Monday, September 22, 2008

Balanced Mutual Funds: Good option when Markets are down

What is a Balanced Fund?

Balanced funds a.k.a. hybrid funds are a type of funds which don't take full exposure either in equity or in debt. They invest in both equity and debt in a well defined ratio as per the fund's mandate. An investor with a low risk capacity and having dependents can use these funds to have stability in his/her portfolio.

They are usually classified in two broad categories:

Equity Oriented Hybrid Funds:

These funds usually invest in the ratio 60:40(equity : debt) or 75:25 (equity : debt). Suitable for investors who want to benefit from the equity market but at the same time would not like to risk his entire money with equities. These funds perform better than equity funds during the downturn in markets and have a better shield in terms of debt component.

In case of a downturn, they increase their debt component to reduce the impact of falling market in the fund's NAV.Similarly during a bull run, these funds will increase their equity exposure to get benefited from the bull run. So a moderate risk investor can choose this fund to have a balanced return.

Debt Oriented balanced Mutual Funds:

These have a big chunk(>70%) of their portfolio in debt instruments. These funds are designed to get returns from debt instruments but have a small portion invested in equities to get that additional kicker return to outpace typical fixed income instruments like bank FDs. In order to get an edge over typical debt instruments and also provide investor an extra bit of return, they have a limited exposure to equities.

Wednesday, September 17, 2008

LTA- Leave Travel Allowance

Leave Travel Allowance (LTA) is an allowance/benefit that your employer gives you to cover your travel expenses. This is a tax saving instrument as well. Your employer gives you money to go on vacation and the money is not taxable! So far so good…
But there are stipulations/rules from the government as in any other benefit.
Let’s get a look into LTA in this post…
What do I do to claim LTA?
Nothing more than getting a break from the work! Isn’t that great?
· You should take a leave from work and travel to anywhere in India. International travels are not covered.
· Travel alone or take the family along with you. However, you need to be on the list of travelers to get the claim. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if your spouse is working) and children.
For children born after October 1, 1998, the exemption is restricted to only two surviving children (unless, of course, one birth has resulted in multiple children like twins and triplets).
What is covered?
Only the travel costs are covered. All the eating, lodging and partying expenses are yours.
So, whether you fly, hop on to a train or take public transport, you will have to show the ticket to claim your LTA. This means you will need to keep your air, rail or public transport ticket.
What if you want to travel by a car? If a car is owned by a central government organization like ITDC, the state government or the local body, LTA is permitted.
If you could not get public transport and resorted to private transport, try and get a bill. If the bill is not accepted by your employer, you can always file an income tax return, claim an exemption and get a refund.
You must take the shortest route though. The LTA is covered for the shortest route only.
Can I claim LTA every year?
No. You can only do that twice in the block of 4 years. This block is not calculated with the start of your employment. The government defines these blocks. The currently running block is 2006-09 -- January 2006 to December 2009.
You can only claim LTA once in a year. This means, you are entitled to go on leave any number of times but it will be tax free only once in a year. If you are married, you can ask your spouse to claim the other journey.
But I can’t travel. My job doesn’t allow me to.
Then you can carry it forward.
One LTA can be brought forward and claimed in the first year of next block.
Let's say you do not take your LTA in 2002-05. You will be able to take one LTA in 2006. This means that, in the 2006-09 block, you will be totally entitled to the three journeys.
I switched my job. What happens to my LTA?
You can still claim your LTA. Let’s say, you claimed one of your LTAs in 2006. 2007 you switched jobs. You can now claim the remaining LTA from the present employer. The only thing you need to show the current employer is the previous tax returns.
What if I don’t claim?
If your LTA is not utilized, it gets added to your salary and you will be taxed on it.
Let's say you and your spouse are both employed and both have LTA as part of the salary package. Your LTA is Rs 20,000 and hers is Rs 20,000 too.
Both of you and your child go for a holiday. The tickets for the three of you amount to Rs 15,000. You supply the tickets to your office and this amount will be eligible for a tax deduction; the balance Rs 5,000 will be taxed. You can claim exemption only to the tune of your expenditure.
If you claim this, your spouse will not be able to claim this same holiday from her employer. His/ Her Rs 20,000 will be taxed. Unless, of course, you go for another holiday and he/ she claims it.
Or, let's say, you spend Rs 30,000 on tickets but your LTA is just Rs 20,000. You can claim up to Rs 20,000 and tell your spouse to claim his/ her ticket from his/ her employer.

Friday, September 12, 2008

Learn about your HRA

House Rent Allowance is a very important component of one’s salary. The tax implications of the house rent allowance (HRA) seem to baffle most people. Taking the case of two individuals, Akram and Rafiq, who work in the same company, I have tried to explain this allowance in detail.

One significant difference between the two individuals, which is necessary for this study, is that Akram resides in his own house while Rafiq in a rental accommodation.

Are both eligible for HRA?

Yes. Because the payment of HRA by an employer does not depend upon its end-use by the employee. An employee may prefer to stay in his/her own accommodation but will still be eligible to receive HRA if it is a part of the salary package. This is so, because HRA, as its name suggests, is an Allowance supplementing the Basic Salary and Dearness Allowance/Pay, if any, in a salary package.

Is HRA taxable?

In the case of Akram, who stays in his own house, tax is payable on the full amount of HRA received by him. Rafiq, living in a rented accommodation, may qualify for relief on the HRA received by him, such relief being dealt with under section 10 (13A) of the Income Tax Act, 1961.

When is HRA exempt from tax?

A salaried individual, in order to get an exemption on his/her HRA, must fulfill the following basic conditions:
  • The employee must not live in his/her own house
  • He/she must pay rent for accommodation
  • Such rent must be more than 10 per cent of his/her salary
Is Rafiq exempt from tax?

Rafiq fulfils the first two conditions. The amount of his salary and rent paid by him will determine whether he meets the last condition too. If Rafiq's monthly salary is Rs 15,000, he will qualify for HRA exemption should the rent paid by him exceed Rs 1,500 (10 per cent of salary).

How much will Rafiq's exact exemption amount to?

The extent to which HRA is exempt is limited to the least of the following:
  • For residential accommodation located at Bombay, Delhi, Calcutta or Madras - an amount equal to 50 per cent of salary and 40 per cent elsewhere
  • HRA actually received by the employee
  • Excess of rent paid over 10% of salary
Rafiq's annual salary = Rs 1,80,000
HRA = Rs 63,000
Monthly rent = Rs 3,000
Rental accommodation situated at: Hyderabad
Rafiq will be eligible for exemption on HRA to the extent of Rs 18,000 being the least of the following:
  • Rs 72,000 (being 40 per cent of salary since rented house is at Cochin)
  • Rs 63,000 (being HRA actually received)
  • Rs 18,000 (annual rent of Rs 36,000 - Rs 18,000 which is 10 per cent of salary)
How should one avail of this exemption?

Provide your employer with information about the rent so that he can credit you with the eligible amount of relief before deducting tax at source. You can also claim such exemption when filing your tax return and seek a refund.
In all cases where HRA exceeds Rs 600 per month (Rs 7,200 per annum), evidence of rent paid, meaning rent receipts, have to be produced. The assessing officer has the right to call for proof of payment.

Points to remember

  • Allowances are different from reimbursements in that they are usually fixed in value and are paid irrespective of whether the recipient incurs expenditure or not. They are aimed at meeting specific requirements like entertainment and travel. They could also be of a compensatory nature like a border area/remote area allowance could be paid to an individual posted in the Lakshadweep Islands.
  • Salary for HRA purposes = Basic Salary + DA/DP + commission (only if calculated as a fixed percentage of turnover achieved by the employee)
  • Salary will not include any arrears for earlier years, which are received during the previous year.
  • If a bonus is received for the last year in the current year, such amount of bonus will not be included in HRA salary for the purpose of determining HRA exemption. You can include the amount of bonus due to you for the current year which you will receive only in the next year.
  • Salary will include all amounts due (even if not received) pertaining to the period during the previous year during which the rental accommodation is occupied by the employee.
  • HRA actually received has to necessarily pertain to the period in the previous year when the rental accommodation is occupied by the employee - meaning, HRA received for that period during which the employee was not occupying the rental accommodation will not be exempt. (If Rafiq were occupying his rented house for only 9 months during the year, then the HRA exemption of Rs.18,000 computed above will get restricted to Rs.13,500 (pertaining to the period of his occupancy).
  • You can pay rent to your parents provided they show the same in their Income tax Returns. This would save both of you from future litigation. You can however, NOT pay rent to your spouse. The relationship is not commercial in nature; a husband and wife are supposed to live together. So, such a payment will not be accepted by Authorities.


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