Taxation
Shubham Agarwal: I am a salaried person aged 26 and earning `6 lakh a year. How can I reduce my income tax liability and plan for my retirement?
Ashish Shanker, Head, Investment Advisory, Motilal Oswal Private Wealth Management, replies:
ELSS funds are a good option for income tax purposes as they offer tax savings, capital growth and relatively lower lock-in periods. You can invest in ICICI Prudential Long Term Equity Fund (Tax Saving)-Growth or Reliance Tax Saver-Growth fund. Also, contribute to the National Pension System (it offers an equity-debt mix but has higher lock-in period), buy term insurance and/or medical insurance to protect self and family or get a home loan where you can claim a tax deduction on the principal portion of the loan. All these will significantly reduce your tax burden.
Planning for your retirement is another good move. Ideally, you should invest in equity and balanced mutual funds via SIP. In the equity space, we recommend Kotak Select Focus Fund-Growth, Aditya Birla Sun Life Top 100 Fund-Growth, Motilal Oswal MOSt Focused 35 Fund and HDFC Balanced Fund. As for debt funds, try Aditya Birla Sun Life Short Term Fund or Franklin India Short Term Income Plan. Set aside a substantial amount every month after paying your bills. It will help you achieve all long-term goals. Start out with a higher equity allocation (70-75 per cent) and increase the debt component year on year to ensure a balanced portfolio that will reach its full potential by the time you retire.
As retirement is still a long way off, you can consider buying a house as your immediate goal. Owning an appreciating asset like a house has its benefits and saves expenses such as house rent.
Subhash Nagpal: I invested in bitcoin last year and had a profit of `1,75,000. As bitcoins are not recognised by the Reserve Bank of India or the Indian government, do I have to pay tax on my gains? If yes, how should I show this income?
Chetan Chandak, Head of Tax Research, H&R Block India, replies:
Existing laws in India do not have any specific provision for taxing income from bitcoin, but it is certainly not tax exempt. Moreover, the Income Tax Act is not concerned with the legality of a transaction. Any income, if not exempt, can be brought into the tax net. So, the question is: Under which income category will it be taxable and at what rate? There are three possibilities.
If you are regularly trading in bitcoins, it can be classified as a business activity. But the entire thing is virtual, and taxmen may try to treat it as speculative business income. If you incur a loss here but have other business incomes, you will not be able to adjust the loss against those.
A more tax-efficient move is to put bitcoin profits under capital gains. If bitcoins are held for more than 36 months, the long-term capital gains (LTCG) tax will be imposed, and such gains will be taxed at 20 per cent post-indexation. If the holding period is less than 36 months, it will fall under short-term capital gains, or STCG, and will be taxed as per the slab rate applicable to you. But in the absence of any guideline by the Central Board of Direct Taxes on the taxability of bitcoin, income tax officers may disregard your profit as capital gains.
Mutual Fund
Shailendra Virmani: I have been advised to park my emergency fund in a liquid fund. How should I choose one as the returns vary from fund to fund?
Vidya Bala, Head of Mutual Fund Research, FundsIndia, replies:
Liquid funds are not too different in their returns as they have pretty much the same universe of treasury instruments for investment. However, you can look at a few metrics to gauge the performance and the risk. Look for a fund with a higher yield to maturity. Make sure that the fund's exposure is predominantly in treasury bills and A1+ papers. Also, see if the fund has a higher AUM and a lower expense ratio compared to its peers.
Home Insurance
P. Rajkumar: I recently purchased a house in Faridabad that cost me `40 lakh. I have taken a home loan to buy the house. Now I want to buy home insurance to safeguard the property. Please tell me how to choose a good policy and what is the likely premium?
Yashish Dahiya, Co-founder and CEO, Policybazaar.com, replies:
Home insurance can be split into two parts - structure insurance and content insurance. These can be bought separately or as a clubbed policy. The clubbed policies are often known as comprehensive home insurance policies.
Before buying a policy, read all aspects of the insurance cover and make sure that the sum offered by the insurer is adequate to rebuild your house if it is damaged or demolished. Your policy should not have voluntary deductibles, and when buying it, you must submit a complete list of contents lying in your house, including paintings, white goods, electronics and the likes. Find out if gold and jewellery will be covered or not. Some insurers cover gold and jewellery by default while others offer it as an add-on and charge an additional premium. For `50 lakh sum insured (`40 lakh for structure and `10 lakh for contents), the premium will be around `7,000-10,000, including add-on cover for gold and jewellery.