Introduction to NPS account

Balwant Jain

The National Pension Scheme (NPS) was introduced for salaried people in 2004 as an alternative to employee provident fund scheme to move from defined benefits system to defined contribution for retirement benefits. The scheme was extended to all the persons later on. Of late interest of people has grown substantially in NPS. Since subject of NPS is very wide in itself and can not be covered in one article to in order to heal readers understand NPS thoroughly I have decided to write a series of articles covering entire gamut of various aspects of NPS. Here is first article on basics of NPS

What is an NPS

Since the government in India does not run any social security scheme to take care of its citizen after retirement, NPS was introduced by government under which you can contribute money in order to accumulate funds for your retirement corpus with low cost. This is specifically useful for self employed category of persons who do not have scheme similar to provident fund scheme available for salaried people in organised sector.

Who can open the NPS account?

Any individual who is a citizen of India can open account under NPS. So, an NRI who has retained his Indian passport can also open this account.  The rules have been amended on October 2019 to allow Overseas Citizen of India to open the NPS account. Unlike PPF account where the criteria for opening PPF account is based on your residential status under Foreign Exchange Management Act (FEMA) where even a foreign national who has been working in India can open a PPF account here but he can not open an NPS account here as though residing in India he still continue to be non Indian Citizen. For opening NPS account, a person should have completed 18 years of age on the date of opening the account. Initially the upper age limit for entry into NPS account was set at 60 years but the same has later on been extended to 65 years in November 2017 in view of the fact that many people continue to work beyond 60 and till 65 even after retirement. A person who has been declared an insolvent and has not been discharged as insolvent cannot join this scheme. A person of unsound mind also cannot open account under NPS.

For such late joiners the NPS account will  mature at the subscriber reaching the age of 70 however for those who join before 60 years, NPS account matures on on completing 60 years of age. A subscriber to NPS account has an option to extend this beyond 60 years up to 70 years of age.

Though you are allowed to open a PPF account for your minor child as a guardian this is not possible in the case of NPS as the it can only be opened by a major persons. Moreover in case of PPF, you can contribute to the PPF account 

Limit on contribution to NPS account

Unlike a PPF account where you cannot deposit more than 1.50 lakh in a single PPF account in a year, no such restriction is applicable in case of an NPS account. So  you are allowed to put in any amount in your NPS account. It may be noted that even if the tax laws have some restrictions on the amount up to which you can claim the tax benefits for contribution made in the NPS account, you can still deposit any amount in your NPS account beyond the limit up to which tax benefits are available.

Where the account can be opened?

The NPS account can either be opened online or offline. The online account can be opened the following link of NDSL. https://enps.nsdl.com/eNPS/OnlineSubscriberRegistration.html?appType=main

Or this link of Karvy Fintech https://enps.kfintech.com/registration/

For facilitating opening of an NPS account offline the government has nominated  many entities. Such entities called Point Of Service (POS0

include various nationalized banks as well as private banks. Additionally some more entities like Indian Postal Department, Stock Holding Corporation, UTI Asset Management Company and UTI Technology Services Limited etc. have also been appointed for the purpose of opening an NPS account. I will discuss in detail the process of opening an NPS in subsequent article. These entities have in turn nominated a few branches as service providers and are called POP-SP.

So, you can see that many entities have been nominated for facilitating of opening the NPS account, hence you will not find it difficult to identify the POP for opening your account.

Joint holding and nomination

The NPS account can only be opened in a single name however the rules allow you to appoint maximum of three nominee for your NPS account. The nominee can be appointed at the time of  opening the NPS account. Since it is a prudent practice to have nominee for all your investments, you should appoint nominee for your NPS account as well. Nominee can be a major or a minor but in case of minor being appointed as nominee, you need to furnish details of the guardian with date of birth of the minor. While nominating more than one nominee, you need to specify shares of each nominee in percentage terms. Please ensure that share is not mentioned in fraction and sum of all the nominees add to 100%.

Can one  have both, employee provident fund account and NPS account?

Only an employee can join an employee provident fund account initially though he can continue to retain it even after leaving the employment or after retirement but NPS account can be opened by any one whether salaried or not. So is the case with PPF. In fact a salaried person can have all these account together at the same time.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant his twitter handle.

Taxation of share transactions

The taxation  aspect of share transaction is very  complex and thus confusing for an average taxpayer. The taxability of the same depends on the holding period as well as whether the same are listed or unlisted.  Tax liability will also vary depending on whether the shares have been sold on the platform of stock exchange or not. Let us try to understand all this.

Holding Period requirement long-term and short-term:

For the purpose of capital gains the shares are divided into two categories: listed and unlisted. The shares which are listed on any stock exchange shall qualify as long term once the same have been held for more than twelve months. For other shares (including shares listed on foreign stock exchanges) unlisted shares the holding period requirement is more than 24 months.

Applicable tax rate for shares on which Security Transaction Tax has been paid:

For the shares which are traded on the platform of stock exchange in India the brokers are required to collect Security Transaction Tax (STT). So any profit made on the listed equity shares sold through a broker will be fully tax free if held for more than twelve months. In case of profits made on equity shares held for 12 months or less and sold on Indian stock exchanges will be taxed at a flat rate of 15.45%. Please note that on such short term capital gains the benefits of deductions under chapter VIA like section 80 C, 80 CCD, 80D, 80E, 80 G, 80GG is not available. So in case you do not have any other income except these taxable short term capital gains, you will not be able to take the benefits of various items like contribution toward public provident fund, NSC, ELSS, mediclaim premium, NPS etc. However in case your other income excluding these short-term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit while calculating your tax liability.

Applicable tax rate in case no STT is paid:

In case of profits made on non listed shares which were held for not more than 24 months or the listed shares on which STT was not paid and held for not more than 12 month, shall be treated like your other income and taxed at slab rate applicable to you. The long term capital gains made on such shares (listed shares held for more than 12 months and other shares held for more than 24 months)  will be taxed at flat rate of 20.60%. However in case the of listed shares on which STT is not paid, you have the option to pay tax @ 10.30% without availing the benefit of indexation in case the tax liability @ 20.60
% on indexed long term capital gains is higher. It is important to note that in case the shares are not listed in India, this option of choosing between 10.30% unindexed and 20.60% indexed capital gains is not available. So in case you sell any shares which are listed on any foreign stock exchange, you will have to pay tax on long term capital gains @ 20.60% and on the short term capital gains at the slab rate applicable.

It ,may also be noted that here also you can not claim any deduction under Chapter VIA as discussed above your long term capital gains. Likewise in case your other income excluding these long-term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit here also. 

Taxation of trading transaction

The tax treatment for transactions in shares carried out by the day traders is different than those for investors. The day traders normally indulge in transaction of shares with an intention to square off the transaction without taking the delivery of the securities. For the purpose of income tax,  these transactions are treated as speculative transactions and are treated differently. For profits made on such transaction,  the same has to be offered as business income and added with other income and taxed at the slab rate. In case of a few transactions the profits can be shown under the head income from other sources. Before computing the taxable amount in respect of such squared off transactions you are allowed to adjust any loss incurred by you on similar transactions. However in case the net result of such transactions in  shares is net loss, you are allowed to set off such losses against other income of speculative nature only, where the transaction is squared off without taking delivery of the underlying shares/good. So any loss made by you on shares trading account can be adjusted against profits made by you for any commodity transactions.

The net speculative loss, however, is allowed to be carried forward and set off against any profit of speculative nature in four subsequent years. If the same can not be set off during this period of four years, it will lapse. In case you enter into these transaction very frequently, you will have to get your accounts audited in case the aggregate of profits and loss without netting off exceeds the threshold of Rs. 1 Core in a year.

Taxation  of future and options

In case of derivative transactions of futures and options in shares,  the seller and buyers generally settle the transactions with difference without taking delivery of the underlying shares, the same are still not treated as speculative and any profits/loss made on futures and options in shares will be treated as regular business income by virtue of special exclusion of such transactions from the definition of ”speculative transaction”. In case of such transactions if the aggregate of these profits as well as loss (without netting off)  exceeds Rs. 1 Crore, you will have to get your accounts audited. Any loss on such transactions can be set off against income from other sources except income from salaries.

I am sure the above discussion will help you understand the income tax provisions for transactions in shares.    

All you wanted to know about additional dedcution of Rs. 50,000/- for NPS

My colleague Susan, who is retiring this year, was advised to deposit Rs. 50,000/- in NPS account this year to reduce her tax liability. She approached me for guidance. Based on my interaction with her I realised that the people generally do not know much about the NPS scheme in general and about this additional deduction of Rs. 50,000/- in particular. So I decided to write this article to explain both the points.

Who can open NPS account

Any individual who is citizen of India aged between 18-60  years can open NPS account. Even an NRI can open an NPS account whereas they are not allowed to open a PPF account or extend the existing PPF account after becoming NRI. People generally put the EPS and NPS on parity and feel that they can not open this account unless their employer offers them the facility. This is not true. Any individual including a self employed person can open NPS account. So even if your employer has not implemented NPS scheme, you yourself can open the account and contribute to it, as contribution of employer is not mandatory for opening and maintaining this account. You can  open NPS account even if you are already contributing towards employee provident funds or public provident  funds.

Type and Tenure of the account

Under the scheme of NPS you can open two types of account i.e. Tier I and Tier II. Opening of Tier I account is mandatory and it is the NPS proper account. The tax benefits and restriction about tenure apply to this account only. Tier II account is voluntary and can be used to park your surplus funds pending withdrawal or transfer to Tier I account.

NPS account does not have any fixed tenure but the age up to  which you can join this account is restricted before you complete 60 years of age.  However if you want to contribute beyond the age of 60 years, as per the revised regulations notified last year , you can do so till 70 years of age provided you have given advance notice of such intention. In case you do not want to extend the contribution period, once you complete the age of 60 years, you  have to mandatorily withdraw 40% of the accumulated balance for purchase of an annuity from a Life Insurance Company in India.  The balance 60% is allowed to remain in the account which can be withdrawn anytime before you complete 70 years. The account has to be closed on completion of 70 years of age. The condition as to purchase of annuity from 40% of the corpus does not apply in case the total corpus does not exceed 2 lacs age the time you reach 60 years, in which case you can fully withdraw the balance outstanding in your account.

Tax benefits for contribution.

The tax benefits for a salaried person are available only for contribution upto 10% of his salary towards NPS within the overall limit of Rs. 1,50,000/- along with other eligible items like Life Insurance premium, school fee, repayment of home loan, NSC, PPF, repayment of home loan, ELSS etc.  In case you are self employed you can contribute to Tier I account upto 10% of your gross total income i.e. income before deductions under various Section like 80C, 80 CCD, 80 CCC, 80 D, 80 E, 80 TTA . The overall deduction available shall not exceed Rs. 1,50,000/-. For self employed the limit of 10% is proposed to be increased to 20% from next year.

Last year's  budget had provided for an additional deduction of Rs. 50,000/- for contribution towards NPS account and in respect of which a lots of confusion is prevailing. This is in addition to the existing limit of 1,50,000/-.  Let us understand this with example. Suppose aggregate of all the eligible items of deduction exceeds 1.50 lacs,  your eligibility will be restricted to Rs. 1.50. However in case if it includes any amount of your contribution of NPS which gets excluded due to this limit of Rs. 1.50 , you will be able to claim the deduction for the NPS contribution which gets so excluded upto Rs. 50,000/- from current financial year. So in case you exhaust your limit of Rs. 1.5 lacs without even taking into account NPS contribution, you can claim extra deduction for NPS upto Rs. 50,000/-. For those of you who have not yet opened their NPS account, as the limit of Rs. 1.50 lacs was getting exhausted due to other regular items, can open NPS Tier I account and claim tax benefits by depositing upto Rs. 50,000/-.. It is interesting to note that limit of 10% of salary or Gross Total income does not apply to this additional contribution of Rs. 50,000/- so for those of you who were contributing over 10% of the limit but in excess of Rs. 1.50 lacs in monetary terms  can claim the same under the new provision without actually having to make any additional contribution.

As far as contribution of the employer is concerned, the above limits of Rs. 1.50 lacs or Rs. 50,000/- do not apply and any contribution by your employer is fully deductible without any monetary cap as long as it does not exceed 10% of your salary.

Tax treatment on Maturity

Since you have to compulsorily buy an annuity for 40% of the accumulated balance on your reaching  60 years or extended period, this 40% does not become taxable at the this stage but the annuity as and when received becomes taxable under the head “Income from other sources”. Out of the  withdrawal of the balance 60% of the corpus 40% is exempt and the balance 20% will become taxable as and when you withdraw it. However if you decide to buy annuity form  60% of the corpus at retirement you do not have to pay any tax immediately.   So even if you have a very short period of service left, you can still contribute in NPS and effectively reduce your tax liability as the slab tax rate applicable to you after your retirement will be lower. Even if the slab rate is not going to change, you are still able to defer your tax liability to future.

I am sure this article will help clear the clouds of doubts in the mind of many readers.

So which income tax return form you need to file? Here is the answer.

So the new Income Tax forms have been notified by the government after the forms notified earlier in April were withdrawn due to huge protest by the tax payers. Let us now understand the latest requirements as to the forms which you are required to file. I also intend to discuss other relevant matters relating to additional disclosure on bank accounts and foreign travels as originally proposed and  modified as per these modified ITR forms.

The government has notified four forms for  filing of yourn income tax returns which are applicable to Individual and/or HUF. Let us discuss as to which form you need to file?

Form No ITR 1: This is also known as Sahaj meaning easy. This form can only be filed by an Individual and no other assessee can use this form for filing of their return of income. It is not that every individual can use this form. This form can only be used by a person whose source of income is salary and  not business.  Even a pensioners can use this form. Moreover you can also  use this form in case you have any income under the head income from other sources which generally includes interest from various investment products like saving bank account, recurring bank account, fixed deposits with bank and post offices.  This form can be used by you even if you have any exempt income in addition to the taxable income from two of the sources discussed above. You can not use this form in case your agricultural income exceeds Rs. 5,000/- in the previous year as the same need to be added to your regular income for the purpose of determining the average rate of tax on which your other income shall be taxed.  So you can use this form even if your other exempt income exceeds the threshold of Rs. 5,000/- earlier there was a cap of Rs. 5,000/- of exempt income for using this form.

Please note that if you have won any lottery or have any income from house race  in the last year, you can not use this form. Moreover you can use this form only if you own one house property, so in case you own more than one house, you can not use this form. This can also not be used in case you have any asset outside India or any income from a source outside India.

In my opinion this is the forms which would be applicable to majority of the tax payers as most of the tax payers are salaried and do not own more than one house property and have only income taxable under the head “Income from other sources” in addition to receiving either salaries or pension. 

Form No. ITR 2A : This is a new form introduced from this year.  This form can be used by Individual as well as an HUF unlike the form ITR 1 which can only be used by an Individual  and  who does not have any taxable income under the head “profits and Gains or business or Profession” or “capital Gains”. Moreover in case you have any foreign asset outside India or have income from any foreign source you still can not use this form for filing of your income tax return. It may be noted that you can use this form in case you have more than one house property or have agricultural income exceeding Rs. 5,000/- . This form is extended version of form No. ITR1 and can be used only if you either do not have business income or capital gains as well as do not own any foreign asset or have foreign income.

Form No ITR 2: This form can be used by Individual as well as an HUF.  This form can be used in case you have income taxable under the head Capital Gains in addition to the income taxable under the head “Salaries” and “Income from other Sources”. This form can be used by you even in case you have income from lotteries of horse races. This form can also be used by you in case you have agricultural income exceeding Rs. 5,000/- or you own more than one house property. However this  form  can not be used by you if you have any income taxable under the head “Profits and gains of business or profession howsoever small the amount taxable under this head.

This form can even be used by the resident tax payers who have any foreign asset or any income from foreign source.

Form No. ITR 4S: This is commonly called sugam. This form can be filed by any individual or an HUF who has   business income which is taxable at certain predefined basis either as certain percentage of your gross receipt/sales  or your income is presumed at fixed amount per income yielding asset owned by you like truck etc. So this form can be used only and only if your business income is taxable on  some presumptive basis. Broadly speaking this form can be filed  by a person who is otherwise entitled to file his return of income  in ITR 1 but can not file as he has certain business income taxable at predetermined way. So in case you have capital gains income or agricultural income exceeding Rs. 5,000 or own any foreign asset or have income from any foreign source you can not use this return to file your return of income. You can not use this form even if you have income from lottery or horse race.

Requirement of disclosure in respect of passport and bank accounts

The forms notified earlier had provisions for disclosure of foreign travels undertaken with details of expenses incurred by you. However the revised forms have done away with this requirement and you are only required to give details of your passport number.

As regards the other requirements of furnishing details of your bank account the earlier forms had requirement to furnish details of all the bank accounts held during the previous year  including the particulars of joint holders and closing balances in those bank account. The revised forms have the requirements to furnished the details of only active bank account and in case there are no transaction in the bank account during the last three year, you do not have to furnish the details of such dormant bank accounts. Moreover you are not required to furnish the details of balances at the year end and the details of the joint holder of the accounts.

However you are still required to furnish the  details of the bank name, IFSC code and account number of all your bank accounts whether saving or current account. It seems you are not required to furnish details of your recurring account or fixed deposits with banks held by you during the year.

The forms to be used by the person who has taxable income under the head profits and gains of business or profession  other than on presumptive basis are  not yet notified for the current filing.

I am sure the above discussion will help you in determining  which form you need to use for filing of your income tax return.

Gold deposit Scheme-tax efficient way of investing in gold

In my previous articles I have discussed various avenues of investment for gold like Gold ETF, e-gold and gold funds. With this article I want to apprise readers about one more avenue - the gold deposit scheme. This will enable investors to get the benefit of investment in gold, with additional benefits of earning income on the same, saving on the cost of insurance and storage and retaining the right to receive the appreciation in the price of gold.
This scheme was introduced in 1999 by the Government of India with the objective to save on precious foreign exchange by utilising the vast gold holdings lying with Indian households and various religious trusts.This article will elaborate on various facets of the gold deposit scheme.
Basics of the scheme
Under this scheme, the owner of gold gets a certificate against delivery of the physical gold with the designated banks. Here you can tender gold in the form of gold bars, coins and even jewellery.

While making the application, you have to submit proof of your address and identity with a list of inventory of gold tendered after which the bank branch will issue a provisional receipt while accepting the gold.

The gold received from you is first tested for its purity in a non-destructive method and the provisional percentage of purity is conveyed. You have the option to withdraw the tender if you are not satisfied with the provisional purity ratio on payment of nominal charge to cover the cost of initial testing. But if you accept the results of initial testing, then the gold received is sent for melting and assayed and minted in the government mint. Based on the purity of the melted gold at this stage, the certificate of gold deposited is issued for the equivalent content of pure gold, that is, 0.999 purity. Broadly, banks can issue you a certificate or a statement of account or a passbook for the gold deposited.
Any individual, whether singly or jointly, can make an application under this scheme. Anyone can even make the deposit on behalf of a minor. In addition to individuals, the application can also be made in the name of HUF, trusts or companies. The trust making the application can be a charitable or religious one.
You can avail the benefit of nomination for these bonds, provided the deposits are made in your name. The nomination facilities are not available in case the applications are made in the name of HUF, trusts or companies as these entities have perpetual existence. For making an application under this scheme, you need to tender minimum 500 grams of gold. . However there is no upper limit upto which you can avail the benefits of this scheme.
The deposit can be made for three, four or five years. These deposit certificates can be requested in the denominations of your choice. However, the number of certificates to be issued for each tender shall not exceed five. The minimum denomination of the certificate is 500 grams. These deposit certificates are transferable by endorsement and delivery. Effectively, these are bearer in nature.
After expiry of the tenure opted by you, you have the option to renew these certificates for further periods of your choice. But in case you not want to do this, you can either take delivery of the gold of the same quantity as mentioned on the certificate or you can opt to receive the amount in Indian rupees on the basis of the rate of gold prevalent at the time.
Please note that when you exercise the option to receive the gold in physical form, you will be given gold bar only and not in the form in which you had surrendered.
Benefits of the scheme
First and foremost, the benefit is that while retaining the advantages attached with the ownership of gold like price appreciation, you do not have to incur any expenditure for the purpose of insurance, safe keeping or costs associates with holding of gold in physical form.
In addition to this, the scheme offers you a direct benefit in the form of interest which you earn on the value of your gold. The present rate of interest effective from September 1 2010 are 0.75%pa for three years and1% pa for deposit for the periods of four and five years.
The interest is calculated in gold currency and is paid in equivalent Indian currency. As far as frequency of payment of interest is concerned, you have the option to receive it either on March 31 of each year or lump sum at the time of maturity of the bonds, in which case it is compounded. In case you want to withdraw the gold prematurely, it can be done but you will have to pay a premature penalty in the range of 0.25% to 0.50%, which is adjusted against interest payable to you. Thus, these deposits can be withdrawn in order to reap the benefits of temporary and sudden spurt in the prices of the gold and you do not necessarily have to wait for the entire duration of the tenure of the certificates.
In addition to the above benefits, you can also avail loans against security of the certificates of gold deposit in Indian Rupees from any bank.
What are the tax implications of the scheme?
As per the provisions of the Income Tax Act, the interest earned on these bonds is exempt from income tax, so there is no tax liability on the interest earned by you on such bonds. In addition to the interest exemption, these bonds are exempt from payment of wealth tax as well an additional saving of 1% if your other taxable wealth exceeds Rs30 lakhs.
In addition to the exemption for interest earned and wealth tax under this scheme, these deposit certificates are not treated as capital assets for the purpose of capital gain tax.
However one very important thing to note is that though deposits certificates are not capital assets for the purpose of capital gains and any appreciation in the value of such deposits is exempt from payment of tax on capital gains,this does not hold true when you convert your physical gold into gold deposit certificate. Since the gold deposit certificate is not the same as physical gold and as both the assets are distinct and separate, conversion of your old physical gold into gold deposit certificate will amount to transfer for the purpose of income tax act. Therefore, such conversion will entail capital gains and based on the holding period of the physical gold and difference between the prices of gold as on the date of issue of the certificate and the indexed cost of the physical gold, it will attract capital gains tax @ 20%.
However, in case you feel bullish about gold and want to do some tax planning, gold deposit scheme offers you an excellent avenue for saving on tax, thus boosting your post tax returns on gold. This purpose can be achieved by purchasing the gold in bar form from the market for the purpose of converting the same into gold deposit. Since the time gap between the date of purchase of gold and deposit with the bank will be very small, there will not be any major difference in price. Hence , you do not have to pay any capital gains tax at the time of tenderinggold under gold deposit scheme unlike in case of your old holding of gold.
The scheme is operated by many banks, but State Bank of India is a major operator and can be approached for availing the benefits of this scheme.
Gold deposits scheme thus offers excellent tax effective opportunity for high net worth investors who wish to take large long-term exposure to gold.

Deducstion Under Section 80 C come with restrictions

Section 80C>>>

Deductions & Restrictions>>>

This time round the year when we are still grappling with the sky-high prices of onions, petrol and vegetables, the circular of tax deduction claims submission in our mail box has added to the concerns. This  is a fact of life with which we have to deal with and deal smartly.  As you are aware that  Section 80 C allows you deduction upto Rs. 1 lakh from your total income in respect of some of the items of investment and expenses. But what you are not aware is that these  items of deductions are subject to some restrictions with regard to  person in respect of whom you are claiming  these deductions.  Also there is a requirement with regard  to the period of holding of the investment/asset acquired.

In this article I intend to discuss these restrictions in respect to some major  deductions.

Life Insurance Premium

An individual or an HUF can claim deduction for Life Insurance Premium paid. An individual can claim this deduction in respect of  Life Insurance Policy taken on life of  the person himself, his spouse or any of his children. As a parent, you can pay and claim for life insurance of your children whether dependent or independent but  children can not pay and claim the tax benefits in respect of life insurance premium paid in respect of life of parents. The HUF can claim deduction on the  premium paid on  the life insurance policy taken on the life of any of its members.

In addition to the person in respect of whom the Life Insurance Premium can be paid, there is also a lock-in period of two years, till then you cannot  terminate or let the policy lapse.   In case this happens, the deductions allowed in earlier years are added to your income of the current year.

 

Education Expenses

Your children’s tuition fee is also covered  under Section 80 C, but with some conditions. It is restricted to two children only and institution should be in India only.   In case you have more than two children, the deduction in respect of other children can be claimed by your spouse.

Home loan repayment

One can claim deduction in respect of repayment of home loan, but this too is not without some restrictions.  First the deduction can be claimed only if the loan has been taken from specified financial institutions or entities like your employer which is a public limited company, central government or state government or board, corporation, university established by law.

Then there is another restriction with respect to ownership status of the property. You can claim this  deduction only if your are owner of the property. In one of my earlier articles, I have explained that the claim for deduction can only be made after you have obtained possession of the house property though the repayment might have begun while the property is still under construction. The third restriction is about holding of the property which is acquired with the help of a loan and on which deduction under Section 80 C is claimed. In case you sell the property within five years beginning the end of financial year in which possession of the property was taken, all the deductions in respect of this property shall be treated as income of the year in which you transferred the property.

PPF Account contributions

In respect of  PPF contributions there is no ceiling on the deduction under the Income Tax Act however there is a ceiling as per PPF rules.  You can not contribute more than Rs. 70000 in a single account in a financial year. Moreover  you cannot open a PPF account in the name of HUF after May 2005, however as per the provisions of the income tax act, the HUF can still claim deduction in respect of contributions made to the accounts maintained in the name of any member of the HUF.  You can claim deductions in respect of PPF contributions made towards your spouse as well as for your child. Let me bring to your notice that only PPF contribution is the items of pure investments where a parent can claim deductions in respect of  money deposited in the PFF account of your child and spouse. Since gift to your child is exempt and the clubbing provisions will not have impact as the interest on PPF account is exempt, By contributing to PPF account of your child you can help him build a corpus and save taxes at the same time.

Deposits under Senior Citizen Scheme:

Those who have completed 60 years of age, can claim deduction under 80C under Senior Citizen Deposit Scheme.   Moreover these deposits have to be maintained for a period of five year but if you withdraw the deposit before this period, the amount  withdrawn shall become taxable in the year of withdrawal in case deduction in respect of same has been claimed earlier. However any money received by the nominee or legal heirs on closure of the account due to death of the account holder shall not be taxed when received.

ELSS contributions:

Contribution of ELSS( Equity Linked Saving Schemes) of Mutual Funds, popularly known as tax saving schemes, have gained popularity since these have given better returns in line with the overall returns on investments in equity. Contributions  to these ELSS schemes have a restriction as to holding period of three years. This is the shortest holding period in respect of pure saving based investments qualifying for deduction under Section 80C. In case you sell the units acquired under ELSS before completion of three years, the deduction claimed earlier will become taxable in the year of withdrawal.

In case the investment was made through Systematic Investment Plan, this limit of three years will apply to each contribution.

I hope restrictions applicable have become clear to you in respect of whom you can claim deductions under Section 80C. Besides, you have also understood the importance of holding period of the asset in respect of which you plan to avail the deduction in your tax returns.

Tax benefits for interest on home loans in India

Your house, and Interest related tax deductions

The benefits of interest for house loan allowed under present income tax laws is dependent on usage of the money borrowed, here we will explore the provisions of the same in this article. 

For  claiming the interest benefit, first and foremost thing you should  keep in mind is that the benefit is available in respect of house owned by you which is ready for occupation. Thus you cannot claim this benefit in case either the house is not owned by you or during the period when it is under construction. However any interest paid, during the period when the construction was going on can be claimed in five equal installments beginning from the year in which the construction is completed. The benefit of interest is available on accrual basis and it is not necessary that you should have actually paid the interest by issuing a cheque.

 

Most of people have a notion that interest on loan can only be claimed if the loan has been taken for the purpose of either buying a house or for the purpose of construction on the plot owned by you, which is not true. Even the  interest on money borrowed for the purpose of repair, renovation or reconstruction of house is also eligible for deduction.  However if you have borrowed money against your property for the purpose which is not covered above, you will not get any deduction under the head “Income from house property”. However the same can be claimed  under other heads if the money borrowed against your property has been used in some business or for making some investments, implying a direct linkage is not established.

So what are the sources from where you can borrow besides banks, HFCs and NBFCs? Borrowing from friends and relatives too entitle you for this benefit.    This way we see that for claiming the deduction, it is not the source of money which is  important, but the purpose is and you should be in position to prove the end use of the money for claiming this tax benefit. You  can even claim the interest paid on personal loan taken for making down payment as the banks will not fund you more than 80% of the cost of the house.

However in case the money is borrowed on or after 1^st April, 1999 for the purpose of buying the house in which you are staying, you have to obtain a certificate from the person who has lent you the money specifying the amount of interest payable on this  loan. So except for the loan taken from the period beginning from 1^st April 1999 for the property occupied by you, the law does not require you to even obtain a certificate from the  lender but you will have to conclusively establish the linkage between the amount borrowed and the end usage.

Now you would like to know the quantum of deduction  available for interest which mainly depends on the usage of the property and  timing of the  loan.  For the properties which are let out, the entire amount of interest is allowable. In respect of  properties which are occupied by you or your relatives, implying  it is self-occupied, the normal amount of deduction available is Rs. 30,000. However you can claim an enhanced deduction of Rs. 150000 if loan has been taken for purchase or construction of a house  on or after 1^st April 1999 and the purchase or construction of the property is completed within a period of three years from the end of financial year in which the  loan was  taken. For loan taken for repairs, renovation or reconstruction of the house occupied by you, the limit of deduction is still Rs. 30,000 but there  is no limit in respect of interest on loan for repairs, renovation or reconstruction of house which is let out.

In case of more than one property occupied by you or your relatives, the law allows you to choose one house as self-occupied and all the other house/s shall be treated as let out and the deduction will be available to you accordingly.

I  hope now you know fully about the interest benefits in respect of house owned by you, so if you have been depriving yourself for any such deduction till now, make the first move!