Tax talk- July 19 :: Business Line

I am a bank employee and pay approximately Rs 90,000 as tuition fees and hostel fees a year for my daughter's education. Am I eligible for a tax rebate for this amount? Please advise.

— Raju G

According to Rule 2BB of Income Tax Rules, 1962, any allowance granted to an employee to meet the hostel expenditure on his child, shall be exempted in the hands of the employee to the extent of Rs 300 per month, per child up to a maximum of two children.

Accordingly, if your employer is giving you such hostel allowance, then you can claim exemption of the hostel expense up to the extent of Rs 300 per month, per child.

Further, according to Section 80C of the Income Tax Act, 1961, tuition fees (excluding payment towards any development fees or donation or payment of similar nature), paid to any university/ college/ school/ other educational institution situated within India, for the purpose of full-time education of any two children of the individual, shall be allowed as deduction under the overall deduction limit of Rs 1 lakh (this limit is for deduction under sections 80C, 80CC and 80CCD). You should declare details of the tuition fees paid by you to your employer, so that such deduction is considered while withholding taxes from your monthly salary, else you can claim the said deduction at the time of filing your tax return.

I work at a leading PSU. My taxable income is more than Rs 15 lakh. Further to my salary TDS, TDS at the rate of 10 per cent has been deducted for a fixed deposit with a leading public sector bank. While trying to file my tax return for FY 2012-13, I found that the I-T deducted is short of the tax calculated. As a result I am unable to file the return. Kindly let me know how I can overcome the problem.

— Anil D

Please note that according to the Income tax laws, banks are required to withhold income tax at the rate of 10 per cent on interest income credited on fixed deposits. However, the interest income so earned by the individuals is taxable in their hands at the slab rates applicable to them.

Since your taxable income is more than Rs 15 lakh, the applicable slab rate in your case is the maximum tax rate of 30.9 per cent.

Accordingly, you will first have to pay self assessment tax i.e. total tax payable by you according to the applicable slab rate less the taxes withheld by your employer and the bank. Upon payment of self assessment tax, you would be required to report the details of the challan in your tax return form and file your tax return.

Basics of the bond market :: Business Line

The bond market is the focus of much attention these days with the U.S. Federal Reserve’s announcement of its intention to ease the monetary stimulus programme making foreign investors exiting the bond market in large swathes . So, what are bonds and what influences bond prices?

A bond is an instrument used by a company or a government for borrowing money for a specified period of time at a certain interest rate – fixed or floating. A bond is a debt instrument and the buyer of these is a company’s or a government’s creditor.

TERMINOLOGY

The face value of a bond, also called the par value, is the amount that a bondholder gets when a bond matures. The coupon is the interest rate that the bondholder receives (usually half yearly) till the date of maturity which is when the money borrowed is paid back. Another term associated with a bond is yield. It refers to the return one earns from investing in a bond. Yield is equal to coupon (interest) amount divided by the bond price. That is, the bond price and the yield are inversely related. The price of a bond keeps on changing in response to many factors. A bond is said to be trading at a premium when its price exceeds the face value and is said to be at a discount when its price is below the face value.

Let’s assume you buy a bond with a face value of Rs 1000 at a coupon (interest rate) of 7 per cent with a 10 year maturity. You will then receive an interest of Rs 70 per year for the next 10 years at the end of which you will be paid back Rs 1000.

Even though investing in bonds is supposed to be safe relative to equity, there are risks involved. There is an interest rate risk -- change in bond price in response to changing interest rates. Besides, the risk of not being paid the interest or principal -- credit risk – if the company or the government falls upon bad times also exists.

INDIAN MARKET

In India, bonds or dated government securities (G – Secs) are issued by the RBI on behalf of the government of India with the maturity period ranging up to 30 years. Corporate bonds are issued by companies with tenors of up to usually 15 years. While corporate bonds are relatively riskier (depending on the company issuing them) they may offer better returns. With government securities accounting for a major chunk of the debt market, they set a benchmark for the rest of the market.

If you intend on holding a bond till maturity, the variations in price may not bother you but for someone wanting to trade in bonds, these matter. The price (and so the yield) of a bond is influenced by a number of factors, an important one being the prevailing rate of interest. How do changing interest rates affect bond prices and yields? If the prevailing rates of interest rise then the newer bonds will be offered at higher rates of interest compared to the older bonds. Consequently, investors would prefer these to the older bonds which would no longer be in demand. The prices of the older bonds will therefore have to fall justifying the lower returns offered by them.

So, rising interest rates imply lower prices and higher yields for existing bonds. Likewise, if the prevailing interest rates fall, it will make the existing bonds that offer higher interest rates more attractive. This in turn will push up their prices and bring down the yields.

Don’t gauge opportunities based on past returns: Suyash Choudhary :: Business Line

Gilt funds have delivered close to 14-16 per cent return in the last one year. Do you expect these returns to sustain over the next one or two years?

At this juncture, it is very difficult to take a call. The 10-year G-sec yield is hovering in the range of 7.5 per cent. If one were to assume a one-way decline in yields to 6.9 to 7.0 per cent, which the market was expecting till very recently, the gross returns (for a gilt fund holding it) will be around 10 per cent. The net returns after fund expenses will be much lower. However, if there is a two-way movement in yields, fund managers may be able to capture additional returns from this volatility. But even so, a repeat of last year’s performance looks difficult.

What level of rate cuts is factored in the yields right now?

The market was pricing in another 25 basis points repo rate cut in the RBI’s July policy. However, the recent sharp fall in the rupee against the dollar in the last month or so has taken away some of the expectations, and hence yields have risen by 10 to 15 bps from the 7.3 per cent level earlier.

So is there a price risk for investors who enter at this point of time?

Certainly. In May, the bond market saw a very significant rally, on the back of very aggressive rate cut expectations then. Rupee depreciation has curtailed those expectations and we have seen some retracement of yields. Should the rupee start to stabilise, and if rate cut expectations are met, then yields may decline. So investors need to be cognizant of the risk both ways. And hence we advise investors not to gauge opportunities based on historical returns. If you are not a big risk taker, allocate 50 per cent of your new investments in short and medium-term funds and balance in dynamic, income, and gilt funds.

Will the government exceed its borrowing targets this year?

Finance Minister P. Chidambaram managed to rein in fiscal deficit for 2012-13 at 4.9 per cent of gross domestic product (GDP) by cutting down planned expenditure to the tune of almost Rs 1 lakh crore. For 2013-14, he has set a target of 4.8 per cent of GDP. This means that revenues will have to go up by around 21 per cent from last year’s revised estimates. While we would like to give the benefit of the doubt to the Finance Minister, considering the current scenario, we believe that later this year, fiscal deficit pressures may start to materialise.

So, at this point of time, would you recommend corporate bond funds instead of gilt funds?

Corporate bonds do offer better accruals. To invest in them you also need to have a view on corporate bond spreads (difference between their interest rates and those on government bonds). The fundamental logic is that, as spreads on corporate bonds compress, they may offer better returns. On longer term corporate bonds, we don’t see any case for further compression of spreads. Due to external vulnerability, a large part of offshore borrowing of corporates may get shifted to the domestic market. As supply goes up, we think the spreads on corporate bonds may get wider. Thus on the longer duration side, we would rather own government bonds than corporate bonds. On the other hand, we are quite bullish on shorter end corporate bonds as the domestic liquidity situation seems to be getting better.

Between gilt funds, dynamic bond funds and Fixed Maturity Plans (FMPs), all debt funds, which would you choose?

Investors should choose between them based on risk appetite and investment horizon. A Dynamic bond typically has more flexibility to manage duration and choose between corporate and government bonds. However the fund manager’s calls become critical here. FMPs are lower duration passive products and carry no rate risk, whereas income and gilt funds take a higher interest rate risk.