The Money Quest

What is the right time to buy a home?

2010-02-08T16:07:00.003+05:30

The following question was asked by Shashaank in the comment section of the post: 8 tax considerations to know before investing in property.

I have around 15 lacks in hand...is buying property with added loan the best decision, i pay around 40k income tax per annum apart from declaring 1 lack under 80c.My age is 25 and i am open to any other kind of investment.

Here’s the reply:

Shashaank,

Yours is a typical case of the classic dilemma (to buy or not to buy a house) faced by every young men with a bank balance of a few lakh rupees. Conventional advice is to buy a home early in life. But as usual I can only offer unconventional wisdom.

From what I can gather from your comment, all you have is Rs 15 lakh and you want to invest the entire savings to buy a house and financing the balance with a home loan. May be you think that property is a great investment (amazing returns without any accompanied risk) or, it might be that you want to avail tax breaks available on the housing loan in addition to saving rent (rent is a waste of money!) or probably the temptation is due to current low rates of interest (teaser rates) available on home loans.

Please don’t make such a mistake. You’re very young and I don’t think you should be in such a hurry to buy a house. Following points needs consideration before you arrive at a decision:

1. Return on property investments: A lot of people remain under the impression that property is a great investment just because land is the only asset with a limited supply on the earth and till we’re able to discover another habitable planet, the land prices can go only in upward direction.

Another related wider misconception is that property investment is lot easier (just approach a property dealer) and safer (no downside risk) than other asset classes like equities and mutual funds.

May be that they have never heard of US housing bubble. Understand that property as an asset class behaves in similar fashion to other asset classes like equities, gold and commodities. Put another way, real-estate market also moves in cycles (boom-and-bust) just like stock markets (what goes up must come down!).

2. Tax breaks on home loans will no more be available in future if DTC (direct tax code) is implemented in its current form.

3. Interest is an additional cost borne by you. Further, there are lots of other indirect costs associated with buying a house e.g., brokerage, loan processing fees, stamp duty and registration, municipal taxes, maintenance charges, repair charges, loan insurance charges and house insurance charges which significantly impact your true cost of ownership of a house.

4. Unlike other asset classes investing in property has long term implications.

5. Real estate is the most illiquid asset. Ask yourself following questions: What if there’s an emergent need for funds in the future? What if there is another recession and a salary cut? Or, what if you face a job crisis in future due to any other reason? What if there’s a significant drop in the real estate prices and the lender invokes “Depreciation of security” clause? What if interest rates rise and there is downturn in property prices at the same time? What if you have to change the city due to transfer or change of job?

6. You’ve not mentioned the value of the house and / or the amount of borrowing you’re planning. But let me tell you that excessive debt is not good. It is considered risky to borrow money to invest in stocks but not in property. Why? Isn’t it a case of financial leverage when we borrow money to invest in property? Don’t we also say that companies with debt on their balance sheets are more risky than the others? The point to note is that excessive leverage is bad irrespective of the purpose.

It is better to finance an asset out of your current savings rather than future income. Do you know the main cause behind US subprime crises? Although banks are ready to finance even up to 80-85% of the property value (in fact, lenders often encourage you to go for the maximum possible loan amount), it is always prudent to restrict your debt exposure to lowest possible level, in any case not more than 40-50% of the value of the asset and 50% of your net monthly savings (your take home pay less your monthly expenses). The purpose is to continue savings and investing to meet other financial goals and also keep a buffer for unexpected expenses & life style inflation.

Furthermore, as almost all banks and hosing finance companies are currently offering teaser loans so one has to also keep a safety margin for the imminent future increase in the EMI. So first understand how much loan you can really afford over a period of 20-30 years? You can calculate your loan affordability (& not eligibility) based on the maximum EMI you can afford to pay (as discussed in the previous paragraph) assuming a rate of interest around 2-3% more than the rate you are currently offered by using Loan affordability calculator.

No doubt, it is the dream nurtured by every young man to own his own house at the earliest. But as the above analysis shows it is better not to make this most important investment decision in a hurry and take adequate safeguards to reduce the likelihood of decision backfiring on you later.

Finally, it’s not about real estate vs. equities. In other words, the point of discussion is not whether investing in real estate is better than equities / other asset classes or vice versa. These are both different asset classes having their own pros & cons. The point is one should first have some investments in other asset classes, then buy a house for living (& not investing) as per your needs (& not wants), and after that even if you got some extra money, you might think of investing in real estate.

So Shashaank, first have some comfortable savings level. Your first priority should be to build a healthy investment portfolio by investing in debt (PF, PPF, NSC, Bonds, NCDs, Debt funds), equity (direct investing / diversified equity funds, index funds, ETFs) and gold based on your financial goals, risk profile and time horizon and then after some years you can go for your dream house. Remember—Buy in haste, repent in leisure.

In a nutshell, buy a right house at the right time and for the right purpose.

Do you agree? Please don’t forget to tell me about your decision.

Also see:

1. Housing Loan Queries
2. Why do you need a savings plan?

How to Invest in Bank Fixed Deposits (FDs): Practical Tips (#1)

2010-02-04T08:57:00.000+05:30

Photo by Refracted Moments

Bank fixed deposits (FDs) are favorite choice for parking your funds due to safety of capital and assured / guaranteed returns. Other reasons for their popularity are familiarity and dependability.

No doubt, bank FDs are best for parking your short-term temporary cash. For long term investment one has to take a call based on the interest rate scenario. But solely relying on FDs is not a prudent choice due to plethora of other debt / fixed income instruments available for investment.

However, if you’re already investing in fixed deposits (FDs) of banks or would like to invest in future you should at least be aware of certain tips and tricks to make the most of your money invested in fixed deposits.

Fixed Deposits (FDs) of banks are no more a passive investment instrument which didn’t require a much thought. There is a lot of scope for planning while investing in them.

How to Invest in Fixed Deposits: Practical Tips
Here’s a list of a few tips to know while investing in bank fixed deposits:

1.Have an on-line bank account
Know that in this era of online banking, you’re no more required to walk into a branch to open a FD. With the net banking facility offered by banks, investing in FDs is quick, simple and hassle free. You can do it sitting at your home or office.

Once you sign-up for net-banking, operating your bank accounts including investing in FDs becomes quite easy and convenient.

2.Have multiple Bank Accounts
Second, it is very important that you should have bank accounts in at least 2-3 different banks due to following reasons:

i). To avoid TDS
It can help you avoid TDS provisions. TDS @ 10% is applicable on bank FDs if the total interest earned during the year exceeds Rs 10,000 per bank branch.

ii). To take advantage of differential interest rates among banks
Usually, there is some variation in FD rates across different banks. But sometimes the interest rates can vary a great deal between different banks for deposits of similar tenure.

iii). To increase the insurance coverage of your bank deposits
Suppose you’re having around Rs 6 lakh in a single bank held across various accounts such as saving deposits, fixed deposits or recurring deposits. Now, instead of relying on just one bank, if you spread your deposits across say, 3 banks, your insurance coverage will also triple (i.e., increase from Rs 1 lakh to Rs 3 lakh).

No doubt having multiple banks is a very good idea; however, please don’t go overboard and open too many accounts. Have at the most 3 accounts because the more the number of accounts, more the complexity and it can become a hassle to operate and manage them in the long term.

3. Don’t let your money idle away in saving / current accounts
Minimum tenure of bank FDs is usually 7 days. Although, usually rate of interest offered on deposits for 7-14 days and 15-29 days is less than 3.5% which is offered on savings bank account, still it makes sense to transfer the excess funds to FDs rather than letting them lying down idle in saving or current account. Why?

Let’s say you receive a credit of Rs 2 lakh in your saving account on, say, 5th of the month, but you’re going to require the funds before the end of the month (assuming there are no more credits in your account during the month). So, although the amount gets deposited in your savings account before the 10th but since it won’t be there in your account till the last date of month, you won’t receive any interest on it. So the better alternative is to transfer the funds to a fixed deposit account. Suppose, you require the funds on, say, 26th of the month, here you can open a FD for 20/21 days. Let’s further assume that your bank offers you an interest rate of 3% on this FD. So, earning an extra amount of Rs 329 in a month on Rs 2 lakh is not a bad idea, if you’ve to spend just 2 minutes for it. And depending upon the idle money lying in your savings account, this can be even greater.

Similarly, money idling in your current account should be invested in short term deposits because there is no interest on the balance lying in a current account.

However, you won’t be required to do this financial jugglery for saving accounts from next financial year (i.e., w.e.f. 1st April, 2010) as per RBI circular issued in April 2009.

4. Consider Recurring FDs
If you’re a regular investor in FDs, you should also contemplate investing in bank recurring deposits because they offer many advantages over regular FDs: investment in smaller denomination, no TDS, and disciplined investing. Recurring deposits of banks are like Systematic Investment Plan (SIP) of mutual funds.

For other tips about investing in bank fixed deposits, wait for part-2.

Also see:

1. Interesting Interest Information about Bank FDs
2. Taxation of Interest on Bank FDs
3. Bank FDs of a Deceased Person

Should you split your term life insurance coverage?

2010-01-30T16:16:00.004+05:30

Photo by simpologist

Few days back, an anonymous reader asked me the following question (see: 4 unknown facts about term plans):

Can I take two to three term insurance policy say one from sbi, second one
can be from birla and third can be from hdfc??Is it advisable to do so?

Contrary to the usual advice—that it is always better to split your life insurance cover into two or more policies as it imparts flexibility to your insurance cover so that if in future your insurance requirement decline, you can make a safe exit from one of the policy and thereby save considerable premium—this post is going to prove otherwise:

Why single policy with a higher sum assured is better than two or more policies?

Let’s assume you are 35 years old and have decided to buy a term insurance plan of Rs 40 lakh for 25 years. But you’re not able to decide whether to go for a single term plan or buy two policies by splitting the coverage in the ratio, say, 50: 50 (i.e., each policy of Rs 20 lakh) , or approximately 60:40 (first policy 25 lakh and second policy for 15 lakh), or around 70:30 (first term plan 30 lakh and second term plan for 10 lakh) so that if need arises (i.e., your life insurance coverage requirement declines in future) you can make a exit from one of the policy.

So you decide to evaluate which choice among the following four is most suitable:

Case 1: Single term plan of Rs 40 lakh
Case 2: 1st term plan of Rs 30 lakh and 2nd of Rs 10 lakh
Case 3: 1st term plan of Rs 25 lakh and 2nd of Rs 15 lakh
Case 4: Two term plans of Rs 20 lakh each

Further let’s assume you’ve decided to buy a term plan either from HDFC or ICICI. Please note that ICICI life insurance companies offer you two variants of the term insurance plan. While ICICI Pru Pure Protect Classic provides coverage up to 24.99 lakh, ICICI Pru Pure Protect Elite takes care of coverage beyond 25 lakh.

Notes:
1. The premium figures are as per Bimadeals.com (I hope the premium rates are correct. Anyhow, even if not correct or if there is any future change in the premium, should not significantly affect the crux of the analysis).

2. I’ve only considered one case study assuming three different scenarios; there could be numerous permutations and combinations. So, you can do the same exercise according to your specific needs. For example, if you would like to opt for 15 years for second term plan instead of 20 years considered in the above example, the entire calculation will change.

3. Time value of money is ignored.

4. There are three scenarios: zoho sheet 1 covers first two and sheet 2 covers the third one.

What do we observe?

Scenario-1:All the policies are continued till maturity
Splitting the policy involves extra cost as follows:

a. Single term plan of Rs 40 lakh --> NIL
b. 1st term plan of Rs 30 lakh & 2nd of Rs 10 lakh --> HDFC—Rs 34,550; ICICI— Rs 27,100
c. 1st term plan of Rs 25 lakh & 2nd of Rs 15 lakh --> HDFC—Rs 49,750; ICICI— Rs 40,650
d. Two term plans of Rs 20 lakh each --> HDFC—Rs 49,750; ICICI— Rs 1,08,400

This extra cost is involved if you don’t make a premature exit (as planned) and both the policy run for the entire tenure of 25 years.

Scenario-2:Decision to exit second Policy (i.e. lower value policy) is taken after 20 Yrs
Now let’s consider another scenario where after 20 yrs you feel that your life insurance need is reduced and decide to make an exit from the lower value policy while the higher one will go for entire 25 years.

Extra Cost involved:

a. Single term plan of Rs 40 lakh --> NIL
b. 1st term plan of Rs 30 lakh & 2nd of Rs 10 lakh --> HDFC—Rs16,345; ICICI— Rs 5,300
c. 1st term plan of Rs 25 lakh & 2nd of Rs 15 lakh --> HDFC—Rs 22,855; ICICI— Rs 7,950
d. Two term plans of Rs 20 lakh each --> HDFC—Rs 14,165; ICICI— Rs 64,800

So even if you give up one of the policy and reduce your risk coverage, you end up paying more premium. In other words, here also buying one consolidated term plan scores over splitting the term plan.

Scenario-3: Decision to exit second policy after 20 years made right at the purchase stage.
Further there can one more scenario where you’re sure right at the time of buying the policy that the lower value policy is required only for 20 years (so buy it only for 20 years instead of 25 years) while the higher one will go for the entire 25 years. Now let’s see does it make any difference and help you save premium outgo:

Extra Cost / (Savings) involved:

a. Single term plan of Rs 40 lakh --> NIL
b. 1st term plan of Rs 30 lakh & 2nd of Rs 10 lakh --> HDFC—Rs 8,425; ICICI— (Rs 3,300 )
c. 1st term plan of Rs 25 lakh & 2nd of Rs 15 lakh --> HDFC—Rs 10,975; ICICI— (Rs 4,950)
d. Two term plans of Rs 20 lakh each --> HDFC—(Rs 1,675) ; ICICI— Rs 47,600

Here also you pay more in 3 out of six cases while there is very negligible saving in other three.

Finally before wrapping up the discussion, let us consider one more possibility. What if the policyholder die (please don’t mind) after, say, 22 years? The nominee will receive the following insurance proceeds:

Case--------Scenario 1----Scenario 2-----Scenario 3
1. ---------- 40 lakh--------40 lakh---------40 lakh
2. ---------- 40 lakh--------30 lakh----------30 lakh
3. ---------- 40 lakh--------25 lakh----------25 lakh
4. ---------- 40 lakh--------20 lakh----------20 lakh

I hope you got the point.

Further, please also note the following points:

1. It is always better to be over-insured than under-insured.

2. More the number of policies, more the hassles (documentation, premium payment, filing claims).

3. A life insurance with a sum assured of 40 lakh will provide coverage of just 12.47 lakh in real terms (assuming a nominal inflation rate of 6%) after 20 years. In other words, the real worth of Rs 40 lakh after 20 years will be equivalent to Rs 12.47 lakh in today’s money if the average rise in prices of goods & services is 6%.Put another way, after 20 years the real worth of your policy would be roughly 1/3rd at inflation rate of 6%, 1/4th at 7% and around 1/5th at 8% respectively. Do you still need to lower your coverage any further?

The point worth noting is that there won’t be any need to scale down your insurance cover in future. Inflation automatically takes care of it.

The above discussion proves that in majority of cases single policy (pure term plan) with higher sum assured is better than two or more individual policies. Put another way, splitting your life insurance cover (with or without splitting the tenure) doesn’t work.

What do you think? Do you agree? Do you already have multiple policies? Or, were you thinking of splitting your life insurance cover? Please share your views.

Also see:

1. Most amazing fact about life insurance
2. 4 Things you don’t Know about term plans
3. Term insurance plans - FAQs

PPF: FAQs

2010-01-25T18:32:00.009+05:30

Photo by Valerie Everett

I’ve already covered Pubic Provident Fund (PPF) in my earlier write ups. But there are still certain operational issues left unanswered. So this post is going to be your guide to PPF investing by answering almost every possible question about PPF. Here’s the list of commonly asked questions (FAQs) about PPF:

PPF Investing

Q-1: How much interest do I earn by investing in PPF scheme?
Ans: Since the year 2003-04, the rate of interest on PPF saving scheme is 8% p.a. compounded annually.

Q-2: How does PPF stand vis-à-vis NSC?
Ans: Investing in PPF certainly scores over investing in NSC. For more details see: Which is better between the PPF and the NSC?

Q-3: How can I make the most of my PPF account? What are the considerations to be kept in mind while investing in PPF?
Ans: There are certain tips and tricks you can use to make the most of your PPF account such as opening PPF account at the earliest, investing on regular basis rather than waiting till the end of the year, and investing before 5th of every month. For more of such tips see: 10 Practical Tips for investing in PPF.

Q-4: How do I calculate the interest on PPF?
Ans: Use PPF interest Calculator to calculate your PPF interest and maturity value.

Q-5: Why should I invest in PPF?
Ans: You must invest in a PPF because it is the best debt option after PF:

1. 8% p.a. tax-free returns in addition to section 80C deduction on deposits.

2. Option to invest regularly for long term and can be continued indefinitely even after maturity

3. Highest safety as it is a government- backed saving scheme.

4. Can’t be attached by any court.

5. Flexibility to invest varying amounts. You’re allowed to deposit in lump sum or in installments. Further, you can vary amount of installments as per your convenience and it is not necessary to deposit every month.

Making Contributions in PPF Account

Q-6: What is the maximum ceiling on deposit in PPF?
Ans: As per Section 80C of Income Tax --> no ceiling
As per PPF Rules --> Rs 70,000

Q-7: How many numbers of times can I make deposits in PPF account during a year?
Ans: You can deposit money in your PPF account either in lump sum or in installments which need not be of same amount. However, total number of deposits during a financial year can’t exceed twelve.

Q-8: Am I required to deposit money in my PPF account every year? What if I don’t?
Ans: Yes, a minimum deposit of Rs 500 is required every year. If you don’t, then your account will become inoperative.

PPF: Tax Benefits

Q-9: What are the tax benefits available on PPF scheme?
Ans: There are two benefits: first when you deposit money in your PPF account, you get entitled for tax deduction u/s 80C and as a result your taxable income stands reduced to that extent. The second tax benefit is that the interest earned on your PPF deposits is completely exempt from tax.

Q-10: Is it possible to avail Rs 1 lakh deduction under section 80C though we’re allowed to deposit maximum of Rs 70,000 under PPF rules?
Ans: Actually under the IT Act, there is no limit and even under PPF rules Rs 70,000 limit is meant for self a/c and minor a/c. It doesn’t include the contribution to the a/c of spouse and major children.

In other words, as per PPF rules, the total deposit in your own account and in the account of your minor child can’t exceed Rs 70,000 in a FY. But PPF rules doesn’t bar you from making additional deposit beyond the limit of Rs 70,000 in the account of your spouse or your major children and accordingly you can claim Rs 1 lakh tax deduction u/s 80C of IT Act.

Q-11: Who can claim section 80C benefit: the person in whose name the PPF a/c stands or the person who deposits money in the PPF account?
Ans: The person who makes the contribution to PPF is entitled for tax benefit. For example, if you invest your money in the PPF account of your spouse, you’ll be entitled to claim section 80C deduction instead of your spouse.

Q-12: Can I contribute to the PPF account of my parent’s and claim section 80C tax benefit?
Ans: No, you’re not allowed to claim tax benefits on the contribution made by you in the PPF account of your mother or father.

Q-13: Is it possible to avail section 80C benefit without making deposits in the PPF account?
Ans: Yes, but only from 7th financial year onwards. The trick is to make partial withdrawals (as mentioned below) and redeposit it in your PPF account.

PPF: Account Opening

Q-14: Is PAN compulsory to open a PPF account?
Ans: No, PAN is not compulsory.

Q-15: Can I open a joint PPF account?
Ans: No, joint PPF accounts are not allowed.

Q-16: Can I open a PPF account in the name of a minor?
Ans: Yes, if you’re a guardian.

PPF: Loans / Withdrawals before Maturity

Q-17: When can I start making partial withdrawals / loans from PPF?
Ans: Loan facility is available from 3rd year to 6th year. From 7th year onwards, you’re allowed to make partial withdrawals. Also note that once you become eligible for withdrawals, no loans are allowed.

The basic difference between the two is that unlike withdrawal facility, loan carries interest and is to be repaid.

Q-18: What is the process for applying for loans and partial withdrawals?
Ans: To avail loans you’ve to fill Form D and for making partial withdrawal from your PPF account, you’ve required to fill up Form C.Further the application should be accompanied with the passbook.

Q-19: How much can I borrow from PPF?
Ans: The amount of loan can’t exceed 25% of the balance at the end of 2nd immediately preceding year. For example, if you apply for loan in 4th financial year, then the maximum amount of loan you can avail is restricted to 25% of the balance at the end of 2nd FY.

Q-20: How much can I withdraw borrow from PPF?
Ans: You’re allowed to make one withdrawal each year after completion of six financial years (i.e., from the beginning of 7th FY). The amount of withdrawal can’t exceed

a.) 50% of the balance at the end of the 4th immediately preceding year, or
b.) 50% of the balance at the end of the immediately preceding year

which ever is lower.

Further, the amount of withdrawal gets reduced by the outstanding loan amount, if any.

For example, if the account was opened in 2004-2005 the first withdrawal can be made during 2010-2011. The amount of withdrawal will be the lower of:

i. 50% of the balance as on March 31, 2007, or
ii. 50% of the balance as on March 31, 2010

Q-21: Can I close the account before maturity?
Ans: No, the premature closure of PPF account is allowed only in case of death.

However there is an exception. Premature closure can be considered after the expiry of 5 years in case of genuine hardship .

PPF: Account Operation

Q-22: How can I change the nomination in my PPF Account?
Ans: By filling up Form F, you can apply for change of nomination in your PPF account.

Q-23: Can PPF account be transferred from one post-office / bank to another?
Ans: Yes, it is possible to transfer from one post office to another or one bank branch to another bank branch. Transfer from Post office to bank & vice versa is also possible. Finally inter bank transfer is also possible.

Q-24: My PPF account is currently inoperative? How do I reactivate it?
Ans: To revive and regularize your PPF account, you'll have to deposit Rs 500 for every year of non-payment along with a penalty of Rs 50 for each year of default.

Q-25: What if I don’t reactivate it?
Ans:The balance in your PPF account will continue to earn interest and repayment of the subscription with interest will be made to you on maturity. In other words, the restrictions are as follows:

1. You can neither apply for a loan nor for a premature withdrawal.
2. Before making any further investment, you’ll have to reactivate it.

Q-26: I’m the nominee of the PPF account of my spouse who expired recently? Can I continue to operate the account?
Ans: No, nominees are not allowed to operate the account of deceased subscriber. The account needs to be closed by submitting Form G together with proof of death.

However, as the account is closed on demand by the nominee, it continues to earn interest till the date of closure.

Q-27: What is the procedure to close the account if the deceased account holder forgot to make a nomination?
Ans: If balance is more than Rs 1 lakh, succession certificate is required.
But if the balance is up to Rs 1 lakh, it can be claimed by legal heirs by filing Form G along with i) a letter of indemnity, ii) an affidavit, iii) a letter of disclaimer on affidavit, iv) a death certificate.

Q-28: What if the minor attains majority before the maturity of PPF account?
Ans: Ex-minor will have to take over the operation of the PPF account by registering his signature (attested by the guardian).

PPF: Post Maturity Operation

Q-29: Can I continue to remain invested after the maturity period?
Ans: Yes, you can continue to remain invested after the initial maturity period of 16years. There are two options available:

-With further subscriptions: This option can be exercised only in writing and in a block of 5 years.

-Without further subscriptions: No conditions attached and no intimation required.

Q-30: How many maximum numbers of extensions are possible after the initial maturity of 16 years?
A: There is no limit imposed on the number of extensions. The only restriction is that every extension is for a block of 5 years in case of continuation with further subscriptions.

Q-31: Can I further invest during the extension period of 5 years?
Ans: Yes, provided you have exercised the option in writing by submitting Form H.

Q-32: What is the time limit of submission of Form H?
Ans: Form H is required to be submitted within a period of one year from the date of maturity.

Q-33: Can I make withdrawals during the period of extension?
Ans: In case you’ve exercised the option to continue the account with further subscriptions, you’re allowed to make one withdrawal per year but the total amount of withdrawal during the 5 year period can’t exceed 60% of the balance in your PPF account at the beginning of each extended period.

On the other hand, if you continue the account without subscription, then there’s no maximum limit imposed on the amount of withdrawal. You can withdraw even the entire amount. The only restriction is that only one withdrawal is allowed in a financial year.

PPF: NRIs

Q-34: I’m a NRI. Can I open a PPF account?
Ans: No, a non-resident Indian (NRI) is not allowed to open a PPF account.

Q-35: I opened a PPF account while I was a resident India. Subsequently, I attained the status of an NRI while the scheme is yet to mature. Now Can I operate it and make further investments?
Ans: Yes, an NRI can continue to make the deposits in the PPF account (which was opened while he was resident Indian) till the maturity.

Q-36: Can a NRI extend the term of his PPF account?
Ans: No, once the PPF account matures, NRI can’t make further extensions. In other words, post-maturity extension is not allowed to NRIs.

In next part, i'll explain the impact of DTC on your PPF investments.

Also see:

1. Salary TDS: FAQs
2. 10 Tips to Invest in PPF
3. Is PPF better than NSC?

NRIs Taxation (#3): How to Calculate Taxable Income of NRI

2010-01-20T10:10:00.003+05:30

Photo by gramola2three

This is part three of tax planning for non-resident Indians (NRIs). After determining residential status, the next part of NRIs taxation is determining the taxable income under Indian Income Act, 1961. Thus, this post is about how to determine the taxable income of NRI under the IT Act.

Calculating Taxable Income of NRI

1.Only Indian income taxable unlike taxation of global income in case of resident individuals
The major difference between the tax on the income of resident Indians and non-resident Indians is that a non-resident pays tax only on ‘Indian Income’ and his foreign income (income earned and received outside India) is totally exempt from income tax in India.

Indian income means income which accrues /arises (or deemed to accrue or arise) in India OR which is received (or deemed to be received in India) though it accrues/arises outside India and is taxable in the hands of non-resident.

Put simply, in order to qualify as ‘foreign income’, it should satisfy both the conditions: accrue or arise (or deemed to accrue or arise) outside India AND received (or deemed to be received) outside India.

2.Heads of Income
Like resident Indians, non-resident Indians are also required to calculate the taxable income separately under five different heads. These ‘heads of Income’ are

1. Income from Salary
2. Income from house property
3. Income from business / Profession
4. Income from Capital Gains
5. Income from Other sources

3. Exempt / Tax-free Income
In addition to incomes such as agricultural income, dividend income and specified capital gains (e.g. long term capital gains u/s 10(38) arising out of sale of equity shares on stock-exchange on which STT is paid and also LTCG on sale of mutual fund units) which are exempt in case of all tax payers, there are certain other incomes which are exempt only in the hands of NRIs. The two most common incomes exempt in the hands of NRIs are as follows:

a.) Interest income of NRIs from NRE accounts is exempt from income tax u/s 10(4) of IT Act, 1961.

b.) Interest payable by a scheduled bank on FCNR deposits is also exempt u/s 10(15) of IT Act, 1961.

4. Availability of various deductions (Tax Saving Options for NRIs)
NRIs are allowed following deductions under the IT Act, 1961:

a. Home Loan Interest Deduction u/s 24: NRIs are eligible to avail home loan interest deduction u/s 24(b) for the interest portion of the EMI paid towards the repayment of home loans. The deduction for principal part of the EMI is available u/s 80C.

b. Savings Deduction u/s 80C, 80CCC & 80CCD: Available. For details about various tax saving options and investment avenues available u/s 80C, see Section 80C Tax Saving Avenues. However, following investments are not allowed:

i.) NRIs not allowed to open a PPF account. An existing PPF account can be continued till maturity.

ii.) NRIs are also barred from investing in National Saving Certificates (NSC), Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits (POTD). Existing investments (i.e., those that were purchased before becoming an NRI) can be continued till maturity.

c. Health Insurance Premium Deduction u/s 80D
Non-residents Indians can also claim deduction under section 80D for premium paid on mediclaim / health insurance policy of self and family (Rs 15,000 / Rs 20,000 as the case may be) and another Rs 15,000 (Rs 20,000 if either of parents is a senior citizen) premium paid to insure the health of parents.

d. Other Deductions u/s 80
There are many other deductions available to resident Indians under section 80. Let’s see whether NRIs also qualify for these deductions:

i.) Deduction for medical treatment of disabled dependent u/s 80DD: Not available
ii). Deduction for medical treatment of certain specified ailments u/s 80DDB: Not available

iii). Deduction for interest paid on educational loan u/s 80E: Available

iv). Deduction u/s 80G for certain specified donations: Available

v). Deduction u/s 80U for a handicapped person: Not available

For details about the various deductions u/s 80D to 80U, you can see ‘Other Tax Deductions Available u/s 80’. And also understand various conditions & restrictions imposed under section 80 before availing these deductions.

In next part, I’ll discuss about how to calculate the tax on NRI income under Indian tax laws

Also Read:

1. NRIs tax planning – An introduction
2. How to determine the residential status
3. Residential status of returning NRIs

Money Teaser # 3: Retail Banking

2010-01-15T09:56:00.002+05:30

Photo by lumaxart

Enough of life insurance! For a change let’s shift our focus to banking.

To operate our personal finances, every one of us deals with banks on day-to-day basis. So let’s see how much you know about the way banks operate and manage their business.

This money teaser should be easier to answer as compared to life insurance riddle because banking business is quite simple in comparison to business of life insurance which involves so many intricacies (After all designing Smart & Innovative insurance products takes a lot of time and effort). Moreover, the questions doesn’t relate to complex banking terms such as asset-liability mismatch, SLR & CRR, BPLR, NPAs, Basel II norms, risk management, repo and reverse-repo.

So here we go fishing in the troubled banking waters:

This time try to think inside the box!!

Q-1: Why do the lenders quote flat rate of interest instead of reducing balance rate?

Q-2: Why do the banks charge pre-payment penalty?

Q-3: Why do banks continue to offer you personal loans while your savings and FD accounts are overflowing with cash?

Q-4: Why do banks offer teaser loans (fixed-cum-floating-rate schemes with artificially low interest rate in the initial fixed period)?

Q-5: What makes the banks sure that despite teaser loans being similar to sub-prime mortgage, these won’t lead to large scale default in future?

Q-6: Why do banks offer lower rates to potential customers as compared to the current customers?

Q-7: Why the banks have shifted focus from corporate lending to retail lending?

Q-8: Finally, what is the definition of retail banking?

Answers will be published in another post.

Best of Luck!

Also see:

1. Money Teaser #2: Life Insurance
2. Answers to Money Teaser #2

TDS Salaries - FAQs

2010-01-11T08:21:00.003+05:30

Photo by Stefan Baudy

I’ve seen people visiting various online forums for their tax queries and getting answers that are either incomplete or incorrect. The most commonly asked questions relates to TDS and taxation of salary income. So, to start with, here I’m making an attempt to answer all your queries relating to tax deduction at source (TDS) on your salary income.

TDS Salary: FAQs

Manner of TDS Deduction

Q-1: Whether TDS is to be deducted from the beginning of the financial year? Or, can it be deducted during the last few months of the FY?
Ans: TDS from salary income should be deducted uniformly throughout the year starting from the month of April based on the projected salary for the whole year and considering the savings declaration (no specified format) given by the employee. In subsequent months, adjustments can be done for any changes in salary or tax savings plan of employees.

Q-2: Can I request my employer to deduct TDS on my other income also?
Ans: Yes, if you submit the particulars of your any other income (including loss on house property) in plain paper [Earlier Form 12C was prescribed but since 2003 it is not required], employer is bound to deduct TDS on it. Anyhow, the particulars to be mentioned on the declaration are exactly in the same format as earlier Form 12C.

Please note that in case of loss from house property, detailed computation has to be enclosed. Further for claiming tax benefits on home loan [interest u/s 24(b) & principal repayment u/s 80C], a certificate from the lender specifying the amount of interest paid / payable during the financial year also needs to be furnished.

Q-3: Whether TDS is also to be deducted on the non-cash benefits provided to the employees?
Ans: Yes, from the current financial year (FY 2009-10) tax burden on fringe benefits / perks has again been shifted back to the employees (the FBT stands abolished). So all the non-cash benefits provided by the employer (e.g. official car, ESOPs, company owned or leased accommodation, gift vouchers, interest free or concessional loans, club membership etc) will have to be taken into account for the purpose of tax deduction at source from salary. The valuation of these perquisites will be as per the CBDT notification issued in December 2009.

Q-4: What if due to an error the employer deducts TDS in excess?
Ans: According to section 192(3) of the IT Act, any excess or shortfall can be adjusted subsequently but within the same financial year. In other words, excess / shortfall TDS of one financial year can’t be carried forward for adjustment in subsequent financial year.

The other point worth noting is that there is no bar on inter-employee adjustment i.e., if there’s a excess deduction on account of one employee and short deduction from the salary of other employee, those can be adjusted.

Exemptions and Deductions

Q-5: What if my employer doesn’t allow HRA exemption while calculating TDS on salaries?
Ans: If in fact you are residing in a rented accommodation and paying rent, I don’t think any employer will refuse deduction on account of HRA. Only in a very exceptional case, employer will refuse HRA deduction against rent paid by you. In such an eventuality, you can always claim it while filing your return of income and receive tax refund.

Many more such frequently asked questions regarding claiming HRA deduction are answered in Tips & FAQs for claiming HRA Exemption.

Q-6: Can an employer allow both the tax concessions: HRA as well as Home loan tax benefits while calculating TDS from salary?
Ans: Yes, indeed! As long as you’re eligible for both, employer should not have any objection in allowing both: HRA exemption u/s 10 (13A) as well as tax benefit on a/c of repayment of housing loan [interest u/s 24(b) and principal repayment u/s 80 of the IT Act 1961].

There are many possible scenarios where you can claim HRA along with housing loan tax benefits.

Q-7: Whether employer can insist on travel proof for allowing LTC exemption while calculating TDS on salary?
Ans: Yes, of course employer can insist on production of documentary evidence to satisfy regarding the genuineness of the LTA claim. Mere submission of a declaration for the purpose of claiming LTA / LTC exemption u/s 10(5) of the IT Act, 1961 is not enough.

Though in a judgement delivered in 2009, the Supreme Court exempted the employers from collecting travel bills to allow LTA / LTC exemption to employees while calculating TDS on salaries; however, most employers still demand it.

Q-8: Whether employer can allow 80G deduction while calculating TDS from salary income?
Ans: Employer is not allowed to take into account section 80G deduction in respect of donations made for charitable purposes while calculating TDS on salaries. However, DDO may allow (after due verification) the donations made to specified funds (such as Rajiv Gandhi Foundation and National Defense Fund) as specified in CBDT circular no 9 /2008.

UPDATE (01/02/10): As per the latest salary TDS notification issued in Jan 2010 by the CBDT (Circular no 1/2010 dated 11th Jan 2010), there are two conditions for allowing 80G deduction by the employer:

1. Donation is made to any of the three specified funds: Prime Minister’s National Relief Fund, Chief Minister’s Relief Fund, or Lieutenant Governor’s Relief Fund.

2. Donation is made through the employer.

For all other donations, tax benefit will have to be claimed by you in the return of income.

Q-9: Section 80DD allows a fixed deduction Rs 50,000 / Rs 75,000 irrespective of the amount of expenditure incurred on the medical treatment of handicapped dependent. However, my employer doesn’t agree and he is only allowing the actual expenditure incurred by me?
Ans: Law is law no matter how illogical or absurd it is. Logic dictates that either there should be allowed a fixed deduction without any stipulation as to the actual incurring of the expenditure and in case it is made dependent on actual incurring of expenditure then the expense actually incurred should be allowed subject to a maximum limit.

It doesn’t make sense to make the deduction / exemption conditional on incurring of the expenditure but allowing a fixed amount irrespective of the actual expenditure incurred. In simple words, it is highly illogical to allow a fixed tax deduction of, say, Rs 75,000 irrespective of whether you spend Rs 100 or Rs 60,000 but disallow it if you don’t incur any expenditure.

But understand that law is not what it should be but what it is. So, your employer shouldn’t have any objection in allowing you the fixed deduction of Rs 50,000 / Rs 75,000 (as applicable) allowed u/s section 80DD so long as you’re incurring any expenditure on account of medical treatment of your handicapped dependent (even Rs 1 will do).

Q-10: What are the various investments allowed for the purpose of tax savings?
Ans: For complete list of various tax savings investments and expenses allowed under section 80C, see: Section 80C Tax Saving Avenues & Investment Options. For mediclaim / health insurance premium and other expenses allowed while calculating taxable income, see: List of Other Deductions allowed u/s 80

Q-11: Do we have to submit the original proofs for claiming exemptions and deductions?
Ans: No, you can submit self-attested photocopies of all the documentary evidence / proofs (e.g., rent receipts, ELSS account statement, life insurance premium receipt, school fee receipt etc) required by the employer for the purpose of allowing you various deductions and exemptions.

However, for the purpose of verification your employer might ask you to show the originals also. But remember original can be required only for verification and not for submission, so don’t forget to get them back and file in your tax file for future reference and any query from tax authorities.

Change of Employment: Form 12B

Q-12: For an employee joining in the middle of a FY, is it the responsibility of employer to ask for salary details of previous employment? In other words, is it mandatory for the current employer to deduct TDS on salary income received from previous employer? Can the employer force the employee to submit the information for TDS purpose? Or, is it at the total discretion of the employee? Can the current employer adjust if there any shortfall or excess TDS deducted by previous employer?
Ans: According to section 192, it is the option / discretion of the employee whether or not to file Form No 12B. The current employer can’t insist on filing of Form No 12B. If the employee chooses not to file, then employers’ obligation is limited to compute TDS on salary payable by him.

If Form 12B is filed, then current employer can deduct the TDS on salary paid by previous employer (in case no TDS was deducted by previous employer). And if the TDS was deducted by previous employer, any excess or shortfall can also be adjusted.

It is always in the interest of an employee to furnish such details because otherwise there can be duplication of exemptions and deductions and there can be a shortfall in tax deduction and as a result the employee would become liable to deposit advance tax.

Q-13: Who’s responsible for filling up the Form 12B: My previous employer or me?
Ans: It is the responsibility of the employee to fill the declaration in Form No 12B and also attach Form 16, if any, issued by your previous employer. It is required to be filled up even if there was no TDS deducted by your previous employer due to the salary being less than the basic exemption limit. It is quite possible that after combining your current and previous salary, your total salary income exceeds the maximum amount not chargeable to tax.

Q-14: How to fill Form No. 12B for giving it to my current employer so that income (and tax already deducted thereon, if any) from my previous employment can be considered for the purpose of TDS from my current salary income?
Ans: Fill up Form 12B based on the Form 16 (if TDS deducted) or on the basis of salary certificate (if no TDS deducted or pending issuance of form 16) issued by your previous employer. You can also take the help of your salary slips. In case of any difficulty, you can take guidance from your previous or current employer.

Q-15: Can my current employer still refuse to deduct TDS on my previous salary once I submit Form 12B?
Ans: No, once you submit Form 12B, it becomes the obligation of the employer to deduct TDS on your consolidated salary after accounting for TDS deducted (if any) by your previous employer.

Issue of Form 16

Q-16: What is Form 16? What’s the difference between Form 16 & Form 16A?
Ans: Form 16 is the Tax Deduction Certificate issued by an employer to his employee against the income tax deducted from his salary. On the other hand Form 16A is issued by organizations against TDS deduction from certain payments made to contractors, service providers, professionals and certain other payments like rentals, interest etc. For example, bank issues you Form 16A against TDS deducted on FD interest.

Q-17: What if my employer or previous employer doesn’t issue me a TDS certificate?
Ans: Now a days you don’t need to submit any documents with your IT return as these are annexure-less. But, although Form 16 is not required to be attached with return of income but still it is the duty of employer to furnish it to the employee. It is required because

a. It shows your salary income (various components are shown separately). In its absence it might not be possible for you to calculate tax on your salary income (particularly if no salary slips are issued at the time of payment of salaries)

b. It shows the details of TDS deducted by your employer which is also required to be mentioned in the Tax Return.

c. You’ve to show it to the income tax authorities if asked for at the time of assessment.

As per section 203, TDS certificate in form no 16 is required to be furnished by the employer to the employee within one month of the close of the financial year. But you don’t have any remedy against your employer if he refuses to issue you the TDS certificate although he is accountable to the tax authorities.

Therefore, the only option left to you if the employer doesn’t issue the certificate is to register yourself on http://www.tin-nsdl.com/ and get the TDS status as shown in Consolidated Tax Credit Statement (Form no 26AS) from that site. Based on this online statement, you can file your return.

Q-18: Is it compulsory to issue TDS certificates even in case of an employee where no TDS is deducted due to the total income falling below the maximum exemption limit on account of various deductions allowed u/s 80C?
Ans: No, it’s not! There is no obligation on the employer to issue Form 16 in case tax is not deducted by virtue of claims of exemptions and deductions.

Q-19: Is the TDS amount shown in my Form-16 final figure of my tax liability?
Ans: No, the tax shown by your employer on the form 16 is not the final figure of your tax liability. Your actual tax liability may differ on account of following reasons:

i). You might have other income (loss) from other sources of income: Income from house property (rental income), business income, capital gains (e.g., profit / loss on sale of shares or mutual fund units) other income (interest on your savings bank account or FDs).

ii). Your employer might have made excess / short deduction of tax at source from your salary income by not considering any, exemption / deduction or inadvertently allowing any deduction in excess.

It’s your responsibility to show the actual tax on your total income while filing your tax return which might differ from the TDS figure shown in Form 16.

I hope the above discussion answers most of your questions regarding TDS on salary income and there’s no more any need for you to visit various online forums for your tax queries on salary.

Still, if any question is left unanswered, just let me know.

Also see:

1. Section 80C Tax Planning – 10 Tips
2. Income Tax Calculator: FY 2009-10
3. How to Calculate Your Taxable Income

How to Convert Flat Interest Rate to Reducing Balance Rate?

2010-01-06T11:54:00.003+05:30

Photo by TheTruthAbout...

At the time of publication of 4-in-1 Loan Calculator (to calculate EMI, interest rate, loan period or Loan Affordability), I promised to design an interest rate converter to help you convert flat rate of interest to monthly reducing balance rate and vice-versa.

Before you start using this calculator, let me clarify you some basic features including relationship between a flat rate of interest and a reducing balance interest rate.

What’s the Difference between a Flat Rate of Interest & a Reducing Balance Rate?
Flat rate of interest is the simple rate of interest calculated on the entire loan amount without considering the amount of loan repaid by you. On the other hand, reducing balance rate of interest (even this is not the effective rate) calculates the interest for each period based on the actual outstanding amount of loan.

Why Flat Rate of Interest is considered as Misleading?
In other words, what’s wrong with quoting flat rate of interest? Flat rate is misleading because it’s not the actual rate of interest you pay. It will reflect the true picture only if you repay the entire loan at the end of the period rather than making monthly repayments.

What’s the Connection between Flat Rate of Interest and Reducing Balance Rate?
The rule of thumb is that monthly reducing balance rate is almost twice the flat rate but it is incorrect. In fact, there can be wide variation based on the period of loan and rate of interest. For example a flat rate of interest of 10% for a 3-yr loan period is equivalent to 17.92% reducing balance rate (i.e. around two times minus two percent). Now, if we increase the loan tenure from 3 years to 10 years, then 10% flat rate of interest converts to 15.86% monthly reducing balance rate (i.e., approximately double the flat rate less 4%).

What’s the Use of this Interest Rate Converter?
What’s the need for this calculator? Sometimes, a lender deliberately quotes flat rate of interest instead of reducing balance rate to misguide you. In such a case, you should not get carried away with it (as it is always a tempting offer) and apply for a loan based on it. Instead, you must first convert it into reducing balance rate to get a fair idea of the actual cost of the loan.

Let me give you an example, if you borrow Rs 1 lakh for 3 years at a flat interest rate of 10%, the total interest would be Rs 30,000 (Rs 100000*10%*3) and EMI Rs 3611 (Rs 130000 / 36). Now insert this EMI in Loan Interest Rate calculator (indirect method of converting flat rate into reducing balance rate) and calculate the reducing balance rate of interest. It works out to be 17.92%.

What if you’re in doubt and want to make sure that the rate of interest is in fact reducing balance rate? Always ask for EMI in addition to the rate of interest and cross-check it by using the Loan EMI Calculator. If the two doesn’t match, then most probably interest rate is the flat rate which can be verified by using this interest rate converter.

Here’s the Interest Rate Converter:

One More Trick!
Finally, let me tell you one more trick. This interest rate conversion calculator can also help you calculate the EMI. How? Just convert your monthly reducing balance rate into flat rate of interest by using this calculator. And once you know the flat rate, the EMI calculation becomes a cake walk as shown in the above example.

I hope from now onwards you won’t let the banks and their DSAs (Direct Sales Agents) deceive you anymore.

Also see:

1. PPF Calculator
2. Income Tax Calculator

My New Year's Resolutions for 2010

2010-01-01T08:12:00.009+05:30

Photo by m.a.r.c.

I’ve never made any New Year resolutions before. What’s the point of making a resolution when I know I would break it for sure? But I thought why not give it a try this time. So, after a lot of deliberation, I’ve come up with a few ideas.

Here’s what I’ve resolved to do in 2010:

UPDATE (3O Jan, 2010): Sorry, i'm deleting resolution number 1 & 2.

3. Buy myself a new cell phone: I really love my 6-yr old Nokia 1100. It serves the basic purpose of a phone i.e., to make and receive calls. Besides, it’s too strong (can be handled roughly); there’s no risk of theft; and using it also goes with the concept of avoiding waste and becoming environment friendly.

Then, what’s the need for a change? Actually, it’s very embarrassing to take it out of my pocket in front of others. Moreover, when people are changing cell phones regularly like diapers, why should I be left behind? After all, it’s a matter of social status.

4. Say goodbye to natural foods: Instead I’ll start consuming more of packaged and fast foods such as

i. Breakfast cereal (Kellogg’s Corn Flakes)
ii. Energy drinks (Boost, Maltova, Horlicks, Bournvita)
iii. Soft drinks (Pepsi, Diet Coke, Mirinda)
iv. Bottled water (Bisleri, Acqufina, Kinley)
v. Packaged fruit juices (Real, Tropicana, Maaza)
vi. Biscuits (Parle G [must be quite good for children when Aamir is endorsing it], Tiger, Good Day, Milk Bikis)
vii. Ready-to-eat foods (Maggi noodles, Kissan Tomato Soup, Amulya Dairy Whitener)
viii. Snacks (Kurkure, Crax, Lays, Bingo, Uncle Chipps)
ix. Fast Food (McDonald’s Pizza & Domino’s Burger)

There are hundreds of other such tempting foods available in the market. Why unnecessary resist the temptation to eat HEALTHY & FRESH foods?

What’s the benefit? Very simple – Health Bhi Aur Taste Bhi! And on top of it – Time saving.

5. Stop planning about my personal finances: Why? Actually it is too time consuming and not worth the effort (a sheer waste of time!). Moreover, there are no proven benefits. Ad-hoc approach seems to be the best. This would help save a lot of my precious time which can be better spent on some real fun such as watching TV (reality shows, masala news, cricket matches etc) and visiting shopping malls.

By following these resolutions I’m sure to make a positive contribution towards my physical health as well as my financial health. There are so many other changes I would like to see in my life, but let’s leave them for the next year.

Wish me a Good Luck!

By the way, have you made your resolutions? My only advice to you is to change the strategy this time and make some tempting resolutions like mine so that this time you can fulfill the promise you made to yourself.

Happy New Year!!

Also see:

1. Amazing Online SIP Calculators
2. Answers to Money Teaser #2: Life Insurance

DTC Tax Calculator

2009-12-30T19:13:00.008+05:30

Photo by Mishelle Lane

You must have heard a lot of stories about the impact of DTC on your tax liability. Why not calculate it yourself? To know your tax liability under the new Direct Tax Code (DTC), try this DTC Tax Calculator:

To calculate your tax under DTC, first you need to know your total income. But, what if you don’t have any idea about your total income under DTC? Please note, the purpose of this calculator is not to calculate your exact tax liability under DTC regime but to arrive at an approximate figure. Let me give you a hint: your almost entire salary package is taxable with the exception of transport allowance. Similarly entire capital gains are taxable including long term gains although you’ll get the benefit of indexation.

If you can just make a rough estimate of your total annual earnings (salary + property income + capital gains + business income + other income), this calculator will help you get a fairly good idea about your tax liability under the New Tax Code.

Here’s the tax calculator as per DTC

DTC INCOME TAX CALCULATOR

Notes / Instructions for Using Tax Calculator:
1. The calculator is meant only for tax calculations of resident individuals. In other words, it is not applicable for non-residents.

2. It is presumed that there is no agricultural income.

3. Income from ordinary sources includes following income:

a. Income from employment
b. Income from House Property
c. Income from business
d. Capital Gains (both short term and long term)
e. Other Income

4. Other Deductions includes the following:

a. Deduction for interest on loan taken for higher education [Section 68] (Replaces section 80E of IT Act, 1961)

b. Deduction for medical treatment of certain specified diseases [section 70] (Replaces section 80DDB of IT Act 1961)

c. Deduction for maintenance of a disabled dependent [section 71] (Replaces section 80DD of IT Act 1961)

d. Deductions for donations [section 72, 73] (Replaces section 80G of IT Act 1961)

e. Deduction in case of a person with disability [section 79] (Replaces section 80U of IT Act 1961)

The terms and conditions are also almost similar to various existing deductions under section 80 (such as 80E, 80DD, 80DDB & 80U).

5. In the “Tax Payer Status” column of the calculator, please enter 1 for senior citizens [i.e., if you’re an individual (man / women) above 65 years at any time during the financial year, 2 for Women and 3 for other individuals.

6. Rounding-off of income is ignored.

So, what do you observe: an increase (or decrease) in your tax liability?

In next part, I’ll compare tax liability of a salaried tax payer under current tax regime vis-à-vis New Tax Code.

Also see:
1. DTC: Tax Rates / Slabs
2. Impact of DTC on Life Insurance
3. Tax Calculator FY 2009-10

Answers to Money Teaser # 2: Life Insurance

2009-12-25T10:46:00.015+05:30

Photo by § Mary §

Here is the list of answers to life Insurance quiz:

1. Of course, buying life insurance, isn’t it? When life insurance is the first choice of the majority of people for saving tax, obviously it should be the best tax saving option. Don’t we say that majority is always right?

2. To make money for Life Insurance Industry.

3. By dying early. But suicide during first policy year is not allowed.

4. There is hardly any difference. Both are working towards safeguarding the interest of life insurance industry.

5. Sorry, deleted...

To see the questions, please click here.

P.S. Please don’t laugh because I’m dead serious! And, if you think any of the answer is wrong, or if you can think of a better one, please write it in the comment box.

Also see:

1. Sale of Medicines in India: Mind Boggling Price Differences

2. New Tax Code – Impact on Life Insurance

Amazing Facts about Medicines Sold in India

2009-12-21T11:27:00.008+05:30

Photo by net_efekt

Managing your money affairs is not just about making smart investment decisions. Becoming smart consumer is equally, if not more, important. So, today let’s learn a thing or two about some malpractices of pharmaceutical companies.

For a moment, just imagine Reliance Fresh start selling potatoes under its own brand, say, ULOOS at a price of, Rs 80 per Kg and Spencer starts selling them at Rs 50 per kg under its brand LOOLOOS while SAFAL price is Rs 20 per kg and sabzi mandi price is just Rs 10 per kg.

Are you going to buy them from Reliance or Spencer? Of course, not! You’re intelligent enough to be wary of such marketing tricks. You know quite well that fancy packaging can’t better the quality of an Aaloo.

Let’s change the picture and replace vegetables by medicines.

Isn’t it amazing that those branded LOOLOOS and ULOOS are the most popular and most sold drugs in India? Did you know that big pharma companies in association with doctors (so-called most venerable profession) and chemist shops make a big fool of consumers?

D0 you know the following facts about medicines sold in India?

1. There are different brands of the same medicine available in the market.

2. The brand name instead of the generic name is more prominently displayed on the medicine.

3. There is wild variation in prices (100%, 200% or even more than 1000% i.e., 10 times) of these different brands without there being any difference in quality.

4. The most selling brand of a medicine is usually the most expensive one.

5. Big pharma companies directly or indirectly bribe doctors to sell their higher priced branded medicines.

6. The pharma companies supply generic versions of the same medicines to the government at very low price (in some cases the retail market price is more than 50 or 100 times the government procurement price).

7. Unlike their western counterparts, doctors in India prescribe branded medicines instead of the generic version.

8. The medicine (brand) prescribed by doctors is usually the costliest brand.

The most shocking observation, in fact, is not just the availability of these exorbitantly priced medicines but people openly buying them without even knowing it. Why is it so?
Actually, medicines are the only product where purchase decision is not under our direct control. The decision is made by the doctor on our behalf. Ethics demand that recommended drug should either be a generic name or lowest price brand if there’s no difference in quality. But the fact is otherwise. Isn’t it a total breach of faith by the community of doctors whom we consider next to god and trust blindly?

To be continued…

Also see:

1. Advertisements: The Biggest Marketing Trick

2. Credit Cards: Know the Hidden Traps

Deceptive Marketing by MFs: Be Wary of Advertised Returns

2009-12-17T11:54:00.016+05:30

Photo by Aphrodite

"Good is not good, where better is expected."

—Thomas Fuller

I don’t read MINT, but the day before yesterday my newspaper vendor inadvertently delivered a copy of MINT instead of ET. While flipping the pages of the newspaper, I came across an advertisement by Birla Sun Life Mutual Fund on the last page (page 24 of MINT dated 15 Dec 2009) claiming that two of its mutual fund schemes have delivered exceptionally good returns during the last 10 years (without considering the load).

The following claims were made:

i). At 24% CAGR your money multiplies 8 times in 10 years;

ii). 2 of our schemes have given more than 24% CAGR in last 10 years (as on 16 Nov 09)

a) Birla Sun Life Tax Relief’96 --> Value of Rs 1 lakh invested in scheme on 16 Nov 99 is now Rs 8.91 lakh @ 24.45% CAGR

b) Birla Sun Life Equity Fund --> Value of Rs 1 lakh invested in the scheme is now Rs 8.72 lakh @ 24.19% CAGR.

On the other hand, value of similar investment in benchmark (BSE 200) is Rs 4.21lakh @ 15.46% CAGR.

The first thought which crossed my mind was that how come such a great mutual fund scheme escaped my attention while I was writing the post: Best Tax Savings Schemes for FY 2009-2010.

So, I decided to take a second look and review the performance of Birla Sun Life Tax Relief’96 (BSLTR '96).

Review of Birla Sun Life Tax Relief’96
In the published advertisement, the 10-Yr returns are as on 16 Nov 2009 i.e. assuming the investments were made on 16 Nov, 1999. However, I checked the figures as per the latest data ((14 Dec 2009) available on Value Research, a mutual fund rating agency.

Here are the findings:

1. Current 10-Yr trailing CAGR of Birla Sun Life Tax Relief 96 (growth option) is 21.49% and its comparative position vis-à-vis other ELSS based on 10-Yr returns is as follows:

ELSS-----------------------------------10-Yr CAGR----Rank
HDFC Taxsaver-------------------------29.45%--------1/15
Franklin India Taxshield--------------25.00%--------2/15
Sundaram BNP Paribas Tax Saver---23.31%-------3/15
Birla Sun Life Tax Relief 96-----------21.49%--------4/15

We notice that although the performance of Birla Sun Life Tax Relief 96 is good considering last 10-yr returns, there are many funds which have given far better returns (note the difference of 8% in CAGR of HDFC Tax Saver and Birla Sun Life Tax Relief’96). For example, the amount of Rs 1lakh invested in HDFC Tax Saver and Franklin India Taxshield would have become 13.21 lakh and 9.31 lakh respectively as compared to 7.0 lakh in Birla Sun Life Tax Relief’96.

2. Next, though last 10 years returns are important but the returns earned in immediate past are more relevant than those earned in distant past (although both may or may not be sustained in the future). Do you know that Value Research ratings are also based on combined performance of last 3 years and 5 years? So let’s see Birla Sun Life Tax Relief 96 return performance for last 7-Yrs, 5-Yrs, 3-Yrs and 1-Yr (trailing CAGR returns):

Period-----------CAGR------------------Rank
7-Yr --------------30.99%---------------10/19
5-Yr --------------21.48%-----------------9/20
3-Yr --------------10.15%----------------10/26
1-Yr --------------103.83%----------------2/30

What do we observe? The fund has indeed performed quite well during the last one year. Nevertheless, the return ranking of last 7-Yrs, 5-Yrs and 3-Yrs returns is almost average. Why? Let’s see.

3. To get a better glimpse of its performance, we take a peek at its year-wise return performance of last five years :

Year------------Returns----------Rank----------- + (-) BSE 200
2009------------99.14%----------2/32--------------14.20%
2008----------(62.67%)---------26/29-------------(6.21%)
2007------------76.07%----------4/26--------------15.63%
2006------------43.53%----------2/23---------------3.95%
2005------------32.31%----------19/20------------(1.49%)

Here, we notice that this ELSS fund has beaten its benchmark (BSE 200) in three out of last five years. That’s nothing to be proud of!

That’s ok. What else do we notice? The most striking observation is that it’s one of the riskiest mutual funds in the ELSS category of equity funds. How? Please note the wide variation in returns. So, while Birla Sun Life Tax Relief 96 delivered extraordinary returns in the year 2009, 2007 and 2006, it was among the worst performers during 2008 (Rank 26/29) & 2005 (Rank 19/20).

4. To substantiate our findings that it is indeed a risky ELSS scheme, let’s take a look at various risk parameters. So, while risk grade of Birla Sun Life Tax Relief 96 is ‘above average’, beta (1.14) is highest in the ELSS category, even higher than Tauras Tax shield whose performance I reviewed earlier.

5. One more point worth noting is that Birla Sun Life Tax Relief ‘96 P/E multiple of 29.46 and P/B ratio of 4.12 (as on Nov 30 2009) is second highest in the ELSS category which indicates that the current valuations of the majority of the stocks in which the fund is invested is quite high thereby limiting the future return potential.

6. Finally, what about its rating by Value Research? Yes, this is in fact the most important factor to consider. Know that its current rating by Value research is 3-star. In other words, based on last 3 and 5 years risk-adjusted returns, Birla Sun Life Tax Relief 96 is an average performer not worth investing in when there are so many better alternatives out there.

Lesson
Why did I write a review of a 3-star rated fund? What lesson do we learn from the above review of Birla Sun Life Tax Relief’96?

The message is clear: you should be wary of the returns advertised by the mutual funds. Investment decisions should never be based on such misleading claims made in advertisements. Literally speaking, the facts stated may be quite correct but the reality is that such an ad hides more than it reveals. So understand that before investing in mutual funds, it is necessary to look beyond the appearance in order to see the broader picture.

What’s your opinion?

P.S. I’m sorry Mr. Balasubramanian; your ELSS is not worth investing as of now. I’m quite aware that recently Birla Sun Life Tax Relief 96 (BSLTR ‘96) has been adjudged World’s Best Performing Equity Fund for the 13-year period ended September 30 2009 as per Lipper global fund data. However, the above analysis shows that it has a long way to go before it finds its proper place in the best performing ELSS funds.You must have heard of the quote, “Good is not good where better is expected”. So, please stop hard selling the ELSS by misleading public through such deceptive ads.

Also see:

1. Best ELSS for the FY 2009-10
2. How to Choose Best Equity Funds
3. Amazing SIP Calculators

Amazing Online SIP Calculators

2009-12-12T21:56:00.006+05:30

Photo by sea turtle

UPDATE: 24/01/2010

Sorry, I’m deleting this post.

Of late, I was going off-track and trying to be overly critical of other people’s work rather than minding my own business. Many thanks to Arjun, for making me realize my folly.

Anyway, very soon I’ll publish an online SIP calculator based on excel.

Also see:

1. Home Loan Calculator
2. Tax Calculator
3. PPF Calculator

Best Tax Saving (ELSS) Mutual Funds: FY 2009-2010

2009-12-07T08:03:00.007+05:30

Photo by Tony Blay

In January 2009, I published a list of seven best ELSS (equity-linked savings scheme) funds for the purpose of tax savings under section 80C. Further, out of those seven tax planning mutual funds in India, we selected top 3 schemes on the basis of their consistent outperformance during past 10 years.

The following were the top 3 ELSS Funds:

1. Canara Robeco Equity Tax Saver
2. Sundaram BNP Paribas Taxsaver
3. Sahara Tax Gain

So, now that almost a year is over, let’s review the performance of tax saving mutual funds and see whether those are still the top rankers or, is there any new addition or deletion? Put another way, which are the current best tax planning equity mutual funds in India for FY 2009-2010 having potential to deliver top returns over next 3-5 years?

Out of the previous seven 5-star and 4-star rated schemes by Value Research, a mutual fund rating agency, Magnum Taxgain and Sundaram BNP Paribas Taxsaver stands downgraded from 5-star to 4-star; Principal Personal Tax Saver rating has been lowered from 4-star to 3-star (hence removed from the list) while Canara Robeco Equity Tax Saver has got its rating improved from 4-star to 5-star. There are two new additions to the league of ELSS toppers: Tauras Tax Shield and Fidelity Tax Advantage. Revised current list (as on Nov 30, 2009) of top tax saving mutual funds in India is as follows:

Best Performing ELSS Funds
a) Fidelity Tax Advantage (5 star)
b) Canara Robeco Equity Tax Saver (5 star)
c) Magnum Taxgain (4 star)
d) Sundaram BNP Paribas Tax Saver (4 star)
e) Franklin India Taxshield (4 star)
f) HDFC Taxsaver (4 star)
g) Sahara Tax Gain (4 star)
h) Tauras Tax Shield (4 star)

Further, talking about the best of the best, out of the top three ELSS funds I recommended, two are still maintaining their top position.

While the Canara Robeco Equity Tax Saver is performing quite well (despite change of fund manager 1-year back) and is in tune with its excellent long term performance, there is some slippage in the performance of Sundaram BNP Paribas Tax Saver but let’s hope it’s a temporary phenomenon and the fund will soon recover (but still it can no more claim to be in the league of top three ELSS). Coming to Sahara tax gain, delivering consistent above average returns there’s no change in its 4-star status.

Our choice has been vindicated by the ET Quarterly MF Tracker (Sept 09 ratings) according to which the only two schemes to get Platinum rating in the equity-linked saving scheme (ELSS) category are Canara Robeco Equity Tax Saver and Sahara Tax gain. So we get additional assurance that our choice of best of the best among the tax saver equity mutual funds (ELSS category) is in fact right.

Next question is: Which new ELSS scheme should take this coveted third position? Whether HDFC Tax Saver or Fidelity Tax Advantage (a new entrant)? My vote goes to HDFC Taxsaver, despite comparatively better 3 year performance by Fidelity Tax Advantage (and its 5 star rating). There are basically two reasons: first is consistent top performance by HDFC Taxsaver over a period of 10 years except in the year 2007 (the only year in its history when it performed miserably and failed to beat its benchmark index), while Fidelity Tax Advantage is a new entrant yet to complete even 5 years. Second reason is that the current performance (trailing 1-Yr returns as on 30 Nov 2009) of HDFC Taxsaver(108.73%; 4/30) is a lot better than Fidelity Tax Advantage (91.92%; 13/30). The only thing I don’t understand is why the HDFC Taxsaver scheme is awarded ‘Silver’ rating (which indicates average risk-adjusted return performance) by the ET MF Tracker Sept 09.

Won’t it be an injustice to Tauras Tax Shield, another promising ELSS with the highest Sharpe Ratio (i.e., delivered best returns per unit of risk taken) and highest alpha (i.e., excess returns on and above the risk-adjusted returns) among all the tax saving mutual funds?

No, because Tauras Tax Shield is a highly risky scheme in the ELSS category: high risk grade (only ELSS among the top 8), mid-cap orientation, beta of more than one and highest turnover ratio. While it was the best performing ELSS in the year 2007 ( 111.69% returns outperforming its benchmark index [BSE 200] by a huge margin of 51.25%), it was the worst performing tax saving fund in the year 2006 (returned negative 10.13% as against around +40% delivered by both BSE 200 and Nifty). OK, that’s 2-years back, what’s about the recent performance? See again that although it’s ranked 6/30 on the basis of 1-yr trailing returns (as on 30 Nov 2009), but last 6 months performance (16.03%, [Rank 32/36] against the category average of 21.72%), is again poor. Put simply, there is too much variation in the performance of Tauras Tax Shield which is not good.

Here’s the latest list of TOP 3 ELSS Funds for FY 2009-2010.

Top 3 ELSS Funds
1. Canara Robeco Equity Tax Saver
2. Sahara Tax gain
3. HDFC Taxsaver

Do you agree?

Also see:

1. Why must you Choose the Best Equity Funds?

2. How to Invest in Best ELSS Mutual Funds?

3. Review of Birla Sun Life Tax Relief '96

Money Teaser # 2

2009-12-02T19:49:00.003+05:30

Photo by Striatic

Now that I’ve written extensively on life insurance, let’s test your understanding about it.

Here’s a short Quiz about life insurance:

Think out of the Box!!

Q-1: Which is the best tax-saving option under section 80C?

Q-2: What is the sole purpose of life insurance?

Q-3: How can you maximize returns from your life insurance policies?

Q-4: What’s the difference between IRDA & Life Insurance Council?

Q-5: What’s the difference between smoking cigarettes and buying ULIPs?

Please take a pause before answering. Answers to the riddle will be published in another post.

P.S. Subject of personal finance is a bit boring. So, this is an attempt to enliven it.

Also see:
1. New Financial Definitions

2. Welcome to The Money Quest

3. Amazing SIP Calculators

How to Choose the Best Equity Mutual Fund

2009-11-29T18:41:00.011+05:30

Photo by nuanc

Sometime back, a reader asked me this question (in the comment section of the post ‘Direct Stock Investing vs. Mutual Funds’): Which is the best equity mutual fund? In fact, every mutual fund investor is faced with this burning question: How to choose the best mutual fund? If you’re investing in an equity fund, then you would like to know which the best equity fund is and if you’re interested in a debt fund, you want to know which is the top most debt fund. So, this post is about how to choose the best equity mutual fund?

The Moot Question: Why this search for Best Equity Mutual Fund?

Before I list down the best / top funds in equity diversified category, the foremost question is: Why is it important to choose the right fund? Why can’t you just invest in any equity mutual fund? How does it make a difference?

The choice is important because there is too high variation in the performance of different mutual funds within the equity diversified category. For example, as per data from Value Research, a mutual fund rating agency, during the last one year (trailing returns as on 27 Nov’ 2009), the best performer in equity diversified category gave a return of 159.48% [Principal Emerging Bluechip –1/211], and the worst performer 14.58% [JM HI FI – 211/211]. The difference is mind-boggling (144.90%). It’s like comparing US with Somalia. However, if we increase the time horizon the gap between the best and the worst equity diversified fund narrows down.

For example, returns from equity diversified mutual funds for a three year period are in the range of +25% to -22% (i.e., a gap of around 46%). Similarly, if we further increase the period to 5 years the return band is 32% to 11% (i.e., variance of around 22%). But the gap is still wide enough to make a substantial difference to our overall returns from equity funds. Besides, due to compounding, the difference between the best and the worst equity fund gets magnified with time.

Let’s see the absolute impact the equity funds return differential can make to your investment returns over time. Suppose that you invested Rs 1 lakh each in ING Core Equity and Reliance Equity about 10 years back. So as on date (27 Nov 2009) while your investment in Reliance would be Rs 14.17 lakh, the total value of ING Core Equity would amount to just 2.20 lakh, a huge difference of about Rs 12 lakh. Put simply, over a period of 10 years the return differential between best and the worst equity diversified mutual fund is 12 times the initial amount invested which is indeed quite significant.

Thus, by not being careful enough to select the right equity fund at the time of investing can really cost you dearly over a long run. Just ask somebody who invested in JM HI FI or Tauras Discovery.

Now we can say for sure that selecting the best / right fund at the time of investing is a crucial factor and can make a big difference in our returns over a long term.

Avoiding the Trap
Second point which I would like to highlight is that a lot many investors make the mistake of comparing the latest short term performance of various funds to arrive at the best performing mutual fund. Actually, the fund which has given the best returns during last 1M/3M/6M/1-Yr may or may not be a good scheme to invest in.

Let me give you an example. First, see the below figures. These are one year trailing returns (as on 27th Nov’09) of a few selected equity diversified funds as per Value Research:

Fund Name-------------------------Rating---1 YR Return---Rank
1. ICICI Prudential Discovery-------3-star---147.73%-------3/211
2. Magnum Emerging Businesses--2-star---120.38%------12/211
3. JM Emerging Leaders--------------1-star---111.00%------29/211
4. UTI Opportunities------------------5-star-----98.08%------67/211
5. ICICI Prudential Infrastructure---5-star-----79.52%----144/211

What do you observe?

Regardless of the outstanding one year returns by ICICI Prudential Discovery, Magnum Emerging Businesses, and JM Emerging Leaders, these schemes are still rated 3-star, 2-star and 1-star respectively. It means that in spite of their short term superb performance, they are yet to prove their long term potential. On the other hand, despite not so good performance of UTI Opportunities and ICICI Prudential Infrastructure, both the equity funds are rated 5-star.

Thus, the lesson to be learnt is that don’t ever try to judge a book by its cover and mutual fund by its short term performance. Put simply, never buy a mutual fund on the basis of excellent short term performance. On the other hand, never sell a mutual fund just because of its recent poor performance.

Theory of Relativity
Another important point you should understand is that the mutual fund rankings are relative and not absolute. Let me clarify the difference between absolute & relative performance of mutual funds.

Suppose you’ve got 97% marks in an examination, but out of, say, a total of 5 persons, three have scored better results than you, say between, 97.5—98% marks. Does it mean that you’re not good enough? Consider another scenario, where all the 5 persons failed in the examination but you scored, say, 25% marks while all others scored less than you? Does it mean you’re the best?

It is very similar dilemma with fund rankings. Mutual Funds are ranked not on the basis of their absolute performance but on the basis of their relative strength as compared to their peers (other funds in the same category). For example, if I tell you that your fund, say, Tata Dividend Yield has returned more than 100% during last one year (1-Yr ending 27th Nov 09), you will be on top of the world but the moment I tell you it is ranked 56 / 211 on the basis of returns (meaning thereby that 55 other mutual funds in the equity diversified category have earned better returns than it), then probably you won’t feel like celebrating it, isn’t it? The handsome returns of over 100% pales down when compared to others.

Do you know that this theory of relativity is also one of the root causes of our unhappiness? Shouldn’t an investor be more concerned with absolute performance rather than relative performance?

Anyway, the point to notice is that the best performance is always relative (i.e., in comparison to others). There are no best absolute returns. For example, a mutual fund can be ranked as top fund in a particular category even by earning a meager return, say CAGR of 3%, if the other funds in the same category are earning less than that. In a similar vein, a mutual fund, say, ABC giving you an annualised returns of, say 40% would still rank much lower if the benchmark index and other funds in the same category are giving better returns than it.

Finally, before I list down the best / top equity mutual funds, understand that while selecting best / top equity funds it is important to consider short term performance as well as long term performance, relative performance as well as absolute performance, trailing returns as well as calendar year returns, CAGR as well as year-wise returns, and returns as well as risk-adjusted returns.

To know the best equity diversified fund, just wait for part two!

Also see:

1. Stock Investing vs. Mutual Funds: Making a Choice
2. How to Choose Best ELSS Mutual Funds
3. How to invest in Gold ETFs

4-in-1 Loan Calculator in Excel

2009-11-22T12:17:00.003+05:30

Photo by spackletoe

After Tax Calculator, HRA Calculator and PPF Calculator, The Money Quest now brings you 4-in-1 Loan Calculator in excel sheet which includes EMI Calculator, Interest Rate Calculator, Loan Affordability Calculator and Loan Tenure Calculator.

Basically, for doing any loan calculations, four variables are involved: Loan Amount, rate of interest, Loan tenure (period) and EMI (Equated Monthly Installment). Given any 3 parameters, we can arrive at the fourth one. Thus, we can have 4 different Loan Calculators:

Loan Calculators:
1. Loan EMI Calculator
2. Interest Rate Calculator
3. Loan Amount / Affordability Calculator
4. Loan Tenure Calculator

The Calculators are multi-purpose and can be used for any kind of loan. For example, Loan EMI Calculator can be used whether you want to calculate EMI of home loan, EMI of personal loan or EMI of Car loan. Thus, the EMI Calculator serves the purpose of

1. Home Loan EMI Calculator
2. Personal Loan EMI Calculator
3. Car Loan EMI Calculator

To compute Equated Monthly Installment (EMI), you’ve to enter following loan details in the excel sheet:

a. Loan Amount
b. Tenure (in months)
c. Rate of Interest (in %)

Similarly, to calculate rate of interest, you’ll have to enter EMI, Loan amount and period of loan.

Furthermore, Calculators are universally applicable to loans from all banks (e.g., ICICI Bank, State Bank of India [SBI] and IDBI Bank) and housing finance companies (e.g., HDFC, Can Fin Homes [CFHL] and LIC Housing Finance).

Purpose: Different Ways in which Loan Calculators can be put to use

EMI Calculator: Calculate EMI based on loan amount & repayment period
1. The EMI (Equal Monthly Installment) Calculator helps you calculate how much you need to pay every month towards your loan repayment based on the loan amount, interest rate and tenure / period of loan. Put another way EMI is the fixed amount you pay every month towards principal repayment and interest payment.

2. You can use the EMI Calculator to check the EMIs for different periods to decide which would be most suitable for you.

3. You can also use EMI Calculator to find how the change in interest rate affects the EMI.

4. EMI Calculator can also help you find out the effect of change in loan amount on the EMI.

5. EMI Calculator also shows you the total interest to be paid during the entire loan tenure.

6. This excel Calculator can be used to calculate EMI of all types of loans such as EMI of home loan, EMI of personal loan and EMI of car loan.

Interest Rate Calculator: Know the interest rate for a given EMI
1. Interest rate Calculator can be used to find out rate of interest charged for a given EMI (Equated Monthly Installment). It can help you find out the interest rate being charged on the loan if the lender gives you an EMI quote without mentioning the interest rate.

2. It can also help you make sure that the loan EMI you’ve been asked to pay is in fact based on the interest rate quoted to you. In other words, you can get the assurance that interest rate quoted to you is in fact the monthly reducing balance rate and not the flat rate of interest.

A lot many lenders (particularly in case of personal loans and car loans) try to fool borrowers by quoting flat rate of interest (ostensible rate) which is considerably lower than the actual rate of interest being charged (i.e., monthly reducing balance rate).

In case the interest rate as per this excel Calculator doesn’t tally with what you’ve been told, you can ask the lender for clarification.

Loan Affordability Calculator: Find out Loan Affordability based on EMI & Tenure
1. Loan Affordability Calculator will let you calculate the maximum amount you can borrow based on the EMI you would like to pay and the period for which you would like to avail the loan (given the rate of interest).

2. You can see the effect of increasing /decreasing EMI on the loan amount. Similarly, by increasing or decreasing the repayment period (loan tenure) with or without changing the EMI, you can see the effect on the maximum amount you can borrow.

3. It can also help you find your loan affordability (& not eligibility) based upon your regular monthly income / salary income. Suppose your monthly income is Rs 1,00,000 p.m. and you think that you can manage to pay, say, 40% (i.e., Rs 40,000) of it as monthly loan installment without affecting your finances, then just enter Rs 40,000 as your EMI and you will know how much maximum amount of loan you can afford. If it comes out to be less than the loan amount you require, you can increase the loan tenure and arrive at an optimum combination of loan amount and EMI.

Loan Tenure Calculator: Find out Repayment period based on Loan Amounts & EMI

1. Loan Tenure Calculator will help you find out the tenure (period of the loan) based on an amount you would like to borrow, and EMI you can afford (for a given interest rate).

2. It can help you arrive at the repayment period for different loan amounts, for different EMIs and available at different rates of interest. By changing the loan amount and / or the EMI and / or the rate of interest, you can arrive at the optimum loan tenure you would like to go for.

To sum up, this loan calculator can help you plan house loan, personal loan and car loan requirement and arrive at the optimum / best combination of loan amount (borrowing required), EMI (repayment installment you can afford) and tenure (repayment period) for a given rate of interest.

Assumptions:
Loan Calculators are based on the following assumptions:

1. EMI is calculated based on monthly reducing balance. In other words, loan calculators are not applicable if interest is charged on daily reducing balance or annual reducing balance.

2. Processing & other charges which may applicable as per the rules of banks and other lending institutions are not taken into account.

3. EMI Calculator calculates EMI in arrears (when you pay EMI at the end of the month) and not EMI in advance (when you pay EMI at the start of the loan followed by beginning of each month).

Shortly, I’ll publish Interest Rate Converter (Converting flat rate of interest into reducing balance interest rate & vice-versa), Loan Eligibility Calculator (the maximum loan you can avail based on your income and existing loans) and Effective Interest rate calculator (IRR of your loan based on various associated loan costs).

If you encounter any difficulty or error while using this excel based loan calculator, just write a comment.

Also see:
1. Income Tax Calculator (FY 2009-10)
2. PPF Calculator
3. HRA Calculator
4. Home Loans in India: Tax Queries

Answering Readers’ Questions # 3: Home Loans Queries

2009-11-17T15:35:00.003+05:30

Photo by occam

In this post, I’m going to answer various queries asked by readers regarding claiming tax benefits on home loans in India under different scenarios such as home loans for second house, claiming both HRA exemption as well as housing loan interest deduction and tax concession on joint home loans.

If you would like to understand the basic provisions of Income Tax Act, 1961 regarding eligibility of home loan interest under section 24(b) and principal repayment u/s 80C, read this post.

Home Loan Queries

Considering loss from House Property while calculating TDS from Salary

Q1: While planning my Income tax for the year 2009-10 in my office are not considering my interest on loan u/s 24(b) over & above Rs. 150000/-. I was told that only income will be considered for my TDS calculation not loss.

Is it wrong to consider income from Salary & Income/loss from House property for calculating TDS for the year 2009-10? Kindly do clarify me at the earliest.

I do not want my employer to deduct more TDS and finally land up in IT office to take refund may be 2 years later. [By Chandra Kanth B, Email: chandrakanthb [at] dcil.co.in]

Ans: Regarding set-off of loss from house property while calculating TDS on salary income, it has been specifically provided u/s 192 that loss from house property (irrespective of whether self-occupied or rented out) can be taken into account by the employer while calculating tax on salary income.

However, if it is your self-occupied property, loss can’t exceed the amount of interest deduction allowed under section 24. Put another way, loss from a self-occupied house property can’t exceed Rs 1.5 lakh.

But, if it is let-out or deemed to be let out, then the amount of loss can exceed Rs 1.5 lakh. But in such a case you need to provide your employer with detailed computation of loss from house property [i.e. Annual value less municipal taxes less standard deduction u/s 24(a) less interest on home loan u/s 24(b)].

Now, decide yourself whether the action of your employer is justified or not.

Joint Home Loans

Q2: I have a query regarding Home Loan. I will be purchasing a home with my name and my mother's name (as co-applicant). Also loan is in my name and co-applicant as my mother. I am planning to pay all EMIs, so can I opt for tax benefit on complete interest and principal (limited under section 80C and whatever) or will only be eligible for partial benefit as my mother is a co applicant (although not paying any EMI). Please help. Thanking you in anticipation. [By Nikhil Agrawal, email:mrnikhilagrawal [at]gmail.com]

Ans: It is not mentioned whether co-applicants are also co-owners.

There are two possible scenarios:

a.) Your mother is also a co-owner: In such a case while you can claim only proportionate part of interest u/s 24 according to your share in property (even though EMI’s will be paid entirely by you), principal repayment can be claimed fully (subject to limit of Rs 1 lakh u/s 80C).

b.) Your mother is not a Joint-owner: Here, you’ll be allowed entire interest (subject to maximum limit of Rs 1.5 lakh, in case of self-occupied house property) as well as principal repayment (maximum Rs 1 lakh).

Claiming HRA as well as Interest on Home Loan

Q3: I have an interesting question on HRA and house loan. I have two houses (A1 and A2) in city A (A1's home loan is closed and rented out. A2 has home loan and is currently occupied by my parents). Now I have moved to city B as I changed my job and so rented out a place in city B. Now my question is:

1. Can I claim HRA for the house that I am currently staying in city B?

2. Can I claim house interest deduction on the home loan that I have taken for house A2?

Your response will be highly appreciated. Thanks in advance. [By Wasim Raza, email: wasim.raza [at] ymail.com]

Ans: Yes, you can claim HRA exemption under section 10(13A) of the IT Act for the house you’ve rented in city B. Point need to be noted is that there is no co-relation between claiming HRA exemption and claiming housing loan benefits under Income Tax Act, 1961.

Yes, you’re also allowed to claim interest deduction u/s 24 and principal deduction u/s 80C on home loan taken for house A2. It will be considered your self-occupied house property for tax purposes although you’re staying in rented accommodation in another city on account of your job and accordingly you’ll be entitled to claim tax benefits on your second home loan.

Interest on Home Loans: Second House

Q4: I am private company employee. I stay in Ahmedabad city. I purchased my recent home in 2004 with house loan from bank. I took tax benefits. I repaid the loan in 2006 or 2007. I am staying in the same house. And since repayment of home loan I do not claim HRA or anything else. I purchased another house in same city – Ahmedabad in January, 2008 which I have given on rent. I pay EMI of around 22000 and get rent around 6000 per month.

My query is can I claim second house home loan benefits- entire interest amount (no limits for second house loan) – rent income as per 24(b)?

Ans: Yes, of course, you can claim the entire interest on housing loan u/s 24(b) since there is no limit in case of rented house property.

For the purpose of claiming tax benefits of home loans, there is no limit either to the number of houses you can own or to the number of home loans you can avail.

Q5: Myself is a salaried person working with Private Company in Gurgaon. I am having one flat in Ghaziabad which is rented out. I am planning to purchase another flat which will again be rented out. My questions are

1) Can I sign off the amount of Loss from house Property for loan availed on the both the properties?

2) Whether limit in my case would be u/s 24(b) would be 1.5 Lacs/house i.e. 3.0 Lacs for two houses.

Kindly reply in two contexts

1) If I also stay in Ghaziabad in my parental house and I am giving rent to my Father.
2) If I stay in Gurgaon on rent. [By Manish Gambhir, email: mgambhir_1001 [at] yahoo.co.in]

Ans: Yes, you can avail deduction u/s 24(b) on both the house properties. Furthermore, there is no limit for interest deduction in case of rented property. In other words, the limit of 1.5 lakh doesn’t apply in case of let out house property and you’ll allowed actual amount of interest paid (even if exceeding Rs 1.5 lakh) while calculating income / (loss) from both the houses.

In your case for the purpose of home loan interest deduction under section 24(b) of IT Act, 1961, it hardly matters whether you reside in Gurgaon or Ghaziabad. It is also immaterial whether you are paying rent or not. Similarly, it doesn't matter whether you pay rent to your father or to any third person.

The above factors will matter only if you want to claim HRA. These factors will also be relevant if either one or both of the houses is not rented-out. For further details read this post.

If you’ve any question relating to home loans, ask in the comment section and for other queries mail directly to feedback [at] themoneyquest [dot] com.

Also see:

1. 8 Tax Considerations to Know while buying a Property

2. 4 Ways of claiming HRA Exemption with Home Loan Tax Benefit

3. Home Loan Tax Benefits: Section 80C vs. Section 24(b)

4. Home Loan EMI Calculator in Excel

4 Other Ways to Live a Happy & Simple Life

2009-11-14T12:17:00.001+05:30

Photo by Rickydavid

He who appreciates and understands a song, a symphony, a painting, some sculpture or architecture gets more satisfaction than he who owns musical instruments or works of art.

-Richard Gregg

In part 1, I wrote about 5 top ways to simplify your life: take life easy, live your own life, stop trying to please everyone, have a feeling of gratitude and slow down. Here’s a list of next 4 ways to lead a simple and happy life:

4 Other Ways to Live a Simple & Happy Life

1. Don’t make money the central point of your existence
This is the most important of all. Money is no-doubt important for our basic needs. But you still need to look beyond money. Why? Because in the pursuit of earning more & more money, we forget to enjoy the present, we keep on postponing our happiness to a future day without knowing that life is a journey and not a destination.

Understand that our happiness depends upon our state of mind and not on the status of our bank accounts.

Therefore, manage your existing money in the most efficient manner and also make efforts to earn more of it. However, don’t run after it like a mad man. Understand that money alone can’t buy you happiness.

2. Differentiate between Your Needs & Wants
Learn to differentiate between what’s a necessity and what’s a luxury. Moreover, know how much is enough? By buying more and more stuff, you not only waste your money but also unnecessarily complicate your life.

Paramhansa Yogandanda , the author of the spiritual classic Autobiography of a Yogi said:

“It is important to differentiate between your needs and your wants. Your needs are few, while your wants can be limitless.”

Make it a principle that whatever you buy should be in response to an actual need or something you really value, not simply because you can afford it or your neighbor has it.

To better understand the importance of difference between your needs and wants, read this post and this post.

3. Adopt voluntary Simplicity
Simplifying life is about discarding the clutter and improving the quality of life. It is about saying yes to the things you want in your life and no to the things you don’t want. It is about not getting distracted by consumer culture, living with a purpose, and focusing on the essentials.

Richard Gregg - who coined the term ‘Voluntary Simplicity’ - in his seminal essay (1936) The Value of Voluntary Simplicity pointed out the need and benefits of living more simply. According to him,

“Voluntary simplicity involves both inner and outer condition. It means singleness of purpose, sincerity and honesty within, as well as avoidance of exterior clutter, of many possessions irrelevant to the chief purpose of life. It means an ordering and guiding of our energy and our desires, a partial restraint in some directions in order to secure greater abundance of life in other directions. It involves a deliberate organization of life for a purpose”.

4. Live Frugally
We are living in a golden age of indulgence. It is human nature to want certain luxuries, but the key is to enjoy them in moderation and not to let them get out of hand. On the other hand, spending frugally need not be an exercise in self deprivation.

Frugal living is more than getting the most out of every rupee. Frugal lifestyle is not just about making good financial decisions and saving money, but is a lifestyle or belief system which emphasizes self-restrain, reduction of waste, using fewer resources & getting more out of existing resources and indirectly becoming environmental conscious. It's about a simpler, less complicated lifestyle, not about being cheap or stingy.

It is entirely possible to be thrifty and dignified. Some of the world’s richest people are the world’s most frugal people.

A good write up is never complete without an example. OK, I’ll give you just one example which should be enough to understand that it is very much possible to be rich and yet lead a simple life.

You must have heard of Warren Buffett, the greatest investor of all times. But, do you know about his lifestyle? Despite being one of the wealthiest men in the world, he still lives in same home he bought nearly 50 years ago and he still drives his own car. Read more about Mr. Buffett’s secrets for living a happy and simple life.

The next part will discuss how to live a purposeful life. Meanwhile, what’s your choice? Frugal & simple lifestyle of Mr. Buffett, or lavish & indulgent lifestyle of Larry Ellison; modest lifestyle of Mr. Narayan Murthy, or flamboyant and extravagant lifestyle of Vijay Mallya.

Simplicity is the ultimate sophistication. -Leonardo da Vinci

Also Read:
1. Top 5 Ways to Simplify Your Life

2. Hidden Flaws of Spending (#1)

Term Insurance Plans: FAQs

2009-11-08T18:41:00.002+05:30

Photo by Marco Bellucci

The earlier post: Lesser known details about term plans, examined why term plans are considered as the best way to insure life and why insurers and agents are reluctant to sell them.

This post will answer some of the questions frequently asked about term plans such as basic features, types of term plans, maximum tenure of a term plan and best term policies available in India.

Term Insurance Policies: FAQs

1. What are term Plans?
Term plan is a pure risk coverage life insurance plan with no maturity benefit that takes care of your family or dependents in case of any unforeseen eventuality. It provides a lump sum to the family in case of death of the life assured during the policy tenure.

Other Unique features of Term Plans:
1. No surrender benefits
2. No Paid up value
3. No benefits are payable on maturity / survival
4. Most of the policies also offer riders such as Accidental Death Benefit (ADB), Permanent Disability Benefit (PDB) and Critical Illness Benefit (CIB) on payment of additional premium.

2. Are term insurance plans eligible for tax benefits?
Premium paid on term insurance policies is eligible for tax deduction under section 80C and death benefits are exempt u/s 10(10d) of IT Act, 1961.

Furthermore, premium paid on critical illness rider is eligible for tax benefit u/s 80D of IT Act, 1961.

3. Are the term plans available in the market similar in all respects?
Broadly speaking, yes they are similar with minor differences in terms of duration, maximum entry age, minimum and maximum sum assured, cost etc. I’ll be reviewing few of the term insurance plans in subsequent posts.

4. How many types of Term Plans are there?
There are broadly two kinds of term insurance policies – Pure Term Plans without return of premium (WROP) and Term Plans with return of premium (ROP).

Second classification is based on conversion option. There are simple term plans without conversion option and convertible term plans.

Convertible term plans provides you an option to convert your term plan into another insurance policy at a future date. For example, Kotak Term Plan offers you conversion option to convert it to any other plan offered by Kotak Life Insurance (except for another term plan) provided there are at least 5 years before cover ceases.

Majority of the term insurance plans available in the market are non-convertible type.

There is yet another factor (sum assured) based on which we can group them. First is a level term insurance plan and second is increasing sum assured term plans. As opposed to level term insurance plans, where sum insured remains constant throughout the term of the policy, in case of latter the cover keeps on increasing as you grow older. For example, in addition to level term cover, SBI Life Shield also offers you 2 other options of increasing sum assured. Under the first option, the basic sum assured increases by 5% for each policy year and in the second option there is a 50% increase in the cover after every 5 years.

Finally, like traditional insurance plans and Ulips, we can also distinguish term policies based on premium payments. First kind is single premium plan (paid in lump sum at the time of purchase of policy) and the other one is regular premium plan (paid at regular intervals).

5. What’s the difference between term plans and home loan term plans?
While term insurance plans provide same coverage (i.e., level term cover) throughout the policy term, home loan covers come with declining coverage i.e., which reduces in line with the loan amount and expires when the loan is fully repaid. In other words, the coverage provided under declining liability home loan term plans (such as ‘ICICI Home Assure’ and ‘HDFC Home Loan Protection Plan’) decreases as the outstanding loan amount decreases.

6. What’s the maximum tenure of a term plan?
The maximum duration of term insurance policies is generally 25 years with a few companies even offering term plans for a term up to 30 or even 35 years.

There is yet another condition that maximum age can’t go beyond 60 or 65 years (some plans extend even up to 70 or 75 years).

For example, while HDFC Term Assurance Plan is available for maximum tenure of 30 years with the second condition that maximum age at expiry not to exceed 65 years, ICICI Pru Pure Protect Classic is also available for a maximum duration of 30 years but maximum age at expiry is increased to 75 years. Therefore, an individual aged 45 years looking for a term plan for 30 years can choose the term plan of ICICI in comparison to HDFC.

7. How to Compare various term plans? Is the premium quoted by the insurance companies on their brochures final? Or, are there any other charges involved?
Yes, the premium charges mentioned by life insurance companies on their brochures are final. But understand the following:

a. While some life insurance companies quote the premium rates inclusive of service tax (& Cess), others quote the rates exclusive of service tax.

b. The rates quoted are standard rates applicable in case of a healthy male individual (non-tobacco user). In other words, while smokers and unhealthy individuals are usually charged extra premium (due to high mortality risk), women policy holders are offered discount from the standard rates (due to low mortality risk).

c. While comparing term plans of various life insurance companies, one should also ensure that age of the individual, sum assured, tenure / duration is same across all the plans.

8. Which is the best term plan available in the market?
Although term insurance plans are commoditized products (i.e., all the products available in the market are more or less the same), still you can choose the best one in terms of costs, duration, coverage. The best plan should be the least expensive while providing for maximum coverage and available for maximum duration.

In next part, I’ll tell about the practical tips on how to go about buying the best term plans.

Also see:
1. Most Amazing Fact about Life Insurance
2. Lesser Known Facts about Term Plans
3. Understanding Life Insurance

Answering Readers’ Questions – Part 2

2009-10-31T13:28:00.002+05:30

Photo by ralphbod

The following question was asked by a reader in the comment section of the post: Residential Status of Returning Indians.

Q: Is there a difference or advantage in operating as an Individual or setup a firm in trying to work from India for a US client? I assume as a consultant, I could claim tax deductions on travel and such. Would business setting enable tax deductions on rent if operating from home? BTW, any recommendation of folks who can advice me either in US/India regarding this would be appreciated.

As the query requires an exhaustive response, I thought it prudent to write a separate and detailed post so that other upcoming / budding entrepreneurs can also benefit from the advice.

How to Start a Consultancy Business in India: Regulatory and Other Issues
An individual planning to start his own consultancy in India, would like to have the answers for the following questions:

Q1: Can I simultaneously start my own business / consultancy while working as an employee?

Q2: Which is better from tax point of view: salaried employee vs. working as a consultant?

Q3: If I start a consultancy, then what are the legal formalities?

Q4: If working as a consultant, whether to open a sole proprietorship firm or work under individual’s name?

Q5: If I open a sole proprietorship, whether any registration is required for it?

Q6: How can I be sure that the name I’m going to use, say, “ABC Consultants” is unique and there is no other business or profession is being operated under the same name? What if in future I become famous and someone else copies my firm name?

Q7: What is the status of sole proprietorship under Income Tax Act, 1961? Do I need to apply for a separate PAN card for sole proprietorship? Do I need to file two returns, one in the individual capacity and other for proprietorship firm? What are the tax deductions allowed in running my own business or consultancy? How does it make a difference in the taxation if I run the run the business / profession from home?

Q8: What are the TDS implications?

Q9: Whether any other tax is applicable such as service tax? If yes, then is there any exemption limit below which I’m not liable for service tax? What about service tax registration? Is it required irrespective of the exemption limit or only if my billing exceeds certain minimum threshold? Do I require registration before starting the service or can I apply afterwards? What is the rate service of service tax applicable for FY 2009-10?

Q10: Whether a separate bank account is required for banking purposes?

Q11: What if I render services to a foreign client?

Q12: What if I start a sole proprietorship and later on in future (to expand the business) decide to convert it into partnership / company?

In a nutshell, the reader wants to know how to start a consultancy business in India?

Working as an Employee vs. Consultant: Income tax Implications
Location of Clients: In deciding whether to work as an employee or as a consultant, it is immaterial whether you work for a US client or Indian client.

However, if you work for US clients you also need to take into account US tax laws and DTAA between India and US.

Tax on Salary vs. Professional Income: As a consultant your income is taxed under the head “Income from business or profession” and accordingly you’re entitled for all the genuine expenses incurred for purpose of running your professional practice such as travelling, rent (even if working from home), depreciation (on car, computer etc) printing and stationary, telephone etc.

On the other hand, if you work as an employee, your entire salary doesn’t get taxed. You’re entitled for various exemptions and deductions such as HRA (for rent paid), transport allowance, medical reimbursement, LTA etc.

TDS: If you are a salaried employee, the entire tax on your salary gets deducted at source as per section 192 of the IT Act. But, if you’re working as a consultant, TDS @ 10% is deducted under section 194J (TDS on professional or technical services).

Non-Tax Consideration: As a consultant you can work for many clients but as an employee you can only work for one employer. Why? There are no statutory restrictions on engaging yourself in any other activity / trade while simultaneously working as an employee. However, usually as per the terms and conditions of employment contract (appointment letter), employees are barred from undertaking any business, profession or vocation directly or indirectly without prior permission of the employer.

Starting or opening a Sole Proprietorship Firm
Meaning: A sole proprietorship firm (also called proprietorship) is a form of business entity (other forms are partnership firms and Companies registered under Companies Act, 1956) owned and operated by an individual. It is the oldest, cheapest, simplest and most common form of business organization.

Registration: In India, a sole proprietorship firm has no legal existence separate from its owner. Therefore, there is no requirement of registration.

However, you might require registration under other regulatory authorities. For example, if you’re a professional, say, practicing as a CA, you require registration with ICAI; if selling mutual funds, registration is required with AMFI; if selling insurance need to have license from IRDA; if into import / export of goods or services, IEC (Import Export Code) is required.

Tax Status: From tax point of view, it is immaterial whether you run consultancy in your name or open a proprietorship firm. Unlike a partnership firm, which has a separate status than the partners running it and is accordingly a separate tax entity for tax purposes, the sole proprietorship firm and the sole proprietor are the same and there is only one tax assessment in the name of individual. Therefore, only one tax return is to be filed in the name of individual.

PAN: There is no need to apply for a separate PAN card for proprietorship firm and you can quote your individual PAN wherever required in your business dealings. In other words, PAN of the proprietor will be PAN of the proprietorship firm.

Conversion: In future, if required you can convert your sole proprietorship into partnership firm or a private limited company under Companies Act, 1956.

Service Tax Implications
Registration: If you’re providing a specified taxable service and the aggregate value of the service provided by you exceeds Rs 10 lakh during the financial year, then you’re liable for service tax and also need a registration [Form no ST-1] under Service tax.

Rate: The current rate of service tax is 10.3 percent.

Location of Clients: If the taxable service is exported then no need to pay service tax by virtue of Rule 4 of Export of Service Rules 2005. But what is export of services? As per Rule 3 of Export of Service Rules, 2005, if the taxable services is provided from India and used outside India and payment is received in convertible foreign exchange, then the taxable service is considered as exported.

Banking Issues
If you’re running consultancy services or professional practice in your individual name, then there is no mandatory requirement to have a separate bank account. But it is always better to keep your personal transactions separate from business transactions as it also helps in accounting and compliance with tax matters.

On the other hand, if you’re rendering consultancy or other services under a sole proprietorship name, then it becomes necessary to have a separate bank account in the name of proprietorship firm. Why? Because your clients are going to issue cheques in the name of your proprietorship concern which can’t be deposited into your personal bank account.

Besides, as business / professional concerns are not allowed to open a savings bank account, you’ll have to open a current account. To open a business account in the name of proprietorship concern, banks usually demand a registration with any government or statutory body or a trade license (as a part of KYC norms) and if you don’t have any registrations / license, you might face problem in account opening. However, some banks allow you to submit a CA certificate. This is in fact the most troublesome part of opening a sole proprietorship firm.

But in my opinion banks are not at fault because in order to satisfy themselves about the genuineness of the sole proprietorship firm and as a safeguard against fraud, it becomes necessary for banks to require proper documentation.

Other Requirements
Website: Now a day, if you expect your clients / customers to take you seriously, it is a must to have your own website. So it is always better to buy a domain name at the beginning itself even if you would like to wait for sometime before launching your website.

Accounting & Auditing: As per section 44AB of Income Tax Act, 1961 read with Rule 6F of IT Rules, 1962 every person carrying on business or profession is required to maintain books of accounts depending upon the income and turnover / gross receipts as specified therein. In case of ‘specified professions’ the requirement is mandatory irrespective of the ‘gross receipts’.

Furthermore, according to section 44AB of IT Act, a person carrying on a profession is required to get his accounts audited if the gross receipts exceed Rs 10 lakh in a financial year.

Printing & Stationary: A letter head, visiting cards and a stamp is also required.

Trade Marks: If you want to make sure that in future nobody else makes use of your business name, brand or logo, you have to get it registered as a Trademark with Trademark Registrar under Trade Marks Act, 1999. Before registration a market survey is required to ascertain if same / similar mark is already in use in the market.

I’ve tried to ensure that the above write-up gives a comprehensive view of all the issues faced by a budding entrepreneur in starting his own consultancy business in India either in his individual name or as a sole proprietorship firm.

If anything is still missing, please write in the comment box. You can also send your queries directly to feedback [at] themoneyquest [dot] com.

Also see:
1. Why do we make Fatal Money Mistakes?
2. Answering Readers Questions: Part - 1

In a Lighter Vein: New Financial Definitions

2009-10-27T14:18:00.003+05:30

Photo by Picture Taker 2

A person without a sense of humor is like a wagon without springs. It’s jolted by every pebble on the road.

––Henry Ward Beecher

I've bored you enough already with the technical jargon of tax laws, insurance and stock markets. What’s life without humour? Why not take a break and have some lighter stuff to read and laugh about? So this post is about some interesting and funny definitions:

New Financial Definitions…

1. Banker: A fellow who lends you his umbrella when the sun is shining and wants it back the minute it rains.__Mark Twain and Robert Frost

2. Lawyer: A learned gentlemen who rescues your estate from your enemies and keeps it for himself.__Lord Henry P. Brougham

3. Consultant: A person who borrow your watch to tell you the time and then walk off with your watch.__Robert Townsend

4. Tax payer: One who does not have to pass a civil-service exam to work for the government__Ronald Reagan

5. Economist: A person who knows more about money than the people who have it.

6. Optimist: A person who keeps the engine of his car running while his wife is shopping.

7. Miser: A person who lives poor so that he can die rich.

8. Rich Man: Nothing but a poor man with money.

9. Advertising: The art of convincing people to spend money they don’t have for something they don’t need.__Will Rogers

10. Advertisement: The most truthful part of the newspaper.__Thomas Jefferson

11. Insurance Company: Heads we win, tail you lose.

12. Life Insurance: A plan that keeps you poor all your life so that you can die rich.

13. PMS: Portfolio Mismanagement Services.

14. CEO: Chief Embezzlement Officer

15. CFO: Chief Fraud Officer

16. Budget: A method of worrying before you spend money, as well as afterwards.

17. Cash Flow: The movement your money makes as it disappears down the toilet.

18. Prices: The only thing which violates the law of gravity.

19. Inflation: Cutting money in half without damaging the paper.

20. Bull Market: A random market movement causing an investor to mistake himself for a financial genius.

21. Market Correction: The day after you buy stocks.

22. Liquidity Crunch: The state of an economy / corporate body that’s undergoing extreme dehydration.

23. Competition: When someone earns money not to make himself rich but to make his neighbor / rival less rich.

24. Capitalism: Man exploiting man, as compared with socialism, which is the reverse.

25. Old age: Age when thoughts turn from passion to pension.

Hope you enjoyed it!

Also see:

1. How to Simplify Your Life

2. First Blog Anniversary

3. Money Teaser #2

Considerations to know while Investing in Bank FDs

2009-10-24T08:48:00.002+05:30

Photo by Jim (jaytay)

Most conventional investment option for retail investors particularly for risk-averse investors is fixed deposit (FD) of Banks. Although investing in bank FDs is the easiest among all the investment options, but before investing in bank term deposits you should well understand the considerations such as tax impact, safety, liquidity and effective returns. In the previous post, we had a look at the the taxation of interest income of FDs. This post talks about the 3 other most important considerations to be kept in mind while investing in Bank Fixed Deposits (FDs).

Investing in Bank FDs: 3 Other Most Important Considerations

1. Liquidity
Liquidity is an important consideration while making investment decisions. There can be so many reasons for breaking the FDs before the maturity date. Broadly there are two main reasons: first is an emergency need and second is to take advantage of increasing interest rates.

Though you’re allowed to break up your bank term deposits, know that premature redemption / encashment of fixed deposits (FDs) involve a cost.

Normally, banks give you an interest rate applicable for the period during which the deposit remained in force (i.e., rate of interest applicable for the shorter tenure) which is usually less than the rate of interest applicable for the original duration. For example, if you invest in a 2-yr bank FD offering 9% p.a. and after 1-yr you break the FD and the interest rate applicable for one year FD was (at the time the deposit was made), say, 8% p.a., then you’re going to lose 1% p.a. straight away.

Furthermore, most banks (with the exception of a few) also levy a penal charge for premature withdrawal of fixed deposits—usually 0.5%. So, ultimately, in the above example, you’re going to receive interest @ 7.5% p.a., instead of 9% p.a. on your bank FD.

But what if the interest rate for the period during which deposit remained with the bank is more than the contracted rate (i.e., the rate offered for the original maturity of a term deposit)?

To safeguard against such a possibility, banks usually put the clause that interest on premature withdrawal of a term deposit will be payable at the rate applicable for the period for which the deposit remained with the bank or the contracted rate, whichever is lower, less penalty as applicable.

3. Safety
Bank deposits are covered by Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance up to a maximum amount of Rs 1 lakh per person per bank. Please remember limit of Rs 1 lakh includes all deposits whether held in savings account, fixed deposits account, current account or recurring deposit account.

Although bank fixed deposits offer a lower interest rate vis-à-vis company deposits, these are considered better from safety point of view because company deposits are completely unsecured.

4. Return / Yield
The return consideration is the most important consideration while making a decision for investing in Bank FDs. Here you should be concerned with post tax returns i.e., how much net amount of interest income is left to you after paying the tax.

For example, if your marginal income falls in highest tax bracket (30.9%) and you invest in a bank FD with 8% rate of interest, then your effective post-tax return from the FD will be 5.53% and if you happen to fall in middle tax bracket (20.6%), then the post-tax return would be 6.35%.

In next part, I’ll let you know some practical tips for making the most of your investment in bank fixed deposits.

Also see:

1. Bank Fixed Deposits - Interesting Interest Information
2. Impact on Continuity of a Bank FD in case of Death
3. Taxation of Interest Income from Bank FDs

Top Most Tax Myth: Taxation of Interest on Bank FDs

2009-10-19T20:57:00.002+05:30

Photo by net_efekt

In an earlier post about bank fixed deposits (FDs), I had elaborated on the known and not-so-known facts about bank interest rates and the difference between interest rate and the yield. In continuation, this post talks about taxation of FDs Interest: the top most myth associated with Bank Fixed Deposits (FDs).

A lot many people believe that tax on Bank FD interest is payable only at the time of maturity; others think that it has to be taxed on accrual / annual basis. Then there is another associated myth that if TDS is already deducted on interest income from Bank FDs, then it need not be shown in return of income (ITR). Therefore, this post is going to dig out the facts concerning taxation of interest income on bank FDs including the tax deduction at source (TDS).

Note: The ensuing discussion is regarding tax implications of interest income on bank fixed deposits of resident Indians. In other words, taxation (including TDS) of NRO (Non-resident ordinary rupee account) deposits of NRIs (Non-resident Indians) is not covered and will be discussed separately in another post.

Taxation of Interest on Bank FDs
Know that interest income from Bank fixed deposits (FDs) is fully taxable in your hands. It is included in your other income and taxed according to applicable highest tax bracket.

Interest Income on FDs: Taxation vs. TDS
Understand that TDS and taxability of interest are two separate things.

First, just because TDS has been deducted from interest income on bank FD doesn’t mean that you’re no more required to show it in your return of income.

Second, even if there is no tax deduction at source (TDS), you’ve to include the interest income in your total taxable income and pay tax on it at the maximum marginal rate applicable to you.

Regarding TDS, two points are worth noting. First, TDS on bank interest is always deducted @ 10% whereas the marginal rate of tax applicable to you may be 20% or 30%; therefore, there can be additional tax liability based on your total income. Second, even if full TDS gets deducted from any income, one has to show both the income earned as well as TDS deducted in the return of income (ITR).

However, according to section 145 of the IT Act, 1961, you’re provided an option to include the interest income for tax purposes either on cash / receipt basis or accrual basis as per the regular method of accounting employed by you. But, once a choice is made, it should be followed consistently.

Anyhow, it is better to show the interest income on accrual / annual basis because you might have to pay higher tax if you show the entire interest on FD in the year of maturity due to increase of income to next higher tax bracket.

Rate of TDS on Bank FDs
As per section 194A of IT Act, 1961, tax @ 10% (earlier 10.30%) is deducted at source if the aggregate interest payable or reinvested exceeds Rs 10,000 for all your deposits (except recurring deposits and savings account deposit) in a bank branch during a financial year. TDS is deducted every time bank pays interest during the financial year. It is also deducted on interest accrued (but not paid / credited) at the end of every financial year (i.e., 31st March).

As per the changes made by budget 2009, with effect from April 1, 2010, it will be compulsory for you to furnish your PAN to the Bank failing which the bank will deduct TDS at the rate of 20% instead of 10%.

Avoiding TDS on Bank FDs: Form G / Form H
If your income is below the taxable limit, you need to present Form 15G/15H (as per section 197A of Income Tax Act, 1961), while opening a Fixed Deposit (FD) account in a bank to avoid tax deduction at source (TDS) from your interest income. Following points are worth noting regarding self-declaration in Form 15G / 15H:

1. While Form 15H is meant for senior citizens, 15G is for any other individual.
2. Form 15G / 15H can be submitted only if the tax on your total income is nil. In other words, you can’t submit a Form 15G / 15H if you’re already a tax payer.
3. New Form 15G / 15H has to be submitted for each FY.
4. An individual who is liable to pay tax can apply in Form 13 to Assessing Officer (as per Section 197) to obtain a certificate of lower rate of tax or no tax as may be appropriate.
5. According to amendment made by Finance Act 2009, the requirement of submission of PAN is also made mandatory for those submitting declaration in Form No 15G / 15H (effective from April 1, 2010). In other words, in the absence of PAN, the 15G / 15H declaration would become invalid.

I hope this answers all your questions regarding TDS and taxation of interest on bank fixed deposits. If any doubts remain, ask in the comment box.

The next part will discuss about other considerations to know while investing in Bank FDs.

Also see:

1. Bank FDs - Interesting Interest Information
2. Investing in Bank FDs - 3 Other Considerations
3. Impact on Continuity of an FD in case of Death