I regularly invest in mutual funds. However, I find that when I calculate my return on investment (ROI), it is sometimes lower and sometimes higher than what is given in the media (Economic Times, Business Standard, etc.) Could it be because my way of evaluating the return is based on my cost price rather than the face value? The face value is irrelevant to me since my cost would be what I have paid for the units and this is the figure which I require to find out my return. Your clarification on my question is highly appreciated.

?P R Singh

You are correct in observing that for any investor the face value of the units is irrelevant and it is his or her individual cost, which will have to be considered for calculation of the return. The ROI figures are based on the value (NAV) of the units. Therefore, if there is a ROI figure since inception, the same would be the IRR from the face value to the current value.

Three-year figures would calculate IRR from the NAV existing 3 years back till the NAV to date. So to answer your question, face value (which is the then NAV) comes in the picture only once, when since inception returns are calculated. Else it is year-on-year.

As far as your calculations are concerned, the same would be different, since your purchase date and the cost incurred would not be the same as the one considered by the media.

1) In the case of a liquid fund, what is the current rate of dividend distribution tax? My CA told me that it is higher than that applicable to other debt based schemes. 2) Would the tax be different in case I invest in MIP of any mutual fund and opt for regular monthly dividends?

?M P Shenoy

Your CA is correct. The distribution tax in the case of liquid funds is higher at 25% as compared to other debt-based funds. Other debt-based funds such as income funds or MIP have a lower distribution tax of 12.5%. Nowadays, mutual funds have introduced liquid plus funds that are for all practical purposes like liquid funds. However, the distribution tax rate on these funds is the lower rate of 12.5%. You may choose to invest in liquid plus funds instead of MIPs, as MIPs have an element of equity component that increases their risk.

I stay with my parents in their house. Recently one of my friends advised me to pay rent to my father to claim HRA exemption. Is this allowed under the rules? Is there any restriction on giving money to your parents and living under the same roof?

?Bhavin Shah

There is a deduction available from the House Rent Allowance amount (HRA) if the taxpayer pays rent for the premises he or she resides in. The reason your friend asked you to pay rent to your father was because then you would be able to claim HRA deduction. If no rent is paid, then there is no deduction available. However, this transaction should not be entered into to evade tax. In other words it should be a genuine arms length agreement between you and your father. Also, note that your father would have to include the rent you pay in his taxable income.

I have quite a large accumulated balance in my provident fund. I understand that I can avail it on my retirement. However, if I want to withdraw from the fund and use the money for my personal purposes, is there any tax incidence?

?Rajesh Shetty

The withdrawal from accumulated balance due and becoming payable to an employee participating in a recognised provident fund will not be taxable only in the following situations:

? If he has rendered continuous service with his employer for a period of 5 years or more. If accumulated balance includes any amount transferred from his individual account in any other recognised provident fund(s) maintained by his former employer(s), then, in computing the period of 5 years, the period(s) for which the employee rendered continuous service to his former employer(s) is also to be included.

? If the employee is not able to fulfill the conditions of such continuous service due to his service having been terminated by reason of his ill-health or by reason of the contraction or discontinuance of the employer’s business or due to some other reason beyond the control of the employee.

? If, on the occasion of his retirement, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer.

Is the LTA paid to employee taxable as fringe benefit tax in the hands of employer?

?P M Dixit

Vide F No 142/21/2005-TPL the ministry of finance, department of revenue, central board of direct taxes have released detailed explanatory notes on the provisions relating to fringe benefit tax.

Further, the finance ministry has clarified that LTA as we all know it is outside the purview of FBT. In other words, if the LTA forms a part of the salary package of an employee (which it does in most cases), irrespective of the exemption claimed in any year, such LTA will not be subject to FBT.

However, if any other form of LTA is given by the employer, then the same would be envisaged as an FBT item. For example, an incentive for achieving a certain level of business or an extraordinary performance manifests itself in a gratuitous holiday bestowed by the employer on the employee. So far, the expense on such profligacy escaped tax altogether – i.e. the same was not taxable either in the employee’s hands or the employer’s. In fact, the employer would claim such expenses tax deductible by classifying the same into travel and tour expenses or conveyance etc.

The finance ministry has clarified that it is only such holiday expenses that are envisaged to be taxed and not the regular LTA that an employee receives.

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