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From the Rat Race to Financial Freedom... A common man's journey
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Happiness Unlimited...How to be happy..always !!
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Dream On...Every setback is a little nudge from HIM to Dream On
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The Autobiography Of A Stock
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A Father's Diary
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Thursday, December 27, 2012

Income from House Property Part-2 (Sec 22 and 24 IT Act)

In the last post(Income from House Property Part-I (Sec 22 and 24 IT Act), we studied essentially about Sec -22 of Income Tax Act which talks about what is considered a house property and what kind of taxes are applicable on the same.
In this (Part-2) of this series of posts on "Income from House Property", we would study Sec-24 of IT Act. Once you have a taxable house property (as per Sec-22) which is worthy of generating income for you, we must understand the applicability of Sec-24.

Monday, December 24, 2012

Income from House Property Part-1 (Sec 22 and 24 IT Act)

As your wealth grows, so grows your tax liability. Hence, understanding of tax laws can play a critical role in paying the correct taxes. Income Tax laws can be sometimes very complex but if we understand the intent behind the specific law, it becomes all the more easier to interpret, understand and follow these laws.

Friday, December 21, 2012

How to measure life - A perspective

The criteria and measurement of success and happiness in life can be very different for everyone. Which criteria is right or wrong is a an individual's prerogative. There is nothing which is absolute "right" or "wrong" in this world anyways. Let us see how different can these perspectives be?

Sunday, December 16, 2012

Quick decision making

Decisions must be taken after giving enough thought to them. While that is true for most decisions, it has also been observed that most of the landmark decisions are instant, taken with gut feel, involves emotions and mostly lack the "thinking time" that is normally advisable to be associated with any decision making process.

Let me tell you a small story to exemplify what i am trying to say.

Once there was a saint who was giving a lecture on the beauty of "giving" in life. There was a king who was sitting as a part of the audience. The saint delivered a very motivating and inspiring speech. Every one amongst the audience liked the speech. In fact, most of the audience were "moved" by the speech. All of them decided to "give" some money at the end of the speech, as per their individual capabilities to support the cause for which the saint was giving the lecture. The king decided to donate Rs. 100.

After the speech was over, there was a person with a platter going round each audience and offering them the chance to "donate" whatever they wished to. The king had already decided to donate Rs. 100, though his turn was at the fag end of the queue. While waiting in the queue, he was watching others "donate". He realized that the first few people did not donate more than Rs. 50. He started to "think". Won't it be wiser if he also donates Rs. 50 now and may be he can donate Rs. 50 next time also? The platter went moving and the king saw more people donating Rs. 20 and Rs. 10 bills. His mind kept "working". The king was more or less sure that he would donate Rs. 20 only now. That seemed enough considering what everyone was donating. Then, he saw a few people donating Rs. 5 coins. Well, that triggered another "thought" process in his mind. The coins made some noise when thrown in the platter. That means that everyone would know that he has at least donated something. If he throws in a bill, no one apart from his neighbors might even know whether he has donated anything or not.

As his turn came finally, he threw a Rs. 1 coin in the platter. That seemed to make a perfect sense to his "mind". Rs.1 coin made the same noise as a Rs. 5 coin. Isn't this more profitable?

So, the king, came down from a decision Rs. 100 to finally donating Rs. 1.

In life, there would be moments when you are inspired and in a state to take a right decision. Many times, taking instant decisions at such stage is the best possible thing to do. If you allow your mind to "think", it would get corrupted by the environment around it.

I am sure there would have been times in your life when you knew that you must take a decision at that very instant, and that you have everything else covered if you take that decision, but the sad fact was that you allowed the decision to get delayed and this gave enough time for your mind "to think" and let you know why your decision was either impractical or why you should not go for it.

These decisions could be related to your career, your job, business, family or anything else. Whenever such an idea strikes, whenever your conscious says that it likes the message from a book or an article from the blog, take an immediate decision and start following your decision. In the long run, you will never repent having chased what your inner conscious wanted you to. If you do not do that, you might be one of those kings who had all the power and willingness to follow his heart but just "delayed" the decision enough for the mind to "think" and align itself with the world. 

What happens in this "additional time frame" is not that difficult to understand. Your  mind tries to bring you from an "elevated state" to a "state of equilibrium" with the rest of the world. The more time you allow, the more close you would be to the state of equilibrium. 

Decisions taken in an "elevated state" are often unique and hence are also likely to give you unique results. It is just that we must trust our gut feel and go ahead and take that decision.

Go ahead, take those decisions instantly, before the world around you makes you "think" and takes that golden opportunity away from you, before your mind brings your thinking down from a highly elevated state to an equilibrium state with this "ordinary" world. At an equilibrium state, you follow what everyone around you does.

To lead, you need to lead in decision making and for that to happen, decisions must happen in an elevated state of mind. !!!


Manoj Arora

Sunday, December 09, 2012

What is a Stock Split

In our recent post, we studied about the Bonus Issue.

To summarize, what we read
Share-holders get bonus shares from company's earnings in compensation of dividend. But we also realized that the overall wealth of the shareholder does not increase because of the drop in share price post the bonus issue.

Most readers seem to have some confusion about whether bonus issue and stock splits are the same or not.  They may appear to be the same especially in the eyes of a person not well-versed in finance. But they are, in fact, two different things.


Simply put- A bonus is a free additional share. A stock split is the same share split into two.

Usually companies accumulate it’s earnings in reserve funds instead of paying it to share-holders in form of dividend. This accumulated reserve fund is then converted into share-capital and allotted to share-holders as bonus shares in proportion to their existing holding. So, Share-capital of the company increases with a concomitant decrease in its Reserve profits. Share-holders get bonus shares in compensation of dividend.

But when a share is split, say, from Rs 10 denomination to Re 1 denomination, there would neither be an increase in the share capital nor a concomitant decrease in the reserves of the company. This is because while in a bonus issue a person having one share of Rs 10 face value would get another share of the same face value should the company go for a 1:1 bonus what would happen in a stock split is his one Rs 10 share would now be converted into ten Re 1 shares.

The primary reason is to infuse additional liquidity into the shares by making them more affordable. It needs to be reiterated here that the shares only appear to be cheaper, though it makes no difference whether you buy one share for Rs 3,000 or two for Rs1,500 each.

Stock market interprets a stock split as a statement of confidence by the company – it interprets a split as a signal from the company that it is confident about its future growth. Also, a stock split increases the number of shares traded in the market, which increases liquidity.These factors are considered positive, and therefore the market reacts positively!

So, if you are an investor in the company, you have reason to celebrate when you get a bonus. But don’t celebrate when your company splits stock. It’s is just a technical change in the face value of the stock. But if you want to buy more shares, it is good news because now, you will be able to afford them or at least get them cheaper!

Manoj Arora

Friday, December 07, 2012

Implement the change that you want to see

Yes, we must listen, read, see, visualize, learn, understand and also appreciate the things the way they ought to be, but we must also remember that for any change to happen, you must take a very important next step and that is "to act" towards the change that you want to see in the world around you.

Very often, we spend a lot of time in all the aspects of reading, listening, visualizing, understanding but just halt at the step of "acting". While all of these is important, failure to act turns out to be the single biggest reasons why your ideas and thoughts do not take the shape of reality.

I was talking to my friends over a morning tea session and as usual, they were talking about how things around them are not going so well, that the quality of human thoughts have gone down to an unacceptable and unimaginable level. Everything around the globe is going bad and it is a pitiable state to be in. Some went to the extent of saying that something is wrong in the air and water which has changed and depreciated the very thought process of human beings.

Post all those negative thoughts, everyone appreciated some of the recent positive articles they have read, known about some of the inspiring people that have tried to change the world around them. Everyone agreed to the fact that a positive change requires a positive thought process. Everyone was unison in the view that we all need to change the way we all "think" before we can realize a positive change. As usual, they were about to wind up the conversation on a happy note. And this happens with so many conversations and ideas. This time, i had different intentions. I was not going to allow them to drift away so easily. I thought that this was an appropriate time to intervene and let them know that we are all missing out on one very critical step. While positive thoughts are definitely important, there is one more critical step that gets missed out every time we want to bring in a change.

Yes, things around us are not as good as they can be. Yes, the quality of human thoughts is not at the same level it used to be a few years back. Yes, we need to do something to do about it. But we all have an inherent belief that "someone" would come and do "something" about the situation and after some time, things should change for the better "automatically". Ah !! What a great thought. The missing piece between the thought and the reality is the "effort" that is needed to be put in. Trust me, nothing of this "automatic" sort is ever going to happen. One of us will have to come out of our comfort zone. It is one of us who must start with the step of implementation and then after consistent efforts only can we hope for some more like minded people to join us and then hope for a bigger change to happen.

A leader becomes a leader because that person had the guts to take the first step towards implementation of what he or she thought was appropriate. A study reveals that 90% of the innovative and brilliant ideas never move into implementation phase because no one has enough courage to get them started with the first step towards implementation phase. We can keep discussing the greatest of the ideas but all that is not beneficial to anyone if we cannot take it to implementation phase.

Having ideas is one step, taking the initiative and moving into the implementation phase of that idea is a different ball game altogether.

I am sure you have an idea in your mind. You keep getting great ideas during your shower or during your sleep. Jot them down, shortlist and select some of the greatest ones that you have. Have the guts, go and take the next step, even if it mains trying and failing.

No one has ever succeeded without giving it a try.

Thomas Edison once said : “I have not failed. I've just found 10,000 ways that won't work.”

Joel Osteen mentioned in his bestseller book : “You must make a decision that you are going to move on. It wont happen automatically. You will have to rise up and say, ‘I don’t care how hard this is, I don’t care how disappointed I am, I’m not going to let this get the best of me."


Manoj Arora

Monday, December 03, 2012

What is a Bonus Issue?

Stocks reward you in many ways. Apart from the regular interest free dividends and the capital appreciation on the stock value, investments in company shares also fetch you certain non monetary benefits to you. Bonuses and Rights issue are two such noticeable benefits.

Let us understand in detail about the Bonus issue.

What is a Bonus Issue?
Instead of distributing the entire accumulated profit as dividends, the company has the option of issuing bonus shares to its existing shareholders. Issue of bonus shares results in the conversion of the company's profits into share capital. Therefore it is termed as capitalization of company's profits.

Bonus Shares, as the name suggests, are additional shares issued to the existing shareholders free of cost as a bonus. Prima facie, it does not impact your wealth as a shareholder.

How does Bonus Issue Work?
If a company X issues bonus shares in the ratio of 1:1 and assuming that you are holding 200 shares of this company, you will receive another 200 free bonus shares from the company free of cost. Normally, the price of the stock in the stock market would fall to keep your overall wealth the same.  This reduced price is called as the ex-bonus price.
As an example, if you were holding 200 shares worth Rs. 50 a share before declaration of 1:1 bonus issue, then your total wealth was Rs. 50 * 200 = Rs. 10,000/-. After you get the bonus shares, the most probable price of the stock would fall by 50% to about Rs. 25. Hence your total wealth would still remain the same ie Rs. 25*400 shares = Rs. 10,000/-

Benefits of Bonus Shares for the Company and the Investor
1. Since such shares are issued to the equity shareholders in proportion to their holdings of equity share capital of the company, a shareholder continues to retain his / her proportionate ownership of the company.
2. The bonus issue tends to bring the market price per share within a more reasonable range.
2. It increases the number of outstanding shares. This promotes more active trading.
3. The nominal rate of dividend tends to decline. This may dispel the impression of profiteering.
4. Share capital base increases and the company may achieve a more spectacular size in the eyes of the investing company.
5. Shareholders regard a bonus issue as a strong indication that the prospects of the company have brightened and they can reasonably look for an increase in total dividend.
6. It improves the prospects of raising additional funds.


Manoj Arora

Friday, November 30, 2012

Are you blindly following everyone around you?

"Go with the crowd" mentality is so typical in any corporate work environment. It is also not uncommon to notice this in our personal lives. You will see people just following what people around them have been doing for many years, sometimes, not even knowing the rationale behind what they are doing and why.

There was a real experiment (scientific study) done involving 5 monkeys (10 altogether, including replacements), a cage, a banana, a ladder and an ice cold water hose. Some of you may have heard about this experiment before, but the fact that this was a real experiment amazes me every time i read this story and relate the same to the real world.

Experiment - Part 1
5 monkeys are locked in a cage, a banana was hung from the ceiling and a ladder was placed right underneath it. As predicted, immediately, one of the monkeys would race towards the ladder, to grab the banana. However, as soon as he would start to climb, the researcher would spray the monkey with ice-cold water. The trick was that in addition to the monkey who raced towards the ladder, the researcher would also spray the other four monkeys who are silently sitting on the side.

When a second monkey tried to climb the ladder, the researcher would, again, spray the monkey with ice-cold water. As done in the previous step, he would spray the other four watching monkeys also.

These steps were repeated multiple times until a point when the monkeys learned their lesson.

Monkey's lesson from Part 1
"Climbing" equals "Scary cold water for EVERYONE". So no one should climb the ladder.

Experiment- Part 2  
Once the 5 monkeys knew the drill, the researcher replaced one of the monkeys with a new inexperienced one. As predicted, the new monkey spots the banana, and goes for the ladder. BUT, the other four monkeys, knowing the drill, jumped on the new monkey and beat him up. 

Monkey's lesson from Part 2: 
The beaten up new monkey thus learns : "No going for the ladder and No banana at all" without even knowing why! and also without ever being sprayed with water!

These actions get repeated 3 more times, with a new monkey each time and ASTONISHINGLY each new monkey- who had never received the cold water spray itself (and didn't even know anything about it), would join the beating up of the new guy.

This is a classic example of mob mentality where in the bystanders and outsiders uninvolved with the fight- join in 'just because' every one else is doing the same.

When the researcher replaced a third monkey, the same thing happened; likewise for the fourth until, eventually, all the monkeys had been replaced and none of the original ones are left in the cage (that had been sprayed by water). 

Experiment- Part 3 
Again, a new monkey was introduced into the cage. It ran toward the ladder only to get beaten up by the others. 
The monkey turns with a curious face asking "Why do you beat me up when I try to get the banana?"
The other four monkeys stopped and looked at each other, puzzled on their action.

None of these monkeys had been sprayed ever with water and so they really had no clue why the new guy can't get the banana. But it didn't matter since it was too late and the rules had been set. 

So, although they didn't know WHY, they beat up the monkey just because "that's the way we do things around here".

Does this experiment sound familiar to you? Think all around your personal and professional life, scan through a typical day at your office or at home and you would realize that you are a part of this "monkey business" everyday in one way or the other. Are you not copying what others in your neighborhood or society are doing, without knowing why? Go for a house on loan, go for a good car, both husband and wife working, go for the latest mobile etc etc. No one knows why we are doing all this, but we all are doing because everyone else is doing that way, and if everyone is doing, then it must be the "correct" way. 

Is your professional life not following a similar career path as almost everyone around you? Can it not be different? Of course, it can be. Can money only be earned by being in a job and leaving yourself with no choice but doing something which makes you hate those beautiful Monday mornings? No, there are many alternatives. But being different means being uncomfortable. It means coming out of your comfort zone, It also means thinking out of the box, and sometimes being looked upon by your so called "mature and senior" colleagues as if you have been left behind the "rat race". 

Think about it. Question yourself. It takes guts to question yourself after you have lead most part of your life as a "monkey life". Let me help you. Why are you here on this planet? What is the mission of your life? What are your dreams and goals? What makes you happy? and if what you are doing on an everyday basis does not add to your mission, goals and strategy of your life, then stop and think. Are you not the same monkey who is just trying to follow what everyone around you is doing? Or have you got the guts to question what everyone else is doing and then change your path accordingly?

Unless you go inside yourself and start searching for these answers, the easiest thing is to continue to be a monkey and keep beating anyone who starts going towards the banana.

Don't be a monkey. Start questioning every action of yours. Have guts to tread a different path if your heart says so. Your future destiny depends on what actions you take today, on an everyday basis.

Wish you luck !!


Manoj Arora

Tuesday, November 27, 2012

Top-Up Premiums for a Life Insurance Policy

Did you know that paying a top up premium for your existing life insurance policy does not attract much of the regular charges deducted by the life insurance company?

Saturday, November 24, 2012

Can i change the world?

Can i make any difference to the world? Can i make any difference to my country? At least, can i make a difference to the people and society around me? On numerous occasions, we get ideas and plans to bring about a change around us.... for the better. But in most such occasions, what stops us are some questions like these or some very simple but logical doubts in our mind.

What if no one else is ready to change? 
What difference does it make if only i change?

Well, i grew up with similar doubts in my mind that stopped me from making so many attempts at doing great things in life till i read the below story, which changed my entire thought process.

We talk about corruption, cleanliness around us, traffic rules or for that matter anything else that we wish should be immediately corrected. But what stops us from going and bringing that change in the society are some of the questions and doubts as stated above.

I have a completely different belief system now. If you ask me now, actually it does not matter whether any one else is ready to change or not, or anyone else will actually ever change or not or whether you would be able to bring a difference to your society, country or the world or not. Yes, it does not matter at all. What matters is what you do !!

Let me try and explain this concept through a short story which triggered the change in me some time back.

There was a house in a village which unfortunately caught fire. The fire became very intense very fast, because of the high winds and the combustible material that the house was made of. By the time villagers could gather around and plan to take some steps to extinguish the fire, almost half of the house was already gutted. There was no scope of calling a fire brigade in such a remote village. The only hope was if some of the villagers could make a dedicated effort to get some water and start pouring on to the house. But it all seemed too little too late. There were a few who were still trying to get some buckets full of water from the nearby well, but it was just not good enough to have any significant impact on the deadly fire that had engulfed almost the entire house by now. The situation was hopeless. Most of the villagers were now "onlookers" who had given up any hope to save the house.

Suddenly, someone detected a small bird flying at the top of the house and pouring a few drops of water on the house. The bird was flying back, getting its beak filled with water from the nearby pond, and coming back and throwing it at the top of the house. It was doing it repeatedly and was trying to do it as fast as it could. The people who had gathered around the house and were seeing the bird do this strange thing, asked an obvious question to the bird : "Do you think by doing what you are doing, you will have any kind of impact on the fire?". The bird ignored the question and kept trying. After 30 min, when the situation of the house under fire was hopeless, and the bird was still trying hard, the people again asked the seemingly "stupid" bird: "See, your efforts are not going to yield any result. You may very well stop trying. You are wasting your time and energy."

The bird halted for a minute and responded to all of them : "It does not matter whether my efforts would yield the results I want, It does not matter whether i would be able to extinguish the fire or not. I do not even know whether i can save anything in this house. It does not matter what will be the end result. I am not even thinking about that." When people heard this response from the bird, they were puzzled. I mean, if the end result does not matter, then what is the point making such an effort. They once again asked the bird: "If it does not matter whether the fire will get extinguished or not with your efforts, then why are you trying so hard?"

The bird stopped once again and replied calmly to all the onlookers: "When the history would be written and someone would read this incident ever in future, there would be 3 categories of beings that would be talked about - "First, those who lit the fire, Second, those who watched the fire, and third  those who made an attempt to extinguish the fire. I do not wish to be counted in the first two categories." Villagers were stunned by the response.

This story is not about the end result. It is about the intent, the effort and the thought process. I was amazed by the thought process of the bird. It is so important that you hold you own self in high esteem and for that to happen, you need to make an effort towards doing the right thing, without worrying about the end result or whether that would make any difference in the end or not.

Mahatma Gandhi once said : "Satisfaction lies in the effort, not in the attainment, full effort is full victory."

So go on, chase your dreams and goals. Live them while you have energy in your body and before your time runs out.  Do not keep procrastinating them. In the end, it will not matter whether you are able to achieve them or not. What will matter is that you made a serious attempt. At the end of life, this effort of making an attempt will give you immense satisfaction.


Manoj Arora

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One person can make ALL the difference

Thursday, November 22, 2012

The Power of Simplicity

"Simple" has immense power.

Doesn't the above quote look too simple? Yes, it is. But why do we need to complicate it if it conveys the message that we want to convey. Most of us, in life, either ignore or undermine the power that simple things can bring. We either believe that such simple things cannot bring success, else everyone would have achieved it or we get satisfaction out of complicating things for ourselves.
We discussed this to an extent in one of our earlier posts : "Big things will happen by doing Little things right"

Leonardo da Vinci once said : “Simplicity is the ultimate sophistication." . Let me share with you a few examples that i have seen in my life that are governed by the principles of simplicity.

Both my daughters are fond of playing video games on any iPhone or any touch screen enabled phones that they can get hold of. Whenever any of my friend pays a visit to our home, they look forward to the opportunity of grabbing their phones and look for some new and adventurous games. Not that they do not have a laptop of their own at home but it is just the fun and excitement of playing high quality games over a touch screen enabled device that excites them. Could you have imagined all this 10 years back? Steve Jobs had a penchant to break the digital divide between the devices and humans. He wanted to make things so simple to use so that any "kid" could operate it without any formal guidance or training. He believed that simplicity has lot of power. Today, we can easily see the way the world has accepted such devices which simplify our lives.

Mc Donald's, the burger maker, sells 3 times more Aloo Tikki burgers in India than its world wide no. 1 best seller - Mc Chicken Burger. It is not that Indians do not like chicken, but Aloo Tikki burger can reach masses and is so much more simpler to associate with.

Warren Buffet, arguably the greatest investor of all times, has an advise for all his investors. He says that any investor who wishes to make long term profits should not complicate his or her strategy of stock selection beyond the simple mathematics that it deserves. No financial degrees, no complex charts are necessary to make such decisions. You do not need more than high school maths to arrive at a stock that will pay you handsome long term returns. Of course, there are other subtle attributes in your personality that contributes to your success in stock market, but keeping things simple has made him one of the best known investors in history.

Look at all the above examples and start thinking about those things that you feel are complicated for you in your life. If you cannot find a means to simplify something, it is very likely that it will never lead you to success. Success is always linked to simplicity, whether it is success in your professional life, your family life, your passion or anything else. It is we, the humans, who are masters at complicating simple things and then getting ourselves entangled in the same.

Financial Freedom, Stocks, Equity, ....nothing is complicated as long as you keep it simple. The book "From the Rat Race to Financial Freedom" talks about an extremely simple methodology and plan to get financially free. Sometimes, it looks so simple that many of us might not even believe it, to the extent that we may ignore it. For example, if we all understand the simplicity and yet the power of compounding, sound planning and great execution, reaching financial freedom is well within everyone's grasp.

Go for it folks, keep things simple, and realize the immense power that simplicity brings with it. Do not underestimate the huge potential of simple things just because they are simple.

As Albert Einstein once said: “If you can't explain it to a six year old, you don't understand it yourself.”


Manoj Arora

Monday, November 19, 2012

Your TIME is your most valuable ASSET

Rohit and Sapna have been happily married for the last 10 years. They have an adorable 5 year old daughter who has just started going to school. Both of them work for top notch multinational companies. Money is not a real problem for them. They earn well, and spend well. 

Weekdays are typically packed from early morning conference calls till late night customer meetings. They hardly get time to talk to each other except for the customary, mundane and routine activities from getting their kid ready for school, getting themselves ready for office, checking emails before they launch for a long drive for office. After going through the office churn and by the time they are back home, they are too tired and exhausted to think of anything other than planning for the next day.

However, they look forward to the "weekend" time. Weekends are typically a new movie in a theater followed by a dinner at a good restaurant and a great drive back home. Other than that, usually, the modern technology forces them to stay connected to office through SMS, phone calls or emails over phone. 

Because of the high profile jobs and the money that both Rohit and Sapna earn, they have been able to procure an elegant apartment (of course on a 20 year home loan). They also have a good latest model SUV and other latest electronic gadgets. Do not ask me about the loan part. It is very obvious. Loan, now a days, seems to be our birth right. They also realize that they got to continue to work for the next 20 years to make sure that they pay off all their loans. Not that they seem to have any issue with working and continuing to earn better salaries as they grow up in their career paths.

Everything is going fine and life seems to be picture perfect, or so it seems from the outside.Something is not 100% right. They are not truly happy.

Does this story sound familiar to you? Are you a part of a similar story line? While money and luxury have not been a problem in Rohit and Sapna's lives, they had one big assumption throughout their "successful" career journey, which seems to be going fundamentally wrong. They always had a feeling that having enough money will solve most of their problems. Well, hold your thought. I am not against money at all. I love money to a large extent. Money is surely important. There are no two considerations about that. But is money the MOST important ingredient of life? Is there anything that is even more important than money? Is there anything that is available to you only in defined and limited quantity and you cannot do without that? There is ... and that's TIME.

"TIME is money" is an age old saying. We read it, appreciate it and ignore it. Simple. 

Rohit and Sapna got everything correct in their lives except for understanding the fact that TIME always stays over MONEY in terms of its asset value. 
Let me try and explain you how.

While you can work hard and earn more money, you cannot do the same with time. You can never earn more time in your life. Time is limited. Worse, unlike money, you cannot control time's expenditure. Time of your life is getting spent at the rate of 24 hours per day and you cannot get more than that, you cannot take it on loan and you cannot produce it. And if you look at it closely enough, Time happens to be the biggest ingredient that enables your capacity to earn even money. 

Because of all these constraints on time, TIME scores as your most important asset in life, much more important than money is.

Let me ask you a very simple question to emphasize how this theory on time translates to practical life. When do you see your child more happy? When you give him more gifts OR when you gift him with more of your time? In most cases, i have seen the response as latter. That was true for Rohit and Sapna and that's true for me and my family as well. Your child needs more time. He can play with an ordinary or even a broken toy as long as you are physically and mentally involved with him or her with all your time. But you give him the best and the costliest of the toy and you would see that he would get bored in a few days, if not earlier. 

Your child wants your TIME. Your spouse needs your time, your parents need your time, YOU need your own time for yourself.

I want to reiterate that i am no way saying that money is not important. But what i am only suggesting is that "do not try to trade off ALL your available time for money". It is not a wise deal by any means. Save some of it to have the right balance in your life. 

There are only 2 ways to balance time and money in life. 

1. Do not trade off all your time with money
You have got to create a balance in your life. Do not keep running in a rat race not knowing where you are headed. After you have enough money for a decent living, you got to hold on to trade more of your time with money. Progression, beyond a certain point, in your job may not always be for good, especially if it consumes more of your time and introduces more stress in your life. Stay happy in the position you are in - keep earning enough but have enough time in your life to give it to your family and loved ones.

2. Accumulate enough money so that you don't have to spend any more time to earn money.
You can trade back your time if you accumulate enough nest egg which is self sustaining in nature. We call this state as "Financial Freedom" and this freedom allows you to spend your TIME the way you want it. The money part is taken care off by the nest egg, which ensures flow of enough money to meet your regular money needs.Yes, it takes some time and patience to reach this state, but that is one way to come out of the rat race and spare enough TIME for our family.

Whatever path you take, make sure you understand and acknowledge the fact that time is limited and you cannot produce more of it. Spend it wisely. Even if you have not spent enough time with your family till now, you can start doing it now. 

Mother Teresa once said:
“Yesterday is gone. Tomorrow has not yet come. We have only today. Let us begin.”  


Manoj Arora

Saturday, November 17, 2012

5 Year Tax Saving Fixed Deposit (FD) under Section 80C

Can we do a risk free investment that not only saves your tax under Section 80C but is also more liquid than PPF or EPF? If yes, then you must have a look at 5 Year Tax Saving Fixed Deposit (FD).

Thursday, November 15, 2012

Be careful of what you feed your mind

Nutritious filling breakfast, elegant lunch and a light but fruit and salad filled dinner..We do take care of what we feed our body. But are your physical problems only a result of what you feed your body? Or it has do something with what you feed your mind?..Read on...

Monday, November 12, 2012

What is Reverse Mortgage Loan

What is Mortgage?
We understood the fundamentals on mortgage in one of earlier posts titled : "Understanding Mortgage" . I would suggest you to go through the details of Mortgage before getting in to understand about Reverse Mortgage.
In layman's definition, a mortgage is a loan to finance the purchase of one's home. This is clearly the biggest debt that you would ever get into in your life.
Literally, The word mortgage is a French Law term meaning "death contract", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.

What is Reverse Mortgage Loan (RML) ?
Reverse mortgage is a loan that enables home owners above 60 years of age to convert a part of their self-owned home equity into income without having to sell it.
Under the scheme, the bank determines the value of the property and fixes a percentage of its current value as loan amount. This is based on various parameters e.g. likely lifespan of the senior citizen and his spouse.
Typically, the loan amount is 60-70% of the market value of the property. The applicants have the option of taking the loan as a lump sum or a fixed monthly amount. After the death of the senior citizen, the surviving spouse can continue to occupy the property till his/her demise. The value of the property is periodically re-evaluated by both the parties, the owner and the bank. If the valuation has increased, the applicants are given the option of increasing the quantum of the loan.
However, one should be prepared to shell out money for charges like processing, valuation, as well as legal fees for availing of the loan. The maximum limit for processing charges is Rs 10,000. The valuation and legal charges may add up to between Rs 5,000 and Rs 10,000 depending on the loan amount.

How is the Reverse mortgage loan paid back?
With a reverse home mortgage, no payments are made during the life of the borrower(s), unless you want to pre-pay and cancel the reverse mortgage contract. 

The loan has to be paid only after both the borrower and spouse die.  Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas, where the appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.

When both, the borrower and spouse pass away, the ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remains.

Renting out a Reverse Mortgaged property
One of the clauses in a reverse mortgage agreement is that the property in question should be a house that is being used by the borrowers as their principle residence. This implies that renting or leasing the property is not legally possible.

Selling a Reverse Mortgaged Property
Selling a reverse mortgaged property is legally permitted. But one must consider the following before going ahead:

1) Compare the total debt incurred (because of the monthly principle and interest that the bank is accruing as per the reverse mortgage agreement) with that of the house's market value. If the amount owed to the bank is more or less the same as the current market value of the property, or if the positive difference is minimal, it may not make too much sense to sell the property.

2) In fact, you may not be able to sell the property if you owe an amount to the bank that is close to the value of the property and do not have the financial resources to cover the costs associated with selling the home.

What happens if property prices go down?
If the current value of the property is less than accrued principal and interest amount, the bank suffers a loss. This is a risk that the bank is taking while signing a reverse mortgage agreement with you. This could happen if the real estate market has not moved up in the manner that the bank had initially estimated. 

In that case, you are either required to pay back the principle + interest to the bank and take possession of your property or you may decide not to do so, in which case bank owns the property. Since the property price is less than principle+interest, bank might suffer a loss.

Tax Implication of selling a reverse mortgaged property
1) The borrower will have to pay capital gains tax on the profit generated from the sale of the property.
2) However, banks don't need to pay anything as the property is held as a security or a collateral for the loan that it has provided.
3) Another crucial consideration is that the loan borrower should have an alternative accommodation before he plans to sell his house. A rule of thumb is to opt for a sale only if the proceeds are large enough to facilitate another accommodation after repaying the loan to the bank. Besides, the transaction should yield enough amount so that it can be invested to fetch reasonable monthly returns.

How to foreclose a RML?
1) A senior citizen who has reverse mortgaged his property can easily claim ownership by paying the outstanding sum to the bank. 
2) The pay structure of a reverse mortgage is such that you owe only what you have received of the loan amount till date, along with the interest payable and any fees that the lender may charge. According to bank officials, the institution calculates the interest till the day the principal amount is to be paid. So the interest is calculated on the money taken till date. Many public-sector banks don't even have a foreclosure charge while some may have.

When to consider taking Reverse Mortgage ?
Even though Reverse Mortgage seems like a nice idea, it should not be the primary tool to fund one’s retirement expenses. It should not be used to fund the shortfall in the retirement income. 
It should be used in exceptional cases like if one does not have any legal heirs or leaving money to/for them after death, is not a high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income. One can use reverse mortgage in that case.

Quick Recap on Reverse Mortgage Loan
1. Reverse Mortgage is available to Senior Citizens only. Any house owner over 60 years of age is eligible for a reverse mortgage. If wife is a co-applicant, she  should be above 58.
2. The maximum loan is up to 60 per cent of the value of the residential property subject to maximum of Rs 50 Lacs.
3. The maximum period of property mortgage is 15 years. Minimum tenure will be 10 years. Some banks like PNB offer a Reverse Mortgage Loan for 20 years also.
4. The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his or her discretion.
5. The revaluation of the property has to be undertaken by the bank every 5 years. 
6. The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. 
7. Reverse mortgage rates will vary according to market conditions depending on the wheather borrower has chosen Fixed or Floating interest rate. 
8. One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.


Manoj Arora

Friday, November 09, 2012

6 Inspiring Lessons from Sir Edmund Hillary's Life

GOD made you and me with the same dedication, commitment, focus and HOPE as HE did for someone like Sir Edmund Hillary. This is also true for each and everyone around us. When HE created us, he did not create any difference, in terms of giving us the "freedom" to mould our own lives, live the life that we want to live, define our own path and to go and achieve our own goals and dreams.

Tuesday, November 06, 2012

What is in a Gift - Know about Gift Tax in India

Most of us consider giving and taking gifts as a normal tradition in India and may not have ever bothered to even look at the fact that this could also have some serious tax implications. The last thing that you want to think of while receiving a gift from your loved one is about its tax implications.

The Gift Tax has had a bit of a roller-coaster ride in India; There was a brief period when it was abolished and then it got renewed later. Let us look at a little bit of history

Gift tax in India is governed under the Gift Tax Act constituted on April 1, 1958. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash (including draft / cheque), received from one who does not have blood relations with the recipient, were taxable.

However, with effect from October 1, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax.

But in 2004, Gift Tax was again revived partially and a new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to this,"any gifts" received by any individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable (there are exceptions to this which we will deal with subsequently). Note that the individual who has recd the gift is going to be taxed and not the person giving the gift.

The 'any gift' clause means that not only cash but all gifts of any value. So if someone receives a gift of a house worth Rs 30 lakh (Rs 3 million), then he/she is automatically in the highest income bracket and has to pay 30% + surcharge on value of the house as tax (close to Rs 10 lakh (Rs 1 million) in this case).
The rule thus effectively prevents money laundering in the guise of high value gifts. 

Exemption from Gift Tax:
In the following case, the receiver of the gifts will be exempt from applicable gift tax:
1) The gift being given by a blood relative, irrespective of the gift value. So, was this a sigh of relief? :)
2) Immovable properties located outside the country
3) Gifts received from relatives (including non blood relatives) on the occasion of marriage.(including gifts received by daughter-in-law from parents-in-law; but excluding gifts received by son-in-law from parents-in-law)
4) All gifts received by way of a will and inheritance
5) NRIs gifting parents in India from their NRE account

It is important to understand who falls under the "relative" terminology as defined in the tax laws

Defining Relatives
The section goes on to define the term "relative" to ensure that there are no loop holes which could in turn lead to some sort of money laundering. The relations who would come under the ambit include
  • Spouse of the individual
  • Brother or sister of the individual
  • Brother or sister of the spouse of the individual
  • Brother or sister of either of the parents of the individual
  • Any lineal ascendant or descendant of the individuals ie children and grandparents.
  • Any lineal ascendant or descendant of spouse of the individuals
  • Spouse of the Brother / sister of individual or brother/ sister of spouse of individual

Gifts received by children
The gifts received in the names of one's minor children will be clubbed with the parents' income for taxation purpose.
Also the taxman is very alert in saying that, in case of both parents having income, clubbing will be done with that parent who is earning more.
So one cannot hide under the cover of their minor child(ren) receiving the gifts.

Real estate Gifts
Real estate deals done for values lower than the rates fixed by state governments / local bodies will also be taxed, because the difference in the value is essentially a gift. Here, the tax will be levied on the difference of amount between state government's rate and purchase price. The tax needs to be paid by the buyer of the property.

An effective curb against money laundering
It was found that many individuals used the loopholes in this act, to launder money.  The key reason for bringing back Gift Tax in its latest avatar is to plug loopholes and make norms more stringent. It is clear that exchanging assets amongst relatives to evade taxes have come under control and this has also ensured that the Income tax authorities can keep tab on the movement of assets (movable / immovable).


Manoj Arora