Private provident funds and superannuation funds, that channelise a larger chunk of their corpus equity will not attract income tax, following change in tax rules. The tax-free status would allow more of retirement savings to flow into shares The Central Board of Direct Taxes (CBDT), the apex direct taxes body has now issued a notification, aligning the investment pattern prescribed in its rules with the new one given out by the Department of Economic Affairs, to allow these funds’ equity investments tax-free status. The DEA, under the finance ministry had announced the new investment formula for these funds in August, 2008, permitting them to invest up to 15% of their corpus in the stock market instead of the earlier 5%. The new investment pattern comes into effect from April 1, 2009. Therefore, aligning the CBDT investment pattern with the one prescribed by DEA was very crucial for these entities to retain their tax-free status.
Income-tax rule 67 prescribes an investment pattern for private provident funds and superannuation funds which is to be followed mandatorily to avail tax benefits. Income earned on investments not in line with the pattern prescribed by tax body face tax.
As per the new patter, equity investments can made in shares of companies on which derivatives are available in BSE/NSE.
The funds would also be able to channelise up to 55% of their funds in central and state government securities and units of mutual funds investing in such securities. The new pattern also allows these entities to park their funds to the tune of 40% in debt securities with maturity of not less than three years tenure issued by companies, banks and public financial institutions, term deposits of scheduled commercial banks and rupee bonds having an outstanding maturity of at least three years issued by multilateral institutions such as the International Bank for Reconstruction and Development, International Finance Corporation and the Asian Development Bank. Investments in money market mutual funds has been capped at 5% of the total corpus.
INCOME-TAX (FIFTH AMENDMENT) RULES, 2009 – AMENDMENT IN RULE 67
NOTIFICATION NO. 24/2009, DATED 12-3-2009
In exercise of the powers conferred by sub-section (1) of section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-
1. (1) These rules may be called the Income-tax (Fifth Amendment) Rules, 2009.
(2) They shall come into force with effect from the first day of April. 2009.
2. In the Income-tax Rules, 1962, in rule 67, for sub-rule (2) the following shall be substituted, namely:-
“(2) The manner of investment referred to in sub-rule (1) shall be in accordance with the following Table, namely:-
Provided that any moneys received on the maturity of investments made prior to the 1st day of April, 2009, reduced by obligatory outgoings, shall be invested in accordance with the manner of investment specified in this sub-rule:
Provided further that the investment pattern specified in this sub-rule may be achieved by the end of the previous year; so however that at no time during the year investment in any category should exceed by more than ten per cent of the limit prescribed:
Provided also that, irrespective of the proportion of investments stated in clauses (i) of the said Table, exposure of a trust to any individual mutual fund, under sub-clause (c) of the said clause, which has been set up as a dedicated fund for investment in Government securities, shall not exceed five per cent of its total portfolio at any point of time:
Provided also that the trustees shall invest at least 75 per cent of the amount invested under sub-clause (a) of clause (ii) of the said table in instruments having an investment grade rating from at least one credit rating agency registered under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992):
Provided also that in the event of the rating of any instruments mentioned in this sub-rule for being rated and their rating falling below the investment grade, as certified by one credit rating agencies registered under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), then the option of exit from such instruments can be exercised and the released funds shall be invested in accordance with the manner provided in the Table of this sub-rule:
Provided also that the turnover ratio, being the value of securities traded in the year divided by the average value of the portfolio at beginning of the year and the end of the year, should not exceed two.
Explanation I.- The manner of investment specified in this sub-rule shall apply to the aggregate amount of investible moneys with the fund in the previous year.
Explanation 2.- For the purposes of this sub-rule,-
(i) the expression “Government securities” shall have the meaning assigned to in clause (b) of section 2 of the Securities Contracts (Regulation) Act, 1956:
(ii) the expression “public financial institutions” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);
(iii) the expression “public sector company” shall have the meaning assigned to it in clause (36A) of section 2 of the Income-tax Act;
(iv) the expression “public sector bank” shall have the meaning assigned to it in clause (23D) of section 10 of the Income-tax Act; and
(v) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.”.
[Notification No. 24. F. No. 142/13/2008-TPL]