Budget2016 and your money

 

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.

4. 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.

5. 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.

6. 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.

7. 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.

3. 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.

3. 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.
4. 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.

6. 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.
7. 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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Are you saving enough for your child’s education?

The cost of education is increasing at a rate faster than normal inflation. Do you have enough for your child’s education? Are you aware of the best options for doing so? Do you have to sacrifice your other goals for achieving your child’s education? Read the article by Vishal and do comment how you are planning your child’s education.

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Large-Cap funds best option for investors with long-term goals – Article by Shalini Dhawan in TOI

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Don’t park all your Retirement Funds in FDs – A case study by Vishal Dhawan

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Do SIPs in Equity Mutual Funds help in goal based investing?

Some days back, in a discussion with a friend of mine, we once again ended up discussing whether mutual funds and in specific whether Equity mutual funds, play any role in goal based investing. Can an investor gather any sizeable corpus by systematic investing?

After a lot of discussion and arguements both for and against from her side and mine, I presented to my friend the below example.

Suppose you were to invest Rs. 1000 in a SIP in a equity mutual fund from January 1995 till 30 Sep 2013, and invest regularly each month. Simultaneously one could also invest in the Sensex a similar SIP of Rs. 1000 for the same time duration. Once could argue that the returns would depend on the type of mutual fund scheme chosen. So as to avoid being partial to any particular style or scheme, we took the SIP and simulated it over many different types of schemes such as a large cap scheme, a mid cap scheme, a value category scheme and a hybrid equity oriented (balanced) scheme and the Sensex.

When we tried to map the values of these SIP investments, the results were as you can see in the graph below.

Scheme	Type	Value  of Rs 2.25 Lakhs	Returns (xirr)
A	Equity Large Cap Scheme	Rs. 24.3 Lakhs	21.7%
B	Equity Flexi Cap Scheme	Rs. 23.5 Lakhs	21.5%
C	Equity Mid Cap Scheme	Rs. 22.4 Lakhs	21.1%
D	Hybrid Equity Oriented Scheme	Rs. 20.1 Lakhs	20.2%
E	S&P BSE Sensex	Rs. 7.7 Lakhs	11.9%
F	NSE CNX Nifty	Rs. 7.6 Lakhs	11.7%

In the simple example above, we figure that an investor by investing Rs. 2.25 Lakhs over a time period of about 19 years, has been able to grow his money from a small Rs. 2.25 Lakhs to a sizeable corpus of Rs. 24 lakhs (in case of scheme A). She has been able to get phenomenal returns in the range of 20-21% each year, depending on the scheme selected (A to D).

Even if the investor had invested in either the BSE Sensex or the CNX Nifty (Scheme E or F), she would have made returns in the range of 11% each year.

This brings us back to the moot question. Can we use SIPs for goal based investing. The answer as we can gather from the above analysis is a big Yes.

For all of us who are looking at investing simple small amounts each month, without burdening ourselves with huge commitments, can look at this example as an easy solution to garnering corpuses for long term goals. Of course, there are a few caveats:-

– this example assumes systematic investing of Rs 1000 each month, without fail for the last approx. 19 years, which means riding through both bullish and bearish phases of equities and giving equity investments the time they deserve

– this example also assumes no redemptions have been made from each SIP investment, especially important during bearish phases where most of us contemplate stopping our SIPs

– past performance is not indicative of the future, but history does teach us some important lessons.

So keep investing towards your goals and keep the faith !

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Are you your own doctor ?

A few days ago, I had this terrible headache. My first reaction was to take a pain relieving pill thinking it must be a normal headache but my friend gently castigated me saying ,”Don’t take self-prescribed medicine. From the outside, it can look like a mere headache but you don’t know what’s within. There are myriad ailments with common symptoms. Your job is to go to the doctor and let him decide on the cause and remedy, so that you can go back to your job at the earliest.”

Let’s relate this example to our finances. We often think we know everything about finances. We have chosen star rated mutual funds, fundamentally good large company stocks, we are well informed traders, etc. Of course, we know that the medicine is good, but the key question is – are we taking the right medicine?

When it comes to our savings, we are saving in a disciplined manner. But do we know, what’s the optimum level of saving for ourselves and our family -are we saving less or more than we require? We are often under an impression that if we save a certain portion of our earnings, thats good enough. However, we still aren’t sure about the level of saving and types of investments that suit our age, goals, expenses, etc. As far as investment products are concerned we may be excited by some product which is apparently very attractive but, are we sure it’s really good? Or even if its good, is it suitable for our requirement?

If we admit that we need a specialist to handle our health, we need a specialist to manage the health of our finances as well. The specialist who will guide us through all our important transitions and be with us as a ‘FPG’ (Friend, Philosopher and Guide) for all our financial decisions.

Like a doctor who will first focus on your problem and not on the medicine to be sold, your planner will always be interested in you, your financial goals, needs, abilities, etc. and not on a product. Is it not time you stopped being your own doctor?

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A 12 step guide to managing your money in 2012

We are now at that critical time of the year, where new year resolutions could be in different stages of action or inaction. Whilst I’m sure that not all of you make new year resolutions ( why should making a resolution in the new year be any different from making a resolution on your birthday, or your wife’s birthday, or in fact any other day), there are probably a large number of you who do. Since losing weight and quitting smoking/drinking are probably the top two resolutions for the year globally, we are simply attempting to create a monthly calendar to simplify the process of managing your money. One of the biggest myths about managing money is that it is all about returns on your investment. Whilst returns are no doubt a critical component of managing money, we believe it is critical to take a more holistic view on finances.

January – Put it all together – There is no point in having made a large number of investments because of the potential for above average returns or tax savings or putting away excess savings and not knowing where the documents for these are or how they are doing. Create an inventory of all your savings and investments – bank accounts, insurance policies, mutual funds, shares, demat statements, real estate agreements, credit card statements, loan documents, amongst others. Whilst this may sound simple, it can be much more challenging than it seems. Whether you wish to maintain a set of files with all these or use software for tracking, it is critical that all the records are well documented and stored so that you or your dependents have easy access to it. Treat it like an ISO certification for yourself whereby you or your dependents can retrieve any document within a maximum of 15 minutes after you realize you need it.

February –  Question what you really want your money to do for you – This could vary from person to person, for some it is retiring at 45, for another sending a child to study overseas, or for someone else, visiting 100 places before he or she dies. As you think deeply about these life goals, you will find monies would have an important role to play in a large number of these. Try to put numbers to each of these goals and estimate how your finances are currently designed to get you to these goals. In case you find this process difficult,you may need to seek the help of a certified financial planner.

March –  Keep what matters, let the rest go – This is one of the most challenging parts of managing money, since you may have to admit to mistakes that you made in the past. Past performance should not be the only factor driving this decision. For example, if you have a large number of small value insurance policies that do not give you substantial life cover, it may be better to surrender these policies and buy a term insurance cover that will allow you to cover the risk to your life meaningfully for your dependents. Or equity investments made in the past that have not delivered for more than 7 years, may need to be substituted with better equity investments. Remember to separate underperformance of equity markets from underperformance of specific stocks or equity mutual funds in your portfolio.

I will endeavour to continue with this calendar over the next few columns as well. I look forward to hearing from you on what you believe is an ideal calendar for the second quarter of 2012. You can write to me with your wishlist on vishal@planaheadindia.com or by leaving your comments.

This article was written by Vishal Dhawan, CFP^CM 

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Why you need that financial plan?

Whether you pick up a magazine or newspaper, put on your television set or drive through your city, you will be inundated with financial products screaming “Buy me“ at you. One of the most common questions we encounter is “ How is this mutual fund “ or “ What do you think of this insurance plan?” or “Is it a good time to buy stocks now?” Unfortunately, there are no right or wrong answers to the above – it completely depends on what suits you.

So how do you establish what suits you? The starting point to establish what suits you is to devise a financial plan for yourself. Whilst a financial plan may sound rather complex, it is simply a roadmap that allows you to think about what you want to achieve with your life goals and how your finances will allow you to get there. Let me illustrate this with an example. Let’s say one of your life goals is to send your child overseas for a higher education. How would you design your financial plan towards this life goal?

1. Establish the current cost of the education that you want to plan for – The costs for higher education vary significantly depending on the type of college, country of education, type of program and number of years of education. The total costs of education should be established including the costs of living and travel and not just education costs.

2.Understand the impact of inflation on current costs – Inflation rates on education may vary significantly depending on whether you wish to plan an education in India or overseas. You need to establish the corpus required for the education after adjusting for inflation.

3.Choose the appropriate asset mix to achieve your target – It is critical to establish the right balance of stocks and fixed income exposure so that you understand the returns and associated risks that you will take on the portfolio in order to reach your target.

4.Choose the appropriate product/products  to achieve this targeted amount – Once the above steps have been undertaken, you can move to the product selection stage where you can look at the merits/demerits of using deposits, mutual funds, insurance plans ,  stocks or other options to achieve your target.

5.Evaluate the progress towards your goal at regular intervals – It is important to review the progress of your financial plan to ensure that you are on track to achieve your financial goals. However, it is important that you give your products adequate time to deliver as per their designed objectives. A review once a year should be adequate.

A financial plan can be developed for all your life goals accordingly. You may need to take the help of a financial planner to integrate all your goals into a plan so that your overall finances can be aligned to all your goals.

So the next time you see a new product, go back to your financial plan and you will probably find whether the product is suitable for you.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Asian Age  on 9^th July 2011 .

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Invest in commodities to offset inflation risk

OVER THE last few months, inflation concerns have been at the top of everybody’s mind, with both the government and RBI unveiling multiple measures to try to control it. The concern has now become more widespread, with prices of agricultural commodities at multi-year-highs and higher prices of oil on the back of the Middle East tensions starting to create concerns of a growth slowdown inIndia.

Considering the significant short term impact that inflationary concerns are having on Indian equity markets, coupled with concerns on higher interest rates and higher commodity prices, investor portfolios may need to get realigned to the reality of higher inflation over the next few quarters. So far, inflationary concerns have largely been limited toIndia,China and some parts of Asia but inflation could start to become a concern in the developed world from the second half of this year as well.

Adding commodities to portfolios tends to be a good solution to hedge against higher inflation, and also tends to have low correlation with other asset classes over long periods of time. Commodities can largely be bought through the use of commodity futures wherein investors buy commodities through a commodity exchange or through managed products including international mutual funds and exchange traded funds. Since products on the commodity exchange tend to be margin products most of the time and could involve some degree of leverage, investors need to be careful about the use of these products.

Commodity exposure can largely be taken in portfolios through the use of different types of commodities, namely —

1) Agricultural commodities — Agricultural commodities are available either through the use of commodity futures wherein specific commodities can be purchased on the commodity exchange, or through the use of agricultural funds available overseas. Agricultural funds available over-seas tend to invest in stocks of agriculture linked businesses.

2) Precious metals — Gold is the most popular investment in this category and can be bought through Exchange Traded Funds (ETFs) or gold mutual funds, which either invest in gold ETFs or in stocks of gold mining companies. Of course, physical gold purchases are also an option though they have a disadvantage to other options in terms of purity control, taxation and storage. Silver is also a popular option wherein you can either explore the option of buying silver on a commodity exchange or an international silver ETF.

3) Industrial commodities — These include commodities like copper, zinc, tin, etc and can be bought either through a commodity ex-change or through the use of international mutual funds that invest in shares of industrial commodity businesses.

Since commodities tend to be very volatile and are also at multi year highs in many cases, the exposure should be built gradually, and not exceeding 10 per cent of the overall portfolio. International exposure also involves currency risk that investors need to be aware about.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Asian Age  on  12^th  March 2011 .

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Wealth protection gets a new meaning – headline

TWO EVENTS over the last few days have hit the headlines one from India and the other from Pakistan, in which the person with the mandate to protect has done quite the opposite. Both unfortunate events the killing of a leading politician by his bodyguard in Pakistan, and the significant financial losses caused by a relationship manager closer home, have driven home the point clearly that whether it’s your life or your wealth, you need to take responsibility to protect it yourself.

While protecting your life is not something that I pro-fess to have much expertise in, protecting yourself from financial fraud can definitely be minimised by greater alertness and awareness. Unfortunately, investors spend far more time buying a television set than investing five times the amount in a financial product.

Betrayal of trust does create a lot of angst, so it is critical that investors take referrals from friends and family before choosing a financial adviser. Unfortunately, a lot of investors choose their financial advisor based on the rice the cheaper the better, which is contrary to what they do when they buy other products where the belief is that the more expensive the product, the better the quality.

Once the due diligence on the advisor has been done, what can an investor do to protect oneself:

■ As investors seek new products, financial product manufacturers tend to create exotic instruments to fulfill that need. Investors need to stick to products that are more transparent and where risks are clearly understood. Remember the mortgage backed securities in the US a couple of years ago that took some big names down with them or guaranteed return products that did not even return the principal, forget the guaranteed returns.

■ Multiple products today use back testing data, which essentially demonstrates how the product would have performed over different time frames.

This is different from actual performance and is exposed to the risk of data selection bias. Ideally, the track record should be independently verifiable. For example, mutual fund performance data is available on independent websites, so investors can do their own verification of performances and track records.

• Any product that offers returns that are completely out of sync with competing product returns needs to be closely subscribed. In an era, where fixed income returns range between eight and ten per cent, a guaranteed return of more than 15 per cent should definitely cause you to do a significant amount of homework.
• While time is definitely at a premium for everyone in today’s busy world, time spent on understanding where you’re putting your money is definitely time well spent. Avoid signing blank documents and cheques just because you don’t have time.
• Many investors have small sums of money in multiple investments making them very difficult to track.

With larger chunks of money in each investment, you will tend to give it more thought both at the time of investment and also monitor it on an ongoing basis.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Deccan Chronicle  on  8^th  January 2011 .

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