Gifts at the time of marriage are tax-free

Updated: Jan 21 2007, 09:07am hrs
Recently, I have read in the papers about Index funds. I assume these funds have been recently launched. Are these better than investing in regular equity funds Can you throw some light on this subject

Chaitanya

Index funds are passive equity funds that invest in a basket of securities that comprise the index, say the Sensex or the Nifty etc, in the same proportion as they are contained in the index. Therefore, at any given point in time, the performance of an index fund should mirror the performance of the underlying index.

However, practically this may not happen as some funds have to be kept in cash to fund repurchase. Then there are transaction costs that the fund has to bear that the index as such doesn't.

This difference in the performance of the index fund vis-a-vis the underlying index that it is based on is known as the tracking error. Lower the tracking error better the performance of the fund. Index funds are really not a new concept in the Indian market.

These have been available for several years now. However, of late, equity funds that used to perform extremely well have been under-performing the index. This is especially true for calendar year 05-06. A section of the investment community believes that after a point, as the market gets more and more efficient, it is not possible for actively managed funds to continuously beat the index and as such it makes more sense to invest in index funds such that at least the investor will get the index returns.

A type of index fund that contains no tracking error at all is called Exchange Traded Funds. Space constraints preclude a detailed discussion on the subject however if you wish to invest in index funds, do choose the Exchange Traded variety over normal index funds.

My query is regarding the tax rules applicable on gains from PMS (Portfolio Management Schemes). Does the amount of tax be decided when we redeem the PMS Or do we pay STCG / LTCG tax based on the churning of portfolio by the PMS Manager Is the tax rate as applicable to equity-oriented mutual funds

Ravindra

In the case of a Portfolio Management Scheme, the company that manages the portfolios (referred to hereinafter as the Portfolio Manager) undertakes transactions on behalf of its clients. The clients' monies are pooled in the pool account of the Portfolio Manager and transactions are undertaken there from on behalf of the clients.

In this regard, the Portfolio Manager merely acts in a fiduciary capacity with regard to the client's funds and all rights, liabilities and obligations relating to securities transactions are essentially that of the client. For this service, the Portfolio Manager charges an agreed fee to the clients for rendering portfolio management services.

The Portfolio Manager ordinarily purchases or sells securities separately for each client. However, in the event of aggregation of purchases or sales for economy of scale, interest allocation is done on a pro-rata basis.

In other words, the Portfolio Manager may hold the securities belonging to the portfolio account in its own name on behalf of its clients

(if the contract so provides) and in such an event the records of the portfolio manager and its report to the client indicate that the securities are held by it on behalf of the portfolio account.

This is in conformation with the guidelines issued by Sebi vide Securities And Exchange Board Of India (Portfolio Managers) Regulations, 1993 as amended from time to time.

The rates of tax depend upon the view taken by the authorities as to whether this is a business or investment activity of the investor.

We strongly feel that this should be construed to be investment activity since the person does not spend any time on decision taking process.

(a) I am working at a PSU and posted at Sikkim. Towards my leased accommodation my company is paying Rs 4,200 towards the house owner per month. Besides that I am paying an extra amount of Rs 1,000 per month towards my house rent. Will I be able to get tax benefit on account of my extra payment

(b) I got married in 2003. My spouse is a housewife and fully dependant on me. At the time of marriage, the father of my spouse has deposited some amount in fixed deposit. Will I be able to get any tax relief for that If yes then what amount of that Please clarify me.

Nalin Shah

Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental less any amount paid by the employee or 20% of the salary (15% in cities with population less than four lakhs), whichever is lower. Therefore, the tax benefit on account of the extra payment is indirect in terms of a lower perk value.

From your query, it seems like you are asking about the tax benefits associated with an amount that you or your wife received three years back. Gifts at the time of marriage are tax-free. In any case, in 2003 there was no gift tax applicable and the amount would not have been taxable.

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