Saturday, May 31, 2014

True example of WEALTH Creation

We are optimistic about "ACCHE DIN AANE WAALE HAIN.".

If last 20 years were not good then going by above phrase next 10 years are going to be extraordinary.Last almost 20 years have been the best days an investor can wish for but the problem is we ourselves are not confident of our economy and power of Young India.

Investors confidently invest in Gold, Corporate Fixed Deposit, FD of Co-operative bank and above all real estate.But when it comes to equity they shy away from it.

Demonstrating herewith how equity mutual funds in real life can create wealth for the investors.

"Reliance Growth Fund is an Equity Diversified fund launched 19 years back wherein its NAV has moved from Rs.10 to Rs.615.59 that means investor has multiplied his money 62 times.

It is evident that there is no other asset class which can beat performance of Equity and specially investments made through Mutual fund route. Many a times investor do compare returns of equity with real estate. 

Let's see the comparison - 

If one had invested Rs.10 lacs in this fund 19 years back it would have grown to 6.2 crores that too TAX FREE and to add some other benefit is liquidity, daily valuation,transparency, diversification, part redeemable, no legal cost or hurdles, well regulated etc etc...

I leave it to the real estate investor to evaluate that how much of them can confidently claim similar returns for their real estate portfolio as a whole.

Disclaimer : Performance of fund taken only for demonstration purpose, should not be considered as our recommendation. Please consult you adviser before investing.

Undoubtedly investor should allocate funds to different assets  according to time horizon and goals.But, Investors are very comfortable with investment in FD, Gold and Real estate but when it comes to Equities every one thinks that it is a speculative asset class. History has proved that you can speculate anything for a short period, but in long term fundamental works.

Many a times the excuse given for not investing in equity is of lower risk profile, but we forget that risk profile is evaluated on 3 aspect i.e Willingness,Ability and Need. The most important aspect with most of the individuals is Need, may be they are not willing to take risk and might not have ability as well. But in today's high inflationary scenario everyone's NEED should make them a equity investor. For today's investor equity is not an option but a necessity.

So evaluate your future needs, make equity mutual funds your friend for wealth creation,but in consultation with your financial advisor.

Saturday, May 3, 2014

Interest of FD not TAX FREE for investment made in your spouse name out of your income

In our married life whether we share good moments or not, but one thing we all share is our income and invest it in the name of spouse. But we need to understand that investments made in the name of spouse out of our income may not be tax free.

Section 60 to 64 of income tax act lays down details regarding clubbing of incomes. 

What is clubbing of income : Many a times we open a fixed deposit in the name of spouse or minor child and think income or interest earned is not taxable as they are in lower or nil tax bracket. 
But unfortunately this is not true. Although it is correct that you can gift any amount to your spouse without any tax. But the gifted amounts Interest or any other income, earned by  spouse from gifts is to be included in your income for tax purposes.The only exception is if you are separated from your spouse and the transfer is in connection with the agreement to live apart. 

These measures have obviously been taken to stop tax evasion by falsely showing gifts. The transferor is liable to pay tax on income from the gift in the following situations: 

l. Transfer of income without transfer of underlying asset. For instance, you are the owner of a house, which is rented out. You may arrange that the rent be paid to your spouse, parents or sister for their benefit, but rent would be added to your income and tax you on it as the asset is still owned by you. 

2. Transfer of income producing assets is revocable within the lifetime of transferee. In the above example, you may transfer the house along with the income, but if this transfer is reversible, the income shall still be taxed as your income.

The following types of transactions will also attract clubbing. These are specific to your spouse and your daughter-in-law.

a). Income from assets transferred to daughter-in-law.
b). Income from assets transferred to any third person for benefit of spouse.
c). Income from any assets transferred to a third person for the benefit of daughter-in-law. Even the capital gains arising from sale of such gifted assets by the spouse get clubbed in your hands. 

There are certain ways by which you can save yourself from clubbing :

a). Gift to major son or daughter, or to son-in-law. Gifts to minors are always clubbed. Incidentally, this means that if you want to create wealth for your children, only gives them assets that will generate income after they turn major.
b) Gift to grandchildren.
c) Gifting away tax-free income bearing instruments such as RBI Bonds and other tax-free bonds.
d) Giving interest free loans to your adult children so as to legally reduce your taxable income.
e)If husband is in higher tax bracket then he can transfer a certain sum to his wife in exchange of her jewellery. She can open a FD and interest would be taxed in her hand.(She would start loving you more as you become owner of her jewellery)
f)Gift even if the income is clubbed. Since income on income is not clubbed. It would become advantageous in long run if you earning is high and your spouse  income is nil or low.

So in future before making any investments in your spouse name do check for taxability of income earned on it.