Smart investing through better tax planning

A penny saved is a penny earned. Nothing can be truer than this when it comes to smart investing through better tax planning. Many investors look at only the gross returns while evaluating the merit of a financial investment.

The tax efficiency of financial investments can vary widely, typically from no tax to 30% tax. So an instrument, let's say PPF, which pays 8.6% tax free, is better than a fixed deposit that pays 10% p.a. but with a tax rate of 30%.

Let us look at a simple example of smart investing. If a person needs, let's say, 50,000 after one year from his investment income, he has two choices. One, he can invest in a fixed deposit of 5 lack that can yield a return of 50,000.

However, the interest earned would be taxed and the net in hand may be only 35,000. The other option is to invest only 45,000 in a fixed deposit that can grow to 50,000. In the second scenario the tax will reduce to just 1,500. So while the risk of both the investments was the same, one investment provides higher return than the other considering the tax paid.

We can look at tax planning at three different levels - Tax planning at the source; Choosing the right tax saving instruments; and overall investment planning.

The tax planning options at the source of income are fairly limited and more so for people in the higher income categories. The only significant tax saving option is those under Section 80C that includes investments like insurance, PF, PPF, ELSS etc.

Choosing the right tax saving instrument is important here. PPF provides tax-free income and is now tied to the 10-year government security returns and it will now vary with the market rate of interest. Equity-linked saving schemes can also be an excellent choice for moderate risk investors as they are the only instruments that have the potential to give higher returns.

When it comes to income from investments, tax planning can really make a difference in the overall returns generated.

The investment income is taxed primarily under three broad heads - interest income, dividend income and capital gains income. Interest income is taxable at the highest applicable tax rate, also called the marginal tax rate. Investors can make such investments efficient by investing in instruments that provide tax-free interest.

Dividend income is derived from investment in shares or mutual fund units and is tax free in the hands of investors. Even fixed income mutual funds have the benefit of tax-free dividend income after a dividend distribution tax of 12.5% for individuals. Therefore, fixed income funds provide an efficient way to plan investments and score over traditional fixed deposits because of the tax efficiency.

The third form of investment income is capital gains that are further segregated into short-term and long-term gains. Long-term gains have a concessional rate of tax and also provide the benefit of adjustment for inflation. In case of equity investments there is zero long-term capital gains tax.

There are many ways in which one can plan long-term gains tax. In case of house property, buying another property whose value is equivalent to the extent of capital gains can save complete tax. A similar benefit is available if the capital gains are invested in a capital gains account of a nationalised bank

Article by Raghvendra Nath 

Delisting nightmare haunts MNCs, most may have to use accumulated profit of 10 years

Delisting shares from Indian bourses could cost multinational companies, or MNCs, dear, as some of them may have to shell out more than 10 years of their accumulated net profits to delist their Indian entities.

The global parents of some of the Indian entities may find the fund set aside for delisting inadequate as their share prices soar on hopes of delisting, making it unviable for some firms to delist, said industry experts. As per regulations, the global parents will have to reduce promoter stake to below 75% if they fail to delist their Indian units before June 3, 2013.

"Most of these delisting candidates have surged once again, trading at exorbitant valuations. This may make delisting expensive even for MNCs with deep pockets," said Chokkalingam G, executive director & chief investment officer at Centrum Wealth Managers.

For instance, if the global promoter of Blue Dart Express decides to delist the stock, they will need to shell out nearlyRs856 crore based on Monday's closing price. The amount is huge when compared with its cumulative net profit of Rs610 crore in the past 10 years.

Oracle Financial Services, whose accumulated 10 years' net profit stood at Rs4,344 crore, will have to shell out an almost equivalent amount to delist at current market prices. "A failed delisting offer may impact the shareholders," said Akil Hirani, managing partner, Majmudar & Co. Afailure to delist can result in the stock price of the company coming down in the same manner as it could have caused it to rise in case of a successful delisting, he said.

Experts said several foreign companies are being prompted to delist due to increasing compliance requirements and rising investor activism, which are interferring with their day-to-day operations. "Most of them also want to delist to stay away from the huge market glare as we are seeing lot of investor activism picking up," said Chokkalingam.

He said the control over huge reserves that these listed Indian subsidiaries command may also be attracting some promoters. However, as most of these companies have not formally initiated delisting, once reverse book-building starts, the final price could be at a significant premium to the prices at which these companies are trading at present.

For instance, in case of Alfa Laval , while the parent gave a floor price ofRs2,045 and also indicated a price of Rs2,850, the price that was determined based on the reverse book-building stood at around Rs3,850, as per BSE, which is almost 35% higher than the company expected

The Swedish company will have to pay around Rs785 crore to delist the shares, which is equivalent to its past 10 years' net profit of Rs753 crore. Industry experts feel that the prolonged run-up in share prices is leading to some kind of bubble.

"Expectations have gone up after Atlas Copco's delisting. After the huge price discovery of Alfa Laval, stock prices of most of the delisting candidates have started surging in anticipation that promoters will be willing to delist at any price," said Vishal Jajoo, senior analyst at Nirmal Bang Securities .

Despite the market fall, these delisting candidates continue to trade firm and in many cases continue to rise, resulting in the risk-reward ratio turning against the minority shareholders.

"Beyond a certain price, many promoters will start looking at alternative methods to meet the compliance," said Jajoo. "Only the delisting story without any exemplary financial performance  may not keep the stock price buoyant, beyond an extent," he added.


Source : ET

$500-billion stashed away abroad by Indians: CBI

A whopping $500 billion or Rs 24.50-lakh crore has been stashed away by Indians in foreign tax havens, according to the Central Bureau of Investigation (CBI).

The first-time estimate was made by the CBI Director, Mr A.P. Singh, during the inauguration of First Interpol Global Programme on Anti-Corruption and Asset Recovery.

The disclosure comes at a time when the Finance Ministry is considering introducing an amnesty scheme to bring back black-money. The Finance Ministry has commissioned a study on unaccounted income and wealth held within and outside the country. The study group is also expected to suggest methods to tax and repatriate this money.

“India, in particular, has suffered from the flow of illegal funds to tax havens such as Mauritius, Switzerland, Lichtenstein, British Virgin Islands, etc.,” Mr Singh said in his speech.

 

‘Political will' lacking

He blamed a lack of “political will” in such tax haven countries to part with information which can help trace such assets, adding that 53 per cent of the countries identified as “least corrupt” by corruption watchdog Transparency International are also tax havens where “most” of the corrupt money ends up.

The World Bank estimates the cross-border flow of money from criminal activities, including corruption and tax evasion, to be around $1.5 trillion annually. Around $40 billion of this flow is on account of bribes paid to public officials in developing countries, Mr Singh disclosed.

The CBI chief did not mention any basis for his estimate, but he did say that development of new methods of financial flows and communication technologies have made it easier for the corrupt to conceal and stash away stolen wealth.

 

Complex process

On the other hand, differences in legal systems, high costs in coordinating investigations, inadequate international cooperation and bank secrecy laws have made the task difficult for anti-corruption authorities, he added.

Quoting the World Bank estimates, Mr Singh said that only $5 billion in stolen assets have been repatriated over the past 15 years. That leaves a wide gap between the outflow from the developing countries and its subsequent repatriation.

“Managing the asset recovery investigation is complex, time consuming, costly and, most importantly, requires expertise and political will. There are many obstacles to asset recovery. Not only is it a specialised legal process filled with delays and uncertainty, but there are also language barriers and a lack of trust when working with other countries.

 

Moody's cuts ratings of Italy, Spain, Portugal; warns France, Britain

Moody's has chopped the debt ratings of Italy, Spain and Portugal and put France, Britain and Austria on warning, saying they were increasingly vulnerable to the eurozone crisis.

Casting doubt over whether Europe's leaders were doing enough to reverse the downslide of the region's economy and financial sector, Moody's also cut its ratings for Slovenia, Slovakia and Malta yesterday.

The ratings agency cited the region's weak economic prospects as threatening "the implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness."

Market confidence "is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks," it said.

Moody's also questioned whether Europe was pulling together adequate resources to deal with the crisis.

"To a varying degree, these factors are constraining the creditworthiness of all European sovereigns and exacerbating the susceptibility of a number of sovereigns to particular financial and macroeconomic exposures," it noted.

Austria, France and Britain all retained the top AAA rating but were put on negative outlooks, a warning that if conditions worsen they could be hit with full downgrades.

Italy was cut one notch to A3 from A2; Spain two notches to A3 from A1, and Portugal one step to Ba3 from Ba2.

Slovakia and Slovenia both went down one step to A2, while Malta moved one step to A3.

The downgrades came a day after Greece and Europe appeared to pass a major hurdle when the Greek parliament agreed to a tough austerity package despite rioting in the streets of Athens and other cities.

That appeared to open the way for a comprehensive debt restructuring and second massive bailout of the country, avoiding a default that could have sparked more turmoil in the eurozone.

"The negative outlooks reflect the presence of a number of specific credit pressures that would exacerbate the susceptibility of these sovereigns' balance sheets, and of their ongoing austerity programs, to any further deterioration in European economic conditions and financial landscape," it said.

Moody's said it had limited the magnitude of the rating cuts due to the "European authorities' commitment to preserving the monetary union and implementing whatever reforms are needed to restore market confidence."

Source : ET

Four sales pitches by insurance agents that you mustn't fall for

The first three months of every year is very lucrative for most insurance agents. This is the period when they manage to lure financially novice tax payers into buying various insurance options that can also pass off as investment and make their moolah.

As most of the salaried people start looking for common quick-fix tax solutions during this period, insurance agents manage to push products that are beyond the comprehension level of most investors, and pocket hefty commissions and meet their business targets. There are some typical sales pitches which are necessarily factual and definitely not in your best interest. We list some common ones here.


Pay premium only for five years

Beware of the agent if he/she tries to sell you a Unit-Linked Insurance Plan (Ulip) as a five-year product. Factually, there is nothing wrong per se with this sales pitch, but you will not mostly make any or meaningful gains if you quit the product after five years. "It becomes easier to tap a customer for a short-term commitment such as five years.

Hence Ulips are very popular among customers than a simple term plan," Also misselling takes place when these agents promise stupendous returns within a span of five years.

"Ulips are highly rewarding only if an investor stays invested for 15 years. The front loading is so high in case of Ulips that it takes almost five years for the customer to recover the loss and it takes another 10 years to earn a decent return," . "Even an agent gets maximum commission in this period.

Hence, there have been instances where agents have convinced customers to sign up for another Ulip after three years, citing reasons that they would be rewarded by opting for multiple Ulips than continuing with one for a long period of time," says Suresh Sadagopan, certified financial planner with Ladder 7 Financial Services.


Buy Ulips instead of ELSS. It's like an MF with insurance

Does this sentence ring a bell? Anytime you walked into a bank to do a KYC or buy a tax-saving mutual fund , chances are they must have tried to sell Ulips as an attractive combination of investment bundled with insurance. "I have come across instances where Ulips are sold as unit-linked investment (not insurance) plans. It is pitched as an ELSS with an insurance cover .

For a financially non-savvy customer, this just does not occur as an insurance plan," .What an investor doesn't realise is although a Ulip works very similar to a mutual fund, it is strictly a short-term product. If an investor is looking for a 5-year investment vehicle, he/she is better off investing in a mutual fund.

Money back policy offers insurance & return on premium

This is a fact but is still not a good enough reason to buy traditional insurance policies.

"Investors end up buying an expensive recurring product like an insurance scheme thinking that much amount will be saved from the tax perspective every year.

But this investment may not be in line with the individual's goal and the financial portfolio,". The problem with endowment policies is that a policyholder has no idea where the money is being parked.

They are not transparent compared to Ulips, which clearly give a bifurcation of all the expenses and investment corpus from the premium amount.

There are a number of such products in the system where the investor is unaware of the investment strategy of the product. But what works against an endowment plan is the long tenure of premium payments.

 

Don't buy term cover, you won't earning Anything in return

This pitch will find many takers because of which the concept of term cover is yet to take off. "Today, there are several takers for term products because of their fine pricing. At the same time, there are several policyholders who feel that term products don't offer any return on premium," .

Insurance is primarily a tool for protection. It covers the possibility of an eventuality which could land your family in a financial mess. Considering that misfortune, this is a small price a policyholder has to pay for a term cover. On an average, you can get a pure online term cover of 50 lakh at around 8,000 per annum. Even if you take on a huge liability such as a home loan or a car loan, take a term cover of the loan amount, which will pay the dues if something happens to you.

Whenever you want to buy an insurance product, you have to be clear about your objective. "When it comes to last-minute tax planning, avoid buying long-term products which have recurring payments. Go for products with one-time investment amount such as NSC, tax saver FDs, ELSS, etc,"

 

 

 

 

 

Source :ET

You can save additional tax through NPS

Many taxpayers feel that the Rs 1.2 lakh tax-saving investment limit under Section 80C and 80CCF is too low. However, a handful of employers, including Bangalore-based Wipro Technologies, is allowing its staff to claim more tax deductions by investing under the newly introduced Section 80CCD(2).

Under the new section, up to 10% of an employee's basic salary put in the New Pension Scheme is tax deductible. This means a person with an annual basic salary of Rs 5 lakh (nearly Rs 40,000 a month) can get an additional deduction of Rs 50,000 if his employer puts this money on his behalf in the NPS. Assuming that he will have other income (bonus, special allowance, interest, etc), which puts him in the 30% tax bracket, the NPS investment under Section 80CCD(2) will reduce his tax liability by almost Rs 15,000.

This clause was introduced in the previous budget by amending the rules regarding the deduction of contribution made on behalf of the employees. Till then, only the contribution towards a recognised provident fund, approved superannuation fund or gratuity fund were allowed as a business expense.

The only glitch with the new clause: this is one investment that a taxpayer can't make on his own. It is the employer who needs to deposit the amount on his behalf. For this, the company has to be convinced to include the benefit in its emolument package.

Despite the enormous tax-saving potential of the provision, very few corporate houses have offered the benefit to their employees. "There is little awareness about this clause. Not many people believe that their employees can save more tax through this avenue," says Sudhir Kaushik, co-founder and CFO of tax filing portal Taxspanner.com. Kaushik and his team, who advise companies and individuals on tax-efficient strategies, are trying to convince companies to avail of this opportunity. HCL Tech is another large corporate house that is contemplating the inclusion of Section 80CCD(2) investment in its pay structure.

If your company does not offer you this benefit yet, it's time to ask for it in your forthcoming appraisal. In the highest 30% tax bracket, it will enhance your increment by 3% of your basic salary. All your employer needs to do is rejig the salary structure by reducing any of the fully taxable emoluments (special allowance, performance-linked bonus, etc) and adding this new head in your total CTC.

This provision is also likely to inject new life into the moribund NPS. Till now, the scheme has received a less than lukewarm response from voluntary investors, largely because distributors are not willing to sell the low-commission pension product. Last month, the Pension Fund Regulatory and Development Authority revised the charges upwards to make the scheme more lucrative for distributors. So, the first-time subscribers will now be charged Rs 100 for registration and a transaction charge of 0.25% of the initial contribution. Subsequent transactions will also be charged at 0.25% of the amount invested.

The NPS is open to anyone between 18 and 55 years. Just as the PPF  requires a minimum investment of Rs 500 a year, the tier-I NPS account mandates a minimum annual contribution of Rs 6,000. However, unlike the PPF balance, this amount cannot be withdrawn from the NPS till the age of 60. Even at that age, the investor will have to use at least 40% of the corpus to purchase a life annuity, while the balance can be withdrawn.

The tax benefits under Section 80C and 80CCD(2) are available only on investments in tier-I accounts. However, if you have a tier-I account, you can also open a tier-II NPS account. Contributions to the latter can be withdrawn without any restriction


Source: ET

2G auction money may ease fiscal deficit pressure on govt

Revenues could be about Rs 80,000 crore if the rates are in line with 3G auction prices

The Supreme Court’s judgment cancelling 2G telecom licences is set to ease the government’s fiscal deficit pressure.

With the apex court ordering auction, within four months, of the spectrum originally given to 122 licensees in 2008, the government is slated to garner about Rs 80,000 crore (at the prices paid last year for 3G spectrum). This should provide finance minister Pranab Mukherjee substantial comfort in fixing the fiscal target for 2012-13 lower than what had been expected.


At present, the government faces the challenge of meeting the Budget target of fiscal deficit not exceeding 4.6 per cent of the gross domestic product (GDP). With the growth outlook for 2012-13 sluggish, it has a difficult task in keeping the medium-term fiscal consolidation schedule on track (see chart).


Even if the government refunds Rs 10,000 crore to the companies that paid for the spectrum allotted in 2008, it should have about Rs 70,000 crore to spend.

The Telecom Regulatory Authority of India (Trai) has already started the process of auction of the 2G spectrum at issue, issuing a pre-consultation paper on this, to seek views of all stakeholders. It is to make new recommendations for grant of licence and allocation of spectrum in the 2G band in 22 service areas by auction, as was done for allocation of spectrum in the 3G band.

The final revenue that would accrue to the exchequer, however, would depend on telecom players’ appetite for spectrum and Trai’s recommendation

Last year, Trai had recommended fixing the price for 6.2 MHz of pan-Indian start-up 2G spectrum at Rs 10,972.45 crore, more than six times the cost of Rs 1,658 crore, at which it was allocated to those whose licences had been ordered to be cancelled by SC.

The government’s non-tax revenue had significantly exceeded the Budget Estimate of Rs 1,48,117 crore, to reach Rs 2,20,148 crore in the revised estimate for 2010-11, giving it leeway to keep the fiscal deficit target at 5.1 per cent. This was primarily due to the receipts, much higher than estimated, from the auction of the 3G and Broadband Wireless Access spectrum, which brought in Rs 1 lakh crore.

This gave the government enough confidence to project a 4.6 per cent cap on the deficit as target for 2011-12 and aim for maintaining the schedule suggested in the fiscal responsibility and budget management framework in 2012-13 and 2013-14. However, a ballooning oil subsidy bill, a likely shortfall in the direct tax collection target of Rs 5.33 lakh crore by Rs 20,000 crore, and sluggish disinvestment had come as a dampener to its plan for the current financial year.