your parents will have to be co-applicants. If the loan is sanctioned, you will be eligible for all the relevant tax benefits on home loans.

I am building a house, which will take 9-12 months to complete. Will I be eligible for a home loan and will it be disbursed in advance or on completion of each milestone? -Basil George, Bengaluru
If you have the requisite approvals for building a house, the bank will release the funds based on the progress of construction work. However, it is better to pay the amount partially before asking for disbursement.

I reside in a housing society which is undergoing redevelopment. I want to purchase additional area from the developer, for which I will need to take a loan. What kind of loan will I be eligible for? -Virendrakumar Ashar, Mumbai
You can apply to any bank or housing finance company for home loan. You will need to submit the requisite documents and proof of salary. Once the formalities are completed, you will get an in-principle approval for the loan. However, it will be disbursed on the basis of the stage of construction and after you have paid at least 20% of the cost.

Renu Karnad is the Managing Director of Housing Development Finance Corporation. She will answer queries on home loans.