MONEY MATTERS

Managing your money can be tricky. Read on to find top- notch industry leaders resolve issues faced by readers.

Taxation

Shubham Agarwal: I am a salaried person aged 26 and earning ` 6 lakh a year. How can I reduce my income tax liability and plan for my retirement?

Ashish Shanker, Head, Investment Advisory, Motilal Oswal Private Wealth Management, replies:

ELSS funds are a good option for income tax purposes as they offer tax savings, capital growth and relatively lower lock-in periods. You can invest in ICICI Prudential Long Term Equity Fund (Tax Saving)-Growth or Reliance Tax Saver-Growth fund. Also, contribute to the National Pension System (it offers an equity-debt mix but has higher lock-in period), buy term insurance and/or medical insurance to protect self and family or get a home loan where you can claim a tax deduction on the principal portion of the loan. All these will significantly reduce your tax burden.

Planning for your retirement is another good move. Ideally, you should invest in equity and balanced mutual funds via SIP. In the equity space, we recommend Kotak Select Focus Fund-Growth, Aditya Birla Sun Life Top 100 FundGrowth, Motilal Oswal MOSt Focused 35 Fund and HDFC Balanced Fund. As for debt funds, try Aditya Birla Sun Life Short Term Fund or Franklin India Short Term Income Plan. Set aside a substantial amount every month after paying your bills. It will help you achieve all long-term goals. Start out with a higher equity allocation (70-75 per cent) and increase the debt component year on year to ensure a balanced portfolio that will reach its full potential by the time you retire.

As retirement is still a long way off, you can consider buying a house as your immediate goal. Owning an appreciating asset like a house has its benefits and saves expenses such as house rent. Subhash Nagpal: I invested in bitcoin last year and had a profit of ` 1,75,000. As bitcoins are not recognised by the Reserve Bank of India or the Indian government, do I have to pay tax on my gains? If yes, how should I show this income?

Chetan Chandak, Head of Tax Research, H&R Block India, replies:

Existing laws in India do not have any specific provision for taxing income from bitcoin, but it is certainly not tax exempt. Moreover, the Income Tax Act is not concerned with the legality of a transaction. Any income, if not exempt, can be brought into the tax net. So, the question is: Under which income category will it be taxable and at what rate? There are three possibilities.

If you are regularly trading in bitcoins, it can be classified as a business activity. But the entire thing is virtual, and taxmen may try to treat it as speculative business income. If you incur a loss here but have other business incomes, you will not be able to adjust the loss against those.

A more tax-efficient move is to put bitcoin profits under capital gains. If bitcoins are held for more than 36 months, the long-term capital gains (LTCG) tax will be imposed, and such gains will be taxed at 20 per cent post-indexation. If the holding period is less than 36 months, it will fall under shortterm capital gains, or STCG, and will be taxed as per the slab rate applicable to you. But in the absence of any guideline by the Central Board of Direct Taxes on the taxability of bitcoin, income tax officers may disregard your profit as capital gains.