How to calculate income on house property
Out of all the heads under which income is chargeable to tax, income from house property is the most difficult to calculate. This is because this is a tax which is paid on notional income, i.e the annual value of the house which is its capacity to earn income and not on the actual income earned.
If you own only one self occupied house, it is not chargeable to tax.
If you have more than one property, you have an option of choosing one of them as self occupied whose annual value will be taken as NIL. The other property, even if it is not rented out and earning you an income would be deemed to have been rented out and tax is payable on the annual value based on this deemed rental income. This annual value is calculated as per the provisions of section 23 of Income Tax Act. Let us see how this is done step by step. Continue reading →
What is the right time to exit a mutual fund?
Most of the personal finance investment discussions are centered around what is the right time to enter the mutual fund and choosing the right type of fund for you (Pl see earlier article “Mutual fund is not a one size fits all product”). Once the investment is done, there is seldom any talk of when to exit from the fund. If the investment is doing well, we are reluctant to exit in anticipation of a further rise and if it falls below the principal value, we do not want to book a loss and hence we keep waiting for a recovery.
Just like it is important not to churn your investment very often to avoid lower yields, high charges and tax liabilities, it is also important not to hold on to investments for too long.
You should think of exiting from a mutual fund when –
- The target is reached – Once the fund has made the target profit set by you while investing, it is time to move out of it.
- The fund isn’t performing as per expectations – If the fund is not performing well relative to others in the same category.
- Change in your personal risk profile – Different stages in a person’s life (just started working, married with children, retired etc.), or changes in his financial profile alters his basic risk profile. Accordingly necessary changes should be made in his mutual fund portfolio.
- Change in the basic attribute of the fund – Often AMCs merge Mutual Funds, change the structure or investment style which could impact the fund performance and your investment objective may not be met.
- Some negative news of the fund house – If your mutual fund house is in news for wrong reasons like fraud, not adhering to investment norms etc, it is time to say goodbye.
- Emergence of new and better investment opportunities – The market for financial products is constantly changing with new financial products being launched regularly. A new alternate investment avenue with superior features or lower expenses could be a reason for switching the fund.
If you are from a non-finance background or do not have a good understanding of the financial markets, please consult your financial advisor before makes any such changes.
Physical Real Estate or Real Estate Mutual Funds?
If you already have a house of your own and are desirous of making further investment in real estate solely with a profit motive, it is advisable to go through the mutual fund route. Real estate in the physical form suffers from a lot of disadvantages.
- Risk of loss due to fire and other natural calamities and hazards.
- High ticket size- The cost of even a small piece of land could run in to lakhs of rupees. Real estate mutual funds ( REMF) require relatively lesser minimum investment.
- Concentration risk – It is very cumbersome to maintain a diversified portfolio of real estate through multiple purchases. In a REMF, the fund manager takes care of this.
- Risk of encroachment- This applies especially to vacant plots of land which need to be guarded and visited regularly.
- Illiquid- Physical real estate investments are not as liquid as other investments like deposits, mutual funds or gold. Deals could take a long time to get executed.
- Lack of transparency – The prices of real estate are not standardized and lack transparency. REMFs are valued through regularly published NAVs
- High transaction costs – Real estate deals – buying and selling involve high transaction costs like stamp duty and registration charges.
- Owning more than one house has greater tax liabilities.
These reasons make Real Estate Mutual Funds with a professional manager, flexible entry amounts and transparent prices a superior investment option.
The following are detail of some of the popular Real Estate Mutual Funds in India :
- Kotak Realty Fund – Closed ended fund started in 2005 for a term of seven years and the target segment are corporates and High Networth Individuals.
- HDFC India Real Estate Fund – Closed ended with a minimum initial requirement of Rs 5 crores.
- Anand Rathi Real Estate Opportunities Fund – Closed ended fund which mainly focuses on acquiring secured rental income real estate assets with good quality tenants.
- IL & FS Realty Fund – An aggressive private equity fund which seeks to deliver a compounded annual growth of 25 %.
- ICICI Ventures – Seeks to invest in commercial and residential real estate projects in the developing cities in India.
Though real estate mutual funds haven’t yet really taken off in India, they have a huge future potential. Investors wanting to take exposure to REMFs should check on the fund’s reputation, past returns and investment objective before doing so.
Now keeping money in your savings bank earns you better returns
The Reserve Bank of India deregulated the interest rate on savings bank account with effect from 25.10.2011.According to the new directive-
- A uniform interest rate has to be offered up to a balance of Rs. 1 Lakh.
- For savings bank balances of above Rs. 1 Lakh, banks are free to offer differential interest rates provided the same rate is given to all customers of the bank without any discrimination.
As a result of this, some commercial banks have hiked their savings bank interest rates above the earlier stipulated 4% pa (see table) and many other banks are likely to follow suit soon.
| Bank | SB Rate upto Rs 1 Lakh(pa) | SB Rate above Rs 1 Lakh(pa) |
| Yes Bank | 6 % | 7% |
| IndusInd Bank | 5.5 % | 6% |
| Kotak Mahindra Bank | 5.5% | 6% |
| Karnataka Bank | 5% | 5% |
These deregulated interest rates already exist in many other Asian countries like Hongkong, Nepal, China, Srilanka etc.
In addition to this, Budget 2012 exempts savings bank interest earned of upto Rs 10,000/- from income tax which is an added positive.
How this will help the investors and our economy.
- India is a savings economy and 85 % of the savings deposits come from the household sector. Higher SB rates will encourage more savings from this sector.
- It would also benefit the retirees and pensioners who primarily depend on the interest income.
- It would also provide a relief to the investors who have been earning a negative real rate of return due to the prolonged high inflation in the country.
- More investors opting to keep money in savings would boost the deposit base of banks resulting in overall financial growth of the economy.
Can a Mutual Fund go bankrupt?
* Source of Pic : lastbull.com
Investors having a diverse portfolio of stocks and shares would have had at least an occasional experience of one or more of the companies becoming insolvent or simply “vanishing” overnight. Kingfisher is the latest addition to the list. As mentioned in the previous article, as many as 19 banks have also gone bust last year.
Like banks and companies, can a Mutual Fund go bankrupt? Actually not!
To understand this better, let us analyze the structure of a mutual fund.
In a mutual Fund, the AMC (Asset Management Company) manages the investments and the assets are held by the custodian. Both the AMC and the custodian are controlled by the trustees who are put in place by the sponsors of the mutual fund.
If one of the sponsors want to move out, they have to bring in another sponsor who will have to put in place a new framework of trustees, AMC etc. And if the investor is not comfortable with the new sponsor, he has an option of exiting from the fund with the full NAV within 30 days.
Moreover, the custodian holding the assets is independent of the AMC or the sponsor. This provides structural protection to the assets and the investors’ interest.
Thus, the structure of a mutual fund ensures that the investor is fully protected from all contingencies like misappropriation of funds, fraud etc.
So, the bank in which you hold your fixed deposits could close down, the company whose shares you have bought could go in to liquidation overnight. But your Mutual Fund investment can trade below par, perform below expectations but can never go bust causing you to lose your entire investment. Yet the share of bank deposits in household savings in India is around 55 %, while the share of Mutual Funds is less than 10 %. Is this ratio justified? Your thoughts and feedbacks are welcome!
What makes bank fixed deposits so popular?
For ages, bank fixed deposits have been popular among investors as a safe and hassle free investment haven. People are so comfortable placing their money in deposits that they often do not consider investing in debt schemes and other comparative products. This could be because of lack of awareness or because of the following features which seem to make fixed deposits attractive.
- Fixed deposits are safe – Banks in India are regulated by the Reserve Bank of India and in the event of a bank going bust, DICGC (Deposit Insurance Credit Guarantee Corporation) covers all fixed deposits to the tune of Rs 1 Lakh. This is applicable per depositor in a bank inclusive of principal and interest.
- Ease of operation – Fixed deposits is a simple product easy to start and can be closed prematurely at any time by the depositor.
- Fixed rate of return – While applying for a deposit, the investor knows the rate of return and the exact maturity value which he would get at the end of the invested period.
- Tax benefits – Some special fixed deposits in banks with a lock-in of 5 years are eligible for income tax rebate of up to Rs 1 Lakh under section 80 C.
Now, the drawbacks –
- Lower tax adjusted returns – The interest earned on fixed deposits is fully taxable as per the investor’s tax bracket, hence the post tax returns are low.
- Effect of Inflation – The prevailing high inflation rates in our country (8 % currently) and the low post tax returns ensure that the real rate of return is negligible, if not negative! This means that your money does not grow at all.
- The guaranteed fixed return means that the depositor doesn’t have a chance to earn higher returns than that promised. In the past, during a falling interest rate scenario govt. securities with lower risk have given double digit returns, and during rising interest rates in the economy floating rate debt funds have done exceedingly well. But those who were invested in fixed deposits during these times still got only the fixed interest rate.
- On premature closure of fixed deposits, most banks charge a penalty which the investor has to bear, apart from getting a lower interest rate applicable for the period for which the deposit stays with the bank. For Example – If I open a fixed deposit for Rs 1 Lakh @ 9.5 % pa for 3 years, and am forced to close the deposit after an year, not only would I have to bear the penal charges of say 1 % for pre-closure, the entire 1 lakh would earn only an interest of 8 % pa applicable to deposits of 1 year duration. In effect, I would have earned only a gross interest rate of 7 % pa.
In conclusion, a word of caution.
Co-operative banks, especially the unscheduled ones are best avoided though they offer rates of return which are as much as 2% pa higher than other banks. During the last year 2011, 9 co-operative banks have closed down. This figure was 19 in the year 2009. Getting the insurance money on bankruptcy is also not easy. The Reserve Bank of India first tries to revive the bank and in the event of liquidation, the insurance money is released only on completion of the liquidation process which means the investor could have to wait for a long time to get his money back.
Add glitter to your portfolio with Gold
For generations, gold has been one of the most popular and widely bought commodities in our country. Though gold is bought more as an object of beauty and for emotional reasons like gifting it to near and dear ones and preserving it for future generations, it offers many benefits when added to your portfolio as an investment.
- Gold provides effective portfolio diversification because of its negative co-relation with most other asset classes likes shares and fixed income products.
- It acts as a hedge against inflation.
- Protects the portfolio during times of political and economic turmoil.
- Hedge against currency risk.
How can you invest in Gold?
One can invest in Gold in either the physical form or as a financial asset.
Physical Form
- Gold Jewellery
- Gold coins
- Gold bars and biscuits
Financial Form
An exposure to Gold as a financial asset can be taken in the following ways –
- Gold Exchange Traded Funds – These can be bought and traded through a demat account on the stock exchange just like shares. ETFs track the price of gold and the gold ETFs in India follow the gold index in India. Each unit of an Exchange Traded Fund represents one gram of gold.
- Gold Mutual Funds – These are fund of funds schemes by Asset Management Companies which primarily invest in their own Gold ETFs. For example – Kotak Gold Fund invests most of its corpus in units of Kotak Gold ETF. Unlike ETFs, Gold Mutual Funds give the investor the facility of investing a small sum regularly through systematic investment plans.
- Gold Futures Contracts – These work like normal derivatives contracts with a limited contract period (maximum 3 months) and are traded in commodity exchanges like National Commodities Exchange (NCDEX) and Multi-Commodity Exchange (MCX).Here the investor can take large positions by just paying a percentage of the contract value, called the margin.
- Gold Deposit Schemes– These are like fixed deposits in gold and are offered by some banks. On Maturity, the investor gets back the same quantity of gold or its equivalent value, and is also paid periodic interest which is a pre-specified percentage of the value of gold deposited.
Physical gold or Financial gold?
Though people in India prefer buying gold in the physical form due to various reasons, it has a lot of disadvantages compared to owning it in the financial form-
- Physical gold suffers from the risk of loss through theft/burglary.
- It incurs costs as it requires storage in bank/safe deposit lockers.
- Selling it at any point in time could result in loss in value, wastage and exchange loss.
- Beyond the limit specified for jewellery for personal use, gold holding in the physical form incurs wealth tax. Gold Mutual Funds /deposit schemes are exempt from wealth tax.
- Gold in the non-physical form offers nomination facility wherein on the death of the investor, the proceeds can be transferred to the specified nominee. Physical gold does not have this facility.
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