HRA is not part of your salary but you still want to claim tax deduction on rent paid? can you do it? If yes, then how and under which section can you avail of HRA benefits?
Can you claim HRA benefits if you are staying with your parents and actually paying them rent every month? Can you claim HRA as well as home loan interest deduction if you have taken a home loan but are staying at some other place and paying rent for it?
What is the maximum tax deduction you can avail on your home loan's principal and interest repayment? On the capital gains side, will you have to pay capital gains tax on ESOPs sold in a foreign country and money transferred to India?
Do you know how to pay tax on capital gains and what is the last date for doing so? How will you be taxed on profits made by you in intraday trading?
In a chat with readers on February 13, Get Ahead tax expert Mahesh Padmanabhan answered these and many more queries related to tax claims on HRA, home loans, ESOPs and capital gains tax?
Siddarth asked, Dear Sir, I am getting 2.85 P.a, I have a LIC policy where i pay Rs.6000/- as premium quarterly, how much more i should invest and where?
Mahesh Padmanabhan answers, In case you have no other investments apart from the LIC premium paid, then you would need to invest further Rs 76000 towards tax saving investments such as PPF, ELSS MF, etc. Additionally, you could take mediclaim insurance with a premium of upto Rs 15000 or Rs 20000 in case any of the dependent individual is above the age of 65.
shweta asked, i'l b completing 2 yrs in sip this march, (4000 pm in 4 diff sips namely SBI [Get Quote] magnum sector umbrella, SBI magnum blue chip, Reliance [Get Quote] equity opp, Birla top 100) when do u think i shud withdraw the amt so that i can get max returns since budget is round the corner?
Mahesh Padmanabhan answers, Our recommendation is that you should be invested in the market for a long term period. Hence our suggestion is that longer you stick around in the market and keep investing in a disciplined way, your risk of loss from stock market would be almost minimised.
vikas asked, Can investment in post office RD be treated as tax saving investment......kindly confirm?
Mahesh Padmanabhan answers, No this investment is not covered under the section 80C deduction.
GR asked, If A pays lic premium amt thru his bank account for a policy which is in name of B, then who can claim income tax benefit for the premium paid? A or B?
Mahesh Padmanabhan answers, The relationship of A & B is relevant as an individual is not eligible to claim the tax break on insurance premium paid on behalf of the parents. In normal case either of the guys could take the benefit of such premium. In case the premium is paid on behalf of B then B should repay the said amount to A later.
sannigrahi asked, My tax consultants have just closed their firm in Dibrugarh, Assam. What should I do to get my file transfered to my present location at PUNE?
Mahesh Padmanabhan answers, You would need to make an application for change in PAN data and submit the same with either NSDL or UTI. In case you are an employee, you could thereafter start filing your returns in Pune. In case you are self-employed, it would be advisable to send a letter to your ward officer in Assam and also a copy of the same to your Pune ward officer requesting for the file to be transferred to Pune.
deepak asked, how many yrs a person shud invest in ELSS ideally to get more returns?
Mahesh Padmanabhan answers, ELSS schemes come with a lock-in period of 3 years. The idea here is long term investing to gain in the later years from the capital appreciation of the underlying shares. Hence there is no specific time line that is mentioned for a person to exit the ELSS fund. In case you are market savvy then you could interpret the market to sell on a high and purchase at a low point. However, we do not recommend this course of action as it brings along a high degree of risk.
sk asked, Hi Mahesh, I have calculated my capital gain for this financial year but don't know how to pay it and what is last date for paying it, please help?
Mahesh Padmanabhan answers, You would need to pay the advance tax before March 15. Any advance tax paid before March 31 is also considered to be within time. You would need to fill up challan ITNS 280 and deposit the cheque with any bank accepting tax payments.
neetu asked, hi Mahesh, my hubby's co. does not provide HRA & other allowance, wat he gets is basic of 34k in hand, (till dec it was 31k in hand from jan it is 34k) n we have already done an invt of 1,10,000 for tax saving, n still the a/c's has told him to pay a tax of 43000/- we stay in a rented flat, he has been advised to give rent receipts, we pay a rent of 8k per month. how much money do u think we'l be able to claim next yr with 8k pm?
Mahesh Padmanabhan answers, Your husband could avail of the benefit under section 80GG in case your husband does not get HRA. However, the amount of deduction is restricted to the lowest of the following: Rent paid in excess of 10% of his total income or Rs. 2000 p.m or 25% of his total income
vijay_petu asked, Hi Mahesh, my parents are retired from their respective services. I stay in a room above my dad's house . Can I claim HRA for the same if I pay 6k a month to my dad? Thx.
Mahesh Padmanabhan answers, In case you stay in your father's house and pay rent to him actually then you would be eligible for deduction on account of rent paid.
shipra asked, As a lady i get a tax rebate upto 120000 so how should i save tax on remaining 72000 as my inc. is 1.92 lacs/annum?
Mahesh Padmanabhan answers, In case your taxable income is Rs. 1.92 lakhs then the tax free limit would Rs. 1.45 Lakhs. The further amount of investment required to zero-ise the tax liability would be to invest Rs 47000.
nilesh asked, I am paying pre-emi for home loan, I will be getting possession of my flat next year. Can I claim tax benefits for the amount which I have paid till date as pre-emi?
Mahesh Padmanabhan answers, Pre-emi interest has to be aggregated and claimed in five equal instalments after the completion of construction of the house property. However, such amount is within the Rs 1.5 lakh ceiling of interest deduction for self occupied house property.
nm asked, hi Is sbi magnum tax gain is good option for Investment?
Mahesh Padmanabhan answers, Yes it is a good tax fund and has declared a dividend of 110% with a record date of February 15, 2008.
deepakm asked, Dear Maheshji, my previous employer is a US based MNC, which had issued me some ESOPs. I made some dollars by selling the vested stocks and the proceeds were wired to my Indian account. My previous employer has already paid the FBT. What is the capital gains implication? I know that for stocks listed in India, tax on long term capital gains is nil. Does this apply to stocks listed on NASDAQ? Thanks for going through the post. Deepak.
Mahesh Padmanabhan answers, In your case as the company is based in US, FBT is not applicable to such company. However, conversely as the company shares are not listed here in India, even long term capital gains on sale of such shares is taxable at 20%.
Ashutosh asked, Hi, I recently took a home loan jointly with my wife for a property which is 50% in my name. Though I have already saved 1 lac and only feb and march loan installment would be calculated for this financial year even if I show the home loan in calculating tax. Pls advise is it wise to show these two installments or should I start showing from next financial year?
Mahesh Padmanabhan answers, In case of home loans, though the recovery is done as EMI, the initial EMIs carry bigger interest component and lower principal component. Hence you could benefit out of the interest paid which is outside your section 80C (Rs 1 Lakh) limit.
pankajwani asked, Dear Sir, I am a Salaried Person in Nashik. As per my companies information, tax amt I have to pay is Rs.13000. I will submit some medical bills of Rs 8000, Monthly Rent for my House of Rs 2500 *12, LTA Bill Of Rs 25000, 5000 Rs LIC Premium. Where should I invest in order to have a minimum amt of Tax,and how much?
Mahesh Padmanabhan answers, Aparently you have not made full utilisation of the section 80C limit of Rs 1 Lakh. Based on your financial ability you could invest a further sum upto Rs 95000 as you have made an investment of Rs 5000 in LIC.
deepika asked, SIR, IN CASE THE PROPERTY GIVEN FOR RENT AND SHOWING THE INTEREST INCOME IN THE TOTAL INCOME. WHAT IS THE MAXIMUM INTEREST AMOUNT CAN BE CLAIMED FOR HOUSING LOAN INTEREST?
Mahesh Padmanabhan answers, In case you have rented out your property then you would be eligible for a standard deduction of 30% of the net adjusted annual value and the entire interest paid / payable on the home loan.
shamdeshpande asked, You asked, dear sir, I have taken home loan of 1560000 for this year principal amt. is 33000 approx and 141000 interest amount. I want to ask you what i should invest in Life insurance. My yrly salary is 4,80,000 what amount do you recommend to invest in life insurance which insurance policy is good? do we trust lic only? should we trust max new york life as it is pvt company? waiting for your reply sir.
Mahesh Padmanabhan answers, You have not mentioned the current investment levels that you have achieved under section 80C. In case you have not done any investments then the maximum amount of investment eligible is Rs 1 lakh. When you are investing in insurance policies then you would need to understand if the plan being offered is based on your requirement, whether the cost is comparable with the other companies similar plans. As regards viability of private insurance companies, they are strictly regulated by IRDA guidelines and hence most companies are stable.
max asked, HI MAHESH, I AM REPAYING MY HOME LOAN AND WISH TO KNOW THAT WHAT IS THE ROLE OF PRINCIPAL AND INTEREST PAID TO THE BANK, IN GETTING TAX REBATE? THANKS.
Mahesh Padmanabhan answers, The amount paid as principal contribution to the financial institution is eligible for deduction under section 80C subject to a ceiling of Rs 1 Lakh and the interest paid/payable on such loan is separately eligible for deduction under the head income from house property. In case your house is self occupied then the ceiling limit for such interest deduction is Rs 1.5 lakhs.
SIMHA asked, HOW MUCH IS TAX PAYABLE FOR AN INTRADAY TRADER?
Mahesh Padmanabhan answers, In case of intraday trading the same would be treated as speculative transaction included under the head business income. The tax on such net gains would be at the slab rate applicable to you.
Akhilesh Kumar asked, Hi Mahesh, I took home loan in Nov '07 month and currently i am staying in rented house, Can i calim Home loan Interest and HRA both. What is the possibility to avail benifit of claiming both. whereas i have no income thru my purchased home and it is in another city.
Mahesh Padmanabhan answers, In case of a situation that requires you to stay in a rented premise due to reasons of employment, you would be eligible to avail of the benefits of both HRA deduction as well as the home loan repayment deduction.
sharmapawank.2008@rediffmail.com asked, Dear Mahesh, Hi, This is Pawan Sharma here again, wants to know from you, since i am a Salaried person, last year i have missed out on filing of my Income tax returns, although i had recd. from my Company's H.O. my copy of Form- 16, with all the taxes duly deducted from my Salary and deposited by my Company. Pls suggest, what is the way out now?
Mahesh Padmanabhan answers, In case of financial year 2006-07, you could file your returns without any penalty upto March 31, 2008. In case you fail to file within this time frame, you could still file your returns maximum upto March 31, 2009 but the same might be subjected to a penalty.
bunty asked, Will I gat rebate on personal loan taken this year in income tax?
Mahesh Padmanabhan answers, In case you use the personal loan for running your business or profession, you could claim the deduction for the interest paid. However, in case you are a salaried individual then no such deduction would be available.
Binny asked, Hi, Clubbing together I have I'm saving 100000.00 (EPF,HP Pri, LIC) and around 140000.00 towarsd my HL interest paied. This Year (2007-2008) I have invested on my dauther about 100000.00 ULIP (ING Vysya Bank. Can I claim IT rebate on this investment? Can you suggest the type of investment which I can opt to save IT? Thanks in advance.
Mahesh Padmanabhan answers, You seem to have maxed out your investment limit of Rs 1 Lakh and hence there is no avenue of tax savings here. You could also look at investing in mediclaim insurance which is outside the limits of section 80C and you could avail of a deduction of upto Rs 15000 (Rs 20000 in case of any senior citizen) of premium paid.
nee asked, Hi, i have a full time job and i earn part time too, do i need to file my returns as a salaried employee? I also had a job switch during this financial year.
Mahesh Padmanabhan answers, In your case in case the part time job fetches you a retainer fee then you would need to file a return as salary cum business return. You would need to take care of your current employer of the details of your salary income from the previous employer and your net business gains so that they recover appropriate tax at source from your salary.
Taxavoider asked, Can one pay the rent and also get the rental income from house in same city?
Mahesh Padmanabhan answers, yes you can.
Wednesday, February 20, 2008
7 super tax saving, fixed income plans
If you like the safety of a steady predictable income, every month, quarter or year, then there are a number of tax-saving instruments available for you. In fact, most of the tax-saving paper you could buy earlier was in this category.
For those who are uncomfortable with fluctuating incomes that market-linked instruments give, these are the products for you. Admittedly, returns from fixed income instruments averaging about 8 per cent a year, do not even compare with those from equity-related products that have returned over 40 per cent in the last few years. But then, the return you get is also market risk-free. At the end of every designated period, you know you will get a certain amount.
And that imparts stability to a portfolio. They are suitable for investors who need to cut down on the risk, such as people nearing retirement. For them, these could even form the mainstay of their portfolio. The choice you have is fairly wide. (See Table below: Fixed Income Tax Saving Options)
Vantage points
Three important things that one needs to look at before investing in any of the mentioned fixed income instruments are taxability of interest income, frequency of income, and tenure of investment. Even if the interest rate on the Senior Citizens' Savings Scheme (SCSS) is 9 per cent per annum, the income is fully taxable. This means that for someone in the highest tax-bracket, the actual return after-tax will be only 6.22 per cent.
PPF Calculator
Similarly, if your need is a regular monthly income, the instrument with the highest post-tax return, public provident fund, may not be the right choice. Only three of the fixed income instruments that qualify for relief under Section 80C give a regular stream of income. The SCSS pays interest quarterly, 5-year notified bank deposits half-yearly, and time deposits annually.So, it appears that there is nothing for anyone who is looking for steady monthly income. But that is not quite correct, although you would have to get a little active about your investments in that case.
Rather than putting in a lump sum when the taxman is almost knocking on your door at the end of the financial year, you can invest throughout the year. That, de facto, will give you steady monthly or quarterly returns as the instruments mature in a phased manner.So, you can invest and rest assured that your money is safe, although inflation can eat away at it quietly.
Fixed Income Tax Saving Options
Investment in all these instruments qualifies for Section 80C deduction and gives a guaranteed fixed income. Only endowment life insurance plans give bonus-based returns
Instrument available
Duration (yrs)
Returns (%)
Compounding
Taxability of income
Yield� (%)
Bank Fixed Deposit (Tax savers)
5
8.50�
Quarterly
Interest taxable
5.87
Employee Provident Fund
Till retirement
8.50�
Yearly
Tax-free
12.30
Life Insurance (Endowment)
10 and more
Around 6.00�
Yearly
Tax-free
8.68
National Savings Certificate
6
8.00
Half-yearly
Interest taxable
5.53
Post Office Time Deposits
5
7.50
Quarterly
Interest taxable
5.18
Public Provident Fund
15
8.00
Yearly
Tax-free
11.57
Senior Citizens' Savings Scheme
5
9.00
Quarterly
Interest taxable
6.22
� Applicable to 30% tax slab, including education cess � May vary from bank to bank � Fixed by govt each year � Internal rate of return based on bonuses
For those who are uncomfortable with fluctuating incomes that market-linked instruments give, these are the products for you. Admittedly, returns from fixed income instruments averaging about 8 per cent a year, do not even compare with those from equity-related products that have returned over 40 per cent in the last few years. But then, the return you get is also market risk-free. At the end of every designated period, you know you will get a certain amount.
And that imparts stability to a portfolio. They are suitable for investors who need to cut down on the risk, such as people nearing retirement. For them, these could even form the mainstay of their portfolio. The choice you have is fairly wide. (See Table below: Fixed Income Tax Saving Options)
Vantage points
Three important things that one needs to look at before investing in any of the mentioned fixed income instruments are taxability of interest income, frequency of income, and tenure of investment. Even if the interest rate on the Senior Citizens' Savings Scheme (SCSS) is 9 per cent per annum, the income is fully taxable. This means that for someone in the highest tax-bracket, the actual return after-tax will be only 6.22 per cent.
PPF Calculator
Similarly, if your need is a regular monthly income, the instrument with the highest post-tax return, public provident fund, may not be the right choice. Only three of the fixed income instruments that qualify for relief under Section 80C give a regular stream of income. The SCSS pays interest quarterly, 5-year notified bank deposits half-yearly, and time deposits annually.So, it appears that there is nothing for anyone who is looking for steady monthly income. But that is not quite correct, although you would have to get a little active about your investments in that case.
Rather than putting in a lump sum when the taxman is almost knocking on your door at the end of the financial year, you can invest throughout the year. That, de facto, will give you steady monthly or quarterly returns as the instruments mature in a phased manner.So, you can invest and rest assured that your money is safe, although inflation can eat away at it quietly.
Fixed Income Tax Saving Options
Investment in all these instruments qualifies for Section 80C deduction and gives a guaranteed fixed income. Only endowment life insurance plans give bonus-based returns
Instrument available
Duration (yrs)
Returns (%)
Compounding
Taxability of income
Yield� (%)
Bank Fixed Deposit (Tax savers)
5
8.50�
Quarterly
Interest taxable
5.87
Employee Provident Fund
Till retirement
8.50�
Yearly
Tax-free
12.30
Life Insurance (Endowment)
10 and more
Around 6.00�
Yearly
Tax-free
8.68
National Savings Certificate
6
8.00
Half-yearly
Interest taxable
5.53
Post Office Time Deposits
5
7.50
Quarterly
Interest taxable
5.18
Public Provident Fund
15
8.00
Yearly
Tax-free
11.57
Senior Citizens' Savings Scheme
5
9.00
Quarterly
Interest taxable
6.22
� Applicable to 30% tax slab, including education cess � May vary from bank to bank � Fixed by govt each year � Internal rate of return based on bonuses
Don't get foxed by returns on your investments
Do you remember the price you paid to buy one kilo of onions in 2007? And do you know the price of the same one kilo of onions in 2008? If you find out that one kilo of onions in 2008 is costing you more than what you paid in 2007 then you can easily blame it on inflation.
While generally speaking inflation means a general rise in the level of prices the textbook definition says inflation reflects the situation where the demand for goods far exceeds the supply of goods.
In short, inflation reduces the effectiveness of money as the medium of exchange. High inflation means it becomes difficult to place a value to goods because the value of money is falling.
That is what you could buy for Rs 100 today you will have to pay Rs 103 for the same if inflation increases at the rate of 3 per cent. This might sound small right now but after certain years this is capable of eroding your capital.
Especially for retirees who have invested in fixed deposits or debt products which gave them yields (profit after tax) of about 15 per cent a few years back. Any increase in inflation reduces their yields to that extent.
Inflation does not only affect the purchasing power of your money but also reduces the effective rate of return on your investments.
Inflation pinches...
Now let's get straight to the point as to how it affects your investments. The end product of your investment will not have the same purchasing power as it holds today. But how do we arrive at that calculation.
There are lots of articles on inflation but very few explain how to calculate it. Hence, let us concentrate more on this as it is the main crux of this article. Also let us see its effect on your investments.
What you as investors need to calculate is the Real Rate of Return.
Normally investors look at the nominal rate of return. Nominal interest rate tells you how fast your investment grows. The real rate of return gives you the growth in the purchasing power, which is what should actually matter to you and me.
Let us take an example to understand this concept.
Say an investment is earning 8 per cent per year for you. If you have invested Rs 1,000 then at the end of the year you will have Rs 1,080. This means that your investment has grown by Rs 80 -- the interest earned at 8 per cent on your capital of Rs 1,000.
The real rate of return can be calculated using the formula below:
[(1+ Rate of Return) / (1+ Rate of Inflation)] - 1 (Read 1+ Rate of Return divided by 1 + Rate of Inflation less 1)
For example let us assume the rate of return at 8 per cent and the rate of inflation at 3 per cent.
Then the real rate of return will be [{(1+8 per cent) / (1+3 per cent)} � 1]* 100 = 4.85 per cent.
In the above example, though you have earned Rs 80 on an investment of Rs 1,000, at the end of the year your investment will actually be worth Rs 1048.50 only.
Thus, inflation not only erodes your interest but the principal amount too. This is without considering the effect of taxes. Unless your investment is in tax free instrument we have to take into account the tax implications. Hence, the return should not only be adjusted for inflation but also for taxes.
In the above example, the return is Rs 80 for one year. Taking 3 per cent as inflation the principal with interest is worth Rs 1,048.50 only in today's terms and not Rs 1,080 as expected.
If the interest earned is taxable then from Rs 80 earned you deduct the tax to be paid to reach at the actual return or yield or profit after tax.
Assuming you fall into the 30 per cent tax bracket, you end up paying Rs 24 as tax (Have not taken into account education and secondary education cess for simplicity purpose).
So from Rs 80 earned first you pay Rs 24 as tax which gets your interest down to Rs 56. Now your investment is worth Rs 1,056 on which you calculate inflation at 3 percent. It is then worth Rs 1,025 as of today which is only 2.5 per cent earned on your investment instead of the 8 per cent that investors normally believe.
Though the figures do sound depressing the actual impact on your portfolio depends on the type of your investment.
Equity
If you are investing in equities or equity oriented mutual funds, you may not have to worry about inflation.
Because in the long run the company's earnings increase at the same pace as that of inflation. The only hitch is, in times of high inflation the company's earnings might seem very attractive but inflation might be the real factor behind the good results.
Again, to get good earnings and to beat volatility an investment in equity is only advisable if you are in for a long term.
Debt
Fixed income investors (like investments in fixed deposits) are the hardest hit. Unlike in the past in today's time debt investment do not yield more than 8 to 9 per cent. If you take inflation into account then the real rate of return falls considerably.
The interests earned from most of the debt products are taxable. From the above example the post tax and inflation-adjusted return of 8 per cent gives a return of 2.5 per cent only.
Gold
You might be wondering why I have mentioned gold. India has the highest consumption of gold globally. Initially or in fact even today investors buy gold to beat inflation. Gone are the days of 1970s or 80s when prices of gold would respond to an increase in inflation.
With the relaxation in regulation since 1990 gold prices have now aligned with international prices and have trailed behind inflation.
That is the rate of increase in prices of gold is not equal to the rate of increase in inflation or the former increases at a slower rate than the latter.
Worries for the elderly
Inflation generally causes the maximum anxiety for retirees. While it is also not advisable to completely invest in equity It is always better to spread your investments.
You have to plan your investments to beat inflation. This can be done by calculating the Present Value of your investment.
Say your investment is going to yield you a return of Rs 10 lakhs at the end of 10 years. So what we need to find is what would be the worth of that Rs 10 lakh in today's time. With this you can also determine the extent of fall in the purchasing power of money. It helps you to determine if it would be enough to sustain your current life style.
Assuming the inflation rate to be 3 per cent the present value (PV) can be calculated as follows:
PV = Future Value * 1 / Rate of Inflation^ Number of Years
In the above example, the PV of Rs 10 lakhs would be Rs 10,00,000 * (1/3)^ 10 = Rs 7,44,094
This is useful especially when you are expecting the returns from your traditional insurance plans or any other products which gives you a lump sum return after a long time period.
Hence it is always advisable to start saving from a very young age. It does not have to be a significant amount. You can start with as low as Rs 100 per month and increase it as and when possible.
For long term goals you can opt for systematic investment plans (SIPs) in equity oriented mutual funds or if you can follow your investments in stock market then invest in blue chip companies. By investing in debt products it is difficult, though, to beat inflation but in the short term you cannot avoid them.
The effects of inflation is relatively less in short run as compared to the long run. For short term you can invest in debt products that help you beat inflation like investing in short term liquid funds or in fixed maturity plans rather then going for fixed deposits. Though every one knows about inflation what matters is how many of you actually take it into account while calculating your returns. Inflation plays an important part in deciding investments so do not forget this vital factor while deciding to invest.
Sheetal Mehta
Rediff
While generally speaking inflation means a general rise in the level of prices the textbook definition says inflation reflects the situation where the demand for goods far exceeds the supply of goods.
In short, inflation reduces the effectiveness of money as the medium of exchange. High inflation means it becomes difficult to place a value to goods because the value of money is falling.
That is what you could buy for Rs 100 today you will have to pay Rs 103 for the same if inflation increases at the rate of 3 per cent. This might sound small right now but after certain years this is capable of eroding your capital.
Especially for retirees who have invested in fixed deposits or debt products which gave them yields (profit after tax) of about 15 per cent a few years back. Any increase in inflation reduces their yields to that extent.
Inflation does not only affect the purchasing power of your money but also reduces the effective rate of return on your investments.
Inflation pinches...
Now let's get straight to the point as to how it affects your investments. The end product of your investment will not have the same purchasing power as it holds today. But how do we arrive at that calculation.
There are lots of articles on inflation but very few explain how to calculate it. Hence, let us concentrate more on this as it is the main crux of this article. Also let us see its effect on your investments.
What you as investors need to calculate is the Real Rate of Return.
Normally investors look at the nominal rate of return. Nominal interest rate tells you how fast your investment grows. The real rate of return gives you the growth in the purchasing power, which is what should actually matter to you and me.
Let us take an example to understand this concept.
Say an investment is earning 8 per cent per year for you. If you have invested Rs 1,000 then at the end of the year you will have Rs 1,080. This means that your investment has grown by Rs 80 -- the interest earned at 8 per cent on your capital of Rs 1,000.
The real rate of return can be calculated using the formula below:
[(1+ Rate of Return) / (1+ Rate of Inflation)] - 1 (Read 1+ Rate of Return divided by 1 + Rate of Inflation less 1)
For example let us assume the rate of return at 8 per cent and the rate of inflation at 3 per cent.
Then the real rate of return will be [{(1+8 per cent) / (1+3 per cent)} � 1]* 100 = 4.85 per cent.
In the above example, though you have earned Rs 80 on an investment of Rs 1,000, at the end of the year your investment will actually be worth Rs 1048.50 only.
Thus, inflation not only erodes your interest but the principal amount too. This is without considering the effect of taxes. Unless your investment is in tax free instrument we have to take into account the tax implications. Hence, the return should not only be adjusted for inflation but also for taxes.
In the above example, the return is Rs 80 for one year. Taking 3 per cent as inflation the principal with interest is worth Rs 1,048.50 only in today's terms and not Rs 1,080 as expected.
If the interest earned is taxable then from Rs 80 earned you deduct the tax to be paid to reach at the actual return or yield or profit after tax.
Assuming you fall into the 30 per cent tax bracket, you end up paying Rs 24 as tax (Have not taken into account education and secondary education cess for simplicity purpose).
So from Rs 80 earned first you pay Rs 24 as tax which gets your interest down to Rs 56. Now your investment is worth Rs 1,056 on which you calculate inflation at 3 percent. It is then worth Rs 1,025 as of today which is only 2.5 per cent earned on your investment instead of the 8 per cent that investors normally believe.
Though the figures do sound depressing the actual impact on your portfolio depends on the type of your investment.
Equity
If you are investing in equities or equity oriented mutual funds, you may not have to worry about inflation.
Because in the long run the company's earnings increase at the same pace as that of inflation. The only hitch is, in times of high inflation the company's earnings might seem very attractive but inflation might be the real factor behind the good results.
Again, to get good earnings and to beat volatility an investment in equity is only advisable if you are in for a long term.
Debt
Fixed income investors (like investments in fixed deposits) are the hardest hit. Unlike in the past in today's time debt investment do not yield more than 8 to 9 per cent. If you take inflation into account then the real rate of return falls considerably.
The interests earned from most of the debt products are taxable. From the above example the post tax and inflation-adjusted return of 8 per cent gives a return of 2.5 per cent only.
Gold
You might be wondering why I have mentioned gold. India has the highest consumption of gold globally. Initially or in fact even today investors buy gold to beat inflation. Gone are the days of 1970s or 80s when prices of gold would respond to an increase in inflation.
With the relaxation in regulation since 1990 gold prices have now aligned with international prices and have trailed behind inflation.
That is the rate of increase in prices of gold is not equal to the rate of increase in inflation or the former increases at a slower rate than the latter.
Worries for the elderly
Inflation generally causes the maximum anxiety for retirees. While it is also not advisable to completely invest in equity It is always better to spread your investments.
You have to plan your investments to beat inflation. This can be done by calculating the Present Value of your investment.
Say your investment is going to yield you a return of Rs 10 lakhs at the end of 10 years. So what we need to find is what would be the worth of that Rs 10 lakh in today's time. With this you can also determine the extent of fall in the purchasing power of money. It helps you to determine if it would be enough to sustain your current life style.
Assuming the inflation rate to be 3 per cent the present value (PV) can be calculated as follows:
PV = Future Value * 1 / Rate of Inflation^ Number of Years
In the above example, the PV of Rs 10 lakhs would be Rs 10,00,000 * (1/3)^ 10 = Rs 7,44,094
This is useful especially when you are expecting the returns from your traditional insurance plans or any other products which gives you a lump sum return after a long time period.
Hence it is always advisable to start saving from a very young age. It does not have to be a significant amount. You can start with as low as Rs 100 per month and increase it as and when possible.
For long term goals you can opt for systematic investment plans (SIPs) in equity oriented mutual funds or if you can follow your investments in stock market then invest in blue chip companies. By investing in debt products it is difficult, though, to beat inflation but in the short term you cannot avoid them.
The effects of inflation is relatively less in short run as compared to the long run. For short term you can invest in debt products that help you beat inflation like investing in short term liquid funds or in fixed maturity plans rather then going for fixed deposits. Though every one knows about inflation what matters is how many of you actually take it into account while calculating your returns. Inflation plays an important part in deciding investments so do not forget this vital factor while deciding to invest.
Sheetal Mehta
Rediff
MF investment is the best way to reduce your risks
The domestic equity market has been very volatile in the recent past. An average volatility of 1,000 points either side at the bourses has become an order of the day. Due to this, the net asset value (NAV) of mutual fund (MF) schemes too have been impacted as they are directly linked to the equity markets.
The volatile financial market has compelled retail investors to chalk out their investment strategies properly. And, they have been sending several questions to this website on MF industry and the financial market.
FAQs
Q. I want to invest in mutual funds. Please give me a brief knowledge about them.
A. A MF is a trust that pools the savings of a number of investors who share a common financial goal.
The money thus collected is then invested in the capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.
Thus, a MF is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Currently, in which scheme should I invest? My budget is Rs 4,000 per month.
With a budget of Rs 4,000 per month, you can invest wisely and the best way to do so is investing through a systematic investment plans (SIP). You can have couple of SIPs with allocations to mid-cap funds and the flexi-cap funds. If you are looking for tax planning then allocations can also be made to equity linked saving schemes, ELSS.
Is a unit linked insurance plan (ULIP) better than ELSS (close ended) scheme?
Investment in ULIPs and ELSS funds has to be viewed differently, though the products look comparable. In terms of returns, ELSS funds would always outperform the ULIPs due to low fund administrative and other charges.
Secondly, ULIPs also charges for the life cover associated with it.
The general opinion is that investing in an SIP on a long-term basis is better.
Q. Could I set a time frame for SIPs, say 20 years on a compounding basis?
A. Best results from SIPs are visible only in the long-term, though the definition of long-term may vary from people to people. I believe one should look at allocating funds towards SIP for minimum of 5 years.
Q. What is the minimum amount to start investing in SIP?
A. To begin with a Rs 1,500 SIP is a very good idea. SIPs are the best way to invest for long-term wealth creation.
Q. I am 28-year-old and earn Rs 45,000 month. What should be my monthly investment in MFs through SIP and what are the good MFs in which I can invest?
A. Your SIP allocation should be at least Rs 5,000 per month. You can look at mid-cap and flexi-cap funds to start off your investments and later move to thematic funds. If you are looking at tax planning then make some allocation to ELSS funds as well.
A. I want to invest Rs 15,000 per month in MFs. Please inform which are the best performing in terms of providing returns and tax saving?
Q. Returns from MFs are directly linked to the equity markets so it would be very difficult to put a number to returns in term sof percentage. In the long run, markets have given returns in the range of 15 per cent to 18 per cent.
For tax saving, one needs to invest in special category of MFs termed as ELSS. These schemes have a lock in of three years.
Q. Will investing in an infrastructure fund be profitable in the long run?
A. Investing in equity markets with a long term view is always good. And investing in companies participating in India's infrastructure boom is even better. India still has a long way to go in infrastructure development and as current order books of the infrastructure companies suggest they are in for huge rise in scale of operations.
Q. What is a new fund offer (NFO)? How does it differ from equity shares?
A. New fund offer (NFO) or investments in MFs are quite different than investing in equity shares. Basically, MFs pool money of several investors through a professionally managed asset management company. MFs are the best tool tomitigate your risks associated with investments in equity markets and at the same time enjoy the upside of equities.
Mukul K Gupta, CEO, Birla Sun Life Mutual Fund
The volatile financial market has compelled retail investors to chalk out their investment strategies properly. And, they have been sending several questions to this website on MF industry and the financial market.
FAQs
Q. I want to invest in mutual funds. Please give me a brief knowledge about them.
A. A MF is a trust that pools the savings of a number of investors who share a common financial goal.
The money thus collected is then invested in the capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.
Thus, a MF is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Currently, in which scheme should I invest? My budget is Rs 4,000 per month.
With a budget of Rs 4,000 per month, you can invest wisely and the best way to do so is investing through a systematic investment plans (SIP). You can have couple of SIPs with allocations to mid-cap funds and the flexi-cap funds. If you are looking for tax planning then allocations can also be made to equity linked saving schemes, ELSS.
Is a unit linked insurance plan (ULIP) better than ELSS (close ended) scheme?
Investment in ULIPs and ELSS funds has to be viewed differently, though the products look comparable. In terms of returns, ELSS funds would always outperform the ULIPs due to low fund administrative and other charges.
Secondly, ULIPs also charges for the life cover associated with it.
The general opinion is that investing in an SIP on a long-term basis is better.
Q. Could I set a time frame for SIPs, say 20 years on a compounding basis?
A. Best results from SIPs are visible only in the long-term, though the definition of long-term may vary from people to people. I believe one should look at allocating funds towards SIP for minimum of 5 years.
Q. What is the minimum amount to start investing in SIP?
A. To begin with a Rs 1,500 SIP is a very good idea. SIPs are the best way to invest for long-term wealth creation.
Q. I am 28-year-old and earn Rs 45,000 month. What should be my monthly investment in MFs through SIP and what are the good MFs in which I can invest?
A. Your SIP allocation should be at least Rs 5,000 per month. You can look at mid-cap and flexi-cap funds to start off your investments and later move to thematic funds. If you are looking at tax planning then make some allocation to ELSS funds as well.
A. I want to invest Rs 15,000 per month in MFs. Please inform which are the best performing in terms of providing returns and tax saving?
Q. Returns from MFs are directly linked to the equity markets so it would be very difficult to put a number to returns in term sof percentage. In the long run, markets have given returns in the range of 15 per cent to 18 per cent.
For tax saving, one needs to invest in special category of MFs termed as ELSS. These schemes have a lock in of three years.
Q. Will investing in an infrastructure fund be profitable in the long run?
A. Investing in equity markets with a long term view is always good. And investing in companies participating in India's infrastructure boom is even better. India still has a long way to go in infrastructure development and as current order books of the infrastructure companies suggest they are in for huge rise in scale of operations.
Q. What is a new fund offer (NFO)? How does it differ from equity shares?
A. New fund offer (NFO) or investments in MFs are quite different than investing in equity shares. Basically, MFs pool money of several investors through a professionally managed asset management company. MFs are the best tool tomitigate your risks associated with investments in equity markets and at the same time enjoy the upside of equities.
Mukul K Gupta, CEO, Birla Sun Life Mutual Fund
Things to know before investing in Tax Saving Funds
Equity Linked Saving Schemes (ELSS) or tax saving mutual fund schemes as they are otherwise known as, are a popular tax saving investment. The major reason for this popularity has been the introduction of Section 80C of the Income Tax Act, from April 1, 2005. This section allows the investor to invest up to Rs 1 lakh in various investment products and get a tax deduction for the same. The list of investment products also includes ELSS. Earlier, till March 31, 2005, investment in these tax saving schemes only allowed for a tax deduction of up to Rs 10,000 under Section 88.
However, that being said, there are various things an investor needs to keep in mind before deciding to jump into an ELSS investment.
1. Section 80 C spoils you for choice: As has been mentioned above, ELSS is not the only investment avenue that comes under Section 80C. Other investments such as Life Insurance, Public Provident Fund (PPF), National Savings Certificates (NSCs), Senior Citizen Savings Scheme (SCSS), Post Office Monthly Income Scheme (POMIS) etc also offer a similar tax benefit. Then there are mandatory payments such as your PF, tuition fees of children and even housing loan repayments that are covered under Sec. 80C. Let us say an individual contributes Rs 40,000 to the PPF every year and Rs 30,000 is his provident fund deduction. So for him it makes sense to invest only the remaining Rs 30,000 [Rs 1 lakh – (Rs 40,000 + Rs 30,000) = Rs 30,000] for tax deduction under Sec. 80C. This is primarily because if he invests more than Rs 30,000, he will cross the overall level of Rs 1 lakh and the deduction is limited to Rs 1 lakh.
2. Lock-in of three years: Like all investment avenues under Section 80C, ELSS funds also involve a certain lock in. In this case the lock in is for three years. Hence an ELSS investment cannot be withdrawn for a period of three years from the date of investment. This lock-in is like a double-edged sword. On the one hand, it fosters long-term investment, which is very essential while investing in equity. And on the other, if you find yourself in a situation where you require funds in an emergency, you will have to resort to other means / investments --- the ELSS fund will be closed to you for three years. Withdrawals are just not allowed, not even with a penalty.
3. Tax saving schemes carry the risk of investing in equity: ELSS funds are promoted as good investments as they enable the fund manager to take long-term calls on account of the enforced three year lock-in. In other words, the fund manager doesn’t have to worry about keeping funds liquid to cater to daily redemptions that can happen in normal open ended schemes. However, it has to be kept in mind that ELSS funds for all practical purposes are similar to normal diversified equity mutual fund schemes. The funds in these schemes are invested in the stock market. Hence the returns these schemes generate depend on the kind of stocks the fund manager invests in and the overall state of the market. So if an investor invests in a tax saving scheme, and three years down the line, when the lock-in ends and the markets are not doing well, his total returns will take a beating. Yes, this has not happened in the past as the Indian market is in a lateral bull phase (barring the occasional hiccups). However, the potential of capital loss is very much there and it has to be considered. So investors need to consider their risk taking ability in terms of age and responsibility before deciding on investing in ELSS.
The bottom line? Whether ELSS or any other investment, do not invest because the investment offers a tax benefit. Ask yourself whether you would have invested in the particular instrument per se --- the tax benefit should be the incidental icing on the cake. This will ensure that all your investments will be as per your risk profile and goal oriented and not only on for the temporary purpose of saving tax.
moneycontrol
7 important reasons to invest in SIPs
Fact No. 1: Over a long term horizon, equity investments have given returns which far exceed those from the debt based instruments. They are probably the only investment option, which can build large wealth.
Fact No. 2: In short term, equities exhibit very sharp volatilities, which many of us find difficult to stomach.
Fact No. 3: Equities carry lot of risk even to the extent of loosing ones entire corpus.
Fact No. 4: Investment in equities require one to be in constant touch with the market.
Fact No. 5: Equity investment requires a lot of research.
Fact No. 6: Buying good scrips require one to invest fairly large amounts.
Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming.
1. It’s an expert’s field – Let’s leave it to themManagement of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative.
2. Putting eggs in different basketsAnother advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.
3. It’s all transparent & well regulatedThe Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds.
4. Market timing becomes irrelevantOne of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing.
5. Does not strain our day-to-day financesMutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
6. Reduces the average cost In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy.
7. Helps to fulfill our dreamsThe investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.
Sanjay Matai
moneycontrol.com
Fact No. 2: In short term, equities exhibit very sharp volatilities, which many of us find difficult to stomach.
Fact No. 3: Equities carry lot of risk even to the extent of loosing ones entire corpus.
Fact No. 4: Investment in equities require one to be in constant touch with the market.
Fact No. 5: Equity investment requires a lot of research.
Fact No. 6: Buying good scrips require one to invest fairly large amounts.
Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming.
1. It’s an expert’s field – Let’s leave it to themManagement of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative.
2. Putting eggs in different basketsAnother advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.
3. It’s all transparent & well regulatedThe Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds.
4. Market timing becomes irrelevantOne of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing.
5. Does not strain our day-to-day financesMutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
6. Reduces the average cost In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy.
7. Helps to fulfill our dreamsThe investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.
Sanjay Matai
moneycontrol.com
Monday, December 10, 2007
Why is the stockmarket booming?
December 10, 2007
So what is causing the Indian stockmarkets to rise at such a frenetic pace?
Even though there is consensus over the reasons for this unprecedented Bull Run on the Indian stockmarkets, no one is quite sure why it is happening at the pace at which it is happening.
However, the reasons for the Sensex's stunning rise are many:
1. Major foreign and Indian investors are pouring money by the buckets into the Indian stockmarkets because of the attractive returns they are getting from here. The reason why money has taken flight from some major foreign markets is because growth levels in those economies has stagnated for a while now, making them less attractive. Almost 85 per cent of the foreign investment into India in 2007 has been in the form of equity -? or stock market -- investment.
2. Stellar corporate results from Indian companies have made domestic and foreign institutional investors salivate. And as they buy more of these companies' shares, the entire market soars. Corporate India has a positive growth outlook which is rubbing off on their stocks too.
3. India's market reforms, better regulation, more opening up of the economy and a strong judiciary have added to the market boom.
4. Inflation has been contained, which will add to the nation's growth, making it a very alluring economy.
5. The country's political climate is very stable and there appear to be no threats to the country from any quarter in the near term. And despite the worries of rising oil prices, possible natural calamities or a weak monsoon or even an economic meltdown in the US, India remains a strong economy with all its fundamentals in a robust state.
6. In the long term, Indian markets are being considered as one of the most attractive in the world.
7. The Reserve Bank of India's monetary policy has kept the economy stable and the interest rates are at levels that foreign investors find very appealing.
8. With the US Federal Reserve cutting interest rates in America, investors are looking at markets like India to earn more on their assets.
9. Rising Asian markets, including Hong Kong and Korea, are also helping lift the entire region's markets.
10. Also, the Indian currency -- the rupee -- is strengthening against the US dollar leading to dizzying growth of its stockmarket.
11. And finally, there is this widespread perception that India is the place to be and that is what the global investor is adhering to.
from rediff.com
So what is causing the Indian stockmarkets to rise at such a frenetic pace?
Even though there is consensus over the reasons for this unprecedented Bull Run on the Indian stockmarkets, no one is quite sure why it is happening at the pace at which it is happening.
However, the reasons for the Sensex's stunning rise are many:
1. Major foreign and Indian investors are pouring money by the buckets into the Indian stockmarkets because of the attractive returns they are getting from here. The reason why money has taken flight from some major foreign markets is because growth levels in those economies has stagnated for a while now, making them less attractive. Almost 85 per cent of the foreign investment into India in 2007 has been in the form of equity -? or stock market -- investment.
2. Stellar corporate results from Indian companies have made domestic and foreign institutional investors salivate. And as they buy more of these companies' shares, the entire market soars. Corporate India has a positive growth outlook which is rubbing off on their stocks too.
3. India's market reforms, better regulation, more opening up of the economy and a strong judiciary have added to the market boom.
4. Inflation has been contained, which will add to the nation's growth, making it a very alluring economy.
5. The country's political climate is very stable and there appear to be no threats to the country from any quarter in the near term. And despite the worries of rising oil prices, possible natural calamities or a weak monsoon or even an economic meltdown in the US, India remains a strong economy with all its fundamentals in a robust state.
6. In the long term, Indian markets are being considered as one of the most attractive in the world.
7. The Reserve Bank of India's monetary policy has kept the economy stable and the interest rates are at levels that foreign investors find very appealing.
8. With the US Federal Reserve cutting interest rates in America, investors are looking at markets like India to earn more on their assets.
9. Rising Asian markets, including Hong Kong and Korea, are also helping lift the entire region's markets.
10. Also, the Indian currency -- the rupee -- is strengthening against the US dollar leading to dizzying growth of its stockmarket.
11. And finally, there is this widespread perception that India is the place to be and that is what the global investor is adhering to.
from rediff.com
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