Archives June 2022

With the completion of five years of India’s GST law, the GST Council has conducted its 47^th Council Meeting with the presence of Finance Minister Nirmala Sitharaman. GST Council has allowed Amendments in GSTR-3B (Monthly GST return for taxpayers). Further, it permitted Auto-Population of most details in Form GSTR-3B and in Form GSTR-9 for better and easy compliance.

RELIEF TO INTRASTATE E-COMMERCE SUPPLIERS

GST Council have agreed to ease compliance bottlenecks for e-commerce suppliers. It allowed the e-commerce suppliers to register under the composition scheme for intrastate supplies easing their registration hassles and for reducing tax outgo. The new composition scheme for e-commerce suppliers for intrastate online sales will be implemented on 1st Jan 2023, once the IT system is set up. It means that such intrastate e-commerce suppliers will no longer need to obtain mandatory GST registration if their turnover does not exceed the limit of Rs.40 lakh (goods) or Rs.20 lakh (services) or such lower limits defined for some states/UTs. However, Interstate suppliers on e-commerce platforms shall have to obtain registration irrespective of turnover, compulsorily.

DEADLINE EXTENSIONS TO COMPOSITION TAXPAYERS

• GSTR-4 for FY 2021-22 to get a waiver of late fee for filing up to 28th July 2022 as against earlier extension of up to 30th June 2022.
• CMP-08 deadline for Apr-Jun 2022 (Q1 of FY 2022-23) to get an extension up to 30th July 2022 from 18th July 2022.

CORRECTION OF INVERTED TAX STRUCTURE

DESCRIPTION OF GOODS & SERVICES	OLD RATE	NEW RATE
Solar water heaters and systems	5%	12%
Prepared or finished leather or chamois leather or composition leathers	5%	12%
Job work for processing of hides, skins, leather, making of leather products including footwear, and clay brick manufacturing	5%	12%
Earthwork works contracts and sub-contracts to the Central and state governments, Union Territories and local authorities	5%	12%
Pawan Chakki being air-based atta chakki, wet grinder, cleaning, sorting or grading machines for seeds and grain pulses, and milling machines or cereal making machines, etc;	5%	18%
Ink for drawing, printing, and writing	12%	18%
Knives with paper knives, cutting blades, pencil sharpeners and its blades, skimmers, cake-servers, spoons, forks, ladles, etc	12%	18%
Centrifugal pumps, submersible pumps deep tube-well turbine pumps, bicycle pumps that are power-driven mainly for handling water	12%	18%
Milking machines and dairy machinery, cleaning, sorting or grading machines and its parts for eggs, fruit or other agri produce	12%	18%
Lights and fixture, LED lamps, their metal printed circuits board	12%	18%
Marking out and drawing instruments	12%	18%
Services by foreman to chit fund	12%	18%
Works contract for railways, metro, roads, bridges, effluent treatment plant, crematorium, etc.	12%	18%
Works contract and sub-contract to the Central and state governments, local authorities for canals, dams, pipelines, plants for water supply, historical monuments, educational institutions, hospitals, etc	12%	18%

GST RATE HIKES

DESCRIPTION OF GOODS & SERVICES	OLD RATE	NEW RATE
What’s costlier
Cut and Polished diamonds	0.25%	1.50%
Tetra Pack (Aseptic Packaging Paper)	12%	18%
Tar (From coal, or coal gasification plants, or producer gas plants and coke oven plants)	5%/18%	18%

GST RATE CUTS

Description of goods or services	Old Rate	New Rate
Import of tablets called Diethylcarbamazine (DEC) free of cost for National Filariasis Elimination Programme (IGST)	5%	Nil
Import of particular defence items by private businesses or suppliers for end-consumption of Defence (IGST)	Applicable rates	Nil
Ostomy Appliances	12%	5%
Orthopedic appliances such as intraocular lens, artificial parts of the body, splints and other fracture appliances, other appliances which are worn or carried, or body implants, to compensate for a defect or disability	12%	5%
Transport of goods and passengers by ropeways (with ITC of services)	18%	5%
Renting of truck or goods carriage including the fuel cost	18%	12%

SNIPPING OF GST EXEMPTIONS

DESCRIPTION OF GOODS & SERVICES	OLD RATE	NEW RATE
Earlier fully exempted, now withdrawn
Maps and hydrographic or similar charts of all kinds, including atlases, wall maps, topographical plans and globes, printed	Nil	12%
Cheques, lose or in book form	Nil	18%
Parts of goods of heading 8801	Nil	18%
Air transportation of passengers to and from north-eastern states and Bagdogra now restricted to economy class	Nil	Condition added
Transportation by rail or a vessel of railway equipment and material, storage or warehousing of commodities attracting tax such as copra, nuts, spices, jaggery, cotton, etc, fumigation in a warehouse of agri produce, services by RBI, IRDA, SEBI, FSSAI, and GSTN, renting of residential dwelling to GST-registered businesses, and services by the cord blood banks for preserving stem cells	Nil	Applicable rate
Room rent (excluding ICU) exceeding Rs.5,000 per patient day taxed without ITC	Nil	5%
Common bio-medical waste treatment facilities for treating or disposing biomedical waste shall be taxed with availability of ITC, like CETPs	Nil	12%
Hotel accommodation priced up to Rs.1,000 per day	Nil	12%
Training or coaching in recreational activities on arts or culture, or sports other than by individuals	Nil	Applicable rate
Earlier partially exempted, now withdrawn
Petroleum/ Coal bed methane	5%	12%
e-Waste	5%	18%
Scientific and technical instruments to public funded research institutes	5%	Applicable rate

SECTION 115BBH – TAX ON INCOME FROM VIRTUAL DIGITAL ASSETS

As per Section 115BBH, virtual digital assets (cryptocurrencies and non-fungible tokens) would be taxed at a flat rate of 30% on profits. This section will be effective from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 (Financial Year 2022-23) and subsequent assessment years.

• Tax shall be levied in the same manner as winnings from horse races or other speculative transactions are treated.
• No deduction will be allowed in respect of such income from virtual digital assets except for the deduction as “Cost of Acquisition”.
• Cost of Acquisition does not include infrastructure cost which might be incurred on mining crypto assets.
• Losses incurred from one virtual digital currency cannot be set-off against any income, not even from the income from another digital currency. However, Rebate under section 87A is available.
• If any person receives Digital Currency as a gift, it would be taxable in the hands of recipient.

SECTION 194S – TDS ON VIRTUAL DIGITAL ASSETS

The Finance Bill, 2022 has inserted a new section 194S which requires to deduct tax at source (TDS) @ 1% on the purchase consideration on transfer on virtual digital asset to any resident. Section 194S is effective from 1st July, 2022.

TDS @ 1% shall be paid irrespective of profit or loss on Virtual Digital Asset (mainly cryptocurrencies). Virtual Digital Asset is defined under Section 2(47A). In case of transfer of virtual digital assets, tax shall be deducted from the gross amount of consideration paid to the resident person.

However, in some cases, before releasing the consideration, the person responsible for the transfer of virtual digital asset shall ensure that tax has been paid in respect of such consideration:

• Where consideration is wholly in kind;
• Where a transaction is in exchange for another virtual digital asset, and there is no part in cash; or
• Where consideration is partly in cash and partly in kind, but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer.

According to Section 194S of the Income tax Act, Specified Person is defined as:

• a person being an individual or Hindu Undivided Family (HUF) whose total sales, gross receipts or turnover in case of business does not exceed Rs 1 crore and in case of profession does not exceed Rs 50 lakh during the financial year immediately preceding the financial year, or
• a person being an individual or Hindu Undivided Family (HUF) not having any income under the head “Profits and gains of business and profession”.

In case of Specified Person, the provisions of section 203A (Requirement to obtain Tax deduction and Collection Account Number) and 206AB (Special provision for deduction of TDS for Non-Filers of Income Tax Returns) will not be applicable.

Further, in case the payer is a Specified Person and the aggregate value of such consideration to a resident is less than Rs.50,000 during the financial year, no tax shall be deducted. However, in any other case, the threshold limit is proposed to be Rs.10,000 during the financial year.

TDS collected under Section 194S shall be deposited within 30 days from the end of the month in which the deduction has been made. Deposit of tax so deducted shall be made in the challan-cum-statement Form 26QE.

If the PAN of the deductee (buyer) is not available, then the tax at the time of transfer of VDA will be deducted at the rate of 20%. Further, if an individual has not filed his/her income tax return, then TDS will be deducted at a higher rate of 5% (as against normal rate of 1%), if the payer is not a specified person.

CIRCULAR NO. 13 of 2022 – Guidelines for removal of difficulties under sub-section (6) of section 194S of the Income-tax Act, 1961 issued by CBDT on 22nd June, 2022

Question 1. Who is required to deduct tax when the transfer of VDA is taking place on
or through an Exchange and payment is made by the purchaser to the Exchange
(directly or through broker) and then from the Exchange it goes to seller directly or
through the broker?
Answer: According to section 194S of the Act, any person who is responsible for paying to
any resident any sum by way of consideration for transfer of VDA is required to deduct tax.
Thus, in a peer to peer (i.e. direct buyer to seller) transaction, the buyer (i.e. person paying the consideration) is required to deduct tax under section 194S of the Act.
However, if the transaction is taking place on or through an Exchange there is a possibility of
tax deduction requirement under section 194S of the Act at multiple stages. Hence, in order
to remove difficulties for transactions taking place on or through an Exchange, the following
clarifications are issued:-
(i) In a case where the transfer of VDA takes place on or through an Exchange and the
VDA being transferred is owned by a person other than the Exchange: In this case buyer
would be crediting or making payment to the Exchange (directly or through a broker). The
Exchange then would be required to credit or make payment to the owner of VDA being
transferred, either directly or through a broker. Since there are multiple players, to remove
difficulty it is clarified that:

1. Tax may be deducted under section 194S of the Act only by the Exchange which is
   crediting or making payment to the seller (owner of the VDA being transferred). In a
   case where broker owns the VDA, it is the broker who is the seller. Hence, the amount
   of consideration being credited or paid to the broker by the Exchange is also subject to
   tax deduction under section 194S of the Act.
2. In a case where the credit/payment between Exchange and the seller is through a
   broker (and the broker is not seller), the responsibility to deduct tax under section
   194S of the Act shall be on both the Exchange and the broker. However, if there is a
   written agreement between the Exchange and the broker that broker shall be deducting tax on such credit/payment, then broker alone may deduct the tax under section 194S of the Act. The Exchange would be required to furnish a quarterly statement (in Form no 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962.

(ii) In a case where the transfer of VDA takes place on or through an Exchange and the
VDA being transferred is owned by such Exchange: In this case there are no multiple
players. The buyer is required to deduct tax under section 194S of the Act. However, there may be a practical issue as the buyer may not know whether the VDA being transferred is
owned by the Exchange or not. Hence, there may be genuine doubt in the mind of buyer with regard to its responsibility to deduct tax under section 194S of the Act. This difficulty would also be there if the buyer is buying VDA from an Exchange through a broker. To remove this difficulty, it is clarified that while the primary responsibility to deduct tax under section 194S of the Act, in this case, remains with the buyer or his broker, as an alternative the Exchange may enter into a written agreement with the buyer or his broker that in regard to all such transactions the Exchange would be paying the tax on or before the due
date for that quarter. The Exchange would be required to furnish a quarterly statement (in Form No. 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962. The Exchange would also be required to furnish its income tax return and all these transactions must be included in such return. If these conditions are complied with, the buyer or his broker would not be held as assessee in default under section 201 of the Act for these transactions.
For the purpose of this circular,-
(i) The term “Exchange” means any person that operates an application or platform for
transferring of VDAs, which matches buy and sell trades and executes the same on its
application or platform.
(ii) The term “Broker” means any person that operates an application or platform for
transferring of VDAs and holds brokerage account/accounts with an Exchange for
execution of such trades.

Question 2: Question no 1 was with respect to transactions where the consideration for
transfer of VDA is not in kind. How will this operate in a situation where it is in kind or
in exchange of another VDA?

Answer: According to proviso to sub-section (1) of section 194S of the Act, there could be
situations where the consideration is in kind or in exchange of another VDA or partly in kind
and cash is not sufficient to meet the TDS liability. In these situations, the person responsible for paying such consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration.

In the above situation, the buyer will release the consideration in kind after seller provides
proof of payment of such tax (e.g. Challan details etc.). In a situation where VDA “A” is being exchanged with another VDA “B”, both the persons are buyer as well as seller. One is buyer for “A” and seller for “B” and another is buyer for “B” and seller for “A”. Thus both need to pay tax with respect to transfer of VDA and show the evidence to other so that VDAs can then be exchanged. This would then be required to be reported in TDS statement along with challan number. This year Form No. 26Q has included provisions for reporting such transactions. For specified persons, Form No. 26QE has been introduced.
However, if the transaction is through an Exchange there is practical issue in implementing
this provision. In order to address this practical issue and to remove difficulty, it is clarified
that in such a situation, as an alternative, tax may be deducted by the Exchange. Such an alternative mechanism can be exercised by the Exchange based on written contractual agreement with the buyers/sellers.
If such an alternative mechanism is exercised,
(i) the Exchange would be required to deduct tax for both legs of the transactions and pay
to the Government. In the Form 26Q it will, for the reasons explained before, need to
report it as tax deducted on both legs of the transaction.
(ii) the buyer and seller would not be independently required to follow the procedure
prescribed in proviso to sub-section (1) of section 194S of the Act.

When the Exchange opts for deduction of tax under section 194S of the Act on such
transactions, there is also a possibility that the tax amount deducted is also in kind and needs to be converted into cash before it can be deposited with the Government. In this regard, the following mechanism shall be adopted by the Exchange
(i) At the time of transaction, the Exchange will deduct TDS in the pair being traded. For
example, in case of trade for Monero to Deso, 1% of Monero and 1% Deso will be
deducted as tax under section 194S of the Act by the Exchange and balance shall be
transferred to the customer. The trail of transactions evidencing deduction of 1% of
consideration for every VDA to VDA trade shall be maintained by the Exchange.
(ii) The Exchanges shall immediately execute a market order for converting this tax
deducted in kind (1% Monero/ 1% Deso in the above example) to one of the primary VDAs (BT, ETH, USDT, USDC) which can be easily converted into INR. This step will
ensure that the tax deducted under section 194S of the Act in the form of non-primary
VDAs like Deso/Monero is converted to an equivalent of primary VDAs which have a
ready INR market. Time stamps of timing of orders to be maintained to ensure such
conversion of VDAs withheld to be done on immediate basis by the Exchange. If the
taxes are withheld in primary VDAs, this step would be ignored.
(iii) All the tax deducted under section 194S of the Act in the form of primary VDAs {or
converted into primary VDA under step (ii)} will be accumulated for the day. Time limit
will be from 00:00 hours to 23:59 hours. VDA accumulation by the Exchange shall be
verifiable from the trail of orders for VDA to VDA trades executed during the day.
(iv) The accumulated balance of primary VDAs at 00.00 hours will be converted into INR
based on the market rate existing at that time. In order to bring in consistency and to
avoid discretion, the Exchanges are required to place market order at 00:00 hours for the
tax withheld {or converted under step (ii)} in form of primary VDAs for conversion into
INR. These sell market orders shall be executed based on the open buy orders in the
market. Price and quantity data for every matched trade shall be maintained by the
Exchange and shall be available for verification. It shall be verifiable from the system
coding that the conversion into INR happened at the first available buy order based on the
prevailing buy order book of the respective Exchange at the time of conversion. As a
practice, the respective Exchange liquidating the VDA shall be prohibited to be a buyer
for these VDAs.

(v) Customer will be issued a contract note over email which will include the amount of
tax withheld in kind under section 194S and the amount of INR realized from such tax
withheld.
(vi) The tax withheld in kind under section 194S of the Act and converted into INR by
following the above procedure shall be deposited in the Government Account as per the
time line and process given in the Income-tax Rules 1962.
It is clarified that there would not be any further TDS for converting the tax withheld in kind
in the form of VDA into INR or from one VDA to another VDA and then into INR.

Question 3: Whether the provision of section 194Q of the Act is also applicable on
transfer of VDA?
Answer Without going into the merit whether VDA is goods or not, it is clarified that once
tax is deducted under section 194S of the Act, tax would not be required to be deducted under section 194Q of the Act.

Question 4: Whether the consideration for transfer of VDA shall be on Gross basis after
including GST/commission or it shall be on “net basis” after exclusion of these items.

Answer: In order to remove difficulty, it is clarified that the tax required to be withheld under
section 194S of the Act shall be on the “net” consideration after excluding GST/charges
levied by the deductor for rendering service.

Question 5: In transactions where payment is being carried out through payment
gateways, there may be tax deduction twice.

To illustrate that a person ‘X’ is required to make payment to the seller for transfer of VDA. He makes payment of one lakh rupees through digital platform of “ABC”. On these facts liability to deduct tax under section 194S of the Act may fall on both “X” and “ABC. Is tax required to be deducted by both?
Answer: In order to remove this difficulty, it is provided that in the above example, the
payment gateway will not be required to deduct tax under section 194S of the Act on a
transaction, if the tax has been deducted by the person (‘X’) required to make deduction
under section 194S of the Act. Hence, in the above example, if “X” has deducted tax
under section 194S of the Act on one lakh rupees, “ABC” will not be required to deduct tax
under section 194S of the Act on the same transaction. To facilitate proper implementation,
“ABC” may take an undertaking from “X” regarding deduction of tax.

Question 6: Section 194S shall come into effect from the 1st July 2022. The liability to
deduct tax under section 194S of the Act applies only when the value or aggregate value
of the consideration for transfer of VDA exceeds fifty thousand rupees during the
financial year in case of consideration being paid by specified person and ten thousand
rupees in other cases. It is not clear how this limit of fifty thousand (or ten thousand) is
to be computed?
Answer: It is clarified that,-

(i) Since the threshold of fifty thousand rupees (or ten thousand rupees) is with respect to
the financial year, calculation of consideration for transfer of VDA triggering deduction
under section 194S of the Act shall be counted from 1st April, 2022. Hence, if the value or
aggregate value of the consideration for transfer of VDA payable by a person exceeds
fifty thousand rupees (or ten thousand rupees) during the financial year 2022-23
(including the period up to 30th June 2022), the provision of section 194S of the Act shall
apply on any sum, representing consideration for transfer of VDA, credited or paid on or
after 1st July 2022.
(ii) Since the provision of section 194S of the Act applies at the time of credit or payment
(whichever is earlier) of any sum, representing consideration for transfer of VDA, such
sum which has been credited or paid before 1st July 2022 would not be subjected to tax
deduction under section 194S of the Act.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While we have exercised reasonable efforts to ensure the veracity of information/content published, we shall be under no liability in any manner whatsoever for incorrect information, if any.

Section 194R of the Income Tax Act has been inserted in the Finance Act 2022 which is applicable from 1^st July 2022. Government has introduced section 194R keep a check on tax leakage. This section requires for deducting tax at source (TDS) in respect of business or profession on Benefits or Perquisites. Benefit/Perquisite can be either in kind or in combination of cash and kind.

Section 28(iv) of the Income Tax Act, 1961 provides that the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as Business Income in the hands of the recipient of such benefit or perquisite.

APPLICABILITY

Section 194R of the Income Tax Act is applicable to

• All assessee (other than Individuals and HUF)
• Individuals and HUF whose Turnover exceeds Rs.1 Crore or Professional Receipts exceeds Rs.50 Lakhs.
• Any person providing benefit or perquisite to a Resident.

NON-APPLICABILITY

• Provision of Section 194R is not applicable if the benefit or perquisite is provided to any Government entity.
• Section194R is not applicable on the benefits given on occasions like festivals, marriage, etc. It is applicable only on benefits and perquisites arising out of business or profession of any resident.
• As gift/ perks/ benefits, i.e., any benefit/perquisite provided to Resident employee will be added in salary and TDS will be deducted U/s 192 So provisions of Sec 194R is Not applicable in given case.

TAX RATE & THRESHOLD LIMIT

Any benefit or perquisite arising from business or profession whose aggregate value exceeds Rs.20,000 in the financial year will fall under Section194R and shall have to pay TDS @ 10%. TDS should be deducted before providing such benefit or perquisite.

To calculate the threshold limit, benefits or perquisites for the whole year shall be taken into consideration. In other words, we can say that benefits or perquisites shall be calculated from 1st April, 2022.

However, the benefit or perquisite which has been provided before 30st June, 2022 would not be subject to tax deduction under section 194R. Only the value of benefits or perquisites which are provided after 1st July, 2022 shall be liable for deducting tax at source at the rate of 10%.

CASE STUDIES

M/s PQR Limited/ PQR (Partnership Firm/AOP/BOI/Trust/Co-operative society), or Mr. PQR (Individual/HUF) having Turnover above Rs.1,00,00,000 or Professional Receipts above Rs. 50,00,000 in FY 2021-22 AY 2022-23 provides Gold Coins/ Holiday Package/ Coupons/Laptops/etc. to its dealers who is:

Case 1: Resident Person, provided with a holiday package amounting to Rs.40,000 +GST on 15/05/2022.

APPLICABILITY	REASON
Not Applicable	Since the benefit/gift/perquisite is provided before 1st July,2022, this section will not be applicable.

Case 2: Resident Person, provided with a holiday package amounting to Rs.40,000 +GST on 15/07/2022.

APPLICABILITY	REASON
Applicable	Since the benefit/gift/perquisite is provided after 1st July,2022, this section will be applicable and TDS will be payable @10%.

Case 3: Resident Person, provided with a holiday package amounting to Rs.10,000 +GST on 15/05/2022 and Gold Chain worth Rs.16000 on 31/07/2022.

APPLICABILITY	REASON
Applicable	Since the Gold chain is provided after 1st July,2022 and the aggregate value exceeds the threshold limit of Rs.20,000, i.e., 10,000 before 01/07/2022 and 16,000 after 01/07/2022, this section will be applicable but TDS will be payable only on the value of Gold chain which is Rs.16,000 @10%.

Case 4: Resident Person, provided with a holiday package amounting to Rs.10,000 +GST on 15/05/2022 and Gold Chain worth Rs.25000 on 31/07/2022 on the occasion of marriage

APPLICABILITY	REASON
Not Applicable	As the Gold chain provided after 1st July,2022 is on the occasion of marriage and not from business/profession, it would not be included in the aggregate value. And therefore, aggregate value does not exceed the threshold limit of Rs.20,000, so Section 194R will not be applicable.

Case 5: M/s ABC Limited (Resident Dealer) was provided with Gold Coin Worth Rs.15000 on 31/07/2022 on achieving target for FY 2021-22 and being impressed with Mr. B (employee of M/s ABC) performance it provided Silver Coins amounting to Rs.10,000 + GST to Mr. B on 31/07/2022 as gift.

APPLICABILITY

REASON

Not Applicable

As the Gold coin provided after 1st July,2022 does not exceed the aggregate value of Rs.20,000, section 194R will not be applicable on M/s ABC Ltd.   Silver coins worth Rs.10,000 is not in relation with business and is provided under his personal capacity. Hence it shall not be included in the calculation of aggregate value. Therefore, Section 194R is not applicable to either Mr. B or M/s ABA Ltd.

VALUATION

It has been clarified that the valuation of benefit/perquisite shall be made at the fair market value of that benefit or perquisite.

However, if the deductor has purchased that benefit from an outside party, the value of benefit/perk will be equal to the purchase price to the deductor. And in case the deductor manufactures the same, value of benefit/perk would be equal to the market price of such item.

FAQs

Q1. Whether sales discount will attract TDS under this section?

Since sales discount are ordinary selling expenditure and are incurred as incentives to distributors for meeting sales targets, so it does not constitute as benefit or perquisite. Therefore, Section 194R will not be applicable.

Q2. Does Section194R applies to Capital Assets?

Capital Assets like car, land, etc. are taxable as benefit or perquisite and thus capital assets are covered under the ambit of section 194R.

Q3. Does Section 194R attracts taxability for free samples of medicines given to doctors?

Section 194R will be applicable to doctors or hospitals if they are receiving free samples of medicines.     

Q4. Does the valuation of benefit or perquisite include GST?

The CBDT has clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R.

Q5. Under which head would it be taxable in the hands of the Receiver?

It would be taxable as business income under the head Business and Profession.

Q6. Many a times, a social media influencer is given a product of a manufacturing company
so that he can use that product and make audio/video to speak about that product in social media.
Is this product given to such influencer a benefit or perquisite?
In case of benefit or perquisite being a product like car, mobile, outfit, cosmetics etc and if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act.

Q7. Whether reimbursement of out of pocket expense incurred by service provider in the
course of rendering service is benefit/perquisite?
Any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.

Let us assume that a consultant is rendering service to a person “X” for which he is receiving consultancy fee. [n the course of rendering that service, he has to travel to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to “X”. Ordinarily, the expenditure incurred by the consultant is part of his business expenditure which is deductible from the fee that he receives from company “X”. In such a case, the fee received by the consultant is his income and the expenditure incurred on travel is his expenditure deductible from such income in computing his total income. Now if this travel expenditure is met by the company “X”, it is benefit or perquisite provided by “X” to the consultant.

However, sometimes the invoice is obtained in the name of “X” and accordingly, if paid by the consultant, is reimbursed by “X”. In this case, since the expense paid by the consultant (for which reimbursement is made) is incurred wholly and exclusively for the purposes of rendering services to “X” and the invoice is in the name of “X”, then the reimbursement made by “X” being the service recipient will not be considered as benefit/perquisite for the purposes of section 194R of the Act.
If the invoice is not in the name of “X” and the payment is made by “X” directly or reimbursed, it is the benefit/perquisite provided by “X” to the consultant for which deduction is required to be made under section 194R of the Act.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While we have exercised reasonable efforts to ensure the veracity of information/content published, we shall be under no liability in any manner whatsoever for incorrect information, if any.

WHAT IS BUYBACK OF SHARES?

Buyback of Shares is also known as Share Repurchase. The name itself suggests that buyback refers to the buying back of shares by the company from the shareholders in the open market at a premium. The repurchased shares are cancelled by the company and hence, reduce the outstanding shares in the market. Tax on Buyback of shares is now regulated by Section 115QA of the Income Tax Act,1961.

WHY DO COMPANIES BUYBACK SHARES?

• Correction of Share Price: Buyback of Shares generally results in increase in the market price. So, if the market price of the shares is highly undervalued, the company can correct it by buying back of shares.
• Promoter’s Shareholding: One of the main reasons behind buyback of shares is to increase the shareholding of the promoters by purchasing from the open market.
• Attractive Financials: With the reduced number of shares from buyback, Earnings per share of the company would increase. It also helps in improving the key financial ratios.
• Utilization of Excess Cash: By buyback of shares, company can use their excess cash balance by paying premium to the shareholders over and above the market price.

INCOME TAX ON BUYBACK ON SHARES AS PER SECTION 115QA

Initially, Section 115QA was applicable only to Unlisted companies but in the Union Budget 2019, it was announced that this section is now applicable to Listed companies also. The effect of this was applicable from 1^st July, 2019.

As per Section115QA, all the companies (both listed and unlisted) have to pay tax at the rate of 20% (plus Surcharge @ 12% and HEC @4%).

• Companies have to pay tax on the amount of distributed income on the buyback of shares.
• The tax shall be paid within 14 days from the date of payment to the shareholders.
• The amount of tax paid is not available for any credit.
• Every company shall pay tax on the distributed income in case of buyback of shares even if that company is not liable to pay income tax.

As per Section 115QA read along with Section 10(34A), shareholders are exempt from any kind of tax on buyback of shares. It would have been considered as double taxation if both shareholders and companies have to pay tax on buyback of shares. Therefore, only companies are liable to pay tax on buyback of shares.

TAX LIABILITY	BEFORE AMENDMENT	POST AMENDMENT (2019)
COMPANY (Both Listed and Unlisted)	No Tax Liability	The company is now liable for a buyback tax of 20% on the Distributed Income*
INDIVIDUAL SHAREHOLDER	Individual shareholders must pay Capital Gains Tax (Long term or Short term) depending on the holding period of shares	No Tax Liability

 

WHAT IS LIMITED LIABILITY PARTNERSHIP?

Limited Liability Partnership (LLP) is a combination of a corporate structure along with the flexibility of a partnership. LLP is governed by Limited Liability Partnership Act, 2008. Nowadays, LLP has become very popular of business as many entrepreneurs are willing to opt for it.  An LLP is a separate legal entity and the liability of its partners are limited to the agreed upon contribution in the LLP. An LLP can enter into contracts and hold property in its own name. Just like partnership deed, LLP is also operated on the basis of the LLP Agreement. Limited liability partnerships are taxed at the rate of 30%.

ADVANTAGES

• Limited Liability (from the partner’s point of view): Partners in an LLP have limited liability which implies that the partners are liable only to the extent of their contribution. Partners are not responsible for any misconduct by other partners, and they are not liable to pay off the debts of the LLP from their personal assets.
• Flexibility: Since LLP is operated by LLP Agreement, it has greater flexibility in the management of the business in comparison to a company.
• Separate Legal Entity: LLP is a separate legal entity from its members. It can hold property, and buy assets in its own name.
• Corporate Ownership: LLPs have corporate ownership without having to comply with all the compliances as in a company. It means that LLPs can appoint two companies as their members, rather than having to appoint at least one director as in the case of a company.
• Perpetual Succession: Perpetual succession in an LLP means that it is not affected by the death, insolvency, retirement or any other change of the partners.
• Easy Formation: As compared to a company, forming an LLP is less complicated and less time consuming. It has fewer legal compliances.
• Capital Requirement: There is no minimum cap as for the requirement of capital. LLP can be formed with any amount of capital.
• Audit: Audit of an LLP is not mandatory. Although, if the turnover of an LLP exceeds the certain prescribed limit, then LLP shall require to get the tax audit.

DISADVANTAGES

• Taxation: In an LLP, the rate of taxation is flat 30% irrespective of the turnover, while a company is taxable at the rate of 25% if the turnover is upto Rs.250 crores.
• Limited Liability (from point of view of LLP): Partners are the real owners of the LLP. They can operate in their own ways. And since the liability of the partners are limited, LLP would have to suffer any loss even if the fault is of the partner/member.
• Public Disclosure: Financial Accounts have to be represented as public records. Personal income of the members also has to be disclosed.
• Capital Requirements: LLPs does not have the concept of equity investments. Investors cannot fund an LLP without becoming a member. So, it would be difficult for an LLP to fulfil the capital requirements.

TRADITIONAL PARTNERSHIP V/S LLP

PARTICULARS	TRADITIONAL PARTNERSHIP	LLP
Registration under Act	Indian Partnership Act, 1932	Limited Liability Partnership Act, 2008
Minimum no. of Partners	2 Partners	2 Partners
Maximum no. of Partners	Maximum 20 Partners	No Limit
Liability of Partners	Jointly Liable	To the extent of their contribution
Registration	Not Compulsory	Compulsory
Tax Audit	Required when Turnover/Gross Receipts exceeds Rs.1 crore – Business Rs. 50 Lakhs – Profession	Required only if Turnover > Rs.40 Lakhs; or Contribution > Rs.25 Lakhs

COMPANY V/S LLP

PARTICULARS	COMPANY	LLP
Registration under Act	Companies Act,2013	Limited Liability Partnership Act,2008
Designated Directors/Partners	Minimum – 2 Maximum – 15	Minimum – 2 No Maximum Limit
Minimum no. of members	2	2
Maximum no. of members	200	No Limit
Abiding by	MOA/AOA of the company	LLP Agreement
Tax Audit	Compulsory	Required only if Turnover > Rs.40 Lakhs; or Contribution > Rs.25 Lakhs
Compliances	High Legal Compliances	Less Compliances as compared to company
Registration Costs	Higher as compared to LLP	Low Registration Cost

E-Invoicing is a system for authentication of B2B invoices electronically by the GSTN. Under the electronic invoicing framework, a unique Invoice Reference Number (IRN) is issued against each invoice digitally using Invoice Registration Portal (IRP) managed the GSTN. Maximum 100 items can be incorporated in a single invoice.

E-Invoicing eliminates the need to enter data manually in different portals, i.e., we are not required to enter the same data again and again into GST Portal, E-Way Bill Portal and in the E-Invoice Portal.

E-Invoicing also helps to track the invoices in real-time. It helps in resolving a large gap in data reconciliation under GST to reduce the mismatch of errors. It provides a framework to quickly access the complete invoice related details.

APPLICABILITY

An assessee shall comply with the provisions of e-invoicing if their aggregate turnover exceeds the specified limit in any financial year after the implementation of GST, i.e., 2017-18 onwards. The calculation of aggregate turnover shall include the turnover of all the GSTINs issued under a single PAN across India.

PHASE	APPLICABLE IF	APPLICABILITY DATE
I	TURNOVER > 500 CRORES	01.10.2020
II	TURNOVER > 100 CRORES	01.01.2021
III	TURNOVER > 50 CRORES	01.04.2021
IV	TURNOVER > 20 CRORES	01.04.2022

Example: Suppose PQR Ltd had aggregate turnover as follows:

YEAR	TURNOVER
FY 2017-18	Rs.12 crore
FY 2018-19	Rs.16 crore
FY 2019-20	Rs.23 crore
FY 2020-21	Rs.18 crore
FY 2021-22	Rs.14 crore

PQR Ltd shall mandatorily generate e-invoices from 01.04.2022 irrespective of the current year’s aggregate turnover as it has crossed the threshold limit of Rs.20 crore turnover limit in FY 2019-20.

Following class of taxpayers are currently covered under e-invoicing:

• Supplies to the registered persons (B2B)
• Supplies to SEZs
• Exports
• Deemed exports

WHO DOESN’T REQUIRE E-INVOICING?

Following category of a person exempted under e-invoice

• A banking company
• A non-banking financial company
• A financial institution
• An insurer
• A person engaged in supplying passenger transportation service
• A goods transport agency (GTA) supplying services
• A person engaged in supplying services in terms of admission of the exhibition of cinematograph films in the multiplex screen
• Persons registered in terms of Rule 14 of CGST Rules (OIDAR)
• Special Economic Zone units (although e-invoicing is required for SEZ Developers)

HOW TO REGISTER FOR E-INVOICING

• Go to the website https://einvoice1.gst.gov.in/

• Click on Registration < e-Invoice Establishment.
• Fill your GSTIN, enter the captcha and click on GO.
•  After clicking on GO, the details would be shown as below:

• Then, click on SEND OTP. OTP will be sent on your registered mobile number. Verify the OTP.
• Now, select the respective financial year and specify the turnover of that period.
• Click on SUBMIT.

• After submitting the required details, login credentials would be generated. He/she would be registered for preparing e-invoices.

WHAT IS F&O TURNOVER?

Computing the turnover on Futures and Options is significant for the purpose of tax filing and F&O trading is mostly reported as business income while filing tax returns. Yet, one needs to analyze their total income, which can be positive or negative value (profit or loss). Expenses like office rent, telephone expenses, broker’s commission, etc. which are directly connected to F&O business should be deducted from the income. The remaining amount would be considered as the turnover from the F&O trading.

Traders are often faced with the challenge of calculating trading turnover from Derivatives and Intra-day. So, following are the formulas, using which, we can calculate the turnover:

TYPE OF TRADING	CALCULATION OF TRADING TURNOVER	TAXABLE UNDER THE HEAD	RATES
Equity Trading Intra-day	Absolute Profit/Loss [Sale price – Buy price]	Speculative Business Income	Respective Slab Rate
Futures – Equity, Commodity, Currency	Absolute Profit/Loss [Sale price – Buy price]	Non-Speculative Business Income	Respective Slab Rate
Options – Equity, Commodity, Currency	Absolute Profit/Loss* + Premium received from Sale of Options	Non-Speculative Business Income	Respective Slab Rate
Equity Delivery** Trading & Mutual Fund Trading	Total Sales Value of Shares/ Mutual Fund	Capital Gain	LTCG@10% STCG @15%
Debt Funds***	Total Sales Value of Debt Fund	Capital Gain	LTCG@20% with indexation STCG @ respective slab rate
Hybrid Funds	If: Equity Oriented > 65% = Equity Debt Oriented > 60% = Debt	Capital Gain	Respective slab rates as per Equity and Debt Orientation

*Profit & Loss both here are taken as positive figures.

**In case of Equity Funds, if the holding period is less than one year, it would be treated as Short Term Capital Gain.

***In case of debt funds, if the holding period is less than 3 years, it would be treated as Short Term Capital Gain.

We should understand this with the help of some examples:

Case 1: If Saurabh purchases 500 quantity of Equity Shares @Rs.50 and sells at Rs.57 on the same day (intra-day). His turnover would be determined as:

PARTICULARS	CALCULATION	AMOUNT
Profit on Sale of Shares	500 * (57-50)	3,500

Case 2: If Saurabh purchases 500 quantity of Futures @Rs.600 and sells at Rs.620. His turnover would be determined as:

PARTICULARS	CALCULATION	AMOUNT
Profit on Sale of Futures	500 * (620-600)	10,000

Case 3: If Saurabh buy 500 quantities of Options A @Rs.80 each and sells them at Rs.77. and he also purchases 250 quantity of Options B @ Rs.60 and sells at Rs.62. His turnover would be determined as:

PARTICULARS	CALCULATION	AMOUNT
Loss on Sale of Options A	500 * (80-77)	1,500
Premium on Sale of Options A	500 * 77	38,500
Profit on Sale of Options B	250 * (62-60)	500
Premium on Sale of Options B	250 * 62	15,500
Total Turnover		56,000

Case 4: If Saurabh buy 500 quantities of Equity Share A @Rs.80 each and sells them at Rs.87 after 13 months. He also purchased 250 quantity of Equity Share B @ Rs.60 and sells at Rs.62 after 4 months. His turnover would be determined as:

PARTICULARS	CALCULATION	AMOUNT
LTCG on Sale of Equity Share A	500 * (87-80)	3,500
STCG on Sale of Equity Share B	250 * (62-60)	500
Total Capital Gain		4,000

Note: Equity Share A has been taken under Long Term Capital Gain (LTCG) since they have been held as investment for more than one year.

F&O LOSSES AND TAX AUDIT

Intra-day stock trading is taxable under the head Speculative income/loss. Speculative loss can be adjusted only against the speculative income. However, any unadjusted speculative loss can be carried forward up to 4 years. F&O trading income/loss is covered under Non-Speculative business income. Any unadjusted business loss can be carried forward for 8 assessment years.

Tax Audit u/s 44AB is applicable when the trading turnover exceeds Rs.1 crore, but if the taxpayer has opted for presumptive taxation scheme, the limit for turnover is Rs.2 crores.

CONCLUSION

F&O trading has turned into an appealing proposition because of the accessibility of numerous trading platforms. Taxpayers often get confused while filing taxes about the income generated by F&O trading, and it is vital to comprehend the process to ascertain F&O turnover for income tax purposes, and when tax audit is applicable.

Section 40(B) of Income Tax Act provides the maximum permissible amount payable to a partner in a partnership firm. The returns of a partner can be in the form of

• Interest on Capital: Interest payable to partners shall be in accordance with the terms of the partnership deed, however, it shall not exceed 12% per annum.
• Share of Profit
• Remuneration: Remuneration payable to partners shall be in accordance with the terms of the partnership deed

ESTIMATION OF INCOME OF PARTNER IN A FIRM

The partner’s share in the total income of firm is exempt in the hands of the partner and hence would not be included in his total income. And due to this exemption, he cannot set-off his share of profits a firm’s losses.

INTEREST PAYABLE TO PARTNERS

There are few conditions which shall be fulfilled in order to be eligible for interest payable under section 40(B):

• The interest payable by a firm to its partners should be authorized by and in accordance with the partnership deed.
• The interest payable by a firm to its partners should not be for a period falling prior to the date of such partnership deed authorizing the payment of such interest.
• Interest payable to partners has a maximum cap of 12% per annum. Firm cannot pay any more than the prescribed limit.

Note: Interest here means simple interest and not compounding interest.

CONDITIONS FOR DEDUCTION UNDER REMUNERATION:

Remuneration to partners includes salary, bonus, commission, etc. Following conditions need to be satisfied for claiming the deduction:

• Remuneration shall be allowed only to working partners. Working Partner is a partner who actively engages in conducting the business affairs of the firm.
• Remuneration must be authorized by partnership deed and according to the terms of partnership deed.  Clear directions must be specified in the partnership deed.
• Remuneration paid to the working partners will be allowed as deduction but it should belong to the period as specified in the partnership deed. It should be related to the period of the partnership deed.
• It is not allowed if tax is paid on presumptive basis under section 44AD or section 44ADA.
• Remuneration payable shall be within the maximum permissible limits (as mentioned below). This limit is for total salary to all partners and not for any single partner.

CALCULATION OF BOOK PROFIT FOR PARTNER’S REMUNERATION U/S 40(B)

Book profit means the net profit as shown in the profit and loss account which is computed according to the manner laid down in the chapter IV-D. Book profit is calculated after some adjustments which are mentioned below:

• Net profit as per profit and loss account
• Add remuneration/salary/bonus/commission if already debited
• Add Brought forward business loss, deduction under section 80C to 80U if debited to profit and loss a/c
• Deduct interest if it is not deducted
• Make adjustments for expenses as per section 28 to 44D.

AMOUNT OF DEDUCTION:

BOOK PROFIT (Rs.)	MAXIMUM DEDUCTIBLE AMOUNT (Rs.)
Loss	1,50,000
Profit upto Rs.3,00,000	90% of book Profit or Rs.1,50,000; whichever is more
More than Rs.3,00,000	60% of the Book profit

TAXABILITY IN THE HANDS OF PARTNERS:

Remuneration is taxable in hands of partners as Business Income. Note that remuneration to partners is distant from the share of profits payable to partner since share of profits is exempt,  but remuneration is taxable in the income of partners.

SOURCE: SEBI

WHAT IS MUTUAL FUND?

A mutual fund is a professionally-managed investment scheme, made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

DIFFERENT TYPES OF MUTUAL FUND SCHEMES

EQUITY SCHEMES

S.NO.	CATEGORY	SCHEME CHARACTERISTICS/MINIMUM CONDITIONS
1	Multi-Cap Fund	Invest across large-cap, mid-cap, small-cap stocks Min. equity component – 65%
2	Large Cap Fund	Predominantly invest in large-cap stocks Min. equity component – 80%
3	Large and Mid-Cap Fund	Invest in both large-cap and mid-cap stocks Min. equity component (large-cap stocks) – 35% Min. equity component (mid-cap stocks) – 35%
4	Mid Cap Fund	Predominantly invest in mid-cap stocks Min. equity component (mid-cap stocks) – 65%
5	Small Cap Fund	Predominantly invest in small-cap stocks Min. equity component (small-cap stocks) – 65%
6	Dividend Yield Fund	Predominantly invest in dividend-yielding stocks Min. equity component – 65%
7	Value Fund	The scheme should follow a value investment strategy Min. equity component – 65%
8	Contra Fund	The scheme should follow a contrarian investment strategy. Min. equity component – 65%
9	Focused Fund	Maximum 30 stocks Min. equity component – 65%AMC to mention where the scheme intends to focus, viz., (multi-cap, large-cap, mid-cap, small-cap)
10	Sectoral/Thematic Fund	AMC to clearly mention the sector/theme that the scheme shall focus on Min. equity component (for stocks belonging to that sector/theme) – 80%
11	Equity Linked Savings Schemes (ELSS)	The statutory lock-in period of 3 years Min. equity component – 80% (per Equity Linked Saving Scheme, 2005, as notified by the Ministry of Finance)

DEBT SCHEMES

S.NO.	CATEGORY	SCHEME CHARACTERISTICS/MINIMUM CONDITIONS
1	Overnight Fund	Invest in overnight securities – Maturity of 1 day
2	Liquid Fund	Invest in debt and money market instruments – Maturity of up to 91 days
3	Ultra-short Duration Fund	Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 3 – 6 months
4	Low Duration Fund	Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 6 – 12 months
5	Money Market Fund	Invest in Money Market instruments – Maturity up to 1 year
6	Short Duration Fund	Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 1-3 years
7	Medium Duration Fund	Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 3 – 4 years
8	Medium to Long Duration Fund	Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 4-7 years
9	Long Duration Fund	Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be more than 7 years
10	Dynamic Bond	Investment across duration
11	Corporate Bond Fund	Minimum 80% investment in corporate bonds (only in highest rated instruments
12	Credit Risk Fund	Minimum 65% investment in corporate bonds (below highest rated instruments)
13	Banking and PSU Fund	Minimum 80% investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions
14	Gilt Fund	Minimum 80% investment in Government Securities (across maturity)
15	Gilt Fund with 10-year constant duration	Minimum 80% investment in Government Securities (so that the Macaulay duration of the portfolio is equal to 10 years)

HYBRID SCHEMES

S.NO.	CATEGORY	SCHEME CHARACTERISTICS/MINIMUM CONDITIONS
1	Conservative Hybrid Fund	Minimum equity component – Between 10% and 25% Minimum debt component – Between 75% and 90%
2	Balanced Hybrid Fund	Minimum equity component – Between 40% and 60% Minimum debt component – Between 40% and 60% The AMC cannot do any arbitrage in this scheme
3	Aggressive Hybrid Fund	Minimum equity component – Between 65% and 80% Minimum debt component – Between 20% and 35%
4	Dynamic Asset Allocation (or Balanced Advantage)	Invest in equity or debt – AMC to manage it dynamically
5	Multi-Asset Allocation	Invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes Note: AMC cannot offer foreign securities as a foreign asset class
6	Arbitrage Fund	The scheme should follow an arbitrage strategy. Minimum equity component – 65%
7	Equity Savings	Minimum equity component – 65% Minimum debt component – 10% AMC to state minimum hedged & unhedged in the Scheme Information Document (SID) AMC to state Asset Allocation under defensive considerations in the Offer Document

SOLUTION ORIENTED SCHEMES

S.NO.	CATEGORY	SCHEME CHARACTERISTICS/MINIMUM CONDITIONS
1	Retirement Fund	Lock-in: At least 5 years or till retirement age, whichever is earlier
2	Children’s Fund	Lock-in: At least 5 years or till the child attains the age of majority, whichever is earlier

OTHER SCHEMES

S.NO.	CATEGORY	SCHEME CHARACTERISTICS/MINIMUM CONDITIONS
1	Index Funds/ Exchange Traded Funds	Minimum 95% investment in securities of a particular index (which is being replicated/ tracked) AMC to mention the name of the index
2	Fund of Funds (Overseas/ Domestic)	Minimum 95% investment in the underlying fund AMC to mention the name of the underlying fund

KEY MUTUAL FUND RATIO

1. Standard Deviation:

Standard Deviation value gives an idea about how volatile fund returns has been in the past 3 years. Lower value indicates more predictable performance.

So, if you are comparing 2 funds (let’s say Fund A and Fund B) in the same category. If Fund A and Fund B has given 9% returns in last 3 years, but Fund A standard deviation value is lower than Fund B. So, you can say that there is a higher chance that Fund A will continue giving similar returns in future also whereas Fund B returns may vary.

2. Beta

Beta value gives idea about how volatile fund performance has been compared to similar funds in the market. Lower beta implies the fund gives more predictable performance compared to similar funds in the market.

So, if you are comparing 2 funds (let’s say Fund A and Fund B) in the same category. If Fund A and Fund B has given 9% returns in last 3 years, but Fund A beta value is lower than Fund B. So, you can say that there is a higher chance that Fund A will continue giving similar returns in future also whereas Fund B returns may vary.

3. Sharpe Ratio

Sharpe ratio indicates how much risk was taken to generate the returns. Higher the value means, fund has been able to give better returns for the amount of risk taken. It is calculated by subtracting the risk-free return, defined as an Indian Government Bond, from the fund’s returns, and then dividing by the standard deviation of returns.

For example, if fund A and fund B both have 3-year returns of 15%, and fund A has a Sharpe ratio of 1.40 and fund B has a Sharpe ratio of 1.25, you can choose fund A, as it has given higher risk-adjusted return.

4. Treynor’s Ratio

Treynor’s ratio indicates how much excess return was generated for each unit of risk taken. Higher the value means, fund has been able to give better returns for the amount of risk taken. It is calculated by subtracting the risk-free return, defined as an Indian Government Bond, from the fund’s returns, and then dividing by the beta of returns.

For example, if fund A and fund B both have 3-year returns of 15%, and fund A has a Treynor’s ratio of 1.40 and fund B has a Treynor’s ratio of 1.25, then you can choose fund A, as it has given higher risk-adjusted return.

5. Jension’s Alpha

Alpha indicates how fund generated additional returns compared to a benchmark.

Let’s say if a fund A benchmarks its returns with Nifty50 returns then alpha equal to 1.0 indicates the fund has beaten the nifty returns by 1%, so the higher the alpha, the better.

6. Sortino Ratio

The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset’s standard deviation of negative portfolio returns—downside deviation—instead of the total standard deviation of portfolio returns. The Sortino ratio takes an asset or portfolio’s return and subtracts the risk-free rate, and then divides that amount by the asset’s downside deviation.

Just like the Sharpe ratio, a higher Sortino ratio result is better. When looking at two similar investments, a rational investor would prefer the one with the higher Sortino ratio because it means that the investment is earning more return per unit of the bad risk that it takes on.

For example, assume Mutual Fund X has an annualized return of 12% and a downside deviation of 10%. Mutual Fund Z has an annualized return of 10% and a downside deviation of 7%. The risk-free rate is 2.5%. The Sortino ratios for both funds would be calculated as:

Mutual Fund X Sortino = (12%−2.5%)/10% = 0.95

Mutual Fund Z Sortino = (10%−2.5%)/7% = 1.07

Even though Mutual Fund X is returning 2% more on an annualized basis, it is not earning that return as efficiently as Mutual Fund Z, given their downside deviations. Based on this metric, Mutual Fund Z is the better investment choice.