Recently I read reports that the Union government has amended the Public Provident Fund (PPF) rules. What are the changes? — Vyash Muni, e-mail On 12 December 2019, the Union government replaced the PPF Scheme, 1968, with a new PPF Scheme, 2019. In 2016, the government allowed premature closure of the PPF account after five years in case of the account holder's death, the account-holder pursuing higher education or life-threatening illness in the family. Now, a PPF account holder can close the account after five years on change in residency status after production of a copy of passport and visa or income tax returns. Also, PPF can be withdrawn to finance higher education of the dependent children of the account holder on submission of fees bills or confirmation of admission in a recognized institute of higher education in India or abroad. The interest rate on premature withdrawal will be lower by 1% compared with the rate at which interest is credited to the account. The old rules did not permit NRI investors to open a fresh PPF account. They could continue contributing to the existing account till maturity. Now, NRIs do not have to close the PPF account on maturity. They can continue to operate it like any other investor. Earlier, deposits were allowed with a maximum limit of 12 deposits in a year. Now, deposits can be made in multiples of 50 as many times as the subscriber wants to the maximum limit of Rs 1.5 lakh per year. As per old rules, the PPF account could be extended on maturity with the option of "without deposits" and make deposits on further renewal after five years. As per new rules, if deposits are not made for a year after maturity, the subscriber will not be able to make deposits. The PPF account will continue to earn returns till there is balance. An investor wishing to continue the PPF account with deposits is required to inform the authority as well as make a deposit within the same year and every subsequent year. In the PPF Scheme, 1968, interest on loan against the PPF account was 2% per annum above the prevailing PPF interest rate. Now, the interest rate on loan has been reduced to 1% per annum above the prevailing PPF interest rate. The new PPF rules have also revised the application forms. Earlier, they were named as A, B and so on. Now, Form 1 is to be used to open account, Form 2 to apply for loan or withdrawal, From 3 to apply for closure of account, Form 4 to apply for extension and Form 5 for premature closure.   I was under the impression that I am the owner of an apartment on the fifth floor in a building at Walkeshwar, Mumbai. My non-resident brother is the owner of an apartment on the sixth floor. Due to family reasons, i wanted to adjust our mutual rights in the entire building. When I showed the property papers to a chartered accountant, he said I am an indirect owner of my apartment as I am a shareholder of the company owning the entire building. He advised me to take permission of the Reserve Bank of India (RBI) to adjust the rights with my non-resident brother. Why he is insisting of prior permission of the RBI when the matter can be settled between brothers by cross-gifts? — By Sanjay dated 30/11/2019 Shareholders own shares of the company but not the property of the company. You cannot transfer the apartment to your non-resident brother as it belongs to the company. You will have to transfer shares of your company to your brother to adjust the rights. Further, the RBI's permission is required as your brother is a non-resident. A person resident in India who proposes to transfer to a person resident outside India any security, by way of gift, has to make an application to the RBI furnishing the name and address of the transferor and the proposed transferee, relationship between the transferor and the proposed transferee, reasons for making the gift. Sale of any share or convertible debenture of an Indian company has to get the approval of the Union government. Thereafter, application has to be made to the RBI for its approval. The approval is granted subject to conditions considered necessary including the price at which such sale can be made. Thus, every transfer of securities between non-resident and resident requires prior approval of the RBI. Such reporting has to be made in form FC-TRS. FC-TRS is not required for transfer of shares of an Indian company from a non-resident holding the shares on a non-repatriable basis to a resident and vice versa, from a person resident outside India holding capital instruments in an Indian company on a repatriable basis to a person resident outside India holding capital instruments on a repatriable basis, and by gift. The onus of reporting is on the resident (transferor or transferee) or the person resident outside India holding capital instruments on a non-repatriable basis. Form FC-TRS has to be filed with the ----- AD bank within 60 days of receipt or remittance of funds or transfer of capital instruments, whichever is earlier. The share transfer deed (Form SH-4) has to be duly stamped at 0.25% of the consideration amount. Ensure that the articles of association permit such transfer.  

All my demat accounts are with one broker. I am perturbed because recently the Securities Exchange Board of India (Sebi) suspended a broker. What should I do?

— Raunak, e-mail

Sebi on 22 November 2019, barred a big broking house from taking new clients for alleged misuse of clients' securities. On 2 December 2019, the NSE and the BSE suspended the membership of the broking house based on Sebi's instructions. The broking house misused the power of attorney (PoA) given by its clients as it illegally sold securities without the clients' knowledge and got the entire proceeds transferred to its bank accounts.

Securities purchased, based on instructions from clients, are initially received in the broker's pool account. The securities are transferred from the broker's pool account to the clients' demat account within a day if these are paid for in full. Else, the securities are transferred to the client unpaid securities account (Cusa). After funds are received from the clients within five trading days, the securities are transferred from Cusa to the clients' demat account. Otherwise, the securities are sold off in the market to realise the funds.

The clients' shares were pledged to secure loans. The clients' shares were transferred to a proprietary account and were sold off-market without clients' knowledge. The funds generated from those transactions were not transferred to the clients' accounts. The broker illegally pledged them to take loans for its group company undertaking the real estate business. If the pledging had happened in the clients' demat account, they would have received updates about their pledged shares from the exchange.

Therefore, do not rely blindly on anyone. Check the broker's registration and licenses. Make sure that the personal information provided in the documents is correct and is of active email id or mobile. Check your demat holdings from time to time on NSDL or CDSL. Scrutinize bank statements. Cross-check the trades done by you to identify anomalies. If there are discrepancies, get in touch with the broker.

Electronic common account statement, called as e-cas, is shared monthly by the designated depositories through registered email id. The statement includes all the transactions that have occurred in the demat account during the period. The statement updates holdings.

Monitor the use of PoA. Ensure compliance of regulatory requirements. Funds from sale of securities are initially received in the broker's settlement account and then transferred to the broker-client account and should reflect in the clients' ledger instantly. The funds are transferred to the clients' bank accounts if the client requests for a pay-out. If there is no request from the client to transfer sale proceeds into his bank account, then the balance available in the ledger is to be transferred to the clients' bank account every quarter by default.

Listed, rated and principal-protected market-linked debentures offering 9.50% yield are available in the market. These are being pitched as better than fixed deposits because of the tax advantage.

— Anant Javeri, e-mail

The strong surge in the issuances of market-linked debentures (MLDs) is due to two factors: the necessity of companies to collect funds in a tight market and investors looking for some extra returns on post-tax basis.

The supply of money from both banks and mutual funds to NBFCs has dried up after the IL&FS collapse. So they have taken the MLD route. MLDs are of two types: principle protected and non-principle protected. They are issued for a period ranging from 13 months to 60 months. The minimum investment is generally Rs 25 lakh and more. Unlike a bond that pays a fixed interest either monthly, quarterly, half yearly or annually, MLDs do not pay any regular income. Income from an MLD comes only at maturity.

An MLD is linked to some underlying financial security such as stock market index NSE Nifty-50 or a 10-year government security paper. As there is no income to be had during its tenure, the gain from MLDs is ascertained only at the time of maturity, depending on how the underlying asset
has moved.

If the underlying security moves in the opposite direction, investors just get their principal and nothing else. Lower ratings connote higher risk. Though principle protected MLDs are listed on stock exchanges, they are rarely traded. Be prepared to hold on to them till maturity.

Investors are worried about the increasing risks in the fixed income market. Net worth investors to pick these MLDs due to the tax treatment they attract. A listed security held for more than 12 months is considered long-term capital asset. If it held for 12 months or less, the listed security is termed as a short-term capital asset. Unlisted debentures or bonds and units of debt-oriented mutual funds have to be held for more than 36 months to be considered as long-term capital assets. They will be short-term capital assets if held for 36 months or less.

The period of holding is the duration the asset is held by the investor immediately prior to its transfer. It is computed from the date on which the asset was acquired until the date of its transfer. If the asset is acquired other than by means of acquisition, the period of holding is reckoned as per various provisions of the Income Tax (IT) Act, 1961. The third proviso to Section 48 of the IT Act states that indexation will not apply to long-term capital gains arising from the transfer of bonds or debentures. However, indexation will apply to capital indexed bonds issued by the government and sovereign gold bonds issued by the Reserve bank of India under the Sovereign Gold Bond Scheme, 2015.

Short-term capital gains arising from transfer of all of these assets is taxable at the normal slab rates applicable to the person.

Interest from debentures and bonds is taxable under the head, ‘Income from other sources', as per the normal slab rates. Any reasonable expenditure such as commission or remuneration is incurred for realizing such interest can be claimed as a deduction.

If the investor sells MLDs on the exchange close to fair value, the gains so realised are taxed as long-term capital gains at 10%. The remaining amount is taxed as interest. For example, an investor does not sell the units but receives the payoff as maturity proceeds. The amount will be taxed as interest as per the applicable rate of tax. MLDs look juicy but are complex products. It's best that lay investors avoid them.

The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same.
Readers may e-mail their queries on direct taxation to: tax-matters@capitalmarket.com