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.

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.

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?

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. !!!

Cheers

Manoj Arora

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.



WHAT’S THE DIFFERENCE?

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.


WHY DOES A COMPANY SPLIT IT’S STOCK?
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.

WHY DOES MARKET CHEER STOCK SPLITS?
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!

CONCLUSION
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!

Cheers

 

Manoj Arora

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."

Cheers

Manoj Arora

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.

Cheers

Manoj Arora