Wednesday, October 17, 2012

Owning a house or business "OH MY GOD"

After a long time got opportunity to watch a fantastic movie "OH MY GOD". There are certain movies like Munnabhai MBBS, 3idiots, Rang De Basanti, Tare Zameen Par , can shake you inside. It has power to bring in the change required.

Huge success of above movies confirmed that Indian society is ready to appraise the libertarian attitude and the Indian  youth is daring enough to raise the issues of collectivistic problems and is ready to denounce them, to fight against them.

I know this is not a movie review blog, but together with certain other facts shown in the movie "OH MY GOD" a very relevant point related to your financial planning is also been highlighted and that is insuring your HOUSE as well as your BUSINESS.

The biggest asset an individual builds during his life is his own house and business. A small accident can wipe out your earnings of life. How many of us have overlooked at insuring these investments? The requirement of home insurance is overlooked and understated in India.

While owning a house today, what youngsters forget is the protection of their property. The financial institutions providing housing loans ensure that the individual gets himself a home loan protection policy but no one ever bothers to insure the house that is being bought. There are many convenient options available in the market that helps one not only insure the property but also the belongings.

Let's know home insurance

Home insurance plans allow you to protect your house and household items against fire and other perils, such as theft, burglary, accidental breakdowns and so on. If you intend to buy house holders' insurance, you should buy a policy that provides cover for your house as well as contents in it.

Points to remember before buying home insurance

Make sure that you read and understand the policy coverage, exceptions, exclusions in the plan. So that you don't end up like Kanjibhai in the movie. Your cover therefore, should include your house, belongings, liability to others if some mishap occurs and your living exps., if you are forced to stay in rented house. Basically, if a disaster occurs, your policy should help you to rebuild your home and replace its contents.

Take an inventory of your possessions. If you have to file a claim, two things need to be done - prove you own certain items and verify their value. Some insurance companies advise clients to go through their homes with a video camera, walk through each room, and ensure that you have everything you own, recorded.

Always make sure that you update your policy value to cover various assets that you might add to your house as well as taking care of rate of inflation.


Any resident Indian who is owner and/or occupant of the property can purchase a home insurance policy.


The covers provided are :

Fire and Allied Perils - Building and Contents , Burglary (optional), Unlike shown in movie you can also take a cover for earthquake by paying additional nominal premium.

Key features

An individual with an independent house or a flat can opt for this benefit and applicable to any residential building.It covers building against risks like Fire,Lightning,Storm, Riots, Strike and Malicious damage.

In city like vadodara an house with construction area of 2500 sq.ft considering construction cost be Rs1000/sq.ft , Total cost Rs.2500000.00 you need to pay an annual premium in the range of 1300 to 1400.

Remember to cover your house for construction cost and not for the value at which you bought, as it also includes cost of land.

So, put your house insurance to be on top priority.

Thursday, September 13, 2012

SAVE TAX Right way - ITS YOUR RIGHT (2012-13)

Paying tax is moral responsibility of every citizen, but to save tax by using different allowed deductions,allowances and incentives is every one's right.

Let's understand major benefit and deductions allowed to save tax more efficiently.Please do check for your eligibility for saving tax under any of the following benefits.


1.  Rajiv Gandhi Equity Savings scheme: It will provide income tax deduction of 50% for those who first time invest upto Rs.50,000 directly into equities and whose annual income is less than Rs.10 lakh, subject to a three -year lock in. Exchange-traded funds (ETFs) and mutual funds listed on stock exchange and invested only in BSE 100, CNX 100 and blue chip public sector stocks would also be allowed tax rebate under the scheme.

2. Exemption limit raised to Rs 2 lakhs from Rs 1.8 lakh. 30% slab now starts from 10 lakh rather than 8 lakh earlier. Men and women now have same tax slab. No gender bias!

3. Within the existing limit for deduction allowed for health insurance, Rs.5000 deduction for preventive health checkup is allowed.

4. Deduction of upto 10,000 for interest from savings bank accounts under a new section 80TTA.

5. Senior citizens not having income from business proposed to be exempted from payment of advance tax.

6. Securities Transaction tax (STT) reduced to 0.1% from 0.125%

7. Exemption from Capital Gains tax on sale of residential property, if sale consideration is used for subscription in equity of a manufacturing SME for purchase of new plant and machinery.

8. Service tax rate increased to 12% from current 10%. This would mean more taxes in your mobile, telephone, internet, restaurant bills and life insurance premium etc.

9. Import duty free amount limit raised to Rs 35000 from 25000. So guys coming from abroad can bring more stuff.

10. Gold to be more expensive. Customs duty on standard gold raised from 2 per cent to 4 per cent.

11. Duty on large cars raised to 27%, so cars would be more expensive now.

12. Tax saving mutual funds (ELSS) deduction to continue.

13. 80C deduction on insurance policies purchased after 1st April, 2012 only if premium is less than 10% of sum assured. Benefit for existing purchased policies to continue.

14. 1% tax at source on cash purchases of jewellery over Rs 2 lakh.

15. 80CCF deduction for infrastructure bonds not valid anymore.

16. Income tax return filing would be now mandatory for every resident having any asset located outside India irrespective of the fact whether the resident taxpayer has taxable income or not.

17. 80G deduction not applicable in case donation is done in form of cash for amount over Rs 10,000.

Other Benefits :

House Rent Allowance : Rent receipts can be shown for taking tax benefit for living in a rented house.

Income tax exemption for HRA will be least of following:
1. The actual amount of HRA received as a part of salary.
2. 40% (if living in non-metro area) or 50% (if living in metro area) of (basic salary+ Dearness
     allowance (DA)).
3. Rent paid minus 10% of (basic salary+ DA).

In some cases, deduction for both HRA and home loan interest (u/s 24) can be taken together in case owned house is not in same city or not at a commutable distance to office.

Transport/Conveyance allowance: Rs 800 per month is non taxable if salary has this component. This would not be exempted in case employee also avail car reimbursement. No proofs/bills required to submit for this exemption.

Children education allowance: Per school going child 1200 per annum is non-taxable. Maximum for 2 children, so max 2400 per annum becomes non-taxable.
Arrears: Generally arrears are fully taxable, but employee may claim exemption u/s 89(1). One would need to compute income tax on the arrears if it would have been received in actual year. Now difference of income tax between payment year and actual year would be allowed for deduction.

Gratuity: If amount is received before completion of five years of service with employer, it should be taxable. Else it would be non-taxable up to Rs 10 lakh in case of non-government servants. In case of Government service employees, it would be fully non taxable.

Leave travel allowance (LTA): Two trips on a block of four years can be claimed for exemption for travel done inside India. Following amount would be non-taxable:
1. Where journey is performed by rail; railway-fare in first AC class by shortest route to destination.
2. Where places of origin and destination are connected by rail but the journey is performed by any other mode then first AC class fare by shortest route to the place of destination.
3. Where place of origin of journey and destination, or part thereof, are not connected by rail and journey is performed by any other transport; then (i) If a recognised public transport system exists between such places the first class or deluxe class fare of such transport by shortest route, or, (ii) If in other case, first AC class fare for the distance of the journey by the shortest route, as if the journey has been performed by rail.

Leave encashment: Payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt. In case of other employees, the exemption is to be limited to minimum of all below:
1. The actual amount received
2. The cash equivalent of leave balance (max 30 days per year of service)
3. Maximum of 10 months of leave encashment, based on last 10 months average salary
4. Rs. 3 Lakh

Performance Incentive/Bonus: This component would be fully taxable.

Medical allowance/Reimbursement: This component is on-taxable up to 15000 per year (or Rs 1250 per month) on producing medical bills.

Food Coupons – Non-taxable upto 50 Rs per day.

Periodical Journals: Some employers may provide component for buying magazines, journals and books as a part of knowledge enhancement for business growth. This part would become non taxable on providing original bills.

Professional Development Allowance : If original bills are submitted to employer, this allowance may become non-taxable. Generally payment done towards any technical course fee, certification etc done to enhance professional knowledge can be reimbursed.

Uniform/Dress Allowance: Some sections of employees mat get allowance for purchase of office dress/uniform. In such case, the component would become non-taxable.

Telephone reimbursements – In some of the cases, companies may provide a component for telephone bills. Employees may provide actual phone usage bills to reimburse this component and make it non-taxable.
Internet Expenses - Employer may also provide reimbursement of internet expenses and thus this would become non taxable.

Car expense reimbursements – In case company provides component for this and employee use self owned car for official and personal purposes, Rs 1800 per month would be non-taxable on showing bills for fuel or can maintenance. This amount would be Rs 2400 in case car is more capacity than 1600cc.

Driver salary – If employee pays driver salary for self owned or company owned car, Rs 900 per month may become non-taxable if employer provides component for it.

Gift from relatives vs non relatives: Gifts from relatives would be non-taxable with no limits attached. Following relations are covered under non-taxable rule:
1. Spouse of the individual
2. Brother or sister of the individual
3. Brother or sister of the spouse of the individual
4. Brother or sister of either of the parents of the individual
5. Any lineal ascendant or descendant of the individual
6. Any lineal ascendant or descendant of the spouse of the individual, Spouse of the person referred to in clauses (2) to (6).
If gift is received from a non-relative person worth more than Rs.50000, one is liable to pay the tax on whole vale. Gift can be in form of a sum of money (in cash/cheque/bank draft) or any articles.

Agricultural Income: If one has only only agricultural income, then it is fully exempt from income tax. If other income also there, rebate on agricultural income would be provided at 10-30% rate depending on actual amount of agricultural income.

House rent Income: 30% of the rental income can be reduced as a standard deduction for repairs, maintenance etc. irrespective of the actual amount spent.

Fixed deposit/Post Office/NSC/SCSS interest: Interest earned on fixed deposits, post office, debt mutual funds/fixed maturity plans(kept less than one year) would be added to taxable income and taxed as per slab rates.

Short Term Gains from Share Trading/Equity Mutual funds: if stocks/equity mutual funds are sold before one year, 15% tax would be payable on such gains. STT should have been on transaction.
Long term gains from Share Trading/Equity Mutual funds: If stocks/equity mutual funds are kept for more than a year before sale, it would be long term gains and such gains would be fully exempt from income tax.
Securities transaction tax (STT) must have been paid on transactions for availing this exemption.

Section 80C, 80CCD and 80CCC deductions- One can claim his investments/payments under section 80C, 80CCC and 80CCD, up to 1 lakh combined limit. Amount can be invested in:
1. Tax saving mutual funds (ELSS) with three years lock-in
2. Five year tax-saver bank Fixed deposits
3. Public provident fund (PPF)
4. National Savings Certificate (NSC) or National Service Scheme (NSS)
5. Employer contribution into New Pension Scheme (NPS) (Section 80CCD)
6. Life insurance/Unit Linked Insurance Plan (ULIP) premium
7. Employee’s contribution towards Employee provident fund (EPF)
8. Home loan principal amount payment (only if you have got possession of house)
9. Senior citizen savings scheme (SCSS), if your age is more than 60 years
10. Post office tax saving deposit or tax saving bonds
11. Pension scheme/Retirement plans (Secion 80CCC)
12. Tuition fees paid for children education

Section 80D : Maximum deduction of up to 15,000 under mediclaim or health insurance offered by life insurers taken for self and family. An additional deduction of up to 15,000 for buying cover for dependent parents. If parents/assessee are senior citizens, they can claim deduction up to Rs 20,000.

Section 80DD : Deduction of 50,000 for maintenance of a disabled dependent. If the disability is severe, the deduction amount will be 100,000.

Section 80E : Tax relief on interest payments on education loan taken for higher studies for self, spouse or child. There is no maximum limit on this deduction.

Section 80G : The eligibility is 50% or 100% of the donation amount subject to overall ceiling of 10% of your gross total income to certain funds and charitable institutions.

Section 24/Home loan interest payment : The maximum limit is of 1.5 lakh on interest payments of a home loan for a self-occupied house. There is no ceiling on the amount of deduction if the house is let out or deemed to be let out. House rent would needs to shown in income in case house is not self-occupied.

Section 80DDB deduction (Medical treatment expenses): Expenses done for medical treatment for self, spouse, dependent children, parents, brothers and sisters. Maximum deduction can be Rs 40,000 (goes up to 60,000 in case patient is senior citizen). Deduction is only allowed in case of certain diseases:

Professional tax: Professional tax deducted from salary by employer should be removed from taxable salary before computation of income tax.

Tax deducted at Source (TDS) deduction: As per income tax rules, all payment which are taxable in nature should be done after deduction of taxes at the source itself. Hence employer compute income tax on salary payment and deduct it every month. This TDS is based on employee’s saving/investment declaration at the start of year. If investments for tax saving is not done, large amount may be deducted in last few months.

Advance tax schedule: As per income tax rules, 30% of income tax should be paid by 15th Sept, 60% by 15th Dec and rest by 31st March. If its not followed one may be charged interest penalty u/s 234C.

Wednesday, September 5, 2012

Unravelling NCD's (Non Convertible Debentures)

We as an investor are always tempted by higher returns, specially in a time when interest rates offered on bank FD have move down in the range of 8.5 -9 % without knowing risk associated with it.

Another such wave of offering higher returns on your investment is about to come in the form of NCD's or Non Convertible Debenture. But as we are going to invest our hard earned money we need to know nitty gritty of the instrument.

Let's understand what NCD's are:

Whenever a corporate wants to raise money from public they issue a debt paper which is for a specified period and pays a fixed interest this debt paper are known as debentures . Debentures can be convertible as well as Non convertible.

Convertible Debentures : The Debentures which pays interest at fixed rate and on maturity date are converted to Shares of the company are convertible debentures.

Non Convertible Debentures : The Debentures which pays interest at fixed rate and on maturity returns the  capital amount are NCD.

Even NCD's can be of 2 types :
  • Secured Debentures : As an security it is backed by asset of the company and if it fails to pay, the investor holding the debentures can claim it through liquidation of the assets.
  • Unsecured Debentures : Contrary to above it is not backed by any security in case company defaults the amount would be paid only if any amount left after paying off for the secured creditors.
Features of NCD

NCD's normally works more or less like company deposits. One advantage of NCD is they are listed on stock exchange and theoretically speaking they provide liquidity.However, there is no active market for NCDs on the wholesale debt market segment of the stock exchanges and their liquidity is low. You might not be able to find a buyer for your NCDs if their trade volumes on bourses are insignificant.

Any Indian company can raise money through NCDs if it has a tangible net worth of at least Rs 4 crore and has been sanctioned loans by banks or financial institutions which is classified as 'standard asset' and not as bad debt.

Companies seeking to raise money through NCDs have to get their issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. NCDs with higher ratings are safer as this means the issuer has the ability to service its debt on time and carries lower default risk.But the rating provided is at the time of issuance and may change during the tenure.

Interest rates on NCD

Normally NCD provides a higher interest rate then the market or Bank FD and comes with long tenure. Best suited for individuals who have  lower risk profile to build their retirement corpus and also for retirees during low interest rate scenario. NCD's come with lot of interest payment options viz; monthly, quarterly, annually and Cumulative. 

Interest rates also depends on rating of the issue. Lower rating means higher interest rate and vice versa.


Interest on NCD do not attract TDS, but interest is taxable and is added to income for that year.

Capital Gain :

NCD's are listed on stock exchange and if sold on exchange it is taxed like debt fund. If sold before 1 year,  profit will be added to income and taxed at per tax slab. But any profit made selling after 1 year and before maturity would be taxed as long term capital gain. The applicable tax rate is 10.30% without indexation.

Risk involved 

NCD has some inherent risk. Investor need to check companies financial and end uses of the funds. Checking for rating can help a bit. 

Many a times we have seen that although the issue is secured but is backed by assets which may fluctuate in valuation. Like if we take case of Gold finance company mainly engaged in finance against Gold, comes with  secured NCD's backed by asset (Gold) as guarantee. 

As we know that gold has also become an speculative asset and if there is any major fall in prices of Gold. The company might not be able to recover its loan, due to which loan default rate might increase. It may result in default of NCD payment. Investors would not be able to recover their NCD value inspite of being secured as even after liquidation of asset i.e gold the amount recovered would be much less.

Please consult your financial advisor before investing in any such instrument.

Tuesday, July 17, 2012


The Hindu Undivided Family (HUF) structure is a very effective way to save tax and a lot of people are eligible to create HUFs but can't do because of lack of awareness.

Many a times we feel that creation of HUF requires lot of procedural formalities and lengthy process hence try to avoid it.

I do not know whether marriages brings fortune to your life or not, but from tax aspect HUF is the biggest gift for getting married. 


An HUF is automatically constituted the moment a person gets married.Which means a Hindu male needs to do nothing to get an HUF created but to get married to a Hindu female. It is one marriage gift that all Hindus get from the government or Hindu Law. It is not necessary to have children to create HUF.

Sikhs, Jains and Buddhists can also create an HUF under the Income Tax Act even though they are not governed by the Hindu law.


An HUF is a separate and a distinct tax entity. The income of an HUF can be assessed in the hands of the HUF alone and not in the hands of any of its members. The senior most member of the family who manages the affairs of the family is called the Karta. Minimum requirement is of two people (at least one male member)to create HUF.

A coparcener is a member of the HUF, who by birth acquires an interest in the joint property of the family, whether inherited or otherwise acquired by the family.

Coparceners (Member of HUF) have right to claim partition of the HUF. Coparceners consist of a Karta and his lineal descendants within the following four degrees:
  • 1st Degree: Holder of the ancestral property for the first time – Karta
  • 2nd Degree: Son(s) and Daughter(s) of the Karta
  • 3rd Degree: Grandson(s) of the Karta
  • 4th Degree: Great Grandson(s) of the Karta
A daughter, after her marriage, would remain a coparcener in her father’s HUF and at the same time, can become a member in her husband’s HUF. In the event of the death of the Karta and in the absence of any male member, two females can continue to run the HUF and the senior female can take over as the Karta. A son can create his own HUF while remaining a coparcener in his father’s HUF.


Here comes the most difficult part for someone to start the HUF operating – generating capital for the HUF.

One should not contribute his own personal assets or funds into the HUF as any income generated from these assets or from its investment will be clubbed into Individual’s personal income under Section 64 (2) of the Income Tax Act and hence taxed accordingly.

But there is a way out – one can transfer his personal assets or funds into the HUF if the income generated from these assets or from its investment results in a tax free income (like tax free bonds) and hence there is no scope of any tax liability due to clubbing of taxable income.

This tax free income can then be reinvested to earn even taxable income and eventually all of the income would fall out of the clubbing provisions.

Gifts or inheritances meant for the benefit of all the members of a family should be diverted specifically to the HUF. HUFs are liable to pay tax if the value of the gifts taken from the strangers exceeds Rs. 50,000. Though there is a limit for an HUF to take gifts from the strangers, gifts of a higher value can be taken from the relatives, who are not the members of the HUF.

Here is the list of people who fall in the category of relatives:
  • Karta’s Wife
  • Brother(s) or Sister(s) of the Karta
  • Brother-in-law or Sister-in-law of the Karta
  • Immediate Uncle(s) or Aunt(s) of the Karta
  • Immediate Uncle-in-law or Aunt-in-law of the Karta
  • Lineal ascendant or descendent of the Karta or Karta’s wife
A father can also gift money to his son’s HUF but need to specify in the gift deed that the gift has been made to the son’s HUF and not to the son as an individual. Ancestral property can be an asset of the HUF and an income earned on this property can be classified as the income of the HUF. If any of these ancestral properties are sold, the money received on such a sale should be transferred to the HUF.

How to get started with the HUF?

Once there are two eligible family members ready to operate an HUF, the first thing to do is to apply for a PAN card in the name of the HUF and have a separate bank account opened.

For a PAN application, an affidavit by the Karta stating the name, father’s name and address of all the coparceners on the date of the application is considered sufficient as the document proof of identity of the HUF. Also, the identity and address proof of the karta will be treated as the address proof of the HUF.

Then start seeking for gifts or inheritances from relatives or strangers, keep on infusing your own capital, transfer family’s assets/properties to the HUF and do all the possible things that you can keeping in mind the clubbing of income provisions.

(Please ask for format of affidavit if you require by mailing us)

Sections/Provisions under which HUFs can claim Deduction/Exemptions and Save Tax

As already mentioned, an HUF is a separate and a distinct tax entity and just like any other Resident Individual assessee, it also enjoys a basic tax exemption of Rs. 2,00,000. All other tax slabs are also exactly same as for an Individual. Here is a useful link from Bemoneyaware that shows the TDS rates for Individuals and HUFs.

Section 80C: HUFs can claim tax exemption under Section 80C by investing money in ELSS, ULIPs, traditional insurance plans, NSC or 5 year Bank FD with a scheduled bank. Principal repayment on a housing loan taken by the HUF can also be claimed under this section. HUFs are not allowed to invest in PPF anymore.

Section 80D: Members of the HUF can take a family floater policy and make the HUF pay for its premium and enjoy the tax benefit too.

Section 80DD: If any dependant member of the HUF is normally disabled (not less than 40% disabled) and the HUF makes an expenditure for the medical treatment, training and rehabilitation of that disabled member, then the HUF can claim a deduction of Rs. 50K under this section. If the condition is of a severe disability (equal to or more than 80%) then the HUF can claim a deduction of Rs. 100,000.

Section 80TTA: Interest earned on the money deposited in the savings bank account up to Rs. 10,000 p.a. is exempt for an HUF also.

Section 24 (b): Interest on Housing Loan: If an HUF takes a loan for buying out a residential property, it can claim a deduction of Rs. 150,000 in respect of Interest on Housing Loan.

30% Standard Deduction on a Rented Property: An HUF can claim a standard deduction of 30% from the rental income it earns by letting out a property.

Capital Gains on a House Property: Tax on Capital Gains made by selling a house property can be saved if the HUF invests the proceeds into buying another property within two years from the sale of the said property. The money can also be invested in Capital Gain bonds offered by REC and NHAI with a lock-in period of 3 years. The interest income on these bonds would be considered a taxable income of the HUF.

The table below shows how the income of an individual in the 30% tax bracket can be split between two entities to lower the final tax outgo:

Some Other Important Points
  • Karta can be paid a reasonable salary for his services of managing day to day affairs of the HUF. The salary will be considered his personal income but at the same time it is deductible as an expense from the books of the HUF.
  • Only one member or coparcener cannot form an HUF. There have to be at least two members and at least one male member.
  • HUF can keep its normal functioning even with two females after the death of its sole male member.
  • The Hindu Succession (Amendment) Act 2005 has given equal rights to male and female in the matters of inheritance as a result of which a daughter now also acquires the status of a coparcener.
  • An HUF cannot become partner in a firm but a Karta can.
These were some important aspects when it comes to creating an HUF and everyone, who is eligible to create an HUF and pays taxes, should strongly consider this option as it is a very efficient and good way to save tax.


"Even if one co-parcener demands the partition of the HUF property, the other coparceners will have to agree even though they may not want a partition," 

If the HUF has only financial assets (stocks, investments, fixed deposits, etc), gold and cash, it can be easily distributed among the co-parceners. But if the assets include immoveable property or a running business, it is not very easy to split them. Ancestral property may need to be sold to give a share to all co-parceners.

Monday, April 23, 2012

Buy Gold at 15 to 20% Discount

Benefit of Investing through GOLD Mutual Fund against Physical purchase

The Table appended below shows benefits of Buying GOLD through Mutual fund as agst. buying trough  Jewelers or Bank. By investing in Gold through Mutual Fund you can save atleast 15 to 20% due to high prices jeweler/bank charges with same purity and additional benefits.

Saturday, March 3, 2012

Gold : Is it really safe anymore???

It has been said that gold is the safest currency. That is the reason that if there is any uncertainty in any part of the world gold prices shoot up.We have always considered gold as hedge against inflation and that might be the reason that historically gold prices have moved in tandem with inflation.But in last few years it has broken all its records.

With the modern reality of gold as a speculative financial investment. Gradually, over the last two decades the tradability and liquidity of gold in a paper, financialised form has completely overtaken everything else.This is not the same gold but another speculative asset class which moves up and down depending on liquidity. 

The days are not far when we can see the deepest fall in gold prices which we Indians have never experienced in past.

In a recent article ‘Why stocks beat gold and bonds’ that Warren Buffett wrote last week briefed certain facts about gold.

Buffett explains that Gold belongs to a class of investments that will never produce anything, but whose growing value depends entirely on the belief that someone else will pay more for it eventually. The value of gold has been driven by the fear that other asset classes will lose value and this has driven up the relative value of gold. The only thing that motivates gold investors is that in the future, investors will grow more and more fearful in this manner. As more and more investors come to believe this, their increasing belief appears to confirm the truth of the belief itself for a while. Eventually, the bubble bursts at some point when the supply eventually exceeds the rate at which the belief is growing.

As Buffett points out, in gold’s case, there’s the additional problem of supply. At current prices, the world produces 168 billion US dollars of gold every year. Not just that, it is in the interest of the producers to dig up as much of the stuff as possible while prices are high and rising. The continued rise of gold would require at least that much fresh money flowing into gold investment every year. That’s a pretty large inflow that will have to be kept up if prices are to sustain. It’s true that Indians are at the forefront of the efforts to sustain this. We appear to absorb an amazing 30 per cent of fresh production every year, and thereby do huge damage to the country’s current account balance.

Back home in India the biggest problem our government of High current account deficit is also a result of our love for this asset. On the current account deficit (CAD), analysis of the current & capital accounts throws up the following: 

Gold and silver imports stood at 10.1% of commodity-wise imports in FY11, lower than only petroleum products (30.1%) and capital goods (20.3%). For FY11, India’s current account deficit stood at $44.2bn, (-2.6% of GDP), the highest in last 4 years. Gold and silver imports were $38.5bn, nearly 87% of the absolute CAD of FY11. Minus gold imports, CAD was very low at -0.4%. 

As an investor It would mere foolishness to consider that total gold assets of the world till date of $9.6 Trillion (At a price of $1750/Ounce) can replace global economy of approx.$200.00 Trillion. 

At one point in time world would agree for some alternate ways for valuing currency, and reduce dependency on Gold.

As an financial planner I feel gold can't be ignored as an investment class, but should be limited to the %age of Security or liquidity required at any given point in time plus additional requirement for child's marriage or personal consumption.

Thursday, January 12, 2012

Misleading Advertisment of SBI Bank FD

Be cautious of misleading advertisement published by SBI in all leading news paper showing annualised yield of 17.77% on 5 Year tax saving Fixed deposit.
It considers investor to be in the highest tax bracket and also that 80C limit of Rs.100000.00 is not exhausted. It also doesn't consider taxability of interest earned.

PPF is still a better option if you wish to invest for tax saving as the interest earned would by 8.6% (subject to change every year but much better then SBI FD) as compared to tax free interest of above FD i.e 6.39% (9.25 less 30.9% of 9.25%)