Do you know about your HRA exemption.?.

How to get benefit of HRA in Tax Planning..?

For a salaried individual, HRA (House Rent Allowance) is important part of the salary slip. In our taxation rule, there are 3 type of tax deduction. First is the amount paid as a rent, the second is amount paid as principal amount of home loan and last is interest paid on home loan. Most of time, they don’t know how to calculate the exempted amount of HRA. For this they totally depend on their office accountant or friends. I am getting many friends and client call about HRA calculation. So today, I am going to discuss in detail about the HRA.

There are many doubts in the people’s mind about home loan and home rent exemption. I am taking one by one those doubts. The most common doubt that is HRA exemption applicable for both salaried individuals and self- employed. The answer is HRA benefit is not available to self-employed professional, as they don’t earn salary but they can claim benefits of house rent expenses according under section 80GG with subject to certain conditions.

The other most asked query is can anyone take both HRA and home loan benefit. The answer is yes. If you are paying rent, you can claim HRA benefit and if you are earning rent income from in the name of your property you can also claim the interest benefit. There is no direct connection between HRA and home loan tax benefit.

Some common situation faced by salaried person:

·         If the person live in own house then he cannot claim HR exemption. If he is paying home loan and paying EMI then he can claim tax benefit on principal mount and interest paid portion.

·         If the person has bought under construction property and staying in rented home in the same city then he can avail tax benefit of HRA and principal paid but cannot get benefit of interest till construction completed. Once construction complete, he can claim all interest paid during construction in 5 equal installment in the next 5 year from complete construction year.

·         If the person has bought home in other city and stayed in rent in the other city then he can claim HRA exemption and will get benefit of paying home loan of principal amount and interest paid.

·         If the person is paying home loan for home which is ready for occupation but not residing in it due to some reason like work place far away then he can claim tax exemption on HRA and tax benefit of home loan including principal and interest. You have to still pay tax on notional rent income even if your home remains vacant during the year. If you are getting rent then the rent income will add in income from other sources and taxable according to specific rule.

How to calculate the HRA exemption amount:

Lets take an example to understand how to calculate HRA exemption amount. Mr. A gets basic salary Rs 50,000 and HRA Rs 30,000 per month. He resides in mumbai and pays rent Rs 25,000 per month. Calculate the tax exemption amount of HRA?

There are 3 conditions and the least amount of these 3 is eligible for HRA exemption:

(A)  Actual HRA received: 30,000

(B)  50% of basic salary as he resides in metro city: 25,000 (For non-metro city it is 40% of basic salary)

(C) (Actual rent paid) - (10% of basic salary) it means (25,000- 10% of      50,000) = 25000-5000 = 20,000

According to the rule the least of the above 3 figure is eligible for tax exemption so exempted tax mount of HR is Rs 20,000 and taxable HR 30,000-20,000= 10,000.

You can pay rent to your parent and can still claim HRA exemption but in case of spouse you cannot claim HRA benefit.

One more important thing to remember, you have to submit the rent slip signed by owner as rent proof to your employer.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Do you know about Inflation- Indexed Bonds ?

Are Inflation-Indexed Bonds really helpful for the common investors..?

As per the promised by our finance minister Mr. P. Chidambaram in the budget speech, India’s first inflation indexed bonds to be launched on 4^th June. The objective of these bonds is to protect the savings of the poor the middle class as said by our finance minister. These 10 year bonds will have a fixed coupon rate and the principal value of the bond will be linked to the WPI (Wholesale Price Index). According to releasing RBI statement, these bonds will prove better option than gold and also protect the savings of poor from inflation.

In Inflation indexed bonds coupon rate will remain fixed but face value will be changed with the inflation. The RBI referred to a four-month indexation lag, which means January WPI would be used as a reference for bonds issued in June.

For example, if the face value of the bond is Rs 1,000, coupon rate 5% and maturity 10 year. So if inflation rises 8% then the face value will adjust to Rs 1080 and coupon rate 5% will calculate on new face value Rs 1080. So after adjusting the face value the investor will get Rs 54.

So now it has been clear that if inflation increases you will get higher coupon and higher principal as well at the time of maturity. If inflation drop then you will get less coupon but your capital is protected. It means you will get back your principal amount at the time of maturity if inflation drops.

Now come to the most critical part of this bond. These bonds are linked to the wholesale price index (WPI) and not to the consumer price index (CPI). At present according to latest govt. released data WPI is at 4.89% and CPI is 9.39%. Some analyst said that the government is not protecting the poor it is protecting itself from inflation and paying less then CPI to the poor and the middle class. WPI only include food, fuel and manufactured products but it does not include many all the common services.

Initially, the bond will be issued to only institutional investors. But after few months, retail investor having demat a/c can invest in it with minimum amount Rs10,000.

So in short, these bonds may not be fulfill its objectives to protect the poor and the middle class segment from inflation as it has not linked to the CPI and it is not available in simple medium like from banks, post offices.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Do you know about Gilt Fund ?

What is Gilt Fund? This question every time flash in our mind whenever we hear about it on business news channel or business news paper. Now a days it is the flavor of season as equity market has not given impressive return as expected from almost 5 years. According to recent data, now the retail people are also increasing their participation in debt mutual fund day by day. In India, debt market knowledge is still in very nascent stage among investors.

So it is very important to understand the product before investing. At least you should have basic understanding about the product. Without proper knowledge and understanding of the product often don’t prove a good return investment.

Gilt funds are fixed –income mutual funds that invest in G-secs (government securities). Bond prices and interest rates are inversely related. When interest rate falls, bond prices rise. In current scenario, falling in interest rate return expected so these funds may be prove good investment.

These funds invest in G-secs from as low 2 year to 15 year. There are basically 2 most frequently used terms, average maturity and duration. Average maturity reflects the tenor of a gilt fund’s portfolio and duration measures the sensitivity against the interest rate movement. At the time of interest rates fall, long term bond and G-secs give more return than short term bonds. Now, it is clear that high duration bond react more to interest rates movement.

Most advisers promote it as a risk free fund but it is not true. Investments in gilt funds are always vulnerable to interest rate risks. So if interest rates are moving upward direction then long term duration bond may be erode your capital or give you negative return also.

Now the question arises, when should person invest in these funds?  A slowdown in GDP growth, rising inflation, a poor IIP (Index of Industrial number these all are indication of high interest rates. Whenever you feel, the interest rates would fall in near term that time is good time to invest in these funds. In a nut shell, you should have better understanding of interest rate cycle and economic environment of the country. If you hold the fund for the defined average maturity, you will not lose your money likely.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Why real estate investment is bad for long term..?

Why real estate investment is good for long term..?

In our country many investor think that property investment will give the best return in long term and it is safe. I am not expert in real estate investment. Today, I have read an article about written by Mr Ajay Shah (Professor, NIPFP). I want t o share the same article with all of you. It may be useful to all real estate investor.

Most people in India are convinced that real estate is a great asset. More caution is in order. Real estate investment is not a guarantee of profit. It is hard to be diversified, and illiquidity hampers portfolio structuring. Most important, the outlook for supply over the medium term implies that there is no great upside.

Too many intelligent people in India believe that one can never do wrong by investing in real estate. Some facts will help bring more sense. Consider investing in the best commercial real estate of Bombay -- Nariman Point -- in 1994. The price was Rs.35,000 per square foot. Today, almost 20 years later, the price is Rs.25,000 a square foot.

Over this period, Nifty produced returns of 362%. Inflation ate away 272%. Net of inflation, Nifty delivered an average annual return of 1% while Nariman Point commercial real estate delivered -9%.

This is, of course, just an anecdote. Many individual real estate investments have done very well and have occasionally outperformed equities. My point is a limited one. We should not mindlessly assume that real estate is always a good investment. We should not assume that real estate will always outperform equities -- as the above example shows things can be as bad as underperformance (compared with the Nifty index fund) of 10 percentage points per year over a 19 year period.

Why did Nariman Point underperform over this period? Because of new supply. That is the heart of the problem of real estate as an asset class. There is no long term returns in owning steel or bricks. Every time there is a real estate boom, it triggers off fresh construction. This supply quenches the boom.

Bombay is a pretty bad place in terms of availability of space, because of both geography and governance. Elsewhere in India, the case against real estate is even stronger. The government in India is slow to build roads and water supply and police stations in outlying areas. But with a lag, these facilities do come about. Ultimately, when the price of structures exceeds the price of bricks and steel, new supply emerges, which is bad for real estate prices. The rise of a professional real estate industry, coupled with access to formal finance including foreign capital, has increased the scale of supply and given bigger and faster corrections.

Some claim that India has a large population and there is a shortage of land. A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India's land area assuming an FSI of 1. There is absolutely no shortage of land to house the great Indian population.

The biggest story about the future of real estate prices in India is the FSI. In most of India, the FSI is below 2. This is an abysmally small number by global standards. All over Asia, FSIs are above 5, going up to 20 or to no limit. In the long run, politicians in India will see the light and FSI will rise. A higher FSI results in lower rental rates for households and firms, as was seen in Hyderabad which was a pioneer in FSI reform. When FSI goes up, this will unleash supply on a big scale. As an example, if Bombay moves from an FSI of 1 to 2 -- which would still make it worse than the FSI seen anywhere else in Asia -- this would trigger off a doubling of supply.

These arguments are not specific to India. While datasets about real estate investments over long time periods are not easy to come by, academic evidence is slowly building up of fairly poor returns to real estate. Net of inflation, real estate tends to produce roughly 0 over long periods, while equity indexes produce significant and positive returns after inflation.

Finally there are the practical difficulties of diversification and liquidity. Most people are not rich enough to buy 50 properties spread across India. Buying and selling involves very large transactions costs and delays, and generally involves black money.

Skepticism is in order. If less than 1% of the land area of India is built out, this is enough for the entire population. There is no long-run return in hoarding bricks and steel. Real estate booms the world over are quenched by supply. The prospect of holding real estate in India is worse because FSIs are tiny. In the future, FSIs will go up, which will further fuel supply. Households investing in real estate are also hurting on account of inadequate diversification, illiquidity and the use of cash.

For more detail about any other query related investment and financial planning, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Some points to avoid mis-selling

Who will stop the mis-selling ?

Majority of us have experienced mis-selling at least once in our lifetime. Whether you admit or not but it is true. It is surprising fact that not only illiterate but also well educated people also victim of this trend. Now the question arises that how we can stop it. Before find the measure to check mis-selling, first we should find the reason behind this problem.

Who is responsible for mis-selling? Majority of people’s opinion believe that agent and financial institution like bank, insurance companies are responsible for this. The market regulator is also very serious about this and many steps has been already taken like ban on entry load in mutual fund, distinction between advisor and distribution, emphasis on honest and ethics based advice. Many financial forum advocate for ethics based advice. There are so many online websites are available regarding financial planning, investment product but still the problem is exist.

It is very unfortunate situation that the investor does not spent much time to get right advice and easily trap in false unrealistic false return promises. Investor should also alert before investing in any investment product regardless investment amount. After all, every penny comes from your hard work. I urge to all investor that they should be vigilant before any investment. It is wrong to accuse only one side for particular problem. Market regulator is doing well to regulate the financial institution and distributor agent but a lot of work still has not done.

During my meeting with investor, I have clearly observed that they do not give much importance to make financial plan. They easily rely on their bank relationship manager, agent or their close relative for the investment. After doing useless and wrong investment they only repent and accused to financial institution and distributor. I mean before taking any purchase decision like booking holiday package, purchase clothes, electronic products, you spend so much time for product details. But, when we invest in any financial product we sign the forms with close eye and even not read the prospectus. In more than 90% cases we trust on our agents or relative. You should keep in mind that these people or institutions prefer sell high commission products. They also have their sales target and search like you people to achieve their target. Due to this mis-selling your dreams and financial commitments remain incomplete. I wonder, when I ask about insurance sum assured to the clients around 90% of them had no idea about sum assured amount after taking insurance policy.

After reading the above paragraph, you would think that I am only talking about problem where is the solution? According to me, If you remember and follow some points during investment then there would be no chance to be victim of mis-selling.

·        First, do your own research or homework before meeting any agent or adviser.

·         List your doubt and ask them to your agent or adviser during meet.

·         Check the agent’s background like experience, qualification, business card proof and knowledge.

·         Be clear about your short term, medium term or long term financial goal and examine your risk appetite.

·         Discuss about proper asset allocation with your financial adviser.

·        Don’t rely on only one agent or friend, keep updated yourself about financial world.

·         Before investing in any product be clear about your investment period and product risk.

·         It would be better if you prepare financial plan with the help of qualified certified financial planner.

·         Always read offer documents and fill the form yourself.

·       After making the investment, keep your certificate or statement carefully and read properly.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Which is better option Gold ETFs or e- Gold

Which one is good Gold ETF or e-Gold ?

Now a days this question is frequently asked by gold investors. As gold price has seen decline in the rate since last few months. Earlier people had only one option to purchase gold in physical form. It is important that before investing your funds in any instrument first look at pros and cons and compare the cost and return with similar available instruments. Three is different opinion in the market expert but majority of them prefer e-Gold due to its cost effective attribute. Let us find out whether we should go with Gold ETF or e- Gold.

Gold ETF: 

Gold ETFs are exchange traded mutual fund schemes that invest in physical gold. It is also known as paper gold. The prices of Gold ETFs are measured in terms of the net asset value (NAV). One unit represent 1 gm rate of gold. There are many charges like management and advisory fees, marketing and distribution expenses, custodian charges, trading brokerage and other operational expenses. Apart from these charges there is tracking errors which also affect the return of the Gold ETFs. For invest in Gold ETF you need de-mat and trading account with the broker.

It can be converted into physical delivery but there are different quantity criteria for different AMC. It is difficult to convert small quantity Gold ETF into physical gold. You can invest in it during 9:00 AM to 3:30 PM (exchange trading hours of weekdays).

Gold ETFs are taxed as Non equity mutual fund. If you sold in within one year you have to pay short term capital gain tax according to your tax slab.  If you sold it after one year then you have two options for paying long term capital gain tax, one is 10 % tax without indexation and the other one is 20% tax with indexation.

e-Gold: 

For invest in e-Gold you need a de-mat a/c with NSEL (National Spot Exchange Limited). In e-gold, investors are directly holding the gold units and NSEL do not charge for it to investors. Physical delivery in e-Gold is possible even in small quantity. The transaction cost is very low in NSEL compare with Gold ETF. You can trade during 10:00 AM to 11:30 PM on weekdays. The taxation of e-Gold is same as physical gold. If you held it less than 3 year you have to pay short term capital gain tax according to your tax slab. If you hold it more than 3 year then you have to pay 20% long term capital gain tax.

From above information one can easily judge that e-Gold has more edge than Gold ETF. The Gold ETF only score in the term of taxation.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com