Time to invest and get double indexation benefits

If you are planning to make a lump sum investment in a secure investment product, you may consider looking at safe debt mutual funds or Fixed Maturity Plans (FMPs) at this juncture. Investing in such avenues at the end of a financial year, for a duration slightly longer than three years, say for 1095 or 1100 days, makes a lot of sense.

Eg, if you invest on 20th March 2021 and take it out (or it matures) on 10th April 2024, you get the indexation benefit of Four financial years even though you’ve invested for just 21 days more than 3 years. This brings down your lower tax liability substantially due to benefits of longer indexation.

Additionally, while the interest earned on bank or corporate FDs gets added to your income irrespective of period you have invested for and taxed at your tax rates, the returns earned from such debt funds for periods longer than three years are considered as long-term capital gains (LTCG) and taxed at 20% with indexation. This could result in a considerable tax saving for you.

File your ITR or be ready to pay TDS/TCS at double the rates next financial year

If you have not filed your income tax return (ITR) for the financial year 2019-20 yet, better to do it before 31 March 2021 since you won’t be able to file it after that. While there are several consequences of not filing the ITR within the stipulated time period, from next financial year you will also have to face higher rate of tax deduction at source (TDS) or tax collection at source (TCS).

This is because, to put off the practice of not filing returns by taxpayers, the Finance Act 2021 provides penalties for any individual in whose case TDS or TCS of Rs 50,000 or more has been deducted or collected in the last two years. If such a person has not filed his/her ITR, then the TDS/TCS rate will be double of the specified rate or 5 percent, whichever is higher.

To avoid unnecessary higher TDS or TCS in future, better file your return even if you have to pay a delay penalty of Rs 10,000 to file it.

Don’t forget to make minimum contribution in small savings schemes

If you have investments in small savings schemes like Public Provident Fund (PPF), Sukanya Samriddhi Accounts (SSA), National Pension System (NPS) etc, please make sure that you contribute at least the minimum annual contributions required to keep these accounts operative. If you fail to deposit the minimum requisite amount in a financial year, it may lead to the account becoming dormant.

Different accounts have different minimum contribution limits in a financial year. For instance, PPF requires account holders to contribute at least Rs 500, whereas in case of SSA it is Rs 250 and for a NPS account, you need to make a minimum contribution of Rs 1,000 every year. While a dormant or inoperative account continues to earn interest until maturity, to revive the account you may need to pay a penalty fee which again differs from scheme to scheme. For instance, in case of SSA, a default fee of Rs 50 for per year of default along with the pending minimum contribution of each year is levied.

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