Tax on sale of mutual funds can be saved if you’re buying a house!!

Do you know that if you sell your mutual funds for some requirements or for the purpose of balancing your portfolio, you can save your long-term capital gains (LTCG) tax by investing in a residential house or flat, effectively getting you tax-free returns on the sale of the mutual fund? Most people would not know that, but this provision does exist in the income tax laws.

If you purchase / construct a residential house from sales proceeds of any long-term capital asset, other than from sale of residential house, you will get a full tax exemption under Section 54F of Income tax Act 1962, (provided individual does not own more than one residential house at the time of this sale).

The gist of 54F of Income Tax Act is summarized here under –

Please do read the various provisions of Income Tax Section 54F before doing the above stated transactions.

(Contributed by Bibhuti Gaurav, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)

Types of Annuity plans offered by Annuity Service Providers in National Pension System (NPS)

‘NPS investments can be claimed for a tax deduction of Rs 1.5 lacs under 80C and additional deduction of Rs. 50, 000 can also be claimed under section 80CCD 1(B).’  It seems that armed forces investors have only captured this line into their minds when thinking about NPS. Let’s see if there’s more to NPS for more apt decision making by all those who are planning a NPS investment.

You can withdraw only up to 60% of your NPS corpus at the time of retirement. While this 60% is tax-free, balance 40% has to be compulsorily used for buying an annuity plan (ie, a pension plan) from a life insurance company and is fully taxable as per your income slab rate. Also, this 40% is locked for life and cannot be withdrawn ever by the contributor, and the annuity by a life insurance comapny is typically a very low return payout.

Annuity Service Provider (ASP) is an IRDA registered insurance company empaneled by Pension Fund Regulatory and Development Authority (PFRDA) for providing of Annuity Services to NPS subscribers. PFRDA has empaneled seven IRDA approved life insurance companies for providing annuity services to the subscribers of NPS:-

  1. Life Insurance Corporation of India
  2. SBI Life Insurance Co. Ltd
  3. HDFC Life Insurance Co. Ltd
  4. ICICI Prudential Life Insurance Co. Ltd
  5. India First Life Insurance Co. Ltd.
  6. Kotak Mahindra Life Insurance Co. Ltd.
  7. Star Union Dai-ichi Life Insurance Co. Ltd

The different types of Annuity option as offered by ASPs are as follows:

  1. Annuity/ pension payable for life at a uniform rate.
  2. Annuity payable for 5, 10, 15 or 20 years certain and thereafter as long as the annuitant is alive.
  3. Annuity for life with return of purchase price on death of the annuitant.
  4. Annuity payable for life increasing at a simple rate of 3% p.a.
  5. Annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
  6. Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
  7. Annuity for life with a provision of 100% of the annuity payable to spouse during his/ her life time on death of annuitant. The purchase price will be returned on the death of last survivor.

While armed forces officers are not very much dependent on this annuity’s amount if they’re getting Govt pension (and most of them do so), if you’ve still taken NPS, we would recommend you to go ahead with Option 7 in most cases. It takes into account the continuity of income for both self and spouse for the life time and the purchase price is returned to the nominee too.

(Contributed by Devanshu Anand, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)

Should you buy an Equity Mutual Fund (MF) or an ETF?

Everybody knows what is an equity MF. But what is an ETF? An Exchange Traded Fund (ETF) is a basket of stocks that reflects the composition of an Index, like the Sensex or the Nifty. ETF prices reflect the net asset value of the basket of stocks in which it is investing. In many ways, it is similar to mutual funds. ETFs are actually Index Funds that are listed and traded on exchanges like stocks and are passively managed.

Mutual funds aim to outperform a market benchmark, whereas ETFs aim to track the relevant index and replicate its returns. In effect, ETFs don’t try to beat the market, they try to be the market! To invest in ETFs, you need to have demat and trading account with a stock broker. ETFs mainly track an index, a commodity, or a pool of assets. Since it is a passive way of investing, the administrative cost of investing into an ETF is low, much lower than that of active mutual funds where the active involvement of the fund manager raises the costs.

Should it be a part of your portfolio: An ETF buys all the stocks in the very same proportion that make up the index it is trying to replicate. So, if the index does well, the ETF does well. If it does not, there is no chance that ETF will do well since ETF can only mimic the index it follows.

Some investors also think that ETFs are less risky than direct stocks or equity mutual funds. This is not correct – the ETF is as much or less risky as the components of the index it is replicating.

The most apparent reason to buy an ETF is its low cost compared to the active funds. So, while choosing ine of the two, you have to choose between letting the investment go its own way after you’ve invested (ie, the ETF) or place faith in the capabilities of the fund management team of the MF (ie, the active MF) albeit at a higher cost.

(Contributed by Jatin Uppal, Deputy Manager, Hum Fauji Initiatives)

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