Revised ZProposals of Direct Tax code

Dear Friends, here is a quick view of the new proposals of Direct Tax code.

1. PF, PPF, GPF, EPF, NPS & Annuity Plans as well as proceeds from Term plans (Pure Life insurance) 'll be Tax free as per E - E - E. So no Tax at withdraw from these instruments.

2. Home loan Interest benefit on 1.5L Rs. for self occupied property, is retained.

3. The list of permitted savings intermediaries now includes most of the current saving instruments lile - apart from the instruments listed in point 1 above, NSC, ULIPs & Traditional Plans,  ELSS, Bnak Tax saver FDs, Bonds (Possibly Infrastruture bonds)  etc.

4. Long Term capital Gains from shares & Eq. MFs 'll become taxable.

5. No clarity as of now for the earlier proposed Tax slab rates.

This Revised Discussion Paper is available on the following websites:
finmin.nic.in and incometaxindia.gov.in
Responses to the Revised Discussion Paper should be sent online through the link provided at these websites or at the following e-mail address: directtaxescode-rev@nic.in. Responses are solicited upto 30th June, 2010.

Thanks

Ashal

ULIP v/s Term + PPF combo

Dear Friends, I tried to generate a BI on LIC website for their Money Plus - I plan for the following data but I'm unable to generate the same.

Age 30
Male
Policy term 25Y
Prem. amount 50K yly
Sum assured 15L

For the same person, I generated a quote from LIC Anmol Jeevan Term plan, the prem. in this case comes 5732. Now instead of investing the remaining prem. of 44268 Rs. in a MF, I opted to invest in PPF, one of the most secured investment vehicle. At the end of the term of 25Y, the maturity amount in PPF is 34.95L Rs. i.e. almost 35L Rs. without riding any risk of Eq. market for a common person who don't understand all the financial nitty gritty.

Remember Money Plus -I is a Type 1 Ulip, so the family 'll receive only the higher of Sum assured or the fund value. But in this case for the combo of Term plan +PPF, the family 'll receive Sum assured of full 15L Rs. from the term plan & of course the fund value in PPF.

Now to equalize fully with type - 1 ulip, I opted for a split term cover like this, to save on mortality charges.

5L cover for term 25Y - prem amt. - 1911
5L term 20Y - 1614
5L term 15Y - 1406

In initial years the total prem. outgo is 3525 Rs. per annum, amt invested in PPF is 45069.

After completion of 9years the PPF corpus is already more than 6L Rs. so from 10th year, I stopped paying prem. for 15Y policy & diverted to PPF itself.

So the changed equation from 10th year is Term plan prem. outgo 3525 & PPF contribution 46475.

Again after 14 year the value of PPF is 11.87L Rs. so I stopped paying prem for 20Y policy & diverted this prem. too to PPF.

So the changed equation from 15th year is Term plan prem. outgo 1911 & PPF contribution 48089.

Finally after 17 years as the PPF value is 16.64L Rs. I stopped paying for 25Y policy & full money is going to PPF.

At the end of 25Y term, the PPF value is 36.55L Rs.

Plz. post ur comments.

thanks

Ashal

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.

regards,
MIK

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.

Thanks

Ashal...

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.

Thanks

Ashal...

Investing are ' YOU ' in Control

An Investing Illusion

By Dhirendra Kumar | Jul 20, 2009

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.

NEW PENSION SYSTEM - NPS

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.

WHO CAN INVEST?
Scheme is open to all Indian citizens aged between 18 years and 55 years.

WHERE TO INVEST??
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.

HOW DOES THE NPS WORK??
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 :
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.


WHERE IS MY MONEY INVESTED???
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.



RETURNS :
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.

LAST YEAR THE NPS GAVE A RETURN OF 14.82% WHILE HANDLING THE CORPUS OF CIVIL SERVICE PENSIONS.


TAX ANGLE :
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.


NEGATIVES :
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.

POSITIVES :
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.

CONCLUSION :
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.

Thanks

Ashal

DEBT funds or DIversified funds for Retirement

Question - 

Hi,
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?

Rohit

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.

Thanks

Ashal ...

Equity Investments: Tax Impact

``Equity and efficiency are complimentary, not contradictory…`` – Dr. Manmohan Singh

Equity investments can be in the form of direct investments through equity shares or indirectly through mutual funds. Balanced funds with equity exposure above 65% in Indian companies traded on a stock exchange are treated as equity from a taxation standpoint.

Dividend Distributed

Apart from capital appreciation, one can also earn returns by means of dividend declared by the company/fund. These dividends are tax-free in the hands of the investor, and there is no dividend distribution tax either on ``Equity`` mutual funds as per the definition above. This is so because when companies declare dividends, there is a dividend distribution tax that is paid by the company. This has no impact on the investor.

Securities Transaction Tax (STT)

The point which is often ignored is STT that is applicable on purchase/sale of equity shares, units of equity oriented mutual fund (delivery based) at 0.125%. For non-delivery based sale, 0.025% is applicable on transactions, sale of derivatives/options would attract 0.017% STT. Hence, they do not escape from the ambit of taxes irrespective of the holding period.

Computing Date of Holding – Special Scenarios

Shares acquired as a gift

Where one has been gifted equity, the period for which the shares were held by the previous owner (the person who gave the gift) is to be included in the holding period. The cost of the shares incurred by the donor of the gift is considered to be cost of benefactor of gift.

Shares acquired as inheritance

Where one has inherited equity, then the period for such shares will be from the date of transfer (to the one who has inherited the equity). The purchase cost will be the Fair Market Value (FMV) as on the Date of Transfer.

Rights shares

For right shares, the period of holding will be computed from the date of allotment of the shares. The amount actually paid for purchase of the rights shares is taken as cost of the shares.

Bonus shares

When one receives bonus shares, the period of holding is computed from the date of allotment of the bonus shares. Cost of bonus shares is taken as nil.

Shares listed Overseas

Shares listed overseas and mutual funds investing in overseas stock (with Indian traded equity shares composition <>65%

Capital Losses

Since long-term capital gains earned on equity investments are tax-free, long-term capital losses incurred on equity investment cannot be set off to reduce taxable capital gains.

Short-term capital losses incurred on equity investment can be set off against any capital gain (long-term or short-term). If in the current year there is no taxable capital gain to set off the loss against, one can carry forward this loss for 8 years and set it off against future taxable capital gains.

Plan well- you can now reduce the taxes on your capital gains from equities.

Sourced From - www.myiris.com