by Shakshi Bharti | Oct 9, 2024 | FinTech Articles
Important Keyword: Deposits, Withdrawals, Transfers, Bank Account, Current Accounts.
Introduction: The Meaning of Dormant
In financial terms, “dormant” refers to something that is inactive or inoperative. This concept is essential in the realms of banking and business, especially when discussing dormant accounts and dormant companies. Understanding these terms is crucial for anyone entering the fields of finance or business, as they carry significant implications. This article will explore the meanings of dormant accounts and dormant companies, their importance, and the implications of being classified as dormant.
What Is a Dormant Accounts?
A dormant accounts is a bank account that has remained inactive for a specified period, typically more than 12 months. This could be a savings or current account where no transactions—such as deposits, withdrawals, or transfers—have taken place. If an account does not see any activity for more than 24 months, it is classified as inactive. Despite being dormant, the account can still accrue interest, and the account owner or beneficiary can claim their funds at any time.
RBI Guidelines on Dormant Dormant Accounts
The Reserve Bank of India (RBI) has established guidelines to determine when an account is considered dormant. According to these guidelines, an account will be classified as dormant if:
- There are no cash withdrawals at the bank branch or through an Automated Teller Machine (ATM).
- There have been no payments made via checks or electronic transfers.
Various types of accounts can become dormant, including:
- Savings and Current Accounts: Accounts that do not see any transactions for an extended period.
- Investment and Brokerage Accounts: Accounts used for trading stocks and securities that have been inactive.
- Pension Fund Accounts: Accounts related to pension funds that have not been accessed.
Factors Leading to Dormancy
For an account to be classified as dormant, the owner must refrain from all activities, including:
- Logging into the account.
- Making any deposits or withdrawals.
- Contacting the bank via phone or internet.
It is important to note that periodic interest, dividends, or any gains from savings or mutual funds do not count as account activity.
Importance of Identifying Dormant Accounts
The classification of dormant accounts plays a significant role in fraud prevention. By identifying dormant accounts, banks can monitor transactions more closely to prevent fraudulent activities. This vigilance helps maintain the integrity of the banking system.
From a tax perspective, it is essential for individuals to declare all bank accounts, including dormant ones, when filing their income tax returns. Income tax laws require taxpayers to disclose all bank accounts, except those that have been dormant for over three financial years.
What Is a Dormant Company?
A dormant company is defined as a business entity that has ceased trading and is not engaged in any operations that generate income. There are several reasons why a company may become dormant, including:
- Name Reservation: A company may reserve its name before launching operations.
- Business Restructuring: An existing business may pause trading while undergoing restructuring.
- Temporary Leave: Company owners may choose to take an extended leave from business operations.
- Asset Holding: The company may act as a holding entity for intellectual property or other assets.
Steps to Make a Company Dormant
To transition an active company to a dormant status, the following steps are typically required:
- Settle Pending Obligations: All bills, debts, and contracts must be cleared.
- Terminate Agreements: Any existing contracts with customers must be terminated.
- Pay Staff Wages: All employee wages and any associated liabilities must be settled.
- Clear Tax Obligations: All taxes, including VAT, must be paid before the company can be classified as dormant.
- Close Business Accounts: It is advisable to close all business bank accounts associated with the dormant company.
Once a company is deemed dormant, the owner can choose to reactivate it by following the appropriate guidelines and completing the necessary paperwork.
Tax Implications of Dormant Companies
After a company is declared dormant and all tax liabilities are settled, it is no longer required to pay taxes until it resumes trading. However, a dormant company can still function as a shareholder or guarantor for another company, committing to pay certain debts if necessary.
Dormant vs. Non-Trading Companies
It is crucial to differentiate between dormant and non-trading companies. While all dormant companies are non-trading, not all non-trading companies are considered dormant. Non-trading companies may still engage in significant transactions without conducting regular business operations. Therefore, it is essential to evaluate the nature of a company’s activities to classify it correctly.
Conclusion: Understanding Dormancy in Finance
In conclusion, the terms “dormant account” and “dormant company” hold significant importance in the financial and business sectors. Recognizing the characteristics and implications of dormancy is crucial for individuals and businesses alike. Whether it is managing personal finances or navigating the complexities of business operations, understanding these concepts can help individuals make informed decisions and maintain compliance with regulations.
Read More: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Web Stories: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Download pdf: https://taxinformation.cbic.gov.in/
by Shakshi Bharti | Oct 9, 2024 | FinTech Articles
Important Keyword: Demand draft, DD, money transfer, bank-issued, financial transactions, secure payments, cheque vs demand draft, Indian audience.
Introduction: What Is a Demand Draft?
A Demand Draft (DD) is a financial instrument used for transferring money from one bank account to another. Unlike cheques, demand drafts offer a more secure way to conduct financial transactions. They do not require the signature of the account holder to be cashed and are issued only by banks. This feature makes demand drafts a preferred choice for transferring large sums, especially when trust between parties is an issue.
How Demand Drafts Work
When an individual wants to issue a demand draft, they must visit their bank and provide the necessary funds. The bank verifies that the drawer (the person requesting the demand draft) has sufficient funds in their account. Once verified, the bank creates the demand draft, which specifies:
- Payee: The individual or entity to whom the money is being transferred.
- Amount: The sum of money being transferred.
- Drawee: The bank that pays out the funds.
Key Features of Demand Drafts
- Bank-Issued: Demand drafts can only be issued by banks, providing an additional layer of security and reducing the risk of fraud compared to cheques.
- Payable on Demand: Demand drafts are payable only when presented by the payee at the bank. They cannot be cashed by anyone other than the specified payee, making them less prone to misuse.
- No Signature Required: Unlike cheques, demand drafts do not require the drawer’s signature for cashing, further minimizing the risk of fraud.
- Immediate Availability: Once issued, the funds are immediately available to the payee, assuming they present the required documents at the bank.
Types of Demand Drafts
Demand drafts come in two primary types:
- Sight Demand Draft:
- This type of draft is payable immediately upon presentation, provided that the payee presents the necessary documentation requested by the bank. If the payee fails to provide these documents, the draft will not be honored.
- Time Demand Draft:
- A time demand draft is payable only after a specified period. The payee must wait until this period elapses before they can access the funds.
Demand Draft vs. Cheque: Which Is Better?
When deciding between a demand draft and a cheque, several factors come into play:
- Security: Demand drafts are safer than cheques since they require prior verification of funds. This ensures that the payment will not bounce due to insufficient funds, making them a more reliable option, especially for large transactions.
- Usage: Cheques can be used for a variety of payments and do not require the payee to present documentation, while demand drafts are often preferred in situations where trust is an issue or for large amounts.
- Cost: Banks may charge a fee for issuing a demand draft, while cheques can be written without an additional fee, depending on the account type.
Advantages
- Enhanced Security: Since demand drafts are issued only when sufficient funds are available, they reduce the risk of bounced payments.
- Trustworthy Transactions: They are ideal for transactions involving parties who do not know each other well, providing reassurance to both parties.
- Documented Evidence: The bank keeps a record of the demand draft, providing a clear audit trail for financial transactions.
- Convenience for Large Payments: Demand drafts are often used for larger amounts where cash transactions may be impractical.
Disadvantages
- Fees: There may be additional charges for issuing a demand draft, making it a potentially more expensive option than writing a cheque.
- Limited Use: Demand drafts are not as versatile as cheques, which can be used for various payments.
- Time-Consuming Process: Obtaining a demand draft may take longer than writing a cheque, as it involves visiting the bank and waiting for processing.
Demand drafts are an excellent option for safe and secure money transfers, especially when large sums are involved or when dealing with unfamiliar parties. Their bank-verified nature ensures that funds are available for the payee, eliminating the risks associated with bounced cheques. While they may come with fees and require a bit more time to obtain, the peace of mind they provide in transactions often outweighs these drawbacks.
In conclusion, understanding how demand drafts work and their advantages can help individuals and businesses make informed financial decisions. Whether for personal use or business transactions, demand drafts can offer a secure method to transfer funds efficiently.
Read More: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Web Stories: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Download pdf: https://taxinformation.cbic.gov.in/
by Shakshi Bharti | Oct 9, 2024 | FinTech Articles
Important Keyword: Debit cards, electronic transactions, banking, ATM withdrawals, personal finance, advantages of debit cards, disadvantages of debit cards, financial management, Indian audience.
Introduction: What Are Debit Card?
Debit cards have revolutionized the way we handle money in today’s fast-paced world. Issued by banks, these cards make electronic transactions more accessible and convenient. When you use a debit card, the money is directly withdrawn from your savings account, effectively ‘debiting’ the amount and reducing your available balance. They are also widely used for cash withdrawals from ATMs, making them an essential tool for managing personal finances.
Understanding Debit Card
Most banks issue debit cards as soon as you activate your account. Made of durable plastic, these cards contain important information, such as:
- Card Number: A unique number that identifies your account.
- Expiry Date: The date until which your card is valid.
- Cardholder Name: The name of the account holder.
- Verification Code: Additional security information on the back of the card.
Debit cards act as a bridge between credit cards and ATM cards, allowing you to withdraw cash up to a certain limit from affiliated ATMs or make purchases without needing to carry cash. Here are some key features:
- Spending Limits: There is usually a daily spending limit set by the bank. This means you cannot spend more than what is available in your account.
- Zero Balance Accounts: Some accounts may allow you to maintain a zero balance, but exceeding your available funds may lead to charges.
- ATM Withdrawals: Using a non-affiliated ATM may incur additional fees, and losing or needing to replace your card can also lead to costs.
How Do Debit Card Work?
When you swipe your debit card at a payment terminal or withdraw cash from an ATM, the following process occurs:
- Verification: You may need to enter a Personal Identification Number (PIN) for security. Some contactless cards allow payments simply by tapping the card on a reader.
- Authorization: The bank checks your account balance to ensure you have sufficient funds.
- Transaction Completion: If the funds are available, the transaction is approved, and the amount is deducted from your account.
This simplicity and speed make debit cards a preferred choice for many consumers.
Highlights of Debit Card
Here are some notable advantages of using debit cards:
- No Debt Accumulation: Since you can only spend what is in your account, debit cards help you avoid accumulating debt, unlike credit cards where borrowing can lead to interest charges.
- Safety and Security: Debit cards are generally considered safer for making purchases than carrying cash. However, they do not provide the same level of fraud protection as credit cards.
- Lower Fees: Debit cards usually come with lower fees than credit cards, especially concerning annual charges or interest rates.
However, there are also some limitations:
- Limited Offers: Debit cards typically do not come with the same range of rewards, cash-back offers, and deals that credit cards often provide.
- Less Credit Building: Using debit cards doesn’t help in building your credit history, as they do not involve borrowing.
Advantages of Using Debit Cards
- Ease of Use: Debit cards simplify payments. You can use them for both online and in-store purchases without needing to carry cash.
- Immediate Transactions: The funds are deducted instantly, allowing you to keep better track of your spending and balance.
- Budget-Friendly: By limiting your spending to what you have in your account, debit cards encourage responsible financial habits.
- Access to ATMs: Debit cards provide easy access to cash through ATMs, especially during emergencies or urgent situations.
Disadvantages of Using Debit Cards
- No Credit Benefits: Using a debit card does not contribute to your credit score, unlike credit cards.
- Less Fraud Protection: If your debit card is compromised, accessing your funds can be more complicated compared to credit cards, which often have better fraud protection policies.
- Transaction Limits: Some banks impose limits on daily spending and withdrawals, which can be inconvenient.
- Overdraft Fees: If you spend more than your balance and your account does not have overdraft protection, you could face additional charges.
Conclusion: Making the Right Choice
Debit cards are an essential tool for modern banking, providing a convenient way to manage finances and make transactions. They help you stay within your budget by allowing only the amount you have in your account to be spent. However, they also have limitations, particularly in terms of credit building and benefits compared to credit cards.
For individuals looking to manage their finances responsibly, debit cards offer a practical solution. By understanding how they work and their advantages and disadvantages, you can make informed decisions about how to use them effectively.
Read More: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Web Stories: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Download pdf: https://taxinformation.cbic.gov.in/
by Shakshi Bharti | Oct 9, 2024 | FinTech Articles
Important Keyword: Debt-Service Coverage Ratio, DSCR, loan approval, cash flow management, financial stability, business loan, personal loan, Indian audience, net operating income, debt repayment.
Introduction: What Is DSCR?
The Debt-Service Coverage Ratio, or DSCR, is a key financial metric used in many areas like personal finance, business, and government sectors. It helps to determine whether an individual, company, or project can meet its debt obligations. In simpler terms, DSCR shows if there’s enough income to cover all current debt payments, including the interest and principal.
Understanding DSCR is crucial if you’re applying for a loan or managing finances, as it reveals your ability to repay debt from your income sources.
What Is DSCR and How Is It Calculated?
The Debt-Service Coverage Ratio measures how much of your income is available to pay off your debts. Financial institutions, especially banks, use this ratio to check if an applicant is financially strong enough to repay loans. It helps them evaluate the risk of lending money.
Here’s the basic formula:
DSCR = Annual Net Operating Income / Annual Debt Payments
This formula works for both businesses and individuals. Net operating income refers to the total income after deducting all operating expenses, while debt payments include both interest and principal amounts.
There are two other ways to calculate Debt-Service Coverage Ratio for businesses:
- DSCR = EBITDA / (Interest + Principal)
EBITDA refers to Earnings Before Interest, Tax, Depreciation, and Amortization. - DSCR = (EBITDA – Capex) / (Interest + Principal)
Capex stands for Capital Expenditure, which is subtracted from EBITDA to get a clearer picture of available income for debt repayment.
Why Is DSCR Important for Loan Approval?
If you’re applying for a loan, banks and financial institutions will check your Debt-Service Coverage Ratio to assess your financial health. A higher DSCR means you have enough income to cover your debts, making you more likely to get the loan. On the other hand, a low DSCR shows that you may struggle to meet debt payments, and your loan application could be rejected.
Here’s how DSCR numbers are interpreted:
- DSCR greater than 1: You have more income than debt, which is favorable for loan approval.
- DSCR less than 1: Your income is not enough to cover your debt, making it riskier for lenders to give you a loan.
Highlights of DSCR
- DSCR = 0: Even in cases where the Debt-Service Coverage Ratio is zero, some banks might still approve the loan, depending on your credit history and the market situation.
- Comprehensive Ratio: DSCR is more detailed than other ratios like the Interest Coverage Ratio (ICR). While ICR only focuses on interest payments, DSCR covers the entire debt.
- Existing Debts Considered: Debt-Service Coverage Ratio accounts for all ongoing debts in addition to the new loan you’re applying for.
Advantages of Using DSCR
- Better Loan Approval Chances: A high Debt-Service Coverage Ratio gives you a better chance of securing loans, as it shows lenders that you’re financially stable.
- Clear Financial Picture: DSCR helps you understand your financial health by showing whether your income can comfortably cover debt payments.
- Good for Business Planning: For businesses, a strong Debt-Service Coverage Ratio indicates healthy cash flow, which is important for future growth and expansion.
Disadvantages of Low DSCR
- Difficult to Secure Loans: A low Debt-Service Coverage Ratio might make it harder for you to get a loan, as it signals financial risk.
- Limited Financial Flexibility: If your Debt-Service Coverage Ratio is low, it means your cash flow is tight, leaving little room for unexpected expenses or investments.
How to Improve Your DSCR
- Increase Revenue: Boosting your income will naturally improve your DSCR, making it easier to manage your debts.
- Reduce Debt: Paying off debts or refinancing to lower interest rates can help improve your DSCR.
- Cut Down on Expenses: Reducing unnecessary business or personal expenses can free up more income for debt repayment.
Example of DSCR in an Indian Context
Let’s consider an example of an Indian family who wants to apply for a home loan. Mr. Sharma, the head of the family, earns ₹10,00,000 annually, and his total debt payments, including existing loans, come to ₹7,00,000 a year. To calculate his DSCR:
DSCR = ₹10,00,000 / ₹7,00,000 = 1.43
This means that Mr. Sharma’s income is 1.43 times higher than his debt payments, which is a good indicator for banks. Since his DSCR is above 1, it shows that he can comfortably manage his debts, making him a strong candidate for loan approval.
If Mr. Sharma’s DSCR were below 1, it would mean his income isn’t sufficient to cover his debts, and the bank might be hesitant to give him the loan.
Summary: Key Takeaways on DSCR
- Debt-Service Coverage Ratio (DSCR) shows if there’s enough income to cover all current debts, helping banks assess loan applications.
- Higher DSCR (greater than 1) indicates better financial health and a higher chance of loan approval, while lower DSCR (less than 1) signals financial risk.
- DSCR vs ICR: DSCR is more comprehensive as it includes both interest and principal payments, unlike the Interest Coverage Ratio (ICR), which only focuses on interest.
- DSCR Calculation: Whether for businesses or individuals, DSCR is a critical metric to determine financial stability and loan eligibility.
Conclusion: Why DSCR Matters
Debt-Service Coverage Ratio (DSCR) is an essential tool for individuals and businesses alike. It helps to measure financial health by showing whether income is sufficient to cover debt obligations. For anyone applying for a loan, a good DSCR can significantly increase the chances of approval.
Read More: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Web Stories: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Download pdf: https://taxinformation.cbic.gov.in/
by Shakshi Bharti | Oct 9, 2024 | FinTech Articles
Important Keyword: Disbursement, cash flow management, controlled disbursement, delayed disbursement, business payments, cash disbursement journal, financial management, Indian business.
Introduction: What Is Disbursement?
If you’re stepping into the world of business or handling your finances, there are certain terms you should know, and “disbursement” is one of them. In simple terms, disbursement refers to cash payments made by a company or individual to cover expenses. These payments could be for various reasons, such as paying employee salaries, repaying loans, or running day-to-day business operations.
In essence, disbursement is the process of transferring money from one person or organization to another. Understanding how disbursement works and how to manage it properly is essential for maintaining healthy cash flow in any business.
What Is Disbursement and How Does It Work?
Disbursement involves the movement of money, and it’s crucial for businesses to track this carefully. Every time a company makes a payment—whether it’s for goods, services, salaries, or loan repayments—it is making a disbursement.
Disbursements can be made immediately at the time of purchase or over a period of time, such as quarterly or annually. Keeping accurate records of all disbursements is vital, as this helps track the company’s cash flow. If disbursements exceed revenue, the business may be at risk of financial trouble, signaling a need for better financial management.
The responsibility of tracking disbursements often falls on the company’s bookkeeper. They maintain a “cash disbursement journal” or a general ledger, which contains details such as the date, the amount paid, the recipient’s name, the method of payment (cash, check, etc.), and the reason for the payment.
Why Is Tracking Disbursement Important?
- Cash Flow Management: Keeping an eye on disbursements helps ensure the business is managing its cash flow effectively.
- Identifying Financial Issues: If disbursements are higher than revenue, it signals a negative cash flow, which can lead to losses.
- Financial Planning: Tracking these payments allows businesses to make better financial decisions and plan for the future.
Different Types of Disbursement
There are mainly two types of disbursements: controlled disbursement and delayed disbursement.
1. Controlled Disbursement
Controlled disbursement is a cash flow management method offered by banks, primarily for corporate clients. With this method, businesses can manage their daily payments efficiently, ensuring that they know exactly how much money is being disbursed on any given day. This method helps businesses plan their cash flow better and avoid unexpected cash shortages.
2. Delayed Disbursement
Delayed disbursement, also known as remote disbursement, occurs when a company deliberately delays making a payment by issuing a check from a bank located in a distant area. This strategy gives the company more time to maintain cash in its account, as it takes longer for the recipient to deposit the check and for the money to be transferred. While this may benefit the payer, it may inconvenience the recipient due to the delay in receiving funds.
Advantages of Disbursement Management
Proper disbursement management offers multiple benefits for businesses:
- Improved Cash Flow: By tracking payments, businesses can ensure that they have enough money to cover expenses and avoid running into financial trouble.
- Financial Control: Companies can control when and how much money is being disbursed, ensuring they stay within budget.
- Better Planning: Disbursement records provide valuable insights into spending patterns, helping businesses plan and allocate resources more effectively.
Disadvantages of Poor Disbursement Tracking
If disbursements are not tracked properly, businesses can face several problems:
- Negative Cash Flow: If disbursements outpace revenue, the company could face cash shortages and even potential losses.
- Lack of Financial Clarity: Without proper records, businesses can lose track of how much money they are spending, leading to poor financial decision-making.
- Delayed Payments: Mismanagement of disbursements can result in late payments to suppliers, employees, or creditors, which may damage the company’s reputation.
Example of Disbursement in Indian Business
Let’s consider a small Indian business, “Sharma Traders,” that manufactures and sells household items. Every month, Sharma Traders makes disbursements for raw materials, employee salaries, and electricity bills. Raj, the owner, keeps a detailed record of every payment in a cash disbursement journal. By doing this, he knows exactly how much cash is leaving his business and can compare it with the revenue coming in.
At one point, Raj notices that his disbursements are consistently higher than his revenue. This alerts him to a potential cash flow problem, so he decides to cut down on unnecessary expenses, negotiate better terms with suppliers, and focus on increasing sales. By tracking his disbursements closely, Raj prevents his business from going into debt.
Summary: Key Takeaways on Disbursement
- Disbursement Defined: Disbursement refers to cash payments made to cover expenses, such as salaries, loan repayments, or business operations.
- Tracking Is Essential: Proper tracking of disbursements is vital for maintaining healthy cash flow and preventing financial losses.
- Types of Disbursement: Controlled disbursement helps manage daily cash flow, while delayed disbursement allows businesses to delay payments strategically.
- Advantages and Disadvantages: Managing disbursements effectively leads to better cash flow, financial control, and planning, while poor tracking can result in financial problems.
Conclusion: Why Understanding Disbursement Matters
Disbursement is a key aspect of financial management, whether you’re running a business or handling personal finances. Keeping track of payments ensures that you are aware of your cash flow and helps you avoid unnecessary losses. By understanding and managing disbursements effectively, businesses can improve their financial health and make better decisions for the future.
For businesses, especially small ones in India, having a good grasp of disbursement practices is crucial. It allows owners to maintain control over their expenses, plan for growth, and avoid financial pitfalls. Remember, managing your disbursements today can protect your financial future tomorrow.
Read More: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Web Stories: Notification No. 77/2020 – Central Tax: Seeks to make filing of annual return under section 44 (1) of Central Goods and Services Tax Act for F.Y. 2019-20 optional for small taxpayers whose aggregate turnover is less than Rs 2 crores and who have not filed the said return before the due date.
Download pdf: https://taxinformation.cbic.gov.in/
