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budget2016

 

Reams of paper have probably been dedicated to the Union Budget already, but here is a detailed analysis after going through the fine print in terms of Budget 2016 and its impact on your personal finances.

Your Income

  1. House Rent Allowance change: This has been hitherto a lesser used deduction as it comes with multiple conditions. Section 80GG allows individuals to claim a deduction in respect of house rent paid. The limit has gone up from Rs 24,000 previously to Rs 60,000 subject to following conditions:

a.If the person is either self-employed or salaried but does not receive deduction for       HRA from the employer

b.Does not own a residential property in the city in which he is staying on rent.

c.If the tax payer owns property at any place other than the one mentioned above, he        should not be claiming benefit of the property as self occupied. That property should be deemed to be let out.

To claim this deduction the tax payer has to furnish a declaration in Form 10 BA

The deduction allowed under section 80GG for payment of rent shall be least of the following:

  1. 5,000 per month
  2. Rent paid less 10% of the total income
  3. 25% of the total income of the tax payer for the year.

Your Expenses

  1. Tax collection at Source introduced – TCS of 1% on purchase of luxury cars of value greater than Rs. 10 lakhs and purchase of goods and services in cash exceeding Rs. 2 lakhs is now being levied. This does not change the price of the product but will create a trail of transactions in cash of high values, targeting cash usage.
  2. Increase in service tax – Service tax has been increased by 0.5% on all taxable services, with effect from 1 June 2016. As a result, expect the costs of all services to go up.
  3. Infrastructure cess- 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars and 4% on high engine capacity vehicles and SUVs, will mean that cars will become more expensive.
  4. Excise duty on branded ready made garments – garments with a retail price of Rs. 1000 and above has changed from Nil to 2% without input tax credit. Thus, expect garments to become a wee bit more expensive.
  5. Excise duty on tobacco hiked – expect cigarettes to be more expensive as a result.

Your Investments

  1. Long Term Capital Gains tax on equities and debt investments did not see any change – This is positive for investors, as there were fears around tax being introduced on equities or the holding period for equities being changed. Status quo is good news.
  2. New Pension Scheme (NPS) – There are 3 types of withdrawals currently allowed under the NPS.
  3. Normal Superannuation – Lump sum withdrawal on retirement, which was 60% earlier has been changed to 40% now. Earlier this withdrawal was taxable. Now the government has proposed withdrawal upto 40% to be tax free. The balance 60% can be used  for purchasing annuities, to make the annuity portion tax free as well. Thus, the NPS is far more attractive as an instrument to be used for your retirement goals now, especially as its ability to permit equity exposure enables you to get the wealth creation benefit of equities over the long term.
  4. Upon death- The entire 100% would be paid to the nominee/ legal heir and there won’t be any purchase of annuity. These entire 100% proceeds are tax free.
  5. Exit before normal superannuation( 60 years) – At least 80% of the acculturated pension wealth of the subscriber should be utilized for purchase of an annuity and remaining 20% can be withdrawn as lump sum. Considering that this is a long term retirement product, be sure to use the NPS to fund your retirement goals, as early withdrawals make it less flexible.
  6. Other pension products like EPF and superannuation – There has been an attempt to bring all pension products on the same page in terms of taxation. Therefore, EPF and superannuation will also permit 40% of the corpus withdrawn to be tax free. The interest earned on the balance 60% of the contributions made post April 1, 2016 will be subject to tax unless it is used to purchase an annuity.

There is also proposed a monetary limit for contribution of employers to a recognized Provident and superannuation fund of Rs. 1.50 Lakh per annum or 12% of employer contribution, whichever is less, beyond which the same will be taxable in the hand of the employee. You could see smaller contributions towards the EPF from employers going forward as a result, and voluntary Provident Fund contributions could also reduce as a result.

  1. REITS (Real Estate Investment Trusts) and InvITs ( Infrastructure Investment Trust) – Real Estate Investment trusts are listed entities that primarily invest in leased office and real assets allowing developers to raise funds by selling completed buildings to investors and listing them as a trust. Previously REITs did not take off due to taxation challenges. This budget has done away with Dividend Distribution Tax, thus enabling exposure to commercial real estate at lower values.

Expect Infrastructure Investment Trusts to also take off as a result of this change in dividend distribution tax provisions.

  1. Gold Bonds- Long term capital gains from the sale of gold bonds will continue to be taxable but now eligible for indexation benefits. This facilitates taking exposure to gold in a paper form.

The budget has also proposed to make interest and capital gains from the gold monetization scheme tax free. Thus yields from gold are possibly now more attractive than rental yields from residential real estate, considering that the returns are tax free.

  1. Measures for deepening of corporate Bond Market-

a. LICof india will setup a dedicated fund to provide credit enhancement to infrastructure projects. The fund will help in raising credit rating of bonds floated by infrastructure companies.

b.Development of an online auction platform for development of private placement market in corporate bonds.

c.A complete information repository for corporate bonds covering both primary and     secondary market segments will be developed jointly by SEBI and RBI.

d.A framework for an electronic platform for Repo market in corporate bonds will be    developed by RBI.

This will enable investors to invest in corporate bonds and give them another option to add fixed income exposure to their portfolio.

  1. Fiscal target to be maintained at 3.5% – With the government sticking to its target of 3.5% of GDP for FY 17, fiscal discipline has been adhered to for now. This could lead to drop in bond yields and could be particularly positive for duration funds or portfolios having longer duration bonds. Transmission of falling interest rates could finally be a reality.

Your Taxes

  1. There has been no major change in income tax slabs , for individuals earning upto Rs 1 crore.
  2. Surcharge- There has been an increase in Surcharge on income above Rs. 1 Crore from 12% to 15%.

For an individual below 60 years with an income above 1 Crore ( eg. 1.1 Crore), he will end up paying approximately Rs 91,000 more due to the 3% increase in Surcharge.

  1. Rebate- Under Section 87A, for individuals with income not exceeding Rs. 5 lakhs, the rebate has increased from Rs. 2,000 earlier to Rs. 5,000.
  1. Dividend Distribution Tax- The amendment in dividend distribution tax law is applicable to dividend declared under Section 115O. The section is applicable to domestic companies and it is proposed to amend the Income-tax Act so as to provide that any income by way of dividend in excess of Rs. 10 lakh declared by such domestic company shall be chargeable to tax at the rate of 10%.The above amendment will have no impact on the dividends received by the Mutual Fund unit holders as dividend paid by a mutual fund scheme to a unit holder is covered under Section 115R of the The Income tax Act, 1961. This will hit investors drawing higher dividends but since it is not applicable to dividends from mutual funds it’s a relief.
  2. Presumptive Tax – This scheme is available for small and medium enterprises with turnover not exceeding 1 crore rupees. These were free from getting audited and maintaining detailed books of account and could pay tax at 8% .This turnover limit has increased to Rs. 2 Crore.

Also under the presumptive taxation for professionals with gross receipts up to Rs. 50          Lakh, the presumption of profits has been introduced to 50% of gross receipts.

This should result in significant time saving and costs for professionals and small business owners. However, remember to read the fine print on this clause.

  1. Reduction in tax slabs for companies with business income upto Rs 5 crores – The path to reduction of corporate tax rates has begun with a 1% reduction in tax rates for smaller businesses. Expect more to follow going forward.
  2. Undisclosed income – A window from 01 June 2016 to 30 Sep 2016 has been introduced for people to pay 45% on their undisclosed domestic income. This undisclosed income will not be subject to any scrutiny if done within this window. This is an attempt to garner additional revenues and solve the challenges of black money.

Your Loans

  1. Additional deduction of Rs. 50,000- For first time home buyers an additional deduction of Rs.50,000 on top of already existing Rs. 2 lakh has been proposed for loans upto Rs. 35 lakh sanctioned during the next financial year subject to the value of property not exceeding Rs. 50 lakh.

All in all, it’s a budget that will probably not change your money life significantly – but it has a little here and a little there. “Fortunately, there is a sane equilibrium in the character of nations. As there is in that of men.”

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Non-resident Indians (NRIs) should take advantage of their roots in India to invest and thus profit from the India growth story. However the importance of picking the right investment options when choosing their investments in this country should not be underestimated.

Pros and cons of investing in India

 reforms

Image Source: economictimes.indiatimes.com

The Indian economy has emerged as among the fastest-growing economies in the world. With a reform-oriented government at the centre, there is optimism about this rapid pace of growth continuing. Indian stock markets have rewarded long-term investors with returns in the mid-teen range. Interest rates in India being high, the returns from fixed income oriented instruments are also higher than in the developed world.

currency risk

Image Source: allaboutcountertrade.blogspot.com

Weighed against these advantages are some disadvantages that NRIs should take into account. The first is currency risk. The rupee has tended to depreciate against currencies like the US dollar over the long term. It can also fluctuate in a volatile manner. This could erode some of the returns earned on investments in India.

The tax processes are also a little disadvantageous for NRIs. Income and capital gains in India from multiple instruments are subject to tax deduction at source (TDS). If NRIs are eligible for a lower tax rate or for exemption, they have to file tax return and only then do they get a refund. This can take some time.

If NRIs are eligible for a lower tax rate or for exemption, they have to file tax return and only then do they get a refund.

Finally, managing investments in India can be an issue, since NRIs live thousands of kilometers away and visit India irregularly.

Wide range of options

A wide range of investment options is available to NRIs in India: among physical instruments there are real estate and gold, while on the financial side they can invest in deposits, equities, mutual funds and bonds. In subsequent columns, we shall cover each of these investment options in detail. Let us now turn to the challenges of managing investments in India.

Managing investments

Most NRIs typically pass through three stages in managing their investments in India. Here we offer some advice on how best to negotiate each of them.

 First stage: In the earliest phase, he has a relative, usually the father or sometimes a sibling, who is knowledgeable about investment options in India and is willing to help the NRI with his investments in this country.

In this stage, NRIs should avoid buying physical assets in joint name with the individual who is helping them out. At best, they may give a power of attorney (PoA) to the person to manage their affairs. This should ideally be a special PoA for specific purposes and not a general PoA.

NRIs should avoid buying physical assets in joint name with the individual who is helping them out. At best, they may give a power of attorney (PoA) to the person to manage their affairs. This should ideally be a special PoA for specific purposes and not a general PoA.

In case he wishes to buy real estate, the NRI may want to settle down upon his return in a city which is different from the one in which this person (who is helping out) is based. In that case, it may be practical to defer the decision to buy real estate, as managing real estate remotely, even for a person in India, can be challenging.

One mistake that NRIs commonly make in this stage is to send money into their parents or sibling’s account and ask them to invest the money in financial assets in their own name. This is sometimes driven by the desire to avoid paperwork and make it practically easier.

In addition, there could be some product level restrictions. For example, many mutual funds houses in India don’t accept investments from US-based NRIs or a large number of fixed income postal schemes are not available to NRIs. By investing in their parents’ name, NRIs sometimes try to circumvent this hurdle.

Investing in your parents name can lead to several complications. If the father passes away without writing a will, all your siblings could claim a share to the father’s investments. You may have difficulty in reclaiming the money you had given to your father to invest.

Investing in your father’s name could also lead to questions from the IT Department on the source of income.

Investing in your parents name can lead to several complications. If the father passes away without writing a will, all your siblings could claim a share to the father’s investments. You may have difficulty in reclaiming the money you had given to your father to invest.

Investing in your father’s name could also lead to questions from the IT Department on the source of income.

A number of these complications can be avoided by the NRI if he invests his money in his own name in the first phase.

Sometimes, though the person who is helping you out may be knowledgeable about investment options and tax laws in India, he may not have knowledge about tax provisions abroad. For instance, the returns from NRE fixed deposits are tax free in India but may be taxed in the NRI’s country of residence. Thus, even though someone in the family may be knowledgeable, the NRI should seek professional advice in this phase.

Sometimes, though the person who is helping you out may be knowledgeable about investment options and tax laws in India, he may not have knowledge about tax provisions abroad.

Second stage: In this phase, the person who was knowledgeable about investments and willing to help (usually the father) may have passed away. The mother may be willing to help but may not have adequate knowledge about investing. She may also be fearful of dabbling in investment matters.

In this scenario, the use of both physical and financial assets may become difficult because of the mother’s lack of understanding.

The person who was knowledgeable about investments and willing to help (usually the father) may have passed away. The mother may be willing to help but may not have adequate knowledge about investing. She may also be fearful of dabbling in investment matters.In this scenario, the use of both physical and financial assets may become difficult because of the mother’s lack of understanding.

This stage becomes one of transition. The mother’s inability to help the NRI drives the latter to seek professional help for handling his investments.

Third stage: In this stage, the transition that began in the second phase is complete. The parents may have passed away by now. The NRI now depends entirely on professional help in the form of financial advisors, lawyers and structured services like trusts to manage his financial affairs. These professionals file his income tax return and also provide periodic reports on the performance of his investments.

If the size of the assets invested in India is substantial, the NRI could set up a trust, which would have professional trustees to manage its affairs. The trust can ensure that the distribution of assets to heirs takes place in a predefined manner. It can also be used to make sure that a huge amount of wealth doesn’t get passed on to children at a young age, but is disbursed to them at regular intervals.

Thus, besides return on investment, ease of managing investments should be an important criterion for NRIs in the choice of assets they invest in.

If the size of the assets invested in India is substantial, the NRI could set up a trust, which would have professional trustees to manage its affairs. The trust can ensure that the distribution of assets to heirs takes place in a predefined manner. It can also be used to make sure that a huge amount of wealth doesn’t get passed on to children at a young age, but is disbursed to them at regular intervals.

Thus, besides return on investment, ease of managing investments should be an important criterion for NRIs in the choice of assets they invest in.

 

 

 

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In recent months, there has been a sense of euphoria about India and Indian financial markets. The current highs that the Indian equity market is witnessing, is on one hand creating elation and on the other hand causing regret, making many investors feel that they lost the opportunity.

Many investors may believe that those who are invested in the equity markets, turned out to be ‘better’ investors. One year ago, investors who did not invest in equities were looked upon as better investors.  So how can one truly be a better investor? I would like to say that all of us can strive to be better at investing by following a few simple steps:

  1. Save and Invest:

All of us do understand that we need to invest but very few of us understand that we can invest only if we first save. Know how much you earn and spend to arrive at what you can save.

  1. Understand where you are investing your money:

Today investors have a plethora of options to choose from – Equities, Fixed income, Commodities, Gold, International Funds, Real Estate. Each of these asset classes comes with associated risks and benefits. Know these details when you are investing. Understand the risks you are signing up for and resultant return expectations.

  1. Understand why you are investing your money

Many a time when we make the investment we do have the reason or goal in mind. But over time, especially when markets go down, we forget these goals. We forget that we were investing for a goal which was many years away, and therefore there is no reason to panic.

  1. Systematize your investing

Being busy individuals, handling paperwork, cheques, banking errands are the last thing on our minds. Hence the need to systematize. By this I mean, automate investments to selected avenues on monthly, quarterly yearly basis by using technology, available systematic investment plans (SIPs), triggers, alerts, ECS and such facilities available today.

  1. Consistency pays

As we all know from the current scenario, emotions do interfere with investing, sometimes they work for us and sometimes against. As we usually decide with our hearts and not our heads, create a discipline to invest a certain amount every month and systematize it.  There are many examples of SIPs in diversified equity mutual fund schemes generating sizeable corpuses, where investors have consistently run SIPs.

  1. Discipline is key

Discipline yourself to refrain from wavering from an agreed asset allocation and investment strategy. It is easy to get swayed, just because someone else invested and made a short term profit and his investment option seems superior. Look at your agreed investment strategy periodically. Portfolio churn is not necessary value adding to your portfolio.

  1. Take professional help

As is the case where we need dieticians, doctors, lawyers, etc. sometimes we need professional help to nudge us into an investing habit. Hire a SEBI Registered Investment Advisor to help you with your financial life.

  1. Monitor and Review

After the effort of making a investment strategy and implementing it, comes the time to check whether the plan is working for you. Review if you were able to stick to the savings plan and investments plan. Were you able to maintain consistency? Review whether improvements are possible to the savings plan. Control what you can control i.e. items such as saving and investing. Review your investment products every six months to see how they are performing against an appropriate benchmark.

  1. Correct and Act

Make corrections if you have swayed away from agreed savings/investments plan, asset mix and exit underperforming investments, even at a loss. Here is where a professional nudge would help. A professional could provide that much needed nudge as she is not emotionally connected with your investments.

  1. Repeat the Loop

Repeat this loop consistently and religiously to better your investing experience.

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Recent census data seems to indicate that the median household size is now less than four for the first time in urban India. This means that family sizes are shrinking, and over 70% of households are not multigenerational any more. As India as a society becomes more nuclear, planning for retirement becomes even more critical, with children not being a dependable retirement plan any more.

We find that most investors tend to start working seriously on their retirement plans between the age of 35 and 40. Considering that life expectancy in India is increasing rapidly and medical advancements make it very likely that we will live much longer than we currently envisage, creating a corpus that can outlive us can be quite a challenge. To put it into perspective, someone starting his retirement planning at 40 will save and invest for 15 to 20 years till he turns 60, and expect these savings to support him and his family for a 25 to 30 year period.

Most investors have certain investments in their portfolio that are earmarked for retirement. The moot question is – Will those be enough? Since a monthly expense of Rs 40000 per month today would be close to Rs 2.75 lakhs per month after 25 years assuming an inflation rate at 8%, these may just not be enough. So how does one plan to retire rich. Here’s our six step guide:

Step 1: List – Make a list of your current monthly and annual expenses

Step 2: Analyse – Critically evaluate each expense head to see whether these expenses are likely to increase or decrease post retirement.

Step 3: Inflate – Apply an appropriate inflation rate to these expenses to arrive at the likely expenses at retirement age.

Step 4: Estimate – Estimate the corpus required for the inflated expenses to support you during the period of retirement till death.

Step 5: Invest – Evaluate the amount you need to save each month/year to achieve the desired corpus. Invest the amounts in a diversified portfolio that can help you achieve the desired corpus.

Step 6: Monitor – Revisit the plan annually to ensure that it is on track.

Since the rate of return on their investment portfolio is a variable that investors can target to change if they wish to achieve their targeted retirement corpus, we strongly advise that investors look at investment strategies that, although riskier over shorter time frames, have the potential to outperform over longer periods. Investments in asset classes like equities for a retirement portfolio should be looked at very closely for their potential to deliver superior returns over longer time frames.

In addition to the quantitative aspects of retirement, we also urge investors to answer two questions when they plan for retirement

  1. What would your ideal day be like when you retire?
  2.  And will this continue to be your ideal day if you do this day after day?

We find that these answers are also very difficult for most investors to find, as a calculator cannot answer this for them. We urge investors to think deeply about these answers today so that they are prepared for retirement not only financially but holistically.

This article was written by Vishal Dhawan, CFPCM 

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Harsh and Harshita were our usual client couple, happy go lucky, no worries, successful in their careers,  double income, company accommodation, company car, company perks, and you name it.

As they came in for the customary annual plan review meeting, they seemed a little distracted. This was not their usual selves and obviously, the planner in me quickly moved to FPG mode (friend , philosopher, guide ) to understand what’s happening and where I could help.  After some chatting, I gathered Harsh had quit his job as his organization was moving to South India for consolidation reasons. Harshita was apprehensive as they were expecting a baby and she was planning to take a break for family and care giving reasons. Obviously as informed clients, they understood their financial plan and investments needed to be looked at afresh.

Their case is no different from the many life transition situations that we face in numerous client interactions. Infact today, more than ever, most clients are facing multiple life transitions without even realizing so.

Some examples of life transitions are:

  • Children moving out of home for education reasons / marriage
  • Becoming a parent
  • Job losses / Job changes
  • Becoming  an entrepreneur
  • Divorce
  • Widowhood
  • Sudden inheritance
  • Retirement
  • Dependent parents and long term care
  • Sudden illnesses and associated medical expenses
  • Sudden Demise of family member

In all cases of life transitions, there is a commonality. The commonality is that whether one realizes or not, these life transitions affect your finances. Even if there is no direct impact, these life transitions usually tend to affect one emotionally thereby leaving lesser time and mind space to focus on your finances.

These transitions also naturally do tend to unsettle your financial plans at different points. Although I don’t profess to be a crystal ball gazer and don’t expect clients to be one, the only way life transitions can be actually managed is by putting thought to what surprises life may throw up at you and be prepared for these transitions. Essentially a Plan B.

Besides emotional support from family and friends, the client’s own preparedness would be the other weapon to take on life’s surprises. If you are already going through one of these transitions or foresee it in the near future, please talk to your financial planner about it. If not, prepare for it anyways.

Author – Shalini Dhawan

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