When it comes to stock markets the most common question is “Is this the right time to enter the market?” Those who sold when the markets were falling are worried that it might fall again. Those who purchased when the markets were falling are waiting for it to rise to a level to recover their losses. Both the set of investors are scared.
Any time is actually the right time. But instead on going by what their friends tell them, they should have purchased shares with strong fundamentals and their fear would have been less. I’m not saying fear would not be there, it would be less. Since shares with strong fundamentals will always perform.
Some people say the stock markets give an actual indication of how the economy is performing with a lag of 6 to 12 months. i.e. the markets started falling in January 2008, where as the news of recession came much later. Why is it so? Since there are analysts who track certain stock or sectors and keep advising their clients on which stocks and sectors to keep invested and which to come out of. Mind you these guys are stock or sector specific. Now as people start moving their money in and out of stocks or sectors, it gives a clear picture of the economy, which takes 6 to 12 months to collate and publish the data.
The markets have started to rise, so is this an indication that the economy is improving? No idea, it would depend on which stocks or sectors in the stock exchange index are actually going up. So you need to watch and invest. If you noticed in the last year, the persons who made money are those who purchased when the market was falling. So does that give you a strategy? Yes, buy whenever the market falls, sell when it rises. Easy to say, but if you follow this strategy you will always win. Especially in this uncertain market, for every fall in the index by 100 points, invest X amount. For every rise of 100 points exit X amount.
The stock exchange index for Bombay stock exchange is called the sensex and the index for National stock Exchange is called Nifty.
The Sensex is made up of 30 shares and Nifty is made up of 50 Shares. Almost all the shares on the Sensex are a part of the Nifty.
As mentioned earlier, invest based on stocks with strong fundamentals. One of the things to check is the amount of debt in relation to equity. A company with high debt will do well when the economy is good, but in bad times, this company will not do well.
The other is stick to index shares, these share have been made part of the index after a lot of study and research. This will lower your risk.
Monday, August 31, 2009
Monday, August 17, 2009
Home Insurance
Whenever we talk about insurance, we always talk about life insurance. But have we looked at the other type of insurances available. Insurance is available for almost everything and Home Insurance is one of them. We might say we stay in a society and as per the society laws, it is mandatory to obtain an insurance policy. But do we as a member of the society inquire if we do have insurance? If our maintenance bill goes up we start shouting.
When we take a home loan we buy the insurance, that time we do it just because we have no choice. We take it only because it is mandatory.
We insure our lives and our car, but our biggest asset, our home is usually not insured.
What is home insurance? Home insurance covers losses to the structure and contents of our home due to natural or man-made calamities. Like any insurance, it protects us in the event of unwanted, unforeseen damage to our home caused by fire or lightning or smoke, storms of all kinds, explosions, riots or civil commotion, burglary, breakage of glass, vandalism, hooliganism and vindictive mischief.
Now the question would be what is the value of the house and its contents? The value of the house is usually the area of the house multiplied by the construction cost of the house. The construction cost would be the current construction cost. So what happens in the case of a society, in that case the society insures the building and charges you the insurance cost based on the area of your house. So if your society is doing the insurance, you don’t need to do insurance on the cost of the house. You just have to insure the contents of the house. How are the contents valued? The contents are valued at the current market value of the items. That means it should be valued at replacement cost at current market rate. Confused? What if it is 2 years old? Then it will be valued at current cost of purchasing the same item less depreciation for usage.
So how does home insurance help? In case of loss, you do not have to worry, just file a claim with the insurance company and you will be reimbursed.
When we take a home loan we buy the insurance, that time we do it just because we have no choice. We take it only because it is mandatory.
We insure our lives and our car, but our biggest asset, our home is usually not insured.
What is home insurance? Home insurance covers losses to the structure and contents of our home due to natural or man-made calamities. Like any insurance, it protects us in the event of unwanted, unforeseen damage to our home caused by fire or lightning or smoke, storms of all kinds, explosions, riots or civil commotion, burglary, breakage of glass, vandalism, hooliganism and vindictive mischief.
Now the question would be what is the value of the house and its contents? The value of the house is usually the area of the house multiplied by the construction cost of the house. The construction cost would be the current construction cost. So what happens in the case of a society, in that case the society insures the building and charges you the insurance cost based on the area of your house. So if your society is doing the insurance, you don’t need to do insurance on the cost of the house. You just have to insure the contents of the house. How are the contents valued? The contents are valued at the current market value of the items. That means it should be valued at replacement cost at current market rate. Confused? What if it is 2 years old? Then it will be valued at current cost of purchasing the same item less depreciation for usage.
So how does home insurance help? In case of loss, you do not have to worry, just file a claim with the insurance company and you will be reimbursed.
Let’s list some of the advantages:
- Your investment is safeguarded against a variety of unwanted incidents.
- The cost i.e. the premium we pay is as low as just 1% of the insured value.
- In case you are forced to shift to an alternative accommodation because of an insured peril, the cost of the additional rent will be taken care of by the insurance company.
It looks too good to be true, that is why it is important to look at the fine print or even ask questions to the insurance agent and get the answers in writing and make it a part of the insurance agreement. Also take care that the same terms are included during renewal.
- Find out whether the coverage offered by the insurance company is automatically adjusted as a protection against inflation or do we have to review the policy every year.
- Can you make extended coverage for new items purchased during the year?
- If you are in a flood and/or earthquake prone area, does the insurance cover flood and/or earthquake?
- Compare terms and rates with multiple insurance companies and you will be surprised to see the difference in the premium rates.
Almost all home insurance policies have exclusions. Some of the most common ones are:
The company is not liable to make payment for:
- Loss or damage to a human being during an attempted burglary
- Any loss or damage on account of loss of livestock, motor vehicles, cycles, money, securities for money, stamp, bullion, deeds, bonds, bills of exchange, promissory notes, stock or share certificates, business books, manuscripts, documents of any kinds, ATM debit or credit cards, unless previously specifically declared to the company.
- Any loss or damage to any property that is illegally acquired, kept, stored which is subject to forfeiture.Any loss or damage occurring while the insured person’s home is unoccupied, for a period of more than 30 days consecutively and if the insured failed to inform the company about the same.
Saturday, August 1, 2009
Credit Cards and credit score
Most of us would have started using credit cards or have credit cards with us. Some of us have 4 or 5 or may be more. Banks also like to give us credit cards. But with credit cards comes financial responsibility. Till recently banks never used to share credit information with each other, now they have started sharing this information.
Come 2010 and India too would have a system in place where you would be able to see your credit score. What is this credit score and how does it help. Most banks would decide on how much credit to give you as well as the interest rate to charge you based on your credit score.
Making use of a credit card judiciously will help you improve your credit score. If you already have a couple of cards do not go in for more. Going in for more cards does not increase your credit score. Mounting up credit on your credit card is also harmful. Just paying the minimum amount means paying interest and other charges.
Remember taking credit on your card is one of the costliest credits given by a bank. Check out your credit card statement for the charges on opening balance. Now divide the charges by the opening balance and multiply by hundred. This is the interest rate you would be paying for raking up a credit. This rate is only the monthly rate. Now multiply this by twelve and surprised, that is the annual rate you pay. On a monthly basis the amount looks low. But would it not have been better to take a loan, the net effect would have been a higher saving.
Credit cards give you convenience, but they come at a cost. Taking a loan is a bit cumbersome, but its better to take those little pains and save. Always check the credit limit being given to you by the credit card company. The higher the limit the better your score; take care, even if you do not use your credit limit, your credit rating will not go down, so don’t pressure yourself to use the credit.
Now on reading this article doesn’t mean you rush to close your cards, do them slowly. Wait till the expiry date and then close the one’s you do not want. The longer you have a credit card and good payment history, the better your score. If you have multiple cards and yet want to keep them, then plan.
One way would be to increase the number of days you get credit. i.e. you use the card say one week from the start of the billing cycle. Since all cards have different billing dates. The other would be to use one card for a particular type of expense only. Also if you want to keep all your cards, ensure that you use them. Taking a card and not using it would prompt the bank to close your card, leading to reducing your credit score.
Come 2010 and India too would have a system in place where you would be able to see your credit score. What is this credit score and how does it help. Most banks would decide on how much credit to give you as well as the interest rate to charge you based on your credit score.
Making use of a credit card judiciously will help you improve your credit score. If you already have a couple of cards do not go in for more. Going in for more cards does not increase your credit score. Mounting up credit on your credit card is also harmful. Just paying the minimum amount means paying interest and other charges.
Remember taking credit on your card is one of the costliest credits given by a bank. Check out your credit card statement for the charges on opening balance. Now divide the charges by the opening balance and multiply by hundred. This is the interest rate you would be paying for raking up a credit. This rate is only the monthly rate. Now multiply this by twelve and surprised, that is the annual rate you pay. On a monthly basis the amount looks low. But would it not have been better to take a loan, the net effect would have been a higher saving.
Credit cards give you convenience, but they come at a cost. Taking a loan is a bit cumbersome, but its better to take those little pains and save. Always check the credit limit being given to you by the credit card company. The higher the limit the better your score; take care, even if you do not use your credit limit, your credit rating will not go down, so don’t pressure yourself to use the credit.
Now on reading this article doesn’t mean you rush to close your cards, do them slowly. Wait till the expiry date and then close the one’s you do not want. The longer you have a credit card and good payment history, the better your score. If you have multiple cards and yet want to keep them, then plan.
One way would be to increase the number of days you get credit. i.e. you use the card say one week from the start of the billing cycle. Since all cards have different billing dates. The other would be to use one card for a particular type of expense only. Also if you want to keep all your cards, ensure that you use them. Taking a card and not using it would prompt the bank to close your card, leading to reducing your credit score.
Monday, July 27, 2009
Mutual Fund Investments for Non-resident Indians
Many Non-Resident Indians commonly known as NRI’s want to invest in Indian Mutual Funds and why not. After all the Indian financial market is one of the most stable markets. As per SEBI Overseas investment has been on an average of Rs. 100 Million + per working day from March 2009 onwards.
If an NRI wants to invest in Mutual funds in India, the Reserve Bank of India has set certain guidelines. The guidelines are simple whether on a repartiable or non-repartiable basis, the remittance for investment has to come through normal banking channels or out of funds held in his / her NRE / FCNR account. All investments have to be in Indian Rupees only.
Repartiable means the sale proceeds can be taken out of India.
On sale in case of repartiable basis the net sale proceeds (after payment of taxes) of such units sold, can be remitted abroad or at the NRI's option, credited to his / its NRE / FCNR / NRO / NRSR / NRNR account. Note that tax is deducted at source on the sale of units. Though there is no long term capital gains, tax is still deducted to have an audit trail.
If the investment was on non-repartiable basis then the net sale proceeds (after payment of taxes) of such units sold, can be remitted can only be credited at the NRI’s option to his to his / her NRO or NRSR account.
These were only the guidelines of the Reserve bank of India. It is also mandatory that for all investments being made in mutual funds in India you need a PAN card.
What is a PAN card?
PAN stands for Permanent Account Number. This is similar to the Social Security Number (SSN) in USA. It is a document of identity for all financial transactions in India. It is a 10 character code with first 5 being characters, followed by 4 digits and then a character. PAN card has become a very important document, it is also required for filing your income tax returns, opening a demat account, purchase or sale of property etc.
If an NRI wants to invest in Mutual funds in India, the Reserve Bank of India has set certain guidelines. The guidelines are simple whether on a repartiable or non-repartiable basis, the remittance for investment has to come through normal banking channels or out of funds held in his / her NRE / FCNR account. All investments have to be in Indian Rupees only.
Repartiable means the sale proceeds can be taken out of India.
On sale in case of repartiable basis the net sale proceeds (after payment of taxes) of such units sold, can be remitted abroad or at the NRI's option, credited to his / its NRE / FCNR / NRO / NRSR / NRNR account. Note that tax is deducted at source on the sale of units. Though there is no long term capital gains, tax is still deducted to have an audit trail.
If the investment was on non-repartiable basis then the net sale proceeds (after payment of taxes) of such units sold, can be remitted can only be credited at the NRI’s option to his to his / her NRO or NRSR account.
These were only the guidelines of the Reserve bank of India. It is also mandatory that for all investments being made in mutual funds in India you need a PAN card.
What is a PAN card?
PAN stands for Permanent Account Number. This is similar to the Social Security Number (SSN) in USA. It is a document of identity for all financial transactions in India. It is a 10 character code with first 5 being characters, followed by 4 digits and then a character. PAN card has become a very important document, it is also required for filing your income tax returns, opening a demat account, purchase or sale of property etc.
Wednesday, July 22, 2009
Budget 2009
Budget came and with it as usual some changes. These changes have an impact on our net take home. Let us see the impact of the budget on us.
The tax exemption limit has been increase by Rs.10000/- that means a minimum tax saving of Rs.1030/-
Big savings is for those whose income is more that Rs. 10 lakhs. No surcharge i.e. a saving of 10% of the tax.
In one of my earlier articles I had given details of Fringe Benefit Tax (FBT), now with the abolition of Fringe Benefit Tax (FBT), employees will now be liable to pay income tax on a lot of benefits on which FBT was paid by the employer. Under the FBT regime, the employer paid FBT on benefits such as contribution to approved superannuation fund, motor car provided by the employer, gift vouchers, meals, travel, club memberships and so on. Not only the employer was paying FBT, such expenses were subject to FBT at much lower rates because of specific valuation percentages, which resulted in a lesser effective rate of FBT. However, with the removal of FBT and assuming that the old valuation rules of perquisite taxation would be followed, employees would be liable to pay tax on the normal slab rates, resulting in a substantial increase in their taxes. Ultimately, the tax saved due to abolition of surcharge may get compensated by the taxation of perquisites in the hands of individual employees. In one of my earlier articles Money saved from short term business trips I had mentioned that allowance received would be tax free, since the employer was paying FBT, but with this being removed it would become taxable.
The scope of the annual deduction under Section 80E in respect of interest on loans taken for pursuing higher education has been expanded to include all fields of study including vocational studies. Students, who have taken an education loan to pursue a course, which was not covered till now, would be able to claim this deduction.
In the article Gifts and Taxability, I had mentioned that non cash gifts/gifts in kind were not taxable. With effect from October 1, 2009, individuals who receive shares, jewellery, valuable artifacts or even property valued at over Rs 50,000 as gifts from non-relatives, will have to pay tax. However, such gifts will be exempt, if received on the occasion of marriage, or by will/inheritance.
For those who pay wealth tax the limit has been increased from Rs.15 lakhs to Rs.30 lakhs.
Earlier Advance tax was payable if the tax payable was more than Rs.5000/- this has been increased to Rs.10000/-
The tax exemption limit has been increase by Rs.10000/- that means a minimum tax saving of Rs.1030/-
Big savings is for those whose income is more that Rs. 10 lakhs. No surcharge i.e. a saving of 10% of the tax.
In one of my earlier articles I had given details of Fringe Benefit Tax (FBT), now with the abolition of Fringe Benefit Tax (FBT), employees will now be liable to pay income tax on a lot of benefits on which FBT was paid by the employer. Under the FBT regime, the employer paid FBT on benefits such as contribution to approved superannuation fund, motor car provided by the employer, gift vouchers, meals, travel, club memberships and so on. Not only the employer was paying FBT, such expenses were subject to FBT at much lower rates because of specific valuation percentages, which resulted in a lesser effective rate of FBT. However, with the removal of FBT and assuming that the old valuation rules of perquisite taxation would be followed, employees would be liable to pay tax on the normal slab rates, resulting in a substantial increase in their taxes. Ultimately, the tax saved due to abolition of surcharge may get compensated by the taxation of perquisites in the hands of individual employees. In one of my earlier articles Money saved from short term business trips I had mentioned that allowance received would be tax free, since the employer was paying FBT, but with this being removed it would become taxable.
The scope of the annual deduction under Section 80E in respect of interest on loans taken for pursuing higher education has been expanded to include all fields of study including vocational studies. Students, who have taken an education loan to pursue a course, which was not covered till now, would be able to claim this deduction.
In the article Gifts and Taxability, I had mentioned that non cash gifts/gifts in kind were not taxable. With effect from October 1, 2009, individuals who receive shares, jewellery, valuable artifacts or even property valued at over Rs 50,000 as gifts from non-relatives, will have to pay tax. However, such gifts will be exempt, if received on the occasion of marriage, or by will/inheritance.
For those who pay wealth tax the limit has been increased from Rs.15 lakhs to Rs.30 lakhs.
Earlier Advance tax was payable if the tax payable was more than Rs.5000/- this has been increased to Rs.10000/-
Sunday, May 31, 2009
Reverse Mortgage
So you have invested in retirement funds, with an assumption that you will receive X amount after you retire. But on the eve of your retirement you realize that the retirement funds are actually just a pittance. The options at that time are limited; sell the house and live off that money in a smaller house, or give house to the child and live with him/her.
After investing so much money in a house and building an asset, it is very heart breaking to sell off that asset. After all you have gone through so much of pain to build it. It also becomes difficult to shift to a new location after retirement. And living with children is not something most modern-day retirees want to do, as it means compromising on their independence. Also with nuclear families and jet-set lifestyles becoming the norm, many people find it hard to devote time to their parents.
Getting into old age without proper financial support can be a very bad experience. The rising cost of living, healthcare, other amenities significantly compound the problem. No regular incomes, a dwindling capacity to work and earn livelihood at this age can make life miserable. A constant inflow of income, without any work would be an ideal solution, which can put an end to all such sufferings. But how is it possible?
The reverse mortgage scheme offered by some leading banks / housing finance companies could bring the required answers to the sufferings of senior citizens. Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in names, but they were not able to convert it into instant and regular income stream.
Mortgage is nothing but a loan. When we need money we take a load. When we repay a loan the loan component decreases. This is the traditional way in which we look at loans. In Reverse Mortgage, we can take a loan say lump sum or as an annuity against an asset. At the end of the term, if you have the money repay or the asset will be sold to recover the loan amount with the interest and the balance would be refunded. Reverse mortgage is a scheme which is usually formulated to benefit the senior citizens.
Reverse mortgage is a type of home loan product designed for the senior citizens by converting their fixed asset - their home or in banking terms their equity in any house property into an income channel without having to sell their equity in case of any requirement.
It usually involves two parties, the borrower - the senior citizen and the lender - any bank or housing finance institution.
The borrower pledges his house property to a lender, without worrying about any other security.
In return of the house property pledged, the borrower gets a lump sum amount or periodic payments spread over the borrower's lifetime that can be utilized by the borrower as per his needs.
The concept is simple, a senior citizen who holds a house or property, but lacks a regular source of income can put mortgage his property with a bank or housing finance company, and the bank or Housing Finance Company pays the person a regular payment. The good thing is that the person who ‘reverse mortgages' his property can stay in the house for his life and continue to receive the much needed regular payments. So, effectively the property now pays for the owner. So, effectively you continue to stay at the same place and also get paid for it. The way reverse mortgage works is that the bank will have the right to sell off the property after the incumbent passes away or leaves the place, and to recover the loan. It passes on any extra amount to the legal heirs.
The guidelines of reverse mortgage as prepared by RBI have the following salient features:
• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The maximum loan is up to 60% of the value of residential property.
• The maximum period of property mortgage is 15 years.
• The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
• The revaluation of the property has to be undertaken once every 5 years.
• The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
• Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.
The lender will recover the loan along with the accumulated interest by selling the house after the death of the borrower or earlier, if the borrower leaves the mortgaged residential property permanently. Any excess amount will be remitted back to the borrower or his heirs.
Reverse mortgage thus, is very beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.
Thus by investing in a house through a housing loan and repaying the loan during his working life time, one will not only have a roof over his head throughout his life time, but also secure a joint life pension, that keeps in step with inflation, after retirement. Seen in this perspective, reverse mortgage would motivate people to build or buy their homes and, thereby, save for their retirement voluntarily. Hence reverse mortgage helps increase economic activity by more people taking a load to build a house and provides economic security through reverse mortgage.
After investing so much money in a house and building an asset, it is very heart breaking to sell off that asset. After all you have gone through so much of pain to build it. It also becomes difficult to shift to a new location after retirement. And living with children is not something most modern-day retirees want to do, as it means compromising on their independence. Also with nuclear families and jet-set lifestyles becoming the norm, many people find it hard to devote time to their parents.
Getting into old age without proper financial support can be a very bad experience. The rising cost of living, healthcare, other amenities significantly compound the problem. No regular incomes, a dwindling capacity to work and earn livelihood at this age can make life miserable. A constant inflow of income, without any work would be an ideal solution, which can put an end to all such sufferings. But how is it possible?
The reverse mortgage scheme offered by some leading banks / housing finance companies could bring the required answers to the sufferings of senior citizens. Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in names, but they were not able to convert it into instant and regular income stream.
Mortgage is nothing but a loan. When we need money we take a load. When we repay a loan the loan component decreases. This is the traditional way in which we look at loans. In Reverse Mortgage, we can take a loan say lump sum or as an annuity against an asset. At the end of the term, if you have the money repay or the asset will be sold to recover the loan amount with the interest and the balance would be refunded. Reverse mortgage is a scheme which is usually formulated to benefit the senior citizens.
Reverse mortgage is a type of home loan product designed for the senior citizens by converting their fixed asset - their home or in banking terms their equity in any house property into an income channel without having to sell their equity in case of any requirement.
It usually involves two parties, the borrower - the senior citizen and the lender - any bank or housing finance institution.
The borrower pledges his house property to a lender, without worrying about any other security.
In return of the house property pledged, the borrower gets a lump sum amount or periodic payments spread over the borrower's lifetime that can be utilized by the borrower as per his needs.
The concept is simple, a senior citizen who holds a house or property, but lacks a regular source of income can put mortgage his property with a bank or housing finance company, and the bank or Housing Finance Company pays the person a regular payment. The good thing is that the person who ‘reverse mortgages' his property can stay in the house for his life and continue to receive the much needed regular payments. So, effectively the property now pays for the owner. So, effectively you continue to stay at the same place and also get paid for it. The way reverse mortgage works is that the bank will have the right to sell off the property after the incumbent passes away or leaves the place, and to recover the loan. It passes on any extra amount to the legal heirs.
The guidelines of reverse mortgage as prepared by RBI have the following salient features:
• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The maximum loan is up to 60% of the value of residential property.
• The maximum period of property mortgage is 15 years.
• The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
• The revaluation of the property has to be undertaken once every 5 years.
• The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
• Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.
The lender will recover the loan along with the accumulated interest by selling the house after the death of the borrower or earlier, if the borrower leaves the mortgaged residential property permanently. Any excess amount will be remitted back to the borrower or his heirs.
Reverse mortgage thus, is very beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.
Thus by investing in a house through a housing loan and repaying the loan during his working life time, one will not only have a roof over his head throughout his life time, but also secure a joint life pension, that keeps in step with inflation, after retirement. Seen in this perspective, reverse mortgage would motivate people to build or buy their homes and, thereby, save for their retirement voluntarily. Hence reverse mortgage helps increase economic activity by more people taking a load to build a house and provides economic security through reverse mortgage.
Saturday, May 23, 2009
Fringe Benefit Tax (FBT)
When we look at our salary, we think about tax. Any income received is taxable. But in some cases the tax is borne by the employer on behalf of us. These cases mostly come under fringe benefit tax.
What is fringe benefit?
The taxation of fringe benefits provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax.
Any benefits or perks that employees get as a result of their employment are to be taxed, but in this case in the hands of the employer.
This includes employee compensation other than the wages, tips, health insurance, life insurance and pension plans.
Fringe benefits as outlined in Income tax act mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees by reason of their employment.
They also include reimbursements, made by the employer either directly or indirectly to the employees for any purpose, contributions by the employer to an approved superannuation fund as well as any free or concessional tickets provided by the employer for private journeys undertaken by the employees or their family members.
We have got a fair idea of what is fringe benefit, but are all items included in the fringe benefits? As per the Income Tax Act the following items are covered:
• Employer's expenses on entertainment, hospitality, sales promotion and publicity, employee welfare, conveyance, tour and travel (including foreign travel) and use of hotels.
• Employer's provision of employee transportation to work or a cash allowances for this purpose.
• Employer's contributions to an approved retirement plan
• Employee stock option plans (ESOPs)
• Use of telephones, including mobile phones
• Expenses on festival celebrations, use of clubs, scholarships and so on.
• Repairs and maintenance of cars
• expenses on club facilities
• Scholarship to children of employees
• Conference
• Gifts
So how is fringe benefits tax beneficial to employees? If it was taxed to the employee, it would have been at the slab rate in which the individual falls. But in this case it would be at a fixed rate and that too at a much lower rate. Currently the effective FBT rate is around 2%. Isn’t that wonderful?
Who pays fringe benefit tax?
Under the provisions, fringe benefit tax is payable by an employer.
The tax is payable in respect of the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year.
The value of fringe benefits so calculated, is subject to additional income tax in respect of fringe benefits, as provided by the Income Tax Act.
The fringe benefit tax is payable by the employer even where he is not liable to pay income-tax on his total income computed in accordance with the other provisions of this Act.
The benefit does not have to be provided by the employer directly for him to attract fringe benefit tax. Fringe benefit tax may still be applied if the benefit is provided by a third party or an associate of the employer or by under an arrangement with the employer.
Will phone bills invite fringe benefit tax?
Yes. For telephone expenses, the Act assumes that 10 per cent of all calls made from an office are by employees for personal reasons, while for fuel; the extent of use by employees has been taken at 20 per cent.
What about fringe benefit tax on use of cars, etc?
The tax on perquisites like maintenance of a car, club membership, free meals, credit cards and tours and travel, which were earlier taxed in the hands of the employees, has been withdrawn and the employer is liable to pay tax on this.
What is fringe benefit?
The taxation of fringe benefits provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax.
Any benefits or perks that employees get as a result of their employment are to be taxed, but in this case in the hands of the employer.
This includes employee compensation other than the wages, tips, health insurance, life insurance and pension plans.
Fringe benefits as outlined in Income tax act mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees by reason of their employment.
They also include reimbursements, made by the employer either directly or indirectly to the employees for any purpose, contributions by the employer to an approved superannuation fund as well as any free or concessional tickets provided by the employer for private journeys undertaken by the employees or their family members.
We have got a fair idea of what is fringe benefit, but are all items included in the fringe benefits? As per the Income Tax Act the following items are covered:
• Employer's expenses on entertainment, hospitality, sales promotion and publicity, employee welfare, conveyance, tour and travel (including foreign travel) and use of hotels.
• Employer's provision of employee transportation to work or a cash allowances for this purpose.
• Employer's contributions to an approved retirement plan
• Employee stock option plans (ESOPs)
• Use of telephones, including mobile phones
• Expenses on festival celebrations, use of clubs, scholarships and so on.
• Repairs and maintenance of cars
• expenses on club facilities
• Scholarship to children of employees
• Conference
• Gifts
So how is fringe benefits tax beneficial to employees? If it was taxed to the employee, it would have been at the slab rate in which the individual falls. But in this case it would be at a fixed rate and that too at a much lower rate. Currently the effective FBT rate is around 2%. Isn’t that wonderful?
Who pays fringe benefit tax?
Under the provisions, fringe benefit tax is payable by an employer.
The tax is payable in respect of the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year.
The value of fringe benefits so calculated, is subject to additional income tax in respect of fringe benefits, as provided by the Income Tax Act.
The fringe benefit tax is payable by the employer even where he is not liable to pay income-tax on his total income computed in accordance with the other provisions of this Act.
The benefit does not have to be provided by the employer directly for him to attract fringe benefit tax. Fringe benefit tax may still be applied if the benefit is provided by a third party or an associate of the employer or by under an arrangement with the employer.
Will phone bills invite fringe benefit tax?
Yes. For telephone expenses, the Act assumes that 10 per cent of all calls made from an office are by employees for personal reasons, while for fuel; the extent of use by employees has been taken at 20 per cent.
What about fringe benefit tax on use of cars, etc?
The tax on perquisites like maintenance of a car, club membership, free meals, credit cards and tours and travel, which were earlier taxed in the hands of the employees, has been withdrawn and the employer is liable to pay tax on this.
Sunday, May 10, 2009
Tracking mutual fund performance
Objective parameters
The NAV of the scheme will reflect the performance of the scheme. The fund will also give you returns for various periods such as one month, three months, six months, one year, three years, since inception, etc. This will give you an idea about the performance of the fund. Funds also provide comparison with relevant benchmarks. This should tell you whether the fund manager has performed better than the benchmark. However, financial experts believe that these returns do not give the complete picture. They believe that the return should be risk-adjusted. Various publications and Internet sites provide such returns.
Subjective parameters
The performance alone does not make a fund house a winner. Equally important is the service standards and transparency in actions. It is also essential that the fund offer speedy solutions to grievances of investors. The reputation of the fund house among its investors and public at large indicates how well the fund scores on this front.
Information sources
Every financial daily offers daily NAV of all mutual fund schemes. Magazines also come out with annual survey of mutual funds. There are even magazines dedicated entirely towards mutual fund industry. Internet is also a great place for information. There are dedicated sites as well as financial sites, which offer information on mutual funds. Some of the good sites are www.mutualfundsindia.com and www.valueresearchindia.com .
Resolving grievances
Mutual funds are regulated by SEBI. Therefore, an investor always has the recourse to approach the watchdog. Various investor forums also take up the case of individual investors. You can also turn to judiciary as a last resort.
The NAV of the scheme will reflect the performance of the scheme. The fund will also give you returns for various periods such as one month, three months, six months, one year, three years, since inception, etc. This will give you an idea about the performance of the fund. Funds also provide comparison with relevant benchmarks. This should tell you whether the fund manager has performed better than the benchmark. However, financial experts believe that these returns do not give the complete picture. They believe that the return should be risk-adjusted. Various publications and Internet sites provide such returns.
Subjective parameters
The performance alone does not make a fund house a winner. Equally important is the service standards and transparency in actions. It is also essential that the fund offer speedy solutions to grievances of investors. The reputation of the fund house among its investors and public at large indicates how well the fund scores on this front.
Information sources
Every financial daily offers daily NAV of all mutual fund schemes. Magazines also come out with annual survey of mutual funds. There are even magazines dedicated entirely towards mutual fund industry. Internet is also a great place for information. There are dedicated sites as well as financial sites, which offer information on mutual funds. Some of the good sites are www.mutualfundsindia.com and www.valueresearchindia.com .
Resolving grievances
Mutual funds are regulated by SEBI. Therefore, an investor always has the recourse to approach the watchdog. Various investor forums also take up the case of individual investors. You can also turn to judiciary as a last resort.
Monday, May 4, 2009
How to select a Mutual Fund
Selection parameters
Your objective: The first point to note before investing in a fund is to find out whether your objective matches with the scheme. It is necessary, as any conflict would directly affect your prospective returns. You should pick schemes that meet your specific needs. Examples: pension plans, children’s plans, sector-specific schemes, etc.
Your risk capacity and capability: This dictates the choice of schemes. Those with no risk tolerance should go for debt schemes, as they are relatively safer. Aggressive investors can go for equity investments. Investors that are even more aggressive can try schemes that invest in specific industry or sectors.
Fund Manager’s and scheme track record: Since you are giving your hard earned money to someone to manage it, it is imperative that he manages it well. It is also essential that the fund house you choose has excellent track record. It also should be professional and maintain high transparency in operations. Look at the performance of the scheme against relevant market benchmarks and its competitors. Look at the performance of a longer period, as it will give you how the scheme fared in different market conditions.
Cost factor: Though the AMC fee is regulated, you should look at the expense ratio of the fund before investing. This is because the money is deducted from your investments. A higher entry load or exit load also will eat into your returns. A higher expense ratio can be justified only by superlative returns. It is very crucial in a debt fund, as it will devour a few percentages from your modest returns.
Purchasing mutual funds
Purchasing during NFO: Like companies, which have initial public offering (IPO), Mutual funds have New Fund Offer (NFO). It is when they launch the scheme for the first time. You can buy units at par on this occasion. However, it is not always advantageous to buy a mutual fund during IPO. You can always wait and see the performance before investing in it.
Purchasing existing mutual fund units: You can buy units of an open-end scheme anytime at NAV-related price. Most mutual funds charge an entry load. That means you have to pay an additional % of the NAV to get into the scheme. You can buy the plan directly from the mutual fund or brokerage.
Selling mutual funds
You can sell or redeem units very easily. As per SEBI guidelines, a mutual fund unit holder has the right to receive redemption or repurchase proceeds within 10 days of the redemption or repurchase. Most funds do not charge an exit load these days. But check before investing.
When should you sell a mutual fund unit is a crucial question. Ideally, you should sell it when you have met your target profit. The other reason is that you need the money or your profile has changed due to some changes in your life. Other than this, you should sell the units if you find that the fund has been taken over by another fund, which you do not approve of. Any major changes in the objective of the fund or a sharp rise in expenses could also be valid reasons to redeem units. Following a favorite fund manager is also a usual practice. However, it need not be always rewarding.
Income from mutual funds: the options
Mutual funds distribute their income as dividend. An investor has the option of receiving the dividend or opting for the dividend reinvestment or growth. If an investor needs the income, he can opt for dividend payout option. However, if you do not need the money, you can opt for dividend reinvestment. In the growth option dividend is not declared. Here the income is generated from sale of securities.
Speedy investment, redemption and income receipts
Thanks to the Electronic Clearing Services (ECS), mutual fund investor now has the option of automatic credit of dividends and redemptions into bank account. This will save a lot of paperwork, for both you and the fund. You can also instruct your bank to automatically withdraw a certain sum towards systematic investment plan. Alternatively, you can also directly receive systematic withdrawal proceeds in your bank account.
Your objective: The first point to note before investing in a fund is to find out whether your objective matches with the scheme. It is necessary, as any conflict would directly affect your prospective returns. You should pick schemes that meet your specific needs. Examples: pension plans, children’s plans, sector-specific schemes, etc.
Your risk capacity and capability: This dictates the choice of schemes. Those with no risk tolerance should go for debt schemes, as they are relatively safer. Aggressive investors can go for equity investments. Investors that are even more aggressive can try schemes that invest in specific industry or sectors.
Fund Manager’s and scheme track record: Since you are giving your hard earned money to someone to manage it, it is imperative that he manages it well. It is also essential that the fund house you choose has excellent track record. It also should be professional and maintain high transparency in operations. Look at the performance of the scheme against relevant market benchmarks and its competitors. Look at the performance of a longer period, as it will give you how the scheme fared in different market conditions.
Cost factor: Though the AMC fee is regulated, you should look at the expense ratio of the fund before investing. This is because the money is deducted from your investments. A higher entry load or exit load also will eat into your returns. A higher expense ratio can be justified only by superlative returns. It is very crucial in a debt fund, as it will devour a few percentages from your modest returns.
Purchasing mutual funds
Purchasing during NFO: Like companies, which have initial public offering (IPO), Mutual funds have New Fund Offer (NFO). It is when they launch the scheme for the first time. You can buy units at par on this occasion. However, it is not always advantageous to buy a mutual fund during IPO. You can always wait and see the performance before investing in it.
Purchasing existing mutual fund units: You can buy units of an open-end scheme anytime at NAV-related price. Most mutual funds charge an entry load. That means you have to pay an additional % of the NAV to get into the scheme. You can buy the plan directly from the mutual fund or brokerage.
Selling mutual funds
You can sell or redeem units very easily. As per SEBI guidelines, a mutual fund unit holder has the right to receive redemption or repurchase proceeds within 10 days of the redemption or repurchase. Most funds do not charge an exit load these days. But check before investing.
When should you sell a mutual fund unit is a crucial question. Ideally, you should sell it when you have met your target profit. The other reason is that you need the money or your profile has changed due to some changes in your life. Other than this, you should sell the units if you find that the fund has been taken over by another fund, which you do not approve of. Any major changes in the objective of the fund or a sharp rise in expenses could also be valid reasons to redeem units. Following a favorite fund manager is also a usual practice. However, it need not be always rewarding.
Income from mutual funds: the options
Mutual funds distribute their income as dividend. An investor has the option of receiving the dividend or opting for the dividend reinvestment or growth. If an investor needs the income, he can opt for dividend payout option. However, if you do not need the money, you can opt for dividend reinvestment. In the growth option dividend is not declared. Here the income is generated from sale of securities.
Speedy investment, redemption and income receipts
Thanks to the Electronic Clearing Services (ECS), mutual fund investor now has the option of automatic credit of dividends and redemptions into bank account. This will save a lot of paperwork, for both you and the fund. You can also instruct your bank to automatically withdraw a certain sum towards systematic investment plan. Alternatively, you can also directly receive systematic withdrawal proceeds in your bank account.
Sunday, May 3, 2009
Mutual Funds and its advantages
Definition
A mutual fund is a trust that pools the money of several investors with common financial goals. The collected money is invested in various equity, debt or commodity markets, depending on the objective of the fund. The income generated from these instruments and the capital appreciation is shared by the investors in proportion to the number of units owned by them.
Working of mutual funds
A mutual fund is set up by a sponsor. However, the sponsor cannot run the fund directly. He has to set up two arms: a trust and Asset Management Company. The trust is expected to assure fair business practice, while the AMC manages the money.
The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is Net Asset Value, as the name suggests it is arrived at after dividing the net assets of the mutual fund (current value of securities and cash and reduced by the liabilities, if any) by the number of units outstanding. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme. Depending on the load structure of the scheme, you have to pay entry or exit load.
Entry load is the extra amount you pay when you invest in a scheme. It is also called front-end load or sales load.
Exit load is the amount collected when you are selling or redeeming units.
Types of Mutual Fund schemes
Mutual fund schemes are classified on the basis of its structure and investment objective.
By Structure
Open ended funds: Investors can buy and sell units of open-ended funds at NAV-related price every day. Open-end funds do not have a fixed maturity and it is available for subscription every day of the year. Open-end funds also offer liquidity to investments, as one can sell units whenever there is a need for money.
Close-ended funds: These funds have a stipulated maturity period. They are open for subscription only during a specified period. Investors have the option of investing in the scheme during initial public offer period or buy or sell units of the scheme on the stock exchanges. Some close-ended funds repurchase the units at NAV-related prices periodically to provide an exit route to the investors.
By Investment objective
Equity funds: They normally invest most of their corpus in equities, as their objective is to provide capital appreciation over the medium-to-long term. Equity schemes are ideal for investors with risk appetite.
Income funds: As the name suggests, the aim of these funds is to provide regular and steady income to investors. They generally invest their corpus in fixed income securities like bonds, corporate debentures, and government securities. Income funds are ideal for those looking for capital stability and regular income.
Balanced funds: The objective of balanced funds is to provide growth along with regular income. They invest their corpus in both equities and fixed income securities. Balanced funds are ideal for those looking for income and moderate growth.
Money market funds (MMF’s): These funds strive to provide easy liquidity, preservation of capital and modest income. MMFs generally invest the corpus in safer short-term instruments like treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes hinges on the interest rates prevailing in the market. MMFs are ideal for corporate and individual investors looking to park funds for short periods.
Other schemes
These are more of a combination of Investment schemes.
Tax saving schemes: Tax saving schemes or equity-linked savings schemes offer tax rebates to investors under the Income Tax Act. They generally have a lock-in period of three years. They are ideal for investors looking to exploit tax rebates as well as growth in investments.
Special schemes: These schemes invest only in specified industries. These schemes are meant for aggressive and well-informed investors.
Index funds: Index Funds invest their corpus based on a specified Index. They try to mimic the composition of the index in their portfolio. Not only are the shares, even their weightage’s are replicated. Index funds are a passive investment strategy and the fund manager has a limited role to play here. The NAVs of these funds move along with the index they are trying to mimic.
Advantages of investing in Mutual Funds
The reason that mutual funds are so popular is that they offer the ability to easily invest in increasingly more complicated financial markets. Some of the advantages are listed below:
Flexibility: Mutual Fund investments offer you a lot of flexibility with features such as systematic investment plans, systematic withdrawal plans & dividend reinvestment.
Regulated for investor protection: The Mutual Funds sector is regulated to safeguard the investor's interests.
Affordability: Mutual funds are available in units so this allows you to start with small investments. If you want to buy a portfolio of blue chip scripts would need a large amount of money to invest in all of them, whereas if you invest in a mutual fund which invests in the blue chips, the amount of investment would be less. A mutual fund can do that because it collects money from many people and it has a large corpus. Because of the large corpus, even a small investor can benefit from its investment strategy.
Professional management: Expert Fund Managers of the Mutual Fund analyze all options based on experience & research. You can leave the investment decisions to them and only have to monitor the performance of the fund at regular intervals.
Potential of return: The fund managers who take care of your Mutual Fund have access to information and statistics from leading economists and analysts around the world. Because of this, they are in a better position than individual investors to identify opportunities for your investments to flourish.
Diversification: Risk is lowered as Mutual Funds invest across different industries & stocks. This is possible because of the large corpus. A small investor cannot have a well-diversified portfolio because it calls for large investment.
Convenience: Mutual funds offer tailor-made solutions like systematic investment plans and systematic withdrawal plans to investors, which is very convenient to investors. Investors also do not have to worry about the investment decisions or they do not have to deal with their brokerage or depository, etc. for buying or selling of securities. Mutual funds also offer specialized schemes like retirement plan, children’s plan, industry specific schemes, etc. to suit personal preference of investors. These schemes also help small investors with asset allocation of their corpus. It also saves a lot of paper work.
Low Costs: The benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. As per SEBI the maximum fee an AMC can charge is 2.5%. Also, they get the service of a financial professional for a very small fee. If they were to seek a financial advisor's help directly, they may end up pay more. Also, the size of the corpus should be large to get the service of investment experts, who offer portfolio management.
Liquidity: You have the option of withdrawing or redeeming your money at any point of time at the current NAV. Most mutual funds dispatch checks for redemption proceeds within two or three working days. You also do not have to pay any penal interest in most cases. However, some schemes charge an exit load.
Tax breaks: You do not have to pay any taxes on dividends issued by mutual funds. Long Term capital gains are also tax free. Only short term capital gains are taxable. Tax-saving schemes and pension schemes give you the added advantage of tax rebates.
Transparency: Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a regular basis. They also send quarterly newsletters, which give details of the portfolio, performance of schemes against various benchmarks, etc. They are also well regulated and SEBI monitors their actions closely.
A mutual fund is a trust that pools the money of several investors with common financial goals. The collected money is invested in various equity, debt or commodity markets, depending on the objective of the fund. The income generated from these instruments and the capital appreciation is shared by the investors in proportion to the number of units owned by them.
Working of mutual funds
A mutual fund is set up by a sponsor. However, the sponsor cannot run the fund directly. He has to set up two arms: a trust and Asset Management Company. The trust is expected to assure fair business practice, while the AMC manages the money.
The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is Net Asset Value, as the name suggests it is arrived at after dividing the net assets of the mutual fund (current value of securities and cash and reduced by the liabilities, if any) by the number of units outstanding. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme. Depending on the load structure of the scheme, you have to pay entry or exit load.
Entry load is the extra amount you pay when you invest in a scheme. It is also called front-end load or sales load.
Exit load is the amount collected when you are selling or redeeming units.
Types of Mutual Fund schemes
Mutual fund schemes are classified on the basis of its structure and investment objective.
By Structure
Open ended funds: Investors can buy and sell units of open-ended funds at NAV-related price every day. Open-end funds do not have a fixed maturity and it is available for subscription every day of the year. Open-end funds also offer liquidity to investments, as one can sell units whenever there is a need for money.
Close-ended funds: These funds have a stipulated maturity period. They are open for subscription only during a specified period. Investors have the option of investing in the scheme during initial public offer period or buy or sell units of the scheme on the stock exchanges. Some close-ended funds repurchase the units at NAV-related prices periodically to provide an exit route to the investors.
By Investment objective
Equity funds: They normally invest most of their corpus in equities, as their objective is to provide capital appreciation over the medium-to-long term. Equity schemes are ideal for investors with risk appetite.
Income funds: As the name suggests, the aim of these funds is to provide regular and steady income to investors. They generally invest their corpus in fixed income securities like bonds, corporate debentures, and government securities. Income funds are ideal for those looking for capital stability and regular income.
Balanced funds: The objective of balanced funds is to provide growth along with regular income. They invest their corpus in both equities and fixed income securities. Balanced funds are ideal for those looking for income and moderate growth.
Money market funds (MMF’s): These funds strive to provide easy liquidity, preservation of capital and modest income. MMFs generally invest the corpus in safer short-term instruments like treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes hinges on the interest rates prevailing in the market. MMFs are ideal for corporate and individual investors looking to park funds for short periods.
Other schemes
These are more of a combination of Investment schemes.
Tax saving schemes: Tax saving schemes or equity-linked savings schemes offer tax rebates to investors under the Income Tax Act. They generally have a lock-in period of three years. They are ideal for investors looking to exploit tax rebates as well as growth in investments.
Special schemes: These schemes invest only in specified industries. These schemes are meant for aggressive and well-informed investors.
Index funds: Index Funds invest their corpus based on a specified Index. They try to mimic the composition of the index in their portfolio. Not only are the shares, even their weightage’s are replicated. Index funds are a passive investment strategy and the fund manager has a limited role to play here. The NAVs of these funds move along with the index they are trying to mimic.
Advantages of investing in Mutual Funds
The reason that mutual funds are so popular is that they offer the ability to easily invest in increasingly more complicated financial markets. Some of the advantages are listed below:
Flexibility: Mutual Fund investments offer you a lot of flexibility with features such as systematic investment plans, systematic withdrawal plans & dividend reinvestment.
Regulated for investor protection: The Mutual Funds sector is regulated to safeguard the investor's interests.
Affordability: Mutual funds are available in units so this allows you to start with small investments. If you want to buy a portfolio of blue chip scripts would need a large amount of money to invest in all of them, whereas if you invest in a mutual fund which invests in the blue chips, the amount of investment would be less. A mutual fund can do that because it collects money from many people and it has a large corpus. Because of the large corpus, even a small investor can benefit from its investment strategy.
Professional management: Expert Fund Managers of the Mutual Fund analyze all options based on experience & research. You can leave the investment decisions to them and only have to monitor the performance of the fund at regular intervals.
Potential of return: The fund managers who take care of your Mutual Fund have access to information and statistics from leading economists and analysts around the world. Because of this, they are in a better position than individual investors to identify opportunities for your investments to flourish.
Diversification: Risk is lowered as Mutual Funds invest across different industries & stocks. This is possible because of the large corpus. A small investor cannot have a well-diversified portfolio because it calls for large investment.
Convenience: Mutual funds offer tailor-made solutions like systematic investment plans and systematic withdrawal plans to investors, which is very convenient to investors. Investors also do not have to worry about the investment decisions or they do not have to deal with their brokerage or depository, etc. for buying or selling of securities. Mutual funds also offer specialized schemes like retirement plan, children’s plan, industry specific schemes, etc. to suit personal preference of investors. These schemes also help small investors with asset allocation of their corpus. It also saves a lot of paper work.
Low Costs: The benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. As per SEBI the maximum fee an AMC can charge is 2.5%. Also, they get the service of a financial professional for a very small fee. If they were to seek a financial advisor's help directly, they may end up pay more. Also, the size of the corpus should be large to get the service of investment experts, who offer portfolio management.
Liquidity: You have the option of withdrawing or redeeming your money at any point of time at the current NAV. Most mutual funds dispatch checks for redemption proceeds within two or three working days. You also do not have to pay any penal interest in most cases. However, some schemes charge an exit load.
Tax breaks: You do not have to pay any taxes on dividends issued by mutual funds. Long Term capital gains are also tax free. Only short term capital gains are taxable. Tax-saving schemes and pension schemes give you the added advantage of tax rebates.
Transparency: Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a regular basis. They also send quarterly newsletters, which give details of the portfolio, performance of schemes against various benchmarks, etc. They are also well regulated and SEBI monitors their actions closely.
Tuesday, April 28, 2009
Regular Income through Mutual Funds
Earlier we had spoken on how to get regular income month after month. We had said we put some money in Fixed Income generating securities, Income funds, Dividend yielding shares and Equity mutual funds. I don’t think we need to go into Fixed Income generating securities, since this is where most of us invest without thinking viz. Bank deposits, recurring deposits, Post office monthly Income schemes, etc.
In the last article I spoke of dividend yielding shares. Now let us look at Mutual funds. Before we move into mutual funds, we need to understand the basics of Mutual funds. Whenever we buy or sell mutual funds, we actually buy or sell units of mutual funds. How are these units priced? Since they are not traded on the stock exchange, unless they are Exchange Traded Funds (ETF’s), the pricing of mutual funds is based on NAV’s.
What is NAV?
NAV is Net Asset Value, as the name suggests it is arrived at after dividing the net assets of the mutual fund (current value of securities and cash and reduced by the liabilities, if any) by the number of units outstanding.
NAVs are also used to track the performance of the mutual funds. Unlike the prices of stocks which keep changing every second, the NAV is calculated based on the closing prices of the stocks held by the mutual fund. NAV is an important tool to see the returns on your mutual fund investments.
You can keep a check on the NAVs to see the performance of your mutual fund.
The purchase or sale of a unit of mutual fund is its NAV plus or minus entry or exit loads if any.
Entry load is the extra amount you pay when you invest in a scheme. It is also called front-end load or sales load.
Exit load is the amount collected when you are selling or redeeming units.
Effect of dividend payout on NAV
While analyzing a mutual fund scheme on the basis of its NAV performance, you must also check, whether the scheme is a dividend paying scheme or a growth scheme. Usually a mutual fund would have options, dividend and growth. In case of a dividend paying scheme, the NAV shall not reflect the actual returns of the scheme, because, each time when the dividend would have been declared, the NAV would have come down to off set its effect.
As mentioned earlier NAV is the net asset value and the NAV would go down since cash would get reduced from the assets when dividend is declared. If you compare the same scheme with dividend payout and growth option you would discover that the NAV of the growth option of the same scheme is much higher than that of the dividend option scheme.
It is always prudent to judge the performance of a mutual fund by analyzing the NAVs of its growth schemes.
How to get income month after month
What is said above is fine; we will see details about mutual funds in another article. Our main concern is we need to get income month after month; how do we go about achieving this. After going through the performance we decided which funds are good for us.
But does this assure us regular income? First thing to remember, mutual fund returns are not assured. All funds have a pattern of dividend declaration. Check the pattern and choose funds in such a way that we would get some dividend every month. By this we have done 2 things. Ensured that the funds selected are good and also we get income every month.
After saying all this, we need to regularly monitor our funds performance with some benchmark. In case we notice the performance is going down, we should move the funds to another scheme. After all we want regular income.
In the last article I spoke of dividend yielding shares. Now let us look at Mutual funds. Before we move into mutual funds, we need to understand the basics of Mutual funds. Whenever we buy or sell mutual funds, we actually buy or sell units of mutual funds. How are these units priced? Since they are not traded on the stock exchange, unless they are Exchange Traded Funds (ETF’s), the pricing of mutual funds is based on NAV’s.
What is NAV?
NAV is Net Asset Value, as the name suggests it is arrived at after dividing the net assets of the mutual fund (current value of securities and cash and reduced by the liabilities, if any) by the number of units outstanding.
NAVs are also used to track the performance of the mutual funds. Unlike the prices of stocks which keep changing every second, the NAV is calculated based on the closing prices of the stocks held by the mutual fund. NAV is an important tool to see the returns on your mutual fund investments.
You can keep a check on the NAVs to see the performance of your mutual fund.
The purchase or sale of a unit of mutual fund is its NAV plus or minus entry or exit loads if any.
Entry load is the extra amount you pay when you invest in a scheme. It is also called front-end load or sales load.
Exit load is the amount collected when you are selling or redeeming units.
Effect of dividend payout on NAV
While analyzing a mutual fund scheme on the basis of its NAV performance, you must also check, whether the scheme is a dividend paying scheme or a growth scheme. Usually a mutual fund would have options, dividend and growth. In case of a dividend paying scheme, the NAV shall not reflect the actual returns of the scheme, because, each time when the dividend would have been declared, the NAV would have come down to off set its effect.
As mentioned earlier NAV is the net asset value and the NAV would go down since cash would get reduced from the assets when dividend is declared. If you compare the same scheme with dividend payout and growth option you would discover that the NAV of the growth option of the same scheme is much higher than that of the dividend option scheme.
It is always prudent to judge the performance of a mutual fund by analyzing the NAVs of its growth schemes.
How to get income month after month
What is said above is fine; we will see details about mutual funds in another article. Our main concern is we need to get income month after month; how do we go about achieving this. After going through the performance we decided which funds are good for us.
But does this assure us regular income? First thing to remember, mutual fund returns are not assured. All funds have a pattern of dividend declaration. Check the pattern and choose funds in such a way that we would get some dividend every month. By this we have done 2 things. Ensured that the funds selected are good and also we get income every month.
After saying all this, we need to regularly monitor our funds performance with some benchmark. In case we notice the performance is going down, we should move the funds to another scheme. After all we want regular income.
Sunday, April 26, 2009
Dividend Investing
Over the last year or so we have seen a lot of ups and downs in the market. In this type of market buying and selling of shares by trying to time the market is like playing with fire. Another option is to look at dividend yield stocks. Dividend is a tax-free income. Investing in stocks which give regular dividends is called dividend investing.
Investing in good dividend yield shares dual advantage of a consistent cash flow in the form of dividend and potential for capital appreciation. (Dividend Investing + Capital appreciation = Great Returns)
Dividend investing focuses on identifying solid companies with a record of growing their dividends each year; and an expectation that it will continue to do so in the future. History has proved that stocks that pay constant/growing dividends have always out-performed those that don’t give any dividend or have inconsistent dividend payout history.
Dividend investing is usually considered safe in all market situations. It provides diversification and thus reduces investment risk.
Spotting a Dividend Yield Stock
Dividend yield is the dividend per share divided by price per share. In the last one year stock prices have crashed, so the dividend yield has gone up. However, one should not aim at accumulating stocks with high dividend yield because such high yields may not be sustainable in case profit falls due to economic slowdown.
There are several other things to look out for in a stock before considering it a dividend counter to invest in. Some of the determining factors include:
- A company that has a history of paying a consistently growing dividend is better than the one that pays a consistent, but steady dividend. And the consistent but flat dividend is better than a company who has had to cut its dividend.
- Whenever a company pays dividend, it has to pay cash. That means the company is able to generate cash from its operations to pay the shareholders. Cash flow is King. A company that generates a steady or growing operating cash flow is better able to fund a dividend than a company that cannot consistently generate cash. But take care of companies which pay dividends out of cash generated in the earlier years. Look at the cash flow statement.
- The stronger the balance sheet the better. Stronger here meaning less debt. A company with no bank debt has a stronger balance sheet because it can borrow if necessary to support operations and the dividend if need be.
- Keep clear of companies with high fluctuations in profits. As we all know that investing in stocks is risky
Friday, April 24, 2009
Returns of Rs.50,000/- per month
The other day a friend of mine came to me and said “I want to get a steady income of Rs. 50,000/- per month, what should I do?” The option of job or business was ruled out, since he did not want to work for the money, but wanted his money to work for him. Does this not sound like the book “Rich Dad Poor Dad”? I also thought about this book, when he said I have another option of rental income.
He mentioned that rental income was a good option, since he would get regular income as well as appreciation in the value of the property. But here again you would have to keep following up, running to the registrars, brokers around you and other normal fears of getting a good customer etc.
So let us see what other options we could think of for this gentleman. There is this option of interest and dividends. This is a very good option. We have to look at it very carefully. Interest is assured return, nothing to worry. Low risk, steady and assured returns, but returns are usually low. As it is normal, low risk low returns.
We should also look at dividends. Dividends would be of 2 types, shares and mutual funds. The assumption is we look at only those shares and mutual funds which have been giving regular dividends year after year. Yes, we are looking at dividend yield shares.
A thing to remember is Interest is taxable and definite but dividend is tax free but variable.
Taking the points mentioned above into account, a suggestion is invest around 25% of the corpus into fixed income securities taking current scenario into account the post tax return on fixed income securities is around 8%. Another 25% could be put into Income funds, the returns on this is around 10%.
The balance could be put in dividend yield shares and equity mutual funds, the average returns on this is around 15%. Now these are all average returns per annum, taking the economic scenario at any time the return could go up or down.
So if you have a corpus of Rs. 50 Lakhs, you could easily achieve the target of Rs.50,000/- a month. How?
He mentioned that rental income was a good option, since he would get regular income as well as appreciation in the value of the property. But here again you would have to keep following up, running to the registrars, brokers around you and other normal fears of getting a good customer etc.
So let us see what other options we could think of for this gentleman. There is this option of interest and dividends. This is a very good option. We have to look at it very carefully. Interest is assured return, nothing to worry. Low risk, steady and assured returns, but returns are usually low. As it is normal, low risk low returns.
We should also look at dividends. Dividends would be of 2 types, shares and mutual funds. The assumption is we look at only those shares and mutual funds which have been giving regular dividends year after year. Yes, we are looking at dividend yield shares.
A thing to remember is Interest is taxable and definite but dividend is tax free but variable.
Taking the points mentioned above into account, a suggestion is invest around 25% of the corpus into fixed income securities taking current scenario into account the post tax return on fixed income securities is around 8%. Another 25% could be put into Income funds, the returns on this is around 10%.
The balance could be put in dividend yield shares and equity mutual funds, the average returns on this is around 15%. Now these are all average returns per annum, taking the economic scenario at any time the return could go up or down.
So if you have a corpus of Rs. 50 Lakhs, you could easily achieve the target of Rs.50,000/- a month. How?
Type of security | Investment | Income per month | Post tax rate of return |
Interest bearing securities | Rs.12.50 Lakhs | Rs. 8,333/- | 8% |
Income funds | Rs.12.50 Lakhs | Rs. 10,417/- | 10% |
Shares | Rs.12.50 Lakhs | Rs. 15,625/- | 15% |
Equity Mutual Funds | Rs.12.50 Lakhs | Rs. 15.625 | 15% |
Total | Rs.50.00 Lakhs | Rs. 50,000/- |
Monday, April 6, 2009
Money saved from short term business trips
Many of us go on business trips abroad. During such trips we are paid a fixed amount of allowance per day, to take care of our day to day expenses. Some might go on single trips in a financial year, some on multiple. In both these cases we would need to know what is the total time spent outside India.
Out of the allowance received, some amount is saved. Is this amount taxable?
As per the IT Act any unspent amount shall be taxable.
Since the company has sent the employee on foreign assignment, his/her salary is TAXABLE in India.
However in 2005 the income tax department came with a circular with respect to Fringe Benefit Tax (FBT) and allowance received.
As per the circular the employee is not liable to pay income-tax on any amount saved from the allowance received. If your company deducts the FBT on those sums of money paid to you as allowance, the same is not taxable in your hand under I T Act.
Now that we are clear if it is taxable or not, the question is how we convert the foreign currency into Indian Rupees. Always use the official route, since its legal and not taxable. This way you could also invest the money. You have gone through a lot of sacrifices to save the money, now that you have saved it, would you like to just spend?
The main reason we talk about using the official route is, you do not just spend the money.
Where do you invest? There are many choices; lets have a look as some of our options.
Conventional: Bank Fixed deposits, NSC’s, Company Fixed Deposits, PPF, Insurance
These are safe returns and capital is guaranteed. The downside is the taxable part.
Share / Stock Market / Commodities / Futures and options:
You need to be really careful. Don’t go by hearsay, do your own study before you invest.
Mutual Funds: Equity / Debt / Sector specific / Income.
Though risky, the risk is somewhat less compared to the option above.
Real Estate:
This is quite safe. But the amount required is quite high.
Business: Is this everyone’s cup of tea?
Out of the allowance received, some amount is saved. Is this amount taxable?
As per the IT Act any unspent amount shall be taxable.
Since the company has sent the employee on foreign assignment, his/her salary is TAXABLE in India.
However in 2005 the income tax department came with a circular with respect to Fringe Benefit Tax (FBT) and allowance received.
As per the circular the employee is not liable to pay income-tax on any amount saved from the allowance received. If your company deducts the FBT on those sums of money paid to you as allowance, the same is not taxable in your hand under I T Act.
Now that we are clear if it is taxable or not, the question is how we convert the foreign currency into Indian Rupees. Always use the official route, since its legal and not taxable. This way you could also invest the money. You have gone through a lot of sacrifices to save the money, now that you have saved it, would you like to just spend?
The main reason we talk about using the official route is, you do not just spend the money.
Where do you invest? There are many choices; lets have a look as some of our options.
Conventional: Bank Fixed deposits, NSC’s, Company Fixed Deposits, PPF, Insurance
These are safe returns and capital is guaranteed. The downside is the taxable part.
Share / Stock Market / Commodities / Futures and options:
You need to be really careful. Don’t go by hearsay, do your own study before you invest.
Mutual Funds: Equity / Debt / Sector specific / Income.
Though risky, the risk is somewhat less compared to the option above.
Real Estate:
This is quite safe. But the amount required is quite high.
Business: Is this everyone’s cup of tea?
Monday, March 30, 2009
Reducing Costs
So the economy is at its worst. Inflation is up, salaries are not going up and it’s difficult to meet expenses or is it that we have to reduce our costs till we get some stability.
Wasting money is not only detrimental to your overall financial well being, it's irresponsible. Your house and living expenses make up the major portion of your financial plan. Just like spending cash unnecessarily, paying for expenses that aren't necessary is just wasting money.
With so much of uncertainty, its best to try and reduce our expenses. This way would still be able to meet our financial plan. Here are a few tips to reduce costs.
Avoid impulse spending
The first thing we do while preparing a financial plan is preparing a budget. So why not stick to the budget and avoid impulsive spending. Yes, we must have kept some amount of money aside for contingencies, but this would be time to keep our contingencies to the minimum. This is the best time to check our actual expenses more regularly against the budget.
If you have a habit of paying by credit card, stop. Use cash instead, this helps in keeping a check on impulsive buying. Withdraw the exact amount for your weekly budgeted expenses. Make sure that your expenses are met from your income and not loans. Charging expenses on a credit card and then paying only the minimum amount is nothing short of taking a loan from the financial institution. The interest rate on credit card loans is the highest.
Have more home made food.
While preparing the financial budget we must have made created a head for eating outside. This was fine when the economy was good, but now is the time to have a re-look at the budget. If you have been eating outside for lunch, start carrying Tiffin. If you must eat out try eating going to a more mid sized restaurant, this will help reduce costs. Have a picnic dinner, pack food at home and go to a beach or park and have your dinner, this is much cheaper. Another option is have a movie dinner in the house, hire a DVD and have the family movie experience in the house. Make it special. Cook food from the scratch, instead of having ready to eat or half made food, its cheaper. Kids like Pizza’s and burger’s, why not make them at home?
Stop unwanted phone features
Features like call waiting, caller ID, return call service, long distance packages, etc, etc, etc. are extra expenses. Some we might require, but others are just expenses. If incoming calls are free, caller ID is just and additional expense. If your phone as an answering machine, then important persons or people you know would leave a message. If they did not, it was not important.
Minimize costs on essential household expenses.
Try using the air conditioner only when it is really essential, than just turning it on as a routine. This will help reduce the electricity bill.
Review, remove, and reduce expenses to stop wasting money and trim your household budget. Analyze each household expense for necessity and the costs associated with it. Make an effort to reduce each expense to the minimum amount possible, while still meeting your family's needs. Before you know it you'll be saving hundreds, if not thousands, on your household budget expenses each year.
Laundry Expenses
Yes, you do not send your clothes to the laundry unless you get the hard to remove stains. But before you do that why don’t you try some household tips viz. bicarbonate of soda, distilled vinegar and lemon juice solutions can pretty much clean anything for a fraction of the cost.
Holidays
We definitely need holidays, now we can’t say stay in the house all the time. We could get mad. It will cost us a small fortune. I'm talking about holidays of course. But there are ways to have a cheap break.
Many of us, surprisingly, haven't explored our local areas in great depth. Try going to these local areas, this would come cheaper. Make an itinerary of different activities to do each day, pack a picnic and go. As you don't have to pay for accommodation it can be surprisingly cheap, just make sure you don't ruin the fun by doing chores when you get home. Ensure that it is really a holiday
Wasting money is not only detrimental to your overall financial well being, it's irresponsible. Your house and living expenses make up the major portion of your financial plan. Just like spending cash unnecessarily, paying for expenses that aren't necessary is just wasting money.
With so much of uncertainty, its best to try and reduce our expenses. This way would still be able to meet our financial plan. Here are a few tips to reduce costs.
Avoid impulse spending
The first thing we do while preparing a financial plan is preparing a budget. So why not stick to the budget and avoid impulsive spending. Yes, we must have kept some amount of money aside for contingencies, but this would be time to keep our contingencies to the minimum. This is the best time to check our actual expenses more regularly against the budget.
If you have a habit of paying by credit card, stop. Use cash instead, this helps in keeping a check on impulsive buying. Withdraw the exact amount for your weekly budgeted expenses. Make sure that your expenses are met from your income and not loans. Charging expenses on a credit card and then paying only the minimum amount is nothing short of taking a loan from the financial institution. The interest rate on credit card loans is the highest.
Have more home made food.
While preparing the financial budget we must have made created a head for eating outside. This was fine when the economy was good, but now is the time to have a re-look at the budget. If you have been eating outside for lunch, start carrying Tiffin. If you must eat out try eating going to a more mid sized restaurant, this will help reduce costs. Have a picnic dinner, pack food at home and go to a beach or park and have your dinner, this is much cheaper. Another option is have a movie dinner in the house, hire a DVD and have the family movie experience in the house. Make it special. Cook food from the scratch, instead of having ready to eat or half made food, its cheaper. Kids like Pizza’s and burger’s, why not make them at home?
Stop unwanted phone features
Features like call waiting, caller ID, return call service, long distance packages, etc, etc, etc. are extra expenses. Some we might require, but others are just expenses. If incoming calls are free, caller ID is just and additional expense. If your phone as an answering machine, then important persons or people you know would leave a message. If they did not, it was not important.
Minimize costs on essential household expenses.
Try using the air conditioner only when it is really essential, than just turning it on as a routine. This will help reduce the electricity bill.
Review, remove, and reduce expenses to stop wasting money and trim your household budget. Analyze each household expense for necessity and the costs associated with it. Make an effort to reduce each expense to the minimum amount possible, while still meeting your family's needs. Before you know it you'll be saving hundreds, if not thousands, on your household budget expenses each year.
Laundry Expenses
Yes, you do not send your clothes to the laundry unless you get the hard to remove stains. But before you do that why don’t you try some household tips viz. bicarbonate of soda, distilled vinegar and lemon juice solutions can pretty much clean anything for a fraction of the cost.
Holidays
We definitely need holidays, now we can’t say stay in the house all the time. We could get mad. It will cost us a small fortune. I'm talking about holidays of course. But there are ways to have a cheap break.
Many of us, surprisingly, haven't explored our local areas in great depth. Try going to these local areas, this would come cheaper. Make an itinerary of different activities to do each day, pack a picnic and go. As you don't have to pay for accommodation it can be surprisingly cheap, just make sure you don't ruin the fun by doing chores when you get home. Ensure that it is really a holiday
Sunday, March 22, 2009
New Pension Scheme
In the budget of for 2003-04 the government announced a new pension scheme (NPS) based on defined contribution, which would be borne equally by the employee and the government. Defined contribution means monthly contribution of 10 percent of the salary and DA to be paid by the employee and equally matched by the Central Government. The contribution by the central government would only be in respect of government employees.
The pension scheme would be flexible allowing the benefits to continue even in case of change of employment. On change of employment the benefits would be transferred to an individual pension account.
The pension funds would be supervised by Pension Fund Regulatory and Development Authority (PFRDA).
All new entrants joining the central services would compulsorily be part of the new pension scheme. NPS would be available to all individuals on a voluntary basis from the date announced by PFRDA.
The NPS will use the existing network of bank branches and post offices etc. to collect contributions and interact with participants allowing transfer of the benefits in case of change of employment and offer a basket of pension choices.
The contributions would be of 2 types
• Tier-I account
• Tier –II account
Tier-I account – This account based on defined contribution which are non-withdrawable, till eligible for withdrawal. Withdrawals from this account would be taxable. Own as well as government contribution would form part of section 80C deduction.
Individuals can normally exit at or after age 60 years. At exit the individual would mandatorily be required to invest 40 percent of pension wealth to purchase an annuity. In case of Government employees the annuity should provide for pension for the lifetime of the employee and his dependent parents and his spouse at the time of retirement. The individual would receive a lump-sum of the remaining pension wealth, which he would be free to utilize in any manner. Individuals would have the flexibility to leave the pension system prior to age 60. However, in this case, the mandatory annuitization would be 80% of the pension wealth.
Tier-II account – Contribution to this account is voluntary. There would be no government contribution. The amount in this account can be withdrawn anytime and there would be no tax implication. Contribution to this account is not eligible for 80C deduction.
Both the type of accounts would be managed in the same manner. They will have a central record keeping and accounting (CRA) infrastructure and several pension fund managers (PFMs) to offer different categories of schemes.
The participating entities (PFMs and CRA) would give out easily understood information about past performance, so that the individual would able to make informed choices about which scheme to choose.
This would allow a subscriber to monitor his/her investments and returns under NPS, the choice of Pension Fund Manager and the investment option would also rest with the subscriber. The design allows the subscriber to switch his/her investment options as well as pension funds. The facility for seamless portability and switch between PFMs is designed to enable subscribers to maintain a single pension account throughout their saving period.
Pension fund managers would be free to make investment in international markets subject to regulatory restrictions and oversight in this regard.
The scheme was slated to be launched on April 1, 2009. PFRDA had started marketing of the scheme through print media on March 2. However, with the election code of conduct being announced, the pension regulator decided to put off the campaign.
The pension scheme would be flexible allowing the benefits to continue even in case of change of employment. On change of employment the benefits would be transferred to an individual pension account.
The pension funds would be supervised by Pension Fund Regulatory and Development Authority (PFRDA).
All new entrants joining the central services would compulsorily be part of the new pension scheme. NPS would be available to all individuals on a voluntary basis from the date announced by PFRDA.
The NPS will use the existing network of bank branches and post offices etc. to collect contributions and interact with participants allowing transfer of the benefits in case of change of employment and offer a basket of pension choices.
The contributions would be of 2 types
• Tier-I account
• Tier –II account
Tier-I account – This account based on defined contribution which are non-withdrawable, till eligible for withdrawal. Withdrawals from this account would be taxable. Own as well as government contribution would form part of section 80C deduction.
Individuals can normally exit at or after age 60 years. At exit the individual would mandatorily be required to invest 40 percent of pension wealth to purchase an annuity. In case of Government employees the annuity should provide for pension for the lifetime of the employee and his dependent parents and his spouse at the time of retirement. The individual would receive a lump-sum of the remaining pension wealth, which he would be free to utilize in any manner. Individuals would have the flexibility to leave the pension system prior to age 60. However, in this case, the mandatory annuitization would be 80% of the pension wealth.
Tier-II account – Contribution to this account is voluntary. There would be no government contribution. The amount in this account can be withdrawn anytime and there would be no tax implication. Contribution to this account is not eligible for 80C deduction.
Both the type of accounts would be managed in the same manner. They will have a central record keeping and accounting (CRA) infrastructure and several pension fund managers (PFMs) to offer different categories of schemes.
The participating entities (PFMs and CRA) would give out easily understood information about past performance, so that the individual would able to make informed choices about which scheme to choose.
This would allow a subscriber to monitor his/her investments and returns under NPS, the choice of Pension Fund Manager and the investment option would also rest with the subscriber. The design allows the subscriber to switch his/her investment options as well as pension funds. The facility for seamless portability and switch between PFMs is designed to enable subscribers to maintain a single pension account throughout their saving period.
Pension fund managers would be free to make investment in international markets subject to regulatory restrictions and oversight in this regard.
The scheme was slated to be launched on April 1, 2009. PFRDA had started marketing of the scheme through print media on March 2. However, with the election code of conduct being announced, the pension regulator decided to put off the campaign.
Sunday, March 8, 2009
Tax Planning
March is a time by when you would have already completed your tax planning and investment, but if you have not done it now is the time. Anyway you can go through this article to do your planning for the next financial year as well.
Most people have the tendency to do investment based on what comes their way or what they hear from their friends and families. This helps in saving tax, but does this type of investment meet your long term investment objective? While doing tax planning one should have a look at different investment options in conjunction with your age, needs, goals and risk-appetite.
The 2 main sections we would look at are sections 80C and 80D.
As you are aware, the maximum investment allowed as deduction from Income under section 80C is Rs. 1,00,000/-. Now depending on your income you can decide to make a lump sum investment or do it on a monthly basis. There are many items which are available as deduction under section 80C.
Let’s have a look at some of them:
Employee Provident Fund: Most companies have Employee Provident Fund, where 12% of your basic and DA are deducted as contribution to this fund. In addition to this your employer also contributes and to this fund. The amount contributed by your employer is not added to your income, so you do not pay tax on this income.
The Employee Provident fund helps in building a healthy retirement corpus. You also get an interest on the amount lying in this fund and the interest is tax free. This fund would be operative till you retire.
Public Provident Fund: This is also another way of building your retirement corpus, but this is voluntary. Anyone can open a Public Provident Fund account. The minimum contribution per annum is Rs.500 and maximum Rs.70,000/-. You also get an interest on the amount lying in this fund and the interest is tax free.
The tenure of this fund is 15 years and can be renewed by 5 years each time after that. The best part is withdrawal facility is also available, subject to certain conditions.
Pension Plans: Though this comes under a different section, investment under pension plans comes under the overall limit of Rs. 1,00,000/-
Life Insurance: Premium paid on a life insurance policy is also deductable under section 80C. The premium amount should not exceed 20% of the insured amount. Any return received against an insurance policy is tax free. One should note that insurance and investment are 2 different things and insurance should not be mixed with investment.
Housing Loan: Repayment of principal amount upto Rs. 1,00,000/- is allowed as deduction under this section. In addition interest payment on housing loan upto Rs. 1,50,000/- is allowed as deduction under Income from house property.
Tuition Fees: Whole amount of Tuition fees paid towards your childs education is allowed as deduction.
National Saving Certificate: Investment upto Rs.1,00,000/- is allowed as deduction. lock-in period is 6 years. The interest received is taxable as income from other sources, but since it is locked in, the interest is also allowed as a deduction under section 80C.
Bank Fixed Deposit: Fixed deposit for 5 years or more in a scheduled bank is allowed as a deduction. The interest earned is taxable under Income from Other Sources.
Equity Linked Saving Scheme: Only schemes notified under the income tax act are allowed as deduction. The minimum lock-in period is 3 years. Dividend received is tax free.
IPO of Infrastructure Company: As the name suggests this deduction is only available for purchase of shares of an Infrastructure Company through an IPO. Dividend received is tax free. The lock-in period is 3 years.
Deduction under section 80D
Health Insurance: Premium paid towards health insurance policy is allowed as deduction upto Rs.15,000/-
Having seen the different deduction options, let’s see what options we should look at different stages of your life.
Single: Here we assume that you are in your early stage of your career with not many liabilities. The risk taking appetite is also high. So the suggestion is to put maximum in Equity Linked Saving Scheme. But at the same time it is best to start accumulating your retirement corpus. One should look at Pension plans and Public Provident Funds.
Married without children: Being young, the risk taking appetite is high, but being married one should also try and protect one’s spouse. In addition to Equity Linked saving scheme and building a retirement corpus, one should also look at life insurance policy.
Married with children: At this stage the risk taking appetite is reduced, so the exposure to Equity Linked Saving Scheme should be reduced. People in this age group would definitely be looking for regular income to take care of children’s education, marriage and other expenses.
Increasing exposure to Public Provident Fund would help, since withdrawal is allowed, when needed. The other option is to look at National Saving Certificate and Bank Fixed Deposits. But one should note the interest is taxable. One should also look at increasing the life insurance coverage, since the numbers of persons depending on you have increased.
Pre-retirement: This is the best time to increase exposure to Pension Plans and Public Provident Fund.
Post-retirement: This is the time when a person wants to have a good life style. With the increase in tax breaks and reduction in income, this is the best time to have exposure to National Saving Certificate and Bank Fixed Deposits
Most people have the tendency to do investment based on what comes their way or what they hear from their friends and families. This helps in saving tax, but does this type of investment meet your long term investment objective? While doing tax planning one should have a look at different investment options in conjunction with your age, needs, goals and risk-appetite.
The 2 main sections we would look at are sections 80C and 80D.
As you are aware, the maximum investment allowed as deduction from Income under section 80C is Rs. 1,00,000/-. Now depending on your income you can decide to make a lump sum investment or do it on a monthly basis. There are many items which are available as deduction under section 80C.
Let’s have a look at some of them:
Employee Provident Fund: Most companies have Employee Provident Fund, where 12% of your basic and DA are deducted as contribution to this fund. In addition to this your employer also contributes and to this fund. The amount contributed by your employer is not added to your income, so you do not pay tax on this income.
The Employee Provident fund helps in building a healthy retirement corpus. You also get an interest on the amount lying in this fund and the interest is tax free. This fund would be operative till you retire.
Public Provident Fund: This is also another way of building your retirement corpus, but this is voluntary. Anyone can open a Public Provident Fund account. The minimum contribution per annum is Rs.500 and maximum Rs.70,000/-. You also get an interest on the amount lying in this fund and the interest is tax free.
The tenure of this fund is 15 years and can be renewed by 5 years each time after that. The best part is withdrawal facility is also available, subject to certain conditions.
Pension Plans: Though this comes under a different section, investment under pension plans comes under the overall limit of Rs. 1,00,000/-
Life Insurance: Premium paid on a life insurance policy is also deductable under section 80C. The premium amount should not exceed 20% of the insured amount. Any return received against an insurance policy is tax free. One should note that insurance and investment are 2 different things and insurance should not be mixed with investment.
Housing Loan: Repayment of principal amount upto Rs. 1,00,000/- is allowed as deduction under this section. In addition interest payment on housing loan upto Rs. 1,50,000/- is allowed as deduction under Income from house property.
Tuition Fees: Whole amount of Tuition fees paid towards your childs education is allowed as deduction.
National Saving Certificate: Investment upto Rs.1,00,000/- is allowed as deduction. lock-in period is 6 years. The interest received is taxable as income from other sources, but since it is locked in, the interest is also allowed as a deduction under section 80C.
Bank Fixed Deposit: Fixed deposit for 5 years or more in a scheduled bank is allowed as a deduction. The interest earned is taxable under Income from Other Sources.
Equity Linked Saving Scheme: Only schemes notified under the income tax act are allowed as deduction. The minimum lock-in period is 3 years. Dividend received is tax free.
IPO of Infrastructure Company: As the name suggests this deduction is only available for purchase of shares of an Infrastructure Company through an IPO. Dividend received is tax free. The lock-in period is 3 years.
Deduction under section 80D
Health Insurance: Premium paid towards health insurance policy is allowed as deduction upto Rs.15,000/-
Having seen the different deduction options, let’s see what options we should look at different stages of your life.
Single: Here we assume that you are in your early stage of your career with not many liabilities. The risk taking appetite is also high. So the suggestion is to put maximum in Equity Linked Saving Scheme. But at the same time it is best to start accumulating your retirement corpus. One should look at Pension plans and Public Provident Funds.
Married without children: Being young, the risk taking appetite is high, but being married one should also try and protect one’s spouse. In addition to Equity Linked saving scheme and building a retirement corpus, one should also look at life insurance policy.
Married with children: At this stage the risk taking appetite is reduced, so the exposure to Equity Linked Saving Scheme should be reduced. People in this age group would definitely be looking for regular income to take care of children’s education, marriage and other expenses.
Increasing exposure to Public Provident Fund would help, since withdrawal is allowed, when needed. The other option is to look at National Saving Certificate and Bank Fixed Deposits. But one should note the interest is taxable. One should also look at increasing the life insurance coverage, since the numbers of persons depending on you have increased.
Pre-retirement: This is the best time to increase exposure to Pension Plans and Public Provident Fund.
Post-retirement: This is the time when a person wants to have a good life style. With the increase in tax breaks and reduction in income, this is the best time to have exposure to National Saving Certificate and Bank Fixed Deposits
Wednesday, February 25, 2009
Derivatives and Taxation
A derivative is a financial instrument, whose value is derived from some underlying source viz. share, stock-market index, bond, currency or commodity. In other words, its value fluctuates with the value or performance of the underlying source on which it is based.
So for a small premium depending on the future value of the underlying source an agreement is made to buy or sell the underlying source at a future date.
So first the derivative offers insurance to take the uncertainty out of the future value of the underlying source. Second, derivative is risky (i.e. the potential to make large losses as well as large gains) for someone who does not have a cash position to hedge because, in return for a comparatively small payment upfront, that party accepts the consequences of what transpires in the future.
Derivatives were originally sold mainly by banks, but now they are also available on the exchange.
From the above we noted that derivative could be on any underlying source. But here we will concentrate more on derivatives traded on the stock exchange.
To make trading possible the stock exchange has set up certain standards for drawing derivative contracts.
The most common derivatives available on the exchange are Futures and Options.
Let us see what each of them are:
Futures: are contracts to buy or sell shares at a particular price on a specified future date.
Option: is a right, but not an obligation, to acquire or sell a security at a particular price.
The difference between these two types of derivative instruments is in respect of the rights and obligations of the parties involved in such contracts. In case of a futures contract, both the parties are under obligation to complete the contract on the specified date. However, in case of Options Contract, the buyer/holder has a right, but no obligation to exercise the Option, whereas the seller/writer has an obligation but no right to complete the contract.
In India the settlement of the derivative is done by squaring up the position in cash only. Also the life of the derivative cannot be for more than 3 months.
Taxation of Futures & Options
According to Circular No 3/2006, dated 27-2-2006, trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction.
Since Derivatives trading is relatively new one has to look at the provisions of the Income Tax Act and try to reach a conclusion.
As the circular has said it is not a speculative transaction. Trading in derivatives can be Business Income, Short Term Capital Gains or Income from other sources.
If you treat it as Income from other sources, then loss cannot be considered.
How do we decide under which head the income should be booked, we are not looking at the option of Income from other sources. Let us look at the different options and reasons available:
1) Since derivatives instruments are only for 3 months, trading in derivatives would be treated as business Income.
2) If you are devoting a major portion of your productive time in trading then it would be treated as Business Income.
3) Taking the frequency and regularity of the transactions a call can be taken if it is Business Income or capital gain.
4) If a derivative transaction is carried out to hedge your investment portfolio i.e. every 3 months square up your position and take up a fresh position. It would be treated as capital gain
5) Arbitrage transaction between cash and future markets could be treated as capital gains
Whatever the stand we take Business Income or Capital gains, what would be the cost of acquisition? As per the Income Tax Act cost of acquisition is the purchase cost as well as any other cost necessary to bring the asset into a ready and deliverable stage. Taking this into account, the premium paid on the derivative can be treated as cost of acquisition.
If it is treated as short term capital gain, the concessional tax treatment under 111A would not be allowed since this section is available only to equity shares or units of equity oriented mutual funds.
If it is treated as business transaction, what would be the turnover? Since cost is only the premium and only the difference is settled in cash. Also there could be profits and losses, should they be netted to arrive at the turnover?
The view taken currently is gross amounts of the transactions are to be considered for turnover and not just the premium amounts. Also negative amounts should also be treated as positive for the purpose of arriving at the turnover.
The reason we spoke about turnover, is as per the Income Tax Act, if business turnover is above a certain amount, then the books of account need to be audited.
So for a small premium depending on the future value of the underlying source an agreement is made to buy or sell the underlying source at a future date.
So first the derivative offers insurance to take the uncertainty out of the future value of the underlying source. Second, derivative is risky (i.e. the potential to make large losses as well as large gains) for someone who does not have a cash position to hedge because, in return for a comparatively small payment upfront, that party accepts the consequences of what transpires in the future.
Derivatives were originally sold mainly by banks, but now they are also available on the exchange.
From the above we noted that derivative could be on any underlying source. But here we will concentrate more on derivatives traded on the stock exchange.
To make trading possible the stock exchange has set up certain standards for drawing derivative contracts.
The most common derivatives available on the exchange are Futures and Options.
Let us see what each of them are:
Futures: are contracts to buy or sell shares at a particular price on a specified future date.
Option: is a right, but not an obligation, to acquire or sell a security at a particular price.
The difference between these two types of derivative instruments is in respect of the rights and obligations of the parties involved in such contracts. In case of a futures contract, both the parties are under obligation to complete the contract on the specified date. However, in case of Options Contract, the buyer/holder has a right, but no obligation to exercise the Option, whereas the seller/writer has an obligation but no right to complete the contract.
In India the settlement of the derivative is done by squaring up the position in cash only. Also the life of the derivative cannot be for more than 3 months.
Taxation of Futures & Options
According to Circular No 3/2006, dated 27-2-2006, trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction.
Since Derivatives trading is relatively new one has to look at the provisions of the Income Tax Act and try to reach a conclusion.
As the circular has said it is not a speculative transaction. Trading in derivatives can be Business Income, Short Term Capital Gains or Income from other sources.
If you treat it as Income from other sources, then loss cannot be considered.
How do we decide under which head the income should be booked, we are not looking at the option of Income from other sources. Let us look at the different options and reasons available:
1) Since derivatives instruments are only for 3 months, trading in derivatives would be treated as business Income.
2) If you are devoting a major portion of your productive time in trading then it would be treated as Business Income.
3) Taking the frequency and regularity of the transactions a call can be taken if it is Business Income or capital gain.
4) If a derivative transaction is carried out to hedge your investment portfolio i.e. every 3 months square up your position and take up a fresh position. It would be treated as capital gain
5) Arbitrage transaction between cash and future markets could be treated as capital gains
Whatever the stand we take Business Income or Capital gains, what would be the cost of acquisition? As per the Income Tax Act cost of acquisition is the purchase cost as well as any other cost necessary to bring the asset into a ready and deliverable stage. Taking this into account, the premium paid on the derivative can be treated as cost of acquisition.
If it is treated as short term capital gain, the concessional tax treatment under 111A would not be allowed since this section is available only to equity shares or units of equity oriented mutual funds.
If it is treated as business transaction, what would be the turnover? Since cost is only the premium and only the difference is settled in cash. Also there could be profits and losses, should they be netted to arrive at the turnover?
The view taken currently is gross amounts of the transactions are to be considered for turnover and not just the premium amounts. Also negative amounts should also be treated as positive for the purpose of arriving at the turnover.
The reason we spoke about turnover, is as per the Income Tax Act, if business turnover is above a certain amount, then the books of account need to be audited.
Friday, February 20, 2009
Gifts and Taxability
What is a gift?
Gift means transfer by one person to another of an existing movable or immovable property made voluntarily and without consideration in cash or kind. As per the Income tax Act only gifts received by Individuals and HUF’s are taxable.
But is any gift received taxable? Gifts received from relatives are exempt fully. Gifts received from non-relatives above Rs. 50,000/- is taxable under the head Income from other sources. The amount of Rs. 50,000/- is in aggregate for a fiscal year i.e. total of all gifts received from non-relatives up to Rs. 50,000/- is exempt.
Now the question is if gifts received from relatives are exempt, can we make anyone our relative? No, the Income Tax act defines relatives. Of course all will agree that HUF’s cannot have relatives.
So for individuals who can be defined as relatives? As per the Income Tax act, the following persons will be termed as relatives:
• Spouse;
• Brother or sister or their spouses;
• Brother or sister of the spouse;
• Brother or sister of either of the parents or their spouses;
• Any lineal ascendant or descendant and
• Any lineal ascendant or descendant of the spouse
The second part was gifts received from others above Rs. 50,000/- is taxable, but we know the act, there are exceptions to everything. Let’s have a look at these exceptions:
• Marriage: Any gift received on the occasion of marriage is not taxable.
• Gift received under a Will or by way of inheritance;
• Gift in contemplation of death of the donor;
• Gift from any local authority;
• Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution specified by the act;
• Gift from any trust or institution, which is registered as a public charitable trust and
• Gifts received in kind
There is always a question that what happens if I receive gifts from NRI’s. As per the latest provisions, there is no separate distinction based on residential status. Only the rules stated above would apply.
Clubbing of Income
Gifts made by an Individual to his or her spouse, minor children or son's wife will involve clubbing of income in the hands of the Individual.
In the case of gifts to minor children the clubbing of income, will cease upon such children attaining the age of 18 years.
The clubbing provisions will apply, in case of gift to spouse or son's wife, only to the first-stage of income from the original gift. Second-stage income arising from investment of the income from the original gift is not clubbed and this will constitute the separate income of the receiver.
Generally, the income of minor children, from any source (including income from gifts from parents) is clubbed with the income of the parent whose total chargeable income is greater.
Gift means transfer by one person to another of an existing movable or immovable property made voluntarily and without consideration in cash or kind. As per the Income tax Act only gifts received by Individuals and HUF’s are taxable.
But is any gift received taxable? Gifts received from relatives are exempt fully. Gifts received from non-relatives above Rs. 50,000/- is taxable under the head Income from other sources. The amount of Rs. 50,000/- is in aggregate for a fiscal year i.e. total of all gifts received from non-relatives up to Rs. 50,000/- is exempt.
Now the question is if gifts received from relatives are exempt, can we make anyone our relative? No, the Income Tax act defines relatives. Of course all will agree that HUF’s cannot have relatives.
So for individuals who can be defined as relatives? As per the Income Tax act, the following persons will be termed as relatives:
• Spouse;
• Brother or sister or their spouses;
• Brother or sister of the spouse;
• Brother or sister of either of the parents or their spouses;
• Any lineal ascendant or descendant and
• Any lineal ascendant or descendant of the spouse
The second part was gifts received from others above Rs. 50,000/- is taxable, but we know the act, there are exceptions to everything. Let’s have a look at these exceptions:
• Marriage: Any gift received on the occasion of marriage is not taxable.
• Gift received under a Will or by way of inheritance;
• Gift in contemplation of death of the donor;
• Gift from any local authority;
• Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution specified by the act;
• Gift from any trust or institution, which is registered as a public charitable trust and
• Gifts received in kind
There is always a question that what happens if I receive gifts from NRI’s. As per the latest provisions, there is no separate distinction based on residential status. Only the rules stated above would apply.
Clubbing of Income
Gifts made by an Individual to his or her spouse, minor children or son's wife will involve clubbing of income in the hands of the Individual.
In the case of gifts to minor children the clubbing of income, will cease upon such children attaining the age of 18 years.
The clubbing provisions will apply, in case of gift to spouse or son's wife, only to the first-stage of income from the original gift. Second-stage income arising from investment of the income from the original gift is not clubbed and this will constitute the separate income of the receiver.
Generally, the income of minor children, from any source (including income from gifts from parents) is clubbed with the income of the parent whose total chargeable income is greater.
Monday, February 16, 2009
Set off of Income
As per the Income tax act, Income is not only what has been earned but also what is lost. We will call what is lost as negative income. Therefore the income tax act has specific provisions regarding this negative income. In certain cases it is set off against Income, in some cases it is carried forward to the next financial year. Only those negative incomes which are chargeable to tax can be set off or carried forward. Of course there are restrictions, but this is only to avoid misuse of these specific provisions. Under the Income tax act Income earned is divided into the following 5 heads:
• Salary
• House Property,
• Business
• Capital Gains
• Other Sources
Each of these heads has specific rules for computation of Income. So based on these rules Salary and Other sources cannot have negative income. So that leaves us with only House Property, Business and Capital gains.
Within each of these heads you can have multiple sources of Income. When you have a positive Income as well as negative income under the same head of Income, and you set them of against each other it is called Intra head set off. As per the Income Tax Act any negative Income should always be set off against the same head. The exception to this is capital gains. As you are aware capital gains is of 2 types long term and short term. Long term capital gains cannot be setoff against short term capital gains.
Now what happens if you have negative income in a particular head of Income which cannot be setoff using intra head setoff? In such cases we can set it off against income from another head. This is called Inter head set off. As there are exceptions in Intra head set off, there are restrictions in Inter head set off as well. First negative income from Business cannot be setoff against Income from salary. Second capital gains cannot be setoff against any other head of Income.
Even after this setoff if there is still some negative Income it can be carried forward to the next financial year. Of course next year the same rules as mentioned above apply. Also there is a limit till when this can be carried forward, currently it is 8 years. Again this also comes with a condition i.e. returns for negative Income has been filed in time as per the Income Tax act.
So to summarize
Income from House Property: can have Intra head as well as Inter head set off.
Income from Business: can have Intra head setoff, but Inter head setoff cannot be done against Income from Salary
Income from Capital Gains: Short term capital gains can only have Intra head setoff. Long term capital gains can have only Intra head setoff against long term capital gains.
• Salary
• House Property,
• Business
• Capital Gains
• Other Sources
Each of these heads has specific rules for computation of Income. So based on these rules Salary and Other sources cannot have negative income. So that leaves us with only House Property, Business and Capital gains.
Within each of these heads you can have multiple sources of Income. When you have a positive Income as well as negative income under the same head of Income, and you set them of against each other it is called Intra head set off. As per the Income Tax Act any negative Income should always be set off against the same head. The exception to this is capital gains. As you are aware capital gains is of 2 types long term and short term. Long term capital gains cannot be setoff against short term capital gains.
Now what happens if you have negative income in a particular head of Income which cannot be setoff using intra head setoff? In such cases we can set it off against income from another head. This is called Inter head set off. As there are exceptions in Intra head set off, there are restrictions in Inter head set off as well. First negative income from Business cannot be setoff against Income from salary. Second capital gains cannot be setoff against any other head of Income.
Even after this setoff if there is still some negative Income it can be carried forward to the next financial year. Of course next year the same rules as mentioned above apply. Also there is a limit till when this can be carried forward, currently it is 8 years. Again this also comes with a condition i.e. returns for negative Income has been filed in time as per the Income Tax act.
So to summarize
Income from House Property: can have Intra head as well as Inter head set off.
Income from Business: can have Intra head setoff, but Inter head setoff cannot be done against Income from Salary
Income from Capital Gains: Short term capital gains can only have Intra head setoff. Long term capital gains can have only Intra head setoff against long term capital gains.
Monday, February 2, 2009
Provident Fund
Provident fund scheme was setup to help people build a retirement corpus. These are of 2 types:
• Employee provident fund
• Public Provident fund
A person can invest both these schemes. Any contribution to both the funds is allowed as a deduction from income under section 80C of the Income tax act. Though the interest rates may sound low, because of the tax exemption the return is larger. A cherry on top of this, is the interest earned is also tax free. The amount in these accounts is also exempt from wealth tax.
One important thing to remember, money cannot be transferred from Employee Provident Fund to Public Provident fund of vice versa. What is the difference between both the types of provident funds? Let’s try and understand each of them.
Employee Provident fund:
This fund is usually run by the Employee Provident Fund Organization. Though in large organizations the organization may run the fund on its own by forming a trust. 12% of an employee’s salary (Basic + Dearness Allowance) is deducted towards this corpus. The employer also contributes an equal amount. But from the Employers contribution 8.33% is transferred towards pension scheme and balance is added to the employees corpus. The Pension scheme is also run by the Employee Provident Fund Organization.
The money is returned to the employee on retirement along with Interest. Interest on the amount is declared on a yearly basis. Partial withdrawal is allowed from this fund for upto 90% of the employee’s contribution. This scheme is available only for salaried employees. If this account is closed before 5 years, the amount withdrawn is taxable.
The best part of this is employer contribution. But tax exemption is available only on own contribution.
Public Provident fund:
Any resident Indian can open a Public Provident fund account. The amount invested in this account is backed by the government. A person can invest upto Rs. 70000/- into this account in a fiscal year. A fiscal year is from April to March. The current interest payable on this investment is 8%.
The money in this account is locked for a period of 15 years. Partial withdrawal from this account is allowed after a period of 5 years limited to 50% of the balance on the date of withdrawal. If money is required earlier then the option is to take a loan. But the loan amount is limited to 25% of the balance.
• Employee provident fund
• Public Provident fund
A person can invest both these schemes. Any contribution to both the funds is allowed as a deduction from income under section 80C of the Income tax act. Though the interest rates may sound low, because of the tax exemption the return is larger. A cherry on top of this, is the interest earned is also tax free. The amount in these accounts is also exempt from wealth tax.
One important thing to remember, money cannot be transferred from Employee Provident Fund to Public Provident fund of vice versa. What is the difference between both the types of provident funds? Let’s try and understand each of them.
Employee Provident fund:
This fund is usually run by the Employee Provident Fund Organization. Though in large organizations the organization may run the fund on its own by forming a trust. 12% of an employee’s salary (Basic + Dearness Allowance) is deducted towards this corpus. The employer also contributes an equal amount. But from the Employers contribution 8.33% is transferred towards pension scheme and balance is added to the employees corpus. The Pension scheme is also run by the Employee Provident Fund Organization.
The money is returned to the employee on retirement along with Interest. Interest on the amount is declared on a yearly basis. Partial withdrawal is allowed from this fund for upto 90% of the employee’s contribution. This scheme is available only for salaried employees. If this account is closed before 5 years, the amount withdrawn is taxable.
The best part of this is employer contribution. But tax exemption is available only on own contribution.
Public Provident fund:
Any resident Indian can open a Public Provident fund account. The amount invested in this account is backed by the government. A person can invest upto Rs. 70000/- into this account in a fiscal year. A fiscal year is from April to March. The current interest payable on this investment is 8%.
The money in this account is locked for a period of 15 years. Partial withdrawal from this account is allowed after a period of 5 years limited to 50% of the balance on the date of withdrawal. If money is required earlier then the option is to take a loan. But the loan amount is limited to 25% of the balance.
Monday, January 19, 2009
Preference Shares
We have heard of different types of shares and one of the types is Preference Shares. What are preference shares? As the name suggests, it has preference over the other type of shares. Therefore equity shareholders are divided into 2 types; Ordinary shareholders and preferred shareholders.
When does this preference come into picture, it is usually in 2 situations; once when dividends are paid and secondly when the company goes into liquidation. Usually there is a percentage attached to these types of shares and this percentage is the dividend to be paid on these shares.
With the economy down and corporations in need of funds, one of the options for corporations with a win-win situation is to go for issue of preference shares. One of the problems with preference shares is, they are not liquid.
Some of the differences between preference shares and ordinary shares are
- Preference shares may be listed
- Preference shares usually has a higher divided rate
- Preference share holders are always paid dividends
- In case of liquidation Preference shareholders have preference over ordinary shareholders
- Preference shares are usually for a fixed period, like fixed deposits.
Usually there are 4 types of Preference Shares; Cumulative, non-cumulative, participating and convertible. The rest would just be a combination of these. Let us take a look at each of them.
Cumulative Preference Shares: Now cumulative means collect. So whenever a company does not pay dividends, they start accumulating and these would need to be paid before dividends are paid to ordinary share holders. In the year dividends are declared first the preferred shareholders, along with the accumulated dividend needs to be paid.
Non-cumulative Preference Shares: In this type of shares, if dividends are not declared for a particular year, they lapse.
Participating Preference Shares: In this type of preference shares in addition to normal dividend, it allows for additional dividend depending on certain circumstances viz. achieving a certain target, increase in dividend to ordinary shareholders, etc. In some cases a formula is associated for the additional dividend.
Convertible Preference Shares: These Preference shares can be converted to specified number of ordinary shares.
When does this preference come into picture, it is usually in 2 situations; once when dividends are paid and secondly when the company goes into liquidation. Usually there is a percentage attached to these types of shares and this percentage is the dividend to be paid on these shares.
With the economy down and corporations in need of funds, one of the options for corporations with a win-win situation is to go for issue of preference shares. One of the problems with preference shares is, they are not liquid.
Some of the differences between preference shares and ordinary shares are
- Preference shares may be listed
- Preference shares usually has a higher divided rate
- Preference share holders are always paid dividends
- In case of liquidation Preference shareholders have preference over ordinary shareholders
- Preference shares are usually for a fixed period, like fixed deposits.
Usually there are 4 types of Preference Shares; Cumulative, non-cumulative, participating and convertible. The rest would just be a combination of these. Let us take a look at each of them.
Cumulative Preference Shares: Now cumulative means collect. So whenever a company does not pay dividends, they start accumulating and these would need to be paid before dividends are paid to ordinary share holders. In the year dividends are declared first the preferred shareholders, along with the accumulated dividend needs to be paid.
Non-cumulative Preference Shares: In this type of shares, if dividends are not declared for a particular year, they lapse.
Participating Preference Shares: In this type of preference shares in addition to normal dividend, it allows for additional dividend depending on certain circumstances viz. achieving a certain target, increase in dividend to ordinary shareholders, etc. In some cases a formula is associated for the additional dividend.
Convertible Preference Shares: These Preference shares can be converted to specified number of ordinary shares.
Saturday, January 10, 2009
Planning for new born
Everyone says get married and have children. Children are a gift of god. But taking the current economic scenario, having children is not cheap. Do I sound too blunt? It’s better to do that then cry later. It all starts from the time of conceiving. What do I mean? As soon as you realize that the woman is pregnant expenses start.
First to the Doctor and doctors are not cheap, add to that the medicines and diet, till delivery and regular visit to doctors. So you thought everything was cheap, think again. First thing you need to start planning is medical expenses. Try and get a medical insurance which would take care of these expenses.
It would be difficult to get everything out of insurance. So you would need to plan for these expenses. Now let’s assume you have taken care of the first hurdle. The next step is after the child is born. Child care for a new born is not cheap; taking the Indian society and social pressure, the cost would just keep mounting.
First there would be the costs of Pediatric care, in the initial years. And do not forget the cost of sweets and party for the naming ceremony for the new born. It’s better to be happy about the child being born, than to keep cursing throughout your life. Start keeping some money aside to take care of these expenses.
So start a child fund, to take care of pre-delivery and post delivery non-reimbursed expenses for 5 years.
Scared? There is still more to come. The expenses mentioned above would be for around 5 years; this could be different depending on the circumstances. Now comes the schooling time. Please remember things change when a child is born. If both of you were earning, there could be circumstances where one would need to stop working, to take care of the child. Your income goes down, so don’t you think you should plan?
As soon as the child is born, start investing in a good child care mutual fund on a regular basis. This would start building the corpus for higher studies. As you are aware higher education is not cheap and the cost would just keep creeping up.
This may sound cheap, but you need to rethink.
Try bargain hunting for all items you purchase for the child, be it toys or clothes. Since in hardly 6 months the child would have outgrown the things you have purchased and people are too busy to notice. Spend big bugs only were needed, in all other cases bargain hunt.
Does your child understand a brand? No. Then it really does not make sense throwing out your hard earned money, just to please people. Your child will not even notice or know the cost of the items you have spent. Spend money on him/her when he notices and gives credit to you.
Don’t stop your baby fund, even if you are dipping into the baby fund for non-reimbursable expenses. These funds would help for the ongoing education. After that the higher education fund you have created would take over.
First to the Doctor and doctors are not cheap, add to that the medicines and diet, till delivery and regular visit to doctors. So you thought everything was cheap, think again. First thing you need to start planning is medical expenses. Try and get a medical insurance which would take care of these expenses.
It would be difficult to get everything out of insurance. So you would need to plan for these expenses. Now let’s assume you have taken care of the first hurdle. The next step is after the child is born. Child care for a new born is not cheap; taking the Indian society and social pressure, the cost would just keep mounting.
First there would be the costs of Pediatric care, in the initial years. And do not forget the cost of sweets and party for the naming ceremony for the new born. It’s better to be happy about the child being born, than to keep cursing throughout your life. Start keeping some money aside to take care of these expenses.
So start a child fund, to take care of pre-delivery and post delivery non-reimbursed expenses for 5 years.
Scared? There is still more to come. The expenses mentioned above would be for around 5 years; this could be different depending on the circumstances. Now comes the schooling time. Please remember things change when a child is born. If both of you were earning, there could be circumstances where one would need to stop working, to take care of the child. Your income goes down, so don’t you think you should plan?
As soon as the child is born, start investing in a good child care mutual fund on a regular basis. This would start building the corpus for higher studies. As you are aware higher education is not cheap and the cost would just keep creeping up.
This may sound cheap, but you need to rethink.
Try bargain hunting for all items you purchase for the child, be it toys or clothes. Since in hardly 6 months the child would have outgrown the things you have purchased and people are too busy to notice. Spend big bugs only were needed, in all other cases bargain hunt.
Does your child understand a brand? No. Then it really does not make sense throwing out your hard earned money, just to please people. Your child will not even notice or know the cost of the items you have spent. Spend money on him/her when he notices and gives credit to you.
Don’t stop your baby fund, even if you are dipping into the baby fund for non-reimbursable expenses. These funds would help for the ongoing education. After that the higher education fund you have created would take over.
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