1. I invest in equity mutual funds regularly. However, the Direct Taxes Code (DTC) proposal to tax long-term capital gains has made me wary of investing in such funds. Is there a way to avoid this tax?
—Nagaraj, Bengaluru
While the DTC proposes to tax long-term capital gains, it has suggested liberal tax slabs. Income up to Rs 10 lakh a year may be taxed at 10%, while that between Rs 10 lakh and Rs 25 lakh may be taxed at 20%. The 30% tax could be for incomes more than Rs 25 lakh. The limit for tax-saving investments may also be raised from Rs 1.2 lakh to Rs 3 lakh.
You could reduce your tax liability by gifting money to specified relatives, such as your parents. If they invest the money, the gains will be treated as their personal income and taxed at the applicable rates. In case of a spouse or children below 18 years, there is no tax on money given to them. However, if it is invested, the gains from the investment will be clubbed with your income.
2.Is the dividend paid by mutual funds taxed? Will the arrangement change under the DTC?
-Diwakar, Jaipur
The DTC proposes to tax all types of incomes, including dividends from mutual funds and companies. These are currently tax-free. The original DTC draft had proposed a uniform tax for all incomes, but the revised version mentions a lower tax for long-term capital gains from equities. It is unclear whether dividends will be treated differently. If dividends are to be taxed at the marginal rate and capital gains at a lower rate, it might be better to shift to the growth option of mutual funds. However, the government is yet to clarify on this.
3. In 2007, my son went to the US for higher studies and, last year, he got a job there. Now, he intends to come to India once a year, but will remain an Indian citizen. I want to open a PPF account, invest in the New Pension System and buy an LIC policy in his name. Given his residential status, can I do this? If yes, which insurance policy should I buy for him?
- Dolly, Moga
Since your son is a non-resident Indian (NRI), he cannot open a PPF account here. As for the New Pension System, he can make investments through any bank’s NRI account. We would recommend a life insurance plan only for covering risk, not as an investment. You can consider term plans from any insurance company. Based on the income replacement method, he can opt for a cover that is 12.5 times his annual income. At his age, a Rs 30 lakh cover for 25 years will cost him about Rs 7,000 a year.
4. My annual income is Rs 5 lakh. I invest Rs 1 lakh in 80C options to save tax. Are there other avenues to prevent the tax outgo?
- Ashoka Shenoy, Mangalore
In addition to the Rs 1 lakh deduction offered under sections 80C, 80CCC and 80CCD, this year’s budget has added a new Section 80CCF. Under this, an investment of up to Rs 20,000 in infrastructure bonds is fully deductible from the taxable income. You can also invest in infrastructure bonds issued by the IFCI, LIC, IDFC or any non-banking finance company classified as an infrastructure finance firm. These bonds will be long-term instruments with a minimum tenure of 10 years and a lock-in period of five years. There are many other tax deductions available. If you have taken a home loan for a house that you are occupying, the interest paid is deductible up to a limit of Rs 1.5 lakh a year. If living on rent, you are eligible for an exemption of the house rent allowance. Any medical insurance policy bought by you entitles you to a deduction of the premium paid. For a detailed list of deductions, read our July 2010 issue.
5. I was sold an investment plan by a bank, which required me to invest Rs 2 lakh a year for 10 years to get a lump sum on maturity. After I paid the first premium I realised it was a Ulip. Now I am saddled with an insurance cover of Rs 17 lakh. I don’t need it as I already have a term cover of Rs 40 lakh. I have paid three annual premiums. Should I surrender the policy or turn it into a paid-up plan?
—Anjali Goel, Gurgaon
You have been mis-sold the insurance policy. The lure of high commission pushes agents to sell plans that don’t serve the needs of buyers. If you do not want life insurance, you should consider surrendering the policy. However, it is not possible for us to calculate the surrender value because it would depend on how much your policy has earned over the past three years. Roughly, this amount should be Rs 2-3 lakh, but you will have to check with the company. If you turn the policy into a paid-up plan, the cover will continue but you will not have to pay the remaining premiums. The corpus collected till date will be used to provide cover for the rest of the term. You need to decide which of these two options is more acceptable to you.
6. I’m 30 years old, married and have a one-yearold child. My wife is 27 years old. Which type of medical insurance policy should I go for? —Vishal Bukelia, Bhavnagar
A family floater medical insurance plan is best suited to your circumstances. Such schemes give a combined cover to the family. Buy a plan with at least Rs 3 lakh cover for your family. At your age, it would cost about Rs 5,500 a year. Individual covers of Rs 1 lakh each for all three members would have cost roughly Rs 3,800. So, while the premium per Rs 1 lakh for a family floater plan is higher, the cost per head is lower as each member is entitled to a higher cover of Rs 3 lakh. Almost all insurance companies offer such floater plans. You will also be able to add new members under the plan if your family grows.
7. My company has insured me, along with my dependants (parents, spouse, child), for Rs 4 lakh for hospitalisation. I want to increase this cover to Rs 7 lakh. Do I need to take a fresh policy or can the same policy be extended to give a higher cover?
- Rohit Goel, Hyderabad
You could talk to your company and ask it to raise the medical insurance cover. However, if the cost is nearly the same, you should take a fresh medical insurance policy. You will be eligible for income-tax benefits under Section 80D for the premium you pay. You could either pick a standalone policy or consider a top-up cover, which is not as expensive. A top-up plan will cover your family beyond the initial Rs 3-4 lakh, which would bring down the premium drastically. It is preferable to consult an insurance adviser before you decide on buying the policy that suits you.
8. I had bought shares of TCS in 2005 and received additional bonus shares on 19 June 2009. I sold all the shares in August 2009. How will the capital gains be taxed?
- Shantanu Vengsarkar, Dombivli
TCS has given two bonuses in the past five years. If you had invested in 2005, you must have got a bonus in July 2006 as well. Bonus shares are deemed to be issued at zero value, so the entire sale proceeds comprise capital gain. While the bonus shares issued to you in 2006 are eligible for an exemption of longterm capital gains, the ones issued in 2009 are not. You will have to pay a 15% shortterm capital gains tax on their sale proceeds. This was payable by 31 March 2010. If you haven’t paid it, do so now, along with a penalty of 1% interest for every month of delay.
