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Bonds Investments

Taxation on Gains from Bond Investment in India

  In India, bonds are financial instruments that are used to raise capital by companies, financial institutions, and government entities. They are essentially debt instruments that provide a fixed rate of return to the investor. Under the Indian Income Tax Act, the interest income earned on bonds is treated as taxable income and is subject to tax at the applicable rate. The interest income earned on bonds is added to the total income of the individual or entity and taxed accordingly. However, there are certain types of bonds that are exempt from tax under the Income Tax Act. For example, interest earned on government securities, such as the National Savings Certificate (NSC), Kisan Vikas Patra (KVP), and Public Provident Fund (PPF), are exempt from tax. In this article, we will discuss about Taxation on Gains from Bond Investment in India.   Taxation on Gains from Bond Investment in India   Bond investors check many parameters while investing in bonds, such as a coupon, frequency of coupon payments, maturity & yield. Important factor to be considered in bond investment is “taxation on gains from bond investment. Few important points that need to be considered before taxation on gain from bond are:   Bonds provide coupon payments and return principal amount on maturity. Firstly, the coupon payments are the gains from bond investment; hence they are taxable. Secondly, you may sell bonds in the secondary market before maturity, or you may hold bonds till maturity. In either of the cases, if there is capital gain, then the gains are taxable.   The bonds listed on the National Stock Exchange are Listed Bonds, and bonds that are not listed on the National Stock Exchange are called Unlisted Bonds.   Short Term Capital Gain Tax is applicable if you sell listed bonds before 12 months (it is 36 months in the case of unlisted bonds).   Long Term Capital Gain Tax is applicable if you hold listed bonds for more than 12 months or hold unlisted bonds for more than 36 months.   TDS will not be deducted on interest received from Listed Bonds & Debentures.   Slab system defines the tax rate applicable to individuals considering age and income. Individuals can be Resident or Non-Resident or HUF or Association of Person (AOP) or Body of Individual (BOI) or any other Artificial Juridical Person (AJP). The applicable tax rate is called the slab rate.   Taxation of bonds in India as follows   1.  Regular Taxation of Bonds in India – Interest earned from Bonds is taxed as per marginal slab rate, and the maximum slab rate is 30 %. Appreciation of the bond price is considered as capital gain and taxed accordingly. If these bonds are held for the long term (more than 12 months for listed bonds and more than 36 months for unlisted bonds), the capital gain tax will be 10 %. Short-term capital gain tax can be 5% to 30%. Example – Mr. Suresh is a senior citizen aged 65. He has invested Rs. 10 lakhs in listed bonds. The coupon rate, i.e., interest rate, is 10% paid annually. His annual income is 9 lakhs. So, he comes under the 20% slab rate Investment amount – 10,00,000 Coupon rate -10% Annual Interest income – 1,00,000  Tax on interest income:- 1,00,000 * 20% = Rs 20,000 Suresh has to pay Rs. 20,000 taxes on interest income every year till maturity or till he resells bonds STCG Tax – Suppose after 10 months, if he sells bonds for Rs.10,50,000, then the capital appreciation is Rs.50,000 Tax on STCG – 20% X 50,000 = Rs 10,000 LTCG Tax – Suppose after three years, if he sells bonds for Rs. 13,00,000, then the capital appreciation is Rs. 3, 00, 000 Tax on LTCG – 10% X 3,00,000 = Rs 30,000 Note – i) Indexation benefits can be availed only in the case of inflation-indexed bonds or capital indexed bonds. ii) The income should be listed under the ‘income from other sources’ section in your income tax forms   Tax Free Bonds   In the case of Tax- free bonds, the interest earned from bonds is not taxed, but price appreciation of the bonds during maturity (or sale) is considered as capital appreciation. Hence capital gain taxes are applicable. Considering the holding period, either LTCG or STCG, will be applicable.   Tax Saving Bonds   Section 54EC Bonds are Capital Gain Tax Exemption Bonds that provide 100% tax exemption on the long-term capital gain earned by selling any property. These bonds are the best options to save tax after the property sale. But conditions apply, such as the time gap between property sale and bond investment cannot exceed six months. Also, the investment limit in Section 54EC Bonds is 50 lakhs. Section 54EC Bonds do not provide any exemption on short term capital gains. Note – i) Interest earned on tax exemption bond will be taxable as per the slab rate of the individuals. Income should be listed under the ‘income from other sources’ section in your income tax forms. ii) There is a lock-in-period of 5 years on these exempted 54EC bonds from the date of purchase of bonds, if these bonds are sold before 5 years from date of purchase then the LTCG exempted earlier will be taxable in the hands of assessee. Even if any loan or security is taken against these bonds will be treated as redemption & LTCG exempted earlier will be taxable.   Example – An immovable property is sold at Rs. 85 lakhs after a period of 42 months from the date of acquisition. The indexed cost of acquisition is 52 lakhs and indexed cost of improvement is Rs. 13 lakhs. Calculate the capital gain that is taxable after claiming exemption under Section 54EC if investment amount is Rs. 22 lakhs invested in NHAI bonds within 6 months from date of sale of immovable property Particulars Amount (Rs) Sale Consideration 85,00,000 Less: indexed cost of acquisition 52,00,000 Less: indexed cost of improvement 13,00,000 Long Term Capital Gain 30,00,000 Less: Investment in NHAI

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common mistakes in investment

Common Investment Mistakes Investors should avoid while making Investment

In this article, we will discuss about common investment mistakes investors should avoid while making investment.   Common Investment Mistakes Investors should avoid while making Investment are   1   Not Investing   Of all of the mistakes that a beginner investor might make on their investing journey is not investing. Retirement is expensive & unfortunately, most of us won’t be able to save enough without a lot of help from the stock market. If you had invested that money in the stock market and it was allowed to compound, meaning you earned interest on your interest. The same amount of money contributed throughout your life would be significantly higher by investing in the stock market instead of any fixed or low return investing instruments.   2.  Using money you can’t afford to risk   When you invest money that you cannot afford to risk, your emotions and stress levels get higher, which can lead to poor and impulsive investment decisions. When evaluating stocks, consider your risk tolerance, which is your willingness to lose a portion or all of your original investment in exchange for higher returns. When determining your risk tolerance, evaluate the securities or asset classes you’re comfortable with, such as growth stocks v/s bonds v/s fixed savings instruments. Don’t invest money you can’t afford to lose, such as your emergency funds. You will make much better investment decisions by investing money that you can afford to risk.   3. Being driven by Impatience   Another investing mistake is a lack of patience. If you’re investing for the long term, stocks may not experience the desired gains right away. If a company’s management team unveils a new strategy, it may take months or several years for that new approach to play out. Too often, investors will buy shares & then immediately expect the shares to rise at highest level. What often makes investing profitable is the magic of compounding. Compounding takes time to really work, which is why those who start saving at young age (in their early 20s) often see the best returns.   4. Learning about shares & stock knowledge from the wrong places & following the crow   Getting stock, shares tips or information from the wrong sources is another common and costly investing mistake. Following the crowd is an investing mistake since it doesn’t involve research but instead mirrors what other investors are doing. Many people only hear about an investment after it has already performed well. If certain stocks double or triple in price, the mainstream media tends to cover those moves as hot takes. Television, Newspaper & the Internet (including social media) can push stocks higher into excessively overvalued territory. There is no shortage of experts in the stock market who are willing to offer their opinions while presenting them as if they are educated and endlessly correct. Even stock analysts that work for investment firms get it wrong and usually have a solid grasp of the company and the industry they cover. In other words, even if they’re qualified to render an opinion, they can still be wrong. Generally, government-backed reliable sources is a good place to start for general investment advice or guidance. You could also consult a financial advisor to guide you through the process. Not even the most experienced and successful investor can predict the future. If an investment professional guarantees a certain outcome on your investment, consider it a red flag.   5. Not doing your due diligence   Not performing due diligence when investing can be a costly mistake. With a proper due diligence strategy Investors are more likely not to be blindsided and make well-evaluated investment decisions. An individual investor should perform proper due diligence especially with highly speculative and volatile penny stock shares. The more due diligence, the better your investing results. If you’ve reviewed the company, including any warning signs and potential risks, you’re much less likely to be negatively surprised by an event.   6. Investing without goal & understanding of your risk profile   Setting goals is extremely important. Once you set a goal, you are determined and focused to achieve it. Goal-setting restructures your brain cells in order for you to be more successful in achieving them. Your brain tries to bring down all possible obstacles that keep you away from achieving these goals. Once you set a goal, like buying a house or going on vacation to your favorite destination, you are less likely to miss your SIPs or tamper with your savings. Because, suddenly, you feel like these goals matter to you the most. As important as it is to set a goal, understanding your risk profile is equally important. Different investment options have different risk profile. Understanding the risk of investing in different categories of investments will allow you to understand your risk profile in a better way. An equity-oriented portfolio will have more risk than a debt-oriented portfolio or a fixed investment portfolio.   7. Try to time the market   Market timing is generally prevalent amongst stock market investors, where they make buying and selling decisions based on their predictions about the future market price movements. Many investors also try to time the market. They try to sell off their investment when they feel the market is going to crash. These predictions might not always be true. Many researchers and experts say it’s impossible to time the market. Moreover, trying to time the market leads to your goals not getting realized. The reason being, by redeeming your investment from time to time, whenever you feel, the market is going to crash, you are missing out on opportunities like the benefit of compounding that lets you reach your goal faster.   8. Reshuffling your investments too often   By looking at the returns or a promising headline, makes a lot of investors sway towards doing the same thing. Many investors make the mistake of falling into this trap too often. Based on the predictions based on headlines

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Life Insurance Policy rules

Life Insurance Policy Taxation Rules

In this article, we will discuss about Life Insurance Policy Taxation Rules. Important points that need to be considered in case of taxability of Life Insurance Policy   1.. Deduction under Section 80C 2. Exemption under Section 10(10D) on maturity of policy 3. TDS on the life insurance policy 4. Tax implication of single premium life insurance policies   Buying a life insurance plan is very important for people who have dependent family members. The policy will help you protect the financial future of your parents, spouse & children. Payment of premium on life insurance policy not only gives insurance cover to a taxpayer but also offers tax deduction u/s 80C of Income Tax Act.   Deduction under Section 80C   Any premium paid towards a Life Insurance Policy is allowed as deduction. A taxpayer, being an individual or a Hindu Undivided Family (HUF), can claim deduction u/s 80C in respect of premium on life insurance policy paid by him during the year. However, the LIC Premium is allowed on ACTUAL PAYMENT BASIS only (not on due basis). It will be allowed even if the premium payment is made in cash. In case of an individual, deduction is available in respect of policy taken in the name of taxpayer or his/her spouse or his/her children. No deduction is available in respect of premium paid in respect of policy taken in the name of any other person, other than as mentioned. In case of a HUF, deduction is available in respect of policy taken in the name of any of the members of the HUF. Limit of Deduction u/s 80C – Overall deduction u/s 80C (along with deduction u/s 80CCC & 80CCD) allowed is up to Rs. 1,50,000.   Minimum holding period   Minimum holding period in case of Life Insurance Policy is 3 years. In case policy is terminated/surrender before the minimum holding period then the deduction allowed in earlier years would be deemed as income of the previous year of termination. Further, no deduction will be allowed in respect of payment made towards such policy which is terminated during the year of termination.   Exemption under Section 10(10D) on the maturity benefit   Section 10(10D) of the Income Tax Act allows any amount received such as maturity proceeds, bonus amount, survival benefits or surrender value on life insurance policy as exempt if premium paid on the policy must not be more than 20% of sum assured for policies issued before April 1, 2012 & 10% of sum assured for policies issued after April 1, 2012.   In case of policy taken on or after 1-4-2013 in the name of any person suffering from disability or severe disability u/s 80U or suffering from disease or ailment given u/s 80DDB, limit will be 15% of sum assured.   Benefits of section 10(10D) also apply to any gains arising out of ULIPs & Single Premium Life Insurance Policies (if the conditions mentioned in section 10(10D) are met).   Deductions are applicable to both foreign as well as Indian life insurance companies.   TDS on the life insurance policy   In case life insurance policy is taxable, TDS u/s 194DA will be applicable if the amount received is more than ₹1 lakh. TDS rate will be 5% on the income component (amount received – total premium paid in the tenure of the policy). Any amount received under life insurance policy is taxable under the head “Income from other sources” as per the applicable income tax slab rate, if not exempt u/s 10(10D).   When will be the amount received as maturity proceeds, bonus amount, survival benefits or surrender value on life insurance policy is taxable ?   There are certain situations when Section 10(10D) does not apply, If the premium paid towards the life insurance policy is more than 10% of the sum assured for policies issued after April 1, 2012 & for policies taken before April 1, 2012, if premium paid more than 20% of sum assured, then tax benefit is not available.   Also, as per Finance Budget 2023, any sum received from life insurance policy having premium annually in a financial year is more than Rs 5 lakh would be taxable from 1st April 2023. If a policyholder already has a life insurance policy with premium exceeding Rs 5 lakhs in a financial year, then it will be exempt from tax, if all the other conditions u/s 10 (10D) are satisfied. The new tax law is applicable only to the policies purchased on or after 1st April, 2023.   This Income tax rule will NOT be applicable on ULIP policy. Any amount received on the death of the person insured will still be exempt from tax.   For ULIP plans, the tax exemption limit is limited to Rs 2.5 lakhs annual premium payment in a financial year.   Tax implication of single premium life insurance policies   For a single premium payment life insurance policy, the premium paid is often more than 10% of the sum assured. Hence, the maturity benefit of the policy will be taxable under the head “Income from other sources” as per the applicable income tax slab rate. TDS u/s 194DA @ 5% will apply on the income component (amount received – total premium paid in the tenure of the policy) if the amount received is > ₹1 lakh. For example, if a policy is taken on 12 July, 2013 with a maturity value of ₹3.5 lakh, the single premium amount will be approximately ₹95,000, which is over 10% of the sum assured. Suppose, if assessee surrendered the policy on 16 July, 2019 & he/she received Rs 1,50,000 then the insurance company would deduct TDS @ 5% on Rs 45,000 (income component). Rs 1,50,000 received as surrender value will be taxable under the head “Income from other sources” as per the applicable income tax slab rate.   Comparison of Old Regime & New Regime tax (under section 115BAD) for investing in life insurance policies  

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Investment Strategy

Investment Strategy for Beginners – how to plan, save & invest in different segment

In this article, we will discuss about Investment Strategy for Beginners.   Investment Strategy for Beginners   As an investor, you need to follow the below steps before starting your investment journey which are as follows:   First of all, you have to prepare your per month income & expense sheet to have a better understanding. For example –  If your per month income is Rs 40,000 per month & household & other expenses is Rs 25,000 per month then your saving is Rs 15,000 per month.   a) There is a General Thumb Rule which says – An Individual needs to save & invest at least 15-20% of their salary. So, for example – If your salary is Rs 30,000 per month then you should save & invest at least Rs 4,500 to 6,000.   b) The Second Thumb Rule says – An individual need to invest (100 – their current age) in equity investments such as equity oriented mutual fund, shares etc. & the balance amount in debt fund or secured investment fund. So, for example – If your age is 30 then 100-30 = 70% of your investment should be part of your equity investment & balance 30% should be part of your debt & fixed investment.   c) It is a general tendency in India that after getting their salary credited to their account, the individual first pays their essential expenses as required & then they spend the balance amount on their own luxuries & after that any amount left with them, they will save & invest (Income – Expense – Personal spend = Savings). This is the wrong approach to save money, the ideal scenario will be Income – Savings (which should be equal to 15-20% of their income) = Expenses & Personal Spend.   d) Remember, there is no point having a large sum of money to be sitting idle in your saving bank account because the rate of interest in saving account is largely 2-3 % which will depreciate your money & also decrease your purchasing power. India Inflation rate is around 5-6% annually, so if you put your money idle in saving bank account it will depreciate your money & also will reduce your purchasing power because the things which can afford at present will become expensive in the future years to come due to inflation rate. Since your savings which barely gets a interest rate of 2-3% will reduce your money & purchasing power considerably.   e) Always remember you just don’t have to save the money but have to invest accordingly to get the desired return to build your wealth.   Investment Procedure   1. Set Your Objectives – Set your objective before starting your investment. Whether you want to invest for short time period (say < 3 years) or you want to invest for long time period (say > 3 years). Setting long tern horizon can be a great benefit when investing in Mutual Fund & Share Market. Your investment portfolio will grow based on factors such as the amount of capital invested, the tenure of investment & the net annual earning on capital. Hence, it is advisable to begin investing as early as possible as it helps you to save a significant amount of money & enjoy the power of compounding on your investment.   2. Find what is your risk tolerance (risk appetite) capacity? The types of investments you choose will depend greatly on your risk tolerance (risk appetite). The best way to identify the risk is to conduct a comprehensive comparison between the different schemes of Investment. Doing so will enable you to figure out what levels of risk each product holds & you can invest money accordingly. Generally, there are 3 types of investors having risk taking capacity are classified: a) Low risk-taking investors b) Moderate risk-taking investors c) High risk-taking investors   3. Whether adequate amount of emergency fund has been kept in place if required by the investors? Generally emergency fund needs to be kept of around 6-8 months of individual earning of one month salary. Emergency fund has to be highly liquid assets, so that int can be withdrawn anytime 24*7. It is preferable to keep Emergency fund in Fixed Deposits as it is highly liquid assets.   4. Whether proper cover has been taken by the investor by securing his life through any Life Insurance Policy or a Term Plan & proper Health Insurance Policy? It is preferable for any investor that before starting your investment journey, you should have an ideally 1 or 2 Life Insurance policy or 1 Term Plan (in case of dependency level on earning member of the family is more). It is also advisable to have a adequate health insurance policy to be taken in the name of main earning member of the family & health insurance should cover his spouse & children also, If any.   5. Based on the risk appetite & also considering investment diversification in mind, Investor should first invest their money in safe investment mode having fixed Rate of Return (RR) generating capacity which will give them a fixed RR & also the compounding effect on their return in the long run. Always remember its the inflation adjusting return that you actually earn, hence you should invest in that investment instrument that give you inflation adjusted return.   Tips for smart Investment   a) It is preferable to first invest in fixed investment returns such as Public Provident Fund (PPF), National Pension Scheme (NPS) & Post Office Deposit Scheme.   b) Investment in fixed investment return gives you security of fixed earning even in dynamic & adverse situation which is guaranteed. Investment in PPF & NPS not only gives you the guaranteed returns but you can also claim deduction under section 80C & 80CCD (1B) of the Income Tax Act, 1961 amount to Rs 1,50,000 & Rs 50,000 at the time of filing of your Income Tax Return in the

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Rules of investments

Thumb Rule of Investing that every investor should consider before starting their investment journey

In this article, we will discuss the Thumb Rule of Investing. Thumb Rules of Investing     In terms of investing, there are certain thumb rules that help us ascertain how fast our money grows or how fast it loses its value. Then, there are rules to make our investment process easier. Like how should we do our asset allocation, how much to save for retirement & for emergencies etc. Various points to be considered before starting investing are:   1 . The Emergency Fund Rule    As the name suggests, the money kept aside for emergency use is called an emergency fund. It is a good practice to keep at least 6 months to 1 year’s expenses as an emergency fund. While calculating your expenses you should include expenses for food, utility bills, rent, EMIs etc. & instead of keeping it idle in savings bank accounts invest these funds in liquid funds or in FD. These funds provide a little more returns than savings bank accounts. At the same time, like saving banks accounts, liquid funds & FD are highly liquid, i.e. the money is available in very short notice.   2. 100 minus age rule   The 100 minus age rule is a great way to determine one’s asset allocation i.e., how much you should allocate in equities investment & how much in debt investment. For this, subtract your age from 100, and the number that you arrive at is the percentage at which you should invest in equities. The rest should be invested in debt. For example, if you are 30 years old and you want to invest Rs 8,000 every month. Here if you use the 100 minus age rule, the percentage of your equity allocation would be 100 – 30 = 70%.  So Rs 5,600 should go to equities and Rs 2,400 in debt. Similarly, if you are 20 years old and want to invest Rs 8,000 every month, then according to the 100 minus age rule the equity allocation would be 100 – 20 = 80%. i.e., Rs 6,400 should go in equities and Rs 1,600 in debt. 3. The 10,5,3 Rule   When you invest or even think of investing money, the first thing that you usually look for is the rate of returns that you will get from your investments. The 10,5,3 rule helps you to determine the average rate of return on your investment. Though there are no guaranteed returns for investments, but as per this rule, one should expect 10% returns from long term equity investment, 5% returns from debt instruments & 3% average rate of return that one usually gets from savings bank accounts.   4. Not considering the impact of inflation on returns   One of the common mistakes that most investors tend to make is to ignore the effect of inflation on returns. We all know that the value of the rupee is not the same as what it was 10 years ago. It’s worth was way more than what it is today. And after a few years, it will decrease even further. It’s almost inevitable. In other words, inflation bites into the value of the rupee and decreases its purchasing power. So, while making any investment, your main aim should be to fetch returns that beat inflation.   5. 10% for Retirement Rule   When you start earning in your early or mid twenties, saving for retirement is the last thing in your mind. But starting to save from your first salary, no matter how little the amount is, you will be able to create a huge corpus for retirement. Ideally it should be 10% of your current salary which you should increase by another 10% every year. For example, If you are 25-year-old & earn Rs 30,000 a month. You have decided to invest 10% of your salary, i.e. Rs 3000, every month & increase it by another 10% every year. The retirement corpus you will be able create by investing in an instrument that provides 10% returns will be approx. to Rs 3.3 crores. A great way to build your retirement corpus is by investing in NPS following the 10% rule. Current Age 25 Investment amount every month Rs 3,000 % of increase in investment amount every month 10% Average rate of return 10% Retirement age 60 Tenure of investment 35 Total retirement corpus Rs 3.3 Crores approx. 6. Rule of 72   We all want our money to double & look for the ways it can be done in the shortest amount of time. Well, calculating the number of years in which your money doubles is very easy with the Rule of 72. Take the number 72 & divide it with the rate of return of the investment product. The number at which you will arrive is the number of years in which your money will double. For example, If you have invested Rs 1 lakh in an investment product that provides you a rate of return of 6%. Now, if you divide the number 72 with 6, you arrive at 12. That means, your Rs 1 lakh will become Rs 2 lakh in 12 years.   7. Rule of 114   Like the ‘rule of 72’ tells you in how many years your money can be doubled, this rule tells you how many years it will take to triple your money. Rule of 114 is similar to Rule of 72. For this, take the number 114 and divide it with the rate of return of the investment product. The remainder is the number of years when your investment will triple. So, if you invest Rs 1 lakh in a product that gives you an interest rate of 6%, then as per the rule of 114, it will become Rs 3 lakh in 19 years.   8. Rule of 144   Two multiplied by 72 is 144. Hence, you can simply understand that ‘rule of 144’ helps you calculate in how many years

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