Be Money Aware Blog

Awareness empowers

Austerity Measures in World and India

Written By: admin - May• 18•12

Finance minister Pranab Mukherjee on Wednesday(May 16 2012) said he would impose new austerity measures, howsoever unpopular they may be, to address India’s fiscal problems and spur growth. “I am going to issue some sort of austerity measures… whether people like it or not … to convey a signal that we are responding to the situation,” the minister said. He, however, did not spell out the measures.

While newspapers have been full of austerity measures, protests in Greece, France and European countries , for us it was just a news – happening to others., yes stock market was volatile but we were not affected directly. I was reminded of US President Ronald Reagan words “Recession is when a neighbor loses his job. Depression is when you lose yours.” When our Finance minister said the A-word, it seemed so close, so decided to explore the topic of Austerity Measures.

Austerity Defintion

As per dictionary aus·tere [aw-steer]  (adjective) means

  1. severe in manner or appearance; uncompromising; strict; forbidding: an austere teacher.
  2. rigorously self-disciplined and severely moral; ascetic; abstinent: the austere quality of life in the convent.
  3. grave; sober; solemn; serious: an austere manner.
  4. without excess, luxury, or ease; simple; limited; severe: an austere life.
  5. severely simple; without ornament: austere writing.

It’s origin is in 1300–50, Middle English derived from Anglo-French, derived from Latin austērus , derived from Greek austērós meaning harsh, rough, bitter

In economics, austerity loosely defines policy of deficit-cutting by lowering spending often via a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending(the amount by which a government’s spending exceeds income over a particular period of time) and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency( ability to meet its long-term fixed expenses and to accomplish long-term expansion and growth) to creditors. Term Fiscal usually refers to government finance.  The policies that governments come up with are are called Austerity Measures.Quoting from Dave Manuel:Investor Dictionary

Austerity measures are strict measures that are undertaken by a government to help bring expenditures more in line with revenues. Austerity measures can be voluntarily implemented (for example, in order to bring deficits down) or involuntarily implemented (for example, if a country defaults on its debt and is given loans by the IMF).

“Austerity measures” usually include a combination of spending cuts and tax/fee increases.The most common example of “austerity measures” occurs when a sovereign government’s bond rating is downgraded. This makes borrowing more expensive, and usually forces the government to impose these new measures. Many European countries have either imposed “austerity measures” or are in the process of introducing them.

Austerity was named the word of the year by Merriam-Webster in 2010, because of the number of web searches this word generated that year. The term “Age of Austerity” was popularised by British Conservative Leader,David Cameron, in his keynote speech to the Conservative party forum in Cheltenham on 26 April 2009, when he committed to put an end to years of excessive government spending.”Over the next few years, we will have to take some incredibly tough decisions on taxation, spending and borrowing – things that really affect people’s lives,” Cameron warned.(Ref:guardian.co.uk:David Cameron warns of ‘new age of austerity’)He became Prime Minister of Britain in May 2010 elections. However, regarding policies designed to address fiscal problems, a more accurate term would be fiscal consolidation.

Ref:Infrastructure Investments in an Age of Austerity : The Pension and Sovereign Funds Perspective (Jul 2011)

Austerity in World

Though Austerity measures came into focus in the 2008-2009 financial crisis and the ensuing debt crisescurrently afflicting the US and most European economies. Austerity is not a new phenomena , some of earlier examples are:

Europe is in the grip of tough austerity measures – some of the deepest public sector cuts for a generation. The colossal debts and rock-bottom growth of Eurozone nations – especially Greece and Italy – have hammered market confidence. The interest rates (yields) on their sovereign bonds have soared, making it hard or even impossible for them to borrow in international markets. Greece, Ireland and Portugal have all received massive bailouts from the EU and International Monetary Fund (IMF). The 27 EU member states aim to cut deficits to a maximum of 3% of GDP by the financial year 2014-15. BBC:EU austerity drive country by country lists the various belt-tightening measures that the European countries are taking. Austerity measures for some of them are listed below:

Greece: In the largest restructuring of government debt in history, lenders and banks wiped 105bn euros ($138bn, £88bn) off Greek’s debt burden. But in order to receive the new 130bn-euro (£110bn; $173bn) bailout, Greece has also had to implement stringent austerity measures such as cuts in pensions and civil service job cuts new property tax and the suspension of 30,000 civil servants on partial pay by the end of this year.

Italy: Silvio Berlusconi government adopted an austerity package in July 2011, featuring savings worth 70bn euros. It included increases in healthcare fees, and cuts to regional subsidies, family tax benefits and the pensions of high earners. When Mario Mont replaced Mr Berlusconi pushed through further austerity measures, including higher taxes for the wealthy, a rise in pension ages and a major drive to tackle tax evasion.In the public sector Italy has been cutting pay and freezing new recruitment. Only one employee will be replaced for every five who leave.

Portugal:In May 2011 Portugal became the third Eurozone country to receive a huge EU/IMF bailout – 78bn euros.The new government adopted a range of austerity measures, including a 5% pay cut for top earners in the public sector, a VAT rise of 1% and income tax hikes for high-earners.The military budget is being slashed and two high-speed rail projects have been postponed. There has also been widespread privatisation.

Vote No To Austerity Measures

The EU implemented austerity measures in order to bring their deficits and debt levels into line. Unsurprisingly, the austerity measures have proven to be unpopular with many EU citizens.Voters in France, Greece and Italy have given an emphatic thumbs down to candidates who have supported austerity measures.

In France, Socialist Francois Hollande defeated Nicolas Sarkozy to become the new President of the country.Francois Hollande was outspoken against the austerity measures. Instead, he argues, the country needs to spend more on teachers, housing, etc., and increase taxes on the “wealthy”. French voters agreed with Hollande and elected him as the country’s new President.

In Greece, voters turned on Conservative New Democracy and Socialist PASOK – two long-standing parties that were both in favor of the bailouts / austerity measures. According to the most recent polls, New Democracy garnered just under 20% of the vote while PASOK managed just 13.6%. In the last election, PASOK captured 44% of the vote.

In Italy’s local elections, candidates opposed to austerity measures are making a strong showing.

Anti-Austerity protests

Anti-austerity protests, chiefly taking the form of massive street protests by those affected by them and some of them also involving a greater or lesser degree of militancy, have happened regularly across various countries, especially on the European continent, since the onset of the worldwide financial crisis. Workers and students in Greece and other European countries demonstrated against cuts to pensions, public services and education spending as a result of government austerity measures. Upheavals in Tunisia and in Egypt in 2011 were originally largely anti-austerity and anti unemployment before turning into wider social revolutions. Some of the anti-austerity movements from Wiki:Anti-austerity_protests are:

  • Occupy movement
  • May–July 2011 Greek protests, also known as the “Indignant Citizens Movement” or the “Greek indignados”, started demonstrating throughout Greece on 25 May 2011
  • 2011 Spanish protests, whose participants are sometimes referred to as the “indignados“, are a series of ongoing anti-austerity demonstrations in Spain that rose to prominence beginning on 15 May 2011. Thus, the movement is also sometimes referred to as the May 15 or M-15 movement as well.
Anti-austerity protesters in Greece on 29 June 2011

Anti-austerity protesters in Greece on 29 June 2011

Is there an Alternative to Austerity Measures?

There is huge debate over whether sovereigns should embrace austerity or increase government spending in an effort to boost demand and avoid a full-blown economic meltdown. Former U.S. Secretary of Labor, Robert Reich, recently wrote a commentary titled, “We Should Not Imitate the Austerity of Europe.” In it, Mr. Reich says “Blame [the recession] on austerity economics – the bizarre view that economic slowdowns result from excessive debt, so government should cut spending” He continued, “A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all. And it’s infinitely better than a smaller debt on top of a contracting economy.”

But blaming a recession on the idea that an insolvent government was finally forced into reducing its debt is like blaming a morning hangover on the fact that you eventually had to stop drinking the night before. Isn’t high level of government spending supported by a compliant central bank caused the debt to GDP ratios to skyrocket to the point where governments are now deemed to be insolvent. Will adding even more public sector debt, most of which is printed, can fix the problem? Does Public sector spending help in grow an economy? Doesn’t it just add to the debt and thus, increases the debt to GDP ratio. It also takes away  money from the private sector. Forcing down a few more drinks to delay a hangover isn’t a very good strategy and it is impossible for individuals, or a nation, to stay drunk forever.

Austerity Measures in India

What Austerity Measures can we expect in India. Quoting FirstPost:FM’s austerity plan: Why it means higher prices for us all(May 2012)

So, austerity measures, huh? That’s the government’s plan to fix the economic mess we’re in. To cut the fiscal deficit – the gap between government expenditure and revenues – the government has decided it needs to take some ‘tough’ measures, or so it claims. The government has done pretty much all it can to raise revenues (it increased service and excise taxes in the Union Budget and seems to be also going ahead with a highly controversial retrospective tax proposal, as well the General Anti-Avoidance Rules), so that means it will now have to concoct new schemes to cut expenditure.

  • One very likely possibility is by cutting subsidies on fuel, which is the biggest component of the government’s subsidy bill(Times of India:Petrol may rise Rs 5/litre, diesel Rs 3(May 2012))
  • What else can the FM do? It’s not entirely clear but the steps will likely involve cutbacks in spending (which will affect demand) and/or raising prices for goods and services

Everything — including the government’s ‘austerity’ measures — points to higher inflation in the future and diminishing possibility of interest rate cuts. Worse, demand could drop, leading to an even further slowdown in growth. Austerity has its price — and consumers, businesses and investors will be paying it for a long, long time to come.

Should we worry about Austerity Measures?

View Results

Loading ... Loading ...

I am scared, damn scared, maybe more than in 2008 crisis when there was Indian growth story to look to. Prices are going up, salaries are not, surely not at the same rate. And there is no end in sight – when will this all end? Will it end? How? What austerity measures would I need to adopt?What austerity measures are you planning to adopt?

Share
Email
Posted in General, Investing , , , , | 2 Comments »

Internet on Mobile – My Savior!

Written By: admin - May• 16•12

A camera, A portable music player, A gaming device, A video recorder, A small computer, A GPS device,A map, A compass,A flashlight and A mobile phone.

There was a time in the not-so-distant past when, if you wanted to have all of those things, you had to carry all of those things.Yes, our mobile phones provide a world of possibilities. It’s about facebook, twitter, email, games, apps – a mobile society. Mobile phone is likely the last thing you see before you go to sleep and the first thing when you wake the next day.  Call it good. Call it bad. It just is.

The earth was flat once. That was until about the 4th century BC, when some ancient Greek philosophers proposed that the earth was in fact a sphere. Internet made world flat again. Everything became just a click away.  It changed how we learn, work, and communicate.  Confronted with a problem, first instinct is to Google. Using internet meant being stuck on a desk sitting at home or in the office. Or pull a laptop out of a carry case! And then came mobile phones!

With an estimated 5 billion mobile phone connections in the world, not to mention the emerging number of tablet computers and other on-the-go connectivity gadgets, mobile technology has altered the way we live. Even with the smaller screens, the superb resolution and usable touch screen makes the internet truly mobile. The apps make the whole mobile web experience simple and satisfying. This has allowed people to quickly adopt mobile internet. The impact these devices are having, and the tide of change that is following in wake of their adoption is fundamental: We want information when we want it, where we need it. We don’t want to wait. A year back I bought a smart phone, Android LG optimus p500. It opened a new world to me and I fell for it hook, line, and sinker! It was as if entire world has come in the palm of my hands. And I was not the only one who is moving to mobile web and for good reasons too!

If you’ve got a mobile phone, you’ve probably got a camera on it. Everybody’s a one-man or one-woman reporting crew so Smile! You’re on camera!  And photo is uploaded on facebook too! And your friends, family from around the world give you instant feedback ! Gone are the days of thinking whether to take a picture or not( there was limit 36 pictures in a film role), getting it developed and showing it to near and dear ones.

Standing in line? Killing those last five minutes before quitting time? Stuck in the doctor’s waiting room? Stuck in the traffic? There was a time in human existence when all of these occasions would have left us staring at the walls in a zombie-like stupor, particularly if there’s not a magazine or book handy. Now? I Chat with a friend. Or Surf the Web, Check my stocks. Fling birds at pigs. If you can’t find something to entertain you for a few minutes of down time, you just haven’t downloaded the right app. There’s no excuse to be bored. World is now just an app away!

How often?

How often?

If Jesus were born in times of Google, Facebook and Twitter  (a youtube video), How mobile has changed the way we live Infographic reflect the changing times. www.vodafone.in/fun shows what fun you can have on the mobile with internet.

For me my mobile is a camera, FM radio, MP3 player, a window to facebook, twitter, youtube, a game player love the apps TomCat, Google Sky, Fruit Ninja, Angry Birds and whatever my son downloads and teaches me(We are into alchemy genetics these days). But it has been more than that- a savior. It lets me watch my favorite soap or serial “Bade Ache Lagte Hain” With one TV, two kids, a husband, a house, a job and a blog- I hardly get the remote of TV or when I get it – I am too tired to watch. My TV time gets lost between Doremon, Chota Bheem, Supernatural, IPL matches, news, stock market. Like millions of people every weekday, I want to tune in to my favorite serial to follow the trials and tribulations of the characters and even blog about them at times, What does Sony serial-Bade Ache Lagte hain tell us about money?, Big Switch In these serials lives are portrayed with passion, courage, love; stories are told with a flair for the outrageous, or even a hint of danger. Thing that happens in the soap world are dramatic with characters coming back from the dead, generation leaps. It feels as if karma has no boundaries when you’re running around serial land.

At times, the storylines, plots, and aggregation of characters all tend to bundle up and really turn you into questioning what will happen tomorrow or the next week – Will Ram and Priya fall in love? Will they separate? Will Nihiraka’s scheme work? That’s how I like to de-stress or realize how small my problems are – maid not coming, daughter not studying for test next day, son’s homework, husband’s travel , deadline tomorrow-there are people with problems bigger than mine.  It is my idea of FUN(BTW The term “soap opera” is deceiving, for it is not about soap, nor is it an opera! It is called this because in America soap companies were big sponsors of the radio shows back in the 1930s. The opera part comes from the fact that operas tell a story, just as the soaps do.)

I had given up on following Bade Ache Lagte Hain and felt pretty bad about it. (Okay I find Ram Kapoor cute -like a teddy bear but BALH is also a mature love story) Tried catching up on reruns and weekends but alas something or other came !Then I came to know of myeduniya.com which uploads link to hindi serials -including BALH within three to four hours of telecast.  With my smartphone I could watch Bade Ache Lagte Hain at my time, yup early morning when I make dhabbas for my children for school, in my kitchen, and that too ad-free! I followed Big Switch too on my mobile. It just makes my day and it’s all possible because of the internet on mobile! Long live internet on mobile!

This is entry for Vodaphone:Internet is fun! contest on indiblogger

Share
Email
Posted in Contests, WomenNMoney , , , | No Comments »

Methods of accounting: Mercantile and Cash

Written By: admin - May• 13•12

The post tries to explain the two methods of accounting – mercantile(accrual) and cash.

  • Under the mercantile (accrual) method, incomes and expenses are taken into account as and when there arises a “right to receive” or “right to pay”.
  • Under the cash method, incomes and expenses are taken into account on actual receipt or payment.

But why are we talking about method of accounting?

Why are we talking about the method of accounting?

Suppose I make a Fixed Deposit for Rs 1,00,000 for 3 years at 10% p.a on 1st April 2011 (the financial year 2011-2012 or Assessment year 2012-13) in cumulative option.  This means that the interest rates is calculated on a quarterly basis and the interest is reinvested into the fixed deposit.  Interest from Fixed Deposits is considered as Income from Other Sources and is taxable. Tax or TDS is deducted by the bank if interest income is greater than Rs 10,000 in a financial year as discussed in Fixed Deposits and Tax. The interest in various quarters are given below using Rupeetimes: Calculator on Fixed Deposit.

Quarter Interest after every quarter(Rs) Balance(Rs)
1. 2500.00 102500.00
2. 2562.50 105062.50
3. 2626.56 107689.06
4. 2692.23 110381.29
5. 2759.53 113140.82
6. 2828.52 115969.34
7. 2899.23 118868.58
8. 2971.71 121840.29
9. 3046.01 124886.30
10. 3122.16 128008.45
11. 3200.21 131208.67
90.5625 days. 3253.27 134461.94
Total: Total Interest Earned:   Rs 34461.94 Maturity Value:  Rs 134461.94

So interest in a year is more than 10,000 Rs. So do we account for the interest every year or on maturity at the end of three years? Answering this question requires understanding the method of accounting. Because The scope of income and its taxability always depend upon system of accounting followed by the assessee.

Methods of Accounting

There are two methods of accounting, Cash and Mercantile or Accrual method

  • Cash Method of Accounting: Under the cash method, incomes and expenses are taken into account on actual receipt or payment. i.e those transactions are considered which physically happen through cash or bank accounts. For example, if you pay your telephone bill on say 15th April 2012, it will be accounted for in the financial year 2012-13 (1-Apr-2012 to 31-Mar-2013) although the bill may be pertaining to the month of March 2012.
  • Mercantile or Accrual method: Under this method transactions are considered as and when they are incurred or earned whether they are are received or not. For example:  Salary relating to a particular year is taxable in that year itself irrespective of whether it is actually received or not.

The cash method of accounting effectively postpones (but does not permanently reduce) your tax liability to the year of actual receipt of income, whereas under the mercantile method, the tax on the income has to be paid even if the income has not been received.

Income Tax and Method of Accounting

Under the Income Tax Act, as discussed in Income Tax Overview, there are five heads of income

  • Salaries,
  • Income from house property,
  • Income from business or profession,
  • Capital gains and
  • Income from other sources.

As far as three of these heads of income–salaries, income from house property and capital gains–are concerned, a taxpayer has no option but to follow the mercantile method of accounting. For instance

    • Salary relating to a particular year is taxable in that year itself irrespective of whether it is actually received or not
    • Rent receivable for house property that has been let out is taxable irrespective of whether it is actually received.
    • Capital gains are chargeable to tax in the year in which the asset is transferred, irrespective of whether the sales consideration is actually received.

When it comes to income under the heads ‘Profits and Gains of business or profession’ and ‘Income from other sources’ (like business profits, professional income and investment income other than capital gains), we have the choice of accounting for them on either basis–cash or mercantile. This is specified in Section 145 of the Income-tax Act, 1961. There was yet another accounting system followed by the assessees before the enactment of section 145 in the assessment year 1997-98, called the hybrid system.

With respect to Fixed Deposits Clause 14 of the  The Bank Term Deposit Scheme , 2006 which became effective from 28-07-2006 clearly stipulates a choice for subscriber to pay tax on interest on accrual or receipt basis which states 

  • Interest on these term deposits shall be liable to tax under the Act on the basis of annual accrual or receipt, depending upon the method of accounting followed by the assessee.
  • The tax on such interest shall be deducted in accordance with the provisions of section 194A or Section 195 of the Act.

Different Accounting Methods can be used

Can one follow the cash method of accounting for income from some investments, while following the mercantile method for income from others? Quoting from article by Gautam Nayak on livemint(Jul 2010)

Although the Income Tax Act has not defined what exactly constitutes a source of income, the courts have generally taken the view that the term “source” must be understood in its “normal” context as consisting of those items that are treated as one category by the taxpayer. Therefore, each category of investments would generally constitute a separate source of income, and a different method of accounting can be adopted for each such category. For instance, debentures and bonds may constitute one source, company fixed deposits another, bank fixed deposits a third source, and so on. Therefore, it is possible to account for the interest on company deposits on a cash basis, while accounting for interest on bank deposits on an accrual basis.

The method of accounting can differ for each source of income, but within a particular source of income, the method must be the same for all items. This is further clarified by answer to question in eLagaan or taxworry.com Quoting from Should Interest on Tax Saving Term Deposit Be Shown on Receipt or Accrual Basis?

I am a salaried employee. I have made a 5 year tax-saving FD for Rs.30000 and a 3 year FD for Rs.10000 in the financial year 2008-09. I am not any income other than salary and interest. I have following two questions: 1) In respect of FD of 3 years, can I pay tax on interest income in the 3rd year (i.e. cash basis) instead of paying it every year on interest accrued ? 2) In respect of tax-saving FD of 5 yrs, can it be taxed like NSC i.e. interest earned be treated as being reinvested and eligible as deduction u/s 80C ? If not, can this also be taxed on cash basis in the year of receipt of interest income?

The income of interest can be shown on the basis of cash ( receipt  ) or mercantile i.e due basis. But once you selected a particular system of accounting , you can not change . Therefore, it is perfectly alright if for you to pay the tax on the interest on FD for 3 years on maturity only.

But if you follow that rule, you can not choose to pay tax on other fixed deposit on accrual basis. It means that for tax saving funds FDs also , you have to show income and pay tax in the year of receipt of maturity value .

While a one-time change in method of accounting is normally allowed, changes in method of accounting from year to year for income from the same source, just to save taxes, is not.

How to choose the accounting method?

You must also examine the nature of income and the deductions available before deciding whether to account for the income on a cash basis or mercantile basis.

Income not guaranteed: If there is a risk of companies defaulting on their interest payment obligations in respect of company fixed deposits (FD) and debentures, it is prudent to account such income on a cash basis so that you do not end up paying tax on income that you do not eventually receive.

Amount of interest: If you decide to use cash accounting method for interest on cumulative deposits i.e you pay tax only on receipt of the interest, then interest paid on maturity will be higher as it is lump sum. Ex: if 50,000 Rs are invested in 3 years then the interest break up after every quarter using using Rupeetimes: Calculator on Fixed Deposit is given below.

Quarter Interest(Rs) Balance(Rs)
1. 1250.00 51250.00
2. 1281.25 52531.25
3. 1313.28 53844.53
4. 1346.11 55190.64
5. 1379.77 56570.41
6. 1414.26 57984.67
7. 1449.62 59434.29
8. 1485.86 60920.14
9. 1523.00 62443.15
10. 1561.08 64004.23
11. 1600.11 65604.33
90.5625 days. 1626.64 67230.97
Total: Total Interest Earn   Rs 17230.97 Ending Balance   Rs 67230.97

Assuming that we started Fixed Deposit on 1 Apr,

  • Interest for first year is 5190.64
  • Interest for second year is 5729.50
  • Interest for third year is 6310.83

Cumulative interest is: 17230.97. So on mercantile basis you will be paying interest on smaller amounts every year(5190.64,5729.50,6310.83) while on cash basis you will be paying in one go for Rs 17230.97.

Interest eligible for deduction under 80C: However, where the interest on such deposits is eligible for a deduction under section 80C, such as National Saving certificates(NSC), it may be beneficial to follow the mercantile method and claim the deduction each year, rather than allow the interest to accumulate and be offered to tax on maturity under the cash method.

Tax Deducted at Source or TDS:If you follow the cash method of accounting, one important aspect to remember is that the tax credit for the tax deducted at source on such income will be available only in the year in which such income is offered to tax, though, the tax would generally be deducted by the payer on an accrual basis each year. Therefore, you need to ensure that the tax deduction certificates (irrespective of the year in which they were issued) are matched with the income offered to tax in the relevant year. Now with TDS information available in Form 26AS it’s easier to find TDS. You might get letter from Income tax office for TDS not matching as in case of Mr Sharma.

Mr Sharma had opened a Fixed Deposit in a bank for 5 years. He got Form 16A from the bank in which TDS was deducted for his Fixed Deposit but this was not reflected in Form 26AS. In July 2011  he filed his return including TDS from bank deposit. In Sep 2011 he got the letter from Income Tax saying his TDS claim does not match Form 26AS and he needs to pay balance amount of Rs 3310. To avoid hassle in Oct 2011 Mr Sharma paid the amount. In Jan 2012 Form 26AS got updated with TDS from the bank account(Mr Sharma went multiple times to bank to get it done). Now Mr Sharma doesn’t know whether to ask for refund extra tax paid or not!

Premature Closure or Withdrawal: Investment such as fixed deposit can be closed before the original term of the FD. As discussed in Overview of Fixed Deposits

In the event of the Fixed Deposit being closed before completing the original term of the deposit, interest will be paid at the rate applicable on the date of deposit, for the period for which the deposit has remained with the Bank. In case of premature withdrawal the deposit may be subject to penal rate of interest as prescribed by the Bank on the date of deposit. RBI has left it to banks to decide whether they want to impose any penalty on premature closure of fixed deposits.  

So in such case actual tax would be different from accrued tax.

Summary or Bottom Line

Even if system of accounting is ignored and also TDS provisions are set aside, it is always prudent to present interest income on annual accrual. This also will not burden you with extra tax in the year of its maturity. Please ensure that TDS matches with the Form 26AS.

Reference: Livemint:The correct method of accounting(Jul 2010), Taxmann: Accrual of Income

Related articles:

Which method of accounting- Cash or Mercantile do you use? Why did you choose that method? Which method do you think makes sense to use? Any case related to method of accounting that you can share?

Share
Email
Posted in Basics, Investing, Tax , , , , | 4 Comments »

Avoid TDS : Form 15G or Form 15H

Written By: admin - May• 08•12

When you open a fixed deposit with bank then you are lending money to the bank and it pays you interest. Applicable interest rates will be given as on the date of receipt of the funds by the bank and is fixed for the specified duration. Interest that is earned on fixed deposits is taxable in the hands of the depositor.  Tax or TDS is deducted by the bank, if the aggregate interest income from fixed deposits that you are likely to earn for all your deposits held in a branch is greater than Rs 10,000 in a financial year. In our article Fixed Deposits and Tax we looked at Taxation aspect of Fixed Deposits. We saw that we can avoid getting TDS cut(not avoid paying tax though Cry ) by Distributing FD investment, Timing the FD,By Submitting Form 15G/15H. 

The conditions under which Form 15G and 15H may be filed are similar yet with a significant difference.  Each taxpayer needs to fully understand the specified conditions and ascertain whether he or she is eligible for filing the relevant form. Filing the form without being eligible to do so is illegal and will invite payment of interest on the tax payable and also a penalty. This article is about explaining the difference.

Income Tax Act

If you believe that your total interest income for the year will not fall within overall taxable limits, you should inform the Bank not to deduct TDS on deposits. You can do this by submitting a form as per the provisions of the Section 197A of Income Tax Act. Quoting fromSection 197A

The Finance Act, 1982 has inserted a new section 197A with effect from June 1, 1982. The section enables an individual who is resident in India and whose estimated total income of the previous year is less than the minimum liable to income-tax to receive interest on securities, dividends and other interest without deduction of tax at source under sections 193, 194 and 194A of the Act on furnishing a declaration, in duplicate, in the prescribed form and verified in the prescribed manner. Rule 29C and Form Nos. 15F, 15G and 15H have been inserted in the Income-tax Rules, 1962 by the Income-tax (Fifth Amendment) Rules, 1982 prescribing the forms for the purposes of section 197A and laying down the procedure for furnishing the declaration form.

The forms required for different categories have been listed below:

 Category of Tax Payer Income Tax Section  Form
Individual:Senior Citizen Sub-section (1C) of section 197A  15H (pdf)
Individual:Non senior Citizen Sub-sections (1) and (1A) of section 197A  15G(pdf)
Trusts/SocietiesAvailable from Assessing Officer  15AASample form(pdf)

Rule 29C of Income Tax Rules offers individual taxpayers the facility of furnishing Form 15G or 15H, as the case may be, requesting the payer of income not to deduct any tax. These forms have to be filed in duplicate and once the bank or the post office takes them on record, the entire interest is paid to the investor without any tax deduction. Important points that one needs to remember is

  • Fresh forms are required to be filed each year. As incomes of investors may differ from year to year, the eligibility for furnishing the forms has to be ascertained every year.
  • Secondly, for optimum benefit, these forms need to be furnished at the beginning of the fiscal such that the entire amount of interest escapes TDS. If the form is filed during the year, the tax already deducted cannot be adjusted against future tax deductions.
  • This form should be submitted to all the deductors to whom you advanced a loan. For example you have deposit in three SBI bank branches with interest of or more Rs.10,000 each. You must submit the forms to each branch.
  • You need to submit forms if interest on loan ,advance, debentures , bonds or say Interest income other then interest on bank exceeds Rs 5000.

Difference between forms 15G and 15H

Form 15H: Declaration under sub-section (1C) of section 197A of the Income-tax Act, 1961, to be made by an individual :

  • Who is of the age of sixty-five years or more (60 years from 1st July, 2012) claiming certain receipts without deduction of tax.
  • Estimated tax for the previous assessment year should be nil. That means he did not pay any tax for the previous year because his income is not coming under the taxable limit.

Form 15G: Declaration under sub-sections (1) and (1A) of section 197A of the Income-tax Act, 1961, to be made by an individual or a person (not being a company or a firm) claiming certain receipts without deduction of tax of tax.

  • Form 15G can be submitted by Individual below the age of 65 years (Age limit reduced to 60 Years from from 1st July, 2012)).
  • The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil.
  • The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab which for financial year 2011-12 or Assessment Year 2012-13 is Rs1,80,000 for men, Rs1,90,000 for women, Rs 2,50,000 for Senior citizens,(60-80 years), Rs 5,00,000 for citizens above 80 years. Please note that these exemption limits keep on changing. For financial year 2012-13 or Assessment Year 2013-14 exemption is Rs 2,00,ooo for men and women and  Rs 2,50,000 for Senior citizens,(60-80 years), Rs 5,00,000 for citizens above 80 years.Income Tax rates Since AY 1992-1993 has all the income slabs and exemptions since Assessment Year 1992-193.

Quoting from Tax expert Sandeep Shanbhag in  DNA:Who is eligible for filing forms 15G, 15H and how to save TDS(Sep 2011) To further understand these provisions, let’s take the example of Mr Shah, who is 55 years old. Shah’s total income is Rs 2,90,000, of which Rs1,90,000 is earned by way of interest from bank deposits. Shah also invests 1,00,000 under Section 80C and pays a medical insurance premium of Rs15,000. Is Shah eligible to furnish Form 15G?This can be ascertained by finding out if he satisfies both the above conditions.

  • The first condition is that Shah’s final tax liability should be nil. Though Shah’s gross income is Rs2,80,000 lakh, on account of his Section 80C and Section 80D deductions of Rs1,00,000 and Rs15,000 respectively, the net income falls to Rs1,75,000 lakh and consequently he is not liable to pay any tax. Therefore, Shah satisfies the first condition. 
  • However, we find that since his interest income of Rs1,90,000 is more than the basic exemption limit of Rs1,80,000. Shah doesn’t satisfy the second condition and hence he is not eligible to furnish Form 15G to the interest paying organisation.

On the other hand Form 15H imposes just the first condition, in that, the final tax on the investor’s estimated total income computed as per the provisions of the Income Tax Act should be nil. The second condition imposed by Form 15G is not applicable in the case of Form 15H.

For example, say Mr. Mehta, 68 years old, has a total income of Rs 3,00,000, out of which Rs45,000 is earned from the senior citizens saving scheme and the rest from bank deposits. He invests Rs 50,000 in PPF. Now, is he eligible to furnish Form 15H?

As pointed out earlier, all Mehta has to do is to ascertain his final tax liability. It doesn’t matter what amount he receives from which source; this information is irrelevant for Form 15H. We find that Mehta’s net income works out to Rs2,50,000 (Rs3,00,000 – Rs50,000). As the basic exemption limit for Mehta is also Rs2,50,000 (on account of him being a senior citizen), his net tax liability is nil and hence he is indeed eligible to submit Form 15H.

So difference between Forms 15G and 15H is that

  • Form 15G is meant for non-senior citizens whereas Form 15H is meant for senior citizens only.
  • The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab for Form 15G while no such condition exists for Form 15H.

These differences are highlighted in the images from the forms below. 15H is a simple 2 page form while 15G is 3 page form with various schedules for declaring income from different sources.

Part of Form 15H

Part of Form 15H

Part of Form 15G

Part of Form 15G

Schedules in Form 15G

Schedules in Form 15G

Penalty in filling wrong form

Penalty

Penalty

References:  TaxGuru:Download, know, FAQ on Form 15G & 15H (Apr 2012), DNA:Who is eligible for filing forms 15G, 15H and how to save TDS(Sep 2011), YahooFinance:Minimising TDS on your fixed deposit  (Apr 2012), JagoInvestor:What is Form 15G and Form 15H,(Jun 2011)

Related articles:

The conditions under which Form 15G and 15H may be filed are similar yet with a significant difference. Hope we have been able to clarify the difference.

Share
Email
Posted in Bank, Basics, Investing, Tax , , , , | 2 Comments »

Fixed Deposits and Tax

Written By: admin - May• 04•12

Fixed Deposit(FD) is an investment product which allows you to invest a lump of money for a fixed time period and at a fixed rate of interest. It is quite popular form of investing in India. Overview of Fixed Deposits as the name suggests give an overview of Fixed Deposits, while Fixed Deposit and Interest Rates discussed the interest rates in FDs. When you open a fixed deposit with bank then you are lending money to the bank and it pays you interest. Applicable interest rates will be given as on the date of receipt of the funds by the bank and is fixed for the specified duration. And interest that is earned on fixed deposits is taxable in the hands of the depositor.  Tax or TDS is deducted by the bank, after a threshold. This article throws light on Taxation aspect of Fixed Deposits.

Tax Deducted At Source or TDS

If the aggregate interest income from fixed deposits that you are likely to earn for all your deposits held in a branch is greater than Rs 10,000 in a financial year, you become liable for TDS. TDS is deducted every time the Bank pays interest during the financial year and the interest earned for the year is more than Rs 10,000 in a single branch. In addition, TDS is also deducted on interest accrued (but not yet paid) at the end of the financial year.For example, if an investor has earned Rs 20000 as an interest in one year, then the bank would deduct Rs 2000 and pay only Rs 18000 as the amount exceeds the limitation of Rs 10000.

A consolidated TDS Certificate in Form 16A, for TDS deducted during a financial year will be issued in the month of April of the following financial year. TDS Certificate shall specify valid Permanent Account Number (PAN) of the deductee, valid Tax Deduction Number (TAN) of the branch, Challan identification Number and receipt No of the quarterly statement. Challan identification Number means BSR code of the branch where tax has been deposited, date on which deposited and challan serial number given by the bank.

Some points to note for Fixed Deposits:

  • Tax liability for TDS is determined at branch level. One of easiest way adopted by many depositors is to spread their investments across various branches so that the interest earned in a particular branch is below Rs10,000 in a financial year.
  • Tax liability is calculated on the first applicant’s name. Deposits held by minors are also subject to TDS. In this case the interest income will be clubbed under the income of the person in whose hands the minor’s income is included.
  • Investors often book fixed deposits in the name of non-earning family members such as spouse. The rule is that if the money is gifted to a non-earning member and the deposit is booked in his or her name, then the person has to submit a declaration saying his or her income is not taxable. However, when income tax is calculated, it will have to paid by the donor or earning member

TDS on fixed deposits is deducted at the following rates for the following category of account holders:

Type of Account Holders  TDS (%)
Resident Individuals, Sole Proprietorship, Trusts, Association of Persons,HUF  10.2%
Domestic Companies  20.4%
NRO Deposits  30.6%

Avoiding TDS

  • Distributing FD investment:Split the FD to separate banks or branches of banks in such a way that interest earned from any of the FD does not exceed the Rs 10000 limits.
  • Timing the FD: The TDS can also be saved by timing the FD in such a way that interest for any of the financial years does not exceed Rs 10000. For example, a 12-month FD of Rs 1 Lac @ 10.5% could be started in September as the financial year closes on 31st March so the interest would split in two financial years, and hence TDS could be avoided.
  • By Submitting Form 15G/15H

By Submitting Form 15G/15H

If you believe that your total interest income for the year will not fall within overall taxable limits, you should inform the Bank not to deduct TDS on deposits. You can do this by submitting a form as per the provisions of the Section 197A of Income Tax Act. Quoting from Section 197A

The Finance Act, 1982 has inserted a new section 197A with effect from June 1, 1982. The section enables an individual who is resident in India and whose estimated total income of the previous year is less than the minimum liable to income-tax to receive interest on securities, dividends and other interest without deduction of tax at source under sections 193, 194 and 194A of the Act on furnishing a declaration, in duplicate, in the prescribed form and verified in the prescribed manner. Rule 29C and Form Nos. 15F, 15G and 15H have been inserted in the Income-tax Rules, 1962 by the Income-tax (Fifth Amendment) Rules, 1982 prescribing the forms for the purposes of section 197A and laying down the procedure for furnishing the declaration form.

The forms required for different categories have been listed below:

 Category of Tax Payer Income Tax Section
Individual:Senior Citizen Sub-section (1C) of section 197A  15H (pdf)
Individual:Non senior Citizen Sub-sections (1) and (1A) of section 197A  15G(pdf)
Trusts/SocietiesAvailable from Assessing Officer  15AASample form(pdf)

Rule 29C of Income Tax Rules offers individual taxpayers the facility of furnishing Form 15G or 15H, as the case may be, requesting the payer of income not to deduct any tax. These forms have to be filed in duplicate and once the bank or the post office takes them on record, the entire interest is paid to the investor without any tax deduction. Important points that one needs to remember is

  • Fresh forms are required to be filed each year. As incomes of investors may differ from year to year, the eligibility for furnishing the forms has to be ascertained every year.
  • Secondly, for optimum benefit, these forms need to be furnished at the beginning of the fiscal such that the entire amount of interest escapes TDS. If the form is filed during the year, the tax already deducted cannot be adjusted against future tax deductions.

The main difference between Forms 15G and 15H is that Form 15G is meant for non-senior citizens whereas Form 15H is meant for senior citizens only.In order to be eligible to furnish Form 15G, the non-senior citizen investor needs to fulfill the following two conditions:

  1. The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil and
  2. The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab i.e maximum amount not chargeable to tax, which is Rs1,80,000 for men and Rs1,90,000 for women for.

If both these conditions are satisfied, Form 15G may be furnished to the bank or the post office and the entire interest income can be received without tax deduction.

Form 15H imposes just the first condition, in that, the final tax on the investor’s estimated total income computed as per the provisions of the Income Tax Act should be nil. The second condition imposed by Form 15G is not applicable in the case of Form 15H.

TDS and PAN Number

As per section 206AA introduced by Finance (No. 2) Act, 2009 wef 01.04.2010, every person who receives income on which TDS is deductible shall furnish his PAN, failing which TDS shall be deducted at the rate of 20%(as against 10% which is existing TDS rate) in case of Domestic deposits and 30.90% in case of NRO deposits

Please further Note that in the absence of PAN, as per CBDT circular no:03/11, TDS certificate will not be issued, form 15G/H and other exemption certificates will be invalid even if submitted and penal TDS will be applicable.

Ref:DNA:Start tax planning in the new financial year: Five things to do(Apr 2010), BCAJournal(Jun2010), Rediff

Interest and Income Tax

Interest earned on Fixed Deposits needs to be accounted for while filing your income tax returns for the year. Tax on interest of FD is as per the depositor’s income slab If TDS is deducted, it is at only at 10.2% for individuals for remaining part tax needs to be calculated. Interest income is under the head “Income from Other Sources” in the income tax return. TDS (if deducted) on the said interest income can be claimed by the individual in the income tax return.

Under the Act, an individual has an option to either offer income on cash (receipt) or mercantile (accrual) basis according to the method he regularly follows.

  • Where you follow accrual basis for disclosing your income you could claim credit of TDS in the same FY since both in case of interest on fixed deposit with Bank  tax would be deducted in the same year i.e. on accrual basis.
  • Where the interest income is offered to tax on receipt basis i.e. at the time of maturity, you should be eligible to claim credit of TDS only in the FY in which such interest income is offered to tax. However, in such a case you must ensure that correct disclosure is made in all the forms (Form 26A, Form 16A) and returns (personal income tax, e-TDS) with respect to the year in which tax was deposited and the credit of the same is claimed.

How to get TDS refund. If your tax liability is nil, but the bank has levied TDS on the interest earned on your fixed deposit then you can claim refund by filing your income tax return. Customers can take their TDS certificates (Form 16A) from banks and also check the amount deposited to the Income Tax Depart-ment based on their PAN number on the Income Tax website under Form 26AS. Based on the same, customers can apply to get the refund from the IT department.

Tax Saving Fixed Deposit

There is difference between Fixed Deposit and Tax Saving Fixed Deposit. In 2006 Indian government announced bank fixed deposits booked by an individual/HUF for 5 years and up to Rs. One Lac or Rs. 100,00/- will be eligible for exemption. This exemption would be under section 80C of the income tax act 1961. The interest rates on tax saving fixed deposits are generally calculated on a quarterly basis and the interest is reinvested into the fixed deposit. Ref:rupeetimes:Tax saver fixed deposits in India earn you more

Hope the post helped in understanding the taxation of Fixed Deposits.

 

Share
Email
Posted in Bank, Basics, Investing , , , | 12 Comments »
12345>>