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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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Manoj Arora    About Me
Author Mission    My Mission
Credentials & Awards   Awards & Credentials

Corporate & Family Gifts   Corporate & Family Gifts [NEW]

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Saturday, June 29, 2013

TDS on property sale in India Section 194-IA

[Last updated : 12-Dec-2017]
If you are buying a property, remember that it is your responsibility as a buyer to withhold 1% of the sale deed value from the payment to the seller and get it deposited with the Income Tax authorities as TDS in the sellers name. This tax (called as Withholding Tax), is applicable from 1st June 2013, on sale of any immovable property (other than agricultural land) costing more than Rs.50 lakh u/s 194-IA.

Tuesday, June 25, 2013

What is Advance Tax in India

Just like Wealth Tax, "Advance Tax" is another element of taxation which often gets neglected by most of us, probably because of lack of awareness... but remember that as you grow rich, you better equip yourself with all the required knowledge, for ignorance is never an excuse.

What is Advance Tax?
Advance tax is the income tax payable if your tax liability exceeds Rs 10,000 in any financial year. Advance tax should be paid in the year in which the income is received. Hence, it is also known as the 'pay-as-you-earn' scheme.

Is it applicable to you?
Advance tax is applicable when an individual has sources of income other than his/her salary. For instance, if one is earning through capital gains, interest on investments, lottery, house property or business, the concept becomes relevant.

Is there any Rebate / Penalty applicable?
Any rebate due (in case you paid more than your tax liability) fetches you an interest of 0.5 per cent every month, or, six per cent annually, as in the case of an income tax refund.
However, if you don't pay the advance tax on time, you'll be charged one per cent every month, or, 12 per cent a year.

Who should file it?
If you are earning income only via your salary, you need not pay advance tax as your employer deducts tax at source (TDS). However, you still need to file it if you have other sources of income, increasing your liability to more than Rs 10,000. Professionals (self-employed) and businessmen will have to pay taxes in advance as, given their business income, the liability can be huge. The same goes for companies and corporates.
- While employers deduct TDS on salaries, advance tax is paid on income that has not been subjected to TDS.
- There is a need to pay advance tax only when the advance tax payable is Rs 10,000 or more during the year. This might seem to look like a loop but the way in which it works is that the working needs to be done and if the tax shortfall is Rs 10,000 or more than this will trigger the advance tax provisions.  If the tax to be paid is less than this then there is no need to pay advance tax.
- It is important to note that in the entire working the existing tax deduction at source will have to be reduced from the estimated tax liability to see whether the requirement of the advance tax is triggered for an individual. 
- Thus there could be a situation where a person has to pay Rs 1.2 lakh of tax on his estimated income for the year but if the entire amount is already being deducted at source then there is no need for any advance tax payment.
- In another case where the tax to be paid is Rs 15,000 for the year but no amount is deducted at source then the advance tax requirements will have to be met.

When to file advance tax?
Advance tax or self-assessment taxes have to be paid on the 15th of September, December and March, in installments of 30 per cent, 30 per cent and 40 per cent, respectively, for non-corporates. Corporates need to pay it on the 15th of June, September, December and March.

How to file it?
You can pay advance tax using the tax payment challan at the bank branches empaneled with the Income Tax (I-T) department. It can be deposited with the Reserve Bank of India, State Bank of India, ICICI Bank, HDFC Bank, Indian Overseas Bank, Indian Bank, and other authorised banks. There are 926 branches in India that can accept advance tax payments. You could also pay it online through the I-T department or the National Securities Depository site.


Manoj Arora
Lead a Financially Free Life !!

Friday, June 21, 2013

Dividend Payout Ratio and Dividend Yield

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders....Read on...

Sunday, June 16, 2013

What are Index Funds in India

In this series of posts, we are studying about various kinds of mutual funds available in the Indian market. In the last post, we studied about Income Funds. Today, we would study about another important category called as Index Funds.

What is an Index Fund?
An index fund or index tracker is a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market.
Index Funds today are a source of investment for investors looking at a long term, less risky form of investment. The success of index funds depends on their low volatility and therefore the choice of the index.

What is an Index?
An index is a group of securities that represents a particular segment of the market (stock market, bond market, etc.). Among the most well-known companies that develop market indexes internationally are Standard & Poor's and Dow Jones.

What is the composition of an Index Fund?
Index funds will hold almost all of the securities in the same proportion as its respective index. Index funds can be structured as a mutual fund, an exchange-traded fund, or a unit investment trust.

What about Fund Management Fees?
Since the index fund directly tracks the index composition, it does not involve active fund management. The lack of active management generally gives the advantage of lower fees (which otherwise reduce the investor's return)

Tracking Error
The difference between the index performance and the fund performance is called the "tracking error", or, colloquially, "jitter". This is usually because of the administration fees or time delays in tracking.

Some Common Index and associated Funds
ICICI Prudential Index Fund  - tracks Nifty index
HDFC Index Fund Nifty Plan - tracks Nifty index

Why are Index Funds not as popular in India?
In spite of low cost and low risk, Index Funds in India are not as popular in India as they ought to be. Why?
1) Globally, it has been witnessed that as markets become more efficient, it becomes harder for fund managers to beat their benchmarks. Passive funds progressively become the preferred investment vehicle in such markets. In the Indian market's most efficient segment, the large-cap space (funds with more than 80% allocation to large-cap stocks), passive funds have a significant presence.
2) Today, returns from index funds are smaller compared to other diversified equity mutual funds, and investors generally avoid these funds. It has been proven that some random stocks could beat market returns
How should to choose best index funds in India?
1) Expense ratio: Since there is no research or higher management costs, the costs of index fund should be relatively low. E.g. for IDFC Index Nifty fund, the expense ratio is 0.25% and followed by Reliance Index Nifty fund at 0.40%.
2) Tracking error: If all the Index funds tracks the same index, then every index fund should offer the same return. Then our choice is to pick-up a low expense ratio. However you also need to check the tracking error. The returns generated by an index fund may vary due to returns generated by underlying index. This deviation from index fund returns is called tracking error. Generally low tracking error funds are good. 


Manoj Arora
Lead a Financially Free Life !!

Wednesday, June 12, 2013

What are Income Funds

If you are a novice to mutual fund investments, it can be difficult to pick the right ones given the number of schemes on offer. I am starting a series of fund types available in the market. This first post in the series deals with Income Funds.

What are Income Funds?
An income fund is a mutual fund whose goal is to provide an income from investments.
Income funds are often assumed to be bond funds, but they may be stock funds instead, more accurately called equity income funds. Typically these hold stocks with a good history of paying dividends. In fact, a typical income fund holds both stocks and bonds, to gain some of the strengths of both.

The point in any case is that the investor is more interested in income than capital gains, perhaps with the intention the fund will never be sold.

Who manages Income Funds?
They are managed by expert fund managers who actively try to manage the portfolio based on interest rate movements, while at the same time keeping the portfolio credit worthy.In other words, they seek to generate returns both in declining and rising interest rate scenarios by managing their portfolio actively. They either generate interest income by holding the instruments till maturity or manage gains by selling them in the debt market if the price of the instrument rallies well.

If you are investing for not less than two years, then ‘income funds’ a class of debt mutual funds can deliver superior returns compared with bank deposits. That means you can earn a bit more than traditional debt avenues, by still staying invested in debt.

Income fund advantages
• Highly liquid. Can with draw money anytime unlike fixed deposits that come with a fixed lock-in period
• Actively managed. Seek to generate returns from varying interest rate cycles
• Have historically generated superior post tax returns than fixed deposits.
• Very tax efficient, especially for those in the 20% and 30% tax brackets. Long-term capital gains (for holding over one year) are taxed at 10% without indexation or 20% with indexation. Interest on fixed deposits, though, is taxed at your income slab.
• Offers high flexibility. Besides investing systematically you can even withdraw money systematically thus generating regular cash flow for yourself.

How to use income funds?
• Invest your money in a combination of traditional fixed income options such as deposits and income funds to pep overall returns. You need not put your money in one basket.
• When you build a mutual fund portfolio, consider investing over one half of your capital in income funds when you have a time frame of say 2-3 years
• Use income funds, along with equity funds, as part of a long-term asset allocation strategy to build wealth.
• You can use income funds to also provide for some monthly cash flows by opting for a systematic withdrawal plan after first holding it for at least two years.

Words of Caution
 The returns depend on the fund manager's ability to make the right calls on interest movements.
 If you have a time frame of less than 18 months, there are other short-term debt schemes that mutual funds offer. Income funds will not fit a short time frame. 
 Income funds do not guarantee fixed returns nor are they covered by insurance as is the case with bank fixed deposits (up to Rs 1 lakh). To this extent, they do not top the safety chart.


Manoj Arora

Friday, June 07, 2013

Fixed Deposits vs Debt based Mutual Funds

[Last Update : 11-Aug-2017]
In a landmark move that is going to set the tone for future, State Bank of India lowered the interest rate on savings account from 4% to 3.5%. All other banks are likely to follow suit. Fixed Deposit Rates are hovering around 6-6.5%. There has been a reduction of 25% in interest rates of Fixed Deposits of what investors were earning just a couple of years back. The ease and confidence in Fixed Deposits is being challenged by another aspect : worthiness of staying with them.

Wednesday, June 05, 2013

Home Insurance for an Apartment Flat in India

Any standard home insurance policy will protect the structure of your house and its contents from perils such as fire, flood and earthquake. The terms are therefore straight if the house is on your own land. However, if you own an apartment, which is equally exposed to the dangers of getting partially damaged or completely razed by a natural or man-made calamity, it may raise some queries in your mind considering that your apartment is just one part of the complete building. Let us find more.

How it works?
In case of loss due to risks listed in the insurance policy document, the insurer will pay on the basis of the house's reconstruction cost. The reinstatement value (the price needed to reinstate the house back to its original condition before the calamity) is calculated on the basis of the built-up area and the construction cost, generally fixed by the insurance company. 

How to calculate the Sum Assured Needed?
You just have to estimate the cost of rebuilding the apartment 'which should be the sum insured' and the insurance company will pay accordingly in case of loss. The insurance plan for an apartment has the same underwriting principles and sets of inclusions and exclusions as a policy for an independent house, irrespective of the floor on which the flat is. There are no additional features either. The insurance is done considering the built-up area and the cost of reconstruction. If you feel the society's insurance is inadequate, buy an individual policy as a top-up cover.

Who does the group insurance?
Usually, housing societies get the structure of the building insured. This means you have to insure only the contents of the house such as jewelry, electronics and furniture. If the society hasn't insured the building, you can buy a cover individually as well.
In such a case, each flat owner gets a separate insurance cover. An insurance contract is concluded based on declaration by a proposer wherein occupancy is also declared. So, if your declared occupancy has not changed, for example from residence to a shop, the policy will continue and the claim will not be affected even if your neighbor has breached the contract.

What about an "Under Construction" Apartment
You cannot buy a cover for an individual apartment in the course of its construction since it is part of the entire building structure. While a building is under construction, it should ideally be covered under a project insurance policy taken by the builder.
This would be in place until the construction is completed as per the approved plan. After the completion of the project, either individual flat owners or all of them together, as a society, can buy the insurance cover.
In case it is a private bungalow or an independent house which the customer himself or a builder is constructing, then the owner can take a cover for the same and change it to a regular home insurance cover  after the completion of construction.

If neighbor violates policy terms in a group policy

An insurer can reject your claim if any commercial activity is being carried out from your house. But if the flat is covered under a common policy taken by the society as a whole and your neighbor violates the policy terms, then usually it does not lead to rejection of your claim. Such activity by a neighbor will not affect the claim as long as the flat owner doesn't breach the contract himself.

What about common areas of the building?
The only difference between buying a cover for an independent house and an apartment relates to common areas such as compound walls, staircase, etc.
The whole apartment, including the common area, can be insured only by the residents' association on behalf of all flat owners. In such a case, a copy of the policy is given to each flat owner with details of the sum insured for individual flats. If an owner feels the sum is insufficient, it can be increased through the association only.

Will the claim settlement be with society or individual owner?
If a single flat in a building has been insured the cost of reconstruction of the flat is payable, to the flat owner, but up to the sum insured. Even if the proposer was the association, there is a provision to settle the claim with individual flat owners, to the extent of damage to the flat, provided the association gives a no-objection certificate. However, if the association takes up reconstruction, the amount will be paid to the association only.

Adequacy of sum insured
Since sum insured is the basis of compensation, it is important that it reflects the correct property value. Most people make the mistake of choosing the sum insured equal to the market value of the house, which may be extraordinarily high. However, the company pays on a reinstatement basis, which keeps fluctuating with construction costs.
On an average, one can take a 10-15% increase in the cost of construction (this differs from city to city) every year. One can check construction rates from the municipal corporation or real estate websites. However, arriving at an exact figure is difficult.
A customer can also opt for an escalation clause for increasing the sum insured every year. "The escalation can be up to 25% of the sum insured.

Tenure of the cover
You can either go for an annual cover or choose a multi-year policy. While the annual policy will give you the option to revisit the sum insured's adequacy every year, a long-term policy offers discounts which can be as high as 50%, depending on the tenure.

Manoj Arora

Saturday, June 01, 2013

Book now available for sale on Amazon - Kindle and Paperback editions

Ah !!
It doesn't get better than this...my vision of reaching out to as many freedom seekers as possible across the globe gets a big boost as the book is now available at Amazon. Not only that, the book is now available in both the editions - the standard paperback edition and the much awaited e book edition - the Kindle edition.

Exactly three weeks after the launch of the book (From the Rat Race to Financial Freedom) on 10th May 2013 at Landmark, Gurgaon, we have formed our own army of 21 registered freedom seekers on the Financial Freedom portal (RR2FF Portal)

These are the people who have decided to take on the challenge of this journey to achieve financial freedom in life - and then chase their true dreams in life. I have been talking to some of these freedom seekers and i realize that most of them would want to contribute to the upliftment of the people and society around them. That's the key. We re trying to bring in a big change.

The more of such people i can inspire, the closer i get to my mission in life - and that is to elevate my society.

With the book now available on Amazon, i am sure i have got a shot in the arm.

Go on folks, come out of your comfort zones and think if you can live a life which is extraordinary. It is worthwhile to put an effort to strive for your freedom, because on the other end of this freedom journey is a completely different and beautiful world, which gives us a chance to change the world around us - after taking care of our own and family finances for the rest of our lives. 

This is perhaps your only life, and you can add value to the life's of others around you.

Wish you all the best.

Manoj Arora