Tax Saving Options

It’s that time of the year where most of us run to save tax, as our organizations ask us to submit proof.

The most popular section for saving tax is Section 80C. Let us look at the various avenues available to us under this section. Remember that this section gives us deduction not only for investments but also expenses. The total amount allowed under this section is Rs. 1,50,000/-. Let us look at the options available:

• Principle amount of Home Loan: If you have been repaying your Home loan EMI’s, the principle amount of the home loan is eligible for deduction. Please note that the interest amount is allowed as a deduction under section 24 against income from house property. The amount of stamp duty and Registration fee is also allowed as deduction if a person has not taken a housing loan.
• Tuition Fee: This is allowed for only the tuition fee paid to any school, college or university for education of children. The maximum allowed is Rs. 1,00,000/- per child. You can claim exemption only for 2 children.
• Life Insurance Premium: Any premium paid for insuring your own life or that of your child or spouse is allowed as deduction. You have to ensure that the premium paid does not exceed 10% of the assured amount.
• PF: In case of salaried employees your own contribution to PF (compulsory or voluntary) is allowed as deduction.
• PPF: Any contribution to PPF is allowed as deduction.
• 5 Year Bank Fixed Deposits: The principle amount invested is allowed as deduction. Interest amount received is taxable.
• 5 year postal time deposit: This is similar to bank fixed deposit. Interest amount received is taxable.
• NSC: There are 2 types available 5 years and 10 years. Any investment is eligible for deduction. Interest amount received is taxable and also can be claimed under section 80C as investment, as interest is treated as reinvested.
• Senior Citizen Saving Scheme: investment in this scheme is allowed as deduction, but this is available only for those above the age of 55. Interest amount received is taxable.
• ELSS: any investment in this is available as deduction.  

Try and plan your tax saving wisely, if after doing any of the above, you exhausts you 80C limit, do not do any other investment under this section unless it is as per your financial goals.

If you have a housing loan, interest paid on housing loan to the extend of Rs. 2,50,000/- is allowed as deduction, under income from house property for self-occupied property.

Premium for health insurance is allowed as deduction under section 80D upto Rs. 15,000/- for self and family and Rs. 20,000/- for Sr. Citizens.

Make use of the options given to you and save tax. Tax saved is money earned.

Financial Goal Setting

We all have dreams, but most of us continue dreaming, whereas some of us convert their dreams into reality. Why is it that some of us manage to make our dreams a reality and others find it difficult? Simple. We try to find reasons or excuses why our dreams are difficult to be met. This is where we kill our dream. Then when we ask how was another person able to achieve his dream and we find reasons for his / her success. What if I tell you we all can meet our dreams and achieve it, if we want? I’ll give you some simple steps:

• First for every dream determine what the preconditions are, write them down. Don’t judge if it can be achieved or not, just write it down.
• Next check if there are any financial needs attached to achieve the dream. Some easy dreams which involve finance are financial freedom, retirement, child education, marriage, and house.
• Now once you determine that financial needs are attached, let us try to make them measureable. Put a figure against each dream.
• This step becomes much easier, now we need to decide where we invest to meet our financial dreams. This is a very important step, as this will tell you how much time you have to achieve your dream. Every investment option has a risk attached as well as the return. So depending on your risk appetite, your timeframe gets determined. If you feel that the timeframe is too high and you want to give up, meet a practicing financial planner. He will determine your risk appetite and give you a better idea on how to achieve your dreams.
• The financial planner would also be able to do the categorizations of your dreams into short, medium and long term, depending on your current wealth and income. As depending on the category of your dream, your investment need to be done accordingly. The Planner would also do proper diversification of investments, taking into account you tax bracket as well. We often forget the tax angle, your investments should be tax efficient.

These simple steps and your financial goal is set. Let me tell you, once your financial goal is set, all your other reasons and excuses disappear and your dreams become more achievable.

Convert your child’s future into reality

The moment a child is born, we see the parents very happy. Not only parents but also the friends and relatives. A few days on everyone starts having big dreams for their children. It’s good to have dreams, but we also need to works towards achieving those dreams. The two most important dreams the parents have are child’s education and marriage. If you have actually seen over the years the cost of education is just going up. Competition among children is also going and parents are also competing with other parents to show that they can give their children better education. Earlier all students used to study through the state board. Then slowly as awareness spread parents moved their children to CBSE and then ICSE and god knows what else is on the cards.

Whatever is on the cards, the cost of education is and will keep going up. So what should you do? Start now. Start a SIP which will be used only for your child’s education. As I have said many times the earlier you start the amount you need to keep aside remains small, with every passing year the amount to be kept aside keeps increasing.

Start with the following:

• Define your goal i.e. what sort of education you would like to give your child, what is the current cost of such education and till when you would be able to contribute to such goal.
• Start your contribution and remain focused, come what may, your dream and your child’s future depends upon you.
• Consult your advisor, to understand the risks involved in various types of investments and then take an informed choice.

If you start early your child’s future will definitely turn into a reality.

Creating Wealth through Equities

The sensex is going up and I can see that I can make money, so I want to invest in the stock market. This is what I hear from every second person. This is a good opportunity to create wealth through equities. Is it so easy, if it was everyone would have been making money. The fact is, it is not, you need to have knowledge and time, and best part is you should also be ready to lose some money if the market falls. As mentioned you need to have knowledge, time and risk taking appetite, not having even one is a sure shot disaster. So what are the options? One option is to go for investing in Equity Mutual funds. In this you are into equities indirectly. Indirectly means you do not own the stocks directly, but you put your money into a fund, which invests into equity.

Some of the benefits of investing through mutual funds are

• Knowledge – This aspect is taken care of because of the fund employs professionals who have the knowledge.
• Time – As these professionals are employed for the fund, they have the time
• Amount – You do not have to do big investments, you can start with as little as Rs.500/-, if you go for portfolio management, the amount to be invested would be a minimum of Rs. 25 Lakhs.
• Cost – the costs of portfolio manager are much higher compared to the costs of a mutual fund, as there are limits placed by SEBI.
• Liquidity – It is easier to get you money back, with minimal paper work.
• Tax – Mutual funds are tax friendly, you do not pay tax as your portfolio is churned, based on the market situation. In case of portfolio managed funds, you have to pay tax on every sell, depending on the period the stock was held.

Looking at the advantages, one can easily say, investing in the stock market through mutual funds is comparatively less risky.

Kisan Vikas Patra – The good, the bad, the Ugly

The finance minister recently introduced the Kisan Vikas Patra in its new avatar. Let us see some of its features

Interest Rate                – 8.7%

Period                           - 8 years 4 months

Redemption                 - Can be redeemed in 6 monthly intervals after a lock-in period on 2 years 6 months

Transferability              – Can be transferred with endorsement

Loan                               - Can be used as a collateral for loan

Minimum investment – Rs. 1,000/- and thereafter in multiples of Rs. 1,000/-

Maximum Investment – No Limit

Taxability                       – Interest is fully taxable

Documents required   – Proof of identity and address

Where to Purchase     – Post Office

The Good

The best part of Kisan Vikas Patra is there is no ceiling on the amount of investment. Even those who do not have a bank account or PAN card can apply. It has high liquidity, money can be withdrawn after just two and half years and there after every 6 months. The amount you would get at the end of every period is clearly mentioned. You could even use it as a collateral to get loan and can be transferred to anyone with just an endorsement.
The Bad

The interest rate guaranteed is 8.7% which is very less compared to other instruments for similar periods. The biggest problem is, it needs to be redeemed at the post office at which it was issued only and the interest is taxable.

The Ugly

Though the government has said that there will be KYC required, the absence of PAN makes room for a lot of black money.

Final View

Kisan Vikas Patra is good for village areas where they do not have access to banks. Hopefully the Jan Dan Yojna would overcome that. But for people in areas where there are banks, it would make more sense to put their money in Fixed Deposits, as you would get better rate of interest. Of course you have the taxability factor. To overcome tax issues, a better option would be Debt Mutual Fund, after taking indexation into account the tax would almost come to nil. Even for sr. Citizens its better to put their money in Sr. Citizen scheme where one can invest upto Rs. 15 lakhs and the interest rate is 9.2%, which is much higher than Kisan Vikas Patra.

Investing in Mutual Funds is not investing in Equities

You ask any person these days to invest in Mutual funds and they will tell you the market is high, what has the market got to do with Mutual Funds. It has a lots to do, but only if you are invested in Equity mutual funds. This has happened because of the high amount of advertisement about returns in Equity Mutual Funds as well as the wrong selling by mutual fund distributors. Commissions to distributors was high in case of Equity Mutual Funds, hence they used to sell equity mutual funds. But Mutual Funds is not just Equity, there are different types of funds for different goals and also based on your investment timeframe.

If people have money lying with them and they would like to use it for the contingency purposes, then people usually keep the money in Savings bank account or fixed deposits. This money could also be kept in Liquid funds as there is no entry or exit load and the returns are better than the savings interest rate. You might say then I could keep in fixed deposits, this is one option, but when you withdraw prematurely you lose on the interest. So effectively liquid funds are better.

Investors are also scared because of the volatility of the market and would like to keep their investments safe, in such cases investors could go for Debt mutual funds. If your goal is to buy gold for your child’s wedding,   then go for gold ETF’s. This way you would slowly start accumulating gold in paper form and when you need to buy, just redeem the investment and buy the gold. This is safer than buying physical gold. Remember the designs also will keep changing so it is better to keep the money aside and buy actually when required. This also takes care of the rise or fall in the cost of gold.

In some time we would have real estate funds. So as you can see, you can invest in mutual funds depending on your goal and risk appetite. Equity in not the only option in mutual funds. In equity too, you have options, depending on your risk appetite, aggressive or conservative. In debt too you could go for hybrid funds, where you capital is kept safe and equity is used for returns. As mentioned above, mutual fund investment in not just equity investment. You can do investments in mutual funds depending on various factors. Depending on your risk appetite and investment horizon choose your fund. Don’t just go for equity mutual funds just because they give you good returns. Remember Equity mutual funds are for those whose investment horizon is minimum 7 to 10 years.

Power of compounding

By definition compounding is the process of generating earnings on earnings. i.e. the initial earnings are reinvested to generate more earnings. As you are aware, for any earning there have to be two things Asset and time. For compounding you need to have two things that is time and initial earnings. So it means that the initial earnings have to be reinvested and over a period of time it will generate more earnings.

So let us take an example, if you invest Rs. 1 lakh for a 10% return over a year, at the end of the year, you would get Rs. 1,10,000/- in this the earning is Rs.10,000/- , the Asset is Rs. 1 lakh and time is one year. For Compounding, this initial earning of Rs. 10,000/- has to be reinvested over time. Assuming the same one year time frame and 10% return, you would get Rs. 1,000/- over a year. Don’t forget that you would keep getting the Rs.10,000 over the initial Rs. 1 lakh as well. In this way, Rs.1 Lakh invested over 15 years at 10% return could get you Rs. 4,17,725/-.

Compounding fuels growth of your money, so why let it lie idle in a savings bank account, when it could fetch more. You could put it in a fixed deposit at the same bank and generate 8 to 9 % or in a company fixed deposit or debt mutual fund for 9 to 10%. But remember in fixed deposits the interest generated is taxable. There are better ways to earn your income and still save tax. If you are ready to keep your funds for 3 to 5 years debt mutual funds are the best, as the return would be capital gains and the tax after taking indexation into account would be negligible.

Always remember the longer the period and higher the return percentage, the better the compounding. If you are ready to wait for 10 years, the best option would be to go for equity mutual funds, historically they have generated a return of around 15 to 16% returns, that too tax free. Invest with a plan in hand and watch the power of compounding.

Unoccupied Property – Care to be taken

An NRI friend of mine called the other day and mentioned that he has a property which he had purchased some years back and was planning to sell. The property had really appreciated very well, but there was more scope for appreciation. Knowing his financial condition I asked him, are you really in need of money? The obvious reply was “NO”. Then why? The real reason was fear of encroachment. Then I realized than this is a real problem for a lots of people, not only NRI’s but many other persons who have purchased a property a bit far off, where it is not possible to go and visit it on a regular basis. Unless you check on a regular basis, the chances of encroachment are very very bright.

These land sharks who do encroachment know very well, that the purchasers do not have the time and it would be very difficult for them to fight a legal battle in absentia. So what should one do? One has already purchased the plot. Here are some thing which you could do.

• Ensure that the documentation is completed and all records are transferred to your name. After transfer, put advertisement in local newspapers and keep copies of the same for future records.
• Ensure that all taxes and water and electricity bills are in your name and paid on a regular basis, during that time make sure your name is still as per the records. Do not delay such payments, any delay in even receiving regular bills should send alarm bells ringing.
• Get the property fenced and put a notice board which mentions the ownership. These boards have a life, so whenever you visit the site, make sure that the sign is visible, if not get a new one or paint it.
• If given on rent/lease, make a rental/lease agreement, with proper renewal and termination clauses. Get police verification done. This acts as a notice to police as well.
• There are many organizations which provides services of looking after property, get help.

You took all the above steps and yet encroachment has taken place, then

• Get set for a tough battle, get your documentation out (Copies, original to be ready, in case required)
• File a police complaint under Specific Relief Act 1963, along with your documentation.
• Get good legal help
• Be patient, this could be a long battle.

A Little care would help you really make some really good money.

Slow and steady wins the race

Every time we keep telling invest in SIP and watch your funds grow, SIP’s have always given better inflation adjusted returns, etc. But we have always said in the long run and by long run we always mean 10 years or more. I read an article in The Times of India, some days back, where the financial planners were trying to convince two businessmen brothers to start a SIP for their children’s education which would be after 15 years. But they were both very adamant. For that matter all of us are. We have come up the hard way and managed to succeed with whatever odds we have faced. So we assume that we will still be able to manage.

What we forgot at that point of time, is that it is our parents who have bailed us out and done it with a lot of sacrifices and you are ready to go down the same route. It was only when the Financial Planner told them that after 15 years the amount would run into crores after taking inflation into account, they agreed. Why? Because they knew they would not be able to remove that kind of money out of their business at one go, without doing a lot of sacrifices. So when there is an easy way out why do you insist on waiting? Start a SIP today. The brothers did it and they were tension free, why? Because they were assured that now whatever happens to the business, their children’s future was secure.

Even when the market was down and their business was not doing well, they still had a smile on their faces. They had seen the results for the last 3 years and were assured. Frankly unless we start we will always be sceptical. Don’t you want a smile on your face all the time? The beauty of SIP is that you can start with as little as Rs. 1,000/- a month. I’m sure this is a very small price to pay for securing your children’s future and reduction of your tensions. In this article I just spoke about children’s education, but your goals could be anything, say marriage, retirement, own house, holiday, etc. Start now and secure your goal. Slowly and steadily you will reach your goal.

After all reaching your goal is equivalent to winning the race.

Want Guarantees for your investments

There are some persons who would like to see their investment grow, but cannot think of anything other than Fixed Deposits. If you suggest anything else, they want a guarantee. But you are aware that in Mutual Fund investments there are no guarantees, whether it’s Equity or Debt. Ask any financial planner and he would say, if you want to grow your wealth and beat inflation, go with equity. So what do these people do, they invest where they have guarantees i.e. Fixed Deposit, Post office, Insurance, etc. and these are the very investment which erode your wealth in real terms. Many of them had burnt their fingers with equity investments in 2008 and with the many scams which took place.

This year they saw the market go up all the time and now they are again scared to invest in equity, because of their fear, which is, the market can crash anytime. Such investors should go for hybrid funds, which invest in both debt and equity. The debt portion would take care of the security of the investment and Equity would take care of the growth. This is one of the safe investments in mutual funds which would ensure you do not erode your wealth.

One of the most commonly named funds in this hybrid category are monthly Income plans. These funds invest around 75% in Debt and the balance in equity. The debt portion increases if the market is too heated. So the debt portion gives you a stable return just like fixed deposits and depending on market situation equity would give growth. So when the going is good, the returns would go to say 13-15%, but in a bad market the returns could be from 11-13%, which is not bad at all. If you look at all the Monthly Income plans the average returns for the last 5 years is around 12.5%. Here as I had said earlier, we still cannot give guarantees for returns.

Investments in these funds should be for a minimum of 3 years, as a major portion of the funds are invested in debt, these are treated as debt funds for income tax purposes and if you have read some of my earlier posts, you would have seen, that debt funds definitely beat fixed deposits if the investment is for more than 3 years. So Monthly Income Plans are tax efficient investments as well. If you go for dividend option, it’s even better as Dividends are tax free, but remember, the income tax department taxes their pound of flesh, in the form of dividend distribution tax, which is quite heavy at around 28% after adding surcharge and tax. So it is better to go for growth option and withdraw any time after 3 years when you need the money or go for a systematic withdrawal plan after 3 years.

Are your investment strategies right

You have been very careful about money and a vivid reader. You have managed your funds right and have been following certain strategies. But then you see everyone around you flouting their wealth and you are still saving and able to reach your dreams. What is wrong? The problem is planning. In our effort to save pennies we are losing pounds, which could have grown our wealth. You might be saying that the others are lucky, then why don’t you try and get lucky yourself. I’m not asking you to gamble nor have the others got their wealth gambling.

There could be many reasons why your savings have not been growing, you might be investing in shares based on tips and those tips are not going right. As I said earlier, everyone will give tips, but the same persons investing based on those tips. Also they set a stop loss, do you do it or just wait. You should be ready to bear losses as well.

Of course there are some safe investments like Fixed deposits, where you would get a return of 10%, but then this is taxable, if you are in the highest tax bracket, your post tax return would just be 6.1% which is less than the inflation rate. So though you have increased your money you have lost to inflation. Therefore it is always recommended to invest in such a way that you beat inflation and then only you can be wealthy, like those around you. Those people have not been lucky, but have been investing wisely.

Insurance is good, it secures the future of your loved ones in case you are no more. But do not treat it as an investment to make you wealthy, but an investment to take care of a risk of death. Real Estate is good, it has been growing, but for how long? Have you considered the tax implications?

Asset allocation is the most important method of increasing your wealth. Just equities will not help, unless it is for the long run. Just don’t hope for the market to just keep going up for ever. Follow a plan, based on your financial goals and you will be wealthy.

Are loans bringing your wealth down? Have you made best use of the cheap loans available? Is there a better option available? Are you using your credit card for loan purposes?

You need to reassess and check where you stand financially and get a good financial advisor. Now every person who sells mutual funds or insurance calls himself an advisor, don’t get carried away. Check the advisors credentials and check if he spends time to understand your goals, before suggesting you a solution.

Usually financial advisors will spend at least an hour with you to first understand your goals and assess the type of investor you are. He will then assess your existing investments and only then will come up with a strategy based on your goals and risk appetite. Take help and get wealthier faster, with the right investment strategies.

Should one invest in ULIP’s

ULIP’s were the most widely sold insurance products some time back. As they served a dual purpose of being market driven as well as giving insurance. They even gave mutual funds a run for their money. Why did this happen, only one reason, the commissions for the agents were good, whereas commissions were stopped for distributors. It was a good sale for the insurance companies as well with very low regulation. This also led to a lot of mis-selling. This is when IRDA stepped in and brought many changes. With changes made by IRDA, the playing field between ULIP’s and Mutual funds has almost become level.

Though the field has almost become level, people have stopped buying ULIP’s as because of mis-selling, people are scared of getting duped again. But now with the changes there is money to be made in ULIP’s as well. Many financial planners would say do not mix insurance with investment. But if you look at ULIP’s only as investment also makes sense, look at it from long term investment point of view.

The biggest advantage of ULIP’s is tax; we keep shifting funds from debt to equity and vice-versa depending on the portfolio value and your requirements. When you do that, you need to sell, and every sale has got tax attached to it. Though tax is not applicable on sale on equity mutual funds after a year, there is tax applicable for debt mutual funds. But in case ULIP’s since there is no sale of units, there is no tax involved. Also maturity proceeds are tax free as long as the premium amount is 10% or less of the insured value.

Most ULIP’s allow shifting of units free of cost certain number of times a year. Though most of you might not do it that often, you should do it at least once a year. Also as you near maturity, start moving from equity to debt, this will help, if there is a sudden crash in the equity market. Looking at the advantages, on should definitely go for ULIP’s but only as supplementary insurance and more from an investment angle.

Making money during inflation

We all know that inflation means rising costs. But is it just costs, costs go up because the facilities that are given along with the item also have gone up. We are paying more for the convenience value as well. Let’s take the case of coffee or tea which you used to have in the good old days. We used to sit in the wayside cafe and chitchat. Today even if we have the same group, we will go to either Cafe Coffee Day or Starbucks. 

Oh! It struck you why you paying so much. You will not go to the same wayside cafe even if it present. Your status has gone up or you have assumed that your same old friend’s status is up. So we tend to showoff and this habit increases our expenses. Life has become more expensive just because of these small showoffs. 

So it is not only inflation, man, I have removed one myth of rising costs only because of inflation. But let us not forget, inflation is real and costs are going you, but we could save some amount by just not showing off. One might save my standard have improved; yes they are and should improve. But has your income gone up by the same percentage? If not improve your standard so that your income also increases.

Wow, your income will go up by just increasing your income or reducing your expenses. We are spending more in the hope of making more money either for ourselves of for our families. How? We send our children to international schools or to foreign countries, only because we want them to grow and by grow we mean make more money.

But this does not happen uniformly, our expenses increase at a faster rate than our income. So we need to work on reducing our expenses. It is always best to first increase your savings and provide enough before increasing your expenses. So how do you do this? One get a second income or as I said earlier, work harder that your income increases.

Now we come to expenses. We need to spend and that is not a choice but a need. But we can do it prudently. So if you need something, buy it, but buy something which will meet its purpose, lets say, you need a vehicle. Now you can either buy a two wheeler or a 4 wheeler. But since your family is big, you need a car. Here you can go for an economical car instead of a luxury car and you save both on cost and maintenance. In this manner, we can keep saving even during inflation. Ultimately money saved is money earned.

Taking advantage of credit cards

We find it difficult to keep noting down our expenses on a daily basis. But we keep using our credit card without thinking twice. Start using your credit card statement as your expense statement and start tracking where you are spending your money. This will help you remove or reduce your unwanted expenses, which will lead you to savings. We should stop looking at credit card as an alternative to cash, but look at it as cash. But the unfortunate thing about credit card is you can keep spending and you would not know that you do not have the money to repay what you have spent.

Credit Card is anytime more convenient than cash. Another advantage would be to see the type of expenses and shift to a credit card which would give you savings. Almost all banks have tie-ups with companies and come up with co-branded cards. These cards come with a host of advantages, deals and saving opportunities. Some of the popular cobranded cards are for fuel, dining, travel, fashion, groceries and travel.

These cards are a win-win for both the customer and company. For you as the consumer, you get deals and for the company they get loyal customers. This might lead you to have two or three credit cards. Don’t go for more than three, you would start losing track and in case you default your credit rating would also go for a toss. Always look at your credit card very carefully and pay in full. Most of the credit card statements tell you the full amount and mention minimum payment due in bold. If you pay only the amount in bold, you will land you paying interest and other charges.

After a few months you will notice that you have started saving some money. Savings won’t just happen, start tracking your expenses and switch to the right cards.

Employee’s Provident fund - Retirement corpus

In the last article we read about Employees Pension scheme. Now if you are part of the Employees pension scheme you are part of the Employees Provident Fund as well. See the government has thought about you. Did not get it? As you are part of the Employee Provident Fund, you are automatically saving for your retirement. This is in addition to the pension which you would get from the Employees Pension scheme. When you looked at it, the pension figures looked so partly. But along with this fund, you would be saving substantially, in addition to getting tax deduction.

Let us see how. Assume a fresher starts working at the age of 22 and his starting Basic Salary is Rs.10000. He would be contributing 12% of this to Provident fund. In addition the employer would also be contributing the same amount. So there is Rs.2400 getting saved from your salary every month. From this Rs.541 would be going to the Employees pension scheme. So you would be saving a net of Rs.1859 per month, which comes to around Rs.22308 per year. 

Now the government has declared an interest of 8.75% on this.

Now if you retire at the age of 58, you would be saving for 36 years. If we keep contributing the same amount for 36 years, the amount contributed becomes Rs.8.03Lakhs. Now this is without interest and we have not considered yearly increment. Assume a yearly increment of 10%. The amount after 36 years with 8.75% would be Rs.1.86 cr. Now this can definitely give you a good annuity. In addition to the annuity from Employees pension scheme.

We are always worried about our retirement and say we are going to find it difficult. The only reason for this is we keep dipping into this retirement corpus, without thinking. We feel that since we are allowed to withdraw from it, it is our right. But then, we are hurting our future. If it is such a pressing need, go ahead and withdraw, but withdraw in the form of loan. So that you repay whatever you have withdrawn. This will keep your retirement corpus intact.

Now we have seen how easy it is to build a retirement corpus of almost Rs. 2 cr. But most of us just do not think.

We have seen the rosy picture, let’s see the dark side as well. With current inflation, this amount of Rs.1.86 cr, will not give us enough annuity as the interest earned is not more than the inflation. Hence to take care of inflation we should look at stocks. By stocks I mean invest through SIP’s in Diversified Equity Mutual funds. You do not have to start with a big chunk, start with a Rs. 500 SIP and keep increasing it in the same proportion as increase in salary. This will give you a much bigger and inflation adjusted corpus.

Though we know that Stocks have always beaten inflation, Economic Times have shown that in the last 20 years, Employees Provident Fund has beaten the Sensex. On long term Stocks have given an average return of 13 to 15 %. So it is always good to have some portion in stocks.

So don’t be disheartened go ahead and start enjoying your life, start with this small investment to build a better future.

Employees Pension Scheme 1995

We work hard throughout our lives, so that we can have a good retired life. How do we achieve this? By planning for our retirement. Do we actually plan? No…

Knowing our culture, it is very difficult for us to save. Any occasion we have in our family, we call all and sundry and spend a bomb. We keep earning and spending for others always forgetting to save for our own selves. Knowing this our government did the thinking for us and started the Employees Pension Scheme.

All of us who are working and Provident fund is deducted, automatically also become a part of the Employees Pension Scheme. Now you are smiling, wow I would get pension, but do you know how much?

Before we get into the calculations, let me give you some good news.

Minimum monthly pension of Rs 1,000 will be implemented from September 1, 2014.  There is another part i.e. wage ceiling is increased to Rs.15,000/-, we will not get into this.

Now that we know what the minimum is, let us understand how this scheme came into force. We just keep paying, because it is mandatory. The Pension Scheme was started along with the provident fund scheme, but on 16th November 1995, the government changed the rules of calculations of the scheme with new rules called the Employees Pension Scheme 1995.

So for pension calculations the number of years of service is divided into 2 parts i.e. service before 16th November 1995 and service from 16th November 1995. The first part is called past service as it was with old rules and latter part as pensionable service. Already confused? This is the way, anything from the government is anyway done. Now past service is divided into 4 slabs, the reason given is to make it simple. Service upto 11 years, 12 to 15 years, 16 to 19 years and 20 & above.

If the salary as on 16.11.95 is below Rs. 2500, the monthly compensation will be Rs. 80, 95, 120 & 150 respectively. For Rs. 2500 & above this will be Rs. 85, 105, 135 & 170. In the case of those attain 58 years after 16.11.95, the above compensation will be multiplied by a factor stipulated in table B, according to the difference between 16.11.95 and the date of completion of 58 years.

For simplicity purposes I have only put factors which are relevant today.

TABLE – B

If Years to 58 of age from 15.11.1995 is:	then factor is:
less than 20 year	6.414
less than 21 year	7.056
less than 22 year	7.761
less than 23 year	8.537
less than 24 year	9.390

For greater than this use 1.08 raised to number of years

Now the best part Pension calculation, the formula is as follows

Pensionable salary*pensionable service/70

Pensionable salary is the amount on which the pension is given to an employee. The pensionable salary is divided into the following three ways:

(1) Salary that is below Rs. 6500
(2) Salary that is Rs. 6500 and above but contribution of statutory calling is Rs. 6500
(3) Salary that is above Rs.6500 and opted to contribute on actual salary.

In point 2 the pensionable service is Rs. 6500 but in point 1 and 3 the pensionable service will be the average of last 12 months .

If an employees has completed his 20 years and above of his service he will be given 2 years bonus.

Let’s take an example:

Date of Birth - 23.1.1967
Date of join - 23.10.1987
Salary on 16.11.95 – Less than Rs.2500/-
Salary on completion of 58 years on 22.1.2025 - Rs. 6500 (Statutory Ceiling)

Past Service - 8 yr 1 m (approx) rounded to 8 years
Compensation - Rs. 80
Factor as per Table B (for 30 years, i.e the difference between 16.11.95 & 22.1.2025) – 10.0627
Past Service Benefit - 80 x 10.0627 = Rs. 805 - (A)

Pensionable Service - 30 years
Bonus (Service is 20 & above) - 2
Pensionable Salary - Rs. 6500
Pensionable Benefit - 6500 x 32 / 70 = 2971 - (B)

Total Pension - (A) + (B) = Rs. 3776

Arbitrage Funds

We have heard of different types of mutual funds and during that conversation sometimes you hear arbitrage funds or you might not have heard of it at all. What are Arbitrage Funds? To understand Arbitrage funds let us go to the definition of Arbitrage. Arbitrage means buying a product in one market and selling it in another to make a profit due to the difference on price.

So now that we know what arbitrage means how does it apply to the stock market? In the stock market trades are done in cash or future and the price in both these are different. In such a case, if the price in the future market is higher than the cash price, one can purchase the stock in cash today and deliver it in the future market at a higher price and make a profit.

That means if we invest in these funds you will never lose your capital. Then why have arbitrage funds not caught up. One reason is, the profit will take place only on a future date and if you want to exit in between there could be a chance of loss. This chance of loss is what is holding people back. But if you are ready to wait for some time, the returns are good, even better that debt funds.

Arbitrage funds are good in a rising market, as the future prices will most of the time be higher. So keep a watch on the cash and future prices of around 10 stocks and if you see the average difference reducing, it’s time to move out of the arbitrage fund.

The other advantage in arbitrage funds is taxation. Since they are mostly equity funds and for equity funds there is no long term capital gain. Even in case of short term capital gain, the tax is just 15% of the capital gain. This is better than debt funds where short term capital gain is taxable as per your tax slab.

So if you are looking at short term, arbitrage funds are better than debt funds, but for long term, equity funds are the best.

Investment in Real Estate

Who does not want to own a house? Everyone! But we need to do a lot of things before we actually invest in real estate. It’s not that we do not want the house, but the issue is the amount of investment. Since the investment amount is high, we need to be very careful. Real Estate should be part of every persons portfolio. Over a period of time it always appreciates. In India the rate of appreciation is much better than it is in other countries. But the appreciation is gradual, unlike gold or equity, which has big fluctuations.  If invested in the right location, it can also give you a steady income, whatever the state of the economy.

If you already own a house, you can go for a second property. If you notice, I mentioned property and hot house. So you could also go for a commercial property and not necessarily a house. You could do it with a loan and if given on rent, the rent will help pay off a part of the loan. In addition you have several tax benefits. If you have rental income, the whole amount interest paid on the loan can be claimed as deduction against the rental income. Of course this is in addition to the 30% you get for repairs and maintenance and the property taxes paid on the property.

Now all the benefits I mentioned above are applicable if you invest for rental purposes. If it is for your stay, then the interest paid is limited to Rs. One lakh fifty thousand only. Now that we have seen the advantages, you really want to start making money or should I say, make money work for you. So how do we start? First thing to do is identify the property. Remember it is easier to get rent on a property which is close to a business center, school, market and public transport. If all these amenities are there then the cost would also be high. So you have to find a balance.

We have identified the property, which in our minds will give us a decent income. What next? Check our finances.  This is important. As, if you have planned on the finances it helps in securing a deal. All good properties are picked up fast, so if you have planned your finances, you would be able to finalize fast. Money talks, so you should have the down payment ready. With money in hand, you will be able to secure a good deal as well. Spend the maximum time on finalizing on a good property, but once you find it you have to be on a sprint. The marathon comes to an end. Do not take a loan if your EMI is going to be more than 40% of your monthly disposable income.

Don’t go by verbal promises given by the builder, broker or the owner. Their intention is to sell. You are going to put in a lot of money. When we buy fruits and vegetables also we check before purchase, so why not get the property checked. There are experts available who do this checking, yes, for a fee. But the fee is worth paying.  If you have your essentials in place, get up and start preparing.