Income tax department introduces new utility software JSON for AY 2021-22 ITRs, discontinues Excel/Java

Income tax department introduces new utility software JSON for AY 2021-22 ITRs, discontinues Excel/Java

To improve the tax filing process, the Income Tax Department has done away with the excel and java-based utility and has launched a new offline JSON-based utility for the assessment year 2021-22. In the new utility taxpayers can import prefilled data and edit it before filing the income tax return (ITR). Let’s understand what the utility is all about and how you can file your ITR using the new utility.

1. You can download the pre-filled data from the income tax e-filing portal and fill in the rest of the data. The imported prefilled data can be edited to change basic information such as address and all.
2. The permanent account number (PAN) can’t be changed. For that, you will have to edit the information on the e-filing portal and then again download the prefilled forms using the utility.

3. Currently, the new utility can be used to file ITR1 to ITR 4. The tax department has released a step-by step guide to use the utility.

4. The facility to upload the income tax return (ITR) on the e-filing portal is not enabled as of now. You can fill and save the utility or export output JSON file on the system.

5. As the tax department will be providing pre-filled data, JSON technology makes the process of extracting data from other sources a lot faster, hence the tax department has switched from Java utility to JSON utility, which is currently being used for filing GST returns. It can handle heavy data in a better way, thus help in avoiding any inconvenience to taxpayers,” said Sandeep Sehgal, Director -Tax and Regulatory, AKM Global, a consulting firm

6. The central board of direct taxes (CBDT) has been working incessantly to simplify procedures and to create a taxpayer-friendly tax regime. The new utility is a user-friendly functionality for filing of returns and will afford greater ease to the taxpayers. The utility itself provides help in the form of FAQs, guidance notes, circulars and provisions of the law so as to enable hassle-free return filing. The Government’s efforts, to build a favourable tax regime for taxpayers cannot be disregarded. Augmenting simplicity and removing impediments will go a long way in increasing compliance and facilitating good governance. Taxpayers shall be able to pay taxes, verify and upload the ITR through the utility itself.

Creation and Redemption Process of ETF and how it works.

Creation and redemption is a process of making and destroying ETFs according to their demand. You can understand the supply and demand process of an ETF with an example of close ended fund. A basic difference between ETFs and closed-ended funds is their reaction to supply and demand in the market.

In the case of closed-ended funds the supply cannot be increased with demand, there are a fixed number of the fund’s units that trade on any exchange. So that means a closed-ended fund trades at premiums in high demand– where the fund costs more to buy than the value of its holdings. But supply of a close ended fund cannot be decreased when demand falls, meaning that the fund can be on discount in low demand.

But ETFs have a magical power of “creation and redemption” to change their supply as demand rises and falls. It also allows ETFs to ensure they are priced fairly even as investor demand swings wildly.

Liquidity in ETF Liquidity in ETF can be easily created by APs . APs are pre appointed by AMCs to provide ETF liquidity in market. APs are basically middle men who help in creation and redemption of ETF to enhance ETF liquidity.

So take a tour to understand, how does it work?

Creation:

There are many participants are involved in making of an ETF called “authorized participants,” (AP). Generally APs are big firms like bank and are pre appointed by AMCs. APs are decide how many ETFs get made and destroyed working closely with ETF providers to make a market for an ETF.

How APs create ETFs.

If an investor want to buy ETF he can buy through a broker. But if there is not enough people who want to sell particular ETF which he want to buy. To solve this, more ETFs can be created instantly to fulfill order. In this scenario Authorized participants purchase all the stocks that are present in ETF and gives to AMC, now AMC creates ETF and gives to APs and then APs deliver it to exchange or broker. This process is called ETF creation. This ‘creation’ mechanism ensures that there are always enough ETFs to go around, and that they never really have to trade at premiums in high demand.

Redemption:

Redemption If an investor wants to sell some ETFs but there are not enough buyers for ETFs. In this type of scenario the close ended funds trade at low cost but in the case of ETFs this is no problem as they can be redeemed and destroyed. In this situation Aps bring the ETFs to the ETF provider and ‘redeem’ them for shares. ETF redemption is also an automatic process like ETF creation.

Creation and Redemption is the “secret sauce” that makes ETFs less expensive, more transparent and more tax efficient than traditional mutual funds.

How to decide to choose Growth or Dividend mutual fund

Which is best growth or dividend plan for mutual fund
In a mutual fund scheme there are many choices for an investor. These all options are having their own advantages and disadvantages. So you have to choose according to your Investment goals. Among the more confusing decisions is the choice between a fund with a growth option and a fund with a dividend reinvestment option. Each type of fund has its advantages and disadvantages, and deciding which is a better fit will depend on your Investment goals.

Growth Option:
This high-risk, high-reward mantra is perfect for those who do not retire soon. Mutual funds come with growth plan and dividend plan. Under the growth plan whatever interests, bonus, gains and dividends the fund earns is reinvested in the same scheme, not distributed amongst the investors. This gets reflected in the NAV of the scheme, no interim payments whatsoever are made out of the fund holdings. The investor gets the return only upon redeeming the fund. So, the NAV of the growth plan and dividend option of the same scheme varies a lot. The NAV of the growth plan is much higher than the dividend plan as no pay-outs are made. If one is opting for an equity based mutual fund then the growth mutual fund is quite suitable as regards wealth creation. Hence no payouts are made, the power of compounding do a magic with your long term earning. And also long term capital gains from equity investment is non-taxable. But in case the fund is redeemed within one year then the tax rate is applicable as per investor’s current tax slab.

Dividend:
I the case of dividend plan dividends are distributed among the investors as per performance of the fund. Dividend option works best when markets are at all-time high. Moreover, if you are dependent on your investments for a regular income, the dividend option might work for you. However, you may lose on the compounding of returns aspect as dividends won’t be reinvested in the scheme. It results in slow growth in NAV of the fund. In dividend plan, there are two sub plans: Dividend Pay-out and Dividend Re-investment. In dividend pay-out the investor receives dividends in form of cash pay-out but in the latter option no cash is paid instead the dividends are re-invested and additional units are bought and credited to investor account.

how dividends are distributed

  • Dividend payout:

In this option dividend is directly credited to investor’s bank account. Such plans are suitable for the investors who want a regular cash flow but the NAV of the scheme grows slowly than growth plan.

  • Dividend re- Investment:

in this method the dividend is reinvested in same scheme. It is same as growth plan of mutual fund and helps in wealth creation over a period of time with the help of compounding.

Tax on dividend from mutual funds
The Finance Act, 2020 changed the method of tax on dividend. According to new Finance Act all dividend received on or after 1 April 2020 is taxable in the hands of the investor. The Finance Act, 2020 also imposes a TDS on dividend distribution by mutual funds on or after 1 April 2020, at the standard rate of TDS is 10% on dividend income paid in excess of Rs 5,000 from a company or AMC. However, as a COVID-19 relief measure, the government reduced the TDS rate to 7.5% for distribution from 14 May 2020 until 31 March 2021.

For example, Mr. Vishnu got ₹. 7,000 as dividend from a company on 15 June 2020. Since his dividend income exceeds ₹. 5,000, the company will deduct a TDS @7.5% on the dividend income which is ₹. 525. Mr. Vishnu will receive the balance amount of ₹. 6,475. Further, the dividend income is the taxable income of Mr. Vishnu taxed at the slab rates applicable for FY 2020-21 (AY 2021-22).

The Finance Act, 2020 also provides for deduction of interest expense incurred against the dividend. The deduction should not exceed 20% of the dividend income received. However, you are not entitled to claim a deduction for any other expenditure incurred for earning the dividend income. In the above example, if Mr. Vishnu borrowed money to invest in units of a mutual fund and paid interest of ₹. 3,000 during FY 2020-21, only ₹. 1,400 is allowable as an interest deduction.

TDS can be avoided
Submission of Form 15G/15H: A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit form 15G to the company or AMC paying the dividend. Similarly, a senior citizen whose estimated annual tax payable is nil can submit Form 15H to the company paying the dividend. The AMC informs investor about the dividend declaration on their registered mail ID and requires submission of form 15G or form 15H to claim dividend income without TDS.

Investors can opt for growth or dividend option based on their investment goals. So, people who wish to grow wealth over the long term, usually opt for growth option – this is because the compounding benefit is lost when AMC pays you dividends.

Here is complete guide on how to analyze a mutual fund with 7 most common parameters

How to analyze a mutual fund?
There is no guided path to analyze a mutual fund scheme. You have to develop your method to do that. All of the small Investors like to focus heavily on the fund manager and the quality of stocks, picked by the fund manager some others like to look at only the historical returns. Hence, there are plenty of different plans in mutual funds so it is very important to analyze a mutual fund according to your financial goals before investing in it.
Here are 7 most common parameters to choose what’s right for you.

1. Expense ratio
Expense ratio is the percentage of total assets that an AMC charges to you as annually fee for managing your money. Higher the expense ratio, reduces the returns of your scheme. So, you should go for funds with lower expense ratio. Expense ratio consist of

  1. Distribution charges.
  2. Security transaction fees.
  3. Management fee.
  4. Investors transaction fee.
  5. Fund service charges.

The expense ratio reduces the returns of your scheme. So it is very important to look for scheme with lower expense ratio. Generally mutual fund schemes are categorized into – Direct and Regular Plans. Both these plans are exactly the same, as they both are managed by the same fund managers with the same stocks and bonds. The only difference is that direct mutual funds charge no broker commission and other charges. On the other hand, regular mutual fund schemes charge intermediary fees or commission. This commission is added to the expense or management cost of your scheme.
Therefore, you must compare the expense ratios of the different schemes before investing in one.

2. performance vs. benchmark performance.
How do you know whether a particular scheme has performed well or not? Each and every scheme has a benchmark, which it aims to outperform. You can compare the returns of a particular fund against its benchmark index.
Let’s understand that with an example.
Assume that a particular scheme gives 20% return in a particular year and you think, it’s good for you to invest in it. But at the same time period benchmark of the same scheme generated a return of 25%.
Now, reconsider that the particular mutual fund performed better or worse as compared to the benchmark?
Well done, you got it right. Here is benchmark index is performed better than particular scheme.
If a fund generates excess returns over the returns of the benchmark, then the quantum of excess returns is referred to as alpha of the scheme.

So you should compare the returns of a particular MF scheme against its benchmark index. It should outperforme.
3. Risk level.
In mutual funds Investment, risk and returns are two sides of the same coin. You can say that high return is associated with high risk also. Check risk associated with the particular scheme, it should fall within your risk appetite. Generally In mutual funds risk is categories as

  1. Low Risk
  2. Moderately low
  3. Moderate
  4. Moderately High
  5. High

If you’re an investor with a low or moderately low-risk appetite, avoid high-risk funds.

4. Fund’s history.
The long-term performance is considered as the real test for a mutual fund scheme. A good scheme is one, which has generated consistent and stable returns over a period of 5-10 years. This gives the investors confidence that the fund can deliver returns, not only in the bull cycle but the bear cycle as well.
You should look at the history of the fund, Specifically, the performance of a fund over a period of at least 5 years.

5. Portfolio turnover ratio.
Portfolio Turnover Ratio means the frequency with which the fund’s holdings have changed over the past one year. It provides you an idea about the fund manager’s overall investment strategy. It helps you to understand the entire functioning of the scheme by looking at the PTR. You can check it in the monthly fact sheet of a scheme. However, there’s a simple formula which you may use to determine a fund’s Portfolio Turnover Ratio. It is calculated by dividing the lesser of purchases/sales by average asset under management (AUM).
Suppose the equity fund purchased ₹. 300 crore of equity shares. In the same year, it sold ₹. 400 crore of equity shares. The average AUM of the fund is ₹. 1200 crore. Hence, the Portfolio Turnover Ratio of the fund is 25%. It means that 25% or one-fourth of the assets of the portfolio were churned over the last one year.

By checking Portfolio turnover ratio of a scheme you can understand the strategy the fund manager is using to generate the return in your scheme. A low turnover ratio means buy and hold strategy. It shows the confidence of fund manager in his securities or stocks purchase. As a fund manager holds securities for a long time, it lower the expense ratio of the scheme. You should consider the category of a scheme when comparing PTR because it also depends on category of your scheme. For example the PTR of a passive funds like index funds, is low because there’s not much trading activity. The fund manager keeps buying and selling the securities to take advantage of the situation. High portfolio turnover means active strategy to generate high returns.
It is always advisable that consider expense ratio while analyzing a mutual fund along with return it provides.

6. Fund manager.
Hence what happens with your hard earned money in the particular scheme is depends on the fund manager. So performance, experience, history of the fund manager and other schemes that the fund manager is managing are crucial. This increases the reliability and confidence that your hard-earned money is in safe hands. Moreover, the reputation and history of the fund house, under which the scheme belongs can also be looked upon.
7. Exit Load.

This is the penalty charged by a fund house for leaving a scheme before a predefined time. Exit load normally ranges between 0% (for liquid funds) and 1% (up to 1 year of holding in an equity scheme). Invest in schemes with lower exit load or no exit load. Generally the exit load is charged, on the base of load structure applicable at the time of investment not at the time of redemption.
Putting all of the above factors together, you can add best mutual funds to your mutual fund portfolio.

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