Select the right stock

The financial year has come to an end and most of the companies have published their accounts. Very soon they will have their annual general meeting and with that they would also announce dividends. In their published accounts in addition to the performance for the last year, they also give a guidance of how they expect the coming year to be.

The published accounts are the best data anyone could ever get of a traded stock. The published accounts in addition to talking about the organization also talk about the sector they are in. When I mentioned the management gives guidance of how they expect the year to be, they base it on some knowledge viz. orders in hand, orders in pipeline and expected projects based on sector forecast.

It s not necessary that the guidance would be right, but it gives you an idea of how the company is planning for the coming year. Most of us look at how the company fared by looking at the profit made during the year. In addition to that we should also have a look at the cashflow statement.

The cashflow statement will give you an idea if the profit is actually getting converted to cash or the receivables is only raising. The published accounts are usually audited, so it would make good sense to read the notes to the accounts. Almost every audited statement has a qualification, which should be looked at as red flags raised by the auditors.

So next time you decide to invest, buy or sell a stock, read the published accounts.

Joint Ownership of Property

Most of us buy a property just before we get married or soon after marriage. Now Property may be purchased in own name i.e. singly or jointly. Jointly would be one or more persons, so usually husband and wife or within the family. Once you purchase a property jointly you say that all the owners would have equal rights to use the property.

One of the advantages of joint ownership is if anything happens to one owner the title automatically passes to the other joint owner/s. There are other advantage is, if the joint owners have taxable income and loan you need a loan, you can get a higher loan amount.

All the joint owners will also get the tax benefits. Joint Owners can claim separate deductions for their share in the property. But we have to be careful, while making payments ensure that all the joint owners make payments directly as per their share in the property.

This way there will not be any tax complications in future. As an individual one can claim deduction of Rs. 1.5 Lakhs towards interest payment against loan during a fiscal year. So each joint owner can claim upto Rs. 1.5 Lakhs towards interest payment, subject to the total of all claims does not exceed the total interest actually paid during the year.

So if the joint owners have their own taxable income, its best to go for joint ownership. Tax saved is money earned.

Loans and Equated Monthly Installment (EMI)

Most of us would have taken a loan or are in the process of taking a loan. When you take a loan you have to repay it. One way is to repay a fixed amount of principal every month and the interest on the outstanding till the end of the month. Of course the interest rate would have been decided or is known in advance.

The other option is EMI i.e. the amount repaid every month would be fixed, this amount would include both interest and principal. The formula is the same, from the amount repaid every month, the interest on the outstanding till the end of the month is deducted from the repaid amount and the balance is applied against the principal.

If you notice that in the first method initially your outgo would be high, but total interest paid would be low. In the second method the outgo is the same every month but the interest amount would be high, since initially the interest outgo is high. The main factors which would be considered for calculation on EMI are Interest Rate, Period and Loan Amount

The higher the interest rate higher the EMI, since the EMI should be able to take care of the interest and some amount needs to go towards principal. If it is used only to pay interest, it would go on forever. Shorter the repayment period, higher the EMI and vice versa.

Whenever we take a loan, repayment becomes a commitment. Sometimes, EMI payments become a burden. Especially when you lose your regular source of income or unexpected expenses arise. The best way to come out of such situations is to get rid of the burden at the earliest or postpone the burden.

The second option is the easiest, but remember the lender will never let go of his pound of flesh i.e. interest. Your interest outgo over the period will increase. The other option is prepayment, whenever you have surplus funds prepay, this will help in reducing the period or if you want to keep the period same your EMI will reduce.

Prepayment is the best option; since this will help you get out of debt at the earliest and will curb wasteful or unwanted luxuries.

Gratuity

Gratuity law; including commentary on the Payment of gratuity act, 1972


Gratuity is a voluntary extra payment made to employees in addition to the salary promised. Such payments and their size vary from organization to organization. Though by definition it is voluntary in India it is legally guaranteed under the Payment of Gratuity Act 1972. Since it is governed by the act it is taxable. Let us examine the payment and taxability.

Any gratuity received by an employee as calculated under the Payment of Gratuity Act 1972 to the extent of Rs. Ten Lakhs is exempt from Tax. This is with effect from May 24, 2010.

All Organizations which have employed 10 or more persons or have employed 10 or more persons in the past come under the Payment of Gratuity Act 1972.

Gratuity is payable when an employee has rendered continuous service of five years or more. In case of death or disablement the five year limit is waived. The amount becomes payable when the employee leaves the organization either on termination of employment or retirement or death or disablement.

 
Gratuity is calculated at the rate of 15 days of basic salary last drawn for every completed year of service or part thereof in excess of six months. So if you have completed six months or more it would be considered as a complete year. The number of days for a month is considered as 26 days, in case of employees earning monthly salary. So if your basic salary is Rs.10000/- per month and you have completed 5years 7 months. The Gratuity calculated would be 10000 * 6 years * 15 / 26 i.e. Rs. 34,615/- but if it was 5 years 5 months it would be Rs. 28,846/- since the number of years would be taken as 5 years. 

Now we mentioned that Gratuity is exempt to the extent of Rs. Ten Lakhs. This Ten Lakhs is over your entire life. That means every receipt of gratuity below ten lakhs is not tax free. The cumulative Gratuity received over your life time from one or many suppliers to the extent of Rs. Ten Lakhs is exempt. The moment it crosses this figure the amount above Rs. Ten Lakhs is taxable.