Prajna Capital - An Investment Guide

Section 80CCD

2020-02-03T10:45:00.000+05:30

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Income tax deduction under section 80CCD

Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides taxpayer deductions against investments made in specific sectors. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard.

There are two parts of Section 80CCD. Subsection

1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In this case, the deduction of a maximum of 10% of the salary in the case of salaried employees and 20% of the gross income in the case of self-employed taxpayers is permitted. The total amount of deductions under this subsection of Section 80CCD cannot be above INR 1 lakh in a fiscal year. Subsection 2 of Section 80CCD refers to the contributions made by an employer towards NPS on behalf of an employee. This subsection allows the employees to claim the contribution as a deduction. The deduction amount is limited to 10% of the employee's salary.

Terms & Conditions for claiming deductions under Section 80CCD

Let's look at the terms and conditions that must be fulfilled to claim deductions under the provisions of Section 80CCD:

-Deductions available under this section can be claimed by both salaried and self-employed individuals, as well as their employers, so long the contributions have been made to the National Pension Scheme/Atal Pension Yojana.

- Maximum deduction of INR 1.5 lakh can be claimed under Section 80CCD. The computation is as follows: 10% of the salary in case of salaried individuals (this would include the basic salary plus the dearness allowance granted) or 20% of the gross income in the case of self-employed individuals.

- From FY 2016-17 onwards, the Finance Department has permitted individuals to claim an additional deduction of up to INR 50,000 on account of any contributions made towards NPS only under subsection 1B. This subsection provides that an assessee is allowed a deduction in the computation of his total income of the whole of the amount paid or deposited in the previous year in his account under a pension scheme notified by the Central Government. This deduction is irrespective of the amounts claimed as deduction as 10% of the salary or 20% of the gross income in subsection 1.

-If an individual is claiming deductions under Section 80CCD, the same cannot be claimed under Section 80 C.

-Any deductions made under subsection 1 of Section 80CCD are capped at INR 1 lakh per year. Any deductions made under subsection 2 of Section 80CCD are capped at INR 1.5 lakhs and is over and above the INR 1 lakh limit.

Who is eligible for claiming deductions under Section 80CCD?

Deductions under Section 80CCD can be made by salaried as well as self-employed assesses. However, such deduction is only permitted for contributions made towards the National Pension Scheme or Atal Pension Yojana.

Deductions on employer contributions are also permitted under Section 80CCD. However, corporate or HUFs or any other class of assesses are not allowed to claim any deduction under the provisions of this section. It is also important to note that only contributions made to Tier 1 accounts of NPS are eligible for the benefit of the deduction. The deductions can be claimed at the time of filing the income tax returns at the end of the financial year.

How to claim tax deductions under Section 80CCD?

The deductions under this section can be claimed at the time of filing IT returns. Evidence of payment of the contribution to the pension account should be provided. If you are filing your returns online via the website of the income tax department, the details of deductions under Section 80CCD will be populated on its own from the information available in Form 24Q. The total amount of deduction under Section 80CCD (1) cannot exceed INR 1.5 lakhs. An assessee can also utilize the provisions of Section 80CCD (1B) to claim an additional deduction of INR 50,000 for the contributions (made by the assessee itself or deduction from salary) towards NPS.

Claiming a deduction can reduce your tax liability significantly. Therefore, it is crucial to calculate the tax deductions carefully when filing the returns.

FAQs on Section 80CCD

Are HUFs eligible to claim Section 80CCD deductions?

No, this section provides tax deduction benefits for individuals only.

What is the National Pension Scheme?

National Pension Scheme was launched in 2004 by the Government of India as a pension-cum-investment scheme. This scheme benefits Indian citizens between the age of 18-65 years. NPS is a very popular option for those individuals who do not draw a steady post-retirement pension. The scheme is regulated by the Pension Fund Regulatory and Development Authority. NPS is based on a contribution model: the subscriber of NPS, while employed, is required to contribute to the retirement account on a regular basis. The contributions received are, in turn, invested by pension funds. The investments are in equity, bonds, government bonds, and alternative assets. The total amount accumulated in the NPS account is dependent on the contributions made and the income from the investment of the amount. The subscribers are permitted to withdraw from the NPS account only for specified reasons.

What is the Tier-II account of the National Pension Scheme?

Tier-II account is a voluntary savings account. It can be opened only where a subscriber has a Tier I account under NPS. The minimum initial contribution is INR 1,000. A minimum of INR 250 should be contributed at one time. Except in the case of government employees, there are no restrictions on the withdrawal of funds from the Tier II account. This account also allows the subscriber to transfer the funds to the Tier I account at any time.

Is it possible to claim Section 80CCD deduction on the amounts contributed to the Tier II account of the National Pension Scheme?

No, the benefit of the deduction is only available for the contributions made to the Tier I account.

I have a Tier I NPS account, and I am self-employed. I wish to claim Section 80CCD deduction. What investment proof do I need to furnish to claim the benefits?

You can submit the Transaction Statement as proof of investment. You can also download the receipt of voluntary contribution made in Tier I account for the financial year in question. It can be downloaded from the tab titled "Statement of Voluntary Contribution under National Pension System (NPS)" once you log on to the NPS website.

What does the word 'salary' refer to for claiming Section 80CCD deduction?

As per the explanation appended to Section 80CCD, salary includes dearness allowance but excludes perquisites and any other allowances provided by an employer.

Rahul has a Tier I NPS account. He is self-employed and makes his contributions to NPS through cheque. Is this contribution eligible for claiming deduction under Section 80CCD?

Yes, both cash and cheque are permitted for claiming deductions.

Are there any exclusive benefits available for claiming tax deductions under Section 80CCD in the case of government employees?

Except for those employed with the Armed Forces, in case of government employees who joined services after 1st January 2004, an additional deduction of up to 10 percent of salary is eligible for tax deduction under Section 80CCD(2). Government employees are also eligible to enjoy an increased income tax deduction of 14% of the employer's contribution.

Ritesh is an NRI. Is he eligible to open an NPS account?

Yes, an NRI is eligible to open an NPS account. However, all contributions made to NPS account by an NRI is subject to the regulations prescribed by RBI and FEMA. Additionally, OCIs and PIOs are not eligible to open NPS accounts in any capacity.

Is it possible to open multiple NPS accounts?

No, an individual can only have one NPS account. However, you can consider opening an NPS account and an account under Atal Pension Yojana.

What are the benefits available for the contributions made to Atal Pension Yojana?

As per the clarification issued by the Central Board of Direct Taxes in 2016, Atal Pension Yojana qualifies as a pension scheme for the purpose of Section 80CCD. Therefore, the benefits are precisely similar to that of the National Pension Scheme.

What is the deduction allowed under Section 80CCD(2)?

As per the provisions of Section 80CCD (2), an assessee who is a salaried individual is eligible to claim deductions up to 10% of the salary. This includes basic pay and dearness allowance. The contribution made by the employer towards NPS can also be claimed as a deduction under this section. The deduction under this subsection is in addition to the benefits under Section 80CCD(1).

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Bharat Bond ETF

2019-12-09T20:16:00.001+05:30

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The government of India has paved the way for the launch of India's first corporate bond ETF called as Bharat Bond ETF. Edelweiss Mutual Fund will be managing it.

The fund is mandated to invest in AAA-rated bonds of select public sector companies (see the table 'List of constituents and their proportions in the portfolio').

The government has a threefold objective behind launching this product. One, to deepen the liquidity of the Indian debt markets and provide a gateway for easy retail participation. Two, to solve investors' dilemma of picking premium bonds. Lastly, to help the underlying government-owned companies raise funding for their operations.

But does it make sense for you, the investor, to invest in it? Lets find out.

What is the product?
As the name suggests, it is an exchange-traded fund which will be listed on a stock exchange from where its units can be bought and sold post launch. It will have two variants - one maturing in 3 years and the other in 10. Upon maturity, the fund will be redeemed and the money returned to the investors.

The issue size of the 3-year variant is set at Rs. 3,000 crore (with the option to extend it by an additional Rs 2,000 crore) and for the 10-year variant is Rs 4,000 crore (with the option to extend it by Rs 6,000 crore).

What makes it stand out?
The fund has a lot of things going for it.

Low-cost structure: The USP of this fund is its wafer-thin expense ratio. At 0.0005% , this bond ETF will be the cheapest mutual fund product in India and one of the cheapest debt funds in the world. In the debt segment, costs matter a lot and this provides it a massive advantage over the more conventional debt fund alternatives.
High quality portfolio: Comprising bonds issued by government-owned entities, the default risk will be low here. In the middle of credit blow-ups, the consequent side-pocketing, and the generally prevalent risk aversion, this fund offers the kind of safety the besieged debt fund investors are seeking at the moment.
Predictability of returns: The fixed maturity feature of the ETF will provide predictability of returns. If held till maturity, the investors of the 3-year variant may expect 6.69% per annum while those of the 10-year variant can hope for 7.58% per annum. It is important, however, to note that no mutual fund guarantees returns. The above figures are simply based on the current indicative yields of the indices which these funds will replicate.
Transparency: There will be daily portfolio disclosures on an independent website. On that front too, it scores over the conventional debt funds which disclose their portfolios once a month.
Tax efficiency: As with other debt mutual funds held for more than a period of three years, investors will be able to get the benefit of indexation here. In comparison to your interest from deposits which is taxed at your marginal rate of tax, the ETF at 20% inflation-adjusted rate is a better alternative. Importantly, the timing of the launch is such that you may get indexation benefit for an extra year. For instance, the 3-year variant will provide indexation benefit for four years, if held till maturity, further bumping up your post-tax returns.

What about liquidity?
Large investors who wish to buy or sell units worth Rs 25 crore or more can directly do so with the fund house. Smaller investors would be able to transact in the units on a stock exchange. The AMC claims that it will appoint several market makers to ensure that adequate liquidity is available on the exchange. Whether they are able to actually create enough liquidity will become clear only once the units are listed.

In any case, the AMC is also planning to come up with the Fund of Fund (FoF) variants almost simultaneously (expected launch date between 13th-20th December) which puts the liquidity concerns to rest. We believe the FoF variants will be better for small ticket investors or those who do not have a demat account.

Should you invest?
At the time of the ongoing mess in the debt funds space, a fixed income fund that offers high quality portfolio, predictable returns (though not guaranteed, of course!) and ultra-low costs seems too good to be true. Bharat Bond ETF comes across as a good option for fixed income investors, particularly those whose investment horizon coincides with the maturity period of the two variants.

But the ones interested in the 10-year variant should note that it can be fairly volatile in the initial years of its existence. Its long maturity profile will make the portfolio quite sensitive to interest rate movements. But it shouldn't matter much if you are looking to hold for the entire 10-year duration.

The NFO period for retail investors will be from 13th to 20th December 2019 and those interested will be able to invest in unit sizes of Rs 1,000, but only up to a maximum investment amount of Rs 2 lakh.

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Mirae Asset Focused Fund

2019-04-29T09:35:00.000+05:30

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Mirae Asset Focused Fund (MAFF) is a new fund from the stable of Mirae Asset Mutual Fund. It is an open-ended diversified equity scheme which will follow a focused approach of investing in equity and equity related instruments.

As per SEBI regulations, a focused fund is not allowed to hold more than 30 stocks and invests a minimum of 65% of its assets in equity and equity related instruments. MAFF will allocate its assets as per the given prescribed limits in equities and will also allocate some portion (up to 35% of its total assets) to debt and money market instruments from an asset allocation standpoint and to mitigate the risk.

In an endeavour to capture potential gains over the long term with a focused approach, MAFF will diversify its equity portfolio by being sector and market cap agnostic. Nonetheless being a focused fund it would entail very high-risk.

Hence, MAFF is suitable for investors who are willing to take the high risk and have an investment time horizon of at least 5-7 years while they seek to appreciate their capital.

Table 1: NFO Details

Type	An open-ended equity scheme investing in a maximum of 30 stocks intending to focus in large cap, mid cap and small cap category	Category	Diversified Equity -- Focused Fund
Investment Objective	To generate long term capital appreciation/income by investing in equity & equity related instruments of up to 30 companies. There is no assurance that the investment objective of the Scheme will be realized.
Min. Investment	Rs 5,000 and in multiples of Re 1 thereafter	Face Value	Rs 10 per unit
Plans	• Regular* • Direct *Default option	Options	• Growth* • Dividend (Pay-out and Reinvestment) Default option
Entry Load	Nil	Exit Load	If redeemed; • Within 1 year (365 days) from the date of allotment: 1% • After 1 year (365 days) from the date of allotment: Nil
Fund Manager	Mr Gaurav Misra	Benchmark Index	Nifty 200 Index (TRI)
Issue Opens:	23/04/2019	Issue Closes:	07/05/2019

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the scheme's asset allocation will be as under:

Table 2: MAFF's Asset Allocation

Instruments	Indicative Allocation (% of Total Assets)		Risk Profile
Instruments	Maximum	Minimum	Risk Profile
Indian equities and equity-related securities$*	100	65	High
Money market instruments/debt securities, Instruments and/or units of debt/liquid schemes of domestic Mutual Funds	35	0	Low to Medium

$ subject to overall limit of 30 stocks
*Equity and Equity related instruments include convertible debentures, equity warrants, convertible preference shares, equity derivatives etc. (Source: Scheme Information Document)

What will be the Investment Strategy?

The Scheme will primarily invest in equity and equity-related securities.

The fund manager will follow a focused approach on the investments. The investments will be limited to a maximum of 30 stocks. The fund has the flexibility to invest across market capitalization in large cap, mid cap and small cap category.

The focus would be to build a portfolio of strong growth companies, reflecting our most attractive investment ideas at all points of time.

The universe of stocks will comprise majorly of companies having robust business models, enjoying sustainable competitive advantages as compared to their competitors and have high return ratios.

The Fund Manager will create a robust portfolio to avoid concentration risk and liquidity risk. The Fund Managers will monitor the trading volumes in a particular stock before investment to avoid liquidity risk.

Risk Mitigation measures arising from investments in equity/equity related instruments

Being a Focused Fund, the scheme has a security concentration risk, however, the scheme will endeavour to have a diversified equity portfolio comprising stocks across various sectors of the economy to reduce the sector-specific risks.
The scheme targets to maintain exposure across different market cap segments - i.e. large, mid-cap and small cap. This shall aid in managing volatility and improve liquidity.
Any investments in debt securities would be undertaken after assessing the associated credit risk, interest rate risk and liquidity risk.

Besides, the Scheme will also invest in debt securities and money market instruments.

The credit quality of the portfolio will be maintained and monitored using in-house research capabilities as well as inputs from external sources such as independent credit rating agencies.
The investment team will primarily use a top-down approach for taking interest rate view, sector allocation along with a bottom-up approach for security/instrument selection.
The bottom-up approach will assess the quality of security/instrument (including the financial health of the issuer) as well as the liquidity of the security.
Investments in debt instruments carry various risks such as interest rate risk, reinvestment risk, credit risk and liquidity risk etc. Whilst such risks cannot be eliminated, they may be minimized through diversification.

Who will manage the Mirae Asset Focused Fund?

Mirae Asset Focused Fund will be managed by Mr Gaurav Misra.

Mr Gaurav Misra has an Honors degree (BA. Hons) in economics from St Stephen's College and an MBA from IIM Lucknow to his credit. Prior to joining Mirae Asset Mutual Fund, he was associated with ASK Investment Managers Ltd for over a decade as a Senior Portfolio Manager

Currently, at the fund house, he co-manages Mirae Asset India Equity Fund.

The outlook of Mirae Asset Focused Fund:

The fate of MAFF hinges on the performance of the stocks held in the portfolio. Although, the fund manager will follow a robust investment style that includes the following:

- A focused approach

- Flexibility to invest across market capitalisation and sectors

- An aim to build and manage a portfolio comprising of strong growth companies based on the investment process

- Building a robust portfolio that will mitigate risk

Image: MAFF's Investment Style

(Source: Mirae Asset Focused Fund One-Pager)

But considering the present volatility due to the ongoing Lok Sabha elections with investors speculating the election's outcome. Constructing the portfolio would be a challenging task for the fund manager, and if the Indian equity markets hit more turbulent waters ahead it may inflict high-risk

At present market when the S&P BSE Sensex is already near its 52-week high. Earnings will have to justify the valuations. The trail P/E of the S&P BSE Sensex and the large-cap index is currently at 28x and 26x. Even the P/E of the S&P BSE MidCap index has scaled to around 30x. Calling any of these levels as 'cheap' would be an imprudent judgement. The S&P BSE SmallCap Index is trading at a negative P/E of around 102x, but that doesn't mean valuation-wise small-caps look attractive. What it means is, many constituents of the BSE SmallCap index are making losses thereby contributing negatively to its growth.

Even though the fund has the option to invest in equity derivatives instruments for hedging or balancing the portfolio to optimize returns and mitigate the risk involved.

While the portfolio construction will be in a diversified manner with a sector agnostic and across market cap, allocating a dominant portion to large caps can offer stability to the investment portfolio. Investing in large blue-chip companies with strong balance sheets and proven track records in the portfolio could help ride the wave of short-term volatility to a certain extent. In present conditions, having a concentrated portfolio of small and mid-caps will prove to be more harmful. Hence, how the fund manager constructs the portfolio is crucial and remains to be seen.

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