Sunday, November 6, 2011

Trading Terms

A growing number of small investors is buying and selling stocks online. However, before you attempt to do it yourself, here are a few terms you should familiarize yourself with.

These orders are used for buying and selling shares in the normal course of stock trading during the day.

This order is valid only for a day. If it is not executed by the end of the session, the order gets cancelled automatically.
Eg: Tata Steel is trading at 440/-. You place a day order for shares at 430/-. It will be executed only if the share price dips to 430/- during the day.

This is for buying or selling a share as soon as the order is placed. If there is no buyer or seller at the specified price, its gets cancelled. Sometimes IOC orders are executed partially.
Eg: An IOC order is placed for 100 shares of Reliance Industries at 12.05pm when the share price is 900/-. Only 25 shares are bought before the price rises to 905/-. The order for the balance 75 shares is cancelled.

This order is executed immediately, irrespective of the share price. The buyer gets to know the price only after the order has been executed.
Eg: In the above example, if it was a market order for 100 shares of Reliance, the buyer would have got 25 shares at 900/- and the balance 75 at 905/-.

Unlike the day order, this remains valid for a specified number of days till it is cancelled by the trader. The validity period is specified by the exchanges.  GTC orders help investors buy at a specified price without having to monitor the share price closely.

Stop Loss orders limit the loss of the investor by buying back or selling a share if the price moves contrary to expectations. He doesn't need to monitor the price.
This limits the price as a percentage of the last traded price. It is useful while trading in volatile stocks
Eg: You place an order for shares at 100/-, but by the time it is received by the system, the price rises to 106/-. In a market order, you will get shares at 106/-, but if you opt for 2% MPP, the order will not be executed if the price rises above 102/-.

The stop loss order can also be set if shares have been bought.
Eg: An investor buys 100 shares at 175/- and sets a stop loss at 173/- with a limit of 170/-. The shares will not be sold if the price falls below 170/-.

A limit order specifies the price at which the shares are to be purchased (or sold) after the stop loss is triggered.
Eg: If the limit for Axis Bank was set at 1107/-, the order would be executed between 1105/- (the trigger price)  and 1107/- (the upper limit). If the price rises to 1110/-, the order will not be executed. Limit order gives the trader some control over the price, but the purpose is defeated if the price moves beyond the defined threshold.

The stop loss is activated when the share price reaches the trigger price and is executed at the prevailing market price. The investor has no control over the price at which the order is executed after it is triggered.
Eg: A trader short sells 100 shares of Axis Bank at 1100/- and sets the threshold price at 1105/-. When the price rises to 1105/-, the order is activated for immediate execution. However, if the price jumps to 1110 or more before it is executed, the order will be executed at 1110/-. Once the trigger is crossed, the trader has no control over the price.


These are trading barriers set up by the exchanges to prevent excessive speculation and panic selling, the circuits are activated when the market moves by over 10% and trading halts across the equity and derivative markets throughout the country. The circuits are currently applicable to two benchmark indices -- BSE Sensex and S&P CNX Nifty.

10% rise or fall in benchmark index
Before 1 pm => Trading halts for one hour
After 1pm but before 2:30 pm => Trading halts for 30 mins.
After 2:30 pm => Trading doesn't halt

15% rise or fall in benchmark index
Before 1 pm => Trading halts for two hours
After 1pm but before 2:30 pm => Trading halts for one hour
After 2:30 pm => Trading halts for the day

20% rise or fall in benchmark index
Trading suspended for the rest of the day.

Friday, September 23, 2011

Assured Returns

Don't be fooled by promises of guaranteed returns. It is critical to look for risks in an investment rather than seek assurances that are easy to give.

Investors love assurances. An assured return conjures up the image of a solid investment that will deliver on its promise. It seems like the best choice one can make with one's money. The truth is that delivering an assured return is the toughest act for an financial product. If investors think that assured return means a risk-free and safe investment, they should think again. The quality of the promise matters so much more than the promise itself.

Why is it tough to assure returns? The performance of an investment is primarily driven by the assets in which the investor's money is put to work. All assets are subject to risk. It is not possible to buy assets that will only appreciate in value. The degree of risk may vary, but no one can tell how an asset will perform in the future. Whether it is land, gold, houses, stocks or art, all assets are subject to the risk of price fluctuation. Prices are influenced by cyclical factors such as the state of the economy (the US housing prices crashed in 2008 triggering an economic recession), and structural factors that impact the specific asset. Some assets, such as property or equity, may face short-term risks that even out in the long-term, but they are risky anyway. All investment products are based on an underlying asset port-folio, which is risky by definition. Asking where, not how, the money will be invested is critical to understanding any assurance of return.

So, how do banks manage to assure returns on deposits? The answer lies in the balance sheet structure. A bank borrows from its depositors. Its assets are the loans it gives out to various borrowers using these deposits. The borrowers agree to pay a fixed rate of interest and return the principal, but their ability to keep the promise is again linked to their assets and performance. A person who has taken a home loan is likely to default, despite committing to a fixed rate of interest, if he loses his job or if his house drops in value significantly. Therefore, the bank's portfolio is also subject to risk. The bank does two things to keep its promise to depositors. First, it ensures that the loan portfolio is not completely risky and holds some safe investments in government bonds as well. Second, it does not fund all the loans with deposits, but ensures that a part of it is funded through equity investors who do not seek assurance. If the risk of the asset portfolio is borne adequately by equity capital, the bank is unlikely to default on its deposits. This is why capital adequacy is a regulatory requirement for banks that seek deposits from the public. This is also the reason that a bank with a poor quality loan portfolio or inadequate capital can default on it deposits despite assurance.

How does a company pay an assured return on its bonds? It does so by further extending the balance sheet structure used by a bank. Unlike a bank that holds loans, a company holds assets that are expected to generate future income. The risk associated with these assets can vary depending on the nature of the business. Therefore, a company has to be funded by its promoters even before it seeks any lenders. The lenders will, of course, want the company to have adequate equity capital already invested in it. They will ask an external credit rating agency to test the quality of assets that they are funding. As we know, these agencies can downgrade and change the rating unfavourably if a company is more likely to default.

How safe are government securities? The central government assures returns on its bonds and saving schemes because of its unique powers that provide it with three options to return the money it borrows. It can unilaterally increase the taxes, borrow internationally, or print money. We can, therefore, assume that the government will pay its liabilities. We know from the experiences in Europe that a government which borrows recklessly can also find itself in trouble, causing serious economic consequences for its lenders and citizens. Hence, the ability to assure returns comes either from the strength of the balance sheet in the case of a bank or company, and from special powers vested with a government. It is critical to learn how to look for risks in an investment, rather than seek assurances that are easy to give but tough to deliver.

Saturday, September 3, 2011

MF Grievance

A  proper redressal system is in place to address the complaints of an MF investor.

Investing in a mutual fund (MF) today is easier than ever before. Now, you could invest not just through the distributor, but also online and without an intermediary. Servicing the MF investor, on the other hand, has always been an issue, though it's being tackled through a series of steps of late. The tardy and unfriendly attitude that characterized the MF industry in its infancy stage has given way to an efficient and personal face. Still, complaints do crop up, such as a missed dividend cheque, issues with a fund's NAV pricing, non-receipt of fact-sheet and annual reports, and so on. If caught on the wrong foot, you can follow the following redressal trail.

The Fund House
Most snags get resolved at the fund house ---- the first step of the redressal ladder --- itself. In case of any clarification or complaint regarding your investment, approach your fund house or its registrar and transfer agent (R&T). Their contact details are there in the account statements or the fact-sheets that funds send to investors. You could also get them from the website of the respective fund house and its transfer agent. The  fund house or registrar will look into the complaint and, more often than not, resolve it then and there.

The Regulator
If, for some reason, the investor is not satisfied with the fund house's response and wants further intervention, the next contact should be the regulator -- Securities and Exchange Board of India (Sebi). A written complaint has to be filled with any of the four zonal offices, detailing the circumstances of the case, along with photocopies of the relevant documents. Complaints can also be filled online on Sebi's website On receiving the complaint, Sebi will give a reference number, which will need to be quoted in all future communications with it. Sebi will follow up the case with the fund house. If the fund house does not resolve the complaint with three months of filing it with Sebi, you will have to sound out (Send reminder) the regulator again.

Investor's Association
If Sebi also fails to resolve a complaint, you will have to approach an investors' association. These are independent entities that help investors in grievance cases. You will have to write to one of the associations, attaching photocopies of relevant documents. Some of these entities provide the services for free, while others charge a nominal fee in the range of 200 - 500 INR. These associations take up individual cases too. To start with, the investors' association will do what Sebi does -- hear the investor's side of the story and follow it up with the fund house concerned. If it does not get a satisfactory  answer from the fund house, and it feels there is a case, it might advise the investor to take legal action. It could even help with the case.

Ministry of Corporate Affairs
'Investor Helpline' is a free, dedicated online portal to handle investor grievances administered by different authorities, i.e., the Ministry of Corporate Affairs, Sebi and the Reserve Bank of India, in a focused and sustained manner. It is sponsored by the Investor Education and Protection Fund under the Ministry of Corporate Affairs. Right from filing of the grievances to tracking their status and interaction with the administrator, all the steps have been made online to make it user-friendly.

The Courts
On rare occasions that your problem remains unresolved, the legal system is your last recourse.

Saturday, August 20, 2011

Market Correction

Investing in uncertain times

There is mayhem in the markets. Here's what small investors should do to cushion their portfolios against the downturn
There is no hard and fast definition of the term "Market Correction". A stock market correction is when the stock market declines 10% or less in a relatively short period of time. It's a natural part of the stock market cycle. Corrections are inevitable. When the stock market is going up, investors want to get in on the potential profits. This can lead to irrational exuberance. This can make stock prices go well above their underlying value.

A correction is different from a stock market crash, which is when stock prices plummet more than 10%, often in just one day. Unlike a correction, a stock market crash can cause a recession. How? Stocks are how corporations get cash to grow their businesses. If stock prices fall dramatically, corporations have less ability to grow. Businesses that don't grow will eventually lay off workers to stay solvent. As workers are laid off, they spend less. Lower demand means lower revenue. This means more layoffs. As the decline continues, the economy contracts and you have -- Voila! -- a recession.

If a correction is relatively benign, and a crash can cause a recession, how can you tell the difference? It's not easy. A correction can turn into a crash if the stock market declines more than 10%. Trying to decide if a correction is turning into a crash is known as timing the market. This is nearly impossible to do, since there are so many factors that can influence the direction the market goes in. However, the markets soon regain their confidence, reverse course and begin to head higher once again.
The worst thing to do right now is panic. Over-leveraged speculators and panic-stricken investors were the only ones who lost money in the 2008-09 crash. For the disciplined long term investor, the spectacular decline in the markets that saw the Sensex hitting a multi-year low was actually an opportunity. A bit of data crunching would reveal that there is virtually no risk if you invest in stocks for the very long term (5-7 years on an average).

Here are a few steps that can help cushion the impact of volatility and ensure that investors don't get carried away by the predictions of doomsayers.

Don't stop the SIPs
Don't even think about terminating your SIPs at this point. It's the worst thing you can do to your portfolio and would defeat the very purpose of the SIP. If you stop now, you are effectively turning down the chance to buy more at lower prices. It's a common mistake that can prevent your attempt at rupee-cost averaging. The impact cost of stopping a Ulip premium is higher than terminating an SIP, so many investors opt for the latter.  The investors should automate their investments so that there is no discretion in their reaction to the noise emanating from the stock market.

Stick to Blue Chips
It's now amply clear that the economy will take some time to regain momentum. Slower growth rates, high inflation and high interest rates are here to stay. When the economy was growing at 9%, the tide has lifted all boats and the mid-cap and small-cap companies flourished. Now, with economies projecting a GDP growth of 7-7.5%, only large companies will be able to clock good growth, while the mid-sized companies will barely manage to stay in the green. Smaller companies will have to struggle and could easily slip into losses in the situation worsens. It's the best to stick to large-cap stocks at this time instead of risky mid-caps and smalls-caps.

Diversify your bets

The infrastructure sector has been badly beaten down but analysts expect it to do well when the economy revives. It's a good time to start nibbling at some infrastructure stocks at these beaten down levels. Even so, don't put all your eggs in the infrastructure basket. Spread your bets and risks -  across a basket of Metals, IT, FMCG and Banking sectors stocks at such throw away prices..

Rupee-Cost Averaging

The markets are down to attractive levels but there is no knowing where the bottom is. It's best not to anchor yourself to an index -  say 4000 (Nifty) or 14000 (Sensex). To avoid buying high, don't invest lump-sum amounts, but do so in monthly installments. In this manner, you will be able to gain the advantage of the rupee-cost averaging that the SIPs offer.

Friday, August 19, 2011

Investor Type

Your investment style will not only determine how you behave during a market crisis, but also help you take the right decisions.

Uncertainty, which breeds fear of the unknown, hinders an investor's ability to make rational decisions. When the markets are buffeted by negative news from around the world and the general consensus is that the worst isn't over, investors become confused about the course of action they should take. The overload of information and analysis makes things tougher. Ultimately, how he behaves during a crisis will depend on the kind of investor he is. The investors who are financially weak may not be able to participate in every kind of market and should know when to keep out. So, risky markets are not for a person who is, say, rolling over his credit card dues, or is paying a large EMI for house that is yet to be delivered, or is worried about not earning or saving enough. The investors who have a limited corpus or significant liabilities, and senior citizens with a low risk appetite are better off not taking drastic measures in risky markets else they can loose much more than they can afford.

Strategic investors, on the other hand, focus on building long-term wealth. They are smug in the knowledge that 10 years on, the events that seem cataclysmic now will be pale into insignificance. They stick to an allocation pattern - say. 50% in equity, 30% in long-term debt, 10% in short-term debt, and 10% in gold -- and earn reasonable returns across market cycles. Sticking to one's allocation means continuing to invest in equity even as the market falls and keeping money aside in debt even if the equity market rises. A strategic investor does not care much for market cycles. Instead, he has faith in the power of  time to even out losses. For such an investor, panic-driven crashes in the market are opportunities to reduce the average cost and even out the expensive pricing of the preceding boom. The losses during the downside are taken in stride as an essential biter pill in order to be present in the market when it turns up. This breed does not use borrowed capital, and is not in a hurry.

Tactical investors are the ones who are tested the most during any uncertainty. This breed lies to predict how asset classes are likely to perform, and based on the macro picture that emerges, it tries to modify the portfolio to protect it from losses. For instance, a tactical investor would reduce his exposure to equity if he foresaw any risk to global flows. He would also increase the exposure to gold in an attempt to cash in on the clamour for a safe investment in turbulent times. In the face of an expected drop in a global demand, this group would reduce the exposure to commodities. or would avoid long-term debt if a jump in market and credit risk was on the cards. Obviously, not all calls can be accurate. Tactical investing needs expertise and skill in reading the market signals, as well as the ability to reallocate assets. The investors who see themselves falling short in either department should keep away.

Some investors enjoy event-based trading. Here, the temptation to buy an asset that is moving up is high. This group uses available information, even if it's partial, for a quick take on an event before making a move, hoping to make money from the resulting volatility. Such investors should focus on the capital in hand and be willing to book losses if their call goes wrong. The amount they allocate to an asset after reading the signs should not be too large a component of their wealth, as it can wipe them off. 

There are bound to be problems if the investor's behaviour in uncertain times does not match his type. So a strategic investors gives in to panic and quits the market in haste; an event-based trader stakes a large chunk of his portfolio in what everyone is chasing but fails to exit in time; a tactical investor assumes that all his calls will hit the bull's eye and borrows funds to add to a position he holds, making a risky bet riskier;  a financially weak investors hopes to make good an earlier loss but ends up repeating his mistakes.

Hence, it is crucial to identify the type of investor you are, to think through your action plan and focus on your wealth before you act on the market information.

Friday, July 29, 2011

Know your PAN

Whether you are an Indian citizen or an NRI, if you are filing taxes or have financial transactions in India you will almost always need a PAN card. 

What is PAN?
A Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department of India. Each set of numbers is unique to the individual, HUF, company, etc. (We will take a closer look at those numbers in a moment.). PAN is a permanent number, is unaffected by a change of address, even between states and is not transferable. It is illegal to own more than one PAN.

The PAN’s primary purpose is to bring a universal identification key factor that links and tracks various documents and information regarding taxes and financial transactions, such as loans, investments, buying and selling real estate and other business activities of taxpayers. By tracking the above it indirectly prevents tax evasion through non-intrusive means.

You can consider this number to be similar to the Social Security Number issued in the United States to USA citizens and other legal residents.

Structure of the PAN
The structure of the new series of PAN numbers is based using Phonetic Soundex code algorithm to ensure that each number is unique. The following list is “constant permanent parameters” that assist in the creation of phonetic PAN (PPAN) number:
  • Full name of the taxpayer
  • Date of Birth/Date of Incorporation
  • Status
  • Gender in case of individuals; and
  • Father’s name in case of individual (including in the cases of married ladies). 
The Date of Issue (DOI) of the PAN card can be found on the right hand side of the photo on your PAN card.

The 10 Digit Alphanumerical Sequence
Let’s take a look at the breakdown of the 10 digit alphanumerical sequence:
  1. The first five fields are called the core fields and are alphabetical in nature.
  2. The first three letters of the core field are an alphabetical series running from AAA to ZZZ.
  3. The fourth character of the PAN must be one of the following, depending on the type of assessee:
  • C — Company
  • P — Person
  • H — HUF (Hindu Undivided Family)
  • F — Firm
  • A — Association of Persons (AOP)
  • T — AOP (Trust)
  • B — Body of Individuals (BOI)
  • L — Local Authority
  • J — Artificial Juridical Person
  • G — Govt
(Example – Company = AAACA; Artificial Juridical Person = AAAJA; HUF = AAAHA; etc.)

     4.  The fifth character of the PAN is the first character of the following:
  • Your surname in the case of “P” or;
  • For all others you would use the first letter of the name of the Entity, Trust, Society, Organization, HUF, etc.
(Example - Atanu Gupta [Personal] = AAAPG4444A; Atanu Gupta [HUF] = AAAHL4444A; General Firm = AAAFG4444A; etc.)

     5.   The next four numbers are sequential numbers running from 0001 to 9999.
     6.   The last digit is an alphabetic check digit.

The New Phonetic PAN (PPAN)
The new Phonetic PAN (PPAN) helps to prevent the allotment of more than one PAN to assesses with the same or similar names. If a matching PPAN is detected, a warning is given to the user and a duplicate PPAN report is generated. In these cases, a new PAN can only be allotted if the Assessing Officer chooses to override the duplicate PPAN detection. Under this new system a unique PAN can be allotted to 17 crore taxpayers.

Myths Regarding PAN
Many people believe that PAN cards are used for tax purposes only. That is a myth. PAN numbers are required for the purpose of income tax but not the actual card itself. Photocopies of PAN cards are required as prove of identity in financial transactions such as opening a bank account, purchase and sale of property and motor vehicles, home telephone lines and investments, such as demat accounts and mutual funds, just to name a few.

In Conclusion
It is easy to see the importance of your PAN card and why you need the physical card as well as the allotted PAN number. If you do not have a PAN card, take the small amount of time need to apply for one today.


Thursday, July 28, 2011

Before the MF Plunge

Investments in equities, especially for the long term, are likely to yield the highest returns. However, for many, keeping track of markets and individual stocks is not possible and also not advisable. Especially so as professionally-managed and tightly-regulated mutual funds are available to do the same job. The endeavor here is to highlight some basic steps to consider in building an equity portfolio through mutual funds

Identify financial goals
The process starts with identifying your financial goals. You may be looking to plan for retirement, children's education, a marriage or buying a house. If you have a fair sense of the time frame in which to build the corpus, financial websites can help you plan for the various scenarios, including factoring in possible rates of inflation.

Risk tolerance
Identifying your risk tolerance is important. If you are young and at the start of your career, you can have an equity-oriented portfolio as you can afford to take a risk in anticipation of higher returns. Those approaching retirement or are retired should ideally have low equity exposure.

Selecting a fund house
The next step is to identify fund houses that have a pedigree in the financial services and provide funds with a consistent track record across all categories. A minimum of five years consistent returns could be a pre-requisite.

Invest objective
Familiarize yourself with the investment objective of the shortlisted funds. Identify whether the funds invests across market capitalization or limits itself to large-cap, mid-cap or small-cap stock baskets. Most financial goals are long term and so it is better to invest in diversified funds that have broad mandates. Also consider the benchmark that the fund follows. It will give you a broad sense of whether the fund is tracking a broad index, such as the CNX 500 or the BSE 200.

Shortlisting schemes
You may use performance as a measure to make your final list of schemes. However, also consider consistency in performance over longer tenures, including for three, five and 10 years. Your selected schemes should ideally be those that have consistently beaten their benchmark and compare reasonably with their peers over long periods. You should also be aware that there is no advantage to over diversifying your investments. A maximum  of four or five equity schemes in more than enough.  A fund manager's track record is also a factor. The longer a manager has been with a fund, the better.

Keep track
Monitoring your investments is the next step. Don't fall in love with your funds. Ask your advisory or sign up for periodic updates on your investments. Do not be tempted to make changes in the first six months or even a year. If you have followed the steps outlined above, you will not need to make a short-term change.

Course corrections
As long as your investments are giving you the required rate of return, don't change your chosen funds or add funds, especially based on short-term performance. The only reason you will need to consider making a change would be if your selected scheme is trailing your required rate of return for over a year or even two.

Friday, July 15, 2011

E-Filing of I-Tax

Make sure your e-return is not rejected
If you are e-filing your tax returns, here are the errors you should avoid while sending ITR V 

Your return can be rejected if the guidelines laid down by the Income Tax Department are not followed while filing returns, be it physically or online. If you are e-filing and not using the digital signature, you will have to print out the acknowledgement form, ITR V. Here are the things you should keep in mind while using the option.

Printing ITR V
Printing the ITR V form correctly is critical. Avoid using the dot matrix printer if you want your return to be processed faster. This is because the bar code on the ITR V should be clearly visible for quicker processing, and this can be done only by using the ink jet or laser printers. Take the printout in black ink only. If you are sending two returns, don't print them back to back. Use a fresh A4 size sheet to print each time. Perforated paper or of any other size is not acceptable.

The signature on the form must be clear and legible. For this a ball-point pen in blue ink only. Also, if you are taking photocopies, make sure you send out the original one signed in blue ink. A photocopy of the signature is not accepted.

The filing of non-digitally signed returns is completed only when the ITR V reaches the CPC in Bangalore. So, make sure that your ITR V reaches the destination within 120 days of e-filing. In case it does not reach CPC Bangalore within the stipulated period, you will have to go through the agony of filing your tax return again. Earlier, you could not send more than one ITR V per envelope, but now, you can include more than one such form. Do not attach other documents, such as photocopies of Form 16 or TDS certificates along with the ITR V. Even annexure documents don't need to be attached. Dispatch it in an envelope that can hold an A4 size paper without folding it to:

Income Tax Department – CPC
Post Bag No - 1,
Electronic City Post Office,
Bengaluru - 560100, Karnataka

Other filing errors
Taxpayers often make mistakes that lead to deduction or incorrect calculation of taxes. One of these is not declaring the correct break-up of deductions under Section VIA, which includes tax-saving investments in life and health insurance policies, mutual funds, bank fixed deposits, etc. It is essential to have the tax filing details like deductee's PAN details, PAN & TAN of the deductor, total amount paid, total taxes deducted and deposited in Form 16/Form 26AS.

In case of a change in the residential address, make the necessary alterations in the PAN database since the IT Department refers to it for correspondence. Do not mention bank accounts that are closed or even dormant because refunds are unlikely to reach you in such a case.

No response from CPC
The CPC dispatches an acknowledgement on receiving the ITR V. Ideally, it should reach you within three days. If you don't receive it, consider sending it again. You can send it through regular post service or speed post. Do not use the courier or deliver it personally. You can call 1800-425-2229 (Toll free) and 080-22546500 (Direct) from 9am to 8pm on working days to check the status. It can also be done online at

Friday, July 8, 2011

Exemption-Can't avail

The exemption to file return for income up to Rs. 5 lakh looks good on paper, but nobody will be able to fulfil the condtions. 

The Central Board of Direct Taxes (CBDT) has made millions of Indians smile by announcing that salaried taxpayers with an annual income of up to Rs. 5 Lakh need not file their returns. Or so they think. Given the stiff conditions, it's unlikely that anyone will be able to avail of the concession. Here's why the CBDT's proposal is just a clever play, a theoretical relief that nobody will get.

According to the notification issued on 24th June,2011 a salaried person is exempt from filing his return if he fulfills the following conditions:
  • Total income after allowable deductions is up to Rs. 5 Lakh
  •  Income is only from salary and savings bank interest
  • Salary is from one employer
  • Savings bank interest is below Rs.10,000
  • Tax due on savings bank interest has been paid and included in Form 16.
The announcement comes at a time when Form 16s have already been prepared and issued to taxpayers. Will it possible to make the necessary changes in the Form 16 at this late stage? The second requirement, that the income should be only from salary and savings bank interest, is patently illogical. How many people who earn more than Rs 3-4 lakh a year will not have income from fixed deposits, mutual funds. stock trading, gold and property? If you invested in fixed deposits or NSCs to save tax or received dividend from your ELSS fund during the year, you don't make the cut for the exemption. Have you given your house on rent for even one month? Sorry, you will have to file returns. Only a person who has no tax-saving investment and lets all his money idle in a saving bank will be eligible.

Let us assume that there is indeed somebody who has no such investments and, therefore, no income other than from his salary and the interest on the bank account. Even then, he may not be able to fulfill the conditions for exemption. The notification says that the tax due on the interest income should have been paid and the income and the tax should be mentioned in Form 16 from the employer. The interest on bank account is credited on quarterly or half yearly basis. The interest from January-March or October-March gets credited after 31st March. You need to be a financial expert to correctly estimate the tax due on this income and pay the right amount. That's not all. You also need to provide these details to your employer in time for the accounts division to mention in your Form 16.

A taxpayer's quest for filing nirvana doesn't end here. If he has changed jobs during the year, a taxpayer won't be exempt from filing his tax returns. Given the high employee turnover rate in certain industries, such as software and IT-enabled services, very few people in these sectors will be able to claim exemption.

If you have managed to fulfill all the conditions, hats off to you.Given the plethora of paper work required to avail of the exemption and the possible repercussions of not filing your return, it seems that spending 30-40 minutes online is a far simpler option.

Friday, June 17, 2011

Rules of Intra-Trading

Follow these basic tenets to avoid losing your shirt in this high-risk arena

 Invest what you can afford to lose
Intra-day trading carries more risk than investing in stocks. Invest only the amount that you can afford to lose. An unexpected movement can wipe out your entire investment in a few minutes. In January 2009, the Satyam Computer script fell more than 80% from Rs.188 to Rs.31 in one day. If it is a leveraged position, you could lose more than you invested

Choose highly liquid shares
Day traders must square their positions at the end of the trading session. This is easy if you are trading in large-cap, index-based stocks, which are very liquid and get traded in large volumes every day. Don't dabble in mid-cap and small-cap shares, where the traded volumes are not very large. You could end up holding shares that have no buyers at the end of the day.

Trade only 2-3 scripts at a time
It's prudent to diversity your portfolio when you are investing in stocks, but when it comes to day trading, confine yourself to just 1-2 stocks. You can have up to 8-10 large-cap, index-based stocks on your watch list, but don't trade in more than 2-3 stocks at a time. Stock movements need to be tracked closely by the day trader and you won't be able to monitor more than 2-3 stocks at a time.

Research watch list thoroughly
Read up on the 8-10 stocks on your day trading watch list. You should know about all forthcoming corporate actions (stock splits, bonuses, dividends, result dates, mergers, etc) as well as technical levels of the stock. There are websites, such as or where you can feed in the price (high, low and closing) to know the resistance and support levels.

Fix entry price and target levels
Before you buy, fix your entry price and target level. The psychology of the buyer changes after he has bought a stock, which could interfere with his judgement and nudge him into selling too quickly even if the price moves up marginally. This might cost him the opportunity to fully gain from the upside. If you set yourself a price target and adhere to it, your psychological frame will not change.

Use stop losses to contain impact
A stop loss is a trigger for selling shares if the price moves beyond a specified limit. It helps the buyer limit his losses in case the share belies his expectations and moves down(or up). Suppose you buy 20 shares of Reliance at Rs.940 each and set a stop loss of Rs.920. If the share falls to Rs.920, your shares will be sold. In this manner, your losses will be curtailed even if the share drops to Rs.900. A stop loss takes the emotions out of the decision to sell.

Don't be an investor
Day trading and investing are like chalk and cheese. Both involve buying shares but factors considered are completely different. One takes into account technical data, while the other looks at its fundamentals. Don't try mixing the two. Often, if an intra-day bet goes wrong, the buyer does not book his loss, but takes delivery of the shares and then waits for the price to recover. This can be a costly mistake because the shares were bought with an ultra short-term horizon. They may not be worth investing in.

Book profits when targets are met
Greed and fear are the two biggest hurdles for the day trader. Just as he should not flinch from booking losses when the trade goes wrong, he should book his profits when the shares reach his target. If he feels that there is more upside to the stock, he should reset the stop loss. Suppose you invest at Rs.100 for a target of Rs.110 and set a stop loss of Rs.95. If the price goes up to Rs.110 but you are bullish, raise the stop loss to Rs.108. This will reserve some of the profit.

Don't fight with the market trend
Even the most sophisticated analysis cannot predict which way the market will move. All technical factors may be bullish but the market may decline. Technical factors only point to the likely movement of the market, they don't guarantee it. If the market movement is not as per your expectations, don't try and be a contrarian. You may end up losing more.

Small is beautiful
While stock investments can yield stupendous return, be content with small gains from intra-day trading. Day traders get a leverage of almost 3-4 times their investment, so even if your stocks go up by 3%, you would have earned 9-12% on your investment. In any case, it's rare for large-cap stocks to move by more that 5-6% in a day. Even if you get a return of 10-12% on your capital, it's not bad for a day's work.

Saturday, June 4, 2011

Being a Guarantor

Should you be a guarantor ?
Take on the financial commitment only if you have the ability to repay a loan if the borrower defaults.

Guaranteeing a loan is vastly different from signing a document as a witness. When you agree to become a guarantor for a loan, you are making a financial commitment, one that should be done only after considering all the aspects. This is important because if the borrower defaults on the payment, the responsibility of the loan has to be borne by the guarantor. In such a case, there is little a guarantor can do except talk to the lender and try to make a settlement for future payments of the remaining debt

When a person signs on as a guarantor, he becomes as liable to repay the loan as the principal borrower. According to the law, if the borrower defaults and is untraceable, the guarantor has to pay the outstanding debt. If need be, his assets can be sold to clear the debt.

Banks insist on guarantors for the loans in which there is no appropriate collateral, such as education and business loans.For other loans too, banks can insist on one, especially if the borrower does not have a good credit history. Other instances where a guarantor is needed are if the borrower has a transferable job or one which involves frequent travel abroad. It's also necessary when the loan is applied for in a city other than the one that is the applicant's permanent address.

While a guarantor need not service a loan on a monthly basis, the loan repayment can have an impact on his credit history. In case of a default, not only will he be asked by the financial institution to pay, but a default on his part while repayment the loan will also be reported to the credit bureaus.

Even if the EMIs are being paid regularly and on time, the relationship of the guarantor and the borrower could affect his own borrowing capacity. For instance, if a friend is a guarantor, he will be able to take a loan independently. However, if the guarantor has a closer relationship, such as a wife, she will have to shoulder a quasi liability. The means that if she wants to take a loan, her borrowing capacity will be calculated after accounting for the original loan that is being repaid.

Also, the liability of the guarantor usually terminates only after the loan has been fully repaid. If you are signing up for a home loan guarantor, be prepared that it will impact all your other financial borrowings for the next 10-20 years. So if you do want to help someone in need, it would be better to opt for short-term loans, such as car and education loans. 

In case you want to be relieved of your responsibility as a guarantor, review the guarantee deed and conditions of revocation. Usually, you can revoke it by giving a notice in writing to the lenders as well as  the borrower. The lender will then check the borrower's financial condition and the original arrangement. However, relieving a guarantor is solely on the lender's discretion. The bank's rationale is that the guarantor cannot shirk his responsibility mid-way as he had initially offered the guarantee for the full tenure of the loan.

However, revocation can be considered in certain cases. You can opt for it if an additional loan has been granted to the borrower without your consent, such as a top-up loan. You will, however, only be relived of the second loan and will be liable until the original amount of the loan has been repaid. The other options include you providing a substitute guarantor with the consent of borrower, or prepayment of the loan by the borrower.

Sunday, May 29, 2011

Education Loan

Education loan helps cut tax

Don't dip into your retirement savings to pay for your children's higher studies. Instead, take an education loan because the tax benefits bring down the effective cost of borrowing.

  While everybody wants their child to have a good education, Indian parents are especially intent on achieving this goad. So focused are they that they are willing to scrounge on basic indulgences to save for their kids' college fees. The problem is that in their efforts to fulfill the needs of the child, they sometimes sacrifice more that they should. They dip into their retirement funds to pay for the education. This is a dangerous strategy because it leaves them financially vulnerable to their sunset years.
We all know that the cost of higher education is raising at a fast pace. Unless you foresaw this trend 10-12 years ago and started investing aggressively for this goal, your savings alone might not be enough to fund your child's higher education. Instead of withdrawing from your Provident Fund or PPF, it's better to bridge the gap with an education loan. It is not only tax-efficient, but helps inculcate financial discipline in the child by making him responsible in his early working years.

It may be argued that taking a loan in these times of high interest rates is not a prudent strategy. You will be paying 12-14% on the loan, while your investments earn only 8-8.5%. However, keep in mind that any loan taken to pay for the education of your child is eligible for income tax benefits. Under section 80E, the entire interest paid on the loan is eligible for tax deduction. The savings in tax can drastically bring down the effective cost of the loan.

The higher the taxable income of the individual, the bigger tax benefits. See Table:
Loan Amt: Rs 500000; Interest Rate: 12%; Term: 8 years; EMI: Rs 8,126

Check Education Loan Calculator for more figures

For someone in the highest tax bracket, a loan taken at 12% p.a effectively costs 8.71% a year. This is very cheap considering today's regime of high in today's regime of high interest rates, wherein personal loans are available at 18-20%. Also, unlike a home loan, where the tax deduction for self-occupied houses is limited to Rs 1,50,000 in a year, there is no limit to the tax deduction on an education loan. However, keep in mind that most lenders don't give education loans for more than Rs 10 lakh, so a limit is set by default.

An education loan will also help in making your child financially responsible in his early working years. Education loans usually come with an EMI holiday and the repayment can be deferred for up to 1-2 year till the student has taken a job. In the initial years, when the financial responsibilities are few, young people tend to be extravagant. However, if you shift the burden of repaying the loan to your child, he will be more careful with his money and is less likely to blow it up at a discotheque or on gadgets and gizmos. The loan EMI will act as a deterrent and force him to be frugal in his spending.

Eligibility for tax deduction:
You can avail of income tax deduction for the interest under Section 80E only if the loan has been taken for yourself, spouse or children. The interest paid on loans taken for siblings or other relatives is not eligible for income tax deduction.

Collateral requirements:
If the loan is more than Rs 3-4 lakhs, the lender may insist on a collateral as security. This could be immovable property, National Savings Certificates, Fixed Deposits, bonds and endowment insurance policies. This is a necessary formality and one should not shy away from providing the collateral.

Specified lenders:
If you are seeking tax deduction, the loan should be from a bank or financial institution notified for the purpose. No tax deduction is available if the loan has been taken from a private source or an overseas lender. Some charitable institutions are also included in the approved list.

Courses covered:
Full-time graduate or post-graduate courses in engineering, medicine, management, applied sciences, vocational studies after senior secondary or its equivalent are eligible for education loans. This can be from any school, board or university recognised by the Central or state government.

Interest deductible for eight years:
Unlike a home loan, the interest deduction is available for a maximum of eight years. If you take an education loan in 2011 and start repaying it in 2013, the interest deduction will not be allowed after 2021.

Saturday, May 21, 2011

Loss Aversion

Why you pick loss over gain

It was mid-2007 and mutual fund investments were giving fabulous returns. Enamored by a particular fund, an acquaintance invested nearly 50% of his SIP money in it. It seemed like a good decision as the fund gave returns as high as 150%. Like many others, he didn't think anything would go wrong. But then on 15-Sept,2008 the Lehman Brothers filed for bankruptcy, and stock markets across the world started to fall. When the NAVs of his star fund went into a free fall, performing worse than the others, the acquaintance conducted a desperate check on the various schemes he had invested in. He found the funds full of speculative stocks.

Despite this, he could not get himself to redeem the accumulated fund units and limit his losses. So the losses continued to pile and he continued to hope that he would recover these. He justified these as being paper losses, convincing himself that til he redeemed the units, the paper losses would bot become 'real' losses. In fact, he started buying more units to average down the cost of buying a single unit. A few months later, the fund manager quit the mutual fund and the value of his investment fell abysmally low. It was then he decided to get out of the fund. Why did he wait till the last minute to rid himself of the pilling losses? He has been a victim of 'loss aversion'.

What is loss aversion?
Loss aversion is the tendency to avoid a loss rather than make a gain. This concept is rooted in the Prospect theory, according to which people tend to base their decisions on perceived gains rather than perceived losses because the emotional impact of losses is far greater than that of gains. Extensive research in behavioural economics shows that people experience twice as much pain when they face a loss in comparison to the pleasure they feel with a gain. So the pleasure derived from a rising Sensex is not as deep as the pain one suffers when it drops sharply.
Another reason  people stick with losing propositions is that they find it difficult to admit they took a wrong decision. They keep hoping that they will recoup the losses, and in the process, they end up deepening these. "When you sell a loser, you don't just make a financial loss; you take a psychological loss from admitting you made a mistake. You are punishing yourself when you sell.", says Jason Zweig, a personal finance columnist at
Wall Street Journal, in his book, Your Money and Your Brain. "Once you make an investment, you can't help regarding it as yours. When you buy a becomes a part of you. From that moment forward, the prospect of having to get rid of it becomes a wrenching thought," he adds.
In fact, people don't stop at holding on to a losing investment. They make things worse by investing more in it a bid to average out the cost. In technical terms, this is referred to as the 'sunk cost fallacy' or trying to recover a bad investment by throwing in more money.

Application in financial life
This theory is amply reflected in our day-to-day financial behaviour. People tend to keep their money in safe debt instruments rather than in equity, despite the promise of higher gains in the latter, because the risk, and the implied loss, in equities is enough to keep them away from the high returns. What they don't realise is that the low returns in safe options will not be able to keep pace with inflation, reducing the purchasing power of their funds several down the line.
Loss aversion also makes people remain stuck to stagnant careers instead of spending money on upgrading their skills and looking for a better job. The lure of an improved and a more lucrative career is not enough to make them part with the money for a degree or a part-time course.

How to escape the loss aversion bias
One way of not falling into the loss aversion trap is to keep the big picture in mind or have a long-term view of your investments. So, sit and actually calculate how much the loss in one fund or stock will impact your entire portfolio before you decide to stick with it. If you are dealing in stocks and don't trust your ability to get out of a losing script, resort to stop-loss order. It will force you into a decision and not allow you to become attached to a particular stock.

Another option is to look for ways to turn your losses into gains. Short-term capital losses make on selling shares and equity mutual funds in less than a year's time can be set off against short-term capital gain as well as taxable long-term capital gain. "The easiest way to do that is to remember that selling investments at a loss creates a tax-deductible event"

Sunday, May 15, 2011

Behavioural Accounts

Don't be fooled by the mind

Lets think about these two incidents. You had bought an advance ticket worth Rs 500 to watch a movie. On reaching the multiplex, you realized that the ticket had been lost. Weekend shows are typically expensive and since you didn't want to spend the same amount again, so you gave up the idea of watching the movie and came back home.
In a separate incident, when a friend of your planned to watch a film, he realized he had lost the note he had kept aside to buy the ticket Not agonizing too much over the loss, he took out another Rs 500 note and bought the ticket.
Both the incidents were basically the same. You had lost a Rs 500 ticket and not bought a new one. Your friend had lost Rs 500 and had gone ahead and purchased another ticket. The loss in both the cases was limited to Rs 500. So why did your friend buy another ticket and you didn't ?
This is a situation what economists call "Mental Accounting" or the tendency to categorize different money situations into separate mental accounts.

What are mental accounts ?
The term mental accounting was coined by Richard Thaller, an economist at the University of Chicago. He defines it as "The inclination to categorize and treat money differently, depending on where it comes from, where it is kept and how it is spent."
In the first case, the loss of ticket was attributed to the "ticket loss account", whereas in the latter case, the loss was ascribed to the "money loss account". The human mind tends to add the loss on the "ticket loss account" to the price of a new ticket, that is, Rs 500, and so people in such situations are not reluctant to buy a new ticket. For you, the movie was worth Rs 500, but not worth Rs 1000.
In your friend's case, the mind values the price of a new ticket only at Rs 500, whereas the Rs 500 lost is attributed to the "money lost account". This explains the different reactions to what is essentially the same situation.

Application in daily life
Mental accounting comes into play in various situations in everyday existence, resulting in a monetary loss or an undesired spend. The victim often fails to realize how the mind has tricked him into bearing the loss, content in the belief that he has cut a good deal.
Suppose you plan to buy a costly mobile phone and find one tagged at Rs 15,500 in a retail chain. Just you are ready to flash the credit card and pay for it, a friend calls. He tells you he has bought a similar model for Rs 15,300 from a shop just 3 km away. Will you drive the distance and save Rs 200? Chances are you won't.
Consider another situation. You want to buy a toaster and come across one selling for Rs 1,200. Just as before, you find another gadget selling for Rs 1,000 just 3 km away. Will you rush to save Rs 200 ? Chances are you will. Why does this happen ?  On a fundamental level, we are thinking in percentages. If Rs 200 is expressed as a percentage of Rs 15,500, it seems very low in comparison to Rs 200 expressed as a percentage of Rs 1,200. At the end of the day, the saving is all about Rs 200.

Another area where mental accounting foxes us is when we come across a windfall, say a tax refund or bonus. More often than not, the tendency is to spend the money as soon as possible. People consider it 'found' money without realizing that it's their money coming back to them in case of tax refund or deferred salary in case of bonus. A small amount of money that comes to us unexpectedly gets treated lightly and we're more likely to spend it on frivolous things we don't need. Bigger sums that come to us, say, from an inheritance, tend to get treated more seriously and are more likely to be saved.

This is the reason people continue to earn low interest rates on fixed deposits in the bank, while paying a high rate of interest on their credit card debt or a personal loan, instead of breaking the fixed deposit and repaying the debt. Remember that the interest you earn on your fixed deposit will always be lower than the interest you pay on your credit card debt.

The bottom line
We need to realize that the money we earn for various sources is basically the same and we should be careful not to divide it into mental accounts while spending it. So, if you get a good bonus or tax refund, don't spend it by categorizing it as 'found' money.
Also remember that money is fungible. This is the reason you should not let money lie in a fixed deposit while you are paying your credit card balance. It makes more sense to first pay your debt instead of saving money before falling into the trap of  'mental account' foolishness.

Saturday, May 14, 2011

Global Income - Tax

5 TAX TIPS if you work abroad 

If you have a job overseas or plan to emigrate, here's how to avoid any tax bloopers in India or the country where you choose to live. 

Governments often demand tax on the global incomes of foreign residents living in their country on a long-term basis. This is set to become more commonplace as governments across the globe, strapped for revenue following the economic crisis, are increasingly exchanging information on tax matters. This is a bid to curb evasion and track money kept in low tax jurisdictions. They are also increasing their focus on high net worth individuals as well as heightening surveillance of accounts held in foreign countries to crack down on financing of terrorism.
Countries such as the US, the UK and Australia now require immigrants who become permanent residents or citizens to report their incomes from all global sources and pay tax accordingly. Temporary residents are not required to declare their global incomes in these countries, but they have to ensure that taxes are paid in the home country. India also requires its residents to pay tax on any income earned overseas, if they ordinarily pay tax in India.

Global income includes anything earned abroad, from rental income and dividends to interest and capital gains. If you are emigrating from India, make a list of your assets, the cost of acquisition, earnings from these assets and the tax paid on incomes and capital gains. For instance, if you own a house in India that is rented out, it will have to be reported as global income if you become a permanent resident or citizen of another country, but you may not have to pay tax on it. 
Permanent residents in the US also have to report inheritances and gifts received in India, though there is no tax liability on such gains either in India or the US.
Conversely, if you are only a temporary resident in these nations, you will have to continue paying taxes in India on the income earned here. You will also have to comply with all the reporting requirements under the Indian tax laws, such as filing the annual information report if a property transaction exceeds Rs 30 lakh. You won't need to declare this income in the country where you are residing temporarily.

The residency rules determine if an NRI has to pay tax in a foreign country in India.There is no common rule across the globe. Countries such as the UK and Australia, which follow the common law system, use a residency test to determine whether a person is required to pay tax in that country. India too follows this system. So, if you have spent more than 182 days in a country, such as India, the UK and Singapore, during the financial year, or more that 729 days in the previous seven financial years, you will have to pay income tax in that country. This means that if you emigrate mid-year, you will pay income tax in India as well as file returns at the end of the year. In the US, foreign residents are taxed as American citizens if they have either acquired a green card or clear the substantial presence/residency test. This test is far more stringent than the residency rules that apply in India and the UK. An individual is said to have satisfied it if he stays at least 31 days in a calender year and 183 days in the current and two preceding years.
To avoid confusion about the number of days spend in a country and prevent double taxation, it will be useful to maintain a travel calendar as well as details of entry and exit as stamped on the passport. Tax authorities could check your passport to determine the residency status. Don't try to fool those guys as they already have the complete picture of your residency status in the country before taking you into consideration.

India has signed double tax avoidance treaty (DTAT) with about 70 countries, including the US, the UK, Australia, Japan, Germany and Switzerland. This ensures that NRIs can claim foreign tax credit if taxes have been paid on incomes and gains made in India. If, however, taxes paid in India are lower than that required to be paid in the country where the the NRI is residing, additional tax will have to be paid. Before you claim foreign tax credit, ensure that you have all the relevant documents as proof.

This current residency rules in India will change when the Direct Taxes Code is implemented, most probable from 1 April, 2012. This change will mean that a person will have to pay tax in India if he spends 60 days (previous 182) in the country during a financial year, or 365 days (previous 729) or more in the previous four financial years.

Sunday, April 24, 2011

Insure your Big Day

If you are spending lakhs of rupees on your marriage, secure the event by opting for a suitable insurance package. Here are the things you should consider before picking one.

Given the wide expanse of wilting expense that are the hallmark of an Indian wedding, it's a marvel that most scrape through without major glitches or mishaps. A bigger wonder is that people don't feel the need to insure such high-cost events. If you are spending lakhs on a wedding, it would be prudent to protect yourself against vulnerabilities such as cancellation or damage during the ceremony.

Most companies sell wedding insurance as a part of event insurance. The policy broadly covers personal accident, postponement or cancellation of event, and damage to property at the venue. These policies can be customised as per one's needs. For instance, an ailing relative in the family, who might pose a risk of cancellation or postponement of event, can be covered. If you're phobic about the quality of food and see it as a risk, you can include food poisoning in the insurance. Terror attack is another threat that can now be covered.

Besides these, you can seek insurance against jewellery theft or cancellation in case the bride or groom in unable to make it to the event on time. If the event is cancelled or delayed due to damaged banquet/marriage halls, this too can be insured.

However, cancellation of an event due to dispute between the wedding parties is not available as a cover. There are exceptions, of course. If the groom does not turn up due to unpaid dowry and the ceremony is cancelled, you can be covered for the eventuality. Of course, the insurance company will not pick the tab if you off the wedding due to last-minute jitters. Willful negligence and criminal misconduct are also not covered.

It's important to read the fine print carefully as the terms and conditions vary among different insurance providers. It's equally significant to choose the cover that suits you rather than fall for the sales pitch. So, you can decide to buy insurance only for the main event spanning a day, or have the cover spread across several days and various ceremonies. Consider the various options offered by insurers and pick the one that fits your needs and budget. If a wedding is at your premises and your house is already covered against fire under the householder package, you don't need an extra cover. Also, if you already have jewellery insurance, knock it off from your wedding insurance policy.

When it comes to making a claim, remember that you need to have all the bills in place.Since wedding insurance is a non-standard product, the proofs required to claim vary. For instance, in case your house is robbed, only a copy of an FIR will be required. However, in case of theft of jewellery, you would also need bills along with the copy of an FIR.

Marriage in India is considered a sacred institution. Nobody likes to think that any thing will go wrong. The social milieu becomes a major obstacle while selling wedding insurance. It time to think differently at the time of big event.

Sunday, April 17, 2011

New Education Loan

Now, take a loan to pay school fee. With this new facility, you can avail of loans ranging from Rs 30,000 - Rs 4 lakh from specific banks for classes up to senior secondary.

It's very likely that the fee your parents paid to educate you from kindergarten till graduation is less than the annual fee that you pay for your child's playschool today. In a metro city, a playschool can make you poorer by Rs 35000 - 1 lakh a year, while primary and secondary education in a private school can cost between Rs 50000 and Rs 5 lakh a year.

Paying such high fees could be a problem if you face a financial crisis, but there's no way you can remove your child from school, can you ? Now, you can resolve this dilemma by simply stepping into a bank. Yes, banks have started offering education loans for children's school fees, a phenomenon that took off about a year ago.

Loan Criteria

Earlier, education loans were offered only for professional courses. Now, you can take them to pay the school fees for classes ranging from nursery to senior secondary. The banks that offer this facility include public sector entities, such as Bank of Baroda, Central Bank of India, State Bank of Hyderabad and J&K Bank, others to follow soon. The loan amount varies from Rs 30000 - 1 lakh, but the Bank of Baroda has an upper limit of Rs 4 lakh. Though you don't need an account with these banks to avail such facility, account holders are given preference. Another condition is that the school should be affiliated to ICSE, CBSE or any state education board.

The loan is primarily meant to fund the tuition fee, but it can also be used to pay for other expenses, such as buying a laptop or any apparatus that may be required for projects.  However, in such a case, the equipment will remain in the bank's name as security till the total amount is paid.

Cost of Loan

Another option to tide over the difficult period is taking a personal loan, but this comes with a high rate of interest, which ranges from 14-19% and can go up to 24% in certain situations. On the other hand, an education loan is available at 12-13%. Despite that fact that both are unsecured loans, the one for education is cheaper.

Funding for coaching
Coaching classes, which help students prepare for various entrance exams, have become a vital part of the education system. Now one can approach the banks as they provide loans for coaching taken for professional courses. So, students appearing for entrance exams for civil services, medicine, chartered accountancy, engineering, etc, can opt for this loan. However it comes with certain conditions. A caveat is that you have to appear for the entrance exam of a recognized course, otherwise you will not be eligible for the loan.

Confusion over tax

According to Section 80E of the Income Tax Act, the interest that you pay on an education load is a deductible expense. Earlier, only the loan taken to fund professional course came under this ambit. This has been amended from the assessment year 2010-11 to include vocational courses pursued after passing the senior secondary exam.

However, there is some confusion about the inclusion of coaching classes. Typically, one can't claim tax deduction for coaching fees. However, under Section 80E, it is suggested that a loan taken for the purpose of higher education be available for tax exemption. So, it is possible to claim an exemption on the loan taken for coaching classes. This is in contrast to Section 80C, where tuition fee is specifically mentioned.

Monday, March 28, 2011

No Second House

Why not to buy a second house
If you own more than one house, you have to pay tax on the rent earned from the house you are not occupying. Even if the house is lying vacant, you have to pay tax on the deemed rental income from that property based on the prevailing rate in that area. Only one of the properties will be allowed to be treated as self-occupied and the others will earn a notional income, which will be taxed at the normal rates after 30% standard deduction. So, if you have a second flat lying vacant in an area, where the monthly rental is Rs 20,000, it will push up your taxable income by Rs 1.68 lakh (Rs 20,000 x 12 = Rs 2.4 lakh, less 30% = Rs 1.68 lakh).

This tax has been a major disincentive for buying a second house as an investment. However, the DTC proposes to change the rule regarding notional income. If the proposal is passed by Parliament, a house owner won't have to pay tax on the deemed rent received from a house that is vacant from 1 April 2012.

There are, however, other taxation issues to content with. Owners of vacant residential properties also have to pay wealth tax if their combined wealth exceeds Rs 30 lakh. The assets considered while assessing an individual's wealth include gold, vacant residential property, luxury watches, cars, yachts, helicopters, pieces of art and artifacts, and hard cash. Wealth tax is 1% of the amount by which the combined value of these assets exceeds the Rs 30 lakh limit. So, if you have a vacant flat worth Rs 80 lakh, you may not have to pay tax on the deemed rent from year 2012 onwards, but you will have to pay wealth tax of Rs 50,000 (1% of Rs 50 lakh). If you have other assets, such as jewellery, luxury car and artifacts, the liability rises further.

Wealth tax is a recurrent tax---it is payable on the same assets year after year, even though these assets have not created any value for the owner during the year. 

Commercial property, for instance, is a more tax-efficient investment than a second house. It is not only exempt from wealth but the returns are also higher than those from residential property. Such a property is also eligible for deduction of interest paid on a loan as well as the 30% standard deduction from rental income. So, even as it enjoys all the benefits and even offer a better cash flow, commercial property will not push up your tax liability if you are unable to find a suitable tenant.

What's taxable

  • You are required to pay tax on rental income from the second house even if it is lying vacant
  • If a person owns more than one house and it is vacant, its value is added while calculating the owner's wealth
  • A 1% wealth tax is payable on the amount exceeding Rs 30 lakh
  • Commercial property is not included while calculating the wealth of a person
  • The interest paid on a loan taken to purchase commercial property is also eligible for tax deduction
  • Commercial space usually fetches a higher rent than residential property. It is also possible to take a loan against this rental income
  • The rental income from commercial property is eligible for 30% standard deduction as in the case of residential property