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This BLOG is meant for those INVESTORS who want to benefit from the India story & are on the look out for expert, unbiased & easy to understand Investment advice about MUTUAL FUNDS & other investment avenues.

Tuesday, October 26, 2010

L&T Infra Bonds

L&T Infra Bonds

October 18, 2010
After, IFCI & IDFC, it is now the turn of L&T Infrastructure Finance Company Limited (L&T Infra) to come out with tax saving infrastructure bonds for the retail investor that also allows deduction u/s 80CCF of the Income Tax Act 1961 to Individuals & HUFs who invest in these bonds.
The maximum amount of deduction available is Rs. 20,000 per income tax assesses and it is over & above Rs. 1 lac deduction allowed u/s 80C.
So it makes sense for any investor in the 30% tax bracket to invest in these bonds and get instant tax savings of Rs. 6,000+ by investing in these bonds.
The bonds will have a maturity of 10 years. As an exit option to the investors, the company will offer buyback facility at the end of 5th and 7th years from the date of allotment. The bonds are proposed to be listed on NSE and can be traded after the initial 5-year lock-in period. There would be four series of the bond. Each bond will have a face value of Rs 1,000 and would be issued at par. The issue opens on October 15 and closes on November 2.
YM Deosthalee, director, L&T Infra said: “There are similarities between our bond and the one which was recently issued by IDFC in terms of coupon rates for five-year paper. We are both offering a coupon rate of 7.5% for that period. However, unlike IDFC, we are offering coupon rates for seven years and beyond.”
Also, unlike IDFC, whose bond can be purchased only by opening a demat account, L&T Infra has got approval from the competent authority to make investors able to purchase its bond even without having demat account. It is basically for those retail investors that live in far-flung areas of the country and hence are unable to open demat account, he said.
Documents required:
PAN card is compulsory but demat is not compulsory.
Who can Invest?
Individuals & HUF can invest in these bonds.
Offer period
Oct 15, 2010 to Nov 2, 2010.
AUM View
SUBSCRIBE to these bonds if you are in the 30% tax bracket and if you missed the IDFC bonds.

Thursday, October 14, 2010

Latest Updates: IDFC Infra Bonds

The last date for applying for IDFC Infrastructure bonds has been extended to Oct 22, 2010 from Oct 18, 2010.


More importantly, on popular demand, the DEMAT a/c requirement for applying for IDFC Infra Bonds has been done away with and rightly so. What was the point in keeping demat compulsory for bonds that have a min. 5 yrs lock-in and that cannot be traded. Also, on one hand you are allowing HUFs to invest in these bonds and on other you make demat compulsory. Did not make sense. So great and thanks to IDFC that it listened to investors & logic prevailed.


Remember, we had raised this issue on our BLOG last week..(http://niravpanchmatia.blogspot.com/2010/10/idfc-infrastructure-bonds-open-for.html )

Friday, October 1, 2010

IDFC Infrastructure Bonds open for a limited period: INVEST


IDFC Infrastructure Bonds open for a limited period: INVEST if you are in the upper tax bracket

Sep 30, 2010
In the last budget, FM Pranab Mukherjee had allowed Investors to invest additional Rs. 20,000 over & above Rs. 1 lac that one is usually allowed u/s 80C to claim deductions. Hence, this (FY 2010-11) is the only financial year in which one can invest Rs. 1.20 lacs per Income Tax file & avail additional deduction.
The extra deduction of up to 20,000 is allowed u/s 80CCF if one invests in govt. specified Infrastructure Bonds to be issued by Infrastructure NBFCs like IFCI, IDFC, etc. Further, these bonds shall remain open for a specified  time period only. IFCI had last month come out with its Infra bonds & the issue is closed now. 


IDFC Infrastructure Bonds issue opens tom on 30th September 2010 & shall remain open for subscription till Oct 18th 2010 only.
 

The bonds have a tenure of 10 years & expected yield of 7.5 % pa or 8.0% pa depending on the option chosen. 

Who can Invest? Individuals & HUF only;    

What you need to Invest? PAN no. & a Demat Account 

(although we believe that making demat compulsory is an unnecessary requirement as one may want to Invest for all members in the family but they might not have a demat account; opening a demat for the sole purpose of investing in these bonds is not advised as it adds to the cost. Also, HUFs rarely have a demat account)


There are four option to choose from:
Bond Type Interest Rate Tenure Buyback Option
Bond Series 1 8.0 % pa annual interest 10 years No
Bond Series 2 8.0 % pa cumulative interest; compounded annually 10 years No
Bond Series 3 7.5 % pa annual interest 10 years Yes; after 5 years
Bond Series 4 7.5% pa cumulative interest; compounded annually 10 years Yes; after 5 years


Analysis & Comments
Any investor who is in the 30% tax bracket, should subscribe to these bonds as it will result in total tax savings of approx. Rs. 36,000 this financial year (30% of Rs. 1.20 lac; surcharge & cess excluded).
The yield under various options are explained in the table below:

Tax Bracket Tax Adjusted Yield to Investors
Your Tax bracket Effective Tax Rates (%) Series 1 (%) Series 2 (%) Series 3 (%)** Series 4 (%)**
30% 30.9% 13.89 % 12.06% 17.19% 15.74%
20% 20.6% 11.57% 10.52% 13.41% 12.57%
10% 10.3% 9.64% 9.18% 10.23% 9.86%
**yield calculated assuming buyback at the end of 5 years

So if you are in the highest tax bracket and have already exhausted the limit of Rs. 100,000 u/s 80C, then it makes sense to invest the maximum amount of Rs. 20,000 in these bonds. We would suggest option 3 so as to net a yield of 17.19% in 5 years. Go for the buyback option that has a lock-in for 5 years only.
 

SUBSCRIBE.....

Monday, September 20, 2010

EPF becomes the most attractive risk-free investment avenue post incresae in interest rate


Latest Developments

Interest rate of 9.50 % on Employees Provident Fund (EPF) makes them attractive vis-à-vis other traditional savings instrument
Sep 15, 2010
The News
In a surprise but encouraging move, the government increased the interest rate offered in the employees' provident fund (EPF) by 1 percentage point to 9.5 % per annum for the current fiscal year that ends in March 2011.
Over 4.4 crore workers and employees of the public and private sectors in the country will receive an interest rate of 9.5% pa instead of 8.5% pa for financial year 2010-11 for their savings in the Provident Fund account.
The move to increase the interest rate by one percentage point was taken at a meeting of the Central Board of Trustees (CBT) of the Employees Provident Fund Organisation (EPFO). The recommendation of the EPFO trustees will now be forwarded to the finance ministry. The finance ministry, which notifies the provident fund interest rate, usually accepts the recommendation of the board of trustees of EPFO.
The move is expected to benefit nearly 4.71 crore employees in public and private sectors. This is the first that the interest rate on provident fund deposits has been increased to 9.5% since 2004-05. With this hike in interest rate, EPFO deposits become more attractive than bank fixed deposits, which at present are offering interest in the range of 7-7.5 per cent. The rate hike is expected to put pressure on companies with independent PF trusts, as they are required to match the PF rate declared by the government.
Analysis & Comments
Three cheers for the govt. & the EPFO department for raising the interest rate to an attractive 9.5% pa. this will at least make it beat inflation which is very high in india and shall remain high in the near future. With this move, the EPF becomes one of the most remunerative fixed income instrument in our country. Have a look at the graphic below:
Comparison of Real Rate of Returns across various instruments
Traditional Savings Instrument Interest Rate (% pa) Inflation Rate (% pa) Real rate of Return (% pa)
Employees Provident Fund Or EPF (FY 2010-11) 9.50 % pa 6.50 % pa 3.00 % pa
Senior Citizens Savings Scheme (SCSS) 9.00 % pa 6.50 % pa 2.50 % pa
Public Provident Fund (PPF) 8.00 % pa 6.50 % pa 1.50 % pa
Bank Fixed Deposits (FDs) 6.75% pa to 7.50 % pa 6.50 % pa 0.25% pa to 1.00 % pa
Debt Mutual Funds 7.00 % pa to 8.50 % pa 6.50 % pa 0.50 % pa to 2.00 % pa
Monthly Income Plans (Mutual Fund MIPs) 10.00 % pa to 12.00 % pa 6.50 % pa 3.50 % pa to 5.50 % pa
Equity Mutual Funds * 15.00 % pa to 18.00 % pa 6.50 % pa 8.50 % pa to 11.50 % pa

*market linked; past 5 years CAGR returns
It is very clear from the table above that with the 1% hike, the EPF @ 9.50% pa has become more remunerative for the Indian investors & even better than Senior Citizens Savings Scheme (@ 9% pa) & PPF (@ 8% pa). The all season & investors favorite Bank Fixed Deposits (FDs) is no match for any of the above three, at least at today’s prevailing rate.
Also, always compare the rate of return from a savings instrument to the inflation rate to see how remunerative a particulars investment is in terms real rate of return. As is clear from the table above, on a post inflation basis, Bank FDs are not very remunerative at the prevailing rates of interest. So give the FDs a miss for know. Monthly Income Plans (MIPs) are an attractive option if you have a tenure of 1.5 years & have tradinally given double digit returns with a minor exposure to equity.
(http://www.myiris.com/shares/company/ceo/showDetailInt.php?filer=20100828195201194&sec=ifa).
For Salaried employees
So, if you are salaried, invest the maximum possible allowed to you in EPF this year (as it shall guarantee a 9.50% pa return for you), the balance amount can be deployed in variety of Mutual funds (including Tax Saving Mutual Funds or ELSS) based on your investment tenure. Consider MIPs & equity diversified mutual funds for better returns. Give the PPF & Bank FDs a miss for this financial year.
For Self employed
If you are self employed professional or a businessman, EPF is not available to you. Your next best risk-free investment is PPF (@ 8% pa tax free). However, if the only purpose of investing in PPF is to save tax, then I would suggest that you skip PPF for the next 2 financial years & invest in Tax Saving Mutual Funds or ELSS (http://niravpanchmatia.blogspot.com/2010/09/tax-saving-mutual-funds-or-elss.html). Click on the link to find out why I am asking you to skip other avenues u/s 80C this financial year & stick to ELSS.
Sound Investing !!!!

Tuesday, September 14, 2010

Tax Saving Mutual Funds (or ELSS)


Tax Saving Mutual Funds (or ELSS): Grab them with both hands before they go away

One of the best tax saving instruments available today might not be available 2 years from now. You guessed it right; I am talking about “ELSS or Tax Saving Mutual Funds”. 
 
Imagine a product that helps you save tax, has a minimum lock-in of a mere 3 years, has given average annualised returns of 15 to 18% pa consistently over the past decade and offers lot of flexibility & above all is tax-free. You should not miss this product for anything. Now this product is available only till Mar 31, 2012. Read further…..

In the recently announced Direct Tax Code 2010, the FM has removed most investment avenues available today u/s 80C like ELSS, ULIPs, NSC, KVP, 5 year Bank FDs & even Senior Citizen Savings Scheme (SCSS). All insurance plans except for Term Plan are out. After April 1, 2012, under the DTC 2010, only the following 4 instruments would be available to save tax u/ch VI; namely; 1. All forms of Provident Funds (PPF, EPF & GPF) 2. The New Pension Scheme ( NPS) 3. Pure Term Insurance Plan (without any Investment component) 4. Any other Govt. approved fund
As is clear from the above, most investment avenues available today u/s 80C will not be available under The New Direct Tax Regime starting from April 1, 2012. And one of the most profitable investments amongst these is ELSS or “ELSS or Tax Saving Mutual Funds”. Have a look at the table below where we have compared the performance of the 10 top performing Tax Saving Mutual Fund schemes with other investment avenues like PPF, Bank FDs & Insurance plans over a 5 year period. 

Tax saving Mutual Funds (ELSS) Actual Returns over various periods Value of Rs. 1 lac invested 5 years ago
1 Year (%) 2 Years (%) 3 Years (%) 5 Years (%)
ELSS Scheme 1
33.3
31.5
18.6
21.6
266,088
ELSS Scheme 2
19.2
20.7
13.7
21.2
261,309
ELSS Scheme 3
37.7
37.7
19.3
21.0
258,839
ELSS Scheme 4
40.9
29.1
13.8
20.0
248,728
ELSS Scheme 5
27.4
21.6
7.0
19.1
239,841
ELSS Scheme 6
32.0
23.2
12.5
18.9
237,135
ELSS Scheme 7
22.5
17.4
7.2
17.9
228,098
ELSS Scheme 8
22.4
17.4
7.2
17.9
227,905
ELSS Scheme 9
44.1
31.1
11.8
17.8
226,555
ELSS Scheme 10
36.3
22.2
10.2
16.4
213,864
Average
31.6
25.2
12.1
19.2
240,385
Maximum
44.1
37.7
19.3
21.6
266,088
Minimum
19.2
17.4
7.0
16.4
213,864
PPF
8.0
8.0
8.0
8.0
146,933
Bank Fixed Deposits
7.5
7.5
7.5
7.5
143,563
Insurance - Money Back & Endow.
6.5
6.5
6.5
6.5
137,009



The best performing Tax Saving mutual fund has given a performance of 21.6% per annum year on year for the past 5 years & the average performance of top 10 tax saving mutual funds is 19.2% per annum. Even the worst performing tax saving fund has given annual returns of 16.4% pa over last 5 years. Now compare the performance of Tax Saving mutual funds with other tax saving instruments like PPF, 5 year Bank FDs & traditional insurance plans like money back & endowments. The table below gives the value of Rs. 1 lac today had you invested in these avenues 5 years back.

ELSS Scheme
5 Years (%)
Value of Rs. 1 lac invested 5 yrs. ago
Current Value times your investment
Best Performing Tax Saving mutual Fund (ELSS )
       21.6 % pa
              266,088
2.66x
Average performance of ELSS Schemes
19.2 % pa
240,385
2.40x
Worst Performing Tax Saving mutual Fund (ELSS )
16.4 % pa
213,864
2.13x
PPF
8.0 % pa
146,933
1.46x
5 year Bank Fixed Deposits (FDs)
7.5 % pa
143,563
1.43x
Insurance - Money Back & Endowment Plans
6.5 % pa
137,009
1.37x

As is clear from the table above, if you had invested Rs. 1 lac 5 years back in the top performing tax saving mutual fund, current value of your investment would be Rs. 2.66 lacs; a return of 2.66x times. Even the worst performing tax saving mutual fund has given a return of 2.13x times. Compare this return to a PPF or Bank FDs or insurance plans where the return is 1.46x times, 1.43x times & 1.37x times respectively.
Other Advantages of Tax Saving Mutual Funds or ELSS:

    1. After the abolition of Entry Load wef Aug 1, 2009, you do not pay any commission to your mutual fund agent. As a result, entire amount of your investment gets invested in mutual funds. Compare this with a ULIP plan where you pay as high as 20 to 40% commission to the agent for no additional benefit at all. 2. You can invest in tax saving mutual funds or ELSS in 2 ways or a combination of these; a) you can invest lumpsum amount at one go anytime within the financial year & b) you can start a Systematic Investment Plan (SIP) in any tax saving mutual fund scheme of your choice or c) you can invest via a combination of the above two. 3. There is a mere 3 year lock-in in tax saving mutual funds or ELSS. This is the minimum lock-in period amongst all tax saving instruments u/s 80C.
Tax Saving Instrument
Expected Return (%)
Lock-in period (Years)
Public Provident Fund (PPF)
8% pa
15 years; partial withdrawal from 7th yr
NSC , KVP etc.
8% pa
6 years
5 year Bank FDs
6.5% pa
5 years
ULIP*
12 to 15% pa
5 years
Insurance Plans
6 to 7% pa
Depends; min 5+ years
Tax saving Mutual Funds or (ELSS)*
15 to 18% pa
3 years
*market linked; average performance over past years

4. There is zero tax on capital gains from tax saving mutual funds or ELSS4. There is zero tax on capital gains from tax saving mutual funds or ELSS
Also, the DTC 2010 comes into effect from April 1, 2012. This article is written in Sep 2010. We thus have exactly 18 months to invest in Tax saving Mutual Funds (ELSS). After that, this wonderful tax saving instrument would no more be available. Or in other words, you have only 2 Financial Years left (FY 2010-11 & 2011-12) to invest in this instrument.
Starting April 1, 2012, under the Direct Tax regime, as already discussed earlier in this article, there is hardly a equity linked instrument available that has a successful history of giving double digit returns. we shall therefore be forced to invest in a PPF, or a NPS or buy a Term plan to save tax. so postpone your traditional investment by 2 years & invest the maximum possible amount for the next 2 financial years in Tax saving Mutual Funds (ELSS).
Just one caveat. There are around 27 Tax saving Mutual Funds (ELSS) available in the market today. Not all of them are performing well. So please consult a Mutual Fund Expert (your next door distributor/agent might not be the best guy) to help you choose the best Tax saving Mutual Funds (ELSS) schemes for you.

Happy Investing!

A Financial Planner decodes The Direct Taxes Code (DTC) 2010 Sep 01, 2010



A Financial Planner decodes The Direct Taxes Code (DTC) 2010

Sep 01, 2010
The Direct Taxes Code 2010 (DTC) 2010 became a reality after good 50 odd years on Aug 31, 2010, when the FM introduced the bill in the parliament. The Income Tax Act 1961 as well as The Wealth Tax Act 1957 has finally been replaced by The Direct Taxes Code 2010. So how have things changed for the average Indian after 50 years?
Well, not much.

The original DTC Draft

When the 1st draft of the DTC was proposed almost a year back, it raised great expectations as it was supposed to herald a new era of direct taxation. The IT slabs proposed were unthinkable, unimaginable even a year back.
The corporate tax rate was proposed to be reduced in one shot from the present 33% to 25% and this move was applauded by one and all. The IT slabs proposed for individuals were supposed to be path breaking. 30% tax bracket was applicable only if your total income exceeded Rs. 25 lacs. Up to Rs. 3 lacs deduction from gross total income was proposed to be allowed.
There were also a few proposals in the original draft that ruffled a few feathers especially in the corporate world and faced lot of resistances. The Minimum Alternate Tax (MAT) was proposed on assets as against book profits and was opposed tooth and nail by the corporate. Another proposal that created disturbances was the proposal to levy tax on long term capital gains which otherwise was tax free. One more concern was that Rs. 1.50 lacs deduction available for interest payments on home loan. It was feared that this deduction might go way.
Final avatar of The Direct Taxes Code (DTC) 2010
When on Aug 31, 2010, the final avatar of DTC 2010 was revealed, some dreams got shattered and some nightmares thankfully did not come true. The biggest dream that got shattered was the revelation of the new Income tax slabs that would be effective April 1, 2012. Have a look at the graphic below.
Personal Income Tax Rates for Individuals, HUF, Association of Persons (AOP) and Body of individuals (BOI):
Income Tax Rate (%) Current under The Income Tax Act’ 1961 As proposed in the 1st DTC draft (Aug 2009) As per the final DTC  2010 (Aug 2010)
Basic exemption limit – Male assesses
Rs. 1.60 lacs
Rs. 1.60 lacs
Rs. 2.00 lacs
Women assesses
Rs. 1.90 lacs
Rs. 1.90 lacs
Rs. 2.00 lacs
Senior Citizens
Rs. 2.40 lacs
Rs. 2.40 lacs
Rs. 2.50 lacs
10 % tax bracket
Up to Rs. 5.00 lacs
Up to Rs. 10.00 lacs
Up to Rs. 5.00 lacs
20% tax bracket
Rs. 5.00  to 8.00 lacs
Rs. 10.00  to 25.00 lacs
Rs. 5.00  to 10.00 lacs
30% tax bracket
Above Rs. 8.00 lacs
Above Rs. 25.00 lacs
Above Rs. 10.00 lacs
Deductions from Gross Total Income
Rs. 1 lac (Sec 80C)+

Rs. 15,000 (Sec 80D)+

Rs. 20,000 (Infra Bonds) = Rs. 1.35 lacs total dedn.
Rs. 3 lacs
Rs. 1.50 lac (Sec 80C)
Corporate Tax Rate
33% (including cess & surcharge)
25%
30% (net)
As is evident from the table above, as per the draft DTC proposal of Aug 2009, one would fall in the 30% tax bracket only if your Gross Total Income exceeds Rs. 25 lacs. This would have been an extraordinary move had it been approved. Approximately 90% of Indian Income Tax payers would have fallen in either 10% or 20% tax bracket which would have improved tax compliance and consequently Govts’ revenues from direct taxes as history shows that whenever the Govt. has reduced taxes, tax compliance has improved and has resulted in increasing revenues for the Govt. coffers.
Unfortunately the final code of Aug 2010 revealed that with a Gross Total Income of mere Rs. 10 lacs, one falls in the 30% tax bracket. This is a mere Rs. 2 lacs increment over the existing tax slab as per The Income Tax Act 1961. The question that comes in mind is that this slight change could have been made in the next year’s budget. Why the need for a Direct Tax Code.
Again, the total deductions from Gross Total Income that are allowed today as per The Income Tax Act, 1961 add up to Rs. 1.35 lacs. This was proposed to be increased to Rs. 3 lacs in the Draft DTC of Aug 2009. Unfortunately, there was disappointment on this front as well. The total deductions have been marginally increased by just Rs. 15,000 from Rs. 1.35 lacs currently to Rs. 1.50 lacs as proposed in The DTC 2010. Again, why the need for a Direct Tax Code to implement a minor change.
Another disappointment is the drastic reduction in the choices available to an average Indian to claim deductions from Gross total income. While the current Income Tax Act offers a wide array of savings & investment products to choose from based on an investors profile like PPF, NSC, KVP, 5 year Bank FDs etc. for the risk averse investors; Tax Saving Mutual Funds (or ELSS) & Insurance Plans & ULIPs for those who want to have market exposure and also a deduction for principal repayment of home loans and additional deduction of Rs. 20,000 for infrastructure bonds.
Unfortunately, and this is one of the biggest disappointment from the DTC 2010 from a financial planner’s perspective that the proposed set of savings & investment avenues allowed under The DTC 2010 is just half of the choices already available today. Have a look at the graphic below:
Also, while currently, women assesses are given preferential treatment by having a higher exemption limit of Rs. 1.90 lacs v/s Rs. 1.60 lacs for male assesses, The DTC 2010 has removed this distinction and has a common exemption limit of Rs. 2.00 lacs for both male & female assesses. This comes as a disappointment for the women.
Comparison of Deductions allowed:
Types of Deductions available Currently under The Income Tax Act 1961 As proposed in The DTC 2010
Traditional savings
instruments
PPF, GPF, EPF, NSC, KVP, 5 year Bank FDs, Post Office Schemes etc. Approved Funds like PF, GPF, EPF, PPF etc, superannuation or gratuity funds, Pension Funds & other funds approved by the GOI.
Market Linked Investments Tax Saving Mutual Funds (or ELSS) & ULIPs None
Pension Schemes The New Pension Scheme (NPS) The New Pension Scheme (NPS)
Expenditure allowed Tution Fees of max. 2 children &

Repayment of Home Loan principal
Tution Fees of max. 2 children only
Medical Premia Available separately u/s 80D with a limit of Rs. 15,000 over and above Rs. 1 lac available u/s 80C (Rs. 20,000 in case of Mediclaim for parents who are senior citizens) Medical Premia payments made for family clubbed with other deductions & no separate limit given
Life Insurance Life Insurance Premia payable for insurance policies of family allowed; all products Premia payable on only pure life insurance policies (where amount of premium paid < 5% of sum assured) allowed.
Infrastructure Bonds Investment in Infra bonds issued by infrastructure NBFCs approved by GOI up to a max of Rs. 20,000 over and above Rs. 1 lacs u/s 80C & Rs. 15,000 No deductions for Infra Bonds
Interest expenses on Home Loan Deduction up to Rs. 1.50 lacs allowed Deduction up to Rs. 1.50 lacs allowed
Total Deductions allowed >>> Rs. 1.35 lacs + Rs. 1.50 lacs = Rs. 2.85 lacs Rs. 1.50 lacs+ Rs. 1.50 lacs = Rs. 3.00 lacs
As is clear from the above table, the incremental deduction allowable under The DTC 2010 over the existing Income Tax Act is mere Rs. 15,000. Much ado about nothing…
Also, a whole host of investment avenues like NSC, KVP, Post Office Schemes, 5 year Bank FDs, Tax Saving Mutual Funds, and Insurance plans are no more eligible for tax deductions.
From more than a dozen savings and investment avenues available today, the DTC 2010 proposes to reduce the choice to less than half a dozen. This according to me is the biggest disappointment from the retail investor’s perspective. A wonderful investment avenue like Tax Saving Mutual Funds (or ELSS) no more figures in the allowable deductions. Even traditional favorites like NSC, KVP, Post Office Schemes do not have a mention in The DTC 2010.
One pain area though is the levy of 5% dividend distribution tax (DDT) ie; dividends paid by companies on shares as well as dividend payments by mutual funds shall both be subject to a 5% dividend distribution tax (DDT). As of now, dividends are tax free. This move was uncalled for as many investors, especially senior citizens, currently invest in Mutual Funds so as to earn regular dividend income from them for their daily needs. This dividend income will now be affected adversely.
So what is good about The DTC 2010
However, there is a silver lining in The DTC 2010. Certain nightmares did not come true. The biggest nightmare was disallowing the Rs. 1.50 lacs deduction for interest payments on home loan. The stock market was terrified at the prospect of levy of a tax on long term capital gain which as of now is tax free. Fortunately, both the above nightmares did not come true. The deduction of up to Rs. 1.50 lacs for interest payments on home loan is going to be allowed under The DTC 2010 & long term capital gains continues to be tax free under the DTC regime. There was one more positive surprise in the DTC. The reduction in rates levied on Short Term Capital Gains (STCG).
As of today, STCG are taxed @ 15% irrespective of our tax slabs. Thus a person in 10% tax bracket is taxed @ 15% on his STCG as also a person who is in 30% tax bracket. This was not being fair with the guy in the 10% tax bracket. This anomaly has now been done away with in The DTC 2010. Have a look at the graphic below.
Taxation of Capital Gains
Particulars Currently under The Income Tax Act 1961 As proposed under The DTC 2010
Tax on Short Term Capital Gains
10% tax bracket
15%
5%
20% tax bracket
15%
10%
30% tax bracket
15%
15%
Tax on Long Term Capital Gains
Tax free
Tax free
As is evident from the table above, under The DTC 2010, you shall now have to pay a much reduced tax on you Short Term Capital Gains @ 50% of your tax bracket. This is a very welcome move and the FM should be applauded for the same.
Conclusion
When the current congress Govt. took charge, an ambitious Minister announced mega plans of building 20KMS of National Highway every day. We all know what the reality is today and are aware of the huge gap between actual road building and mega plans announced then.
Something similar has happened with The Direct Taxes Code 2010. It was announced in Aug 2009 with great fanfare and promises of a new era in direct tax collection. Exactly 1 year later, The DTC 2010 has turned out to be a big dampener and looks like the twin brother of the existing Income Tax Act 1961 and nothing more. In our opinion, The Direct Tax Code 2010 is an opportunity missed and the only plausible reason seems to be the lack of political will. One more minister succumbs to political pressure and fails to walk along the unbeaten path.

To sum up, the New Direct Taxes Code is Very Old Wine in not so New Bottle……

Friday, September 3, 2010

Insurance is the subject matter of solicitation

Insurance is the subject matter of solicitation

April 7, 2009

Next time when you come across an advertisement by an Insurance company, read carefully. You shall come across the following disclaimer that says “Insurance is the subject matter of solicitation”. Ever wondered what this term means? As a consumer , this disclaimer/warning is of utmost importance but often ignored.
According to the dictionary, the meaning of the term “solicitation” is " to ask for". Therefore,the above disclaimar essentially means that insurance has to be requested or asked for, not sold ie; you should be the one calling an insurance agent asking him to sell you a particular policy of your choice and not the other way round. Unfortunately, in real life, the case is exactly the opposite. Traditionally, in India, people buy insurance products not because they need them, but because they are goaded to buy a policy to please a neighbour, relative or a friend who is also an insurance agent.
The above disclaimar is extremely important as it puts the responsibility for selecting the right product on the consumer rather than on the company or the agent. But we know that most of the consumers are not aware about either their needs or the various options available before them. Hence the consumers have to obtain the help from a trained financial planner/advisor who will " advise " him/her in choosing the right insurance product.
Here is the list of some of the questions one should ask the insurance agent before being sold an insurance policy.
  1. Is the agent qualified or authorised to suggest me a financial product?
  2. Am I presently under Insured or over Insured?
  3. What Insurance product will suit my needs the best and what are its features?
  4. What shall be my financial commitments if I buy a particular policy like premium amount, premium paying term, frequency of payment etc.?
  5. What differentiates this Insurance product & how does it compare with other products in the market?
  6. Do I really need this product?
We think that asking such probing questions will help you better understand the reason why you’re buying a policy and whether it’s for savings, tax rebate, life insurance or long-term wealth creation. If you ask us, your insurance policy should serve all these purpose at the same time.
Also, it pays to have a basic knowledge about the type of insurance products. Insurance products are basically of following 4 types:
  1. Term Plans
  2. Money Back Plans
  3. Endowement Plans
  4. Unit Linked Insurance Plans (ULIPs) Plans
Term Plans are pure risk cover insurance products that do the job of insuring your lives against death with zero maturity value ie; in case you survive the policy term, you will not get anything. There is no investment element here. Only in case of the insured dies during the policy term does the family get the sum assured (the amount of insurance cover). So why should you go for this plan. Because this is the only pure insurance product that does exactly what a life insurance product should do; provide your family the much needed financial security in case of your untimely death. Also, this is the cheapest category of life insurance product that money can buy.
Beside term plans, all the other types of insurance products are insurance cum investment products with some variations. While Money back plans are generally with-profit plans that aim to provide a return on your investments at regular intervals over the policy term, endowment plans on the other hand aim to create a corpus for you at the end of the policy term. Money back schemes provide for periodic payments of partial survival benefits as follows during the term of the policy, of course so long as the policy holder is alive. An endowment policy on the other hand makes provisions for the family of the life assured in event of his early death and also assures a lump sum at a desired agewhich can be reinvested to provide an annuity during the remainder of his life or in any other way considered suitable at that time.
ULIPs as the name suggest is the modern avatar of the Investment cum insurance product offering the investor a variety of investment options to choose from. So why not go for ULIP that offers insurance as also investment option. ULIPs by their very nature are very long term products and are beneficial only if you are willing to stick out for a minimum of 15 to 20 years with the product else they prove to be extremely costly in the short run. As for the other investment cum insurance products, while they might involve a savings element, yet all these plans prove to be much costlier compared to a term plan and as a result might not allow you to buy enough insurance.
So what’s the solution? Well, we firmly believe that if there is one insurance product you are going to buy then let it be a pure risk cover TERM PLAN with adequate amount of insurance. Adequate amount of life insurance varies from person to person and depends on a number of factors including your standard of living, age , no. of dependents , income level, your existing savings & so on. Consult a financial advisor to find out the right amount of insurance for you & your family.
As for your investing needs, we believe that the mutual fund industry along with the small savings schemes like PPF, Senior citizens schemes & Bank Fixed Depsoits offer good enough options to suit every individuals profile & financial goals. They are cheaper & offer liquidity & flexibility as well & can also cater to one’s tax savings requirement.
So keep it simple. As far as possible, do not mix insurance & investment. This rule will allow you to buy adequate insurance cover for your family keeping your premium low thus allowing you to save & invest the spare money for meeting most of your financial goals.
INSURE ADEQUATELY & INVEST WISELY!!!!!

 

Six basic questions that every Investor should ask himself NOW (20 Jan 2009)

Six basic questions that every Investor should ask himself NOW

Jan 20, 2009

1. Why Save & invest at all? We do not earn just to meet our daily expenses. We earn so that we can lead a relaxed life & are not financially dependent on others. The amount that we SAVE after meeting our daily expenses needs to be invested judiciously so that we can meet our future expenses. Again, all of us have some kind of financial goals, may it be buying a house, corpus for our retirement, funding children's higher education & marriage, maintaining & upgrading our standard of living etc. We need to INVEST to help us achieve our financial goals. Do you already have enough and do not feel the need to save. Well, I hope you have taken inflation into account. Assuming inflation at an avg. rate of 8% pa, your Rs. 1 crore today would be worth approx. Rs. 29 Lacs, 19 lacs & Rs. 13 lacs respectively at the end of 15 Yrs, 20 Yrs & 25 Yrs from today.
2. Why should I insure myself? Even before you start investing, I would suggest that you buy insurance from your savings and only then think of investing. The reason is not far to seek. We all are well capable of taking good care of our family while we are there for them. But what if something happens to us? Have we made adequate financial provision to ensure that our family is not in trouble financially in our absence? INSURANCE comes to our rescue in such an eventuality.
3. Where to Invest & how long should I remain invested? A million dollar question indeed. Where to invest is a function of your age, your risk taking capacity, liquidity position, your financial goals etc. However, there is one thing you should never do and that is to invest in a haphazard manner. Fortunately for all of us, there is a no. of investment products available in the market today to suit all pockets and profile. The trick is to "prepare the shopping list first & then go out shopping & not do the other way round". We should normally remain invested till the time we have not achieved our financial goals.
4. What type of Insurance should I buy? A billion dollar question. Two types of insurance are a must for most of us. First is Life Insurance & the 2nd is Medical Insurance (or Mediclaim). Pure risk cover Term Plans are the best & the cheapest form of life insurance. A floater mediclaim policy if you are married is a must. Take separate cover for dependent parents.
5. Whom should I go to for investment advice? If investing is such an important activity in our lives, why leave it to chance or in the hands of a not so well informed agent. And with such a wide variety of financial products available in the market today, it is becoming more and more difficult to choose the right product. In such a scenario the role of a financial planner, who is an expert on all matters of investing & insurance, cannot be over emphasized.
6. How to choose the right financial advisor? Never fail to check out your advisor's credentials before you trust him with your hard earned money. First and foremost, check out his qualification & work experience. Then, find out how he is going to benefit from you ie; his method of charging you. Is it purely commission-based or is he going to charge you a fee. Remember, it would be extremely difficult for your advisor to be unbiased if major portion of his earnings is coming from commissions. Do not hesitate to enquire about his family background if need be.
7. Is this the right time to even talk about Investing? Yes I know the title says six questions only. But is not our mind pre-occupied with this question right now? NEVER even attempt to TIME the market because it is a thankless job. NOW is the best time to invest. And considering the discounted prices at which blue chip Indian companies are available in the market today, the downside seems limited with considerable upside.
This article recently appeared in the Times Of India

Death & Taxes!!! (03 Feb 2009)

Death & Taxes!!!

Feb 03, 2009

Death & Taxes are the only two things that are certain in this world. And yet we fear them both.

While we do not have a solution for your fear of death, we can definitely help remove your fear of taxes. Read on---
A major time consuming activity for every Indian, tax planning gives sleepless nights if not done properly & especially if postponed till last minute. Adding to the misery is the complexity & dynamism of the Income Tax Act that changes every year and requires one to be in touch with the latest developments. Further, there are a few mis-conceptions in the minds of common man surrounding tax planning that add to the misery.
Tax planning myths
  • I invest only to save tax
  • I buy Insurance only because I need to save taxes
  • PPF / NSC are still the best tax planning instruments available
  • Unit Linked Insurance Plan's (ULIPs) are good for tax planning & give great returns as well
  • Rs. 100,000 is the maximum I can invest to save taxes
  • Repayment of loans do not qualify for any tax deduction
  • Tax planning needs to be done only at the end of the year around Jan-March
The right approach Tax planning investments have to be planned in a way that it helps you create WEALTH and in the process help you reduce your tax liability. Further, your risk taking capacity & asset allocation should decide what tax planning instrument you choose. Last minute rush to buy insurance or investing in PPF disregarding your actual needs is not the right approach towards tax planning. A good financial advisor can help you decide on the right tax planning instruments for you based on your financial goals.
Steps to tax planning First step in your tax planning exercise, if you have a home loan, is to figure out the principal & interest component of your home loan because the amount of principal that you repay in a financial year qualifies for Sec 80C deduction (subject to Rs. 100,000 limit). Also, interest paid in a financial year on your home loan qualifies for deduction under Sec 24 subject to Rs. 150,000 limit. If you are already repaying principal exceeding Rs. 1 lac in a financial year, there is no need to make further tax saving investment u/s 80C.
Next step is to figure out your existing commitments towards Insurance, Pension plans or other tax saving instruments like ELSS, PPF,NSC, Infrastructure bonds etc. Tution fees of 2 of your children is also eligible for deduction u/s 80C.
Insurance & tax planning If you have still not exhausted your limit under Sec 80C, then give preference to pure risk cover Term Plan, if you do not have one already or if you are insured but the cover is not enough. ULIP's are not advisable as these are very expensive & do not offer enough liquidity or insurance cover. One should buy Life Insurance if you are not adequately covered & not for the sake of saving taxes because once you buy insurance, you have bound yourself to a commitment to pay a certain amount throughout the premium paying term.
Tax planning, your risk profile & asset allocation The balance, if any, should be invested in a way that allows you to achieve your financial goals & suits your risk profile. If you are an investor not willing to take risks & happy with 7 to 8% returns, then assured return schemes like Public Provident Fund (PPF), National Savings Certificate (NSC) & tax-saving fixed deposits are the ones for you. If you are aiming for higher returns & willing to take higher risks, then Equity Linked Savings Scheme (ELSS) is the best option for you. But remember that ELSS or tax saving mutual funds are market linked and you need to stay invested for at least 5+ years to get good returns (lock-in only for 3 years). Investment in ELSS done via Systematic Investment Plan (SIP) helps you distribute your tax burden over 12 months which is better than having to pay the entire amount in Jan-Mar.
Some Investments eligible U/s 80C of The Income Tax Act, 1961
Investment Options Returns Treatment of Income Liquidity
PPF/EPF 8% pa Tax free Withdrawals allowed after 6 years
NSC 8% pa Added to persons income for that year Matures in 6 years
Bank FDs (> 5 Years) 8 to 9% pa Added to persons income for that year Lock-in for 5 years
Pension Plans 7-8% pa Added to persons income for that year Payable on retirement
Insurance Premia (Endowments, Moneyback etc) 6-7% pa Tax free Payable on maturity
Insurance (ULIPs) 6 to 15% pa* Tax free At least 3 years
Tax Saving Mutual Funds (ELSS) 15% pa** Withdrawals and dividends both are tax free Lock-in for 3 years
* Returns are not assured and depends upon asset allocation ** Returns are not assured but market related although past 5 yrs have given a CAGR of > 15%
Do not limit your tax planning to Rs. 1 Lac u/s 80C Sec 80D allows deduction up to Rs.15,000 yearly in case of premium paid towards medical insurance for self, spouse & dependent children. Additional deduction of Rs. 15,000 (Rs.20,000 in case of parents who are senior citizens) shall be allowed for mediclaim of parents. If you have availed an education loan, then entire interest paid on your loan is eligible for deduction u/s 80E upto eight years. Sec 80G allows deduction in respect of certain specified donations up to 50% of the donation amount (100% in some cases) subject to 10% of your gross total income.
To sum up One of the biggest mistakes that people make is that they invest to save tax. The right approach is to invest for achieving your financial goals keeping your risk taking capacity and asset allocation in mind and at the same time save tax. So choose your tax savings investments wisely. HAPPY INVESTING!!!

 

CASH is KING is not just a cliché (Oct 2008)

CASH is KING is not just a cliché..

Oct 2008

Cash is king is a very often used expression that refers to the importance of cash flow in the overall fiscal health of an individual, business or even economy.
If you ask us what is the one asset that I would love to hold today, my answer would be CASH. Yes I know cash does not give any return and losses it value to inflation every year, yet I would still prefer to have it today. Simply because this is one asset class that will allow me to buy all other asset classes that are available at bargain prices today.
Cash is king because the availability of cash enables the investor to avoid two pitfalls:
  • Selling what's cheap so you can buy what's cheaper.
  • Not having enough cash to be able to take advantage of compelling investments opportunity that market throws from time to time
With fear and panic gripping the markets, those with cash will gain immensely by picking bluest of blue chip stocks available at heavily discounted prices that the Indian equity market has to offer today. If you use your cash wisely, the odds are very high that in a couple of years from now you'll be sitting on a handsome profit.
In todays time, when liquidity crisis has engulfed economies the world over, CASH has become the most sought after asset by economies the world over. Even corporates and individuals are yearning for cash.
Last six months or even last one year was probably the time to sit on cash but today is the time to invest with your full might, especially in the Indian equity market. Unfortunately, only those who have cash can take advantage of this wonderful opportunity.
For investors in India, the time to invest your hard earned cash has come.
This Diwali the biggest discount sale is not being offered at Big Bazaar or your local kirana shop but by the Indian Equity market.
So go shopping, but shop wisely.
Happy Investing!!! to all my Indian brethrens.

These are the best of time (Nov 2008)

These are the best of times. These are the worst of times.

Nov 2008

The above famous quote from Shakespeare aptly sums up the state of the Indian Equity Market today.
Why are these the worst of times. Well I do not think anybody needs to be convinced about that.
These are the worst of times because -------------------------
  • The current generation the world over has not seen a financial crisis of this magnitude before
  • The current financial crisis though emanated in US, has impacted the entire world
  • Nobody knows for sure whether the bad news is over or there is still to come
  • The current financial crisis had eaten up financial institutions like Lehman Brothers, Merrill Lynch, AIG etc. that used to be the epitome of the financial world at one point of time
  • Millions of lay investors the world over have seen there portfolio turn red with no sight of recovery anytime soon
  • Thousands have lost there homes, especially in US and thousands have lost there jobs
  • Most importantly, all the security measures set by regulators the world over have failed miserably and that has shaken the confidence of the common man in the financial system
  • Equity as a asset class has performed miserably this year and it would take months if not years for the common investor to turn to this mode of investment again
  • The Indian stock market has fallen by more than 60% from its peak in a matter of a few months putting an end to a 4-5 yr long bull run
So is there a silver lining to this cloud?
What is good about the current crisis?
Well for one, its good that this crisis (International financial crisis) unfolded now. Because, the longer it had gone unnoticed, the more severe and deeper would have been the damage.
Two, hopefully and we can all pray for this, the Heads of Govts., the regulators, the people in-charge of financial institutions the world over (and that includes India) would LEARN A LESSON from the present crisis and devise simple to follow and easy to implement regulations that will stop the world from experiencing a similar crisis in future.
Specifically for India and especially the Indian equity markets, I believe this is an opportunity in disguise.
These are the best of times (for the Indian investor at least) because ------------------------
  • A correction that was long overdue has finally taken place (although it is the severity of correction that has baffled even the best of experts)
  • Shares of the bluest of blue chip Indian businesses are available at attractive valuations of 2-3 years back
  • This is an opportune time for investors who had missed the bus , provided you are sitting on some cash now
  • The Indian economy is one of the better economies in the world today and only big economy besides china that is expected to clock a 7%+ GDP growth rate
  • Most Indian companies are sound and healthy and are expected to tide over the current crises relatively unscatched
  • The Indian banking and financial system is quite robust (thanks to our regulators especially the RBI) and is facing a temporary contraction in growth not expected to last too long.
Yes, some bad apples are expected to surface in the months that follow. Especially those companies that had over leveraged themselves or mis-managed there cash position.
But is this not a blessing in disguise? It is in times like these that "Men get differentiated from the boys".
So, hold your cash for some more time, let the fog get a bit clearer and than go out full throttle and bet on the Men out there. You are bound to get handsome returns in future.
Sound Investing!!!!!