Month: January 2020

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Claiming the correct tax benefit under NPS

The National Pension Scheme (NPS) has tax benefits in the form of a deduction when an amount is invested into it. There are two parts to the whole deduction and those who are making use of the benefits can ensure that they are making the most of their investments.

Initial amount

There is a deduction of Rs 1.5 lakh available to an individual who puts money into the NPS under Section 80CCD. This is the base deduction as this is part of the Rs 1.5 lakh overall limit that the individual has available under Section 80C plus this and an additional Section 80CCC which covers premium for pension plans.The Income tax act says that the overall tax benefit for Section 80C investments plus NPS plus premium for pension products from insurance companies should not exceed Rs 1.5 lakh. Thus if there is a shortfall under Section 80C then the individual can use their investments under the NPS to cover up the shortfall and reach the Rs 1.5 lakh limit.

Additional amount
If you are not using the NPS then the investment deduction ends at Rs 1.5 lakh because that is the overall limit available for other instruments under Section 80C. However if you are using the NPS then there is an extra Rs 50,000 deduction available under Section 80CCD(1B). This is a benefit that is over and above the Rs 1.5 lakh limit. The individual can use this only for the NPS.

The good part of this deduction is that the individual need not invest Rs 2 lakh to claim the extra benefit under the NPS. For example if they invest just Rs 50,000 and the existing investments cover the Rs 1.5 lakh limit under Section 80C then they can shift this extra Rs 50,000 to the additional benefit. In this case they would thus be able to take a total deduction of Rs 2 lakh which will help to reduce the tax effectively.

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Do all institutions automatically renew fixed deposits made with them?

A bank acts according to the rules that are in force for the fixed deposits made with it.

Other financial institutions follow their own rules and they are not similar to that of the bank.

In case of a matured fixed deposit not claimed by an individual the institution would send the money back to the investor.

There might be cases where maturity instructions are taken from the investor at the time of making the deposit.

The company or institution might also hold the money while the investor makes the claim to the matured fixed deposit.

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What happens in case no instructions at the time of maturity of a fixed deposit?

The fixed deposit comes to an end at the completion of its specified time period.

If the fixed deposit is with a bank then the individual would need to give instructions whether this needs to be continued.

Sometimes there are no instructions that are given and no action is taken at the time of maturity of the deposit.

In such a situation the bank will renew the fixed deposit for a similar time period as the initial deposit.

The investor would need to go later and get the updated deposit details from the bank.

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Is the amount of the rolled over deposit the same as the initial investment?

The investor has a choice when it comes to the amount of the roll over of the deposit.

They can choose to take out the interest earned on the existing deposits and just continue with the initial deposit amount.

This is more likely when the interest is being paid out.

In case of a cumulative deposit the investor can reinvest the whole amount with the interest accumulated or they can take out the interest and reinvest just the initial amount.

Giving the right instructions to the bank is essential in making the choice for the investor,

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What is meant by rollover of a fixed deposit?

A fixed deposit will mature at the end of the specified period chosen by the investor.

The investor can take the initial amount invested at this point of time and use the funds for some other purpose.

The other option available for the investor is to continue with the fixed deposit for some more time period.

This continuation of the fixed deposit is known as a rollover as the deposit continues.

The rollover can be for same period as the initial fixed deposit or the investor can also change it to some other period.

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Tax benefit at the time of investing in NPS explained

The National Pension Scheme (NPS) has tax benefits in the form of a deduction when an amount is invested into it. There are two parts to the whole deduction and those who are making use of the benefits can ensure that they are making the most of their investments.

Initial amount

There is a deduction of Rs 1.5 lakh available to an individual who puts money into the NPS under Section 80CCD. This is the base deduction as this is part of the Rs 1.5 lakh overall limit that the individual has available under Section 80C plus this and an additional Section 80CCC which covers premium for pension plans. Thus if there is a shortfall under Section 80C then the individual can use their investments under the NPS to cover up the shortfall and reach the Rs 1.5 lakh limit.

Additional amount
If you are not using the NPS then the investment deduction ends at Rs 1.5 lakh because that is the overall limit available for other instruments under Section 80C. However if you are using the NPS then there is an extra Rs 50,000 deduction available under Section 80CCD(1B). This is a benefit that is over and above the Rs 1.5 lakh limit. The individual can use this only for the NPS.

The good part of this deduction is that the individual need not invest Rs 2 lakh to claim the extra benefit under the NPS. For example if they invest just Rs 50,000 and the existing investments cover the Rs 1.5 lakh limit under Section 80C then they can shift this extra Rs 50,000 to the additional benefit. In this case they would thus be able to take a total deduction of Rs 2 lakh which will help to reduce the tax effectively.

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What is the most important part of a compound interest calculation?

The most important part of a compound interest calculation is the time period when the money compounds.

This is the time at which the interest is calculated and then added to the base to make it bigger.

The larger the number of times the money compounds the better it is for the investor.

This gives the investor higher earnings in the form of interest as the base gets bigger frequently.

A deposit can compound quarterly, half yearly or even annually.

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What is compound interest?

Compound interest is a method of calculation of interest where the base of interest calculation increases every year.

In this method the interest earned in the prior period is added to the base for the next calculation

For example a deposit of Rs 10,000 with a 10 per cent rate will earn Rs 1,000 in the first year.

In the second year the base becomes Rs 11,000 (10,000 + 1000 interest earned) and the earnings will be Rs 1,100.

This continues with the end result that the interest earned increases with each passing year.

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What is simple interest?

Simple interest is a way of calculating the interest on your investments like a fixed deposit.

This is an easy way to calculate the interest on a fixed base..

The base amount remains the same in this calculation of interest.

For example an amount of Rs 5,000 earning 10 per cent interest will generate Rs 500 in simple interest every year.

This figure will remain the same year after year till the end of the calculation period.

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What are some common examples of controlling discretionary expense?

Those looking to cut discretionary expenses can look at many different areas to reduce it.

Different brands charge different prices so shifting from one brand to another is a way to cut costs.

A reduction in the number of time one spends is also a way to reduce this like eating out less or buying less clothes.

Comparing different places and then buying it from a cheaper place is another way to use the same thing but reduce costs.

Use of discounts and sales is another way to reduce these expenses