Friday, 25 December 2009

NPS - Not Cheap

NPS is not that much cheap as it's look in first glance. For investors of higher amounts indeed it's providing the benefit of size but for small investors it's not cheap at all. For a small investors investing just 6K Rs. the minimum yly. subscription, sample this.

Fund management charges are low enough, but the fixed charges are high. In a bad year, when you barely manage to invest 6000 in the requisite 4 yearly installments, you incur the following charges:
A. Account opening charge of Rs. 50 (only required for the first year)
B. Annual maintenance charge of Rs. 350
C. 4 transactions, Rs. 10 fees to CRA for each. Total Rs. 40.
D. Registration with PoP (Point of Presence, kind of the investor’s broker): Rs. 40. This will be required not just the first time, but everytime the PoP is changed for some reason (e.g. migration from one location to another)
D. 4 transactions, Rs. 20 fees to PoP for each. Total Rs. 80.
Other charges are negligible; but these charges total to Rs. 560. This is 9.33 percentage of the investment for the year (Rs. 6000). Consider it kind of an entry load for NPS.

In the light of the above facts, NPS is useful for investors who r going to commit higher amounts, as barring Fund management charge, all other charges r not linked to the investment or fund, instead they r fixed in nature & may prove counter productive for lower investment amounts.



Saturday, 19 December 2009

Date of purchase?

Q. - Dear Ashal,

Thanks for the yeoman service you have been doing to help us with our taxes

Now i had one more query on behalf of my neighbor, can the sale of land that was actually paid for say 10 years back but registered only this month attract capital gains tax if sold today? Or its 3 years from the date of registration thats taken into consideration for capital gains tax.. She bought some plantation property 10 years back on instalment scheme and wants to sell it now though it was registered only last month...Thanks in advance. - Radhika Nandlal

Ans. - Dear RN, from the points mentioned by u, the date of allotment (i.e. some 10 years back) 'll be considered as the date of purchase.

The reason is - Installment scheme of pmt. of the price (as agreed upon at the time of allotment) is merely a mechanism to pay the price over a period of time.

The right on the property were created on the date of allotment itself. In between all these years never ever these rights were questioned & both the parties were following the agreement.

Hence for calculation of Capital gains, the date of allotment 'll be considered as the date of purchase.

There r several instances in court cases where the honorable courts have held the views as stated above.

The details of such court cases can be obtained from various sources - Tax advocates, Tax websites, Taxation experts.

Regarding date of registration I'll only say that it's merely a change of names for the property in question in the records of Registrar of Properties.



Monday, 14 December 2009

UTI Wealth Builder Fund Series II

Q. Dear Ashal,
This fund`s theme seems to be good. Is it worth investing? I am asking, since I have invested in Gold funds (I was going to quit these ones and start investment in Gold ETF). But now i want to know, what will be good.


Ans. Dear MIK, this UTI fund is in a class of it`s own. Having at least or more than 65% Eq. exposure (this is to gain from the Taxation window for Eq. MFs) & mandated to not more than 35% in gold ETFs or money market instruments, it`s very hard to compare this fund with any other fund.

The fund is relatively new (just completed it`s 1st year of operation in Nov. 2009). From it`s launch in Nov. 2008, till March 2009 the Eq. as well as Gold market, both were dull. From march 2009 onwards, both these asset class r firing all guns blazing. This may create a misleading picture due to super duper performance.

In future how it`s Eq. component 'll perform is yet to be tested. having only 35% Gold ETF exposure may not give enough diversification for a person who wants to invest a part of his portfolio in gold ETFs. Yes to have a Gold exposure as per ur requirement u w`d have to stop in some of ur other plain Eq. funds to keep the Eq. & Gold ratio in ur portfolio at ur desired level.

Sample this what i mean.

I assume Gold price 17K per 10 gm.

In normal if u want to invest for 1 gm. of gold in ur portfolio ur inv. amount `ll be 1700 Rs.
In case of this UTI Wealth Builder Fund II, to have the same 1 gm. Gold u w`d have to invest around 5K Rs. - 1700 Rs. for 1 gm of Gold & remaining 3300 Rs. for 65% eq. exposure. As u rinvesting additional 3300 Rs. in Eq. thru this fund, u w`d have to stop some of ur other funds. To maintain the over all balance of Eq. & Gold.

In general, people may invest from diversification point of view to have exposure in 2 asset class under a single investment.



Wednesday, 18 November 2009

Long Term Capital Gains - Date calculation

Q. - Dear Sir, I had sold shares exactly after one year i.e. date of purchase 9.10.2008 and date of sale 9.10.2009. Capital gain earned on this is short term or long term? I am a NRI and my bank has deducted TDS on this capital gain stating that it is a short term gain and I should have hold the shares atleast for one more day. Your guidance shall be highly appreciated. Regards - Haresh Bilakhia...

Ans. - Dear Bilakhia, I`m not at all agree with the view taken by ur Bank. Sample this -

Purchase date - 9 oct 2008
12 months completes on - 8 oct 2009 (by the midnight of 8th oct 2009 i.e. 12AM for 9 oct 2009)

since the holding periods exceeds the 12 months period (no matter the period is few days or few Hrs.), in my opinion ut Gains r LTCG & as the STT was paid,u r eligible for Tax free LTCG.

Bank is not right to ask for completion of 1 more day to be eligible for tax free LTCG.



Saturday, 25 July 2009

Govt to release draft Direct Tax Code by Aug 20, 2009

The government said on Friday a discussion paper on Direct Tax Code, which seeks to simplify the tax laws, will be released by August


"The preparation of a simplified new income tax law is in progress. The new Direct Tax Code will be released along with the discussion paper by August 20," minister of state for finance, S. S. Palanimanickam, told the Lok Sabha in a written reply.

While presenting the Union Budget for 2009-10, finance minister, Pranab Mukherjee, had said that in order to bring in tax reforms in the country the government will bring the new DTC within 45 days.

"The Direct Tax Code, along with a discussion paper, will be released to the public for debate. Based on the inputs received, the government will finalise the Direct Tax Code Bill for introduction," the finance minister had said.

The code will replace the existing Income Tax Act, which was enacted in 1961 and would subsume the direct tax legislations.

The Income Tax code is expected to reduce the plethora of exemptions given to various segments of tax payers.

Talking about the proposed tax code, former finance minister, P. Chidambaram, had said that the marginal rate of taxation, including education cess, stood at 33.99 per cent.

"My endeavour has been to increase the effective rate of corporate tax paid by corporations but I confess my efforts are not entirely successful because of the demands for continuing exemptions or introducing new exemptions," he had said.

The Economic Survey had also suggested that the new simplified law should be put in place to replace the over four-decade old Income Tax Act and streamline the direct taxations structure.

IT companies reconciling to pay more tax as STP exemption ends

"Introduction of the new Income Tax Code that results in natural corporate tax regime (is needed)," Economic Survey had said.

- Economic Times 25th July 2009

Tuesday, 21 July 2009

Investing are ' YOU ' in Control

An Investing Illusion

A few days ago, I read an interesting article by an American security expert named Bruce Schneier. He is a cryptographer and computer security specialist who has evolved into a thinker and writer about all kinds of risks and security. I find it very interesting that some of his ideas about risk and human reactions to it have great relevance to investing. A couple of years ago, I wrote about how people tend to overrate the risks they face from rare but dramatic events and underestimate those from mundane everyday risks.

Schneier talks about a 'Control Bias' where we tend to underestimate risks in situations where we are in control, and overestimate risks in situations when we are not in control. The most common example is the fear of flying vs the perception of risk while driving. There's clear evidence that flying in a commercial airliner is by far the safest mode of transport that there is. In contrast, Indian roads are quite unsafe. Yet, many sensible people have a deep fear of flying but are quite unconcerned about driving.

Worse, people take slippages in risk levels on the road unthinkingly. They chat on their phones while driving (it's not unusual to see two-wheeler riders type SMS messages while driving); they drive after having had a couple of drinks; they drive when they know their brakes or tyres are not good; they overtake while turning and so on. Yet, they are scared of flying. All these could be examples of ‘Control Bias’.

When we are doing something ourselves, we have an illusion of control. We underestimate risk because we are in possession of all the facts and we feel that we can control the situation when in reality we can't. When flying, we really don’t know what’s happening so we do not have the illusion of control.

I find that this false impression of control is exactly what make people underestimate risk while investing. It is a fact that most people don’t know enough to be dabbling in stocks. Yet they do so because they have a large amount of information which makes them believe that they know enough to be in control of the situation. Someone sells investors a story about why a stock will do well and the story appears to have enough information to give an adequate illusion of control.

This is also the reason why many genuinely knowledgeable investors advise even newbies against investing in mutual funds (MFs). These people have enough information of stocks but feel inadequately informed about what is going on if their money is in a MF. The fund investment manager is like pilot and you don’t know what he’s doing.

Unfortunately, investing also has its equivalent of driving drunk or without good brakes and tyres. Almost no individual stock investor follows any systematic risk-control on their portfolio. They don’t diversify properly. They allow their portfolio to have odd concentrations in one or two stocks or sectors and they don’t track exactly what is happening with the stocks they have already bought. The fact that they are doing things themselves gives them the illusion that they know what’s happening and if the situation gets tricky they’ll manage to get out of it.

Tuesday, 14 July 2009

Tax benefit on Land purchase loan

Q. I am buying a residential land in sector 9 in Gurgaon. I want to take home loan from a bank. Though I am not sure if I would get income tax benefit on this or not. I am getting different information from different people. Sombody is saying that if I take Land + Construction loan then I would get IT rebate. But I am not clear if I would get rebate on complete loan or only loan component which is given for construction. - Brajesh Jain.

Ans. Dear Brajesh, Plz. note in order to avail Income Tax benefit on home loan, the construction should completed within 3 years from the date of disbursal of home loan.

Now considering ur case, following options r there for u.

1. Land purchase thru Loan & construction from own money - In this case, although the loan was taken primarily to purchase land still u can avail the tax benefit on this loan if u have constructed ur house on this land within the 3Y period.

2. Lan purchase as well as construction both r from loan - In this case again u can avail tax benefit on total loan condition the construction is completed within 3Y.

Plz. note as the construction `ll take time to complete, the interest paid by u in between on land loan or land + construction loan `ll not be available for tax benefit in the same FY. But u can carry over the same & avail @ 20% each year from the FY of completion of construction.


Ashal ...

Sunday, 12 July 2009

Understand, Then Invest

It was many years ago that I first read the book Small is Beautiful by the economist E.F Schumacher. It's not a popular book in business circles. Shumacher's concepts of getting by with the least possible and smallest possible set of resources seem outlandish to a certain audience. To most businessmen, 'enoughness' seems to be an idea more suited to a hippie commune from the sixties than to the world as they see it functioning.

This may seem like a long jump, but I personally believe that for a non-professional investor, a derivation of Shumacher's approach would work very well an investment philosophy. This is something that I would call the 'Simple is Beautiful' approach. It could also be called 'Do Less to Do More' approach.

This approach is based on my belief, borne out of many years of interacting with investors, that far more people go wrong by trying to do much than by doing too little. In personal investments, the solution is not to do a lot, but to do only the minimum possible.

The 'Simple is Beautiful' approach means sticking to some basic time-tested principles; by investing in the minimum possible number of securities and by taking the fewest possible actions. In the last couple of decades, the culture of investing (and of finance in general, and perhaps of all business) has shifted towards a worship of complexity for its own sake. More and more people assume that any investment methodology that doesn't involve mysterious formulae, and arcane ratios and elaborate charts couldn't possibly deliver the goods. The truth is the exact opposite. This complexity is just smoke and mirrors erected by a priesthood in order to create a need for their services.

How would such a simple approach work in practice? Here's one example, which could well serve as the recipe for the perfect financial plan. You should keep all the money that you might possibly need for at least the next five-to-seven years in a safe fixed-income investment.

The reason is obvious-this is the money that must always be on call. Only safety matters, nothing else. Longer term investments should be invested in a small number -- three to four -- of conservatively run equity funds with a good track record. Remember, the five-to-seven-year time horizon is a sliding window. Money should be moved from equity to fixed income as its date of usage comes near. The investments in equity should be gradual -- shoving money into equity-backed investments in one fell swoop when things get hot is courting disaster, but I suppose everyone should know that after the experience of the last couple of years.

Is this an example the best possible plan? Well, that depends on your definition of best. I think this plan is the best one because its basic principles require no further understanding. It's optimised not for returns, but for the best combination of comprehension and returns. It’s very important to do only those things that we understand ourselves.

In personal finance, there are few issues that are as full of obfuscation, such as insurance. Few financial products that are intended for individuals are as full of complexity as modern insurance products. However, keeping the ‘Simple is Beautiful’ principle in mind, it isn't difficult to cut through this thicket.

Here's what you need to do. Make a liberal estimate of how much money your family will need if you should fail to wake up tomorrow morning and buy the cheapest term insurance you can find. Do diversify your insurance across LIC and two private insurers -- one is no longer confident of who's going to be solvent tomorrow. You should buy lots of term insurance, but never even think of buying any other product from an insurance company. In their mixed savings+insurance products like ULIPs, the huge commissions and obfuscated expenses they charge will kill your real returns.

One important component of the ‘Simple is Beautiful’ approach is to somehow avoid having to react to market ups and downs. This is a major advantage of the kind of approach to investment that I'm describing.

If you have an investment plan needs tailoring to suit the season then it's useless to begin with. Almost by definition, the only useful approach to investing is one that does not need to change in reaction, or worse, in anticipation, of events. The approach that I describe would be just as good during the lows of March 2009 as it was at the highs of January 2008. Or in fact at any other point of time in the past decades. The ‘Simple is Beautiful’ approach is structured around your life, not that of some investment market. In this approach, you change your financial plan when something happens in your life, not in the stock market.

One characteristic of this approach is the emphasis on understanding things yourself rather than being dependent on some expert who is pushing his own agenda. This goes against the grain of modern financial industry, but understandability is a more important characteristic of any investment than high returns or anything else. Far more people get into trouble by putting money into things that they don't understand rather than by earning a little lower return.

Does that mean that experts are not needed at all? Not really, except perhaps to tell you that you don't need an expert! Seriously, this is the gold standard of investment principles. No one should ever dabble in an investment that they don't understand personally. It's better to let a good investment pass by rather than invest in anything that you don't understand. An expert's role is not to tell you where to invest -- it's to show you how to decide for yourself.

Joint home loan & family home loan

Hi Sir,

We have bought a residential bungalow worth Rs. 41 lacs, and we are three joint holders of the property (Me, my wife and my father). We have taken home loan of Rs.32.8 lacs (80% of actual price) from bank. I and my wife are working as salaried employees of an IT firm and we are repaying the loan, where loan installment per month is Rs.27000 (16000 and 11000 paid by me and my wife respectively).

Now, my queries are as follows:

1. Is it possible that I can take the loan of Rs.6 lac from my mother, to pay rest of the bungalow price? If yes, then what are the tax implications for me & my wife as well as my mother & what are the legal documents required for the same?

2. Can I & my wife both avail the tax exemption on home loan interest (for loan from bank as well as from my mother)? If yes, then what shall be ratio to avail exemption?

Ans. Dear Friend, First let me understand from ur query.

A. Property Cost = 41L
B. No. of owners = 3 (U, ur wife & ur father)
C. Amount pitch in by U & ur wife thru bank loan = 32.8L
D. Additional amount pitch in by both of u = 6L from ur mother as home loan
E. Balance amount = 41 - (32.8+6) = 2.2L

Here I assume, that this 2.2L Rs. r coming from ur father only. Even if both of u do have a part in this 2.2L amt. also plz. do inform me for the same.

As per my assumption share of both of u in the house = 38.8L Rs.

Share in Bank loan EMI = 16000 & 11000 & the same ratio both of u may continue for ur mother`s loan.

Now here comes the answer for ur queries.

1. Yes it`s possible for both of u to take home loan of additional 6L Rs. for the same house from ur mother. The interest paid for this loan to ur mother, `ll be available for Tax benefit for both of u in the ratio as stated above. The interest received by ur mother from both of u `ll be her taxable income & if her total income from all other sources is more than the zero tax limit for her (1.9L Rs. or 2.4L Rs, depending upon her age, as the case may be), she w`d have to pay Tax on it. For this loan, u should prepare a loan agreement between ur mother & both of U.

2. Yes both of u can avail tax benefit on the interest & principal repmt. of bank loan & interest only for mother`s loan. But from ur query it seems that the house in Question `ll be self occupied, hence u & ur wife can`t claim more than 1.5L Rs. each, (1.5+1.5 = 3L) interest on combine loan.

For detailed info u may mail me directly to my mail id.

ashalanshu@gmail. com


Ashal ...

Friday, 3 July 2009

Benefit of section 54F on LTCG

Dear Mr. Ashal!

Please clarify the following.

Cost of Purchase 2.42 lakhs (1988)
Cost of improvements 1.00 lakh (approx) 1991.

Cost of improvements 0.16 lakhs (1996).

Sold in 2009 2010 for Rs. 82 lakhs.

Invested in REC/NHAI Bonds 50 lakhs.

Bought another residential property Rs. 32 lakhs.

Taxable long term gains is NIL. Am I right?

Thanks - Subasu

Answer - Dear subasu, b4 I comment here I assume the following -

Purchase year is FY 1988-89.
1st improvement year is FY 1991-92.
2nd improvement year is FY 1996-97.
Year of sell is AY 2009-2010 or FY 2008-2009.

Here goes the LTCG calculation.

A. Purchase price = 2.42L Rs.
B. Cost Inflation index (CII) of FY 1988-89 = 161
C. CII for FY 2008-2009 = 582
D. Indexed purchase price = A*C/B = 2.42*582/161 = 8.75L Rs.
E. 1st improvement price = 1.0L Rs.
F. 1st improvement FY CII = 199
G. Indexed 1st improvement price = E*C/F = 2.92L Rs.
H. 2nd improvement price = .16L Rs.
I. 2nd improvement CII = 305
J. Indexed 2nd improvement price = H*C/I = 0.30L Rs.
K. Total Indexed purchase & improvement price = D + G + J = 11.97L Rs.
L. Sell price = 82L Rs.

As more than 3 years r completed for purchase as well as each of improvement also, hence all r eligible for consideration of LTCG.

M. Hence LTCG = L - K = 70.03L Rs.
N. amount invested in LTCG Tax Saving bonds = 50L
O. amount invested in Res. property = 32L Rs.
P. Total invested amount = N + O = 82L Rs.

As the amount in P above is more than M above, so no LTCG Tax liability is there.

Yes u r right.



Dear Ashal!

Thanks for the prompt response and detailed calculations.

One more modification would be introduced to this calculation because I did not furnish you with that info.

I had financed this purchase in 1988 with the help of Loans from BHEL and Cement Corporation of India. I have not preserved the interest records. The amount was borrowed in 1984, 1985 and 1986 and repaid completely in 1991.

As I do not know the interest quantum, I do not know what to do with that.

Any suggestions would be welcome.
Thanks once again.


Dear subasu, as the records of loans are not with u, also the applicable FYs r also date very back.

Hence I'm sorry to say that u can't do anything now.



Thursday, 2 July 2009

Calculation for Long Term Capital Gain for purchase as well as improvement of the property in subsequent years.

Dear Mr. Ashal!

Please clarify the following.

Cost of Purchase 2.42 lakhs (1988)

Cost of improvements 1.00 lakh (approx) 1991.

Cost of improvements 0.16 lakhs (1996).

Sold in 2009 2010 for Rs. 82 lakhs.

Invested in REC/NHAI Bonds 50 lakhs.

Bought another residential property Rs. 32 lakhs.

Taxable long term gains is NIL. Am I right?


Dear subasu, b4 I comment here I assume the following -

Purchase year is FY 1988-89.
1st improvement year is FY 1991-92.
2nd improvement year is FY 1996-97.
Year of sell is AY 2009-2010 or FY 2008-2009.

Here goes the LTCG calculation.

A. Purchase price = 2.42L Rs.
B. Cost Inflation index (CII) of FY 1988-89 = 161
C. CII for FY 2008-2009 = 582
D. Indexed purchase price = A*C/B = 2.42*582/161 = 8.75L Rs.
E. 1st improvement price = 1.0L Rs.
F. 1st improvement FY CII = 199
G. Indexed 1st improvement price = E*C/F = 2.92L Rs.
H. 2nd improvement price = .16L Rs.
I. 2nd improvement CII = 305
J. Indexed 2nd improvement price = H*C/I = 0.30L Rs.
K. Total Indexed purchase & improvement price = D + G + J = 11.97L Rs.
L. Sell price = 82L Rs.

As more than 3 years r completed for purchase as well as each of improvement also, hence all r eligible for consideration of LTCG.

M. Hence LTCG = L - K = 70.03L Rs.
N. amount invested in LTCG Tax saving bonds = 50L
O. amount invested in Res. property = 32L Rs.
P. Total invested amount = N + O = 82L Rs.

As the amount in P above is more than M above, so no LTCG Tax liability is there.

Yes u r right.



Tuesday, 16 June 2009


Q. - Is it better to go for an annuity like Jeevan Tarang of LIC or an MF with term insurance.Annuity offers returns for lifetime whereas MF does not.Also please tell me which is the best annuity available.My age is 39 and i am due to retire on age 58? - Vinod Pulari

ANS. - Dear Vinod Pulari, Plz. don't opt Jeevan Tarang, for ur age the return from this policy r very poor. Sample this -
For a 5L cover, for ur age, the prem. for 20Y policy = 24610 Rs.

Hence total prem. paid over 20 years = 492200 Rs.
For past 4 years the LIC have announced 48 Rs. bonus per annum per 000 sum assured, so we can take this as benchmark for our calculation.
At the end of 20 year, u 'll get amount = 20*48*500 = 480000 Rs. or appx. ur prem. back.
From 21st year u 'll get 25000 Rs. (5% of 5L Rs.) as survival benefit every year tax free till u r alive.
After ur death, ur nominee 'll get the basic sum assured of 5L Rs. back as maturity benefit.
Now compare this with the combo of PPF+Term Plan (Anmol Jeevan from LIC).
Plz. note cheaper term insurance plans r available in market but i'm limiting it to LIC's Anmol Jeevan for comparing of product within same Ins. co. The annual prem. for 5L cover for 20 Year plan = 3193 Rs.
difference in the prem. = 24610-3193 = 21417 Rs.
Invest this amt. every year in PPF, at the end of 20 year, the amt. in PPF = 10.58L
Withdraw from PPF amt. equal to bonus declared by LIC = 10.58L - 4.8L = 5.78L Rs.
This 5.78L Rs. 'll remain in PPF 'll earn interest for next year. After 1 year the interest on 5.78L Rs. = 46240 out of which u may withdraw 25K Rs. as tax free.
Balance amt. 'll remain with PPF & like vise every year, u 'll withdraw only 25K & the PPF amt. 'll keep on increasing.
Plz. note in this case even after 25 years or 30 years from now onwards or for ur age of 65-70, at ur death, ur nominee 'll receive more than what they 'll get in Jeevan Tarang (the basic sum assured of 5L Rs. only).
Now do tell me, what r u going to opt?
Plz. note here i have not advised to invest in any Eq. MFs for betterment of return. U r already aware that PPF is one of the safest scheme.



Saturday, 30 May 2009


Dear friends, a lot of u were demanding details on the NPS, so for  benefit of all of you. Here i'm giving some details of this.

Scheme is open to all Indian citizens aged between 18 years and 55 years.

You can invest from any of the 285 Point of Service across India, run by 22 Point of Presence Providers(POP) including SBI, its 7 Associate Banks, ICICI Bank, LIC, Reliance Capital, etc. Once registered, the Central Recordkeeping Agency (CRA) will give you a Permanent Retirement Account Number (PRAN) along with Telephone and Internet Passwords.

Just like a Depository maintains Demat Accounts, likewise your Records are maintained by the Depositories.
Six Different Pension Fund Managers would invest the Amount Invested by the Commonn People into Different Asset Classes classifed as
Equity (E)
Government Securities (G)
Debt Instruments (C)

The Six Fund Managers are
ICICI Prudential pension Management\
IDFC Pension Fund Management
Kotak Mahindra Pension Fund
Reliance Capital Pension Fund,
SBI Pension Fund
UTI Retirement solutions

Depending on the efficiency of the Fund Manager, these Contributions would Grow and accumulate over the years.
You do need to mention the Fund Manager of your Choice, without this, your Application is liable to be rejected.
The Default Investment is called the Auto Choice Lifestyle Fund.
For a investor below 35 years of age, 50% of investment amount will go into E(Equity), one-fifth into asset class G(Govt Securities), and the rest into asset class C(Debt Instruments). From the age of 36, the default proportion going to equities decrease annually and investment percentage in government securities will increase such that by the age of 60, these investments will gradually be adjusted so that only 10% remains in equities, another 10% in corporate bonds and 80% in government bonds.

Minimum Contribution per annum is 6000 and you can contribute even as low as 500, at least 4 times a year. You can invest through Cash, Cheque or DD at the POP.
There is no upper ceiling for your annual contribution but Tax Benefits is capped at 1 lakh under Sec80C. The Investor HAS to invest at least once every quarter. In case of default, you will have to pay Rs.100per annum and also need to pay the required minimum amount to reactivate your Account.
Also during this period of your non-payment, your Corpus will keep getting reduced because the NPS will keep charging its Expenses against your Units. The Account will be closed as and when the Value of your Account falls to Zero.

You have got the Right to decide where your money is invested. Please note, that you cannot invest more than 50% in Equity and Fund Managers cannot in invidual stocks but only in Index Funds.

On Completion of 60 years, the investor`s accumulated amount gets transformed into a lumpsum towards buying Annuity for a steady stream of payments for the rest of the Investor`s life. The Insurance Companies, who come into the picture now, with their expertise will compute as to how long the investor could survive and offer flexible investment and payment options on annuities.
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies.
A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.


At present, the NPS is to be Taxed at the time of Withdrawal. The Pension Fund Regulator has taken up the issue with the Finance Ministry to address the anamoly and the decision is expected within next year or so.

1) Though the Fund Management is ridiculously low at a miniscule 0.0009% per annum, the Cost of Opening an Account(Rs.50), Annual Maintenance Charge(Rs.350) and a Per Transaction Charge of Rs.10 actually makes the NPS COSTLIER than a Regular Mutual Fund with a 500 monthly sip. The cost works out to around Rs.350 as fixed cost on every Rs.2000 he contributes. Unless the Govt steps in to correct this, NPS would be a failure with the small savers.
2) No Tax Concession on Withdrawals.
3) No premature Withdrawals allowed expect for Critical Illness, building/buying a house; Even at sixty, you can only withdraw as cash 60 per cent of the corpus, the rest must be used to buy an annuity.
4) You need to compulsorily buy Immediate Annuity with 80% of the Money accumulated, if you want to Withdraw before you are 60.

1) The Investor has the option of shifting from One fund Manager to another by instructing his POP to do so. This facility is available between May 1 and May 15 every year.
2) Even relocating to another city will not affect your investment as the PRAN remains the same.
3) The Monthly/Quarterly Contribution towards the NPS will be partly routed towards Equity which will automatically ensure Rupee cost Averaging and ensure High Returns and thus ensure 'higher than inflation' returns.
4) Investment upto Rs.1 lakh is Tax Deductible under Sec80c.
5) For Investors with slightly larger amounts and investing 4 times a year, the charges are attractively low. The NPS wins hands down on this matter.

This is the Best thing to have happened to the Indian Investors who have not had much of a choice regarding Pension earlier. The benefits of Compounded Returns that the NPS offers will be immense. If the NPS is promoted in the right way, it will be no less than a Revolution.
The Tax on Withdrawal, for me, is a blunder and will be rectified by the Govt sooner rather than later.
The Interim Withdrawal too may be allowed in future, which will make this product that much more attractive.
The best option as of now i think is to remain invested in max. Eq. for person below age 50 & above that should go for the LifeCycle Fund.
The Low Charges and Automatic Rupee Cost Averaging makes NPS a Better Option than the Pension Plans offered by Insurance Companies.
But still some loose ends are there so as of now enter in NPS with minimum annual commitement of 6K Rs. & wait for the dust to settle & the clarity on taxation matters & then bump up ur investment in NPS.



Sunday, 3 May 2009

Tax calculation for STCG on STP from Liquid fund to Equity fund

Q. - Dear Friend,

i have been reading ur post quite long time. please advise on this.

I would like to know the Tax treatment on STP transaction. My transaction are ::

Invested Rs. 49,999 in DSPBR MoneyManager fund on 10th of Dec 2008. Registered STP in DSPBR top 100 equity fund.

started STP from 7th of Jan 2009 for Rs. 4000 every month. so till date total 4 instalments totalin 16000 has been transfered to top 100 equity fund. i understand tax treatment for equity fund. but not for liquid fund. The profit i made each month is

7th jan = Rs. 43
7th Feb = Rs. 57
7th Mar = Rs. 60
7th April = Rs. 65

I would like to know the tax treatment on liquid fund. if there is any tax how it will be taxed(like i need to add in my salary income or some % i have to pay).

If i dont show these incomes to IT Department(i think very few Retail investor use to show these incomes) what will happen.

Waiting for ur reply.


Dear amit, ur STP transactions from Liquid fund to Eq. fund r ok.

The tax treatment is as below.

For Transactions b4 31st of march 2009, the same `ll be treated at STCG & `ll be added to ur income from all other sources & `ll be taxed as per ur tax slab rate in the prev. FU i.e. 2008-2009.

So for total STCG = 43+57+60 = 160 Rs.

As per ur Tax slab the Tax `ll be =

@ 10.3% slab = 17Rs.
@ 20.6% slab = 33 Rs.
@ 30.9% slab = 50 Rs.
@ 33.99% slab = 56 Rs.

Ur April onwards STP `ll be taxable in the same manner for ur income in the current FY i.e 2009-2010.

I hope the message is clear to u now.



Thursday, 9 April 2009

DEBT funds or DIversified funds for Retirement

Question - 
If we see returns of Diversified equity funds for last three years mostly are in red and few are sitting on marginal gains whereas debt funds have given return of 40% over 3 years. Looking at scenario, if i want to invet for my retirement(for 20 Years from now) what is your openinon where should i invest. If you say to invet in Equity MF how should i select for 20 years? If you say Debt funds what are good options available?


Answer - Dear rohit, When u r talking for ur retirement, u should n`t compare the past 3 years` returns for ur future 20 years.

Just for ur info, Eq. is the only asset class which `ll provide inflation adjusted best returns over such long 20 years.

Now look at the following No.

On 31st of march 1989 (i.e. 20 years back) the SENSEX level was 713.60 & on 31st March 2009 the sensex level was 9708.50.

The above Nos. tell the CAGR of Sensex for past 20 years = 13.94% or almost 14%. Even if u adjust 7% inflation rate for all these 20 years, still u r getting 7% positive return over the inflation.

In my view u should invest in 3 large cap funds thru SIP. Check the performance of ur funds once in a year. If the performance is in line with over all market performance it`s ok to continue ur SIP, if the performance lags continuously for 3-4 quarters, switch ur SIP to a better performing fund. After 14-15 years, Stop fresh SIP in large cap funds. Divert SIP amount to balanced funds & gradually shift ur money from Eq. funds to Debt funds when ur retirement is closer to u. 

After 20 years, when u r retired, u should n`t have more than 15-20% money in Eq. funds.


Ashal ...

Thursday, 19 February 2009

Split Term Cover

Dear Friends, Many a times I & several others had advised to opt split Term Covers. But a common person is not able to understand the logic & benefit offered by split Term Covers. Here I’m discussing the benefit of split Term Cover with the prem. Illustrations of LIC’s Anmol Jeevan Term Plan. 

Let’s assume a normal healthy male aged 30 years wants to take term cover of 60L as per his financial liabilities for next 25 years. The different prem. Quotes (service Tax included in the prem.) are given below. 


Table – 1 for LIC Anmol Jeevan Plan

Cover amount


















Split Cover Total Prem.



 Now from Table -1,

If the person opts a single cover of 60L Rs. for next 25 years, the prem. Outgo is 22928 Rs. Now imagine the situation after 8-10 years, He thinks there is no need for such high cover & a lower cover of say 40-45L is sufficient. But he can’t do anything bcoz if he opts to stop his current single cover of 60L Rs. the prem. For new cover of 40-45L ‘ll be higher for remaining period as he is taking the cover at later age. If he opts to remain with the single cover, he is paying prem. For the cover he doesn’t require.

Now for split covers of 15L each for 25, 20, 15 & 10 years the total prem. Outgo is18636 Rs. only. On a first hand there is an immediate saving of appx. 4300 Rs. per annum & the best part is after 8-10 years the person in question can simply stop his 10Y 15L policy as per his changed cover requirement. Already he is paying less prem. Every year for split cover than a single cover & after stopping the 10 year policy. There ‘ll be additional saving of 3846 Rs. These saving amounts can be invested for better investment. The same thing can be done to other policies also one by one after passing of some more years. 

 On a concluding note, it’s finally the choice of the person what he wants. The major flip side or should I say negative side of this strategy of split cover is, in case the financial liabilities increase (normally Fin. Liabs. Decreased, but in extra ordinary cases it may increase also), There ‘ll be shortage of cover & the person ‘ll have to take more cover as per his changed liabilities. 

Jeevan Varsha - New Guaranteed Return Money Back Plan from LIC

Dear friends, There is a new money back product on offer from LIC with GTD. Returns. The plan is open for purchase from 16th February, 2009 to 31st March, 2009.  The prem. paid are eligible for Section 80C Tax benefits as well as money back & maturity amounts are also Tax free underSection  10 (10) (D). Here is the plan scan for benefit of all of you.


Minimum Entry Age: 15 years (completed)

Maximum Entry Age: 66 years (Nearest Birthday) for 9 years term policy, 63 years (Nearest Birthday) for 12 years term policy

Policy Term : 9 years & 12 years

Premium Paying Term: 9 years

Maximum Maturity Age: 75years (Nearest Birthday)

Minimum Sum Assured: Rs. 75,000/- for monthly ECS mode               : Rs. 50,000/- for other modes

Maximum Sum Assured: No limit 

PREMIUM PAYMENT MODES: Yearly, Half-Yearly, Quarterly, Monthly (by ECS mode only).

Survival Benefits:

For 9 Years Policy Term

15% of the Sum Assured is payable at the end of 3 years.

25% of the Sum Assured is payable at the end of 6 years.

60% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 9 years.

For 12 Years Policy Term

10% of the Sum Assured is payable at the end of 3 years.

20% of the Sum Assured is payable at the end of 6 years.

30% of the Sum Assured is payable at the end of 9 years

40% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 12 years.

Death Benefit:

In case of death of the life assured during the policy term, the full sum assured is payable irrespective of the survival benefits paid earlier.

On death during the policy term excluding last policy year: Sum Assured with accrued Guaranteed Additions

On death during last policy year: Sum Assured with accrued Guaranteed Additions along with Loyalty Addition, if any.

Guaranteed Addition :

The policy provides for Guaranteed Addition at the following rates:

Rs. 65 per thousand Sum Assured per year for a policy of 9 years term.

Rs. 70 per thousand Sum Assured per year for a policy of 12 years term.

I calculated the return generated by this policy for a healthy male aged 30 years & sum assured of 10L Rs. with annual prem. Mode (to get highest rebate on tabular prem. Thru annual prem. Mode & high sum assured) for both term 9 & 12 years. For 9Y policy the prem. is 153909 Rs. per annum & for 12Y policy the prem. is 157094 Rs. per annum. Now plz. Go thru the following calculation. Here I had assumed the money back received from the policy ‘ll be reinvested till maturity of policy to earn post tax return of 8%.

1. 9Y Term

A. Total prem. paid over the policy term = 1385181 Rs.

B. 1st M/B (Money Back) after 3Y = 150000

C. Value of B at policy maturity (after remaining 6Y) = 238031

D.  2nd M/B after 6Y = 250000

E. Value of D at policy maturity = 314928

F. Final M/B at policy maturity = 600000

G. Gtd. Addition @ 65 Rs. per annum per 1000 SA = 585000

H. Loyality addition (not Gtd.) = 50000

I. Total Maturity amount =  C+E+F+G+H = 1788000 Rs. appx.

For an annual prem. of 1.54L Rs. The I above (maturity amount) is @ 5% rate of return only.

2. 12Y Term

A. Total prem. paid over the policy term = 1413846 Rs.

B. 1st M/B after 3Y = 100000

C. Value of B at policy maturity (after remaining 6Y) = 199900

D.  2nd M/B after 6Y = 200000

E. Value of D at policy maturity = 317374

F. 3rd M/B after 9Y = 300000

G. Value of F at policy maturity = 377913

H. Final M/B at policy maturity = 400000

I. Gtd. Addition @ 70 Rs. per annum per 1000 SA = 840000

J. Loyality addition (not Gtd.) = 75000

K. Total Maturity amount =  C+E+G+H+I+J = 2210000 Rs. appx.

For an annual prem. of 1.57L Rs. The K above (maturity amount) is @ 5.62% rate of return only.


Conclusion –  From the above calculation, everyone can see itself that the returns generated by this policy r not that much impressive as it looks on first glance. For lower Sum assured say 1L or 2L Rs. & for higher age the returns ‘ll be even lower. Also there is no guarantee of Loyality addition which I had considered in my calculation.

Plz. Don’t fall in the trap of gtd. Returns offered by this policy. It’s making wealth for LIC & it’s agents only, not for U, the Policy Holder. 

Monday, 19 January 2009

14.16% or 33.99%? Which Tax Rate is higher?

Strange isn’t it! With out doubt majority of U ‘ll declare 14.16% as lower Tax than 33.99%. Some of u may be thinking what I’m talking about? My dear friends my question is quite interesting & a valid one. Let me clear u what I’m asking?

All of us already aware that Div. Distribution Tax on Debt based MFs is 14.16% where as STCG Tax on debt funds for a person in the highest Tax slab is 33.99%. Now think again on my question & answer.

Now read below to find the truth –

I assume there r 2 investors Mr. Sharma & Mr. Kapoor. Both r in the highest Tax slab of 33.99%. Now both have a surplus saving of 10L Rs. Which both want to invest in secure debt funds. There is a debt fund available for investment @ NAV of 10 Rs. for both Growth as well as Div. payout option. Mr. Sharma opts to invest in Div. payout option. While Mr. Kapoor has some other plans & invest in Growth option. From 10L Rs. each has been allotted 1L Units. On 364th day, the NAV of the fund for both option is 12 Rs.

Div. pay out option – The fund announces a div. pay out of 10% per Unit i.e. 1 Rs. per unit.
A. Div. Amount = 1*No. of Units = 1*100000 = 100000 Rs.
B. Total amount withdrawn from fund including Div. Distribution Tax = 100000/0.8584 = 116496 Rs.
C. Hence DDT = B-A = 16496
D. Per Unit of fund, the impact of Div. = 116496/100000 = 1.165 Rs.
E. Post Div. NAV of fund = 12-1.165 = 10.835 Rs.
F. Value of investment after Div. distribution = E* 100000 = 1083500

Growth Option – In parallel to Div. amount of 1L Rs., Mr. Kapoor decides to book STCG. Here is his calculation

A. No. of UNITs redeemed for STCG = 8833.8
B. Redeemed amount = Per Unit NAV*A = 12*8833.8 = 106005.6
C. Per UNIT STCG = 12-10 = 2 Rs.
D. Tax on C @ 33.99% = 0.6798 Rs.
E. Total STCG Tax = A*D = 6005.6
F. Redeemed amount net of STCG Tax = B-E = 100000 (Equal to Div. Received under Div. pay out option)
G. Total No. of Units remain = 100000 – A = 91166.2
H. Value of investment post STCG = G*NAV of UNIT = 1093994.4

Now all of us can look, DDT (@ 14.16% ) is higher than STCG Tax (@ 33.99%) due to which the value of investment is higher for Mr. KAPOOR.
So it’s now for all of U guys to decide what to do in case of investment in Debt funds.
The above calculation once again proves that don’t look at the nos. for what they appear at first glance, just dig deep & u ‘ll see another truth.