Tuesday, September 28, 2010

Infrastructure Bonds - A sneak peek

The Budget for the fiscal 2010-11 introduced infrastructure bonds to facilitate financing of long gestation infrastructure projects. The government has notified an investment of up to Rs 20,000 in these bonds to be exempt from income tax over and above the Rs 1 lakh tax exemption under section 80C of the Income Tax Act.  This should result in an additional tax saving of Rs 2,000 to Rs 6,000, depending on the tax slab applicable to each investor.

Structure of Infrastructure Bonds: Amount invested in infrastructure bonds will be used to finance various infrastructure projects in the country. As per the specifications of the central government, infrastructure bonds are to be issued by IFCI, LIC, IDFC and any non-banking infrastructure finance company recognised by the Reserve Bank of India.

While IFCI has recently closed its issue of infrastructure bonds, LIC and IDFC are now set to launch their issues in coming months. The tenure for these bonds is 10 years with a lock-in period of five years. Thus, after a period of 5 years, the issuing company can buy back these bonds from investors.

Alternatively, the investor can choose to trade these bonds in stock exchanges. The issuing company shall offer two rates of interest on these bonds — one is when the investor chooses the buy-back option after the lock-in period and the other is when he chooses to hold on to the investment till maturity period.

Returns and Tax Treatment

Infrastructure bonds will carry an interest rate, which will be determined by the issuing company. The central government, however, has notified that the interest rate so payable shall not exceed the yield on 10-year government bonds. As the current yield on 10-year government bonds is around 8%, investors can expect these infrastructure bonds to offer a rate marginally lower than 8%.

IFCI, for instance, had offered investors an interest rate of 7.85% for bonds with a buyback option after 5 years and 7.95% for bonds without the buyback option and redeemable after 10 years. IDFC, whose bonds have hit the market yesterday (click here), is likely to offer an interest rate ranging from 7.5- 8%.

Investors can opt for either an annual payout of interest or allow the same to be compounded annually and payable only on maturity. Though the principal amount of investment — up to Rs 20,000 — is exempt from tax, the investor shall be liable to pay tax on the amount of interest earned from such an investment. If the investor chooses to trade these bonds in the exchanges after the lock-in period, any gains accrued thereon shall also be subject to long-term capital gains tax.

5-year Tax Saving Bank FD v/s Infrastructure Bonds

As infrastructure bonds have a lock-in period similar to that of a tax saving bank fixed deposit and are expected to offer interest rates similar to the ones being currently offered by banks on their fixed deposits, it is very natural for investors to contemplate as to which one of the two is a better tax-saving avenue.

A 5-year tax saving bank FD is part of the existing 80C basket with a maximum exemption limit of Rs 1 lakh, an investment in infrastructure bonds is an additional exemption of Rs 20,000.

Thus, in case you have already exhausted the exemption limit of Rs 1 lakh through investments in Public Provident Fund (PPF), Employee Provident Fund (EPF), LIC Premium, Repayment of Principal on housing loan etc., you have to opt for infrastructure bonds rather than bank FDs.

As far as the returns from these two instruments are concerned, let us assume an interest rate of 7.85% (as offered by IFCI) for the 5-year infrastructure bond (with buy-back option) and an interest rate of 7.5% on a 5-year tax saving bank FD — as is the prevailing interest rate being offered by most banks.

Thing to note here is that the interest in case of a bank FD is compounded quarterly, but is annual for infrastructure bonds.

Given the above interest rates, an investment of Rs 20,000 shall fetch a pre-tax interest income of Rs 8,999 in the case of the bank FD and Rs 9,183 in the case of infrastructure bonds after a period of 5 years. Thus, it is not the yield on maturity, but the benefit accruing at the time of investment that needs to be considered before making an investment decision.

Risk Element: While there is no risk as far as the underlying asset of these investments is concerned, the embedded risk lies with respect to the institution offering these bonds. It is thus important for investors to carefully scrutinise the credibility of the institution offering these bonds. Moreover, there is still an uncertainity on the future of this mode of investment since with DTC in 2012, there is no mention of these bonds.

There are various articles on internet on this -

  1. Economic Times
  2. Rediff.com

Tuesday, June 29, 2010

Buying ULIPS will Cost Less Now

Insurance Regulatory and Development Authority (IRDA) has announced new set of guidelines for ULIPs. They will now cost lesser but have a longer lock-in period.

IRDA, on Monday, said that insurers will now be allowed to charge up to 4% on annual premium paid on Ulips for the first five years, and thereafter charges will be reduced during the tenure of the policy. For plans of 15 years and above, the charges will be restricted at 2.25% of the yearly premium.

IRDA has also increased the lock-in period for all Ulips from three years to five years now, including the top-up premiums. The decision is expected to make these products more like long-term financial instruments that can provide risk protection. Longer lock-in would also discourage those insurance buyers who often entered Ulips, which are market-linked products, for short term gains. The regulator also increased the insurance cover on such products to 10 times of the first-year premium compared to five times now.


Thursday, March 25, 2010

ICICI Prudential Pinnacle Guaranteed NAV- Review

Guaranteed return products are undoubtedly very popular among us Indians. We use at least one of these products, say, bank fixed deposits, NSC, KVP, PPF, REC Bonds, etc., to pick up a decent fixed return.  The latest offering is by ICICI Prudential which has introduced ICICI Pru Pinnacle, a guaranteed return unit-linked insurance plan (ULIP). But the question remains as whether this plan will succeed in attracting investors by offering something new or fall flat.Here I'm presenting a review of this product from RupeeTalk.com
  • On maturity, the plan offers the highest NAV recorded on daily basis in its first 7 years
  • There is an additional 3 per cent maturity bonus on the completion of term
  • Low charges make it a cost-effective guaranteed return plan
ICICI Prudential, a joint venture between ICICI Bank and the UK-based Prudential Plc., was established in Dec. 2000. Over past nine years, it has built a strong distribution network of 2,074 branches (inclusive of 1,116 offices), over 2,25,000 advisors and 7 bancassurance partners. ICICI Prudential is the first life insurer in India to receive a National Insurer Financial Strength rating of AAA (Ind) from the credit rating agency, Fitch ratings. As of now, the company has a paid-up capital of Rs. 4,780 cr and the total Assets under Management (AUM) over $10 bn (Rs. 47,000 cr).
Product highlights
  • ‘ICICI Prudential Pinnacle’ is an open-ended, unit-linked insurance policy with an advantage of varying exposure to equity with downside risk protected.
  • Limited premium-paying term (3 years) providing extended insurance protection (10 years)
  • An option to increase or decrease the sum assured anytime during the policy term
  • The minimum and maximum age for entry is 8 years and 65 years, respectively.
  • The policy is available for 10 years.
  • The minimum single premium is Rs. 50,000 per annum, with no cap on maximum limit.
  • Minimum sum assured is five times the annual premium.
  • The policy can be surrendered after the 3rd year, and there are no surrender charges after the 5th year.
Benefits of ICICI Pru Pinnacle
  • ‘Guaranteed highest NAV’ as recorded on daily basis in the first seven years of the fund (from Oct. 24, 2009 to Oct. 24, 2016)
  • An additional 3 per cent of fund value (prevailing NAV) received upon maturity
  • Liquidity in terms of partial withdrawals allowed from the 6th policy year
  • In case of the unfortunate event of death of the insured, the nominee gets the higher of the fund value and sum assured (reduced by partial withdrawals, if any)
  • 100 per cent surrender value after the 5th policy year
  • Tax benefits on the premium paid and benefits received under the policy as per the prevailing Income Tax laws.
There are already a considerable number of guaranteed return products in the market such as SBI Life’s Smart ULIP, Tata AIG’s Invest Assure and Birla Sunlife’s Platinum Plus. All these plans have more or less the same features. However, they differ in charges like premium allocation charges, fund management charges, policy administration charges and others.
So where does ICICI Pru Pinnacle stand? This plan, too, is similar to the above-mentioned plans, but what sets it apart from them is its lower policy charges, recording of daily NAV and an additional maturity bonus of 3 per cent. The ICICI Pru Pinnacle fund guarantees the highest net asset value (NAV) recorded in its first seven years, subject to a minimum of Rs. 10. But there is a catch. This guaranteed highest NAV is applicable only at maturity. At maturity, the higher of Fund Value (units X NAV) and Guaranteed Value (units X guaranteed NAV) as on the maturity date shall be payable (refer Table 1).

As per the company’s benefit illustration, an annual premium of Rs. 3 lakh for three years for a 35-year-old healthy male with a sum assured of Rs. 15 lakh will grow to Rs. 11.63 lakh and Rs. 16.34 lakh at an interest rate of 6 per cent and 10 per cent, respectively.
Equating with other products
Here is the refrain, ‘Do not mix insurance with investment unless investment costs are very less and investment horizon is more than 20 years’. We are not comparing ICICI Pru Pinnacle with similar products like SBI Life’s Smart ULIP, Tata AIG’s Invest Assure and Birla Sunlife’s Platinum Plus, for they differ majorly in charges. Rather, we weigh it against a customised product – a combination of a mutual fund and a term insurance. Let us consider that the combo-product grows at the same 6 per cent and 10 per cent interest rate (refer Table 2).

In any circumstances, the combo-product of ELSS + term plan will outperform ICICI Pru Pinnacle by Rs. 1.11 lakh and Rs 1.45 lakh at a growth rate of 6 per cent and 10 per cent, respectively. Moreover, the death benefit in the MF investment will always be more than Rs. 15 lakh (Rs. 32.79 lakh at the 10th policy year). In terms of net returns also, the combo-product will yield 8.86 per cent and 4.43 per cent in comparison to 7.72 per cent and 3.25 per cent by ICICI Pru Pinnacle at a growth rate of 10 per cent and 6 per cent, respectively. Nevertheless, in ICICI Pru Pinnacle Fund maturity amount is guaranteed by its highest NAV recorded in the first seven years, but in ELSS maturity amount is applicable at the recorded NAV at the maturity date. So, in case the market tanks at the time of maturity, ELSS proceeds will go down, failing to provide the guaranteed return while ICICI Pru Pinnacle maturity proceeds are guaranteed at their highest NAV recorded.
Tax benefits
ICICI Prudential Pinnacle Fund provides tax benefits under Sec 80C of the Income Tax Act, where the premium paid is eligible for tax deductions up to Rs. 1 lakh. The maturity proceed is also exempt from tax under Section 10(10D).
Things to look into
• Top-up premiums are not allowed.
• Surrender benefit is limited to 30 per cent of the fund value within 3 years of policy term.
In India, products like ULIPs have become a push product rather than a pull product. By presenting delusive return charts to buyers and hiding the hefty charges applicable on ULIPs, insurance agents try to create a positive image for the product. ICICI Pru Pinnacle fund is no comparison to the combo-product of ELSS and term plan when it comes to tax saving and wealth creation, for the latter offers higher return. However, when compared with its peers like SBI Life’s Smart ULIP, Tata AIG’s Invest Assure and Birla Sunlife’s Platinum Plus, ICICI Pru Pinnacle Fund has an edge over the rest because of its lower policy charges and the unique feature of daily NAV, not applicable in Smart ULIP.
How to invest in the plan?
Investors can buy the plan directly from 2,074 branches (inclusive of 1,116 offices), over 225,000 advisors and 7 bancassurance partners of ICICI Prudential.
Summing it up
Innovation is the key to financial products. It is a known fact that most ULIPs face difficulty in offering guaranteed return as promised. Though fund managers try to invest as per the mood of investors based upon the economic scenario, they may not always succeed in generating desired return. ULIPs carry high risks as returns are linked directly to market performance, and thus insurers may not be able to honour their commitment of guaranteed NAV. However, the guaranteed maturity amount in ICICI Pru Pinnacle by its highest recorded NAV helps it score over a mutual fund whose returns are not guaranteed. So, it can be safely said that ICICI Pru Pinnacle is a good bet for the investors who have a low risk appetite.


Saturday, March 6, 2010

MoneyControl.com in discussion with Subhash Lakhotia on Budget 2010

In an interview with CNBC-TV18, Subhash Lakhotia, Tax Guru; Sanjay Sinha, CEO of L&T Mutual Fund and Kamesh Goyal, Country Head of Bajaj Allianz Life Insurance evaluate the Union Budget and its impact on your wallet. Below is the edited transcript of Subhash Lakhotia, Kamesh Goyal and Sanjay Sinha’s exclusive interview on CNBC-TV18. Also watch the video.
Q: Upto Rs 50,000 seems to be the benefit—more so for people who are earning above Rs 5 lakh—Rs 5 to 8 lakh and of course above Rs 8 lakh as well gets the Rs 50,000 benefit. But under Rs 5 lakh earners seem to be getting a lesser benefit?
Lakhotia: Yes, the individuals having income upto Rs 50,000 to Rs 5 lakh will save Rs 20,000 and individuals having income of Rs 8 or 10 lakh they will save nearly Rs 50,000 income tax saving. But the worst part is the common man having income Rs 25,000 per month—his saving is a big zero. Not a single rupee saving inspite of the fact we are having big rise in inflation and other things in the country—it’s still the poor man or the common man with income of Rs 25,000 per month—no income tax saving at all because the initial exemption limit has not been changed—that’s the big problem.
Q: When we were talking ahead of the Budget, you had asked for an increase in the exemption limit under 80 C. The FM has left that totally untouched.
Lakhotia: No changes made in 80 C—Rs 1 lakh continues and this Rs 20,000, which has been made is a separate section 80 CCF. That is also only in the case of infrastructure bonds. My emotions are taken away. If he would have increased from Rs 1 lakh to 2 lakh—it would have been best one but this Rs 20,000 forced to make the investment in infrastructure bonds only.
Q: Maybe somewhere the Minister had the Direct Tax Code in mind. The Direct Tax Code does talk of an exemption increase to Rs 3 lakh for instance—the draft one. The FM hasn’t moved anywhere closer to that although on the basic exemption, the FM has tried to move in that direction—very small steps compared to what the Direct Tax Code proposes—but he has tried to move.
Lakhotia: Not in the basic exemption, but in the slab rate, FM has moved and that’s pretty good. It gives a chance that yes we can expect in the DTC the tax regime of Rs 10 lakh income and 10% tax only because this time the tax slabs have been changed. They are pretty good and very ideal one for the individuals having Rs 10 lakh or so. They are going to be happy. They will be able to fight the inflation as they are facing today.
Q: Did you expect even this much from him? Were you surprised?
Lakhotia: Not surprised at all because what I expected was for the common man initial exemption limit of Rs 30,000 coupled with standard deduction for salaried employed. Salaried employed the standard deduction is completely missing in this Budget.

Q: When we were talking before the Budget, you were hopeful that while the DTC does hang on our head from next year and that might not allow the Minister to tinker around too much—are you disappointed that from an investment category point there hasn’t been an expansion of the 80 C window at all?
Sinha: Yes one would have expected because as we were discussing that the tax slabs have been tweaked and this tweaking has been to make it come a bit closer to what the DTC proposes to do. One would have expected that the same philosophy would have extended to the tax benefits that you have under the exempt-exempt and then tax category that the DTC proposes. So on that count one is little disappointed.
But if you look at the larger picture, the fact that there is larger disposable income in the hands of people who are probably in the upper income bracket, there could be a possibility of that larger income now getting directed to savings if it’s not getting consumed.
Q: Are you okay with the fact that the category of people who are going to be getting this Rs 50,000 in their wallet are likely to come and invest in financial products?
Sinha: If you look at it from one perspective, this category of income generators may not be very large savers. But the FM has is not entirely left them out of the ambit of whatever he could do because the FM has a provision of putting about Rs 1,000 into accounts by way of the New Pension Scheme for the unorganised sector. So to some extent the FM has tried to cover and there the number of people that he proposes to cover is fairly large.
Q: But that’s not taken off—the New Pension System (NPS) has been a total disaster?
Sinha: Absolutely. In fact that’s why if there is an incentive that is provided by the government by incentivising people to start by making a contribution on the behalf of the pension saver.
Q: But Rs 1,000 a year?
Sinha: In the absence of zero, I would say this is better and given the fact that the NPS right now has only few thousand accounts. The amount that has been allocated for this scheme is about Rs 100 crore, which can potentially open 1 million pension savings accounts. I think that’s a positive sign.
Q: One statement of the FM, which has come in only recently in an interview to Network18, where the Finance Minister has said that issues concerning exempt-exempt-tax (EET), which is a big issue, that the exempt-exempt-exempt (EEE) category may go an be replaced by EET. He is re-looking at that, he is taking in the suggestions of the industry. He is just said a while ago. Is that something that heartens you because otherwise from next year onwards we are perhaps now on the path to moving to a DTC regime, which actually says that the only benefits you are going to get is on long-term pension products?
Goyal: Absolutely and if you look at it logically—for a common man who is investing about Rs 20,000-25,000 a year and he moves to an EET regime where even the premium, which he is been paid each year is not getting deducted, then the entire life savings actually becomes meaningless so that is extremely useful.
Q: Like Sanjay are you disappointed that he has not expanded the 80 C window and you get nothing out of the infrastructure bond because that’s probably going to end-up banks issuing it?
Goyal: Not at all. In fact, I would say that the limit of 80 C of Rs 1 lakh—if we see it as Mr Lakhotia was saying from a common man’s perspective—I do not think a person who is earning Rs 25,000 a month can actually exhaust the limit of Rs 1 lakh. So if he had expanded the limit under 80 C then the benefit would have again gone to the people who are Rs 5 or 8 lakh income bracket in a year. I am not at all disappointed and even on the infrastructure side, my feeling is that for a life insurance companies and mutual funds, we would actually be allowed to float funds, which would invest in those bonds.
Otherwise it will be very difficult for the government to take these bonds to the common man if the life insurance and the mutual fund industry don’t take this in a big way.
Q: So are you saying this time round these infrastructure bonds will not be issued only by financial institutions and banks like in the earlier days?
Goyal: I am saying they will still do the issuance. What we can do is we can float a fund, which will exclusively invest in those instruments.
Q: Have you had talks with the government towards this because he has been quite silent on this?
Goyal: No, we haven’t actually but my feeling is I see no reason why he shouldn’t allow this because we will still be investing in the bonds issued by those entities. The idea is can we take it public?
Q: The idea is will I get the tax benefit if I go through you instead of buying the bonds?
Goyal: My feeling is they should and then we can take this as a very big development next year. I am sure if I look it from a life insurance industry, we can definitely generate close to about Rs 5,000 crore on the infrastructure if he allows life insurance companies to float funds for this purpose.
Q: Do you fear that if this doesn’t happen what Kamesh is saying that we normally are in any case a very risk averse society? Do you fear that I would rather much go and put my Rs 20,000 there and make up that Rs 1 lakh with other incentives that are thrown into it like home loan, education of my children, my standard provident fund deduction rather than going and taking advantage of a mutual fund or of a unit linked insurance policies (ULIP)?
Sinha: We will also have to see what sort of coupon those bonds will have. What sort of lock-in will they necessarily impose—whether that is acceptable to me as an investor—would also be some of the considerations that you would have. Even today you have options within that 80 C, where you have instruments, which do not give you a very attractive rate of return but then there is certain amount of security with them. For example even banks deposits give you section 80 C benefits but why doesn’t all the investments flow into that category. I guess there is a healthy appetite for a trade-off between risk and return.
Ruchira Jalandhar, Jalandhar: Impact on tax slabs for women and senior citizens?
Lakhotia: This time round there is no special mention and that’s the reason that throughout India we have been receiving lot of calls—people are thinking that the Finance Minister has made Rs 160,000 for everyone. But I would like to give the happy news to the viewers that on the explanatory memorandum of the Finance Minister—Page 2 clearly speaks about the new income tax rates as are applicable for individuals, the women taxpayers and the senior citizens. It clearly states—talking about the women taxpayers—Rs 190,000 nil income tax, income between Rs 1,90,001 to Rs 500,000 at 10% and Rs 500,000 to Rs 800,000 at 20% and over Rs 800,000 at 30%. Similarly, happy news for the senior citizens—Rs 240,000 at nil, Rs 240,001 upto Rs 500,000 at 10% and Rs 500,000 to Rs 800,000 at 20% over Rs 800,000 at 30%.
The only big problem, which I feel in the senior citizen point, is age limit continues to be 65 years. I am going to retire 60 years—I get deduction from the airlines when I am 60, railways I get the deduction at 60 but income tax—why 65. This the question people are asking, “Why the age limit is 65?”
Nitin Mittal, Mumbai: Tax liability for Rs 6 lakh taxable income and exemption available under Section 80C?
Lakhotia: Definitely it will undergo changes but the fact is that he has not kept it in cold storage. I feel it will see the light of the day and I am very much optimistic that from 1 April, 2011 it will be implemented but people expect a little more with regard to the clear-cut roadmap of EET and other things.
Talking about the query which we have got of the viewer here from Rs 6 lakh income, Rs 120,000 putting under Section 80 C and the new Section 80 CCF, I would like to tell the views both are two different Sections, one cannot take advantage in the old Section 80 C itself so Rs 120,000 goes away and the balance amount remains Rs 480,000.
On this Rs 480,000 if he has got housing loan interest also that will continue to get him deduction and on the balance amount now he will be paying income tax, flat rate 10% only because the income up to Rs 500,000 now is 10% tax only.
Narayan Singh, Udaipur: ULIPs will become cheaper?
Goyal: This should make a big impact. I personal feeling is that if we look at ULIP for a ten year term or more this could actually increase the income from a customer’s perspective by close to about 1% each year. So this benefit and along with the new changes with the regulator had brought in from 1 January will make ULIPs much more attractive from a customer’s perspective.
Q: I want you to explain the infrastructure bond deduction a bit more -- it’s a deduction, right?
Lakhotia: It is not a rebate; it has no connection with the present limit of Rs 100,000. This means if I invest the entire Rs 120,000 in the new infrastructure bond I am not going to get the deduction. This is a new Section 80 CCF wherein it is provided that Rs 20,000 exclusively de-marketed for this one single item only.
Q: You mean deduction?
Lakhotia: Deduction mean deducted from my gross income.
Q: Quite like currently I do for my health investment up to Rs 15,000?
Lakhotia: Yes, Rs 15,000 plus Rs 100,000 80 C insurance etc same way this Rs 20,000 plain deducted from the income.
Q: We have been seeing that Finance Ministers over the years are abandoning their role as being financial planner. What has he done? He has basically said, “I am giving you more money. You go decide and figure out how you want to invest it. I am not going to give you more benefit under 80 C and therefore decide for you where you should really be investing and the choice is really yours as to how you want to put this Rs 50,000 (for above 500,000) to good use.” Do you think that’s the essence of what he has announced today, “I am giving you money. I am not going to decide for you where you invest” We always been arguing that your investments should not be driven by purely tax saving.
Sinha: Absolutely because if you look at historically many people have created their savings pool in the manner in which the tax benefit was provided at the point of saving. They did not pay attention on the fact as to whether this savings pool was going to meet their financial goals. I think we are now moving more to environment where we should save the way we ought to and not the way where we get more and more tax benefits. So that’s way it’s a healthy thing that the finance ministers are choosing not to be financial planners for the entire nation.
Q: Is your only fear though that people should not go and blow-up this Rs 50,000 that they get, they would rather invest?
Sinha: I would say there would be transitional benefit of that also because even if they go and spend this there will be a multiplier effect of the economy and while as mutual fund we would like to get the larger share of every pie that the saver would have but the larger growth will happen if the markets are stable and they are moving upwards, which would be a function of how the economy grow. So therefore if they go and blow-up the entire Rs 26,500 crore of tax benefit it has a multiplier which should take the markets up and we should be happy for that too.
Q: Not so happy -- probably wanted more?
Lakhotia: The point is how I can be happy? Please remember, savings we have seen but what about the inflation? Due to the inflation out of this income tax saving of Rs 50,000, my household expenditure will be additional expenditure of Rs 30,000-40,000. THe amount available for savings will be pretty small. Petrol prices gone up now, so virtually no impact on the net saving, net take-home money surplus available for the investor to save.
Q: What you are saying is it looks nice Rs 50,000 on the face of it but given the current circumstances may not actually leave much on the table for the citizens?
Lakhotia: Correct.


Friday, March 5, 2010

Harsha Bhogle: The rise of cricket, the rise of India | Video on TED.com

This is a nice presentation by Harsha Bhogle relating Rise of Cricket (T20) and the rise of India. Enjoy:

Harsha Bhogle: The rise of cricket, the rise of India | Video on TED.com

Thursday, March 4, 2010

New Tax Slabs post Budget 2010

Budget 2010 has been out and there has been a change in the Income Tax Rates that one would pay in FY 2010-11. This post has a brief detail about the changes:

Income Tax Slab  for Financial Year 2010-11
Assessment Year 2011-12
Tax Men  Women Senior  Citizen
Rate (In Rupees) (In Rupees) (In Rupees)
0.00% Upto 1,60,000 Upto 1,90,000 Upto 2,40,000
10.00% 1,60,001 to 5,00,000 1,90,001 to 5,00,000 2,40,001 to 5,00,000
20.00% 5,00,001 to 8,00,000 5,00,001 to 8,00,000 5,00,001 to 8,00,000
30.00% Above 8,00,000 Above 8,00,000 Above 8,00,000
1) Surcharge is Nil and 3% Cess will be charged on Above Tax
2) Age of Senior Citizen is 65 Years

Tuesday, February 2, 2010

Section 80 C: A Tax Saving Tool (Part 1)

Section 80C is the refuge that all of us take to protect our hard earned money against the sword called TAXES. But it is important to know this section intoto to get the full benefits. Here is my humble attempt at this:

Section 80C offers you a deduction of upto Rs 1 Lakh from the total income for a year. This money needs to be spent/invested on the instruments mentioned under this section. Here are some of the instruments that can be used to garner this deduction. I'll list only the instruments with fixed returns in this post.
  • Public Provident Fund (PPF): From Rs 500 to a maximum limit of Rs 70000 each year. This has a lock-in period of 15 years. The current returns from this instrument are 8% p.a. which is again tax-free.
  • National Savings Certificate (NSC): From Rs 500 to any amount. Only Rs 100000 is considered for Tax exemprion though. It provides 8% p.a. with a lock-in of 6 years. The point to be considered here is that the returns are taxable and the after tax returns are approx 5.53%.
  • Employee Provident Fund: Your contribution as well as your employers contribution to your EPF are also considered under section 80C. You can withdraw money after 5 years but only under certain defined conditions. The returns are 8.5 % p.a. tax free.
  • Life Insurance - Endowment Plan: Endowment plans give you a life cover as well a fixed amount on maturity. Premiums are usually higher than the term plans. The returns vary from plan to plan and are usually lower than other instruments listed above.
  • Tax Saving Bank FD: The minimum investment is Rs 100 and varies from bank to bank. There is a lock-in period of 5 years. Returns are usually 6% to 8% p.a.
Wait for the next post where I'll talk about the market linked products.

Sunday, January 31, 2010

Tax Rates for FY 2009-10

It's that time of the year once again. Everyone must be wondering what is their tax liability and be scampering to save money from being taxed. Let us start by knowing which tax bracket do we fall in for this year:

Here is a pictorial presentation of the different tax brackets [courtesy: Outlook Money]:

How to arrive at Taxable Income?

Taxable Income = Income from (Salary + House Property + Capital Gains + Business/Profession + Other Sources) - Deductions under (Section 80 C + Section 80 D)

My next post will be about the various tax saving investments under section 80 C.

Thursday, January 21, 2010

Dividend Delusion

An article from Valueresearchonline.com today: One of the most persistent confusions that mutual fund investors have is with the concept of dividends. Many fund investors seem to think that a mutual fund dividend is some sort of a bonanza, an extra bit of money that comes their way because of something special the fund has done. This is not a fringe belief, yet it is so pervasive that giving out dividends has long been a standard method of attracting new investments among fund companies. I have been told by senior sales people of more than one fund company that they even work out thumb rules to figure out how much dividend payout will bring in what amount of fresh investments under which conditions.
This propensity to choose funds based on their dividend payments is a major problem. It is a completely spurious factor with absolutely no merit in it. The only reason why this belief persists can well be that investors do not understand the arithmetic of mutual fund dividends and confuse them with corporate dividends. A mutual fund dividend is basically redemption of your investments in a fund. It (redemption) just happens to be called a dividend. To pay this dividend, the management simply sells off a part of the assets held in the dividend plan of a fund and pays off the proceeds as dividend.
Here's an example of the accounting. Let's say you own a thousand units in a fund with a net asset value (NAV) of Rs 30. Your investment is worth Rs 30,000. The fund declares a dividend of 10 per cent. That's 10 per cent of the Rs 10 face value of each unit. Thus, the dividend is Re 1 per unit. Since you own a thousand units, your total dividend amount comes to Rs 1,000. However, this money will simply be deducted from the residual value of your investment. To pay the dividend, the fund will sell off an appropriate proportion of its assets. When the dividend is paid out, the NAV of the fund will drop by Re 1 to Rs 29. The end result is that when you receive Rs 1000 as dividend, the value of your investment goes down from Rs 30,000 to Rs 29,000. Dividends have no impact on the return you are getting from your investment.
Receiving dividends does have a tax implication. In equity mutual funds, dividends can play a role in tax planning since equity dividend income is tax free. If you invest in a fund and immediately get part of the investment back as dividend then you'll have a loss on your capital. However, one has to hold an investment for at least three months to qualify for a tax set-off with that loss.
The most important thing is the basic non-dividend nature of mutual funds' dividend and that's something that investors must understand. Perhaps the problem is in the nomenclature. Till a few years back, new fund launches were called initial public offerings (IPOs). Then the Securities and Exchange Board of India (SEBI) forbade the use of that term because it led investors to mistakenly believe that new fund launches shared some of the characteristics of new stock offers. Now, new fund offers are called just that - NFOs.
While a similar renaming is unlikely in the case of dividends, knowledgeable investors should stop themselves from choosing funds on the basis of payouts.

Tuesday, January 19, 2010

Skepticism: A tool to investing prowess!

Investing, as they say, is not difficult, but requires a little bit of effort.

Skepticism: By definition means, A doubting or questioning attitude or state of mind. If one maintains this doubting state of mind while making investment decisions as well, one can make some really calculated and good decisions.

Here are a few examples that Dhirender Kumar of Valueresearchonline gives for this:
let's say that a fund distributor wants you to buy a fund on the basis that it gave wonderful returns over the last six months. You could be impressed and just put down your money. Or, you could be sceptical, find out returns over different periods and calculate the effective rate of return, come to the conclusion that other types of funds would be better and invest in that alternative instead.

A perfect example would be when you are being sold a complex product, unit-linked insurance policies (ULIPs) being the perfect example. Typically, you will be told that you will pay charges under different heads like 'premium allocation', 'fund management', 'mortality charges' and so on. If you are not suitably empowered with both scepticism and arithmetic then you would just be impressed by the returns projections shown to you by the agent. On the other hand, if you were empowered with these two qualities, then you would reduce the entire stream of charges and payments and returns to a single rate of return. Then you would see how this rate of return would be impacted if the reality of market returns would prove to be a little less rosy than the insurance company's projections. Then, you would calculate whether buying the ULIP would be better, or buyin g a term insurance and investing somewhere else.

However, if you don't doubt others advice, you may end up buying things that are not as good for your future as they are for other's. So, be a skeptic, doubt/question whatever is told to you about any investment vehicle and then make your decision based on your own research.


Sunday, January 17, 2010

Should you Invest Or Repay your Loans?

Found this article on Outlook Money (Dec 30, 2009 issue) and thought to share it on this platform.

The traditional wisdom says that you probably shouldn’t be investing while in debt unless you can reasonably expect to outperform the interest rates that you’re paying. In other words, if you’re carrying a high-interest debt, you should focus on getting out of debt instead of building your portfolio. This sounds simpler than it is.

What you should do will depend on two factors: the rate of after-tax interest that you are paying on your debt; and the after-tax return that you will be earning on your investments. Understand the types of debt and their impact on your financials.

One type of debt is the high-interest credit card debt, which is mostly used to meet comforts and luxuries, not needs. This kind of debt will eat your financials like a termite and should be avoided unless absolutely necessary.

The other type of debt is the lower interest rate variety, like housing loans, education loan, etc. Often the interest payable on these loans is either fully or partially tax-deductible, thus making them even more attractive.

If your cash flows support you in terms of meeting the debt prepayment and you still have surpluses, you can continue to invest and pay your debt at the same time. For example, you have a housing loan for which you are paying monthly EMIs. Treat this EMI as monthly rent and continue the debt, as you also get tax benefits for the interest portion on the housing loan. Invest the surplus in the asset type depending on your risk appetite. There’s certainly no harm in carrying the loan while building up your investments for the future. In fact, if you wait until you’ve paid off your loan over 15 to 20 years, you’ll find yourself in a very difficult situation by the time you turn your attention to the future. In case your cash flows are not very predictable, and you have surplus today, it will be better to clear the debt and reduce or zero your liabilities rather than investing the surpluses. Imagine a situation where you have invested in the market with the hope of generating returns that are more than what you are paying for the debt. Suppose the markets fell and your investments lost half of their value, while, at the same time, your cash flows took a hit. You will have a couple of painful choices to make—either you sell your investments at a loss and meet your commitments, or borrow afresh at a higher rate. It is better to clear your debts and then start your investments. The illustrations below will help you decide whether to continue the debt or to retire it.

Example I. You have an outstanding balance of Rs 50,000 on your credit card and you are paying 24 per cent annually and the interest is also not tax deductible. In such a situation, you should invest only if you think you can earn over 24 per cent per annum. Historically, the long term returns from equities have been around 18 per cent. It would be detrimental to your financial health to invest in a situation like this. So, clear the debt and use credit cards only if absolutely necessary.

Example II. You have a housing loan of Rs 20 lakh at 9 per cent, to be paid over 20 years. Let us also assume that you are in the 30 per cent tax bracket and as per current tax laws interest up to Rs 1.5 lakh is deductible from your taxable income. This will bring down the cost of your loan further. In such circumstances, it will be wise to continue your EMI of housing loan and the balance surplus is invested in long-term assets to generate returns higher than the interest cost.

What are you waiting for? Work out the numbers, see which is financially economical and just execute it even if it means you have to make a few painful decisions. Remember: “No pain, No gain”.


Friday, January 15, 2010

Know your Credit Worthiness

You can now access your Credit Information Report (CIR) directly from CIBIL. As you may be aware, your CIBIL CIR is a factual record of your credit payment history compiled from information received from credit grantors. The purpose is to help credit grantors make informed lending decisions - quickly and objectively, and enable faster processing of your credit applications to help provide you speedier access to credit at better terms.

You can request for a copy of your CIBIL CIR in three quick steps through Email, Mail or Fax:

  1. Email the CIR Request Form duly filled in
  2. Mail self attested hardcopies of your lastest Identity Proof and Address Proof documents and Fees to P.O.BOX 17, Millennium Business Park, Navi Mumbai- 400710
  3. Once CIBIL receives the documents and Fees3, your request will be processed and copy of your CIR will be dispatched to you.
Letter: Address (mentioned at the end of the post)
  1. Write to CIBIL with the CIR Request Form duly filled in
  2. Also mail self attested hardcopies of your Identity Proof and lastest Address Proof documents and Fees to P.O.BOX 17, Millennium Business Park, Navi Mumbai- 400710
  3. Once CIBIL receives the documents and Fees, your request will be processed and copy of your CIR will be dispatched to you.
Fax: 022-40789007
  1. Fax CIBIL the CIR Request Form duly filled in
  2. Mail self attested hardcopies of your Identity Proof and latest Address Proof documents and Fees to P.O.Box 17, Millennium Business Park, Navi Mumbai 400710
  3. Once CIBIL receives the documents and Fees, your request will be processed and a copy of your CIR will be dispatched to you.

Valid Identity Proof: PAN Card/ Passport/ Voters ID (Mail self attested hard copy of any one of these Identity Proofs)

Valid Address Proof: Bank Account Statement/ Electricity Bill/ Telephone bill (Mail self attested hard copy of any one of these Address Proofs)

Payment terms: Demand Draft (DD) of Rs 142/- (inclusive of all taxes and express delivery charge) , in favour of Credit Information Bureau (India) Limited payable at Mumbai

Please note that the fee once paid is non-refundable.



CIBIL has no authorised agents. Please do not contact anyone other than CIBIL in order to gain access to a copy of your Credit Information Report.

Your CIBIL CIR will be presented to you in a simple and easy to understand format. However, on receiving your CIBIL CIR, if you require any explanation/clarification, you can email us at consumerqueries@cibil.com.

* Credit Information Bureau (India) Limited

P.O Box 17,

Millennium Business Park,

Navi Mumbai- 400710

All your correspondence to CIBIL must be sent through Indian Post only.

Wednesday, January 13, 2010

Tips to tackle Inflation

Inflation as we have discussed, is bad. It affects your buying power as well as it hurts your investments. This is because, the interest on your investments is now worth less than what you were expected to get. The hardest hit are the retired people, who are risk averse and have most of their investments in fixed income instruments.

Inflation adjusted rate: ((1+i)/(1+r))-1 x 100

Here, i is the interest rate and r is the inflation. Thus, an interest rate of 10% would reduce to 3.77% if inflation is 6%.

Here are a few tips to leash the monster called inflation:

  1. Choose investments with returns greater than the rate of inflation.

  2. Select investments with tax deferral of contributions and earnings.

  3. With many retirements now lasting 15 to 30 years, retirees should choose investments that will hedge against inflation. The best ones would be capital indexed bonds, whose returns are linked to inflation.

  4. Look for instruments with highest interest rate and shortest maturity.

  5. Review the limits of your insurance coverage’s periodically, especially homeowners, renters, and umbrella coverage.

  6. Don’t buy into the argument that it is better to borrow and spend money now, paying the debt later with “cheaper” money.

Fixed Income Laddering - This is an inflation tackling strategy where one invests in fixed income securities over fixed periods. Equal amounts must be put in fixed time intervals (for example 2, 3, 5 year FDs). It gives you:

  • a steady income stream

  • money that is not locked for long durations (gives you the ability to invest in better returns options)

  • freedom to adjust your investments as per the financial and market situation.


Monday, January 11, 2010

How does India calculate Inflation?

Continuing from the last post, I'll try to discuss how India calculates Inflation and how is that different from the rest of the world. But first let's discuss what is Wholesale Price Index (WPI) and Consumer Price Index (CPI).

Wholesale Price Index - WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries with the Consumer Price Index in the 1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

Cosumer Price Index - CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for. WPI does not properly measure the exact price rise an end-consumer will experience because, as the name suggests, it is at the wholesale level.

WPI is basically helpful to measure the inflation at business level but we are using this to measure the inflation at consumer level. Moreover, it doesn't take into account most of the services relevant to today's consumer since it was last updated in 1993-94.

What should we do to counter inflation? Wait till the next post...

Saturday, January 9, 2010

The monster of Inflation

Inflation has been a big cause of concern world over in the recent past, especially in India. So, I thought to present a crash course on this topic today. My source is obviously the ever-expanding Internet.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[source]

Inflation is a world problem. Here is a view of inflation all over the world.

 So, what causes Inflation? Why do prices rise? Many people mistakenly believe that prices rise because businesses are "greedy". This is not the case in a free enterprise system. Because of competition the businesses that succeed are those that provide the highest quality goods for the lowest price. So a business can't just arbitrarily raise its prices anytime it wants to. If it does, before long all of its customers will be buying from someone else.

It is actually the supply on money in the market that increases the prices!!! Yes! Prices of comodities rise because people have more money to spend and hence are willing to pay more for the same thing. In other words, with more money supply or monetary inflation (govt printing/minting more Rupees), everyone has more money in their pockets and that results in buying more. Basically when the government increases the money supply faster than the quantity of goods increases we have inflation. Interestingly as the supply of goods increase the money supply has to increase or else prices actually go down. The basic Demand and Supply theory we read in class 12!!

How does India calculate Inflation? Well, that is for the next post!!! Keep checking this space...



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