Ae Dil hai Mushkil...

So we begin our Diwali break, hearing umpteen numbers of times, the songs of latest Bollywood romantic drama (if I may say so) and undivided paternal love. It's all about relations and love. Love makes someone jump from cliffs, mountains and for some sing from bridges. Why can't we do normal things in love? Why do we do want best for our family-best school, best car, holiday or even best life partner? Each and every decision we make for these things are done with lot of contemplation and advise from our previous experiences. We sometimes know what we are doing is wrong but yet do it, because we think there is no harm in trying it. So be it shopping online for your Diwali clothes or buying your 1st I-phone from a stranger on OLX. We are ready to take a chance. What is the motivation here? Is it money savings or comfort of home to buy from or is it the previous bitter experience that makes us try new paths?

Kya Ye Sahi Nahi…..

Why are we not willing to get this flexibility in our personal finances? Why do we still want to invest in fixed deposits even when the interest rates are falling? Why do we feel socially low to take a loan instead of breaking our built assets? What stops us from trying mutual funds now if we once lost our money in it?  Why is real estate transactions still are our favorite? Why do we not ask questions to our banks on loan rates? We bargain all our deals, why do we not bargain on brokerage rates? We download myntra, amazon app but why can't we follow some budget on Google sheets?  When your insurance agent sends you new investment plan why don't you ask him his commission rate IRDA mandates all agents and brokers to make public such information. When was the last time you checked how your bank interest is calculated?  Do you know how many charges your bank levies on you? You have every right to go and ask the breakup of your utility bills?

Why so many small things are just are left unanswered by us as just another moment delay? Every moment a fraction of time lost can give a loss more than millions of rupees together.  So let us together pledge on this New Year to leave back all our laziness, useless explanation and give back to our family - the best they deserve. 

Plan for your family financial goals bring them happiness and security together. Let Saarthi be a part of your planning. Contact us today for your customized financial plan at saarthifp@gmail.com. 

Wishing You a very Happy New Year

Regards 

Saarthi Financial Planners 

Seasonal Greetings

May there be victory of light over darkness, good over evil, knowledge over ignorance, and hope over despair.

Season Greetings

to you, your team and your loved ones.

Thanks and Regards

Team

Saarthi Financial Planner

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A different kinda of Clubbing...

What do you mean by clubbing of income?

​Clubbing of income is when income earned by another entity is merged /added to your taxable income. Although, every person is taxed on his own earned income there are chances under special circumstances it can be clubbed with another person's income. In Income Act, 1961 Sec 60 – 64 deal with such special situations of clubbing of income.  

Section 60 – Transfer of income ownership without transfer of asset.

Conditions to be fulfilled:

1)   the transferor owns the asset

2)   the ownership is not transferred of the asset

3) the income generated from asset is transferred under some contract or agreement 

If the above conditions are satisfied, then the income from such an asset is taxed in the hands of the transferor.

E.g., Mr Mukesh has given the shop owned by him on rent.  Annual rent of the shop is Rs. 96,000. He transfers entire rental income to his friend Mr. Parekh. However, he did not transfer the shop. In this situation, rent of Rs. 96,000 will be taxed in the hands of Mr Mukesh.

Section 61 – transfer of asset and earned income revocable at a future date

Revocable transfer is generally a transfer in which the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset.

Conditions to be fulfilled:

1) The transfer of the asset is revocable.

2) The income generated from asset is transferred under some contract or agreement

Then, under these circumstances the tax is payable by the transferor.

What about the income received by the spouse under Sec 64?

If the income is paid to the spouse as remuneration (i.e., salary) from a concern in which the individual is having substantial interest then it is clubbed with the income of the individual. Provisions in this regard are as follows:

·   The individual has substantial interest in the business.

·   Spouse of the individual is employed in the concern in which the individual is having

substantial interest and does not have any technical qualification for the same.

If both husband and wife have substantial interest in the concerned business, then the income is clubbed with the individual having higher income.

Exceptions to this rule

The clubbing of income is not applicable if the following holds true:

·      The transfer of asset is for adequate consideration;

·      If the transfer of asset is in connection with an agreement to live apart or end of relationship;

·      If the asset is transferred when there was no relationship of husband and wife

How is a Minor child income taxed?

Since a minor is not accepted to be a earning member, his income is usually clubbed with his parents. It is added to the parent whose annual income is higher. 

However, if he earns any income by doing some kind of manual work or something that involves skill, knowledge, talent, etc it is not clubbed with the income of the parent.

Regards,

Saarthi Financial Planners

Marginal Cost of Funds Lending rate ... Is it a big deal or what?

Today we would discuss about the Marginal Cost of Fund based Lending Rate - MCLR rate and whether it is better then the previously used base rate by bank rate. Also, is it advised to shift the existing loan to MCLR rate, which is applicable from 1^st April 2016.

What is MCLR rate?

MCLR is the new internal benchmark lending rate which is adopted by the lending banks on the floating loans provided by them. Every bank is suppose to declare minimum MCLR rates during a year. These rates would largely be affected by change in repo rate announced by RBI and pass on the benefit of lowering of interest rates to customers. It would largely affect the floating loan products and not touch the fixed rate products of the bank.

This benchmark rate is calculated on four basic parameters (from the perspective of the bank):

1. Marginal Cost of funds – it is basically the difference between the cost of obtaining funds from RBI i.e. Repo rate and cost of lending loans to the customers.
2. Cost of maintaining CRR- Every bank needs to maintain a certain liquid reserves with RBI as a safety net for their customers. The RBI doesn't provide any interest on these funds. Thus, the cost of this reserve is to be adjusted in the expenses of the bank, which gradually passes on to the customers.
3. Operating costs – it is the cost of running a bank like any other entity. It is zeroed down to per customer or per 100 rupee loan.
4. Tenure of loan – the longer the duration of loan, higher is the interest charged by the bank. It is more economical in terms of running a bank as it reduces the overall cost.

Why this change in benchmark rate?

1. More clarity in terms of lending rate ,unlike in base rate where every bank could fix its own borrowing rate.
2. Previously under the base rate system, banks only occasionally changed the base rate. The corresponding reduction in their base rate was only after huge change in repo rates . Under MCLR, banks are obliged to readjust interest rate regularly.
3. Under MCLR, the cost of lending is a major component affecting the new rates and so, the banks cannot charge a huge spread.
4. Also, now no longer can any bank add the concept of minimum return to its cost burdening the lender.

Will it affect the home loan EMIs?

Under the new system, all fresh loans bought after 1^st April 2016, is definitely following this methodology for calculating the EMI. Even the old or existing loans as on that date can move their loan to this new system if desired. Under the MCLR regime, the rate gets revised at a fixed predefined date. So, if a particular contract mentions that the interest rate would be revised and accordingly, even the EMI of the loan. However, if the interest follows an uptrend, it could mean an increase in the monthly installments.

Our opinion

MCLR is effective for short term lending, however in long tenure the lending would remain largely unaffected. So, although MCLR is boon for optimistic people believing in interest downtrend, it is not a one way road for the loan takers.

Regards

Saarthi Financial Planners

FAQs on PPF account transfer

Public provident fund (PPF) has been one of the popular way under small savings scheme to plan for retirement and tax savings. It has been the magical box that spurns up the compounding magic on the nominal annual savings made by an individual over years. However, with the downtrend in Government securities, the PPF rates too have been following the negative trend too. It has been reducing at regular intervals. 

Start Year	End Year	Rate of Interest
2010	2011	9.5%
2011	2012	8.6%
2012	2013	8.8%
2013	2014	8.7%
2014	2015	8.7%
2015	2016	8.7%
2016	2017	8% (As announced in Oct 2016)

However, we still maintain that PPF account that have completed or nearing completion its cycle of 15 years as on date, should not be discouraged to invest their 80C investment in PPF. The compounding effect would be huge on the entire corpus.

Our discussion today surrounds on the operational process to transfer a PPF account from one bank to another or from post office to banks. 

Why do individuals usually transfer PPF accounts?

The main reasons for this transfer are:

a) Convenience of nearby branch.

b) Hassles of depositing funds offline: visiting branch during regular working hours.

c) Managing multiple bank accounts. 

d) Change of Location

Process of transferring the PPF accounts

a) Make a written application to the bank or post office where the investor has his PPF account for transfer.

b) Submit along with it the PPF transfer form. The form would contain details of the account, including the names and addresses of the existing branch/bank/post office where it is held. It would require filling in details about the desired location where the transfer is sought.

c)  On receiving the application, a simple process of detail verification is done along with verifying the signature of the account holder with the existing account papers.

d) If all the details are correct, then the bank or post office closes the PPF account.

e) After that the old bank would send a cheque/ demand draft for the outstanding balance in the account to the new bank/post office. They are also responsible to send along a certified copy of the account statement, original account opening form, nomination details and specimen signature.

This account of PPF account is considered to be a continuing account, not a new one. The new bank may ask the customer to redo his KYC process. Also, it is advised to keep a photocopy of past PPF passbook.

During this transfer, the account holder can change the nomination details, along with the account opening procedure.

The new passbook would be issued and it should reflect the past credit records in the account shown as a balance transfer. You can make a small transaction to ensure that all the procedure is correctly followed.

Our Opinion:

PPF is for long term investment and the small term hiccups should not discourage you to close down your PPF account. It is advised to never miss your investment boat for small changes.

The Debentures Story ...

There are ways through which a company can raise funds from general public. The most popular methods are via issuance of IPO or right shares. Today, we will discuss of the other option that is gaining momentum now. i.e. through issue of debentures. It is simpler for company and also the cost of raising funds through debentures is lower than equity. 

What is a Debenture?

Debenture is a debt instrument. It is similar to a loan taken by the issuer (mostly corporate) to raise money without parting with their company ownership). The general features of any debenture are as follows:

a) Fixed interest rate and fixed tenure.

b) It is useful to raise debt for medium and long term.

c)  It can be secured against assets or any collateral. The most popular debentures are unsecured and thus, have lower interest rates over long term bonds issued by government.

d) The debenture holders don’t have any say in the company management. i.e. they don’t any voting power.

e) There are debentures that can be transferred in the secondary market. However, this market is usually illiquid for trading.

Types of Debentures

The debenture are divided based on their term, redemption, underlying security or asset, transferability or tradability, interest rate, coupon rate, etc.

    

     a)   Convertible Or Non Convertible Debentures

The Convertible Debentures can be converted into equity shares at a later date. Thus, as a unit holder it gives the holder chance to become the share holder in the particular company. Usually, the convertible debentures have lower interest rates as compared to Non convertible debentures. The debenture may be partly also convertible. The ratio is pre defined at the time of subscription. In India, most of the debentures issued are Non Convertible Debentures.

    b)   Redeemable or Non Redeemable Debentures

Redeemable debentures are issued for fixed period of time. It is returned to customers at the end of tenure. Non redeemable debentures are only redeemed at the time of dissolution of company. In India, all the debentures are redeemable in nature.

    c)   Secured or Unsecured Debentures

The debentures can be secured or backed by the company assets to fulfil its obligations. They can also be further clubbed with “call” or “Put” options. The call options lets the company call back the debentures before maturity in case if it has issued high interest rate for its NCD and there is fall in interest markets. The Put option is exactly opposite and is exercised by the investor.

The debenture selection depends upon the credit rating of the debenture issued by the credit companies. The interest rate given by high risk debentures is also high. (Debentures are at risk of default.) Also the coupon rate and payout mode determines the selection. One of the important criteria to determine the selection is past performance of the issuer company.

Taxation of debentures

TDS is applicable on interest earned on dematerialised debentures. If the debentures are not dematerialised then they are subject to be taxed at personal tax slab rates for short term. i.e. upto 3 years of holding. Beyond 3 years, the capital gains would be subject to indexation similar to any other debt product.  

Regards

Saarthi Financial Planners