Investment Advice for armed forces officers Archives

26 Apr 2017

Blog Sanjeev Govila 0 comment

Are you helping your Earning Child manage the money Wisely?

There is no doubt that accumulation of substantial wealth generally occurs only over a sustained period of time. The best way to do it is the slow and steady manner in which your earning child needs to go the disciplined way and accumulate the drops that will make the mighty ocean. All this is, however, common knowledge – no points for guessing the same. But the point where the script differs is what financial instruments to save in? Believe it or not, it has been statistically proven time and again that it is not the timing of investments but the asset allocation – ie, what all do you invest in and in what proportion – which matters over a long period of time. Wrong choice of instruments will do irreparable damage to the wealth creation efforts while incorrect timings can easily be handled by regular investments in a disciplined manner over a long period of time to achieve rupee-cost averaging. Fixed interest instruments like bank / company FDs achieve this averaging by the method of ‘laddering’ where new FDs are bought every year and maturing older FDs are re-invested to create the ‘ladder’ effect. In case of equity instruments like the equity-diversified mutual funds, Systematic Investment Plans (SIPs) achieve the same effect of riding out the market fluctuations in the same manner as a flywheel rides out the engine torque variations in an automobile.

However, still the original question of correct asset allocation remains unanswered.

Generally it is seen that, at least in the initial earning years of an earning child, he/she is heavily dependent and influenced by his/her parents’ (generally father’s) pattern of investment. If the influencing parent is conservative and only goes in for safety of capital like in provident fund, bank FDs, insurance policies and NSCs, the child also thinks on similar lines. The fact that these fixed interest instruments are almost never able to keep up with the monster of inflation, and consequently provide negative inflation-adjusted real rates of return, is lost sight of. Thus, while the money may seem to be growing in these instruments in absolute terms, its purchasing power (or effective worth) is being lost at a rate equal to the difference between inflation and tax-adjusted returns of the investment instrument. To take an example – if a bank FD gives 9% rate of interest and the child is in 20% tax-bracket (ie earning between Rs 5 – 10 Lakhs a year), his/her actual returns on the FD are 9% minus 1.8% tax (20% of 9%), that is only 7.2% per year. With the consumer inflation stubbornly at around 9.5% today, the child’s money’s worth is being lost at the rate of 2.3% per year on a cumulative basis! The returns are likely to get further pruned in the current era of high-inflation and falling-interest-rates as this 2.3% gap widens. If the same money was to be invested in SIPs of equity-diversified mutual funds, the long-term returns of the same would be 12% per annum on a conservative basis while being fully tax-exempt as per the current tax laws. Adjusted against inflation, it is likely to give 3% positive cumulative yearly returns on a conservative basis. Of course, one has to keep faith in the long-term returns potential of equity while not getting unnerved by the short-term equity-typical fluctuations.

So finally, how should you, as a financially savvy parent, guide your earning child who has many years of savings potential with him/her? He/she should:-

Save a small amount regularly in fixed-income instruments (like PPF or EPF) for safety and certainty of returns.
Take a term insurance plan for getting a substantial amount of insurance (say, typically Rs 1 Crore or so) at a premium which will be meagre at his/her young age.
Take a medical insurance preferably with life-time renewability, for an adequate amount unless he/she has the surety of employer-provided medical cover like in a Govt job.
Go in for maximum amount of SIPs in equity-diversified mutual funds (MFs) on a monthly basis with long-term in mind. Investment in MFs should made through a carefully constructed balanced portfolio with regular monitoring rather than as stand-alone MFs bought just because they are individually performing the best today.
At some point in future, typically 5-10 years after the child starts earning, you can tell him/her to go in for a house/flat using a home loan with EMIs on a regular step-up basis so that the loan repayment increases as the child’s income increases.

An investment pattern as above is likely to provide the child a substantial accumulation of wealth for future while still giving enough liquidity for any requirements in between.

And what should you tell him/her to avoid? Insurance as an investment vehicle; more than 20% of the regular savings potential into fixed income financial instruments; short-term trading in equity, commodities, futures & options etc unless the son/daughter really understands the same; and lastly, credit card debts which are not repayable in the very next payment cycle.

I am sure your son/daughter will be ever-grateful to you for this intelligent hand-holding and on your part, you would also not have to worry whether you guided him/her well on the financial front as well as you did on other aspects of life.

—
With regards,

Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNER^CM

CEO, Hum Fauji Initiatives^TM,
Your Long-term Partner for Wealth Creation
E-511, 2nd Floor, Ramphal Chowk, Palam Extn, Sector 7, Dwarka, New Delhi-110077 | Tele: 9999 022 033, 011 – 4054 5977, 011 – 4214 7236 | humfauji.in

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20 Apr 2017

Blog Sanjeev Govila 0 comment

Are you ready for ITR Filing?

We’re ready to file your Income Tax Returns (ITR) for the Financial Year (FY) 2016-17 [that is, Assessment Year (AY) 2017-18]. You may not have received your Form 16 so far from your employer, but you can send us all the other details – we’ll get everything ready for you since the Govt has introduced a few new check items for filing ITRs; as soon as you get your Form 16s, please send them to us at the earliest.

This year we’re starting a new tax service for which there has been a persistent demand – Advance Tax service along with regular Income Tax filing. Hence, you have the option of:-

Filing only the ITR for the FY 2016-17, ie, for the period 1^st April 2016 – 31^st March 2017, as regularly done by you.
Combination of getting your Advance Tax for the Financial Year 2017-18 (ie the current financial year which has started from 1^st April 2017) along with the ITR for FY 2016-17 at a small extra nominal charge. Please note that Advance Tax service for FY 2017-18 is not available if you do not file your ITR for FY 2016-17 through us.
If you haven’t filed your ITR for FY 2015-16 (for the period 1^st April 2015 – 31^st March 2016), that can also be done right now.

Please let us know what service would you like to go ahead with us, and either give us a mail on incometax@humfauji.in or whatsapp/SMS the requirement on Phone number 09999 053 522. We would revert back to you with a detailed mail on how to go ahead with the service you’ve chosen.

Our charges for the Advance Tax and ITR filing are as below. Do not miss out details of the concession given by us to our existing Investment Clients given later in this mail. Please remember that we are referring to Advance Tax service for the FY 2017-18 (01 Apr 2017-31 Mar 2018, the current financial year) while ITR filing is for the FY 2016-17 (01 Apr 2016-31 Mar 2017, which has just got over):-

Category of IT Return	ITR Charges	Advance Tax charges
Individuals with income from Salary/Pension only, normal HRA calculations and rentals from a maximum of one property [ITR-1]	Rs 1000/-	Rs 250/-. For all our existing Mutual Fund Investment Clients, these are waived off if they get their ITRs filed by us.
Armed Forces JCOs/OR (Personnel Below Officer Rank, PBOR) with income from Salary/Pension only and rentals from maximum one property [ITR-1]	Rs 500/-
For Individuals having house property income from more than one house and/or capital gains computation from stocks, mutual funds, property sale etc. (We assume moderate calculations of Capital Gains. If calculations are very time-consuming, charges may be higher) [ITR-2]	Rs 1500/-
Professional Income (With Income Expenditure statement)	Rs 2500/-
Professional Income (With Income Expenditure statement, Capital account statement and Balance Sheet)	Rs 5000/-
For NRIs (for Indian Income, simple tax return)	Rs 2500/-

For the clients who have reposed a huge faith in us and entrusted us with their large savings, we are grateful to them for it and wish to give the following complementary services to them:-

Current Mutual Fund Investments with us (As on 30^th April 2017)	No ITR Filing Fee or Advance Tax fee [The complementary ITRs need to be only of ITR-1 or ITR-2 categories. Difference chargeable for other categories]
Above Rs 1.5 Crores	Complementary ITR filing for Self, Spouse and 2 more persons (unmarried Children / parents only)
1.0 – 1.5 Crores	Complementary ITR filing for Self and Spouse
75 Lakhs – 1.0 Crores	Complementary ITR filing for Self.

A large number of people are not very clear about what is Advance Tax. A write-up on the same is given below.

What is Advance Tax?

Contrary to common perception, your Income Tax due for a financial year is required to be calculated in advance and is to be paid throughout the year in instalments as laid down by the Govt. To explain this, say your income for the financial year 2017-18 (ie, income earned from all sources from 01 Apr 2017 – 31 Mar 2018) is Rs 12,00,000 (12 Lakhs). Total Income Tax on this comes out to be Rs 1,72,500. Without considering any complications like tax savings, education cess etc, let’s see how the Govt expects you to pay this tax:-

Due Date for Advance Tax Instalment	Percentage Advance Tax Payable	Amount Payable in our Example
On or before 15 June 2017	Not less than 15% of total tax	Rs 25,875
On or before 15 Sep 2017	Not less than 45% of total tax	Total Rs 1,03,500 including amount paid earlier, if any
On or before 15 Dec 2017	Not less than 75% of total tax	Total Rs 1,29,375 including amount paid earlier, if any
On or before 15 Mar 2018	100% of total tax liability	Total Rs 1,72,500 including amount paid earlier, if any

That’s the reason, your employers, whether fauji or corporate, deduct your tax every month from your salary so as to keep it very simple and not to cause undue sudden financial burden on you. Thus, if your tax is being deducted as above and you have no other income, there’s no additional advance tax to be paid by you.

However, while calculating advance tax, people generally forget the income generated from rent, interests received from FDs (bank FDs, company FDs), regular pay outs from PO MIS (Post Office Monthly Income Scheme) or SCSS (Senior Citizen Savings Scheme), interest received from builders or money lent out etc. Thus insufficient tax gets paid which results in an interest penalty later.

Who has to pay Advance Tax?

Following categories of people have to pay advance tax or additional advance tax:-

Salaried people whose employer does not deduct full quantum of advance tax as due.
Salaried people whose employer deducts correct advance tax every month but they have income other than salary, like House Rent, interest from FDs, HRA, etc where proper advance tax deduction is their own responsibility.
Those receiving pension but their bank deducts only 10% advance tax (TDS) on pension while they themselves may be in a higher tax bracket.
People working as consultants to companies and no/less advance tax is being deducted by the company.

What is the penalty if Advance Tax is not paid, if due?

Advance tax has to be paid by people whose total tax liability for a year exceeds Rs 10,000. If advance tax due, as per the table above, is not paid in time, simple interest of 1% per month (or part thereof) is payable under various sub-sections of Income Tax Section 234. Thus, if no advance tax is paid, at the time of filing the ITR (Income Tax Return), not only a large amount of tax due has to be paid but also the interest that would’ve built up due to non-payment of advance tax. If advance tax is paid in due time, the penalty interest is avoided as also the tax due is comfortably spaced out over the year, avoiding the sudden burden of paying a large amount of Income Tax.

Please remember that the First advance tax instalment of 15% of total tax for FY 2017-18 is due on 15^th June 2017.

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

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21 Feb 2014

Are you still investing in Bank FDs?

If you are like most Indian investors, you would have a large part of your money invested in bank FDs. This is due to the Indian penchant for investing in safe instruments with high liquidity even at the cost of high taxation. In fact, I have often come across a large number of investors who do not need money for a long time but still prefer to invest in short term bank FDs of a year or so, to be auto-renewed each year. In the current era of falling interest rates, this translates into them renewing their FDs every year at constantly falling rates, rather than locking in their deposits for a long term at high interest rates.

However, if you are a smart investor, you should seriously consider replacing most (or even all) your bank FDs with Fixed Maturity Plans (FMPs) of mutual funds.

What are FMPs?

FMPs are the mutual fund equivalent of a bank FD. They are for a fixed period, generally from a few months to 3 years, though FMPs of even 5 years are sometimes available. Other characteristics of the FMPs are:

While bank FDs are deposits in bank debt instruments, FMPs are debt instruments managed by mutual funds which invest typically in Govt backed securities, and corporate fixed deposits, thus being secure almost like a bank FD.
As per SEBI rules, FMPs can give out only indicative returns, and not guaranteed returns, as they used to do earlier. Currently, they offer returns of approx 9.5% but this depends on the kind of instrument they will invest in.
FMPs are open only for a limited time, generally for 7-10 days.

What are the advantages of FMPs over bank FDs?

The biggest advantage of FMPs over bank FDs is in tax efficiency. However, to gain this tax advantage, you should invest in FMPs of tenure of one year or more so that your gains get considered as Long Term Capital Gains (LTCG) which gets you the advantage of indexation benefits. This benefit is not available to bank FDs. So, if you take a one year FMP, you can pay a tax of 10% without indexation or 20% with indexation, whichever is beneficial to you, even if you are in the highest tax slab of 30%.

What is Indexation?

The Govt recognises that inflation erodes the real value of any investment. So every year, the Govt comes out with a cost of inflation index (CII) based on the prevailing rate of inflation. The cost of investment is indexed by multiplying the index of the year of maturity and divided by the inflation index prevailing on the year of investment. Eg, if you invested Rs 10,00,000 in Financial Year 2012-13 (when CII was 852), its cost will be taken as Rs 11,02,110 in Financial Year 2013-14 since the CII this year is declared as 939 (=10,00,000 X 939 / 852). Hence, if your one year FMP has given you 10% returns and made your Rs 10 Lakh as Rs 11,00,000/-, you will pay NIL tax since your cost price after indexation is Rs 11,02,110. Thus, in fact, you have made a notional loss of Rs 2,110 which can be set-off against some other gain! If you had earned the same amount in a bank FD and you were in 30% bracket, you would have paid a tax of Rs 30,900/- on the interest of Rs 1,00,000/- you would have earned, thus bringing down your net interest rate to 6.91%.

In case you had gone in for a 3 year FMP in the year 2010-11 (CII of 711), your Rs 10 lakh investment would have been considered to be costing you Rs 13,20,675 after indexation. If you had got 10% annualised returns, your maturity amount of Rs 13,31,000 would be considered to have earned you a profit of only Rs 10,325 on which you pay a tax of Rs 2,127/-. In case of a similar bank FD, you would’ve paid a total tax of Rs 1,02,279/-.

Indexation can work more wonders if you invest across multiple financial years. Eg, if you invest in a 15 month FMP in Feb 2014, your maturity would be in April 2015, across three Financial Years 2013-14, 2014-15 and 2015-16, giving you double indexation benefits even though the investment is just for 1.25 years. Couple this with the high interest rates prevailing currently, and you have a great investment avenue with huge tax-efficiency and safety.

And what are the disadvantages of FMPs

Primarily two:

One, there is practically no exit available mid-way in a FMP. Hence, you need to invest that money in a FMP which you do not need for that period. In fact, this limitation can be used to an advantage to put away money which you need for a financial goal later (like for child’s education or marriage, or for paying a property instalment) in a safe, tax efficient instrument.
Second, due to Govt regulations, the FMPs cannot let you know any guaranteed returns, though ‘indicative’ returns are allowed to be told.

If they give better returns than bank FDs and are practically as safe, why don’t people invest in them?

Lack of awareness and general perception amongst people of all mutual funds being risky.

How to go about Investing in a FMP

Do give us an email on contactus@humfauji.in letting us know the period for which you wish to invest and the amount. We will search out the best FMP available at that time and email you the same. But please remember that FMPs are open only for a limited time and you will have to send us the complete documents at least two days before the closing date.

Col (retd) Sanjeev Govila, Certified Financial Planner^CM

CEO, Hum Fauji Initiatives^TM

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