Income Streams & Tax saving

Streams
UNIT 4
TYBMS SEM 5
 Unit 4

 Retirement planning

 Income & tax saving streams

Income & tax saving streams
 Annuities

➢ An annuity is a contract where an insurance company

promises to make payments to an annuitant over a
specified period of time or for life.
➢ It is a type of insurance to protect against the risk of
financial hardship during retirement.
➢ It is different from life insurance.
➢ There are 3 parties : Owner , annuitant , beneficiary.
➢ Owner and annuitant may be the same.
➢ Tax liability is of the owner.
 Contd.

 Deferred annuity means payment begins at some future

date.
 Fi8xed annuity means amount paid is fixed sum and is
usually guaranteed.
 Qualified annuity is tax exempt annuity.
 Straight line or single life annuity pays a predetermined
amount periodically usually monthly but ceases when the
annuitant dies.
 Variable annuity has security investment options for
investment of the principal and periodic payment vary
based upon the performance of the investments.
 Contd.

 Types of premium
- Single premium annuity
- Flexible premium annuity
 Uses of annuity
- Guaranteed lifelong income
- Protects and preserves a persons cash flows
 Disadvantage of annuity
- Receipt of lump sum amount could lead to a large tax
liability.
- Cash flow received may not keep pace with inflation.
Types of annuities by payment
 Immediate annuity
Payment starts right away for a specified period of time or life long.
It is always purchased with single premium
The benefits cannot be adjusted against inflation since they are fixed.

 Deferred annuity
It grows until the contract is annuitized ie. Put into a payment stream or
surrendered where lump sum amount is paid.
It is a method of accumulating savings and eventually distributing it over a
period of time. The increase in the account value are not taxed ie. Tax deferred
growth.

- Fixed , has regular benefits in accordance with the rate of return, where a
minimum rate is paid irrespective of the performance of the investment.
- Variable, premium paid in this are directed to the purchase of units in various
investment linked products. Forms a diversified portfolio and expects higher
returns. Returns are not assured and vary with the return on investments.
 Types of annuities by amount

 Fixed rate annuity

Guaranteed rate
Retirement income
Life time income
 Variable annuity – risk of losing the principal
Flexible returns
Investment control
 Indexed annuity – equity linked
Higher returns
Minimum return
Types of annuities by payment term

 Annuity certain – Money recd for the time period of

annuity , if the person dies, beneficiary receives money for
the remaining time period.
 Life annuity – Payment till the person is alive, if the person
dies no money paid to estate or family.
 Joint life annuity – Money till either of the holders survive.
 Annuity with return of purchase price – Principal returned
after certain period or on death.
 Increasing annuity – Annuity increases at the rate of 1%., 2%
or 3% per annum till the life of the annuitant.
 Taxation on annuities
 Premium paid for pension plans are allowed
deduction upto Rs. 1 lac under section 80CCC.
 The benefit is reversed if policy is cancelled or lapses.
 Surrender value recd is taxable.
 Annuity paid by present employer is taxable as salary.
 Annuity paid by ex employer is taxable as profit in lieu
of salary.
 Annuity recd from other employers is taxable as
income from other sources.
 Pension plans
 They provide individuals with a regular income in their
retirement years.
 Enjoy tax benefit of Rs. 10,000 under section 80CCC.
 These are different from life insurance plans since
these cover the risk of living longer that is retirement
risk and benefits self.
 Traditional plans
 ULIP
 With cover assured life cover
 Without cover , corpus built till date is given out, no
sum assured.
 Public Provident fund 1968
 Savings cum tax savings account.
 Rate of return 8.7% compounded annually
 Interest exempt from income tax, no TDS
 Only one account per person permitted
 Can be opened in post office or branches of SBI
 Payment by cash, draft, cancelled cheque or postal order
 Nomination facility available
 Minimum Rs. 500 to maximum Rs. 1,00,000 in a year, one time or
multiple times.
 Tenure 15 years further extended in blocks of 5 years
 Loan can be availed between 3 to 5 financial years up to a certain %.
 Withdrawal is allowed any time from 7 years but not more than 50%.
 Default and revival possible with payment of Rs. 50 for each year of
default.
 National pension system
 Introduced by central government for the benefit of
unorganized sector and self employed.
 Eligible is any government employee who9 has joined
service on or after 1st Jan 2004
 Not eligible if the employee is already covered under
employee PF act.
 He/she is an employee of Indian armed forces
 Age limit 18-55 years
 Must comply with KYC norms
 Not eligible , people of unsound mind, minors, pre existing
account holders of NPS
 Contd.
 Controlled by PFRDA
 Upon account opening , PRAN permanent retirement account
number is allotted.
 Tier 1 pension account , mandatory
- Tax benefited till a certain amount, taxed on withdrawal on
retirement
- Withdrawal; subject to conditions
- Govt. employees to contribute 10% of their basic + DA with equal
contribution from govt.
 Tier 2 savings account , voluntary
- No tax benefits
- Withdrawal as and when reqd.
- No limit on number of withdrawals
- One way transfer of savings from tier 2 to tier 1 allowed
 Investment choice for NPS
 Active choice , individual funds
Asset class E equity
Asset class G govt. securities
Asset class C Fixed income instruments other than govt.
securities

 Auto choice , life cycle funds

Predetermined allocation between 3 categories based
on age of the investor.
18 to 36 years , 50% E, 20% G AND 30% C
36 to 55 years , 10% E , 80% G AND 10% C
 Contd.

 Default option is auto.

 NAV released on regular basis.
 Switching of options can be made once in a year only
in May.
 Returns are not guaranteed under any scheme.
 NRI’s are allowed to invest in NPS.
 NPS lite

 It targets the economically disadvantaged sections of

the society and promotes small savings during
productive life.
 It is designed to ensure ultra low administrative and
transaction cost.
 It works on group model and is available through
aggregators appointed by PFRDA.
 It also targets NGO’S, NBFC’S , old age homes etc.
 Swavalamban scheme is an initiative by the
government where they grant Rs. 100 to all eligible
NPS lite account holders.
 Contd.

Features of the scheme :

- Focused
- Voluntary from 18 to 60 years of age
- Simple
- Safe
- Economical
- Portable
 Income tax sections

Income tax exemption limit under the following

sections is Rs. 1.5 lakhs.

Eligible assessess are Individual and HUF.

Refer TAX subject for all sections

 Deductions

 Section 80C – Specific investments such as LIC, UTI ,

PPF , term deposits NSC etc.
 Section 80D – Mediclaim insurance premium
 Section 80DD – Treatment and maintenance of
handicapped dependent relative
 Section 80E – Repayment of education loan
 Section 80U – Deductions for handicapped assesse
 Section 80TTA – Deductions in respect of interest on
savings bank account
End of UNIT 4