Home loan: Where the EMI pinches Nayantara Rai in New Delhi | May 12, 2006 11:01 IST

In spite of the sweltering heat in Delhi, Amrinder Singh can be seen driving his Wagon R
with the window rolled down. He does not use the car air-conditioner to save fuel. Singh has chosen to sweat his way to ensuring that his fixed month expenses remain fixed at last year's level, when he was paying 7.25 per cent interest on his house loan. Since May last year, when Singh took the loan, the rate has floated up to 9 per cent. Thus, on his Rs 15 lakh (Rs 1.5 million) loan, Singh now has to shell out an equated monthly instalment of Rs 13,496, compared to only Rs 11,856 a year ago. Singh would be the first to admit that an extra Rs 1,640 every month is not exactly crippling. Yet, he is a parsimonious man, who likes to keep things within the budget. He is just happy that he bought the Wagon R, and not the Swift that his heart really yearned for. Had he listened to his heart, Singh may be taking the public transport more frequently now, where he wouldn't have to worry about the windows.

Profile Name: Amrinder Singh Age: 40 Family: Married with two children, both under eight Profession: MNC executive Income: Rs 4.8 lakh per annum Cost of flat: Rs 25 lakh Bought: May 2005 Loan amount: Rs 15 lakh Interest: 7.25%, floating Tenure: 20 years

How to plan for a monthly income May 15, 2006 11:57 IST

Making provisions for a regular and stable monthly income is among the most common
requests dealt with by Personalfn's team of financial planners. Our team recently interacted with a 50-year-old gentleman who wanted to plan for a monthly income starting 5 years hence, i.e. at the age of 55 years. This gave him an investment tenure of 5 years. Also the client had an appetite for high risk investment avenues. Our target was to help the client build a corpus that would provide for his monthly expenses which amount to Rs 10,000 at present. In other words, we were required to create an investment plan, which would help the client earn Rs 10,000 per month and thereby ensure that he can maintain the present lifestyle, 5 years from now. Providing for monthly income
Monthly income required (Rs) Time available (years) Inflation (%) Adjusted monthly income (Rs) Expected return from corpus (%) Corpus required (Rs) 10,000 5 5 12,763 5 3,063,076

To begin with, we need to compute how much Mr. Kumar (the name has been changed to guard the client's privacy), will need every month to meet his regular expenses. Assuming an inflation rate of 5% per annum, Rs 10,000 now would be worth Rs 12,763 at the end of 5 years. This will be Kumar's monthly outflow. Furthermore, it is pertinent that the savings be treated as sacrosanct and hence, they should not be exposed to high risk levels. In result, we shall assume that Kumar's funds will be invested in a low-risk investment avenue that fetches a return of 5% per annum. Given the specifications, Kumar would need a corpus of Rs 3,063,076 in lump sum and has a time period of 5 years to achieve this target. Investing to build a corpus
Sum to be accumulated (Rs) Time to build the sum (years) Expected return on investments (%) Annual investment (Rs) Monthly investment (Rs) 3,063,076 5 15 454,302 35,481

Since Kumar has an appetite for high risk investment avenues, his portfolio can be composed of pre-dominantly equity-oriented investments like diversified equity funds.

Assuming that they earn a return of 15% per annum over the next 5 years, his annual investment would work out to Rs 454,302 i.e. an investment of approximately Rs 35,481 every month. However, this plan has a fundamental flaw. It fails to take into account the change in Mr. Kumar's risk profile over the investment tenure. The plan assumes that Mr. Kumar can take on the same degree of risk even when he is nearing the target date. This may not be the case; in fact, as the corpus grows over a period of time, it would be prudent to expose the savings to a lower degree of risk. Hence we shall incorporate an element of debt in the portfolio. The debt component will account for 50% and 75% of the investments in years 4 and 5 respectively. Considering that the debt portfolio is likely to yield a return of around 7% per annum, the investment amount will have to be revised. In line with the new investment plan, the monthly investment will increase from the earlier sum of Rs 35,481 to Rs 57,297. As in most cases, our view was that the investment process would have been easier (read lower investment) for Kumar, had he approached us earlier, i.e. if he had more time on hand. A similar investment process can also be undertaken for individuals who wish to plan for their post-retirement needs. As stated earlier, the degree of ease with which the targets are achieved will largely be determined by the time available. It is possible for individuals to ensure that they have a stable income stream even after their working life. All it takes is sound planning and a disciplined investment approach; a good financial planner will help you achieve both the aforementioned. If you haven't employed the services of a financial planner as yet, now is the time to do it!

No money? Get the home you live in to pay for you P V Subramanyam, Moneycontrol.com | May 15, 2006 12:13 IST

Every call on a financial planning client is a huge learning. No two situations are alike.
• • •

Smart husbands, irresponsible wives. Super wives, bum husbands. Husband and wife brilliant communicators, cannot talk to each other.

Been there, done it all. So I thought I will share some experiences. Let us start with the anguished cry of a 38-year-old, who called me from Canada saying, "My maternal uncle needs help. Will you please visit him in Colaba?" Off I went. He was a 63-year-old bachelor, who had lived life in full and was now at the fag end of his life. Literally at 30 cigarettes a day, he really was at the fag end. He needed medical, emotional and financial help. Cut the emotional and medical part, I really could not play too much of a role there. Let's come to his financials! He had a net-worth of Rs 25 lakh (Rs 2.5 million) and a cash balance of Rs 15,000. The net-worth was a nice flat in Colaba. Apart from that, no shares, no fixed deposits, no national savings certificate, no insurance. Basically, no assets other than 3 millionaires as nephews staying abroad. No cash to last him for even one month, let alone money for food, medicines, taxi to his sister's house. He had no cash. His sister was in another part of Mumbai, and constantly kept in touch. He was not used to such a situation. He was a big-hearted man and had helped people all his lives. Had attended 500-odd funerals, helping in burials and cremations. Had liberally given pocket money to his nephews, had helped his sister buy a house. Paid for her daughter's wedding. It took him three months to tell me about his financial condition. But I was touched. He was too proud to ask. I blasted his nephew the first time I saw him. Not a great way to start a relationship, surely not as a client and a planner. I suggested the nephews who were rich (okay, a relative term but all of them had one fixed deposit of $1 million in a foreign bank operating in Mumbai) 'buy' the flat and take possession of the same at a later date -- the doctors had anyway given him only about 36 months to live. I could not think of anything other than a reverse mortgage. However, the story had a happy ending. The nephew felt rotten. He later told me he was too ashamed to see my face for a day, so he called me two days after he reached Mumbai. The nephew said his uncle would feel insecure about an arrangement of reverse mortgage. So he asked for an alternative. I suggested a Rs 10 lakh (Rs 1 million) fixed deposit with a nationalised bank (where his uncle had a savings bank account) as an either or survivor and the interest being credited to his uncle's account. Done quietly. No fan fare. Only 3 people knew about it -- the bank manager was extremely helpful -- he offered to use his personal cash in an emergency after banking hours. As human beings, we cannot thank him enough. The nephew was crushed by the help the doctor, the banker, the neighbours were offering. He thanked them a zillion times.

The uncle withdrew from the savings account only twice. Soon after this arrangement he died. But died a peaceful death: he passed away in his sleep. Surely satisfied that his nephew had paid attention to him. More than 40 people attended his funeral -- none had any idea of his financial difficulty. The nephew realised money is not about how much you have. It is about how useful it is for people around you. How you make it go around. It is about how good you feel using it. It is about how helpful it is for people around you who are too proud to ask. It is for people whom you love, but are now on hard times. It is about helping without hurting. It is realising how important money is for people who do not have it. And I thought financial planning was about finance! It was a lesson in growing up. So what was this reverse mortgage that I suggested to the nephew? A regular mortgage (what we call a housing loan) is a forward mortgage, and hence it depends on the borrower's ability to earn and therefore repay the loan. A reverse mortgage on the other hand is a loan that looks only at the value of the asset, not at your current income at all. For most senior citizens and those nearing retirement today, the biggest fear is the need for money to live comfortably after retirement. In their era, the only investment they made was in their Provident Fund and of course, they bought their own home, which is an extremely illiquid asset that doesn't generate cash if you're living in it. Reverse mortgage can make the same home pay for your living expenses and that too, without having to move out of it. I have structured three reverse mortgage deals for some senior citizens and this is how it works. Please be aware this product is not available officially in India. It is available only as a private arrangement between close friends or relatives. Simply stating, a reverse mortgage is a loan that enables homeowners to convert part of their value in their home into a tax-free income without having to sell their homes, give up the title, or take on a new monthly mortgage payment. Many homeowners can use this to supplement their retirement income, pay for their health care, modify their home, or just get some cash for emergencies. To be more explicit, in a reverse mortgage, the owner of the home agrees to mortgage his home for a specific period of time or till his death. Against the mortgage, he receives either a lump sum or a monthly payment or a combination of both. On death, the home is transferred to the person paying the monthly amounts or the legal heirs depending on how the agreement is structured.

Let us look at one case where I structured a reverse mortgage. A retired person in Bangalore had a lovely bungalow -- and was using a small portion of the house. It was a nice 6-bedroom + 2 halls + 2 garages + 2 kitchen house in a prime location built long ago. The senior citizen -- Srinivasan -- and his wife were not keen to leave the house and move to a smaller house. Their two sons were abroad and showing no signs of interest in this property worth at least Rs 3 crore (Rs 30 million). Srinivasan had retired as an executive director of a PSU -- about 20 years ago. He did not have a pension and his retirement corpus was evaporating. I structured a deal for him with his nephew who wanted to buy the bungalow. The nephew has paid Rs 50 lakh (Rs 5 million) into a bank account of Srinivasan and his wife. Apart from this he will pay them Rs 15,000 per month as rent for the rest of their lives. At the end of their lives the house will go to the nephew. Ravi, the nephew will pay all the statutory dues, upkeep, will paint the house once in 3 years, maintain the garden, and stay with them. His children have got 'grand-parents' and he has got a Rs 3-crore house (it has already shot up in the current boom to about Rs 4 crore -- or Rs 40 million) for Rs 50 lakh plus annual rent of Rs 1.8 lakh (Rs 180,000). Mrs. Srinivasan is currently 67 years old. On an assumption that she lives till the age of 80 years it is a deal that will run for the next 13 years. While in this case, Ravi stayed with them, it is not necessary to do so. While globally, reverse mortgages are carried out for people by banks and mortgage companies, in India, such an arrangement has yet to take place. The author, P V Subramanyam is a financial domain trainer and can be contacted at pvsubramanyam@gmail.com. For more on retirement planning, log on to www.moneycontrol.com

Made a loss? How to bounce back Deepa Venkatraghvan, Moneycontrol.com | May 17, 2006 09:34 IST

4285. . .2280. . .5001. . .3604. . .6492. . .8101. . .9403. . .10522. . .11985
No prizes for guessing what those numbers stand for. You've probably taken that Sensex ride in the past to make quick money. But if you're among those who, in that pursuit,

burnt their fingers badly and are too wary to jump on to the current joy ride, this may just be the best time to learn from past mistakes. But again, we are not telling you that this rally is different or for that matter even safer. After all, even the last couple of days have seen a pendulum like movement in the markets. Certified Financial Planner Kartik Jhaveri warns, "No rally is different. What goes up, must come down and vice versa. Factors driving rallies are different each time, sometimes unfortunately due to scams and other times on business fundamentals, business cycles, economic conditions, political environment, international interest and so on. Boom and bust cycles continue forever. What one must do is follow a disciplined approach and consult professionals not run of the mill agents and brokers." Moneycontrol spoke to experts to identify the steps you should take to make this ride a pleasant and lasting one. Step I: Identify your past mistakes Well begun is half done. So begin with acknowledging your mistakes. Here are some of the common mistakes most people made in the previous rallies: 1. Lack of understanding Ambareesh Baliga of Karvy Stock Broking says, "People don't pay attention to research. And by research, I don't mean very complicated research. Basic research such as what the company does or how it has been performing would do." Jhaveri seconds that. He says, "Most people see the stock market as something risky primarily because they don't understand it. People invest on tips. There is very little understanding of investments and the driving element is greed, hence people don't care and just put in their money to make fast bucks." 2. Entering when markets are already high Jhaveri says, "During boom times by the time people realize that everyone else is making big money in the stock market, its already too late. Most people wake up and start investing when markets are nearing the peak. And unfortunately, they repeat the same mistake in the next boom because everyone seems to say that it's different this time." 3. Investing borrowed funds Baliga brings out an important point, "Initially, people invest their own funds and when they start seeing returns in a bull run, they tend to go overboard. They start borrowing funds to invest in the market. And when markets fall, they lose money on borrowed

funds. That is not a very pleasant situation as the margins on borrowed funds are as it is low." 4. Lack of discipline Jhaveri explains, "People want to become rich overnight. They want their investment to double overnight. People become irrational and forget that there are no short cuts in life. People who win invest on an ongoing basis and they are the ones who create wealth." Step II: What are the lessons learnt? Every problem has a solution. If there is a mistake, there will be a way to solve it. The next step, therefore, is to list down the lessons learnt. 1. Consult professionals or invest in mutual funds Inspite of the high risk, Jhaveri believes that stock market investments are the best investments money can buy. The only advice he gives, "Consult professionals, they will shield you against herd mentality and irrational behavior of market elements." Baliga advices, "The markets are at their peak. So if you are investing in equities, I would suggest you opt for large caps. 2. Look at wealth creation in the long run so market levels don't matter This is easier said than done. And who might know that better than someone who has seen previous rallies. Baliga says, "Its easy to tell investors to stay invested in the long run. But once a southward slide begins, people tend to get panicky and want to exit their investments." Jhaveri gives us his words of wisdom, "Most people are driven by greed and are plagued with an extremely short vision. If you want to create wealth forget about intra day trading and taking delivery for 15 days. Wealth is not created in a day or weeks or couple of months. One must nurture it and let it grow first." 3. Assess your risk appetite Baliga says, "In their excitement, people tend to invest more in equities than their risk appetite would permit." While risk appetite does not determine whether you win or lose, but it determines how you handle the victory or the loss. The markets are at their all-time highs and this maybe a good time to boost your investing confidence. But do it the right way to prevent heartburns again.

For more on financial planning, log on to click here.

8 steps to a smart vacation, money-wise Sanjay Matai, Moneycontrol.com | May 19, 2006 09:33 IST

The children's examinations were over and the summer vacations had begun. The family
was contemplating to go on a well-deserved holiday trip. There was a wide variety of places -- both domestic and foreign -- to choose from. Finally after much debate and discussions we settled for Singapore-Bangkok-Hong Kong package. The mood was upbeat. Last year had been pretty good. Apart from a good jump in the salary, the booming economy had resulted in considerable appreciation of my investments in stocks and real-estate. Moreover, the competitive business environment had ensured attractive air & rail fares, increased availability & choice of hotel rooms, easy financing options, and excellent packages from tour operators. Therefore, we didn't give much thought to the money part. The trip was a great success. We all enjoyed ourselves thoroughly. However, in all the fun and excitement we ended up spending way beyond our means. Before we could realise, we found ourselves in a financial trap. The financial balance had gone for a toss. Now it's going to take months to rebalance our budget. As I sit back and try to sort out the financial mess, I recollect my close friend's advice on holiday budgeting. Had we paid heed to his advice, we could have done away with all the post-trip financial hardships and made our holidays an enduring happy experience. 1. I wish we had planned. And planned within our financial capability. We should have set ourselves a spending limit, which would not have strained our finances. Moreover, we could have kept aside 5-10% as contingency amount, so as to not constraint ourselves too much and also leave some room for unforeseen expenses. Spending more money does not necessarily mean more enjoyment. 2. I wish we had not tried to imitate our neighbours. Just because they had gone for a foreign junket last year, didn't mean we should have also gone for one too. This me-too culture and unbridled consumerism is one of the most common of the causes of financial misery.

3. I wish we had not been swayed by jazzy advertisements and read the fine print on the terms and conditions of our tour operator. While the operator was quite professional and experienced, the advertised cost did not cover all the expenses. These included amongst others airport taxes, entrance fees at a few places of tourist interest, local conveyance when left for shopping on our own, optional meals at local restaurants, etc. 4. I wish we had given some thoughts on gifts too. We were keen to get presents for our near and dears, but most of it was impulse purchases. Instead, we should have listed down all the friends and relatives for whom we wanted to get some gift and the amount we were willing to spend on each one. This would have ensured sensible buying and also not left us short-changed at the last minute. 5. I wish we had updated ourselves about the places we were going to. We could have spoken to friends & relatives who had already been there. Today the Internet gives loads of information. We should have used the Net extensively to arm ourselves with all the knowledge about the place, the weather, the places of interest, local specialties, etc. This would have saved us a lot of time and money. 6. I wish we had not used credit cards. These give a false sense of financial comfort. Using cash or travellers' cheques would have automatically kept a check on our spending and we would not have gone overboard. 7. I wish we had not opted for the 'holiday-on-EMI' offer available. As I didn't have sufficient cash for such a long trip, I took the EMI offer. All we had to do was to just pack our bags and go off to have our fun. The payment could be made later and in installments. But this essentially meant that we were borrowing money for consumption, which is definitely not a very prudent thing to do. Living off ones' future income is a sure way of inviting financial disaster. Therefore, one may keep away from such schemes, no matter how strong the temptation. 8. I wish we had scheduled our trip during the off-season or may be just before or after the peak season. This was an excellent way of cutting down expenses while still enjoying the best of everything. We would have saved a lot of money -- on tickets, on hotel rooms, on shopping, on local sightseeing, etc. These savings would have been as high as 3040%. A little bit of thought and care was all that was needed to make our holidays a memorable experience -- forever. The extravagant and wasteful spending wouldn't have turned our trip into a nightmare later. To put it in a few words -- the motto should be: Limited Spending, Unlimited Fun. The author is an investment advisor. He can be reached at smatai@hotmail.com

How to counter rising home loan rates February 01, 2006 13:48 IST

The past few days have seen experts talk of a high interest rate scenario. With respect to
home loans, we have already seen a few housing finance companies increase their home loan rates. Some have decided to adopt a wait and watch policy. This note takes a closer look at the options available to home loan borrowers in such a scenario. In our view, the current rise in interest rates may not be a secular trend as many people believe. Rates may have risen for a few HFCs but we there is nothing to suggest that this is going to be a long term trend. Also hardening of interest rates may not necessarily translate into a rise in home loan rates. Some companies could well decide to raise rates marginally as quite a few have already done, while some could keep it unchanged at least in the near term as some HFCs like ICICI Bank seem to have done. The steep competition in the home loan industry is one reason why higher interest rates do not always lead to higher home loan rates. Marginal interest rate hikes are usually absorbed by the HFC. This is because an HFC by keeping rates competitive in a high interest rates scenario could grab more clients from peers who have raised rates on their home loan offerings. So what does all this mean for the home loan seeker? What should he do in such 'uncertain' times? We believe that interest rates may rise in the near term leading to an increase in the cost of borrowing for home loan seekers. In such a scenario, individuals can always evaluate the fixed rate (fixed for 3 years) option. That way, the individual can lock his loan at prevailing interest rates, which could be lower than what one might see 3 years hence. Individuals also have the option of considering fixed rates (fixed for 5 years) -- however, the interest rates for loans under this option are slightly higher by around 50 basis points as compared to the 'fixed for 3 years' option.

Click here if you are planning to buy property

Another alternative for the individual is to opt for a floating rate loan. Floating rates are usually 75-100 basis points lower as compared to fixed rates. However, the EMI payable on the home loan is (usually) not altered by most HFCs, what changes is the tenure,

which fluctuates depending on the interest rate movements Usually, the tenure goes up by 9-12 months for every 25 basis points rate increase. And since it is observed that home loans are pre-paid usually within 10-12 years, the impact of the interest rate oscillations tends to have a lower impact. Of course, all said and done, the decision on whether to opt for a fixed or a floating rate of interest depends on the individual's risk appetite and his understanding of the economic environment. If an individual believes that rates are headed northwards for some time to come, then he can lock himself into a 'pure' fixed rate loan. However, he will not get the benefit of a fall in rates, if this was to happen in the future. Individuals who don't have a long-term view on interest rates, but believe that home loan interest rates could rise in the short term, should opt for the fixed rate loan, which is subject to revision periodically. This way he will have capped his EMI liability to a predetermined level.

The best way to save tax February 09, 2006 14:10 IST

The last quarter of the financial year is devoted to an activity, which perhaps is as
important as any annual ritual. Yes, we are talking about tax planning; an activity on which most investors spend very little time. Most of us simply invest in line with what we have been doing over the past. But this year, things are going to be different. A lot more time will have to be dedicated to the tax-planning exercise. And rightly so, because there is a lot more at stake! To put it another way, there is a lot more for you to gain this year! Until the previous year, tax benefits related to investments in select instruments were defined under Section 88 of the Income Tax Act. Under Section 88, individuals could benefit from a 'rebate' on an investment amount that could not exceed Rs 100,000. Of this investment limit, Rs 30,000 was exclusively reserved for Infrastructure Bonds (the popularity of this instrument has vexed us for years given the very poor tax-adjusted rate of return). The other part of this investment pie (Rs 70,000) could be invested in a range of instruments including life insurance, National Savings Certificate (NSC), Public Provident Fund (PPF) and tax-saving mutual funds. The investment in tax-saving funds was capped at Rs 10,000 per year. Save Tax, Save a Life

If this kind of inflexibility was not enough, the 'rebate' was offered in a graded manner to most (not all) taxpayers (Refer Table). If you were earning over Rs 500,000 per year, you got no rebate at all! Section 88 rebates
Annual Income Upto Rs 150,000 Rs 150,000 to Rs 500,000 Over Rs 500,000 Source: www.personalfn.com Tax Rebate 20% 15% Nil

The finance minister has scrapped Section 88 and introduced a new section, 80C. This section has redefined the way you can plan your taxes. To start with, the inflexibility has been removed. Now there is a Rs 100,000 limit and you are free to invest in any proportion in the approved investments. Only in case of PPF is the upper limit capped at Rs 70,000. Also, this section offers a 'deduction' benefit as against a 'rebate.' What this means is that the Rs 100,000 that you save in the specified instruments is 'deducted' from your income; therefore the tax benefit that you are eligible for is equivalent to the tax rate that you pay. For example, if you are in the 30% tax bracket, then your tax savings will be Rs 30,000 (Rs 100,000 * 30%). Furthermore, Section 80C covers all taxpayers. God bless the finance minister! New income tax structure
Net Taxable Income Upto Rs 100,000 Rs 100,001 to Rs 150,000 Rs 150,001 to Rs 250,000 Above Rs 250,000 Source: www.personalfn.com Tax Rate Nil 10% 20% 30%

The net result -- you stand to benefit a lot more. Therefore, you must 'invest' more time in finalising your tax-planning investments this financial year. The plan to invest for tax-saving should be driven by two objectives. One, to minimise the tax liability. And, two, to complement your existing investments in a manner that helps you meet your financial goals and objectives. It is important to note that tax planning is not an independent exercise. In fact it is an integral part of your overall financial planning. Asset Allocation for tax-saving instruments The key to achieving your financial goals is to first define an 'asset allocation plan' that suits your profile, needs and objectives/expectations. If you are, for example, planning for

a need say 3 years down the line, then you will have a specific asset allocation. Conversely, the asset allocation to plan for a need 3 months down the line will be entirely different. Any asset allocation plan has to be made in line with your risk profile. If you are capable of taking on additional risk, to earn higher returns, then you need to take higher exposure to assets like equity shares and vice-a-versa. Of course, it needs to be kept in mind that the instrument you are investing in has a matching investment horizon. In case of equity shares (in this instance tax-saving funds), it is three to five years; in case of NSC, the maturity is 6 years. So the instruments will need to coincide with your profile and investment tenure. The other critical component to building an asset allocation plan is a clear objective/goal (or expectation). Once you are clear in what you wish to achieve with your money, it becomes a lot easier to allocate assets. To take an example of how things go wrong, many a time investors park funds in say infrastructure bonds (3 year maturity) when they really need the money only 10 years down the line. The result is that you are invested in an instrument which gives you a post-tax return of no more than 5% pa even though you could have earned a lot more by simply matching the instrument you invest in to your need (tax-saving funds would probably generate a tax-free return of 12% over this period of time; of course the near term volatility is something that you should be able to absorb). A more diversified portfolio of assets (which also save you tax) can be planned to ensure that over 10 years you generate a much higher tax-adjusted return as compared to the infrastructure bonds. Each instrument, which is covered under Section 80C, has its positives and negatives. However, what emerges is that there are sufficient options available today to plan your Section 80C investments in a manner that helps you achieve your financial goals and get a tax benefit to boot. Comparative analysis of tax-saving schemes
Particulars Tenure (years) Min. investment (Rs) Max. investment (Rs) Safety/Rating Return (CAGR) Interest frequency Taxation of interest PPF 15 500 70,000 Highest 8.00 Compounded annually Tax free NSC 6 100 100,000 Highest 8.00 Compounded half yearly ELSS 3 500 100,000 High Risk 12.00 - 15.00 No assured dividends/returns Infrastructure Bonds 3 5,000 100,000 AA/AAA 5.50 - 6.00 Options available Taxable

Taxable Dividend & capital gains tax

free Source: www.personalfn.com

Let's see what an ideal asset allocation plan for tax-saving instruments could look like for individuals based on their age brackets. The basic assumption here is that as individuals age, their appetite for risk reduces. The objective here is to build long-term portfolios that deliver optimal risk adjusted returns. Recommended asset allocation
Age < 30 30 - 45 45 - 55 > 55 Life insurance premium EPF 10,000 20,000 10,000 30,000 10,000 35,000 10,000 PPF / NSC ELSS 20,000 50,000 25,000 35,000 30,000 25,000 65,000 25,000 Total 100,000 100,000 100,000 100,000

Source: www.personalfn.com

A quick glance at the table and it is immediately evident that we do not recommend that individuals go overboard with life insurance as a saving option. Life insurance, in its pure form (term plans) is a must in every portfolio; it is also the most affordable. The allocation should, to start with, be only to that extent. Over a period of time however, if you are sufficiently exposed to other tax-saving asset classes you could consider adding ULIPs to your portfolio. The Employee's Provident Fund contribution is really linked to your salary and not in your control (it is mandatory by law). Therefore as you progress in your career your contribution to the EPF will increase. The PPF is a very popular saving avenue. However, one must remember that the returns in this scheme are not fixed i.e. they are reset every year. So while today you may be parking your funds in PPF at 8% pa, the rate could stand reduced to say 5% pa 5 years down the line. Since the scheme has a tenure of 15 years, you will have no option but to remain invested in the same. Having said that, the PPF is still attractive because of the tax benefits associated with it (the interest received is also tax free). In fact, if your PPF account is nearing maturity you should increase your annual contribution. Otherwise, it is best to invest only a portion of your Rs 70,000 limit in the scheme. The NSC, which has a 6 year maturity, scores over the PPF as the rate of return is locked over the period of investment. However, the interest earned from the NSC is taxable. Finally, we have tax-saving funds (or ELSS -- Equity Lined Savings Scheme). In our view, for investment horizons that are in excess of three years, investors with appetite for risk, must park some portion of their funds in tax-saving funds.

Currently, both dividends and capital gains earned from tax-saving funds are tax-free. This increases the attractiveness of these schemes. However, as appetite for risk reduces, contribution to the tax-saving funds should decline. A well-defined asset allocation plan for tax-saving instruments will help you realise not just your tax-planning objective, but also complement your overall financial planning. And given the flexibility and benefits that have been introduced this year, you should definitely spend more time on ensuring that your money works for you!

How to pay LESS tax Shobhana Subramanian | February 22, 2006 09:47 IST

After having worked so hard the whole year round, you surely don't want the
government to get more than its fair share of your earnings, right? So take some time off to figure out how you can keep most of what you've made. As an individual taxpayer, Section 80C of the Income Act allows you a deduction of Rs 1 lakh (Rs 100,000) from your "income" figure, provided the money is put into specified investments or used for some specific purpose. So, if you pay tax at the highest rate of 33.6 per cent, you could save as much as Rs 33,600 of your liability if you put in a sum of Rs 1 lakh. You have flexibility too. You can put all your money into a single option; you could claim your entire tax break by paying the principal on your home loan, for example. As you can for your children's school fees, likely to be no less steep. If you're a salaried employee, your contribution to the Provident Fund (PF) can be part of this amount. So, for instance, if you make a contribution of Rs 2,500 per month, the total annual deduction would be Rs 30,000. Try any of these to reduce your tax burden
Section 80C

Products
Employee contribution to PF Life insurance premium 8.5%

Return
Not fixed

Tenor
Till you retire As preferred

Public Provident und (ceiling Rs 70,000) Equity Linked Saving Scheme Principal on Housing Loan Tuition fees for 2 children Pension Fund of a mutual fund National Savings Certificate Annuity Plan for insurance Infrastructure bonds (ICICI, IDBI, etc)

8%, interest exempt No fixed return Not applicable No fixed return 8%, interest taxable Not fixed Approx 5%, interest taxable

15 years plus five Three-year lock-in

Lock-in of three years Six years As preferred Approx. 3-5 years

Or you could buy a life insurance policy, the premium on which would qualify for deduction. A life insurance policy is a must, by the way, especially if you have a home loan to pay off. Also, with the tax benefits of a home loan, there has never been a better time to buy a house. Section 80C allows you a deduction of the principal paid, up to Rs 1 lakh every year. (The interest component of Rs 1,50,000, of course, is eligible for a deduction from your income). In addition, you could save money via a Public Provident Fund (PPF) account, which fetches you a neat 8 per cent per annum by way of interest, though the maximum amount that you can put into a PPF account annually is Rs 70,000. The disadvantages of a PPF account are that the interest rate could be brought down and the government has been toying with the idea of taxing the interest earned on withdrawal (which would turn PPF into an unattractive investment, taken together with the somewhat stiff lock-in provisions). But if you simply leave money lying in a bank fixed deposit, the interest you earn will be taxed. It makes sense, thus, to look for smarter alternatives. If you are not too risk averse, try out an Equity Linked Savings Scheme (ELSS). Remember that you are getting more than a 33-per cent return upfront (if you pay your taxes at that rate), and equities do perform better than most asset classes in the long term. The government also encourages you to contribute to a pension plan of an insurance company -- you are allowed a deduction of a maximum Rs 10,000 under section 80CCC. However, if you are claiming a deduction under Section 80CCC, then the deduction under section 80C stands reduced to Rs 90,000. In other words, the aggregate investments under Sections 80C and 80CCC cannot exceed Rs 1 lakh for a tax break. Do note that in a pension scheme, both the principal and the interest are taxed on maturity.

There's also a tax break on medical insurance under Section 80D. Here again, you can get a deduction of upto Rs 10,000 on the premium paid. After all this, if you still have money left, spend it!

How to smartly invest Rs 100,000 to save tax January 03, 2006 12:35 IST Last Updated: January 03, 2006 16:21 IST

For most individuals, financial planning and tax planning are two mutually exclusive
exercises. While planning our investments we spend considerable amount of time evaluating various options and determining which one suits us the best. But when it comes to planning our investments from a tax-saving perspective, more often than not, we simply go the traditional way and do the exact same thing that we did in the earlier years. Well, in case you are not aware, the guidelines governing such investments are a lot different this year. And lethargy on your part to rework your investment plan could cost you dear. Why are the stakes higher this year? Until the previous year, tax benefit was provided as a rebate on the investment amount, which could not exceed Rs 100,000; of this Rs 30,000 was exclusively reserved for Infrastructure Bonds. Also, the rebate reduced with every rise in the income slab; individuals earning over Rs 500,000 per year were not eligible to claim any rebate. For the current financial year, the Rs 100,000 limit has been retained; however internal caps have been done away with. Individuals have a much greater degree of flexibility in deciding how much to invest in the eligible instruments. The other significant changes are:
• •

The rebate has been replaced by a deduction from gross total income, effectively. The higher your income slab, the greater is the tax benefit. And all individuals, irrespective of the income bracket they are in, are eligible for this investment. For most readers, these developments will result in higher taxsavings.

We at Personalfn believe that you should use this Rs 100,000 contribution as an integral part of your overall financial planning and not just for the purpose of saving tax. You should spend time, preferably with your financial consultant, to understand which instruments and in what proportion suit your requirement best. In this note we

recommend a broad asset allocation for tax saving instruments for different investor profiles. If you are below 30 years of age: In this age bracket, you probably have a high appetite for risk. Your disposable surplus maybe small (as you could be paying your home loan installments), but the savings that you have can be set aside for a long period of time. Your children, if any, still have many years before they go to college; or retirement is still further away. Life Total insurance PPF / (All figures Age premium EPF NSC ELSS in Rs)
< 30 30 45 45 55 > 55 10,000 20,000 20,000 50,000 100,000 10,000 30,000 25,000 35,000 100,000 10,000 35,000 30,000 25,000 100,000 10,000 - 65,000 25,000 100,000

You therefore should invest a large chunk of your surplus in tax-saving funds (equity funds). The employee provident fund deduction happens from your salary and therefore you have little control over it. Regarding life insurance, go in for pure term insurance to start with. Such policies are very affordable and can extend for up to 30 years. The rest of your funds (net of the home loan principal repayment) can be parked in NSC/PPF (National Savings Certificates/Pubic Provident Fund). If are between 30 and 45 years of age: Your appetite for risk will gradually decline over this age bracket as a result of which your exposure to the stock markets will need to be adjusted accordingly. As your compensation increases, so will your contribution to the Employees Provident Fund. The life insurance component can be maintained at the same level; assuming that you would have already taken adequate life insurance and there is no need to add to it. In keeping with your reducing risk appetite, your contribution to PPF/NSC increases. One benefit of the higher contribution to PPF will be that your account will be maturing (you probably opened an account when you started to earn) and will yield you tax free income (this can help you fund your children's college education). If you are between 45 and 55 years of age:

You are now nearing retirement. To that extent it is critical that you fill in any shortfall that may exist in your retirement nest egg. You also do not want to jeopardise your pool of savings by taking any extraordinary risk. The allocation will therefore continue to move away from risky assets like stocks, to safer ones line the NSC. However, it is important that you continue to allocate some money to stocks. The reason being that even at age 55, you probably have 15 to 20 years of retired life; therefore having some portion of your money invested for longer durations, in the high risk-high return category, will help in building your nest egg for the latter part of your retired life. If you are over 55 years of age: You are to retire in a few years; then you will have to depend on your investments for meeting your expenses. Therefore the money that you have to invest under Section 80C must be allocated in a manner that serves both near term income requirements as well as long-term growth needs. Most of the funds are therefore allocated to NSC. Your PPF account probably will mature early into your retirement (if you started another account at about age 40 years). You continue to allocate some money to equity to provide for the latter part of your retired life. Once you are retired however, since you will not have income there is no need to worry about Section 80C. You should consider investing in the Senior Citizens Savings Scheme, which offers an assured return of 9% pa; interest is payable quarterly. Another investment you should consider are Post Office Monthly Income Scheme. Investing the Rs 100,000 in a manner that saves both taxes as well as helps you achieve your long-term financial objectives is not a difficult exercise. All it requires is for you to give it some thought, draw up a plan that suits you best and then be disciplined in executing the same.

Here's how everyone can save tax! January 04, 2006 08:17 IST Last Updated: January 04, 2006 08:20 IST

The annual tax-planning exercise for most investors tends to be divorced from their
financial planning process. As a result factors like risk appetite, investment objective and tenure of investment are often overlooked when tax-planning investments are made.

While apathy or lack of awareness on the investors' part could be partly 'credited' for this, the restrictive nature of Section 88 of the Income Tax Act should also shoulder the blame. Section 88 In the erstwhile tax-regime (prior to Finance Bill 2005), provisions for the purpose of tax sops fell under the gamut of Section 88. Investors were required to make investments in stipulated tax-saving instruments to claim tax rebates under the given section. Tax rebates under Section 88 Annual Income
Up to Rs 150,000 Rs 150,000 to Rs 500,000 Over Rs 500,000

Tax Rebate
20% 15% Nil

As can be seen from the table above, the investor's income level was the key to determining the rebate he was entitled to; a higher income level translated into lower rebates. Investments eligible for the purpose of claiming tax benefits included Public Provident Fund (PPF), National Savings Certificate (NSC) and tax-saving funds among others. The upper limit (in monetary terms) for the purpose of tax-saving investments was pegged at Rs 100,000. However, the hitch was that 'sectoral caps' existed on the various investment avenues. For example, investments in tax-saving funds (also referred to as ELSS) of up to Rs 10,000 were eligible for claiming tax benefits. Similarly investments in instruments like PPF, NSC, tax-saving funds and avenues like insurance premium, repayment of home loan (principal component of the EMI only) among others accounted only for a Rs 70,000 benefit. The balance Rs 30,000 (Rs 100,000 less Rs 70,000) was reserved for infrastructure bond investments. Effectively, the investor had little choice in selecting the tax-saving investments. Instead, it was Section 88 which determined how each individual would make his investments.

The 2006 Guide to Tax Planning

An investor with a high-risk appetite had to choose the same investment avenues as a low risk investor because of Section 88's restrictive nature. Enter Section 80C

Section 88 was scrapped in Finance Bill 2005. Instead, Section 80C was introduced. All avenues that were eligible for tax benefits under Section 88 were brought under the Section 80C fold. However, instead of offering tax rebates, investments (up to Rs 100,000) under Section 80C qualified for deduction from gross total income. Hence a new system of claiming tax benefits was introduced; furthermore a new tax structure too was introduced. The new tax structure Net Taxable Income
Up to Rs 100,000 Rs 100,001 to Rs 150,000 Rs 150,001 to Rs 250,000 Above Rs 250,000

Tax Rate
Nil 10% 20% 30%

(A 10% surcharge is levied on assessees with a net taxable income above Rs 1,000,000)

The biggest advantage Section 80C offered was that sectoral caps on tax-saving instruments were removed. As a result investors were given the freedom to select investment avenues of their choice for tax-planning purpose. Why Section 80C scores over Section 88 Investing in line with one's risk appetite is a tenet of financial planning and Section 80C promotes the same. Removal of sectoral caps on investments for tax-planning purposes means that investors can invest in line with their risk appetites and needs. A risk-taking investor can invest his entire corpus of Rs 100,000 in a high-risk instrument like ELSS; conversely a risk-averse investor can select small savings schemes like PPF and NSC. As a result, every investor's tax-saving portfolio can now reflect his individual preferences. Another advantage that Section 80C offers is for investors whose gross total income is greater that Rs 500,000. Under the earlier tax regime, these investors were not eligible for Section 88 tax rebates. However, Section 80C has done away with this disparity and investors across tax brackets can claim the Rs 100,000 deduction. Tax-saving schemes at a glance Particulars
Tenure (years) Min. investment (Rs) 15 500

PPF
6

NSC
3 100

ELSS

Infrastructure Bonds
3 500 5,000

Max. investment (Rs) Safety/Rating Return (CAGR) Interest frequency Taxation of interest

70,000 100,000 100,000 100,000 Highest Highest High Risk AA/AAA 8.00 8.00 12.00 - 15.00 5.50 - 6.00 Compounded Compounded No assured annually half yearly dividends/returns Options available Dividend & capital gains tax Tax free Taxable free Taxable

Eligible avenues for Section 80C 1. 2. 3. 4. 5. 6. 7. 8. Payment of life insurance premium. Contribution to Provident Fund. Repayment of principal amounts on housing loans. Payment of tuition fees. Investments in PPF. Investments in NSC. Investments in Equity-Linked Savings Schemes. Investments in Infrastructure Bonds.

What should investors do? Clearly Section 80C has ensured that the onus of conducting the tax-planning exercise in line with one's risk profile has shifted to investors. Investors now need to utilise the opportunity by making the right investments. Investors would do well to remember that investments made for the purpose of tax-planning can have a significant impact on their finances over the long-term horizon, hence due importance should be accorded to it. Our advice: engage the services of a qualified investment advisor, make an investment plan for your tax-planning investments and stick to it; finally don't deviate from your risk appetite.

How capital gains bonds help SAVE tax January 05, 2006 08:08 IST Last Updated: January 05, 2006 14:18 IST

Managing a capital gains tax liability can be quite a handful for assessees. The
conventional method of dealing with such a liability is to simply invest in capital gains bonds. At Personalfn, we believe there is more than one way of doing this.

However, before discussing the various alternatives, let us understand what a capital gains liability is and how it arises. If you sell any capital asset (like a house property), a capital gains tax liability can arise on the same. If the asset (property in this case) has been sold within 36 months from the date of purchase, it amounts to short-term capital gains. Conversely, if the asset is held for a period of more than 36 months, a long-term capital gain arises. In case of assets like mutual funds, the holding criterion for determining long-term or short-term is reduced to 12 months. So if you hold the security for over 12 months, it qualifies for a long-term gain. The following illustration explains how a capital gains are computed. Table 1
Cost of Purchase (Rs) Sale Proceeds (Rs) Date of Purchase Date of Sale Cost Inflation Index for the year of purchase Cost Inflation Index for the year of sale Sale Proceeds (Rs) Less: Indexed Cost of Purchase (Rs) Long-term capital gains chargeable to tax (Rs) Long-term capital gains tax @ 20% 1,500,000 3,000,000 01-Mar-95 01-Mar-05 259 480 3,000,000 2,779,923 220,077 44,015

Suppose you purchased a house property in March 1995 at a cost of Rs 1,500,000 and sold the same 10 years hence at Rs 3,000,000. Your profit on sale would be Rs 1,500,000. However for the purpose of computing capital gains, the purchase price has to be adjusted for inflation using the Cost Inflation Index (see Table 1). The long-term capital gains will now amount to Rs 220,077. At a tax rate of 20% (for long-term capital gains), the tax liability amounts to Rs 44,015. Now let us examine the various options available for managing the capital gains liability. 1. Invest in capital gains bonds Assesses have the option of not paying any long-term capital gains tax by investing the profit (Rs 220,077) in capital gains bonds with a stipulated time period. Capital gains bonds are issued by specified institutions and tax benefits are available under Section 54EC of the Income Tax Act.

How to smartly invest Rs 1 lakh to save tax • The 2006 Guide to Tax Planning

For the purpose of claiming tax benefits, investments should be made within a period of 6 months from the date when the capital asset was sold. Similarly, investors are required to stay invested in the bonds for a period of 36 months from the date of investment. Redemption before completion of the 36-month period will negate the tax benefits. Table 2 demonstrates the working on capital gains bonds. NABARD offers capital gains bonds with a coupon rate of 5.50% for a 5-year period. Investors have the option of liquidating their investments at the end of 3 years without affecting the tax benefits claimed. Table 2
Long-term capital gains (Rs) Tax saved at time of investing (Rs) Effective amount invested (Rs) Coupon rate Tenure (years) Maturity proceeds (Rs) 3-year CAGR returns* (*Returns adjusted for tax benefits) 220,077 44,015 176,062 5.50% 3 246,252 11.83%

Since investing in capital gains bonds entails not paying any long-term capital gains tax, the net amount (long-term capital gains less tax liability on the same) has been used for computing the returns. Similarly, interest earnings from the capital gains bonds are assumed to be taxed at the highest tax slab (30%, plus 2% for education cess). In the above example, the investor would earn returns at 11.83% CAGR over the 3-year period. This option will appeal to investors with a low risk appetite and to those for whom not paying tax is a high priority. 2. Pay the tax and invest in other avenues If you are not happy with the idea of locking away your gains in capital gains bonds for a 3-year period, you can explore the possibility of paying the capital gains tax liability and investing the balance in alternate avenues like mutual funds. Table 3 lists returns clocked by some leading diversified equity funds and balanced funds. Table 3
3-year* Diversified Equity Funds HDFC Top 200 66.33% Franklin India Bluechip 59.91% Sundaram Growth 55.55% Balanced Funds

HDFC Prudence DSP ML Balanced FT India Balanced

53.89% 42.79% 37.64%

(Source: Credence Analytics; NAV data as on November 11, 2005. *Returns are Compounded, Annualised.)

Clearly the mutual fund schemes under consideration have clocked far superior returns vis-à-vis the capital gains bonds as seen in Table 3. However, equity-oriented schemes are high-risk investment avenues and expose investors to considerably higher levels of risk as compared capital gains bonds. Secondly, unlike capital gains bonds, mutual funds don't offer assured returns. Finally the returns listed above are historical in nature. While it would be difficult to predict how the equity markets will behave over the next 3 years, we believe a 15% CAGR return over this time frame seems like a reasonable one. Equity-oriented funds if held for a period of more than 12 months are exempt from any long-term capital gains tax liability; also dividends received from such funds are totally exempt from tax. In such a scenario, investors will be better off paying tax and investing the balance in mutual funds rather than investing in capital gains bonds. Table 4
Long-term capital gains (Rs) Less: Long-term capital gains tax paid (Rs) Net amount invested (Rs) 3-year returns* Tenure (years) Maturity proceeds (Rs) (*Returns are Compounded, Annualised.) 220,077 44,015 176,062 15.00% 3 267,768

3. Invest the gains in a residential house property Section 54 and Section 54F of the Income Tax Act contains provisions whereby longterm capital gains can be utilised to acquire/construct a residential house property. If the necessary conditions (including the time frame within which the gains must be invested for buying/constructing a property) are fulfilled, the assessee is exempt from paying capital gains tax. As in the case of capital gains bonds, the property acquired should not be transferred within a 3-year period from the date of transfer or construction; failure to adhere to the same will negate the tax benefits claimed.

As we had mentioned earlier, capital gains bonds are not the only means for managing your tax liability. Your decision to invest in capital gains bonds or otherwise should be determined by your risk appetite and investment objective among others. For example, if you are content with the idea of a low-risk but assured-returns investment avenue, coupled with the prospect of not paying any tax, capital gains bonds are your calling. Alternately, you can consider paying up your tax liability and using the mutual fund route. The key lies in being aware of the various options and making an informed choice.

Bridge the gap to your dream home Vidyalaxmi | January 05, 2006 12:53 IST

Rahul Tandon got a job with a multinational company, in Mumbai, for a hefty pay
package. He then came across his dream home in downtown. But he has a problem: he already owns a house in the suburb and he needs to sell it to part-finance the purchase of the new one. The sale proceeds of the old house will be received only after some time. Should Rahul let go off his dream home, then? Not really; he has a rescuer - bridge loan. Now, what is bridge loan? If your existing house commands enough monetary value, you may avail of a bridge loan, which will allow you to make a down payment and buy your new house. This loan comes in handy when you do not want to take a long-term home loan, by giving you enough time to sell your existing property to pay off the loan. In other words, if you need immediate or urgent cash to fund the purchase of a house and do not want to wait till you sell your old house you may avail of this short-term loan in the interim period. Now the question is how to avail of bridge loans for buying a house? Once you have identified the house you want buy, you may go ahead and approach any bank or housing finance company. The procedure is very similar to that applying for a normal home loan in terms of eligibility criteria and the documents to be furnished.

However, it is mandatory for you to identify the new house that you intend to purchase before knocking at the doors of any bank. The application for a bridge loan is generally considered only after ensuring that the prospective borrower has entered into an agreement for sale of his property. The borrower is expected to furnish details of the new property he desires to buy. If he is a senior citizen who may not be eligible for the loan, the borrower's heir(s) can be made jointly responsible for repayment. If the borrower is unable to find a buyer for the old flat within the stipulated period, which is usually six to 12 months, the lending entity has the option to convert the bridge loan into a mortgage loan. However, this loan will be at a higher rate of interest. Salient features of bridge loan are: Quantum of loan - It largely depends upon the repayment capacity as well as the cost of the house. Cost will include cost of house, stamp duty, registration fees, transfer fees subject to maximum of Rs 50 lakh (Rs 5 million) or four times the gross annual income whichever is less. Some housing finance companies such as HDFC offer maximum loan amount covering 90 per cent cost of the new property. Repayment - The borrower has to repay the loan by paying in equated monthly instalments or paying interest on the loan availed of, till the entire loan amount is repaid within two years. Thus, he gets two years' timeframe to sell his existing property and prepay the loan. Rate of interest - The existing house to be disposed of in 12 months time (optional) and the sale proceeds to be deposited in the loan account. EMIs would be fixed on the balance amount, i.e. outstanding, in the account. On the negative side, interest rates on bridge loan are higher than those on home loans because it is a short-term loan, and also, costs and fees are involved in it. Comparison between fixed interest rate and bridge loan rate (%)
Banks HDFC SBI Fixed Floating Bridge 8.50 9.00 8.25 8.25 8.50 10.25 12.50 10.75

Citibank 8.50

Tenure of fixed rate home loan is 15 years and the rates are on monthly basis. However, these rates can vary across borrowers on a case-to-case basis. Security - For the new property title deeds and/or such other, collateral can act as security. You may also have to give an irrevocable power of attorney if asked to sell your existing home. Moreover, both the proposed and existing homes would have to be insured against fire and other appropriate hazards. If the property is under construction, the housing finance company may ask for some insurance in the interim period. So it is not difficult for Rahul or you to meet your interest credit requirements for buying a house, if you do not intend to get locked in for a long-term home loan.

Insure your health and save tax January 11, 2006 07:57 IST Last Updated: January 11, 2006 08:30 IST

Individuals, while conducting their tax planning exercise for the year, should always
keep in mind their financial objectives. One objective should be to insure themselves against any unforeseen medical/health expenses. A medical/health insurance policy helps in achieving this goal. This note explains what the policy is and how it proves to be useful while carrying out the financial as well as the tax planning exercise. Simply put, a health insurance policy, also popularly known as 'Mediclaim,' helps an individual cover the expenses incurred due to an injury/hospitalisation. Not only does it cover expenses sustained during hospitalisation but also during the pre- as well as posthospitalisation stages. An added attraction of these policies is that the individual gets certain tax benefits, which are separate from the Section 80C benefits available on traditional tax-saving instruments. An illustration will help in understanding things better. Medical insurance: Small costs, huge benefits Amount to be Annual Age insured Premium (Yrs) (Rs) (Rs)

United India Insurance Co. Ltd

30

200,000

2,469

New India Assurance Co. Ltd 30

200,000

2,720

The premium quotes are as shown on Web sites of the respective insurance companies. Taxes as applicable may be levied on the quotes given above. Individuals are advised to contact the insurance companies for further details.

Let us assume that an individual aged 30 years, wants to cover himself for a sum of Rs 200,000. As the table shows, if he decides to buy a Mediclaim policy from United India Insurance, the annual premium for the same works out to approximately Rs 2,469 per annum.

How to smartly invest Rs 1 lakh to save tax • Here's how everyone can save tax! • The 2006 Guide to Tax Planning

Conversely, if the policy were to be purchased from New India Assurance, other factors remaining the same, the premium the individual would have to pay would be approximately Rs 2,720 per annum. In case the individual has to undergo hospitalisation due to an injury/accident, then the expenses incurred by him will be covered by the policy. The cover will be to the extent of the sum insured. In this example, the insurance company will pay for expenses up to Rs 200,000. This cover will also include pre and post hospitalisation expenses like money spent for conducting medical tests and buying medicines. Of course, the payment will be subject to certain conditions. For example, the insurance company will want the individual to undergo treatment from a hospital that has a tie-up with the company. Also, the insurance company will ask for all the necessary documents pertaining to the hospitalisation charges, the medicines bought and other related papers. Mediclaim policies attract tax benefits under Section 80D. Deduction under this section is available if the premium is paid by cheque. The maximum amount of deduction available under this section is Rs 10,000. This limit stands enhanced to Rs 15,000 in case an individual is a senior citizen. Tax benefits are also available in case individuals pay for their parents and children who are dependent on them. A host of added benefits are also available on Mediclaim policies. If suppose, an individual continues to buy a Mediclaim policy from a certain company and has a claim

free year, then the company increases his sum insured in the next year. Alternatively, some companies reduce the premium charged to the individual. Most companies also give a discount on the premium being charged in case individuals want to insure their entire family. Individuals also have the option of covering themselves for medical expenses by opting for the 'Critical Illness (CI)' rider available with life insurance policies. Life insurance companies have their own list of critical illnesses as defined by them. If an individual suffers from an illness that is defined by the company in its list of critical illnesses, then he stands to benefit by way of this rider. Section 80D benefits are available on such riders as well. However, medical insurance differs from these riders in one key aspect. In case of a CI rider, on the occurrence of a 'critical illness' during the policy tenure, an amount as proposed in the policy will be paid out to the individual. This is irrespective of the expenses incurred by the individual on hospitalisation, medicines and other such costs. As opposed to this, in case of Mediclaim, the individual is covered only to the extent of the actual expenses incurred subject to the maximum limit as defined by the 'sum insured.' Medical insurance has also seen a lot of innovation being brought in with the passage of time. Nowadays, you have 'cashless hospitalization.' This is where individuals do not have to pay for their hospital bills in case of hospitalisation; the insurance company settles the bill directly. Of course, certain conditions like those already mentioned earlier have to be met- the hospital needs to have a tie-up with the insurance company, the documents need to be in order and so on. Some companies also offer what they call 'floating cover' which can be best understood by an example. Under a floating cover, an individual can either cover himself for say, an amount of Rs 300,000 or cover his family of say 3 individuals, for Rs 100,000 each. This again, will be subject to the conditions laid down by the insurance company. However, what needs to be understood is that individuals have a wider choice now with more general insurance companies entering the fray. With the costs associated with medicine and medical treatment having gone up, individuals need to plan their finances better. They shouldn't be caught in a scenario where they are staring at a huge medical bill and haven't planned for it. That apart, although they might have the money at that point in time, their long term financial planning might go awry. It is in such cases that medical insurance proves its worth all the more.

All said and done therefore, a medical insurance policy should always form a part of any individual's financial planning as well as the tax planning exercise.

All about shares and tax January 16, 2006 07:33 IST Last Updated: January 16, 2006 09:00 IST

What are the tax implications when you buy stocks or sell them? Read on to find out.
Is there any tax implication while making an investment in shares? Are investors in shares entitled to any tax benefits? There is no tax implication while making an investment in shares. There are tax benefits to investing in some pre-approved companies as mentioned in the third point below. The tax implication arises only at the time of sale of shares as under:

If certain eligible equity shares are purchased on or after March 1, 2003 but before March 1, 2004 and are transferred after 12 months, then the gain on the sale of such shares will be entitled for exemption under Section 10(36) of the Income Tax Act, 1961 by eligible equity shares. This applies to any equity shares, which form part of the BSE 500 index of the Mumbai Stock Exchange, the transaction of purchase and sale of which have been entered into through a recognised stock exchange in India and any equity shares, allotted through a public issue on or after March 1, 2003 and listed in a recognised stock exchange in India before March 1, 2004 and the transaction of such shares, if entered into through a recognised stock exchange in India. After October 1, 2004, any equity share, which has been sold through a recognised stock exchange and on which STT (Securities Transaction Tax) has been paid would be entitled to exemption from Long Term Capital Gains under Section 10 (38) of the Act. Similarly, in case of Short Term Capital Gain of such shares, the gains shall be taxed only at 10%, plus surcharge and education cess. Under Section 80C, any subscription to equity shares or debentures forming part of any eligible issue of capital, approved by the Court or an application made by a public company or subscription to such eligible issue by a public finance institution in a prescribed form, would be eligible to deduction subject to the condition of this Section. Also, subscription to any unit of a mutual fund, approved by the board in respect of any mutual fund, referred to in Clause (23D) of Section 10, would also be entitled.

What is the tax implication of a bonus/rights issue on equity shares?

Under Section 55(2)(AA), bonus on equity shares has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of equity shares. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue.
• • •

Here's how everyone can save tax! Do you 'really' know home loans? Infrastructure bonds: Tax party's over! • The 2006 Guide to Tax Planning

The cost of acquisition of the rights issue on equity shares is the amount actually paid for acquiring such right according to Section 55(2) (AA) (iii). The holding period is reckoned from the date of allotment. Where there is a transfer of these rights, the cost of acquisition of such rights is to be taken as 'nil' according to Section 55(2) (AA) (ii). The sale price of such transferred rights will be taken as capital gain. The period of holding in the hands of the transferor is computed from the date of offer, made by the company to the date of renouncement. In case of the transfer of such rights, the cost of acquisition is the aggregate of the amount of purchase price, paid to the transferor to acquire the right entitlement and the amount, paid by him to the company for subscribing to such right offer of share. The period of holding in the hands of the transferee will be from the date of allotment of such shares. What is the tax implication on 'split shares'? Is the cost of acquisition halved or is it taken as nil? What about the period of holding? The split shares represent the sub-divided shares of a lot of shares. The cost of such shares gets proportionately divided and the period of holding also continues to be the same as that of the original lot. What is the capital gains liability arising on sale of shares, i.e. long-term/shortterm? In case of equity or preference shares in a company, if the shares are held for more than 12 months immediately prior to its transfer then it is known as long term capital asset and on transfer of long term capital asset, long term capital arises. Long term capital gains arising on transfer of equity shares will not be chargeable to tax from assessment year 2005-06 if such transaction is covered by securities transaction tax under section 10(38).

If an investor has multiple demat accounts, does he calculate capital gains on the first-in-first-out (FIFO) basis on each demat account separately or just once across all demat accounts? In case of multiple demat accounts, the capital gains on sale of shares has to be computed on the basis of the FIFO with reference to the particular account from where the shares are sold. The FIFO method was introduced to bypass the process of determining the cost on one to one basis with the particular DP (depository participant). Can short-term capital gains be set-off by investing in capital gains bonds? No, short term capital gains cannot be set off by investing in capital gains bonds under Section 54EC. This benefit is only in respect of long-term capital gain. For how long can capital loss (short-term or long-term) be carried forward by investors? A capital loss (short-term/long-term) can be carried forward for a maximum period of 8 years from the assessment year in which the loss was first incurred. A short-term capital loss can be set off against any capital gain (long-term and shortterm). However a long-term capital loss can be set off only against a long-term capital gain. What is the STT (Securities Transaction Tax) and how does it work? Are investments made prior to the STT regime eligible for the long-term capital gains tax waiver or is this facility available only to post-STT investments? The Securities Transaction Tax has been introduced by Chapter VII of the Finance Act (No.2) Act, 2004. It provides for a levy of a transaction tax on the value of certain transactions. These transactions include the purchase and sale of equity shares in a company, purchase and sale of units of an equity growth fund, sale of a unit of an equity growth fund to the mutual fund and sale of a derivative. The transaction tax will be payable on all transactions that have taken effect from October 1, 2004.

Whether securities transaction tax (STT) is applicable Who has Purchaser Seller to pay STT Rate of STT -from June 0.10% 0.10% 1, 2005 -during October 1, 2004 and May 31, 2005 0.08% 0.08% Tax NA treatment of long term capital gain in the hands of seller Tax NA treatment of shortterm capital gain in the hands of seller

Transaction in recognised stock Sale of exchange in India unit of an equity Purchase Sale of Sale of Sale of of equity equity equity derivative oriented fund to shares, shares, shares, the mutual units of units of units of fund equity equity equity oriented oriented oriented mutual mutual mutual fund fund fund (delivery (delivery (nonbased) based) delivery based) Yes Yes Yes Yes Yes

Seller

Seller

Seller

0.02%

0.01%

0.20%

0.02%

0.01%

0.15% Exempt from tax under section 10(38) [long-term capital loss if any shall be ignored] Taxable at the rate of 10% (+surchage +education cess) under section 111A

Exempt Income is Income is from tax generally generally under treated treated as section as business 10(38) business income [long income term capital loss if any shall be ignored] Taxable at Income is Income is the rate of generally generally 10% treated treated as (+surchage as business +education business income cess) income under section 111A

Tax NA treatment of business income in the hands of seller

Who will collect STT • •

If income is shown as business income, one can claim tax rebate under section 88E Stock Stock exchange exchange

One can claim tax rebate under section 88E

One can claim tax rebate under section 88E

One can claim rebate under section 88E

Stock Stock Mutual exchange exchange fund

Surcharge: Nil, Education cess: Nil Note: STT is not applicable in case of government securities, bonds, debentures, units of mutual fund other than equity oriented mutual fund and in such cases, tax treatment of short-term and long-term capital gains shall be as per normal provisions of law.

Effect of levy of the Securities Transaction Tax 1. Long-term capital gain, arising to an investor from the sale of these specified securities, shall be exempt from tax under section 10(38). 2. Correspondingly, long-term capital loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse. 3. Short-term capital gain, arising to an investor (incl. FII) from the sale of such securities, shall be charged at 10%, plus surcharge and education cess under section 111A. 4. This exemption of long-term capital gain is available to all assessees, including FIIs. 5. This exemption is available only to those assessees, who hold these specified securities as capital assets (investments) and not as stock-in-trade. 6. Correspondingly, at the year-end, the stock cannot be valued at cost or market value; whichever is lower, as it is not stock-in-trade. No deduction in the value of investments would be permissible. 7. Securities Transaction Tax will be applicable only with effect from October 1, 2004. For the earlier period, i.e. from April 1, 2004 to September 30, 2004, the earlier law will be operative. 8. The exemption of long-term capital gain is available only to transactions in relation to the specified securities. Exemption will not be available to transactions, not specifically mentioned in the list above. 9. The exemption would be available even in respect of specified securities, purchased prior to the introduction of Securities Transaction Tax but sold after the operative date. 10. The exemption is available to all shares. The earlier exemption, under section 10(36), was restricted to shares listed in BSE 500, which were purchased after

March 1, 2004 but before April 1, 2004 and sold, after being held for more than twelve months. 11. The exemption is available to all specified securities, sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange, will not be covered. 12. The purchase of the specified securities could be through any mode and need not be through a recognised stock exchange. 13. The exemption is not available to other securities, which are not specified, e.g. preference shares, bonds, debenture, etc. 14. The exemption is not available to transactions where Securities Transaction Tax has not been paid. 15. Securities Transaction Tax, paid for the purchase and for the sale of the specified securities, will not be available as a deduction. No deduction for the Securities Transaction Tax is incurred for purchase or sale of the specified securities. 16. Since long-term capital gain would now be exempt from tax, Section 14A would come into play. This means that no expense shall be allowed to be claimed as a deduction in respect of income, which is exempt. For example, expenses like interest, rent, salaries, wages, electricity, telephone, water, etc. and other administrative expense will not be allowed, as a deduction since the income earned is exempt. 17. Rebate, under Section 88E, is available in respect of Securities Transaction Tax from Assessment year 2005-06. Is the dividend income, received from investments in shares, taxable? Dividend, received from investment in shares, is not taxable in the hands of the recipient. The company, distributing the dividend, is required to deduct tax from the amount of dividend declared. Such tax deducted will not be entitled to TDS for the recipient. Do investments in shares have any Gift Tax implications? Investments in shares do not have any Gift Tax implications. Investment in shares in the name of some other person other than the investors has Income-tax (gift) implications with effect from the financial year 2004. These shares will now be treated as income.

The 2006 guide to Tax Planning. Download the complete guide today! Click here!

Mutual funds and tax benefits January 17, 2006 07:49 IST Last Updated: January 17, 2006 08:40 IST

What are the tax benefits available to those who invest in mutual funds? What are the
tax liabilities, if any? Read on to find out. . . What tax benefits are available to those who invest in mutual funds? Please mention the tax benefits on equity-oriented and debt-oriented funds separately. Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds with less than 50% of assets in equities), are tax-free in the hands of the investor. A dividend distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund on the dividends declared by the fund. Long-term debt funds, government securities funds (G-sec/gilt funds), monthtly income plans (MIPs) are examples of debt-oriented funds. Dividends declared by equity-oriented funds (i.e. mutual funds with more than 50% of assets in equities) are tax-free in the hands of investor. There is also no dividend distribution tax applicable on these funds under section 115R. Diversified equity funds, sector funds, balanced funds are examples of equity-oriented funds.
• • •

Here's how everyone can save tax! Do you 'really' know home loans? Infrastructure bonds: Tax party's over! • The 2006 Guide to Tax Planning

Amount invested in tax-saving funds (ELSS) would be eligible for deduction under Section 80C, however the aggregate amount deductible under the said section cannot exceed Rs 100,000. Is a capital gain on sale/transfer of units of mutual fund liable to tax? If yes, at what rate? Section 2(42A): Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset if the same is held for less than 12 months. The units held for more than twelve months are treated as long-term capital asset. Section 10(38): Under Section 10(38) of the Act, long term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. This makes long-term capital gains on equity-oriented funds exempt from tax from assessment year 2005-06. Short-term capital gains on equity-oriented funds is chargeable to tax @10% (plus education cess, applicable surcharge). However, such securities transaction tax will be allowed as rebate under Section 88E of the Act, if the transaction constitutes business income.

Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is less. Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate) to the investor. Section 112: Under Section 112 of the Act, capital gains, not covered by the exemption under Section 10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:
• • •

Resident Individual & HUF -- 20% plus surcharge, education cess. Partnership firms & Indian companies -- 20% plus surcharge. Foreign companies -- 20% (no surcharge).

Capital gains will be computed after taking into account the cost of acquisition as adjusted by Cost Inflation Index, notified by the central government. 'Units' are included in the proviso to the sub-section (1) to Section 112 of the Act and hence, unit holders can opt for being taxed at 10% (plus applicable surcharge, education cess) without the cost inflation index benefit or 20% (plus applicable surcharge) with the cost inflation index benefit, whichever is beneficial. Under Section 115AB of the Income Tax Act, 1961, long term capital gains in respect of units, purchased in foreign currency by an overseas financial, held for a period of more than 12 months, will be chargeable at the rate of 10%. Such gains will be calculated without indexation of cost of acquisition. No surcharge is applicable for taxes under section 115AB, in respect of corporate bodies. Is it possible to offset the capital loss on a mutual fund investment after a dividend declaration? This is a practice that is popularly referred to as 'dividend stripping.' The capital loss from a dividend declaration can be offset if you have remained invested in the mutual fund 3 months before and 9 months after the dividend declaration. If you haven't adhered to this guideline then you cannot offset the capital loss arising from a dividend declaration. How can I avoid payment of capital gains on mutual fund investments? The capital gain, which is not exempt from tax as explained above, can be invested in the specified asset, mentioned below, within 6 months of the sale. Specified asset means any bond redeemable after 3 years:

• • •

Issued on or after April 1, 2000 by NABARD (National Bank for Agriculture and Rural Development or NHA (National Highways Authority of India Issued on or after April 1, 2001 by the Rural Electrification Corporation Ltd. Issued on or after April 1, 2002 by the National Housing Bank or by the Small Industries Development Bank of India.

Such capital gains can also be invested in any residential house property in accordance with Section 54F of the Act and one can claim exemption from capital gains.

All about tax on fixed deposits, bonds January 18, 2006 08:06 IST Last Updated: January 18, 2006 08:38 IST

Read on to find out what the tax implications of investing in fixed deposits and bonds
are. What are the tax implications of investing in fixed deposits and bonds like 8% Savings (Taxable) Bonds, 2003? Interest income on fixed deposits and bonds, such as 8% Savings (Taxable) Bonds, 2003, is taxable under the head 'Income from other sources.' The entire income received is taxable. However, an assessee can claim direct expenses incurred to earn that income under the provisions of Section 57(iii). Can investors claim any tax benefits for investments made in fixed deposits/bonds under Section 80C? Similarly, are any benefits available to investors on the interest income? Investments in fixed deposits are not eligible for deductions under Section 80C. Infrastructure bonds qualify as eligible investments under Section 80C.
• • •

Here's how everyone can save tax! Do you 'really' know home loans? Infrastructure bonds: Tax party's over! • The 2006 Guide to Tax Planning

Section 10(15) states the list of various securities and bonds, on which interest is exempt from tax. Are senior citizens eligible for any additional tax benefits on investments in fixed deposits/bonds?

No, the Income Tax Act provides for the same benefits to all individuals. However certain fixed deposit schemes and bonds may provide higher interest rates for investments made by senior citizens. Are investments made in these instruments subject to tax deducted at source (TDS)? What is the limit below which TDS is not applicable? Yes, if the interest from such investments exceeds Rs 5,000 in a financial year then TDS is applicable. Can investors avoid TDS; if yes what documents are required to be provided for the same? Investors can avoid TDS by presenting Form 15H, which states that the person does not have a taxable income. If the bank deducts tax at source, how should an investor claim the benefit? The assessee has to file a return of income every year declaring his total income and the tax payable thereon. He can furnish the TDS certificate with the return filed and the tax payable would reduce accordingly. If additional tax has been paid, then the excess amount will be refunded to him by tax authorities. What are capital gains savings bonds & what benefits do they offer? Investments in capital gains savings bonds entitle investors to avoid paying the capital gains tax. These bonds are issued by the following institutions: NABARD, NHAI, REC, NHB and SIDBI. For example, when a property is sold and a long-term capital gains liability arises, the assessee has an option to avoid it by investing the capital gains in another property within the specified time duration. Another option available to him (to avoid paying tax) is to invest the requisite sum in capital gains bonds within a period of 6 months from date of transfer. Investors should ensure that these bonds are not transferred or converted within a period of 3 years from the date of acquisition. Also no loan, mortgage or any encumbrances should be created on these bonds. In such an event, investors will lose the tax benefits and capital gains will become taxable.

Taxation and home loans January 19, 2006 08:12 IST Last Updated: January 20, 2006 08:24 IST

When you take a home loan, what are the tax benefits that you can avail of? Read on to
find out more about taxation and home loans. What tax benefits can one avail on a home loan? Tax benefits can be claimed on both the principal and interest components of the home loan as per the Income Tax Act, 1961. These deductions are available to assessees, who have taken a loan to either buy or build a house, under Section 24(b). (A) Interest on borrowed capital is deductible as follows: 1. If the following conditions are satisfied, interest on borrowed capital is deductible up to Rs 150,000.
• • •

Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property. The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed. The person, extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principle amount outstanding under an earlier loan taken for such acquisition or construction.

2. If the conditions stated above are not satisfied, then the interest on borrowed capital is deductible up to Rs 30,000. However, the following conditions have to be fulfilled:
• • •

Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property. Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property. If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years from the end of the year, in which capital is borrowed. • Here's how everyone can save tax! • Do you 'really' know home loans? • Infrastructure bonds: Tax party's over! • The 2006 Guide to Tax Planning

(B) In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up to Rs 100,000 under Section 80C from assessment year 2006-07. A person avails deductions allowed under Section 24 in respect of his self-occupied house property and he takes an additional loan for extension/addition to the same

house; can he claim benefits from the interest deduction on the additional loan taken? The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 150,000. Hence if the person's deductions on the existing loan are less than Rs 150,000, then he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year. If a person avails deductions, allowed under Section 24 in respect of his selfoccupied house property and he takes an additional loan for extension/addition to the same house, can he claim benefits from the interest deduction on the additional loan taken? The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 150,000. Hence, if the person's deductions on the existing loan are less than Rs 150,000, he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year. If a person fails to make EMI payments on his home loan, can he claim tax benefits on the interest payable, under Section 24 and deduction under Section 80C of the Income Tax Act? Tax benefits under Section 24 and deduction under section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits for the same. If a home loan is taken by the father and the loan has been sanctioned on the basis of the son's salary, can the son claim the tax rebate and deduction in respect of the interest payments? According to the Income Tax Act, only the person who has taken the loan can claim tax rebates. Hence, in this case only the father will be eligible for the tax rebate. If a fresh loan is taken to repay an existing loan, which was taken for constructing a house, can the interest on the fresh loan be claimed as a deduction? Tax deductions can be claimed on home loan interest payments, subject to an upper limit of Rs 150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction, subject to the stated upper limit. Does interest on loan taken for repairs, renewals or reconstruction also qualify for the deduction of Rs 150,000? Yes, the interest on a loan, taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 150,000.

Can a husband and wife, both of whom are taxpayers with independent income sources, get tax deduction benefits, with respect to the same housing loan? Yes, in this case, the husband and wife (being tax-payers with independent sources of income) can get tax deduction benefits with respect to the same housing loan. In the above case, in what proportion will the tax benefits be shared? To the extent of the amount of loan taken in their own respective names. What are the tax implications if a person buys a house with a loan and sells it (a) within the same year, (b) after three years? Further, what is the impact on benefits related to interest and capital repayment? If a person buys a house and sells it within the same year/after 3 years, and if any profit is made, then a capital gains tax liability arises on the same. Let us take an example to better understand the same. For example, if you purchase a house for Rs 500,000 by taking a loan and you sell it in the same year for Rs 700,000, then you make a profit of Rs 200,000. On this profit, you will be liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after 3 years, then a long-term capital gains tax liability would have arisen. The long-term capital gains will be exempt from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains tax saving bonds or in a house property as specified under Section 54. Under what circumstances can the tax benefit for taking a home loan towards purchase of a property be denied? If it is proved that the home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly.

All about real estate & taxation January 24, 2006 07:27 IST

What are the tax implications when you sell property? Read on to find out.
Are there any tax implications of making investments in real estate?

There are no tax implications for making investments in real estate. What is long-term/short-term capital gains liability, arising at the time of sale? In case of immovable property being sold within a period of 36 months from the acquisition, the gain arising there from would be short-term capital gain and liability for taxation at 30%. In case the immovable property has been held for more than 36 months, the gain would be long-term capital gain and the tax thereon would be at the rate of 20%. The assessee would be entitled to index the cost as per the cost inflation index. If the asset has been purchased prior to April 1, 1981, then the assessee would be entitled to substantiate the cost by the market value as on April 1, 1981 and index the cost thereafter. Long-term capital gain is taxable at a flat rate of 20 per cent (plus surcharge plus education cess) for the assessment year 2005-06.
• • •

Here's how everyone can save tax! Do you 'really' know home loans? Infrastructure bonds: Tax party's over! • The 2006 Guide to Tax Planning

Is it possible for investors to set-off their capital gains tax liability by investing in capital gains bonds? Long-term capital gain liability can be set off by investing in capital gains bonds as per the provisions of Section 54EC. However, care should be taken to see that the investments are made within a period of 6 months from the date of transfer or before the due date of filing the return, whichever is earlier. In case of a capital loss (short-term/long-term), for what duration can the same be carried forward by investors? A capital loss (short-term/long-term) can be carried forward for a maximum period of 8 years from the assessment year in which the loss was first incurred. A short-term capital loss can be set off against any capital gain (long-term and shortterm); however a long-term capital loss can be set off only against a long-term capital gain. How can investors optimise their long-term/short-term capital gains tax liability? Investors can minimise their long-term capital gain tax liability by either investing in capital gains bonds or by investing in residential house property under the provisions of Section 54, Section 54F and Section 54EC of the Income Tax Act, 1961.

Short-term capital gains can be adjusted against short-term capital losses. How is rental income from one's property treated for the purpose of taxation? Rental income has to be taxed under the head 'Income from house property.' Deductions are available under Section 23 and Section 24 of the Act. It may be noted that a deduction is available for repairs, whether incurred or not. Actual expenses are deductible, except for municipal rate. Are NRIs/foreigners permitted to own property in India? NRIs/foreigners are permitted to own property in India in most of the categories. However, there are certain categories like agricultural land, land for housing project wherein NRIs/foreigners are specifically not entitled to own property. Are different tax laws/implications applicable to NRIs/foreigners vis-à-vis the ones applicable to resident Indians? The laws applicable to NRIs would be Income Tax Act, Wealth Tax Act, Gift Tax Act, Transfer of Property Act and FEMA among others and the implications would depend upon the facts of each case. What are the Gift Tax implications on transfer of real estate? There are no gift tax implications on the transfer of real estate. However, after the implementation of the Finance Act 2004, any gift to a person who is not a relative, as defined by the Income Tax Act, would be taxable as income of the recipient on the market value of the gift. The relatives, as defined under the Income Tax Act, would not be liable to such income tax. Are investments in real estate subject to tax implications under the Wealth Tax? As per Section 2 (ea)(i) of the Wealth Tax Act, guesthouse, residential house and commercial building are treated as assets subject to certain exceptions. These assets are liable to Wealth Tax. Urban land, under Section 2(ea)(v) is an asset liable to Wealth Tax subject to certain conditions. However one house or a part of house or a plot of land not exceeding 500 square meters in area is exempt from Wealth Tax under Section 5(vi). Can individuals buy agricultural property? What are the legal issues involved in the same? Only agriculturists can buy agricultural property. NRIs/foreigners are specifically debarred from buying such property.

Now you, not banker, call the shots Preeti R Iyer & Vidyalaxmi in Mumbai | December 01, 2005 11:32 IST

Pranav Bakshi is a top-notch official with a multinational company based in Germany.
He has, on an average, at least five credit cards of different banks stashed away in his wallet. Pretty naggingly, almost every morning, he wakes up to a call or the other from one of the direct selling agents of his bankers, informing him of an enhancement of his credit limit or asking him about something else. Finally, the day has arrived when Bakshi -- million others like him -- can heave a sigh of relief. Now it is Bakshi and people like him who will be calling the shots - and not their bankers. According to the latest guidelines issued by the Reserve Bank of India, no card-issuing bank can unilaterally upgrade credit cards or enhance credit limits. The RBI has now made it mandatory for and binding upon banks to seek prior consent of cardholders before they carry out any changes in the terms and conditions. It is not only about credit limit, the RBI has also asked banks to seek prior approval from cardholders pertaining to the numbers on which they do not wish to receive calls. Well for this, what you need to do is log on to your bank's website and simply register yourself under the 'do-not-call' registry (DNCR). You could also communicate your need for privacy through a letter addressed to the card-issuer. Gone are the days when banks would bombard you with free-for-life cards sent to you without your having applied for one. The RBI guidelines clearly bar banks from indulging in such activities. So, the next time you get a call on your mobile, informing that a free credit card has been issued or mailed to you, you can indeed take the card-issuing company to task. The central bank's guidelines necessitate that the card-issuing bank should maintain a DNCR, containing the phone numbers of all customers and non-customers, who have informed the concerned entity that they do not wish to receive unsolicited calls/mails for marketing of credit card products.

In fact, the banking regulator has gone one step ahead. It has stipulated that if unsolicited cards are issued without consent and bills raised for the same, the card-issuing bank will have to pay twice the amount billed as penalty. While accepting credit cards, read the fine print of the terms and conditions related to the issuance and usage of cards. Now onwards banks are bound to highlight the MITCs (most important terms and conditions) to prospective customers at all the stages of communication. The next time when you see a monthly interest rate of just 2.50/2.75 per cent, do not get flattered as they seem much lower than an annual rate of 8 per cent on a housing loan. In line with other products and services, banks are expected to quote an APR (annualised percentage rate) for their credit cards. So, instead of saying 2.50 per cent per month, banks will have to state the interest rate in terms of annual figure, say, 30 per cent (per annum). The late payment charges, including the method of calculation of such charges and the number of days, will be prominently indicated. The manner in which the outstanding unpaid amount will be included for calculation of interest will also be shown conspicuously in all monthly statements. Further, to address and redress cardholders' grievances/complaints, banks will now have to constitute a machinery and place all the information on their websites. If a customer does not get a satisfactory response from his banker for within 30 days of lodging a complaint, he can approach the banking ombudsman for solutions. Banks can no longer get away with harassment caused to customers or prospective customers. The credit card issuers would now be liable to compensate the complainant for any loss of his time and finance, expenses incurred by him, as well as harassment and mental anguish caused to him.

Home loans for contract employees December 05, 2005 12:17 IST

All housing finance companies have certain guidelines to help determine the home loan
eligibility for individuals. One such set of norms happens to be for individuals who are employed 'on contract basis'. This note explains how these individuals are evaluated by HFCs and the rationale behind it.

Let us take an individual who has just completed his graduation and is working 'on contract' with a company. This is the individual's first job. In such a scenario, the HFC may have an issue in granting a home loan to this individual. The reason behind this is that the HFC is not sure if the employment is of a permanent nature. And therefore, it doesn't want the loan repayment to suffer in case the employment contract is terminated thereby rendering the individual unemployed. The HFC may also feel insecure about the fact that in case of termination of the contract, the individual may not be able to shift jobs/careers smoothly. However, HFCs will consider such cases if the same individual were to have a work experience of say, 4-5 years behind him. The said work experience will speak for the individual; it will tell the HFC that although he may have been employed 'on contract', there's a degree of continuity in his career. This assures the HFC that the individual's income is of a 'permanent' nature, which in turn will help him duly repay his home loan EMIs. HFCs will also consider individuals who are graduates and have been employed only for a couple of years, but haven't shifted jobs in that time. In this time span, the individual's salary has been revised upwards while also being promoted. The HFC in this case, will not have any problem in considering this individual for a loan. Let us take another example of an individual who has a professional degree like chartered accountancy for instance. He is in his first employment and working 'on contract'. He wants to take a home loan. Keeping in mind his professional qualification, HFCs will consider granting a loan to this individual. That is because the additional degree lends credibility to the individual's capability to generate a stable income stream. HFCs take a stand that even though the individual may be in his first job, he is unlikely to face difficulties in finding another job if and when the contract is terminated or if the individual decides to shift to another employer. Another case in point is individuals who are in the higher age bracket and have been working 'on contract'. Suppose an individual aged 40 years, is working on contract with a certain organisation. If this individual has been working here for say, 4-5 years, then the HFC may not have any problems in granting him a loan. However, if history suggests that he has changed jobs often, then the HFC may be apprehensive about granting him a loan.

The primary concern many HFCs have in such cases is -- why has the individual not been able to get a permanent employment at that age? This is a negative against that individual, which could prevent him from getting the loan. Saving to buy property? Click here. Home loan seekers must appreciate that HFCs are concerned mainly with timely and regular payment of EMIs. If the individual's qualification and employment history suggests that he can be expected to pay his EMIs on time, then the HFC should not have an issue granting him a loan. Individuals should keep these factors in mind while approaching the HFC for a loan. The criteria for home loans in the article are illustrative. They may differ across housing finance companies.

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