13 Jul 2021

Sold a house or flat lately? Hope you’ve calculated the payable tax correctly on your profits?

A year back, Col AK Nijhawan (retd) sold his Noida flat which he had acquired in 2002. In spite of the current real estate market conditions, where the prices haven’t moved for years now, he still got a fairly decent profit on it. He was happy because this money was going to meet the expenses of his daughter’s higher education abroad and his son’s marriage due shortly. The family too felt relieved that the sale of flat helped them do what they had actually planned for years.
And then came the rude shock – an Income Tax notice asking them the details of tax paid on this big transaction was received! And if no tax had been paid, then the tax with late penalty of about Rs 11.5 Lakhs was required to be paid within the next 15 days.
Col Nijhawan, in his exuberance of disposing off the flat, never even thought of the tax to be paid and had already used up all the money got from the sale of the flat.
Is this a unique, isolated incident? No.
We come across many such incidents regularly and the family is put to a lot of inconvenience, anxiety and financial hardships due to lack of awareness about this important issue.

What is this tax when you sell a residential house?

When you sell your residential property that is owned by you for more than two years, any gain arising from such a sale is called long-term capital gain (LTCG). If the period of holding is less than two years, it is called short-term capital gain (STCG).
In case of STCG, the sale price (less brokerage etc) minus the cost of purchase (cost of flat + registration charges + brokerage + stamp duty) is your profit. It is added to your total income for the year and taxed as per your tax slab.
In case of LTCG, the procedure is slightly lengthier but could give you a lot of tax saving. LTCG is calculated as the difference between net sales consideration and ‘indexed’ cost of property.
‘Indexation’ is the process which takes into account the inflation (महंगाई) while calculating the actual gains you have got. Eg, the Govt says that if you bought something for Rs 100 in 2001, then the value of those Rs 100 is really Rs 317 now.
So, if you sold that item for say, Rs 500, then your ‘real’ profit is Rs 500 – 317 = Rs 183 and not 500 – 100 = 400. The tax then to be paid is on Rs 183 and not Rs 400. Thus, LTCG can save a lot of tax for you.
Options with you to save this LTCG Tax
This aspect gets covered under Income Tax Section 54 (Section 54(f) for plots and others, ie those which are not residential house or flat).

Under Section 54, any LTCG arising to an individual or HUF, from the sale of a residential property (whether self-occupied or on rent) shall be exempt to the extent such capital gains (not the full amount but only the calculated gains part) is invested in:

  1. Purchase of another residential property within 1 year before (previous) or 2 years after the transfer of property sold from the owner, and/or
  2. Construction of residential house property within a period of 3 years from the date of such transfer of property; provided that the new residential house property so purchased or constructed is not transferred within a period of 3 years from the date of acquisition and/or
  3. Investing the LTCG into buying Capital Gains bonds (maximum up to Rs 50 lacs) under IT Section 54EC issued by authorized agencies within Six months of such property transfer.

There are also some other rules like depositing the amount of capital gain not utilized by the assessee for the purchase or construction of the new house before the date of furnishing of the ITR under the capital gains account scheme. Please properly research other relevant details before taking a final decision.

Key points to remember:

  • Current Long Term Capital Gains tax rate is 20%.
  • You are allowed to adjust your purchase and sale consideration for any brokerage, commission, registration charges, and stamp duty that you paid at the time of property sale.
  • You are allowed to deduct any expenditure on any brokerage, commission, registration charges and stamp duty, construction, and home improvement of permanent nature incurred during the period you held the asset. This expenditure is also allowed to be adjusted as per the Cost Inflation Index (CII) published by Reserve Bank of India.
  • Any LTCG amount balance after taking care of property investment and/or 54EC bonds will be taxed with indexation.
  • You can choose a combination of property purchase, and/or, 54EC bonds, and/or, paying tax as suitable to you but each option or combination of options will have its own timelines for action too. Do not slip up on that.
  • Sometimes it may be more advantageous to simply pay the tax than buying property (since there has been no appreciation in property for years now and nor is it visualized for some more years to come) or get into the 5-year lock-in of 54EC bonds at the taxable low-interest rate.

Illustration: Col SK Singh sold his property in January 2016 at Rs 50 Lakh, which he had purchased in December 2011 at Rs 30,00,000. As per his income, he falls in the 30% tax rate slab. He spent around Rs 2 Lakh on house improvement in January 2013 and also paid a brokerage of 0.5% of the sale price of the house at the time of selling the house. What will be his taxable Capital Gains and what is the tax amount payable by him?

Solution: In the above illustration, the buyer held the property for more than two years and hence, the gain earned on selling this property will be considered as LTCG which will be taxed at the rate of 20% after indexation. Calculations for this transaction are as below:

Particulars Amount Rs
Sale price of the house 50,00,000
Less: Any transfer expenses such as brokerage, commission etc. 25,000
Net Sale Consideration 49,75,000
Less: Indexed acquisition cost of the house: 

(Purchase Price in FY2011-12 adjusted to FY2015-16 Cost Index) i.e. Rs 30 Lakh * Cost Index of FY2015-16 (254)/Cost Index of FY2011-12 (184)

Less: Indexed house improvement costs ( Home Improvement Expenditure in FY2012-13 adjusted to FY2015-16 Cost Index) i.e. Rs 2 Lakh * Cost Index of FY2015-16 (254)/Cost Index of FY2012-13 (200) 2,54,000
Long Term Capital Gain (LTCG)  5,79,696

(Contributed by Team Vikrant of Hum Fauji Initiatives)


26 Apr 2021
Savers have no choice now! Get into Stock Markets ASAP…

Savers have no choice now! Get Into Stock Markets ASAP….

31st March 2021. Govt announced the following rates for small savings:-

rates for small savings

All hell broke loose – Twitteratti, Whatsappers, media and more were livid. Govt rolled back the cuts the next day. Probably not because of the outcry but realising the official faux pas – elections in 7 states!

How long will the old rates hold? Probably till the next quarter or maybe one more.

Please realise that cutting interest rates so drastically was an act of fiscal desperation. Read on – why?

Why are the interest rates going down? Aren’t they low enough already?

Long story, will try to make it simple.

Let us introduce a very important metric here:

Debt to GDP Ratio =  Total Debt of a Country
Total GDP of the Country

​What is this and why is it important?

The Debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP). It basically measures the financial leverage of an economy. A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called ‘public debts’), which are any balances owed to outside lenders. This impacts its Sovereign Credit Ratings (published by Standard & Poor (S&P), Moody’s, Fitch etc regularly), external capital coming into the country, interest rates that outsiders will charge for lending to the country and its public institutions, or even the sentiment of investing in the country as a whole.

All countries like to keep this ratio healthy and thus keep a high Sovereign Rating. But what happens when a crisis like the Covid pandemic strikes?

Government Debts shoot up to support the economy and the people, as we all already know. Most of the emerging economies have government debt that is around 40% to 50% of their GDP. Compared to that, our debt has traditionally been around about 70% of the GDP, which already used to be on the higher side. And this number is now inching up to 90% of GDP, which is not sustainable. India had a fiscal deficit of Rs 18,45,655 crores (9.5% of GDP) in Financial Year 2020-21 and there is likely to be a further additional deficit of Rs 15,06,812 crores this financial year on top of it – these are really huge amounts of fiscal deficits.

So, what can the Govt do to reduce the Debt to GDP Ratio?

It cannot do anything to the ‘Debt’ part because the economy and the poor people have to be supported right now. So, it does something with the GDP. We call the process as ‘Window Dressing’!!

GDP cannot be increased on its own right now since even the economic activity is very low due to the pandemic. But if somehow the prices of the same things can be increased, the total GDP increases.

It will be good to bring out here what is GDP? GDP (Gross Domestic Product) is the final value of the goods and services produced within the geographic boundaries of a country during a year. If the prices increase, the GDP increases even if the actual goods produced remain the same! Hence, the Govt is likely to allow the inflation to go up more and not control it as aggressively as it has done in the past, of course within certain parameters. This increases the overall prices of same amount of things. The Debt/ GDP ratio improves then.

But then, letting inflation run amok is also suicidal. So, Debt also has to be decreased.

Which is the easiest place to decrease Govt debt? Decrease interest rates on borrowings which Govt takes directly from the citizens, that is, the small savings, given in the table at the beginning of this article.

So, you have inflation going up – you’ve already seen it happening – it was 4.06% in Jan 2021 and the forecast for Apr 2021 is 5.6%, ie, about 37.9% up.

And small savings rate is going down. Thus Govt’s borrowing rate goes down and GDP goes up, thus window dressing the Debt / GDP ratio.

What does it do to you? Double Whammy!

Please look at the chart below to find out whether you’re gaining or losing by investing in so-called safe avenues after the above window dressing by the Govt?

What does it mean? You are losing by investing in any of these avenues. Instead of safe investments, they turn out to be ‘assured risk’ to your money!

Above is the real picture as it will play out for you over the next few months. The choice is up to you – whether you accept it or not. If you feel you’re ready to accept the above figures – “at least the money (or whatever is finally left of it in its real value) is safe with the Govt” – that is a conscious choice you make, with nobody else to blame later.

But what do you do if you don’t like the above picture?

You have really no choice but to go into growth assets. There is no assured safety anywhere but a calculated risk is what is warranted now.

And there is really only one inflation-hedge in the long term. The stock markets.

Most people consider stock markets as risky. We just call them volatile with our long experience.

If you go into equity products with your eyes and ears open, keep a control on your emotions (staying away from the ‘Fear and Greed’ cycle), DO NOT FOLLOW THE HERD, do not watch too much of the 24-hour business channels (our CEO, Col Sanjeev Govila, last watched any of them about 8 years back), do not read too much of ‘prediction-based’ articles on the internet – you are likely to not only protect the ‘purchasing power’ of your hard-earned money but also be able to grow it into a decent wealth over a period of time.

We’ll give you very good and practical ways to go about it in our next episode, due next Saturday.

17 Apr 2021
asset allocation

With markets so High, is it time to rebalance your portfolio? | Asset Allocation

The year 2020 was a depressing one for a large part. Thankfully, 2021 is looking significantly better financially though the covid scenario has turned grim again, though hopefully temporarily. The most important concern that most of us have right now is getting addressed as vaccination is picking up pace globally. On the economic front too, things are improving.

The Indian economy, for instance is expected to grow at a double-digit pace in 2021 after a long time. This is also reflected in the way the stock markets are behaving. The benchmark BSE Sensex has been buoyant. It is difficult to comprehend that the same market, which is around 49,000 points now was around 27,000 a year back, in March 2020.

However, the sharp rise in equity markets should also caution us a little. While being optimistic and hopeful for positive developments is good, it should not lead us in to hubris. When it comes to money, personal finance and financial planning, it is critical that we do not lose sight of the fundamentals. One such thing to revisit from time to time is asset allocation.

What is asset allocation?

While our regular readers must be aware about this terminology, we have also had many people who have joined us only in the last few months on their financial planning journey. With the sharp rise in markets, there has been a renewed interest among all the sections to tap in to equity investments. Many of our readers have also reached out to us for this and we are aware that many more are contemplating entering the markets right now. Hence, it is imperative that we revisit this time-tested concept of asset allocation.

In simple words, or as we like to refer it, as grandma’s wisdom, asset allocation is nothing but the strategy of not putting all your eggs in the same basket. The logic is simple. If all eggs are in the same basket and something hits the basket, it is likely that all the eggs will be damaged. On the other hand, if the eggs are spread across different baskets, the eggs in the other baskets will remain safe.

We should be aware for sure that no asset class ever performs consistently well for a very long period of time.

See the chart below (1990 till Jun 2020), made out for 30 years.

Now extrapolate this situation on your investments, where equity, debt, real estate, gold are the different baskets, or asset classes. Traditionally, if one asset class performs poorly, the other asset classes may not follow suit and may behave differently. For example, when the equity markets were in a downward spiral in early 2020, gold prices were firming up.

If we extend the above argument to Indian asset classes (various types of equity, safer investments, Gold, Real estate) etc and over a shorter 10-year period, even then the aspect of asset allocation holds good.

asset allocation

The idea is that even if a part of your investments performs poorly, there will be other investments that will balance out the negativity to some extent, thereby protecting your investment corpus if you have adequate diversification in your portfolio.

What needs to be understood is that asset allocation needs to be revisited and rebalanced from time to time as your life situation changes, your financial goals’ time horizon changes and also because of the changes in the market.

How to rebalance your portfolio?

To be sure, it is important to understand that asset allocation could be very different for two different people. So, for simplicity, we would only consider equity, debt and gold here. If someone has his ideal asset allocation of 60:30:10 for the three asset classes respectively, it is possible that it has skewed in favour of equity due to the sharp rise in valuation in recent months. Accordingly, that person would need to reduce exposure to equity to rebalance their allocation, by moving some money from investments in equity to debt or gold.

While this might appear to be an innocuous or simple adjustment to some, it can act as a major hedge for the value of your portfolio. The surging valuation of the equity bucket of your portfolio might appear exciting right now. However, you also need to take control of your emotions of greed, particularly in a bullish market environment.