Author: Naveen Kukreja

Investing in equity mutual funds? Here are six mistakes to be avoided at all costs

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Equity as an asset class has consistently outperformed fixed investment and other asset classes over the long term by a wide margin. This has attracted an increasing number of fresh retail investors into equity markets through equity mutual funds. While increased retail participation augers well for the financial inclusion and overall growth of the economy, fresh investors are typically prone to certain myths and investment mistakes.

Here is a list of six common investing mistakes that fresh mutual fund investors usually make:

Comparing NAVs to select mutual funds

Many investors suffer from a popular misconception that mutual funds with lower NAV are cheaper. Some distributors promote New Fund Offers as their units are issued at a face value of Rs 10. The NAV of a fund can be low or high due to various reasons. As the funds’ NAV is based on the underlying asset’s market price, the NAV of a well-managed fund can grow better than other funds. Likewise, a relatively newer fund can have lower NAV in comparison to older funds as it had shorter time to grow. Therefore, avoid using NAVs for fund comparison and use a funds’ past performance and its future prospects of outperforming their benchmark indices and peer funds as a selection parameter.

Investing for dividend

Many mutual fund investors consider mutual dividends as some form of a windfall income. Some distributors also try to take advantage of this by pushing mutual fund schemes that have just declared dividend. However, what those investors fail to understand is that the dividend declared is paid out of fund’s own AUM, which means the investors’ own money. This is why the NAV of a fund gets reduced by the dividend amount. Moreover, the dividend is calculated on the basis of the face value of the fund, not on its NAV. For instance, if a fund with NAV of Rs50 declares 50 percent dividend, the dividend amount will be Rs5 (50 percent of Rs10, its face value), and the NAV will go down to Rs45 after the dividend record date.

Opting for dividend option also lacks in tax efficiency. When mutual fund pays dividend, the investors receive tax free dividend in hand. However, the fund has to pay 10 percent dividend distribution tax (DDT) on the dividends disseminated. This is realised from the fund’s AUM, thereby impacting investor’s returns. Hence, investors should rather opt for growth options and benefit from the power of compounding.

Stopping SIPs during falling market

Volatility is an inherent characteristic of equity markets. However, retail investors witnessing this situation for the first time often tend to discontinue with their SIP investments. However, investors should continue with their SIPs during bearish market conditions as that will buy them more units at lower cost owing to lower valuations. This will reduce the average investment cost, thereby generating higher returns over the long term.

Ignoring investment objectives during fund selection

Mutual funds state their investment objectives, investment mandate and asset allocation strategy in their various investor communication materials, such as product leaflets, e-mailers, fact sheet, scheme information document (SID), etc. With their help, investors can figure out whether a certain fund is compatible with their risk appetite, financial goals and time horizon. Ignoring these information will leave them with a wrong fund for their risk appetite and financial goals.

Expecting unrealistic returns

Bull market conditions attract most of the fresh investors in equity funds. Exceptionally high returns during bull markets lead many to invest their investible surplus, even those meant for short term goals, into equities. As a result, as and when markets correct, they either liquidate their investments in panic or to meet their short-term requirements. Hence, choose your equity mutual funds based on your risk appetite and time horizon of your financial goals and not based on their recent past performance.

 Not diversifying enough

Many fresh investors invest their entire investible surplus in just one scheme, sector or theme that delivered excellent returns in the near past. However, doing so concentrates the market risk to just one sector/theme or fund management team. If your selected sector/theme goes through an adverse market condition or the fund management of your scheme takes wrong investment calls, your investments might underperform the broader market for a long period of time. Thus, instead of putting all the eggs in one basket, diversify your investments across multiple diversified equity funds to reduce your fund management and concentration risk. If any particular fund underperforms, the other funds in your portfolio will compensate for its underperformance. Opt for a sectoral or thematic fund only if you have a good understanding of the underlying theme/sector, both in terms of future potential as well as the risks associated with it.

Naveen Kukreja  is CEO and Co-founder of Paisabazaar.com.

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Decoding Budget 2019: Hits and misses for the middle class

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Budget 2019 was widely expected to announce major tax-reliefs for the middle class. As it happened, budget proposals like increased tax rebates, notional rent exemption for second home, increase in standard deduction, etc succeeded in cheering up the middle class. On the other hand, Budget fell short on removing LTCG exemption on equities and equity mutual funds and providing tax reliefs to the first-time buyers of affordable housing.

Here are the major hits and misses of this year’s Budget for the middle class:

Hits:

Increased tax rebate and standard deduction will boost consumption and investments:

India has registered a steady increase in income tax collections and widening of the tax base over the last few years, taking it towards a high compliance, moderate tax regime. Budget 2019 proposed to pass on some of the benefits of higher tax compliance to middle class taxpayers in the form of increased tax rebate and standard deduction. Taxpayers with taxable income of up to Rs 5 lakh will get 100 percent tax rebate on their tax liability whereas standard deduction has been increased from Rs 40,000 to Rs 50,000. These tax reliefs will result in higher disposable income for the middle class, which can be expected to boost their consumption and investments.

Increases in notional rent exemption and capital gains roll will benefit homeowners:

Homeowners with two or more residential properties have to declare a notional rent from their second home onwards even if those properties are occupied by family members or remain vacant. This increased their taxable income even when the notional income was not earned. Budget 2019 proposed to exempt the notional rent from the second self-occupied house even when taxation of notional rent will continue to apply from third home properties onwards. This proposal will benefit those owning two residential properties due to professional or family reasons.

Budget 2019 has also proposed to allow taxpayers to buy or construct two residential properties to save long-term capital gains derived from selling an existing residential property. Currently, this exemption under Section 54 is only available on buying or constructing one residential property. The increased exemption will incentivise existing homeowners to buy new properties and improve demand in the housing industry.

Extension of Section 80IBA will increase supply in the affordable housing segment:

Continuing with the focus on affordable housing segment over the last few years, Budget 2019 has extended the Section 80IBA deduction to March 31, 2020. Under Section 80IBA, developers can claim 100 percent tax deduction on profits made from building projects under the affordable segment category. This will incentivise builders to build more housing projects under the affordable housing category and speed up the process of achieving “Housing for All by 2022”.

Misses

Not removing LTCG tax exemption on equities and equity mutual funds:

The financial services industry had high hopes of Budget 2019 removing 10 percent LTCG tax on equities and equity mutual funds. The LTCG tax exemption had played a key role in increasing the participation of retail investor segment in the equity markets, especially through mutual funds. Renewing this exemption would have further improved the equity penetration among retail investors. This would have also restored tax parity of equity mutual funds with other equity-oriented schemes like ULIPs and NPS, which still remain LTCG tax-exempt.

Not reintroducing the Section 80EE deductions: 

While extending Section 80IBA to March 2020 is aimed at improving the supply in the affordable housing segment, Budget 2019 did not propose any direct intervention in the demand side of the segment. The best way to do that was to reintroduce the Section 80EE deduction of Rs 50,000 on interest payment to fresh home buyers. The deduction was available on home loans of up to Rs 35 lakh for house properties valued up to Rs 50 lakh. This deduction was over and above the Rs 2 lakh deduction on interest payment available under Section 24b. Re-introducing Section 80EE deduction would have incentivised first-time home buyers and boosted the demand in the affordable housing segment.

Naveen Kukreja  is CEO and Co-founder of Paisabazaar.com

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Budget 2019 Wishlist: Tax-incentives for increasing household savings and supporting housing, MSME and digital transactions

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Despite being an interim budget, I expect Budget 2019 to make major announcements for providing tax reliefs to middle class taxpayers, easing credit supply to housing and MSME segments and incentivising digital transactions. Here are my Budget 2019 expectations.

Increase Section 80C deductions to boost long-term savings: Currently, Section 80C is crowded out by a wide range of qualifying expenses, such as home loan principal repayment, children’s education or tuition fee, life insurance premiums, employer’s contribution to EPF and payment of registration fee and stamp duty incurred on the construction or purchase of home property. Such a wide range of compulsory payments leave no incentive for the middle tax taxpayers to invest in tax saving fixed deposits, PPF, ELSS, NPS, etc for saving tax. With India’s household savings rate steadily declining over the last five years from over 23.6% in FY 2012 to about 16.3% as on March 2017, increasing the Section 80C deduction limit to Rs 3 lakh in Budget 2019 would encourage middle class households to increase their exposure in long term investment instruments.

Restore LTCG tax exemption on equities and equity mutual funds: The tax exemption on LTCG in equities played a major role in increasing retail investor participation in the equity markets. Hence, reintroducing LTCG tax exemption on equities and equity mutual funds will go a long way in increasing the equity penetration and improving the overall investor sentiment. Moreover, doing this will also bring tax parity with other equity-oriented schemes like NPS and ULIPs, which still remain exempt from LTCG tax.

Reintroduce Section 80EE deductions to encourage affordable housing: Section 80EE allows a deduction of Rs 50,000 on home loan interest payment. However, this deduction is only available to fresh home loan buyers who availed home loans of up to Rs 35 lakh for property valued up to Rs 50 lakh during the Financial Year 2016-17.  The deduction available is over and above the home loan interest deduction available under Section 24b. Thus, re-introducing Section 80EE for fresh buyers of affordable homes will boost the housing demand and help achieve the policy objective of “Housing for All by 2022”.

Create a separate deduction for term insurance: The main objective of buying a life insurance policy is to provide a replacement income to the dependents through a life cover in case of untimely demise. Ideally, this cover should be equal to at least 10-15 times of the annual income. Among all life insurance product categories, term insurance plans are the most cost effective ones to buy such large life covers. However, most confuse insurance as an investment vehicle and end up buying life policies that provide very little life cover. Introducing a separate section for term insurance within or beyond the Section 80C limit would act as tax incentive for buying term insurance policies and get adequately covered in the process.

Incentivise digital transaction through lower GST rates: Currently, merchant discount rate (MDR) charges on debit cards and UPI transactions of up to Rs 2,000 are waived off to promote digital transactions. This waiver should also be extended to credit cards and other digital payment options to create a level playing field. Similarly, the proposed 20% cashback of up to Rs 100 on GST on making payments made through Rupay and BHIM app should be extended to the rest of the debit and credit cards and all forms of digital transactions.

Additionally, government can also consider a 2% concession in GST rates to merchants accepting digital payments. With a large section of smaller merchants and the informal sector still resisting digital payments modes due to their higher transaction cost, the concession will act as fiscal incentive for moving towards digital payment modes.

Priority sector tag for bank on-lending to housing and MSME sectors: Currently, bank loans to HFCs for the purpose of on-lending home loans of up to Rs 10 lakh per borrower get treated as priority sector loans. This upper limit should be increased to at least Rs 35 lakh per borrower to boost credit flow to the affordable housing segment and reduce the liquidity pressures faced by the HFCs. Similar provisions  should also be made for on-lending to NBFCs lending to the MSME segment as a sizeable chunk of it is serviced by the NBFCs.

Naveen Kukreja is CEO and co-founder, Paisabazaar.com

This article was first published in Paisabazaar.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

You made an investment blunder. Here’s how you can learn from it

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Investors often believe that they are far better at investing than they actually are. Without having a second thought, they keep taking decisions solely on the presumption that their decisions would eventually turn out to be right.

What we do not realise is that this behaviour may lead to some common yet destructive financial mistakes. Let me explain some of these investment mistakes and how you can learn from them:

Not Tying Your Investments To Financial Goals

The first mistake that many investors commit is of believing that their job ends after merely investing their savings in some popular investment instrument. They often do not tie their investments to specific financial goals. This can leave your investment in jeopardy.

Before linking your investments with financial goals, make sure you have identified your financial goals, which may include the purchase of a vehicle, building corpus for retirement and child’s higher education, or a family vacation abroad.

Each life goal, whether it’s short term or long, would require a separate investment. When your goals are precise, your decision to invest separately for each goal would be driven by the returns expected, investment horizon and your risk appetite.

Being Impatient With Your Investments

Erratic decision making based upon hearsay or temporary market fluctuations is a sign of impatience.  When you invest for specific financial goals, especially the long-term ones, you need to be patient with your investments. However, that does not mean you turn a blind eye towards them. Remember to periodically review your investment basket, primarily for two reasons.

One, in case your financial goals undergo any change, the investments tied to them would also require rectification, if necessary. Secondly, your mutual fund portfolio must be reviewed periodically, to track your chosen funds’ performance (by comparing it with the benchmark indices and peer funds) and re-balance the portfolio if required.

In case a particular fund has been under-performing for past two to three years or its fund manager/management style has changed, consider switching to a better performing fund, to ensure your financial goals’ corpus creation remains unaffected.

Mixing Investment And Insurance

Investment and insurance are two completely different instruments which are meant to serve entirely different purposes. Every individual must understand that these two are the pillars of your financial planning and both are equally important.

Most investors misconceive insurance as an investment instrument and end up investing in money back policies or endowment plans, neither of which provides adequate returns and adequate cover.

On one hand, term insurance and health insurance are a must to secure your family’s future and medical expenses. Term insurance’s main objective is to provide a replacement income to your dependents in case of any unfortunate event. Health insurance assists you to pay heavy hospitalisation expenses and tackle medical emergencies, along with a tax benefit on premium (under section 80D of income tax act) paid for yourself, spouse, dependent children and parents.

On the other hand, investment helps you to achieve your financial goals by growing your money, over time. When you align your investments with separate life goals, as investments provide a direction to your goals and make the task of achieving such goals much simpler.

Learning From Your Mistakes – What To Do

Review Your Past Actions

Firstly, you need to take responsibility for your actions. Reviewing your past actions would assist in knowing where you went wrong. Perhaps, the basis or idea behind your investment decisions wasn’t clear enough, resulting in incorrect decision making. Upon reviewing, if you are clear enough as to which actions lead to the mistakes, make sure you learn from them and not repeat these in future.

If you aren’t very sure regarding where you went wrong, consider consulting a financial advisor to review your portfolio. The advisor would be in a better position to judge your decisions and help you know which actions lead to mistakes.

Identify The Loopholes

Reviewing your past actions can also help in identifying any loopholes, and help in clarifying the next course of action to be taken. From the above step, you must have identified the incorrect actions which led to such mistakes.

Now you need to know the reason behind those mistakes. Identifying the loopholes would prevent such erratic decision making in the future. Reasons can be many, such as basing your actions upon hearsay, blindly trusting the agents, investing without adequate knowledge, impulsive decision making etc. Once you know the source and cause of such loopholes, taking corrective measures becomes easier.

Take The Required Actions To Rectify

Once you have reviewed your actions and identified the loopholes, next step should be to make the required rectifications. The rectification process and course of actions would depend upon the type and reason behind such mistakes. To avoid them, ensure that your investment decisions are based on proper analysis, adequate market knowledge and reliable advisory portals.

While looking for rectification steps, take the help of financial advisors in case you get stuck anywhere. Being unsure and repeating your past mistakes should be avoided. If you are taking the corrective measures on your own, make sure you are confident enough regarding them.

Naveen Kukreja is CEO and co-founder of Paisabazaar.com.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Four things to remember before you take a home loan

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

In pursuit of owning our dream home, most of our research is often limited to choosing the right property and lender for the home loan. While these two are vital, what many home buyers often fail to lay emphasis on is the pre-loan phase, which involves becoming financially capable of taking the loan.

I’ll be discussing four checkpoints to find out if you are financially ready for it:

Checkpoint 1: Accumulation of Down payment amount

Borrowers are often over-dependent on home loans to finance major chunk of their house’s cost, and therefore don’t make much efforts to save and pay a bigger chunk from their own pocket. Lenders mostly provide 75-90% of property’s value as loan, implying that you have to finance minimum of 10-25% of the property’s cost on your own.

However, instead of just paying this prerequisite down payment, try to contribute higher proportion from your pocket (around 30-40 percent) by accumulating a corpus well in advance. Remember that the more you contribute, the lesser you would need to borrow and repay along with the interest applicable on the home loan.

What to do: Before applying for home loan, make sure you have accumulated sufficient corpus for down payment. Stretching your finances and digging your pockets a bit deeper during this pre-loan period would make sure you would require lower loan amount, subsequently leading to lower EMIs when taken with a longer tenure. A great way to accumulate such corpus is to begin investing in mutual funds through SIP route, about 4-5 years prior to taking the home loan, depending upon the amount you can contribute per month for this purpose.

Checkpoint 2: Credit score review

Your credit score is one of the most vital parameters on which lenders judge your creditworthiness before approving loan application. Hence, it is imperative for you to check your credit report before applying for home loan. Failure to do so may lead to credit report errors (if any) getting bypassed, thereby hurting both your credit score as well as loan approval chances.

What to do: Keep reviewing your credit score and report periodically, through online financial marketplaces, since these provide such service for free, along with monthly updates. Checking your credit score before applying would help get a fair idea regarding chances of loan approval.

Checkpoint 3: Existing debt to income ratio

Debt to income ratio (DTI) is another important factor that affects loan eligibility. It is the proportion of your income currently being used for debt payments such as credit card bills and loan EMIs. It measures your ability to repay various debts, as a higher ratio would imply that a major chunk of your monthly income is going out as debt payments.

Most home loan lenders, whether banks or HFCs, may hesitate lending to borrowers with a debt to income ratio above 60 percent (including the new loan’s EMI). A higher DTI ratio depicts an imbalance between the individual’s income and debts, and increases the risk of defaulting during future repayments, especially whenever an additional expense or financial emergency comes up.

What to do: Calculate your current debt to income ratio before applying for home loan. In case the ratio computed is over 60%, consider paying off some of these debts, such as foreclosing or prepaying the loan with the highest interest rate, since that loan or credit card would be the costliest of the lot. This would assist in bringing down your DTI ratio and thereby improving chances of loan approval. With a higher debt to income ratio, chances are high that you may either be denied the loan or a higher interest rate would be charged by the lender.

Checkpoint 4: Prepare for long term commitment

Although paying off 30%-40% as down payment is a good move, a major portion of your property’s cost would still have to be financed through home loan.

To repay such high loan amounts, you may require longer loan tenure to comfortably repay EMIs. Although tenures for as long as 30 years are available, taking a home loan for such long period would certainly require a long term commitment towards regular repayment of EMIs.

What to do: Firstly, opt for long home loan tenure, such as 20-30 years to comfortably repay the EMIs while serving the loan, even if you can afford to pay higher EMI. Start investing about 15-20 percent of your monthly EMI’s amount into mutual fund SIP, from the first month of EMI payment itself. This would enable accumulation of a corpus to close the home loan sooner, may be in 10-15 years, through prepayment/foreclosure.

Naveen Kukreja is CEO and  co-founder of Paisabazaar.com.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Interest rates are rising. Should you transfer the home loan balance?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The repo rate increase of 25 basis points by the Monetary Policy Committee (MPC) on August 1, 2018 took many by surprise, both the experts and the commoners. The latest repo rate increase followed a similar rate hike in the last Monetary Policy Committee (MPC) meeting held just two months ago. Most were expecting a repo rate hike in the October MPC meeting followed by another hike by the end of FY 2019.

However, with the major central banks increasing their policy rates, depreciating rupee requiring steady RBI intervention and a steady increase in inflation, RBI could have done little other than to raise policy rates. Even the tightening liquidity had already led banks and NBFCs to pre-empt RBI by increasing their deposit and lending rates.

The back-to-back hike in repo rates seems to be the start of a rising interest rate regime. Interest rates of loans will steadily go up for existing home loan borrowers as with all loans on floating rates. This will steadily increase their EMIs and upset their disposable income and savings rate.

However, as home loans can vary widely across banks and NBFCs, existing home loan borrowers can still bring down their EMI by transferring their existing home loan to another lender at a lower rate. Here are some of the benefits of transferring home loans:

Reduced interest cost

The prime reason for transferring home loans to another lender is to save on the interest costs by availing a new home loan at lower interest rate. For example, assume that an existing home loan borrower with an outstanding loan amount of Rs 20 lakh at 10% p.a. has a residual loan tenure of 15 years. Now, if he transfers his home loan to another lender at 9% p.a. for the same tenure, he will save over Rs 2.17 lakh in his entire tenure. His EMI will come down from Rs 21,493 to Rs 20,286 saving Rs 1,206 per month in the process.

Remember that once your home loan balance transfer (HLBT) application gets approved, the new lender will charge various charges and fees like processing fees, administrative charges, etc associated with a fresh home loan application. As these charges put together can constitute a substantial amount of money, find out the net savings by deducting those charges from the amount saved in interest payments. Opt for HLBT only if the net savings is substantial or else continue with your existing lender.

Better loan features

As the new lender will consider your HLBT as a new loan, it will apply its own set of terms and conditions before approving your application. If you wish, you can use this opportunity to extend your loan tenure to reduce your EMI payout. You can also ask for a bigger loan amount than your current outstanding to carry out repairs, renovations or extensions to your home property.

Switching to MCLR

Unlike banks, housing finance companies (HFCs) use PLR regime for setting their lending rates. Compared to the PLR system, MCLR is a much more transparent rate-setting mechanism and has better transmission of rates. The MCLR regime also provides for a mandatory interest rate reset date, at least once in a year.

Your bank can change your loan rate only on that date irrespective of the changes in the MCLR rates in the interim. The MCLR prevalent on your reset date will apply on your home loan till your next reset date. As this feature decreases the volatility in the loan rates, it will reduce your interest cost in a rising interest rate regime. Thus, opt for home loans with the longer reset period, preferably the 1-year reset period.

Availing top-up loans

Many lenders offer top-up home loans on transferring your existing home loan. The top-up loan amount would be over and above your existing outstanding loan amount. These top-up loans don’t come with any end usage restriction on loan proceeds.

As with personal loans,  the loan proceeds can be used for any purpose, such as for renovating homes, meeting medical expenses, for holidays or even for buying a car . Top up home loans are also an excellent instrument for consolidating your debt as their interest rates are usually lower than personal loans and most of the other secured loan types.

You can avail a top-up home loan and use its proceeds to pay off your other existing loans. Thus, opt for aanHLBT if your existing home loan refuses to sanction you a top-up home loan.

Naveen Kukreja is CEO and co-founder, Paisabazaar.com.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Filing your tax returns? Keep these factors in mind

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Filing your income tax returns can be well, taxing. Though online filing has made the process extremely easy for tax-payers, there are various aspects that should be kept in mind:

Collate all necessary documentation: Filing your tax returns requires details relating to various documents such as various investments receipts, income receipts, old tax receipts, form 26AS, form 16 etc. You must make sure to keep all the required documents ready before filing the form. Keeping the documents handy would also assist in filing the form quickly and smoothly.

Also, keep these documents in an organized and safe manner even after filing your returns, since these may be required at later stages in case of any discrepancy or for scrutiny.

Choose the right ITR form: The ITR form which you fill depends upon the type and source of income that you receive. With 7 different kinds of ITR forms available, it’s vital for tax assesse to fill the right form. For instance, ITR 1 can only be filled by individuals (and not HUFs) having total income (from Salary, pension, house property or from other sources), up to Rs.50 lakhs. Whereas, individuals and HUFs earning income from proprietary business, any profession, or as partner in a firm need to file ITR 3.

In case you submit the wrong ITR form, your income tax return would be termed as ‘defective’ and a revised ITR form needs to be submitted within 15 days of receiving notice under section 139(9).

Recheck before submission: Before submitting your ITR form, make sure you recheck calculations, income details and personal information etc. Ensure it matches the information shown in your form 16 as any incorrect information, calculation mistake or mismatch would attract a notice from the income tax department. You would then be required to file a revised return in case of any discrepancy, as mentioned in the notice issued.

Also, effective FY 2017-18, you may have to file the revised returns within one year from the end of that assessment year.

Verify details in form 26AS: Form 26AS is an annual statement showing details of each tax payer’s TDS (tax deducted at source), TCS (tax collected at source), tax refunds etc. as per the income tax department’s database.

hrough your Permanent Account Number (PAN), you can access form 26AS and get to know the taxes paid by you or by the deductor (usually the bank or employer) on your behalf. Tax details in your return must match the TDS details mentioned in this form. Every tax payer must verify his/her form 26AS to ensure reporting of complete income and avoid any notices from the income tax department.

Moreover, as tax authorities consider form 26AS as the sole proof of taxes paid by you, make sure you notify the deductor and get the discrepancies (if any) rectified at the earliest.

WHAT TO AVOID

Avoid missing out on disclosure of any income: While filing your income tax returns, make sure you disclose all your income, irrespective of its type and source. Concealment of income attracts a show cause income tax notice under section 148. Such notices are issued when the assessing officer (AO) believes that your income, which was chargeable to tax, has escaped assessment. Most tax payers usually tend to ignore Income from previous employer, Interest incomes from deposits and other incomes while filing their returns.

Additionally, even though you don’t need to pay tax on exempted income, you have to include it under the category of ‘exempted’ income while filing your return. Remember that as soon as the TDS gets deducted, details of your PAN reach the income tax department’s database and get mentioned in the tax payer’s form 26AS. On escaping or concealing any form of income, the tax payer gets the appropriate notice from the tax authorities, along with interest or penalty levied, if applicable.

Not claiming available deductions: Claiming deductions under various sections of the income tax act helps in reducing your overall tax liability. In case you fail to claim tax reliefs and deductions while filing ITR, you won’t be able to claim these afterwards. Deductions on interest paid on home loan and education loan (under section 24 and 80E respectively), ELSS investments (under section 80C) etc. are some common tax reliefs available. Make sure you stay informed regarding various other deductions available, such as those on health insurance premiums, donations to certified trusts and temples, etc.

Even if you didn’t submit proofs to your employer or in case your organization doesn’t accept some claim, you can still claim these deductions in your ITR. Therefore, while filing your ITR, make sure you claim all the deductions for which you are eligible, and thereby reduce your total tax outgo.

Naveen Kukreja is the CEO and co-founder of Paisabazaar.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Defaulted on a loan? Know the consequences and your rights

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

While access to loans has become easy, taking a loan should be a well-thought out decision, as it involves financial commitment on your part to repay the principal along with interest applicable.

At times, unforeseen circumstances such as job loss or medical emergency may lead to loan defaults. Though completely unadvised, in case you default on a loan, here’s what you should know.

Does loan default differ from insolvency, illiquidity and bankruptcy?

They may sound similar; all these terms have different meanings. Insolvency implies that the debtor (borrower) is unable to repay the debt. Illiquidity implies that the debtor has insufficient cash or other liquefiable assets to repay the debt. And, bankruptcy occur when legal findings lead to imposition of court’s supervision over the financial affairs of the insolvent or those who defaulted.

Additionally, the RBI, in 2015, clearly defined the definition of another term, I.e. willful default, which is deemed to occur in the following incidents:

• Failure to repay even when the borrower had the capacity to honour the obligations
• Diversion of the loan’s funds for some other purpose rather than using them for the reason specified to lender.
• Borrower has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds, i.e. utilisation of funds for purposes unrelated to borrower’s operations, thereby resulting in funds not being utilised for the specific purpose for which loan was given, nor are the funds available with the unit in the form of other assets.
• The borrower has defaulted repayment and has also disposed of/removed the movable fixed assets or immovable property given for the purpose of securing the term loan without the knowledge of the lender.

Does loan default affect credit score?

Loan default has a negative impact on your credit score. Any form of default on your loans and even your credit card bill gets reflected in your credit history. Credit bureaus lower your credit score when you miss or delay payments or default on your loans, thereby decreasing your creditworthiness. Moreover, since you failed to repay the loan, whether it’s due to financial exigency or it’s a case of willful default, your future chances of loan approval drop considerably.

 Rights of loan defaulter

Right to ample notice: Every loan defaulter has the right to be given a notice period to repay the outstanding dues. The lenders can neither adjudge you as a criminal nor strip you of your rights in case of default. They need to follow a designated process which allows borrower to repay the loan within the notice period. According to the SARFAESI (Securitisation and reconstruction of financial assets and enforcement of security interest) Act 2002, lenders need to provide a notice period of 60 days to the borrower, which allows the defaulter to repay the dues within 60 days of receiving such notice. Therefore, even if you have defaulted on your loan, you can exercise this right and buy yourself more time to repay the dues.

Right to be heard: During the notice period, the loan defaulter has the right to be heard, by exercising the authority to visit an authorised officer regarding the notice and put forth legal objections to it.  The authorised officer needs to reply within 7 days of receipt of your plea, and provide valid reasons in case of rejection of the objections raised by the borrower.

Right to fair value: When the borrower defaults and is unable to clear the dues by the end of the notice period, the lender recovers outstanding dues by auctioning your secured asset, such as property. However, during the recovery process, the loan defaulter has the right to ensure that his/her property has been valued transparently and as per the law. Before auctioning, the lender needs to issue another notice to the borrower specifying the value of the secured asset, as assessed by lender’s valuers (whether in house or third party valuation), along with other details such as date and time of auction, reserve price etc. The loan defaulter has the right to look for prospective buyers for his/her property and inform about the same to the lender, in case he/she feels that the price quoted for auctioning isn’t fair enough.

Additionally, post recovery of the outstanding dues by the lender (through auction), the defaulter has the right to get the balance amount refunded, i.e. whatever extra amount has been gained by lender by selling the property at a price beyond the owed amount, since that extra amount belongs to him/her legitimately.

Right to humane treatment: Even while recovering their dues from the loan defaulter, the lenders, being regulated by entities such as RBI, cannot misbehave and need to follow behavioural rules during such process. In case you have defaulted on your loan, you still have the right to be treated with respect by the lender. Agents need to respect the borrower’s privacy, land up only during designated hours ( except in case the borrower’s working hours necessitate different timing), ensure disciplined behaviour and visit the borrower at the place specified by the defaulter, whether it’s the residence or place of work.

Naveen Kukreja is CEO and co-founder, Paisabazaar.com.

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