Jun 23, 2017

Paying Rs 50,000 rent? Better cut 5% TDS.

From June 1, individuals who pay a rent of over Rs 50,000 per month are required to deduct tax at source at 5%. The relevant section in the Income Tax (I-T) Act — section 194-IB — was introduced by the Finance Act, 2017 and it widened the scope of withholding tax by making individuals also responsible for tax deduction at source (TDS) on rental payments exceeding the specified sum.

Rents in metros are sky-high and it's likely that many tenants will have to meet with the obligations of withholding tax, depositing it with the government and also filing the relevant documentation. The silver lining is that compliance formalities have been made easier for individuals who are tenants. The Central Board of Direct Taxes (CBDT) issued on June 8 a notification relating to some compliance requirements.

The dos and the don'ts are explained below.

Do not revise your rent agreement

According to tax experts, revising your tax agreement to get out of your TDS obligations is not a sound idea. Let's use an illustrative case study: Sharon has been staying as a tenant in a 2BHK flat in the upscale area of Bandstand, Bandra, for the past eight months. Out of the blue, her landlady asked her whether she wanted to revise the three-year lease agreement and split up the monthly rental of Rs 85,000 into Rs 40,000 as rent and the balance of Rs 45,000 as furniture hire. Sharon learnt that some other tenants in the same vicinity were asking for such a split to avoid their TDS obligations.

"Revising an agreement mid-way is bound to catch the wrong attention of the tax authorities and should not be undertaken. Only if an individual is entering into a new agreement and is actually paying for furniture hire could the drawing up of two separate agreements be considered. Besides, the charges for furniture hire need to be realistic," cautions Amarpal S Chadha, partner (people advisory services) at EY India.

Ameet Patel, tax partner at CA firm Manohar Chowdhry & Associates, says, "There have been instances where people trying to wriggle out of their TDS responsibilities resort to various devices, such as splitting up of the rent agreement. This is clearly done with a view to violate the law and I would never advise anyone to take such a step. Further, several pitfalls are involved. First, there should be actual assets that have been rented out to justify the payment towards furniture hire. Second, the agreement should bring out a list of such assets. Third, the payments towards such assets should be reasonable and justified. Obviously, it would be difficult to prove that payment towards furniture hire of Rs 45,000 is reasonable if the rent for the flat itself is just Rs 40,000. The TDS authorities would definitely take a strong view of such an arrangement and take action against the tenant who has paid rent without deducting tax at source."

Chadha adds, "Tenants should also keep in mind that non-compliance entails penalties. Non-deduction of tax results in a levy of interest at 1% per month, it is 1.5% per month for non-payment after deduction. Further, non-filing of required statement would attract penal fee of Rs 200 per day for the period of delay."

Comply with TDS norms

The government has provided for some compliance-related concessions. Tenants who are individuals and have to meet TDS obligations are absolved from obtaining a Tax Deduction Account Number (TAN). Further, the tax is not to be deducted each month, but merely once a year. "The tax is required to be deducted at the time of credit or payment (whichever is earlier) of the rent, in the last month of the financial year, or the last month of tenancy if the flat is to be vacated during the year. Since individuals would not be maintaining books of accounts, the tax would typically be deducted at the time of payment," says Chadha.

To continue with our illustration: As the rent paid by Sharon is Rs 85,000 per month for the period June 1, 2017 (being the date the new provision comes into force) up to March 31, 2018 (which is the last month in the financial year 2017-18), the total rent works out to Rs 8.50 lakh. The TDS at 5% is Rs 42,500. Sharon will have to deduct this amount from her March rental payment and pay the balance of Rs 42,500 to her landlady.
If the landlady doesn't have a permanent account number (PAN), this means a higher tax of 20% is to be withheld. However, in such cases, the deduction is not to exceed the amount of rent payable for the last month of the financial year or the last month of tenancy, as the case may be.

The tax deducted is required to be paid within 30 days from the end of the month in which the deduction was made. It can be remitted electronically to the RBI or SBI or any authorised bank and form 26QC (which serves as a challan-cum-TDS) is to be filed electronically through the NSDL portal. The same web portal also provides form 16C, which needs to be downloaded and issued to the landlady. This needs to be done within 15 days from the due date of filing form no 26QC.

Both form 26QC and 16C typically call for details such as the name, address, PAN, contact details of the tenant and the landlady. The period of tenancy, the amount of rent and details of TDS are also required.

It must be noted that if the rent is being paid to a non-resident, then section 194-IB doesn't apply. Section 195 relates to withholding of tax on payments made to non-residents and the applicable tax rates would apply.

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Jun 8, 2017

Beware of Money Apps Privacy Policies & Terms...

With the increasing usage of smartphones and other smart devices, our use of and dependence on mobile applications also increases. These apps, while being installed on your device, ask for a lot of permissions. Most users do not take a detailed look at all the permissions being granted to any particular app's publisher. Moreover, even fewer users look at the privacy policies and terms of use of apps, which detail how the publisher intends to utilize the data you share.

In most cases, the data collected is analysed and used for targeted marketing campaigns by the apps' publishers, based on the users' profiles and habits.  While this phenomena is spread across the board for all categories of apps, we take a look at the privacy policies and terms of use of the top 10 Android financial apps in India (top 10 as of June 1, according to App Annie, a mobile apps market research company based in California). The 10 apps are PhonePe, BHIM, SBI Anywhere Personal, Kotak – 811 and Mobile Banking, JioMoney Wallet, Money View Money Manager, State Bank Buddy, Bank Balance Check, All Bank Balance Enquiry, iMobile by ICICI Bank.

Collecting information

The common theme across privacy policies of these apps is that the information is collected to enhance the customer experience while using an app, respond to customer complaints and resolve disputes. Another theme is tracking consumer behaviour. For instance, PhonePe, in its privacy policy states, "We may automatically track certain information about you based upon your behaviour on our app. We use this information to do internal research on our users' demographics, interests, and behaviour to better understand, protect and serve our users. This information is compiled and analysed on an aggregated basis."

Similarly, the privacy policy of BHIM app says, "…once you give us your personal information, you are not anonymous to us. We may automatically track certain information about you based upon your behaviour on our app to the extent we deem fit." It further adds that if you choose to transact on the app, then "we collect information about your transaction behaviour." All the apps collect some or the other information like device IDs and location.

Sharing Information

The information gathered by the apps is not just used by these companies themselves, but also shared with third parties, subsidiaries, parent companies and agents of the companies. iMobile by ICICI Bank, for instance, in its privacy policy states that the bank will limit the collection and use of customer information only on a need-to-know basis to deliver better service to the customers. "ICICI Bank may use and share the information provided by the customers with its affiliates and third parties for providing services and any service-related activities such as collecting subscription fees for such services, and notifying or contacting the customers regarding any problem with, or the expiration of, such services. In this regard, it may be necessary to disclose the customer information to one or more agents and contractors of ICICI Bank and their sub-contractors, but such agents, contractors, and sub-contractors will be required to agree to use the information obtained from ICICI Bank only for these purposes," the policy reads.

Similarly, PhonePe in its privacy policy has said that the company may share personal information with its other corporate entities and affiliates. "We and our affiliates will share/sell some or all of your personal information with another business entity should we (or our assets) plan to merge with or be acquired by that business entity, or re-organization, amalgamation, restructuring of the business. Should such a transaction occur that other business entity (or the new combined entity) will be required to follow this privacy policy with respect to your personal information," it reads.

While installing, the Kotak app seeks your "irrevocable consent" to its privacy policy, which, among others things, states: "We may disclose the customer information to third parties for following, for other purposes, and will make reasonable efforts to bind them to obligation to keep the same secure and confidential and an obligation to use the information for the purpose for which the same is disclosed, and you hereby give your irrevocable consent for the same."

JioMoney Wallet, while disclosing upfront that the publishing company and its affiliates do not sell or rent personal information to any third-party entities, also adds that the company "engages a number of vendors, consultants, contractors and takes the support of our group companies or affiliates. We may provide our partners access to or share your personal information to enable them to provide the services subscribed to you." Terms and conditions of the BHIM app state: "For the protection of both the parties, and as a tool to correct misunderstandings, the user understands, agrees and authorises NPCI, at its discretion, and without further prior notice to the user, to monitor and record any or all telephone conversations between the user(s) and NPCI only."

It is imperative to note that most of these apps announce it upfront in their privacy policies that the policy could change anytime without prior information to the users. At the same time, it should be noted that sharing of some data is required for proper functioning of many apps. While most app publishers may not misuse the data being gathered, you should know exactly what data is being used.

Pranesh Prakash, policy director at the Centre for Internet and Society said that their research outputs show that laws to deal with misuse of personal data are very weak in India. "We need a strong privacy law to address these issues, of which we have proposed a citizens' draft.Clearly, the prevailing situation shows that the industry is not taking enough initiative on self-regulation. At the same time, even the government isn't taking much interest in consumer protection."

Jun 7, 2017

Franklin Templeton note on today's RBI Monetary Policy Review

The RBI announced its second monetary policy review for the financial year 2017-18 today. The Monetary Policy Committee (MPC) decided to keep the key policy rates unchanged. This was consistent with a neutral stance of the monetary policy. Please click here to download our monetary policy analysis and outlook. I am appending a few key highlights from our note for your reference -
  1. Key Rates - RBI kept the Repo rate unchanged at 6.25%. However, the central bank cut the statutory liquidity ratio (SLR) to 20% from 20.5% in order to provide banks with greater flexibility to meet higher liquidity coverage ratio (LCR) of 100% (currently 80%), which will come into effect from January 2019.

  2. Growth Forecast - The projection of real GVA growth for 2017-18 has been revised 10 bps downwards from April 2017 projection to 7.3%, with risks evenly balanced. 

  3. Inflation - Headline inflation is projected in the range of 2.0%-3.5% in the first half of the year and 3.5%-4.5% in the second half. We believe inflation is likely to surprise on the downside, leaving room for an interest rate cut.

  4. Yield Curve - The tone of RBI's policy was perceived to be dovish, as a result bond prices moved up today. On current valuation, the medium to long term segment of the g-sec yield curve looks attractive. 

  5. Our Outlook - The central bank reinstated that it would "see through" inflation prints for the next couple of months before taking any action. Going ahead any action on the rate front will be a function of a downside surprise to RBI's inflation estimates and data on underlying inflation pressures. Hence, we expect a 25 bps rate cut in the near term.

  6. Investment Strategy - We remain bullish on the medium duration segment and recommend investors (who can withstand volatility) to consider duration bond / gilt funds for medium term. Meanwhile, improvement in the credit environment coupled with the existing liquidity surplus may continue to augur well for the shorter end of the yield curve. Hence, we continue to remain positive on corporate bonds and accrual strategies.

Don’t go by high returns in ultra short-term funds

By Bhavana Acharya, Deputy Head - Mutual Fund Research Funds India

The recent spate of credit downgrades and defaults serves to highlight a growing risk in debt funds. That risk is funds' move into lower-quality debt as a trade-off for higher returns. While credit risk is acceptable in debt funds meant for the long-term – given the leeway to ride out rough patches – it is certainly not prudent in ultra-short term funds.

The purpose behind investing in these funds is primarily safety of capital; chasing higher returns in these categories is not a priority. With debt increasingly moving towards the lower end of the credit spectrum and stricter action by credit rating agencies, the risks are higher.

The credit opportunity

Policy rate cuts over 2015 and 2016 and measures to address liquidity demands ensured that lending rates dropped. 1-year CP rates are 7.31% now against the 8.49% last year. The sudden fund inflow post demonetisation also played a role in pulling down very short-term rates.

As rates fell, funds saw portfolio yields (YTMs) move lower. Average YTMs at the start of 2016 were around 8.4% for ultra short-term funds. By mid-2016, YTMs had dropped to 8% and further to 7.3% at the end. With the falling yields, returns would also be lower. 1-year returns for ultra short-term funds in January 2015 were a good 9.1% on an average. In January 2017, the returns were lower at 8.3%.

The rate differential between AAA papers and those rated below turned even more attractive, especially with larger inflows increasing competition. With the financial health of weaker companies still under stress and bank lending drying up, there were better returns to be had lower down the credit line. The yields on AA-rated 3-year paper at 7.68% are 57 basis points higher than the 7.11% for AAA-rated papers. The spread widens to 89 points for a AA- paper and to 118 points for an A+ paper.

Rising share of low credit papers

The move to lower credit is pronounced in ultra short-term funds far more than short-term funds. For ultra short-term funds, anything lower than the AAA set represents higher risk given the very short time-frame. These papers formed 25% of the total AUM in April 2017 (latest available data), against the 21-22% in April 2016 and 2015. More, the share of AA and AA- papers has been steadily climbing, now forming 15% of the AUM. In 2014, ultra short-term funds held no A-rated paper; today, these papers form 3% of the AUM.

Funds do try to mitigate risks by negotiating some security backing such as cash flows from a project or pledged promoter shareholding, or relying on group promoter strength, or limiting exposure to a single paper. However, risks of downgrades do remain. Rating agencies can downgrade a paper by several notches at one go. And in recent times, a downgrade to 'D' or default happens in a matter of months, hardly giving any time for investors or for that matter even AMCs to take preventive or corrective action.

We are not suggesting that debt as an asset class is facing pressure of downgrades now. In fact, if you take the companies rated by rating agency CRISIL, the number of companies being downgraded is moving lower. The value of debt downgraded in FY-17 was below the last 5-year average. But this value of debt downgraded is still more than the value of debt upgraded as shown in the chart below. The upgrade-to-downgrade ratio has also not improved, staying steady at 1.22 times in FY-17 against the 1.29 times in FY-16. In other words, things have not become worse but they have not dramatically turned around either for you to assume these risks.

High risk-high return uncalled for

All ultra short-term funds do not collectively move to low-rated papers. While the average low credit exposure (defined by us as AA+ rated and below for this category) over the past year is 18.4% for the category, the highest exposure is a whopping 72% of the portfolio while the lowest is nil. Portfolio YTMs, therefore, are equally disparate. The highest YTM is that of Franklin India Low Duration at 8.99% against the category average of 7.18%. Its low credit exposure averaged 72% in the past year and holds high at 70% for April 2017. The fund's return is also at the top of the category at 10% and far above the average 7.86%. Kotak Low Duration similarly scores high on returns, but has 60% in low credit papers, a good chunk of which is AA- and below.

Yes, a downgrade involves a mark-to-market loss and is not an actual loss. The fund can still hold the bond to earn interest and so wipe off the loss. In case of a default, interest accrual from the other papers in the portfolio will slowly help recoup the loss. In either case, it requires an investor to wait out the fall and allow the accrual to play out. The time taken for such reversal also depends on the maturity of the papers, and many ultra short-term funds have average maturities of more than one year.

But remember, as a category, you do not usually invest in ultra short-term funds with a long-term time-frame. The purpose of investing in an ultra short-term fund is to park money that will be needed a few months later, or generate income through systematic withdrawals post retirement, or to maintain an emergency corpus. Thus, an ultra short-term fund should simply be able to deliver returns above short-term FD rates. And this, ultra short-term funds can do even without overloading on credit risk or capitalising on 'inefficient' prices.

Choosing funds in the ultra short-term category

It is for the above reason that choosing funds in the ultra-short-term category can be tricky if not risky. FundsIndia's 'Select Funds' lays emphasis on weeding out excessive credit risk and retaining those funds that hold potential to deliver returns higher than short-term FD rates. You will find that these funds may not be chart toppers and may sometimes deliver returns hovering around the category averages.

Funds in our Select Funds list such as ICICI Prudential Flexible Income Plan, Birla Sun Life FRF LTP, Tata Ultra Short, DHFL Pramerica Ultra Short Term, and UTI Treasury Advantage don't go below AA- and even where they do, it is below the category average. At the same time, these funds are able to generate returns better than the category, consistently. Here again, there is no such thing as nil risk. It is always about minimising risks for optimal returns.

If you pick your own funds in this category, especially based on high returns, please be prepared to assume the risks in such funds. Such risks need the benefit of time if there is a credit slip. The simplest way to safeguard yourself is to stay away from high returning funds in this space.

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The information contained and provided on this Website provides Investment advice for the education of investors. The posts are an information service only. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. We do not assume any responsibility or liability resulting from the use of such information, judgment and opinions for Trading or Investment purposes.