Here is a detailed, in-depth analysis of the provisions in the budget and how they are likely to affect you – both positively and negatively.

Note: This article would be updated in case more clarity emerges on some of the new budget provisions. So, do keep visiting it to keep updated about the budget!

Income Tax Slabs and Rates

There is no major change here. The income tax slabs and the tax rate for each slab remains the same as last year. The education cess also remains at 3%.

You can find out the latest tax slabs and rates at “Latest Income Tax (IT) Slabs / Brackets and Rates“.

Income Tax Credit

The only new thing that has been introduced is a tax credit of Rs. 2,000 for people with a taxable income of up to Rs. 5,00,000.

It would be a tax credit for people having an income up to Rs. 5,00,000. The the amount of the credit would be Rs. 2,000, but not more than the tax liability.

Any what exactly is a tax credit?

Well, you would calculate your income tax liability in the usual way, and arrive at the “tax payable” figure. A tax credit would reduce this amount. In effect, it is like you have already paid a tax of Rs. 2,000.

Example 1: If you need to pay tax of Rs. 9,000, a tax credit of Rs. 2,000 would mean that you need to pay only Rs. 7,000 as tax. But if you need to pay tax of Rs. 1,500, the tax credit would be limited to Rs. 1,500.

My comment: Although the tax credit would save you up to Rs. 2,000, it is a step in the wrong direction. It was Mr. Chidambaram who steered our tax system towards simplicity and did away with many rebates, exemptions and deductions. Introducing something like this – along with exemption of bank interest in last year’s budget – only complicates things. It would have been much better to just change the tax slab,

Surcharge on the Super Rich

The budget has also introduced a surcharge of 10% for people having a taxable income of Rs. 1 Crore or more per year.

Income Tax Benefit of Home Loan Increased

In a move that would greatly benefit middle class people, an additional deduction of Rs. 1,00,000 of home loan interest has been allowed for home loans up to Rs. 25,00,000 for first time home buyers.

This deduction can be taken only in 1 year (2013-2014), but if the full limit (of Rs. 1 Lakh) is not utilized in a year, the remaining amount can be carried forward to the next year (2014-2015). This carry forward is allowed only for 1 year.

Example: You have an interest of Rs. 65,000. You can deduct this interest from your income, thus reducing your tax liability. But you would still have Rs. 35,000 left from the limit. This means that you can deduct an interest up to Rs. 35,000 in the next year.

In effect, you can say that this is a lifetime limit per home loan!

Important note: Please note that this is an additional limit for home loan interest deduction. This is available over and above the normal home loan interest deduction available under section 24.

For full details of home loan income tax benefits, please read “Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage“.

Rajiv Gandhi Equity Savings Scheme (RGESS)

The budget has brought about some positive changes in the RGESS:

• Apart from some listed equity shares, now, you would also be able to invest in mutual fund units
• Instead of investing the amount in 1 year, you would be able to spread the investment over 3 consecutive years. So even if you are short on cash, you can benefit by RGESS by investing smaller amount in 3 years.
• The income limit for RGESS has been increased from Rs. 10 Lakhs to Rs. 12 Lakhs

For complete details on RGESS, please read “Rajiv Gandhi Equity Savings Scheme – Save Tax Using RGESS“.

Duty Free Import of Gold

The limit for duty free import of gold by passengers has been increased – men are allowed to bring Rs. 50,000 worth of gold jewellery and women are allowed to bring Rs. 1,00,000 worth of gold jewellery duty free.

More Insurance Penetration

All cities and town having a population of 10,000 or more would have a branch of Life Insurance Corporation (LIC).

Such towns would also have a branch of one of the public sector general insurance companies.

All Women Bank Public Sector Bank

A new, all-women bank would be started as a public sector bank. all its employees would be women, and it would extend loans only to women.

This would have hardly any impact on you or anyone else. A bank like this doesn’t provide any additional benefit or extra services, and is therefore completely unnecessary.

This is just a gimmick that is politically correct!

Other Noteworthy Things

Here are some of the other things you can expect as a result of Budger 2013 – 2014:

• The Reserve Bank of India (RBI) would come out with inflation indexed bonds and inflation indexed National Savings Certificates (NSC) that would protect your money from getting eroded by inflation.
• Tax free bonds of up to Rs. 50,000 Crores would be issued in FY 2013 – 2014. So, you would have many opportunities to grow your money completely tax free!
• The Securities Transaction Tax (STT) has been reduced marginally for various categories of transactions. Its impact would be insignificant for most retail investors.
• A new Commodities Transaction Tax (CTT) has been introduced for trades in all non-agricultural commodities. Again, the impact on your is going to be insignificant.
• A Tax Deducted at Source (TDS) of 1% has been introduced for land deals of more than Rs. 50 Lakhs. This is however not applicable on agricultural land deals.
• The import duty on set top boxes has been increased, which means that you would end up paying a little more for your set top box.
• The excise duty on cigarettes, Sports Utility Vehicles (SUV) and marble has been increased, making them costlier.
• The import duty on most mobile phone has been increased – you can expect a marginal increase in their prices.
• Service tax would not be applicable on all air conditioned restaurants, so expect your restaurant bills to increase by 12%!

Related Articles:

• Budget 2013: What to Expect, What Not to Expect
• Budget 2012 – 2013: Everything You Need To Know
• Higher Provident Fund (PF) Deduction from Your Salary
• Rajiv Gandhi Equity Savings Scheme – Save Tax Using RGESS
• Income Tax Return (ITR) filing deadline extended
• Efiling of Income Tax Returns is Mandatory for Income Over Rs. 10 Lakhs

Please read on for more details.

Provident Fund (PF) Interest Rate for 2012-2013

The Employees Provident Fund Organization (EPFO) has announced that the rate of interest for PF account for the year 2012-2013 would be 8.5% per year.

This has been increased from the 8.25% rate which was applicable for 2011-2012. However, it is still much lower than the 9.5% interest paid in 2010-2011.

The rate was expected to be increased to 8.75%, but it was kept at 8.5% to avoid any deficit for the EPFO.

PF Interest Rate History

In the recent past, the PF interest rate has peaked at 12%! This fabulous rate was applicable in the 1990s.

Here is a graph that shows the historical PF interest rates.

Provident Fund (PF) Interest Rate History

Related Articles:

• Provident Fund (PF) interest rate raised to 9.5% – Implications for you
• Higher Provident Fund (PF) Deduction from Your Salary
• E-Passbook Service for Provident Fund Balance – Now Check Your PF Balance Online
• Tips for Improving Your Chances of Finding a Home Loan
• Private Banking Stocks May See Renewed Interest
• Education Loans / Study Loans / Student Loans in India

This discipline has been enriched by many famous analysts and mathematicians from all over the globe for over a century, and is a vast science in itself.

In this article, I shall be discussing about some fundamental concepts used in the technical analysis of financial instruments.

Technical Analysis – Charts

We all look at a stock’s chart whenever we need to know how it has been performing over a period of time.

A chart that is to be used for technical analysis can be of three types:

• Line chart
• Bar chart, and
• Candle chart

A line chart can also be displayed as an “area” chart, which is nothing but a fill below the line in context. Here are some illustrations of each of the three types of charts.

Technical Analysis Basics – Line Chart

Technical Analysis Basics – Bar Chart

Technical Analysis Basics – Candlestick Chart

A bar chart and a candlestick chart provides much more detail about price action as compared to a line chart. Each bar depicts the open, high, low and closing price for the given time interval.

Charts can again be classified as per the time frames they represent, viz 1 minute, 5 minute, hourly, daily, weekly and so on.

Let us now move on to discuss the basics of a few popular indicators.

Technical Analysis Indicator – MACD (Moving Average Convergence Divergence)

Technical Analysis Indicator – MACD – Moving Average Convergence Divergence

Invented by Gerald Appel in the 1970s, the MACD primarily measures the difference between a fast moving average and a slow moving average.

While a fast moving average reacts more quickly to recent changes in price than its slower counterpart, the difference between them keeps widening or shortening from time to time.

When the difference widens, the MACD reading goes higher and indicates stronger trend. The reverse happens when the difference between the two moving averages reduces and the MACD value falls – which indicates weakening of trend strength.

Typically, a 26 period and a 12 period exponential moving average constitutes the slow and fast moving averages of the MACD respectively. Along with these, a 9 period moving average of the MACD itself is used to detect possibilities of trend reversal.

Technical Analysis Indicator – RSI (Relative Strength Index)

Technical Analysis Indicator – RSI – Relative Strength Index

The RSI is another popular indicator that measures the intrinsic strength of a stock.

Its value ranges from 0 to 100, of which a higher value obviously denotes a higher strength of a trend.

A very popular method of using is the RSI is to use two filters – one at 70 and the other at 30 – wherein a value below 30 denotes an oversold condition while anything above 70 indicates overbought condition.

The indicator was first introduced by Welled Wilder in June 1978.

Technical Analysis Indicator – CCI (Commodity Channel Index)

Technical Analysis Indicator – CCI – Commodity Channel Index

Developed by Donald Lambert, the CCI measures variation of a security’s price from its statistical mean.

In this case, a popular interpretation is that a value above 100 indicats an overbought condition while that below -100 denotes an oversold condition.

This indicator is very popular among analysts, and is widely used in the industry for detection of changes in trend.

Another method of using the CCI is to look for divergences in the trend of the CCI and that of the stock. Whenever any such divergence is observed, it can be considered that a change of trend is imminent.

This article has been written by Somnath Mukherjee, who is the founder of MoneyPlanters, a technical analysis blog about accurate prediction of stocks based on the secret strategies of W D Gann.

He is passionate about the financial markets and Indian Classical Music. Connect with him on Facebook and Google+

Related Articles:

• The Technical Analysis Fallacy
• Rajiv Gandhi Equity Savings Scheme – Save Tax Using RGESS
• Private Banking Stocks May See Renewed Interest
• By popular demand: 20% off on financial planning service – Till 10th Oct ONLY
• 4 days left to get my financial planning service really cheap – Price of the “My Financial Plan” service is increasing
• Your Provident Fund (PF) account balance now available online

And in pursuit of this, civilizations after civilizations have discovered many obscure sciences, which are in use till this date.

Information is power – this is true for everyone in all walks of life, and more so, in the stock markets.

The Basis of Technical Analysis

Technical analysis is a huge subject, and the core idea behind such analysis is to get an idea of what might happen in the future – using data from what has happened in the past.

The scope of this article does not cover any details about any analysis method, but tends to look into the reliability of such methods of analysis.

Anyone who is conversant with the techniques used in the technical analysis of stocks is well aware of the vast array of indicators, oscillators and trading systems available.

General human tendency assumes at the very onset that use of such tools will lead to a reliable forecast of market behavior on which trading decisions can be based, and an expectation of making a profit. If such tools were to be of real use, then why would a huge majority of traders lose money?

Here is why.

The Zero Sum Game

Stock trading is a zero sum game. This simply means that someone has to lose money for someone else to make money. Money is neither created nor destroyed in the markets. It simply changes hands.

And it is a well known fact that a vast chunk of traders consistently lose, while a minute fraction consistently wins.

We all have read about “fear and greed” being the cause of this. It might be difficult to control emotions while taking a trade, but remembering this fact that a market is a zero sum game should be easier to believe.

Stock Markets and Technical Analysis

Now when technical analysis comes into play, we are once again hoping to win with a tool designed to make us lose!

If you take some time to look into the calculations that are executed behind the scenes in any software, you will notice that price points are taken into the calculations. This means that whatever the indicator is displaying bears a direct relationship to price data that has already happened.

Hence, the best such indicators can do is to give us a picture of the present scenario with a bleak idea of what that may mean in the near future.

In order to successfully predict the markets, we need a science that actually can predict the future. Since the markets primarily depend on the mindset of a huge mass of people, it is all the more difficult to predict their collective emotions.

The Gann Predictions

W D Gann precisely focused on this, and that is what made him a legendary trader of all times. He used the so called obscure sciences in his analysis and achieved unparalleled success in his trading career.

His methods are based on astrological patterns and some oriental mathematical tools like the square of nine, which have their origins in ancient India and Egypt.

Though much of his analysis methods still remain a secret, till this date Gann predictions have proved to be the most accurate of all analysis methods of the markets that we have at our disposal today.

Somnath Mukherjee the founder of MoneyPlanters, a blog about accurate prediction of stocks based on the secret strategies of W D Gann. He is passionate about the financial markets and Indian Classical Music. Connect with him on Facebook and Google+

Related Articles:

• Technical Analysis Techniques – Charts, MACD, RSI, CCI & More
• Rajiv Gandhi Equity Savings Scheme – Save Tax Using RGESS
• Private Banking Stocks May See Renewed Interest
• By popular demand: 20% off on financial planning service – Till 10th Oct ONLY
• 4 days left to get my financial planning service really cheap – Price of the “My Financial Plan” service is increasing
• Your Provident Fund (PF) account balance now available online

No wonder there are many rumors going around about the various new proposals for the annual budget!

Here are the details of some of the things that would possibly be included in Budget 2013.

Increase in Section 80C Limit

This is one of the most exciting proposals, and should certainly bring cheer – and more money in your pockets – if it is actually included in the budget.

As you know, Section 80C describes various investment avenues that are tax deductible. Right now, investment up to Rs. 1 Lakh is deductible from your income for calculating income tax.

(For complete details of Section 80C, please read “Saving Income Tax – Understanding Section 80C Deductions“)

There are rumors going around that the deduction limit for Section 80C investment would be increased. There is no indication of the exact amount, but it might be increased by Rs. 25,000 or Rs. 50,000.

There is a possibility that this additional limit might be earmarked only for investment in pension products offered by mutual funds.

Increase in Income Tax for the “Very Rich”

The government is trying very hard to clean up its act, and make its finances better. Once sure shot way to do this is to increase income tax rates.

However, Mr. P. Chidambaram, our current finance minister, has specifically said that the income tax rates would not be changed – they would stay at the current rates of 10%, 20% and 30%.

(Please read “Income Tax (IT) Slabs / Brackets and Rates” to know the latest income tax slabs and rates)

So there is a high chance that a special surcharge would be applicable for the “very rich”.

And what does “very rich” mean? No one knows as of now. But it might mean people with an income of more than Rs. 25 Lakhs per year.

We would have to wait and watch to know the exact limit, and the exact amount of surcharge!

Rajiv Gandhi Equity Savings Scheme (RGESS) Under Section 80C

The Rajiv Gandhi Equity Savings Scheme (RGESS) might also be brought under the Section 80C umbrella.

Currently, there is a separate limit of Rs. 50,000 for RGESS. So inclusion of RGESS in Section 80C might go hand-in-hand with an increase in the Section 80C limit.

There is also a possibility that RGESS would be made available to all equity investors, and not just “new” equity investors.

(To know more about RGESS, please read “Rajiv Gandhi Equity Savings Scheme – Save Tax Using RGESS“)

Mr. Chidambaram has always been in favor of simplified tax regimes – where tax laws do not have multiple deductions, exemptions and rebates.

He has been instrumental in simplifying personal income tax, and inclusion of RGESS in Section 80C would certainly be high in his priority list.

No Long Term Capital Gains Tax on Bonds

Currently, there is no long term capital gain (LTCG) on shares. However, this is not then case for bonds.

(Please read “Long Term and Short Term Capital Gain – Income Tax Calculation” for full details)

It is rumored that the LTCG on corporate and infrastructure bonds would be done away with to bring them in par with equities.

If this proposal is implemented, the government might discontinue the issue of tax-free bonds by government-owned infrastructure companies like RFC, IDFC, etc.

Related Articles:

• India’s Budget 2013 – 2014: Everything You Need To Know
• Budget 2012 – 2013: Everything You Need To Know
• Higher Provident Fund (PF) Deduction from Your Salary
• Rajiv Gandhi Equity Savings Scheme – Save Tax Using RGESS
• Income Tax Return (ITR) filing deadline extended
• Efiling of Income Tax Returns is Mandatory for Income Over Rs. 10 Lakhs

The provisions of this bill are still being finalized, and it is expected to be presented to the parliament for passing in the budget session (Feb / March 2013).

The proposed provisions are quite stringent and consumer friendly – if the bill is passed in its present form and becomes an act (The Real Estate Act), it would be a major boost to the common man buying property from builders.

Read on to know more about what to expect from the bill.

Deals Based on Carpet Area

The act would make it compulsory for builders to list the area of flats and apartments based on the carpet area. They would not be able to use confusing terms like “built up area” or “super built up area”.

This means that you would know exactly how much living space you would get, and you would know the exact cost per square foot for that livable & usable area.

(To know more about terms like carpet area, built up area and super built up area, please check out the article “Real Estate Terms Demystified: Carpet Area, Built Up Area, Super Built Up Area and More”)

All Clearances & Registrations of the Project Necessary Before Sales

As of now, builders can launch a project based only on the floor plan and start selling flats in a building. They worry about clearances later.

This even includes important clearances like the height of the building, which is very important since it decides how many floors the building can have! In fact, many builders launch a building project even before actually buying the land (they only have an agreement to buy the land)!

This means that if there is a delay in getting any clearance, the project would also get delayed. And since you are the one paying for everything, guess who would suffer? Of course, you!

This would become a thing of the past with the Real Estate Act coming into force.

Going forward, builders would have to get all necessary clearances before they can start selling the houses or flats. They would also need to register the project with a real estate regulator, which would be set up by each state.

No Diversion of Funds

Many builders have multiple construction projects going on at the same time. And many times, they use money collected from buyers of one project to fund another project.

This means that as a customer, your money is at risk not only because of the property you are buying, but also due to another property you have no stake in!

This would change, because now, builders would be required to deposit 70% of the funds collected for a particular project into a bank account meant only for that project.

This means that the builders would not be able to divert your funds, making it safer for you to buy under construction properties.

Model Sales Agreement

The Real Estate Act would have a model sales agreement, which would standardize sales agreements across the country to a large degree.

This would mean that as a consumer, you would not have surprised in the sales agreement.

Some builders are notorious to have terms hugely favoring them – like owning the terrace of a building (so that they earn from renting it out for mobile phone towers), right to construct more floors any time in the future (to earn more when they can buy TDR and sell more flats), etc.

Hopefully, with the model sales agreement, these things would be a thing of the past.

Penalty for Builders

Builders would be required to declare the status of all building clearances and all contractual obligations they have.

If they fail to do this, they can be fined up to 10% of the project cost, and can also spend up to 3 years in jail!

Registration of Real Estate Agents

The Real Estate Bill proposes that all real estate agents would need to register with the state’s realty regulator.

Currently, anyone and everyone can become & operate as a real estate agent, and there is no regulation. With registration, there would be more accountability, meaning better service for you.

The Real Estate Bill / Act – Conclusion

The proposed provisions of the bill are very good for consumers, and would really help make real estate transactions more transparent.

However, it needs to be seen what shape the actual Real Estate Act takes. There is a very strong real estate lobby in India, and we can only hope that they do not force the government to dilute the terms of this act!

Let’s hope for the best…

Related Articles:

• Tips for Improving Your Chances of Finding a Home Loan
• 9 Tips on Figuring the Saving And Investment Needed to Fund Your Retirement
• Debt Collection or Debt Recovery – Where are We headed?
• Need for Financial Planning – Why You Must Have a Financial Plan
• Everything You Wanted To Know About Buying Health Insurance In India
• 6 Basic Financial Things a USA Based NRI Should Keep in Mind

As the year ends, it is time to look into the rear view mirror and find out which mutual funds have performed the best in the year gone by.

Of course, we need to remember that “past performance is not a guarantee for future performance”. But please keep in mind that consistent performance over a long period of time can be a convincing proof of strong stock picking and fund management skills.

So, here is a list of top performing mutual funds (MFs) for the year 2012.

My recommendation – It is always advisable to pay more attention to long term performance and rankings instead of the 1 year performance..

Equity – Diversified (Large & Mid Cap) Mutual Funds (MFs)

Top 5 Funds Based on 5 Year Return (Annualized)

Top 5 Funds Based on 1 Year Return

Equity – Tax Saving (ELSS) Mutual Funds (MFs)

Top 5 Funds Based on 5 Year Return (Annualized)

Top 5 Funds Based on 1 Year Return

Debt Mutual Funds (MFs) – Income Funds

Top 5 Funds Based on 5 Year Return (Annualized)

Top 5 Funds Based on 1 Year Return

So, go ahead and make investment plans for the year 2013. And remember not to get influenced by short term returns – long term performance is the only way to judge a mutual fund (MF) prudently!

Happy investing!

Related Articles:

• Rajiv Gandhi Equity Savings Scheme – Save Tax Using RGESS
• Your Income Tax and Tax Saving Investment Related Questions Answered
• What “Kolaveri Di” Song Teaches You About Personal Finance
• Fixed Maturity Plans (FMPs) of Mutual Funds – Benefits of investing
• Are Mutual Fund (MF) entry loads coming back?
• How should you withdraw your money from an equity mutual fund (MF)?

This would have rendered your old cheque leaves unusable – you were required to surrender the old cheques and replace your old cheque books with new ones by then.

However, the implementation of CTS has been extended. Read on for full details.

By When Do You Need to Get New Cheques Now?

The RBI has extended the deadline for Cheque Truncation System (CTS) to 1st April, 2013.

This means that you can continue using your old cheques till 31st March, 2013. You would need to get new chequebooks by then so that you can smoothly write cheques beyond April 2013.

What Happens After March 2013?

RBI has said that it would let banks accept and clear non-CTS cheques even after 1st April 2013, but the clearing of these cheques would be less frequent than CTS 2010 cheques. Therefore, these cheques would take longer to clear.

Also, RBI is considering imposing a fee on non-CTS cheques.

Why Has the Deadline Been Extended?

RBI has realized that all the banks are not yet prepared for the switchover to the new system by 1st January.

The banks have not been able to notify all their customers of the change, and would be unable to replace the old non-CTS cheque books with the new look CTS-2010 standard cheques by the end of the year.

Replacing the post-dated home loan EMI cheques has also been a problem.

Note: This is the second time that the deadline has been extended. It was earlier extended from 1st October 2012 to 1st January 2013.

What are CTS-2010 Cheques?

• CTS-2010 cheques are payable-at-par / multi-city cheques
• These cheques have mandatory security features like the quality of paper, a watermark, the bank’s logo in invisible ink and void pantograph
• These cheques would make computerized processing (image based processing) of the cheques much easier, making their clearing faster
• The clearing would be image based – it would be done using the image of the cheque and not the physical cheque, and therefore, would reduce the claring time of outstation cheques

Related Articles:

• Higher Provident Fund (PF) Deduction from Your Salary
• 9 Tips on Figuring the Saving And Investment Needed to Fund Your Retirement
• Retirement Planning – How Much Should You Save To Build Your Retirement Corpus?
• Positive Changes For Small Saving Schemes and Public Provident Fund (PPF) – What It Means For You
• Control your spending: Consider the “number of hours you have to work for it” before buying an item

They have announced this via a circular dated 30 November, 2012. Read on to get the full details, and how it impacts you.

Provident Fund (PF) – Summary of Current Deduction

You can read everything about provident fund at “Provident Fund (PF) and Voluntary Provident Fund (VPF)“. But here is a quick summary.

Every month, a percentage of your salary is deducted by your employer, and is invested in your PF account on your behalf. The percentage of deduction is usually 12%.

PF is a long term, low risk, high return investment. It also offers multiple income tax benefits.

(Again, you can read the comprehensive article “Provident Fund (PF) and Voluntary Provident Fund (VPF)” to know more about PF)

PF Deduction – What is Changing

So far, the PF deduction was based only on your basic and dearness allowance (DA) – all other allowances were excluded from its computation.

Going forward, the deduction would take into consideration all allowances – all the allowances that you get would be added to your basic pay, and 12% of that would be deducted & deposited in your PF account by your company.

Example

Let’s say your Cost to Company (CTC) salary is structured as follows:

• Basic: Rs. 10,000
• Dearness Allowance (DA): Rs. 2,000
• Conveyance Allowance: Rs. 5,000
• Special Allowance: Rs. 20,000
• Total: Rs. 37,000

What Used to Happen So Far

• PF deduction = 12% of basic + DA = 12% of Rs. 12,000 = Rs. 1,440
• Take home pay (before taxes) = Rs. 37,000 – Rs. 1,440 = Rs. 35,560

What Would Happen Going Forward

• PF deduction = 12% of basic + DA + all other allowances = 12% of Rs. 37,000 = Rs. 4,440
• Take home pay (before taxes) = Rs. 37,000 – Rs. 4,440 = Rs. 32,560

Now do you you see the impact?

What Higher PF Deduction Means to You

Lower Take Home Salary

As we can see above, the disadvantage of including allowances for PF deduction means a higher PF deduction and a correspondingly lower take-home pay.

This would also result in you being able to borrow less – if your take home income is less, banks and financial institutions would be willing to provide you with correspondingly lower home loans, auto loans, etc (banks typically don’t want you to pay more than 50% of your take home salary as home loan EMI).

Higher Income Tax Benefit

Any amount you you invested in PF is deductible from your salary under Section 80C of the Income Tax Act. This helps you save income tax.

A higher PF deduction would mean a higher deduction from your income from calculating your income tax liability, which would result in you paying lower income tax!

However, please keep in mind that Section 80C only allows you to deduct an amount up to Rs. 1,00,000 every year. If you are already reaching that limit, the higher PF deduction would not save you any income tax.

Higher Company Match

Any PF deduction from your salary is matched by your employer – your company (or the government if you are a government employee) invests an equal amount in your PF account on your behalf!

Since your deduction is increasing, the company’s match would also increase – which means more free money for you!

Higher Retirement Corpus

PF is essentially your retirement account, and for most people, their provident fund account is the only retirement savings (another popular retirement saving account is Public Provident Fund or PPF).

A higher deduction and a higher company match means a larger amount would be invested in your PF account every month. Therefore, a larger amount would benefit from the compounding effect, and you would end up with a significantly higher retirement corpus!

The fact that PF is not taxed at all – it follows the Exempt Exempt Exempt or EEE taxation regime – will only help you more.

Conclusion – Is Higher PF Deduction Good for You?

If we consider everything, we see that you would get income tax benefits and a much higher retirement corpus in return for a slightly lower take-home pay.

I believe this is a good trade off, and should certainly benefit you in the long term.

Side Notes about CTC and Salary Structure

Many private companies used to structure the salary with a low basic and many allowances. This was done to lower your PF deduction and increase your take-home pay. With this change in PF deduction rules, we can expect some changes in our salary structures!

Also, if your company is really picky about your CTC, it might pass-on the burden of an increased PF match back to you, which means you could get a lower salary to begin with.

Related Articles:

• 9 Tips on Figuring the Saving And Investment Needed to Fund Your Retirement
• Retirement Planning – How Much Should You Save To Build Your Retirement Corpus?
• Positive Changes For Small Saving Schemes and Public Provident Fund (PPF) – What It Means For You
• Provident Fund (PF) and Voluntary Provident Fund (VPF)
• Public Provident Fund (PPF) – Plan Your Retirement and Save Tax
• Saving Income Tax – Understanding Section 80C Deductions

It is a new tax benefit introduced to encourage small and new investors to participation in the stock markets.

Although it was announced in the budget, more clarity was needed regarding the scheme. Now, the Central Board of Direct Taxes (CBDT) and the Securities and Exchange Board of India (SEBI) have come out with the detailed guidelines regarding RGESS.

Income Tax Benefit Available Under Rajiv Gandhi Equity Savings Scheme (RGESS)

Income tax benefit for an investment of up to Rs. 50,000 in eligible securities would be available under RGESS. This invested amount would be deductible from your income of that year.

So if you fall in the 20% tax bracket, you can save up to Rs 10,000 in income tax!

(Please read “Income Tax (IT) Slabs / Brackets and rates” for the latest income tax brackets and rates).

And what are these eligible securities? These include some of the top traded shares, and more. Here’s the list:

• Shares falling in the BSE 100 or CNX 100 lists
• Shares of public sector units (PSUs) categorized as Maharatna, Navaratna or Miniratna by the Central Government
• Follow-on public offer from companies falling under the above two categories
• Exchange traded funds (ETFs)
• Mutual Funds (MFs) with an investment in RGESS-eligible stocks
• New Fund Offer (NFO) of Mutual Funds

Eligibility for Rajiv Gandhi Equity Savings Scheme (RGESS)

To be eligible for the income tax benefits of RGESS, your Gross Total Income (GTI) for the year should be less than or equal to Rs. 10,00,000.

Also, this is a one-time deduction that is available to you if you are a “new retail investor”. No income tax deduction will be available to you for any subsequent assessment years under RGESS.

And what does “new retail investor” mean?

You have to fulfill all of the following conditions:

• You are a resident Indian
• You have not opened a demat account before RGESS was notified (November 2012) and you have not invested in equities or derivatives till RGESS was notified (November 2012)
• You have opened a demat account before RGESS was notified (November 2012) but you have not invested in equities or derivatives till RGESS was notified (November 2012)
• You have never claimed this deduction in any earlier year

Rajiv Gandhi Equity Savings Scheme (RGESS) Lock-In Period

The total lock-in period of investment is RGESS is 3 years.Out of this, the first 1 year is a fixed lock-in, and the next 2 years have a flexible lock-in.

This means that you when you invest in RGESS, you can not sell your investment within the first 1 year. After the first year, you can sell it, but you would have to invest the initial amount in RGESS eligible securities again.

Initial amount is the amount you originally invested in RGESS and claimed as exempted.

Example

Let’s say you invest Rs. 30,000 in shares and claim as exempt under RGESS.

Now, after 1.5 years, you sell these shares for a profit – you sell them for Rs. 35,000. You would need to invest Rs. 30,000 back into RGESS eligible securities.

But if in the same example, you sell the shares for Rs. 25,000 after 1.5 years of the original investment, you would still need to reinvest Rs. 30,000 in RGESS eligible securities – which is an additional Rs. 5,000!

Other Features of Rajiv Gandhi Equity Savings Scheme (RGESS)

• The investment would need to be done using RGESS designated demat accounts.
• The depository that has your RGESS demat account can ask the stock exchanges for your transaction details in order to enforce the lock-in period.
• Various stock exchanges would need to provide a list of RGESS eligible stocks, Exchange Traded Funds (ETFs) and Mutual Fund (MF) schemes on their websites.
• RGESS would be governed by section 80CCG of the Income Tax Act.

Should You Invest in Rajiv Gandhi Equity Savings Scheme (RGESS)?

In my opinion, the Rajiv Gandhi Equity Savings Scheme (RGESS) offers very little income tax benefit (a maximum of Rs. 10,000) in exchange for a lot of hassle.

Furthermore, the fixed-and-flexible lock-in periods add further complication.

So, in my opinion, RGESS is best avaided by an average investor like you and me – it is just not worth the trouble!

Related Articles:

• Your Income Tax and Tax Saving Investment Related Questions Answered
• Education Loans / Study Loans / Student Loans in India
• Fixed Maturity Plans (FMPs) of Mutual Funds – Benefits of investing
• What is a Systematic Transfer Plan (STP) in MFs and how it can help you
• Senior Citizens and stock market – Why to invest, how to invest
• Lock in for Equity Linked Saving Scheme (ELSS) units purchased through a Systematic Investment Plan (SIP)