Friday, July 29, 2011

Know your PAN

Whether you are an Indian citizen or an NRI, if you are filing taxes or have financial transactions in India you will almost always need a PAN card. 

What is PAN?
A Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department of India. Each set of numbers is unique to the individual, HUF, company, etc. (We will take a closer look at those numbers in a moment.). PAN is a permanent number, is unaffected by a change of address, even between states and is not transferable. It is illegal to own more than one PAN.

The PAN’s primary purpose is to bring a universal identification key factor that links and tracks various documents and information regarding taxes and financial transactions, such as loans, investments, buying and selling real estate and other business activities of taxpayers. By tracking the above it indirectly prevents tax evasion through non-intrusive means.

You can consider this number to be similar to the Social Security Number issued in the United States to USA citizens and other legal residents.

Structure of the PAN
The structure of the new series of PAN numbers is based using Phonetic Soundex code algorithm to ensure that each number is unique. The following list is “constant permanent parameters” that assist in the creation of phonetic PAN (PPAN) number:
  • Full name of the taxpayer
  • Date of Birth/Date of Incorporation
  • Status
  • Gender in case of individuals; and
  • Father’s name in case of individual (including in the cases of married ladies). 
The Date of Issue (DOI) of the PAN card can be found on the right hand side of the photo on your PAN card.

The 10 Digit Alphanumerical Sequence
Let’s take a look at the breakdown of the 10 digit alphanumerical sequence:
  1. The first five fields are called the core fields and are alphabetical in nature.
  2. The first three letters of the core field are an alphabetical series running from AAA to ZZZ.
  3. The fourth character of the PAN must be one of the following, depending on the type of assessee:
  • C — Company
  • P — Person
  • H — HUF (Hindu Undivided Family)
  • F — Firm
  • A — Association of Persons (AOP)
  • T — AOP (Trust)
  • B — Body of Individuals (BOI)
  • L — Local Authority
  • J — Artificial Juridical Person
  • G — Govt
(Example – Company = AAACA; Artificial Juridical Person = AAAJA; HUF = AAAHA; etc.)

     4.  The fifth character of the PAN is the first character of the following:
  • Your surname in the case of “P” or;
  • For all others you would use the first letter of the name of the Entity, Trust, Society, Organization, HUF, etc.
(Example - Atanu Gupta [Personal] = AAAPG4444A; Atanu Gupta [HUF] = AAAHL4444A; General Firm = AAAFG4444A; etc.)

     5.   The next four numbers are sequential numbers running from 0001 to 9999.
     6.   The last digit is an alphabetic check digit.

The New Phonetic PAN (PPAN)
The new Phonetic PAN (PPAN) helps to prevent the allotment of more than one PAN to assesses with the same or similar names. If a matching PPAN is detected, a warning is given to the user and a duplicate PPAN report is generated. In these cases, a new PAN can only be allotted if the Assessing Officer chooses to override the duplicate PPAN detection. Under this new system a unique PAN can be allotted to 17 crore taxpayers.

Myths Regarding PAN
Many people believe that PAN cards are used for tax purposes only. That is a myth. PAN numbers are required for the purpose of income tax but not the actual card itself. Photocopies of PAN cards are required as prove of identity in financial transactions such as opening a bank account, purchase and sale of property and motor vehicles, home telephone lines and investments, such as demat accounts and mutual funds, just to name a few.

In Conclusion
It is easy to see the importance of your PAN card and why you need the physical card as well as the allotted PAN number. If you do not have a PAN card, take the small amount of time need to apply for one today.


Thursday, July 28, 2011

Before the MF Plunge

Investments in equities, especially for the long term, are likely to yield the highest returns. However, for many, keeping track of markets and individual stocks is not possible and also not advisable. Especially so as professionally-managed and tightly-regulated mutual funds are available to do the same job. The endeavor here is to highlight some basic steps to consider in building an equity portfolio through mutual funds

Identify financial goals
The process starts with identifying your financial goals. You may be looking to plan for retirement, children's education, a marriage or buying a house. If you have a fair sense of the time frame in which to build the corpus, financial websites can help you plan for the various scenarios, including factoring in possible rates of inflation.

Risk tolerance
Identifying your risk tolerance is important. If you are young and at the start of your career, you can have an equity-oriented portfolio as you can afford to take a risk in anticipation of higher returns. Those approaching retirement or are retired should ideally have low equity exposure.

Selecting a fund house
The next step is to identify fund houses that have a pedigree in the financial services and provide funds with a consistent track record across all categories. A minimum of five years consistent returns could be a pre-requisite.

Invest objective
Familiarize yourself with the investment objective of the shortlisted funds. Identify whether the funds invests across market capitalization or limits itself to large-cap, mid-cap or small-cap stock baskets. Most financial goals are long term and so it is better to invest in diversified funds that have broad mandates. Also consider the benchmark that the fund follows. It will give you a broad sense of whether the fund is tracking a broad index, such as the CNX 500 or the BSE 200.

Shortlisting schemes
You may use performance as a measure to make your final list of schemes. However, also consider consistency in performance over longer tenures, including for three, five and 10 years. Your selected schemes should ideally be those that have consistently beaten their benchmark and compare reasonably with their peers over long periods. You should also be aware that there is no advantage to over diversifying your investments. A maximum  of four or five equity schemes in more than enough.  A fund manager's track record is also a factor. The longer a manager has been with a fund, the better.

Keep track
Monitoring your investments is the next step. Don't fall in love with your funds. Ask your advisory or sign up for periodic updates on your investments. Do not be tempted to make changes in the first six months or even a year. If you have followed the steps outlined above, you will not need to make a short-term change.

Course corrections
As long as your investments are giving you the required rate of return, don't change your chosen funds or add funds, especially based on short-term performance. The only reason you will need to consider making a change would be if your selected scheme is trailing your required rate of return for over a year or even two.

Friday, July 15, 2011

E-Filing of I-Tax

Make sure your e-return is not rejected
If you are e-filing your tax returns, here are the errors you should avoid while sending ITR V 

Your return can be rejected if the guidelines laid down by the Income Tax Department are not followed while filing returns, be it physically or online. If you are e-filing and not using the digital signature, you will have to print out the acknowledgement form, ITR V. Here are the things you should keep in mind while using the option.

Printing ITR V
Printing the ITR V form correctly is critical. Avoid using the dot matrix printer if you want your return to be processed faster. This is because the bar code on the ITR V should be clearly visible for quicker processing, and this can be done only by using the ink jet or laser printers. Take the printout in black ink only. If you are sending two returns, don't print them back to back. Use a fresh A4 size sheet to print each time. Perforated paper or of any other size is not acceptable.

The signature on the form must be clear and legible. For this a ball-point pen in blue ink only. Also, if you are taking photocopies, make sure you send out the original one signed in blue ink. A photocopy of the signature is not accepted.

The filing of non-digitally signed returns is completed only when the ITR V reaches the CPC in Bangalore. So, make sure that your ITR V reaches the destination within 120 days of e-filing. In case it does not reach CPC Bangalore within the stipulated period, you will have to go through the agony of filing your tax return again. Earlier, you could not send more than one ITR V per envelope, but now, you can include more than one such form. Do not attach other documents, such as photocopies of Form 16 or TDS certificates along with the ITR V. Even annexure documents don't need to be attached. Dispatch it in an envelope that can hold an A4 size paper without folding it to:

Income Tax Department – CPC
Post Bag No - 1,
Electronic City Post Office,
Bengaluru - 560100, Karnataka

Other filing errors
Taxpayers often make mistakes that lead to deduction or incorrect calculation of taxes. One of these is not declaring the correct break-up of deductions under Section VIA, which includes tax-saving investments in life and health insurance policies, mutual funds, bank fixed deposits, etc. It is essential to have the tax filing details like deductee's PAN details, PAN & TAN of the deductor, total amount paid, total taxes deducted and deposited in Form 16/Form 26AS.

In case of a change in the residential address, make the necessary alterations in the PAN database since the IT Department refers to it for correspondence. Do not mention bank accounts that are closed or even dormant because refunds are unlikely to reach you in such a case.

No response from CPC
The CPC dispatches an acknowledgement on receiving the ITR V. Ideally, it should reach you within three days. If you don't receive it, consider sending it again. You can send it through regular post service or speed post. Do not use the courier or deliver it personally. You can call 1800-425-2229 (Toll free) and 080-22546500 (Direct) from 9am to 8pm on working days to check the status. It can also be done online at

Friday, July 8, 2011

Exemption-Can't avail

The exemption to file return for income up to Rs. 5 lakh looks good on paper, but nobody will be able to fulfil the condtions. 

The Central Board of Direct Taxes (CBDT) has made millions of Indians smile by announcing that salaried taxpayers with an annual income of up to Rs. 5 Lakh need not file their returns. Or so they think. Given the stiff conditions, it's unlikely that anyone will be able to avail of the concession. Here's why the CBDT's proposal is just a clever play, a theoretical relief that nobody will get.

According to the notification issued on 24th June,2011 a salaried person is exempt from filing his return if he fulfills the following conditions:
  • Total income after allowable deductions is up to Rs. 5 Lakh
  •  Income is only from salary and savings bank interest
  • Salary is from one employer
  • Savings bank interest is below Rs.10,000
  • Tax due on savings bank interest has been paid and included in Form 16.
The announcement comes at a time when Form 16s have already been prepared and issued to taxpayers. Will it possible to make the necessary changes in the Form 16 at this late stage? The second requirement, that the income should be only from salary and savings bank interest, is patently illogical. How many people who earn more than Rs 3-4 lakh a year will not have income from fixed deposits, mutual funds. stock trading, gold and property? If you invested in fixed deposits or NSCs to save tax or received dividend from your ELSS fund during the year, you don't make the cut for the exemption. Have you given your house on rent for even one month? Sorry, you will have to file returns. Only a person who has no tax-saving investment and lets all his money idle in a saving bank will be eligible.

Let us assume that there is indeed somebody who has no such investments and, therefore, no income other than from his salary and the interest on the bank account. Even then, he may not be able to fulfill the conditions for exemption. The notification says that the tax due on the interest income should have been paid and the income and the tax should be mentioned in Form 16 from the employer. The interest on bank account is credited on quarterly or half yearly basis. The interest from January-March or October-March gets credited after 31st March. You need to be a financial expert to correctly estimate the tax due on this income and pay the right amount. That's not all. You also need to provide these details to your employer in time for the accounts division to mention in your Form 16.

A taxpayer's quest for filing nirvana doesn't end here. If he has changed jobs during the year, a taxpayer won't be exempt from filing his tax returns. Given the high employee turnover rate in certain industries, such as software and IT-enabled services, very few people in these sectors will be able to claim exemption.

If you have managed to fulfill all the conditions, hats off to you.Given the plethora of paper work required to avail of the exemption and the possible repercussions of not filing your return, it seems that spending 30-40 minutes online is a far simpler option.