Category: Blog

18 Jun 2018
Real estate insights

What’s happening in residential real estate and Why? An Insights

‘See Sanjeev, I have the money since I’m recently retired, property is actually very cheap now and I don’t have too many liabilities. Then why the fxxx are you not letting me buy a good property?’

‘But Sir, why real estate of all the things!’

‘Everybody knows that property only goes up, you get good rentals and you can even take a home loan and save so much of tax!’

‘Sir, the property has only moved downwards in the past 4½ years, rental returns are traditionally only 1½ – 2% of capital value, and you save 30% tax on the home loan interest paid but you pay the balance 70% more too to save this 30%. How is it a good investment?’

And after this conversation and more, the senior officer went ahead and invested in a residential property with most of his retirement corpus!!

As far as I know, most of the people with some liberal amount of money are only biding their time by investing in financial assets (FDs, mutual funds, Govt bonds, savings account etc) till they think property prices are likely to resume their upward journey and then would jump on that bandwagon.

So, is it the right time to buy property again, since the prices are at their one of the lowest in recent times?

Before we answer this question, it may be worth its while to analyse why the real estate prices are so down and seem to continue their southward journey to a bottomless pit:

  • It all started as a regular cyclic real estate downtrend in 2013 or so but got a further kick with the current Govt’s war on black money – the colored part of the money which was opium to real estate, started feeling the heat.
  • The systematic raising of circle rates across the country in line with the market rates further limited the playground for the black money. And then there was demonetization…
  • To top it, the current huge inventory – those concrete jungles of rows after rows of unoccupied houses in metro cities around the country reminding one of the similar ghost towns in China, with many more adding up each month – has created huge Demand-Supply imbalances which will take years to be absorbed by buyers.
  • Lastly, regulations like 1% TDS on real estate transactions beyond Rs 50 Lakhs transaction, close monitoring of real estate deals by the Income Tax Dept, implementation of RERA by many states, etc have added to real estate woes.

Do you think even one of the above four reasons is going to go weak in times to come? We think there are no signs of this so far. In fact, the regulatory interventions seem to be only intensifying. Consequently, the arbitrariness of the builders is going out, the sacksful of money used in deals is getting much thinner, there is some semblance of state control coming into this sector, common man (‘the customer’) is getting some say in the state of affairs and many large, loud builders have started going belly up.

So, is real estate dead as an investment? It would be too naïve to write an obituary for a sector which is one of the biggest informal employment generators in India, though it seems to be a long haul ahead for it. Spring shoots are around but only for a small ticket (the ‘affordable’) residential properties, due to the sops being given by the Govt in home loans and in tax exemption to builders for such properties. They don’t interest most people due to the small profit potential.

However, if you still wish to try your hand at the residential real estate, look for genuinely distressed sale properties – there are few around now with prices having been down for such a long time. You may also plan to invest in areas where a real estate trigger is likely to come in a short while – metro being announced, an important highway or road coming in, a flyover facilitating connectivity, IT park or big mall or even an unauthorised colony being declared authorised etc, with good research to establish authenticity. Or you may get really lucky and be able to identify a new property available to you at great prices even with the facility to pay in installments…. who knows!

But for other potential real estate investors, it may still be a long haul.

Like the article?

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16 Feb 2018
Mutual funds

Invest in SIPs and take control of your Finances

Albert Einstein is supposed to have remarked: *Compounding is the 8th wonder of the world – one who understands it, earns it; one who doesn’t understand it, pays it!!*

Compounding as a benefit of Mutual Fund is been a very talked about subject. But as a layman not many know how does it work.

Compounding is simply an activity in which the earnings of the original investment also earn the same rate of return as an original investment.

Now in the case of Mutual Funds let’s say you invested in the fund when the NAV is Rs. 20. Now assume NAV goes up by 25%, in that case, the New NAV will be 25. Again markets go up by 20%. Now the new NAV will be Rs. 30 which is 20% above Rs 25. If there were no compounding than the return would be 20% over Rs 20 which was an original investment. This is compounding in Mutual Funds for you.

I would like to say is that for a long-term investor compounding will work in his / her favor. In fact, I must say compounding is the magic which magnifies your return over the long term.

It is a way which allows an investor to take control on the finances and Systematic Investment Plans are the way to manage finances with ease of investment.
12 Feb 2018
union budget insights

What’s in it for you in 2018?

Finance Minister Arun Jaitley presented the Union Budget 2018 yesterday, a month ahead of the usual date, in the backdrop of a strong stock market rally in 2017, high equity valuations, rising crude oil prices, dropping bond prices and an expanding current account deficit. As expected, the Budget has a populist stance, given the upcoming state and General elections in the next 9-12 months.

The budget has doled out a series of measures for alleviating farmer distress and boosting the rural economy and ongoing support for broader Infrastructure development. While a lot of technical and financial jargon can be written on what all the Budget has, we would give out here only the salient aspects that concern you and your investments. Anybody interested in knowing more can refer to the 102 pages long Finance Bill 2018 (as the budget is called in official jargon) which is available at lots of websites by now.

Salient aspects of the Budget:-

There is no change in the personal tax slabs. Hence the slabs remain the same as below:

  • 0             –          2.5L                                 :              Nil Tax
  • 2.5L        –          5L                                   :              5% tax
  • 5L+         –           10L                                :              20% tax
  • 10L+                                                         :              30% Tax
  • Senior Citizens (60 – 80 Yrs age)            :              Nil Tax is till 3L
  • Super Senior Citizens (80+ Yrs age)       :              Nil Tax is till 5L

Education Cess is being increased from 3% to 4 % and to be known as Education and Health Cess.

  • TDS (Tax Deduction at Source) limit on Interest on FDs raised to Rs 50,000 for senior citizens. Senior Citizen Medical Insurance limit (under Section 80D) raised to Rs 50,000. Critical illness expenditure limit (under Section 80DDB) also increased to Rs 1 lakh for senior citizens.
  • Standard Deduction of Rs 40,000 for salaried employees. However, benefits of no-tax on transport allowance up to Rs 19,200 and Medical Reimbursement up to Rs 15,000 under Section 17(2) are being withdrawn. Thus, net benefit to salaried class is only Rs 5,800.
  • Section 54 EC benefits, under which one could buy Capital Gains Bonds to save Long Term Capital Gains (LTCG), is now restricted to long term capital gains arising out of sale of land or buildings only and not to any other asset classes. Section 54EC bond tenure is also increased to 5 years from 3 years earlier.
  • Penalty for non-filing of Income Tax Returns (ITRs) is being increased to Rs 500 per day from Rs 5000 one-time.
  • Government to take all steps to eliminate use of cryptocurrencies which are being used to fund illegitimate transactions. Hence stay away from bitcoins etc since the harsh measures likely to be adopted by the Govt may jeopardise your entire investment.
  • In the end comes the contentious aspect of tax on equity (stocks and equity mutual funds). The tax introduced is slightly complicated and hence will be explained below with an example. Please remember that it is much lesser than what was being speculated in media earlier.

A. Long term Capital Gains  (LTCG) Tax

Tax Rate:
Capital gains over Rs 1 lakh to be taxed at 10% (no indexation benefit).
Method of Calculation: Any notional gains till Jan 31, 2018 are proposed to be exempted in calculations for long-term capital gains the way they are currently.
Applicability: From April 1, 2018

Investment Implications:
For redemptions done from Feb 1, 2018 to March 31, 2018: No LTCG Payable as earlier.
For redemptions done from April 1, 2018 onwards, LTCG payable on the difference between (i) highest value on Jan 31, 2018 or cost of acquisition, whichever is higher; and (ii) Sale Value
Example: Assuming a stock bought for Rs 100 on July 1, 2017, highest market rate on Jan 31, 2018 is Rs 150, sold on June 30, 2018 for Rs 180, LTCG payable in FY18-19 will be on Rs 30 (Rs 180- Rs 150). The LTCG will be 10% on this Rs 30, that is Rs 3.

B. Dividend Distribution Tax on Equity Mutual Funds:

Tax Rate: Dividend Distribution Tax of 10% introduced on Equity oriented Mutual Funds which was hitherto tax-free. This will be deducted by the Mutual Fund companies and the investors will not have to pay this tax separately.
Applicability: From April 1, 2018 as per Finance Bill 2018
Hence, for those who have been sold (or have enthusiastically bought) Balanced Mutual Fund schemes to get dividends, 10% of the Dividend will go into Govt kitty from April 1, 2018. For those who haven’t, continue not to fall for this mis-selling pitch by some unscrupulous elements.

In our overall analysis, Budgets are irrelevant for long term market moves and this budget will also be the same. The emphasis on the Rural sectors and upliftment of the poor was expected in this last Budget prior to elections. However fiscal profligacy has been avoided to a great extent and that is a positive.

LTCG Tax introduction was widely expected and has come and now will provide policy certainty for the next few years on this front. Beyond this you will read many things in the papers; however, it is the performance of the Real Economy and corporate profits that will determine market movements. So, this is a basically a lack luster Budget which should not affect anything in your life or in your investing life.

For more information, feel free to reach us on, contactus@humfauji.in or call + 011 – 4240 2032, 40545977, 49036836 or

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19 Sep 2017
Don’t lose Big time by not commuting the Additional Pension

Additional Commutation of Pension

Dear Friends,

I had written a series of two articles some time back comparing Commutation of pension Vs Non-Commutation, and recommended that everybody should commute pension due to the reasons outlined there. Now, for the officers who have retired on or after 1st Jan 2016, the Govt has given an option to further commute the additional basic pension accruing due to the 7th CPC (Central Pay Commission) recommendations. In this article, I will deal with this dilemma whether the officers who have retired on or after 1st Jan 2016 should opt for further commuting their additional basic pension or not.

Rather than writing a lot of words, I have taken the indicative data of four officers of the ranks of Lt Gen, Maj Gen, Brig and Col, all of whom have superannuated on 1st Aug 2016 at their respective ages of 60, 58, 56 and 54 years of age and compared the effect of additional commutation Vs non-additional commutation. To keep the things simple, I have assumed that all of them have commuted 50% of their pensions earlier. Similalry, while calculating their tax liabilites, I have assumed that they will take full advantage of the Rs 1.5 Lakh exemption limit of IT Sec 80C. In case of officers having tax-free pension due to Diability or Gallantry Awards, the only small difference will be the tax part.

Details of Commutation and Pension as per 6th CPC

The Table 1 below gives out how the four officers of different ranks retiring on the same day and commuting 50% pension would be receiving their pension and would have received the commutation amount. If they have invested their commuted amount prudently, avoiding (or at least not committing much amount to) ‘apparently’ safe investments like bank FDs, PO MIS, Senior Citizen Savings Scheme (SCSS), Insurance etc, they would be patting their backs on their decision to commute their pension – whether goaded by my earlier articles on commutation or their own personal decision to do so.

 

 

Comparison Commuted Vs Not Commuted pension as per Option given by the Govt now

Table 2 below gives out the financials as per 7th CPC for the four ranks now and paints two scenarios – if you do not commute your pension any further beyond what you’ve already done (ie, 50%) under 6th CPC; Or if you decide to avail the option and further commute 50% of the increased basic pension as per 7th CPC.

Don’t lose bigtime by not commuting the additional pension-min

It can be noticed that the so-called shortfall amount can be easily made up if the amount received as additional commuted amount is invested in financial instruments which yield approximately 9.4% average per annum. On a long term basis, a mutual fund portfolio of 35% Equity & 65% Debt can achieve this average return. If an officer wants to be very safe and invest in a 100% safe Debt portfolio and one assumes a very comfortable 7% per annum returns from this portfolio of very high quality Debt Mutual Funds, the commuted amount received can be used to give out additional pension through the Systematic Withdrawal Plans (SWP) route. The advantage of using this mode would be:-

  • The non-commuted pension is fully matched due to additional returns from the portfolio.
  • Taxation would be much less for first three years of SWP pension compared to tax on uncommuted pension since SWP has a component of Principal which is never taxed. Hence, only a part of the pension is taxed compared to uncommuted pension being fully taxed.
  • After three years, indexation benefits kick in into the investment portfolio and rate of interest goes down as per inflation. Most likely, there will be Nil tax after five years on the SWP pension for the next 10 years or so when the commutation is restored back.
  • As the table below shows (Table 3), you will have a substantial amount of money balance after 15 years even while your pension is fully matched for the 15 years of commutation vis-a-vis no additional commutation option.

Invest Commuted AmountWhat should you do if you are retiring shortly?

While the above cases dealt with the additional commutation option that the Govt has given to the officers who have already retired on or after 1st Jan 2016, what should the officers retiring hereafter do? I sincerely believe that if the officer invests his retirement corpus well, including the commuted amount, there is no reason why maximum commutation option of 50% should not be taken by each and everybody. The Table 4 below depicts the same. If you are prepared to invest the retirement corpus in about 35% equity, you do not have to touch your commuted corpus and can earn the same pension as uncommuted option WHILE STILL HAVING YOUR ENTIRE COMMUTED CORPUS INTACT. And if you do not wish to go in for any equity at all, a full debt option, yielding 7% returns only, will also leave you with a large amount of money 15 years later. Thus obviously, non-commutation is only going to make you poorer!

 

 


Summarising,

Why you should definitely commute your pension to the maximum extent allowed?

I summarise the benefits of commutation brought out in my two articles earlier below:-

  • The pension is fully taxable while the commuted amount is fully tax-free. If this commuted amount is properly invested, just a fraction of the tax would need to be paid compared to the tax on uncommuted pension while getting the same net pension.
  • With prudent investing without taking any or small risks with a small part of your commuted amount, you can have your same amount of pension vis-à-vis non-comutation while having a large amount with you throughout your life.
  • There would be a large bulk amount available in hand which is a big asset to deal with emergencies, financial goals and responsibility or simply to lead a much better lifestyle.
  • Since commutation is a one-time exercise, the commuted amount per month remains static. So while the pension rises continuously due to DA, pay commissions and now OROP, the commuted amount deduction is continuously reducing to be a smaller proportion of the pension. Eg, when I took my PMR in April 2010, my commuted amount was Rs 19,375 per month which was big proportion of my overall pension. Now it is a very small proportion of my Rs 77,000 net pension.
  • If something untoward happens to you, your family will get the same pension since the Govt disregards the commuted amount paid, irrespective of whether you commuted or not. Clearly, non-commutation in such cases is a big financial loss to the family.

 

If you wish to read our last article on Commutation, it is available here.

For more information, feel free to reach us on, contactus@humfauji.in or call + 011 – 4240 2032, 40545977, 49036836 or

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28 Aug 2017
Is this Diamond worth your money

Is this Diamond worth your money?

Life Insurance Corporation of India (LIC) is aggressively marketing its insurance policy, LIC Bima Diamond Plan, as a ‘Diamond for Life’. Let’s see if this ‘Diamond’ is worth your money?

LIC Bima Diamond Plan is a typical non-linked, with-profit, limited premium payment money-back life insurance plan. Non-linked means it is not ULIP or your money will not be linked to equity market movements. With-profit means, it is like investment product where you get returns on your investment based on the product feature. Money back means at a different interval of the policy term, you will receive some money from this policy.

Highlights of the policy

  1. It is a fixed tenure insurance policy. There are three tenure options – 16 years, 20 years and 24 years.
  2. The premium paying term is less than the tenure of the policy e. g. for a 16-year policy you have to pay only for 12 years.Money-Back (Survival Benefits)every 4th year.
  3. The premium rate of LIC Bima Diamond is one of the highest.
  4. It gives life cover even aftermaturity of the policy. It gives extra protection up to half of the policy tenure additionally. For example, for a 16-year policy, you would get life cover till 24 years. However, during the period of this extended protection, the sum assured would be half of the original amount.
  5. It gives life cover even after you stop paying the premium (called Auto Cover). This relaxation is up to two years.
  6. Itvdoes not give annual reversionary bonus. You would get loyalty addition after a certain tenure.
  7. This plan hasa loan facility.
  8. You can take accident & disability rider and new Term Assurance Rider.
  9. The maximum sum assured is Rs 5 lakhs, minimum 1 Lakh and entry age is minimum 14 years completed.

Positives of Bima Diamond Plan

  • It gives life cover even in case of non-payment of premium for up to 2 years. This feature does not leave you vulnerable at the time of financial distress.
  • The death cover continues beyond the policy maturity and can keep you insured till the age of 76 years.
  • You can add term assurance and accident rider to enhance your death cover.
  • You can avail loan from this policy for up to 80-90% of surrender value.

Negatives of Bima Diamond Plan

  • The premium rate is too high. For a sum assured of Rs 5 lakhs, the premium is up to Rs 46,000 per year.
  • Maximum sum assured is Rs 5 lakhs. This amount is exceedingly low for a normal middle-class family.
  • Though touted as a benefit, the sum assured gets halved in extended protection period which is grossly insufficient for a family after 20 years.
  • The maturity benefit would be very low as it pays the basic sum assured less the periodic money back payment already done. Thus if the sum assured for a 20-year policy is Rs 5 lakhs, the maturity sum assured would be only Rs 2 lakhs.
  • The returns from LIC Bima Diamond is less than the market rate. LIC is still giving 5-6% return. One would be in a better position by opting VPF and PPF for saving purpose.
  • Auto Coveris highlighted as a unique benefit but in case of death during this period, the due premium is deducted from the benefit payable. So it seems the idea is to run the policy as much as possible instead of showing in their books as LAPSED policies.
  • At maturity you are eligible for Maturity Sum Assured, which is 55% to 40% of Basic Sum Assured and Loyalty Addition. Hence, do notthink that the maturity benefit will be full sum assured as is the case with other plans.
  • Extended cover is showcased as a unique benefit. But, head-to-head, LIC’s New Jeevan Anand seems to be better in this aspect as offers the extended cover forever and full to the value of sum assured. In this plan, it is only up tohalf of policy term and half of sum assured.

Final Verdict

Any Endowment insurance plan of LIC is primarily an investment product, wherein you actually neither get good insurance cover nor satisfactory investment returns. It is sold as a good combination of protection and returns while all endowment insurance policies of all insurance companies fail on both the counts. In fact, the problem is mixing insurance with investment. Such a combo product never benefits the investor but only the insurance companies and the agents since the premiums are high, commissions are high and when time you discover this after taking the policy, you realise it has been structured in such a way that you can exit only at prohibitive costs (losses) to you.

Hence, we would recommend you to consider only a good term insurance plan for death cover, if you do need such a cover. For tax saving purpose, choose Equity Linked Saving Schemes (ELSS) or PPF/DSOPF. For investments, nothing better than a good portfolio of mutual funds.

For more information, feel free to reach us on, contactus@humfauji.in or call + 011 – 4240 2032, 40545977, 49036836 or

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