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!

Accumulate gold for your daughters' marriage in small quantity

Graduate from electronic goods to electronic gold!

Indian marriages are unthinkable without gold jewellery. Almost  all  parents gift   gold jewellery to their daughters at the time of their marriage and welcome their daughters-in-law with gold jewellery. With on-going global crisis and gold prices hitting the roof,  parents are a worried lot as gold constitutes a significant proportion of expense in daughter’s marriage  of any Indian. 

In this article I will discuss about suitability of various products for the purpose of accumulating gold  for marriage of your daughter. Till now you have been buying electronic goods with easy EMIs, now you can buy electronic gold too. This is a big boon for those parents whose daughter’s/ son’s marriage is few years ahead. 

So what are options available for buying gold electronically?  You can choose the option depending on the  various factors like the time horizon over which you want to accumulate gold or how long you want to remain invested in gold. The other important factor which may impact your decision is the purpose  of investing in gold.

Till some time ago there was only one way by which you could invest in gold i.e. by purchase of jewellery, gold coins or gold bars. Now with electronic medium for purchase of gold stepping in, you can choose between  these products -  Gold ETF,  Gold Funds and E Gold. Electronic mode scores over physical mode for accumulating gold over a longer period of time attributing to various reasons like purity, storage cost,  risk of theft and convenience of buying in small quantity which are taken care of by gold electronically purchased

Investment through Mutual Funds

Once you have zeroed on electronic mode of buying gold for the purpose of accumulating it for the marriage of your daughter, there are two options through which you can proceed. One is through the medium of Mutual Funds and other is E-gold product offered by National Spot Exchange. The Mutual funds offer two products -  the gold ETF which are traded on the Stock exchanges where you can buy and sell gold with your existing stock broker and  a demat account. In addition to the brokerage cost payable at the time of purchase and sell, 1% is  charged by the mutual fund houses for managing the scheme which effectively reduces the return on investment by approx. 1% over returns generated by the underlying asset Gold. A few mutual funds have very recently launched gold fund schemes where  units  can be purchased from the mutual funds directly like other mutual fund schemes. These schemes will in turn invest the money collected in the gold ETF schemes of their fund houses only. Though these offer the convenience of investing without having a demat account and also let you invest a fixed sum of money through SIP and take the benefit of rupee cost averaging. However like in case of gold ETF, here also the annual fund management expenses may be around 1.50% which will effectively reduce your returns by around 1.50% as compared to returns given by the underlying asset i.e. Gold.

In addition, you cannot convert your gold holding directly into gold by tendering the same to concerned Mutual Funds  unless your holding is equivalent to 1000 grams of units. Moreover since you cannot convert the units into gold, you have to invariably sell these units and pay capital gains tax and purchase gold only equivalent to the money left after providing for capital gains tax.

 

Investment through E-gold

This is the recent fad under the electronic Gold mode of investment in gold. In case you want to accumulate gold in small quantity over the long period then E Gold makes better sense. Firstly, the E gold units purchased by you through National Spot Exchange Limited are fully backed by the equal quantity of Gold unlike in case of gold ETF where the investment in gold may not necessarily be exact equivalent to the number of units issued by the mutual fund. This is due to  annual cost incurred for managing the funds and other factors like maintenance of cash balances by the mutual funds.

Since NSEL does not charge anything akin to the fund management charges on yearly basis, the cost which you incur are basically the brokerage cost paid at the time of purchase of E- gold units and then annual charges for  the demat account which are anyway payable in case you invest in gold ETF also. Since you plan to accumulate sufficient quantity of gold in small quantity over a long period of time, the cumulative impact of saving on account of around 1% or 1.50 % over the long period gets translated into huge saving,  thus ensures returns on this investments equivalent to the returns provided  by the underlying assets i.e.  Gold since each units is exactly backed by one gram of gold in the vault  of the NSEL. This is due to the reason that  NSEL presently does not recover any charges towards storage costs of the gold being incurred by them for safe keeping of the same with safe deposit vaults.

Though there are some charges per request for conversion of electronic gold into physical  and making charges for taking physical delivery of gold, this will not be significant as you will be taking the delivery in larger denomination and the request for such conversion will be one time only at the time of marriage of your daughter.

One more benefit here is that you save on account of capital gains which you can ensure if you decide to take physical delivery of gold from the NSEL against your holding of E Gold units. Let us understand this. Once you have taken possession of the gold from the NSEL it does not amount to any transfer attracting any capital gains liability under the provisions of Income Tax Act. The same gold can be used for the purpose of making jewelry to be gifted to your daughter. What you have to do is to obtain an invoice for labour charges in respect of jewelry made with the gold obtained from NSEL.

Since gift between close relatives is fully exempt without any limits, you can gift the jewelry to your daughter without having any income tax implications in respect of capital gains

I hope that now you know that E gold provides you an opportunity to accumulate gold over the periods co terminating at the time of marriage of your daughter./son with cost advantages attached with it.

 

Get started with NPS

Getting Started with NPS

All of us have heard about God but only a few have experienced the miracles which can be attributed to his presence. Same is the case with National Pension Scheme (NPS), many of us have heard about it but only a few know as to how it works.

On the basis of mails received from the readers on previous article on NPS in the columns DNA dated 15^th June 2011, I have realized that though lot of people have heard about the NPS, but not many are aware how it functions and more importantly how to open a NPS account.

In this piece I have discussed about taking the first step towards opening your NPS account.

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. For opening the account under NPS, a person should have completed 18 years of age on the date of opening the account. A person who has completed the age of 60 years cannot open this account since purpose of NPS is accumulation of corpus till one reaches the age of 60 years. 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.

Where the account can be opened?

For facilitating Indian Citizens in opening the NPS account, the Government has nominated 34 entities for the purpose. These include nationalized banks like Central Bank of India, Allahabad Bank, Syndicate Bank, Union Bank of India, and State Bank of India and its subsidiaries. In addition to the nationalized banks, the Government has nominated private banks like ICICI Bank, Kotak Mahindra Bank, Axis Bank and Yes Bank. In addition to the banks, the Government has also nominated some other entities like Indian Postal Department, Stock Holding Corporation, UTI Asset Management Company and UTI Technology Services Limited etc. All these entities are known as Points of Presence (POPs). These entities have in turn nominated a few branches as service Providers and are called POP-SP. The detailed list with contact numbers is available on website www.pfrda.org.in and www.npscra.nsdl.co.in.

So you can see that there are ample entities being nominated for opening the account, hence you will not find it difficult to identify the POP for opening your account.

How to open the NPS account?

You have to collect the Application Form for subscriber registration from any of the 34 POPs. The application form duly filled in with necessary documents for the purpose of KYC should be submitted to any of the above POP. The KYC norms are like those which are applicable for the purpose of opening your savings bank account. You have to make first contribution to your NPS account while submitting the application forms to POP-SP.

Does it have nomination facility?

While filling up the form you can appoint one or more nominees for the purpose of receiving the corpus lying to the credit of your NPS account, in case something happens to you. You can nominate up to three persons as nominees for this account. It is always advisable to have nominees in all your accounts, be it bank account or demat account. Even a minor can be appointed as a nominee here. However in case you are appointing a minor as nominee, you need to provide the details of the guardian and date of birth of the minor. While nominating more than one nominee, you need to specify shares of each nominee in percentage term. Please ensure that share is not mentioned in fraction and sum of all the shares is equal to 100%.

However unlike your bank account, you do not have the option to add someone as joint account holder under NPS. The account has to be opened in an individual’s single name.

What are the documents required?

For complying with KYC, you need to provide documents for identity, date of birth and address proof etc. Please note that you need not have a PAN card in order to make an application under NPS unless you intend to make cash contribution of Rs. 50,000 or above. For proofs of identity and address, various documents are accepted like School Leaving Certificate, water bill, electricity bill, driving license, copies of your depository account, PAN card, rent receipt and credit card statement etc. Even if you are not able to provide any of the documents listed in the application form, as a last resort you can obtain a certificate of identity and certificate of address signed by Member of Parliament, Member of Legislative Assembly, Gazetted Officer or even a Municipal Councilor.

How to select the Pension Fund Manager?

Like the POP (Point of Presence) the Government has also appointed Six Pension Fund Managers (PFM) for the purpose of management of the Funds. While filling up the application form for registration under NPS, you have to indicate your preference for the PFM. If you do not indicate your preference of the Pension Fund Manager, your application will not be processed and will be invariably rejected. The PFM appointed are Pension Fund Management Companies of various financial institutions /mutual fund houses like ICICI Prudential Pension Funds, SBI Pension Funds, Kotak Mahindra Pension Funds, Reliance Capital Pension Fund, IDFC Pension Fund and UTI Retirement Solutions.

What is Pension Retirement Account Number (PRAN)?

The Government has appointed National Securities Depositories Limited as the Central Record Keeping agency for the purpose of NPS. NSDL is responsible for record keeping of the all the subscribers under NPS. Once your application for the purpose of registration is accepted and processed, you will receive a welcome kit from NSDL along with allotment letter of a PRAN along with the PRAN Card bearing your photograph having basic details about you. You have the option of receiving your PRAN card in Hindi also and for that purpose you will have to submit some basic details in Devnagri script. Please be careful while you fill in the details in the application form for registration for NPS. In case you have committed some mistakes while filling in the details in the application form, this may cause errors in all the documents including the PRAN card. The PRAN is your unique identification for the purpose of operating this account.

The welcome kit will also contain a Telephone Identification Number (TPIN) for the purpose of accessing your NPS account through the call center number 1800-222080. The kit will also have an Internet password to access your NPS account through Internet on www.npscra.nsdl.co.in.

I hope now you will not find it difficult to open the NPS account about which you have just heard till now. Take your first step towards experiencing the benefits of NPS.

More on features of NPS in my forthcoming articles…

…watch out this space in the coming weeks!