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

Saturday, March 19, 2011

Global Funds


Global funds are schemes that invest at least 65% of their corpus in foreign stocks or overseas mutual funds. These funds invest in various markets, allowing investors to gain from the rise in other emerging and developed markets. Another advantage of going global is that the investor gets to buy a wider range of assets through his fund portfolio. Global funds give you access to asset classes that are not even available in India.

Before you invest in global funds, keep in mind that the risks involved in overseas investments are far more complex than those in domestic markets. These include the country-specific risk, policy risk, as well as the exchange rate risks.


Tax Implications:

Though foreign exchange regulations permit resident individuals to invest up to 90 lakh INR abroad in a financial year, they are not entitled to any tax-free luxuries on such investments. These individuals are likely to incur tax liabilities both in India and abroad, resulting in complex implications.

Under the Income Tax Act, 1961, a resident and ordinarily resident of India has to pay tax on his worldwide income. If the transaction involves sale of shares or other assets outside India, the income from these will be taxable as capital gains. The definition of capital gains is the same -- if an asset is held for more that 12 months in the case of shares or units, or 36 months in any other case, the profit on sale of the asset is a long-term capital gain. The profits from any assets held for less than the prescribed limit of 12-36 months is treated as a short-term capital gain.

Capital gains are calculated as the difference between the sale consideration and the cost of acquisition. However, for long-term capital assets, the actual cost is adjusted based on the Cost Inflation Index (CII) between the years of purchase and sale.While the long-term capital gains arising from overseas assets are taxable at the rate of 20.6%, short-term capital gains are taxable at the applicable slab rates prescribed for individuals and range from 10.3 - 30.9%. Besides, any dividend or interest income earned by a resident individual on an overseas investment will be taxable as "income from other sources".

If the investment is made in a property outside India, the rent will be taxable as "income from house property" on an annual basis. As much as 30% of the rent, municipal tax actually paid interest paid on housing loan are allowed as deduction from the gross rent to compute the taxable rent.

These tax provisions in India are in for a big change after the Direct Taxes Code comes into effect from 1 April 2010. Such investment income may also be taxable overseas, that is, in the country where the income has arisen, depending on the tax laws of the country. In case of double taxation, one can resort to the beneficial provisions under the Double Taxation Avoidance Agreement (DTAA) entered into between India and such countries.  However, this will vary depending on the nature of income, tax laws in the country and the provisions of DTAA.

While the rising personal income and consequential increase in wealth, which is supplemented by relaxed foreign exchange regulations, may make it lucrative for individuals to invest overseas, the resultant tax implications should not be overlooked. The overseas income results in a tax implication and an outflow. So, it is advisable to examine the tax implications before you invest abroad.

Friday, March 4, 2011

Loan Defaults

When Banks take your Cash 

If you default on your payments, the bank can withdraw money from your savings account or fixed deposits

Did you know that banks can hold your money hostage? Well, they can, and the ransom you have to pay to get your money back: clear all outstanding dues. Banks have devised a clever way of ensuring that customers clear credit card dues and repay loans on time. If you default for several months, the bank can deduct money from your savings accounts or refuse to pay money from the fixed deposit when it matures.

No, banks aren't trying to con you. What they are doing is perfectly legal. In fact, they have your permission to do so. You don't remember giving it, do you? But you did when you signed on the dotted line while availing of the loan or the credit card and accepted the terms and conditions (T&C). The fine print will have a statement similar to this: "I hereby grant and confirm the existence of the right of lien and set-off with the Bank, which it may use anytime to utilize any money belonging to me and deposited with the bank, towards any outstanding dues".

All this legalese simply means that the bank has the right to deduct money from your account. Any collateral that the bank can legitimately hold can be held back. Of course, if your T&C does not state this, the bank cannot touch your money. Banks can't debit unless you agreed that such measure can be taken while taking a loan. However, if you have signed on the loan contract and it mentions that the assets can be adjusted, then they can.

So, if you aren't careful about clearing all your dues with the bank, you might find yourself bankrupt.

If you think you can avoid such a situation by opening a second account, you still won't be able to get away. You can't default on one account and get away by keeping to the straight and narrow on the other. In fact, the bank can lock any account of yours, even if it is with another bank. If a bank wants to lien an account of the defaulting customer with another bank they can do so by filling for a garnishing order. You cannot question this right as the money belongs to the bank.

However, some accounts and facilities that you use can't be touched by the banks. If you have a safe deposit vault where you have kept jewellery, the bank does not have the authority to break open the vault without your approval. Neither can the bank touch your money if your spouse or relative has defaulted on his payments, unless you are the guarantor or a co-borrower.

Your bank isn't suddenly going to land on you like a ton of bricks. Before taking such a drastic step, they follow procedure and mail warnings to the account holder. The procedure is that phone calls are made initially, then a notice is given and the bank follow up on it. If there is no response to any of these, the bank will deduct money from the savings account.
So, if you are facing a financial difficulty and are unable to repay the loan for a reason, don't escape but approach directly the bank to find a solution. Banks are willing to provide a moratorium of about six months, which they may extend it on a case-to-case basis. The banks are ready to listen if a person has an emergency such as health problems or an accident. 

The mistake that most customers make is that they talk to the call centre. You should write to the bank and start documenting all your communications and set up a time frame to resolve the issue.Once you do this, the problem will not grow to an unmanageable size.