Category: Blog

20 Feb 2020
Sanjeev Govilla

Are you confusing Tax Planning with Financial Planning?

The tax season is upon us. We, and almost every financial advisory company in the country, receives numerous calls from people about the ‘the best’ tax-saving opportunity right now.

Somewhere tax saving is considered the best form of financial planning and in fact, all that is there to it. Is it so? Is your financial responsibility towards yourself and your family over with saving tax for the year?

May not be so.

This episode of Money Guru, telecast yesterday (5th Feb 2020) on Zee Business, deals with the aspect of Tax Planning Vs Financial Planning in comprehensive details. Our CEO, Col Sanjeev Govila (Retd), is the financial expert featured in the show explaining these aspects. The show covers the following aspects:-

1. Role of Tax Planning in your Financial Planning.
Understand the significance of financial planning for wiser tax planning that is in-sync with your life goals.

2. Life Goals for which Financial Planning is necessary.
Goal Planning for Life Protection considering the necessity and need for protecting your loves ones through Insurance for Life, Health and even term plan.

3. Power of Compounding and to how you can make Rs 3 Crore by allocating Rs 5000 each month.
Understand the categories of funds, risk appetite and the funds that are most appropriate as per your investor profile.

4. How to strike a balance between savings and investments in case of a new job or career shift? 
Understand the dynamics of Tax Saver Funds in your portfolio and how relevant it is for savings and investments in different life phases.  Similarly the scope of Small Cap, Mid Cap and Large Cap vis vis savings and investments.

Watch the complete video here,

08 Feb 2020
Budget 2020

Budget 2020 : Does It Change Anything in Your Life?

This year’s budget quite confused the financial gurus, media and even the stock markets; stock markets didn’t know how to react – plunged on the day of the budget, went sideways the next working day and then up from there. Let us see how the relevant provisions of the budget affect or don’t affect you.

New Optional Tax Structure. A new tax structure has been introduced with lower tax brackets. However, the normal deductions that one claims on Income Tax, ie, Standard Deduction (Rs 50,000), Section 80C deductions (maximum up to Rs 1.5 Lakhs in instruments like DSOPF/ PPF/ EPF, AGIF/ NGIS/ AFGIS, other life insurances, ELSS, Principal part of home loan, children’s tuition fee, etc), home loan interest (24(b)), NPS, medical insurance (80D), LTA, education loan interest (80E), etc will then not be available if you choose the New structure.

[For those financially inclined, all deductions under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) will not be claimable by those opting for the new tax regime.]

Income Brackets Current New Optional Structure
Up to Rs 2,50,000 lakhs Nil Nil
Rs 2,50,001 – Rs 5,00,000 5% 5%
Rs 5,00,001 – Rs 7,50,000 20% 10%
Rs 7,50,000 – Rs 10,00,000 15%
Rs 10,00,000 – Rs 12,50,00 30% 20%
Rs12,50,000 – Rs15,00,000 25%
Rs 15,00,001 and above 30%

The new structure is Optional. Should you opt for the new structure or continue with the old one? Income Tax Dept has made a calculator available for you at the link: Just feed in your visualized income details for the next financial year (Apr 2020 – Mar 2021) and come to know what to do. Also, remember that you can switch the tax regime every year between the old and the new regime. ‘Taxpayers can switch back and forth between the existing income tax regime and the new one that offers lower slabs without exemptions’, said the Central Board of Direct Taxes (CBDT) Chairman PC Mody. However, business owners won’t have this option.

Why has the Govt. introduced this new system? The overall aim is to simplify tax structure so that it is easily understood by the common man with the least of complications. We see all or most of tax exemptions going off in few years with tax rates coming down and personal tax calculations themselves being much simpler than they are today.

Dividend Distribution Tax (DDT) which the companies had to deduct at their end on the dividends being paid out (in shares and mutual funds typically) at a flat rate of 20.36% will not be deducted, the individuals will have to show dividends received in their own income and pay the tax as per their tax slab. This dividend will also be subject to a TDS (Tax Deduction at Source) at the rate of 10% if the dividend amount exceeds Rs. 5000 during the FY. However, please note that the dividend referred to here is the dividend received from shares as also from mutual funds. The gains made in the shares or mutual funds (called capital gains or increase in NAV/stock price) is not within the ambit of this tax, contrary to popular belief amongst some people post-budget.

Deposit Insurance. Last year, we had the infamous PMC bank scandal where thousands of depositors were left stranded after the RBI imposed strict withdrawal limits thanks to a major scandal. One of the biggest talking points was how it would have been amazing if bank deposits were insured beyond the nominal amount of 1 lakh, considering many people had deposits running into several lakhs all locked up because of RBI notification. The government has listened to us and increased the amount to 5 lakhs. So in case, you lose your bank deposits, you’ll now have 5 lakhs as insurance to protect your downside.

Definition of NRI (Non-Resident Indians) has changed now. Earlier, to qualify as an NRI, one had to be out of India for 183 days. The number of days has gone up to 240 days now. This will affect many individuals like merchant navy guys and NRIs who frequently visit India in a major way.

Tax on NRI Income. The Union Budget has proposed that NRIs had to pay up taxes on global earnings if they were not paying in any other jurisdiction or country, generating much debate, especially with regard to some gulf countries where there is no income tax. The ministry said it was an anti-abuse provision amid growing instances of NRIs shifting their stay in low or no-tax jurisdiction to avoid tax payment in India. Later it has been clarified that NRIs would be liable to pay tax only on income derived from business or profession in India even if they themselves are based abroad. However, some confusion about the merchant navy guys still remains since they are technically the resident of no country!

Employer’s contribution to provident fund, NPS and superannuation funds worth more than 7.5 lakh a year will be taxable. Please note that this pertains to yearly contributions and not the accumulated amount in such avenues. This provision is of concern only to the faujis who’ve transited to the corporate and are (luckily!) earning great salaries, and to similarly placed children and spouses of faujis. Of course, the serving faujis don’t have to bother – your employer (i.e the Govt) makes no contribution to your DSOPF – so no worries!

Other smaller provisions of this budget which may be of interest to some select few:

  1. I-T Act will be amended to allow faceless appeals so that the person appealing cannot be hounded by the IT Dept.
  2. Tax on Cooperative societies to be reduced to 22% plus surcharge and cess, as against 30% as at present. So your housing society can do some more good for its residents!
  3. Tax holiday for affordable housing extended by one more year. Additional deduction up to Rs. 1.5 lakhs for interest paid on loans taken for an affordable house is extended further till 31st March 2021.
  4. The tax burden on employees due to tax on ESOPs (Employee Stock Options) to be deferred by five years or till they leave the company or when they sell, whichever is earliest.
  5. Defense gets Rs 3.37 lakh crore as the defense budget. Last year. It was 3.18 lakh crores.
  6. 100 more airports to be set up by 2024 to support the UDAN scheme.
  7. More Tejas-like trains for tourists.
  8. India is now 5th largest economy in the world.
  9. Central Govt debt reduced to 48.7% of GDP from 52.2% in March 2014.
  10. Govt plans to sell part of its holding in Life Insurance Corporation (LIC) by way of Initial Public Offering (IPO). If it comes out on favorable terms, it’ll be a good business and stock to buy!

Finally Our Take on the Budget?

It is a budget that doesn’t do anything much earth-shaking to the Indian economy! Hard to see how the Rs 5 Trillion economies will be carved out from this, unless Govt does more things outside the budget ambit, like the way corporate tax was lowered a few months back.

The direct personal tax line of thought of the Govt is very clear now. Rates of personal tax will remain low but the innumerable tax sops that are present there right now will be phased out gradually. So, do not plan anything financial long term based merely on tax concessions.

Also, remember that these budget provisions take effect only from the financial year starting from 1st April 2020. So, the Income Tax Return (ITR) that you file this year in the Jun-Jul period (for the earning period Apr 2019 – Mar 2020) will still be based on the provisions existing today.

In the end, All Izz Well!
We can again get down to our lives and planning it well till the next budget comes around 🙂


20 Mar 2019
My equity investments are in losses, what should I do?

My equity investments are in losses, what should I do?

When the markets are going down, the value of people’s market related investments like stocks, equity mutual funds and ULIPs also go down. This has probably been the case for most investors who started investing within the last 2 years and now see their investments in the red after the markets started their downturn sometime in 2018.
So why have the such investments been disappointing lately and what should an investor do now? We’ll explain with the example of equity mutual funds.

Markets work in cycles

The answer, of course, is to deal with volatility. Over a period of 5 or 6 years, the returns are often great but the variability is high. In any given short period, you could face poor returns, or even losses. There’s another way to look at it. The equity markets move in cycles, and often it takes five to seven years to go through a full cycle of steep rise, fall, stagnation and back. To get the right level of returns, we need to invest through the whole cycle. That won’t happen in a year or even two.

There’s yet another way of looking at it, which was the subject of a study conducted by Value Research about a couple of years ago. It was found that on an average, if one invests through an SIP (Systematic Investment Plan) over four years, then the risk of a loss is negligible. For a typical fund with a multi-decade history, over all possible one year periods, the maximum returns were 160% and the minimum -57%. Over two years, it became 82% and -34%. Over three, 63% and -18%. Over five, 54% and 4%, meaning never any loss. Over ten years, the maximum is 30% and the minimum 13%. These are all annualized figures. The trade-off is absolutely clear – the shorter the period, the higher the potential gain but the worse the possible risk. This evidence squarely puts long-term at five years and above.

Don’t panic and redeem

Many investors actually buy when the markets are performing well, the prices are high and euphoria is even higher and quickly sell after panicking when the markets go down. One shouldn’t take his money out from equity mutual funds the moment he sees the markets go down. This is down to a few reasons:

  • Equity mutual funds that are redeemed before a year attract exit-loads of 1% in most cases.
  • Even after that, Long Term Capital Gains (LTCG) may be applicable if the interest earned is more than Rs 1 Lakh.
  • It should also be noted that the perceived loss when the markets go down is only notional. One should not convert notional loss into a real loss by redeeming his investments.

To illustrate this point further, here are a few instances from the past 15 years when the markets went down.

In each of these instances, the market – especially the small and mid-cap segment- fell by a large percentage within the span of just a few months. However, these are only specific periods of decline. When we put the entire 15 year performance on a graph, we get this:

Here, it can be clearly seen that even though there might be certain periods of downward performance, the general trend of the market remains upwards. While the market will go through its ups and downs, if you stay invested in it for the long run, you will generate higher and inflation-beating returns.

Perfect opportunity to buy

The best part is yet to come though. The downturns are not periods when one should just hold tight, sit back and wait it out. These are periods when the market is trading at a discount than what its value was before the downturn started. This presents you with the opportunity to buy more units of the same security at a lower price which means that when the markets eventually go up, you earn a higher return than if you had just waited it out and done nothing.

This is precisely why we recommend investing through the SIP route. By investing regularly, one buys more units at a lower NAV when such a fall occurs, thereby bringing down his/her average cost which eventually earns him/her a higher return.

So, to answer the earlier question, the returns from equity mutual funds have been disappointing lately in large part because that is the nature of markets. The only thing that a wise investor should do in such a scenario is to continue investing and wait it out. Given a long enough time-frame, such a strategy is bound to produce healthy and inflation-beating returns.

Micro-learning Initiative by Hum Fauji