Monday, May 17, 2010

Using a Bank Cheque

Many of us use cheque’s issued by banks in our day to day financial activities but some of us are still not sure of how to use them properly and how to avoid misuse of cheques. The purpose of this article is to outline what a cheque is and how to prevent misuse of our cheques.

What is a Cheque?

A cheque is a negotiable instrument that can be issued by one person to pay money to another person/entity. The person to whom the cheque is issued is entitled to receive the sum mentioned in the cheque (provided the account has sufficient balance) from the bank where the cheque issuer holds his account.

Who can issue Cheques?

Anyone who holds a valid bank account can issue a cheque to make payment to anyone or any organization. The most important thing to note here is that – WE NEED TO MAINTAIN SUFFICIENT BALANCE IN OUR ACCOUNT TO PAY THE CHEQUE. ISSUING CHEQUES WHILE THERE IS NO SUFFICIENT BALANCE IN OUR ACCOUNT IS AN OFFENCE AND WE CAN BE JAILED FOR IT.

What are the important things to note while writing a cheque?

There are a number of important things that we must keep in mind while writing a cheque. They are elaborated below.

1. Remember to Cross the Cheque

Crossing a cheque means putting two parallel lines on the left hand top corner of the cheque. This means that, the cheque is a Account Payee cheque which means it can only be deposited into another account and cannot be exchanged for cash over the counter. This serves two purposes – you can keep a track of who encashed your cheque and also ensure that even if the cheque is lost, it cannot be misused by anyone. The person to whom the cheque was paid will be recorded.

2. Write the Name of the person to whom the cheque is to be paid in full

It is very important to state the cheque payee’s name in full without missing any part of the name in the “pay to line” The name entered here should match the name under which the person holds a valid bank account. If there is any mismatch or spelling mistake the cheque will not be paid

3. Write the amount to be paid both in numbers and words

It is advisable to write both the number value as well as value in words in the cheque. Also care must be taken to ensure that there are no leading or trailing blank spaces while entering these values which might cause tampering of the cheque and modification of the cheque value

4. Write the cheque date promptly

Do not issue cheques that do not have a cheque issue date.

5. Sign the cheque at the bottom right hand corner with the exact signature that is registered with the bank records.

If there is even a slight mismatch between the signature in the bank records and that in the cheque the bank will not release the payment.

Apart from these points, there are some other questions that might arise while using a cheque.

1. Can we overwrite/edit/alter the details in a cheque?

Preferably NO. It is advisable not to rewrite/overwrite any contents in the cheque. But if situation warrants, we must counter-sign near the altered area to confirm that it was a legitimate change done by the cheque issuer. Any unsigned modifications in the cheque would make the cheque unusable and the bank will not release any payments.

2. Can we issue blank cheques?

The answer is a BIG NO. DO NOT issue cheques to anyone that does not contain a cheque value.

3. How long is a cheque valid?

Cheques are valid for 6 months from the date of issue. Any cheque that was issued more than 6 months before from the current date is termed a stale dated cheque and the bank will not pay them.

Note: Starting April 1st 2012, all cheques and drafts are valid only for 3 months from the date of issue. This 6 month validity will cease to exist after that date. Click here for more details

4. What should I do if one of the cheques I wrote is lost?

Call up the bank customer care or visit your nearest branch and provide the cheque number(s) and issue a stop payment requests. It is our responsibility to keep these safe and if anyone uses our cheques after we lose them, the bank will not accept liability

Cheques are very powerful instruments and improper usage of these can result in financial losses due to malpractice. Hence use them safely and with caution.

Tuesday, May 11, 2010

Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits

With the new income tax rules in effect, one of the new additions using which a citizen can avail tax benefits is the Infrastructure Bonds that can be till the amount of Rs. 20,000/- for a financial year. So, for a person in the highest tax slab (30%) the tax benefit because of this investment would be around Rs. 6000/- per year.

Before we get into the details as to whether we must invest in these bonds or not, let us find out what these bonds are and how we can invest in them.

What are Infrastructure Bonds:

Infra Bonds are like any other bond that is available in the debt market for purchase with the only difference being the fact that, the funds collected through the sale of these bonds is used for the infrastructural development of India. Hence, to promote more investment in this segment, the government has come up with the tax benefit so that investors would invest in these bonds.

Where to Buy:

You can buy them from the branches of ICICI and IDBI banks. ICICI also offers electronic sale of these bonds where investors with DEMAT accounts can buy them.

Should we Buy these Infrastructure Bonds:

Actually, this is not such a simple question to answer. Let me elaborate why…

A Bond is a debt instrument which pays a periodic/fixed interest which doesn’t change very frequently. It is like Bank Fixed Deposits. So, depending on what income slab you fall under, the answer as to whether to buy these or not would vary.

Let us consider 3 people – Mr. A, Mr. B and Mr. C. These are 3 people who fall under the 3 tax slabs in our Indian Tax Laws. All 3 of them invest Rs. 20,000/- in these infrastructure bonds.

Other Assumptions:
Returns on the Bonds – 8% (Returns on the actual bonds may vary between 6% and 9%. I am taking 8% because that is approximately the rate of returns most debt instruments give us per year)

Annual Inflation Rate – 10% (The Actual inflation rate of our country is much higher, but still I am keeping this at 10% as an average because the fiscal measures taken by our government would bring down the inflation sooner or later)

Lock In Period – 3 years (The actual lock in period may vary from bond to bond)

Interest Compounding – Annual Compounding (The actual interest compounding may vary from bond to bond. I am keeping it annual for ease of calculations)

Let us go through the results of their investments before deciding on who must buy these bonds.

For Mr. A:

Tax Saved (@10%) = Rs. 2,000/-
Interest earned in 3 years = Rs. 5194.24/-

Net Profit on Investment = Rs. 7194.24/-

Average profit per year = Rs. 2398.08/-

Which is approximately 11% returns per year. Considering the fact that the inflation is running at more than 10% per annum, actually there is no growth in your investment at the end of 3 years. Even if we consider that inflation was constant @ 10% every year, your investment has grown by 1% every year.

For Mr. B:

Tax Saved (@20%) = Rs. 4,000/-
Interest earned in 3 years = Rs. 5194.24/-

Net Profit on Investment = Rs. 9194.24/-

Average profit per year = Rs. 3064.75/-

Which is approximately 15% returns every year. Considering the fact that, the inflation is @ 10%, your investment would grow at approximately 5% every year.

For Mr. C:

Tax Saved (@30%) = Rs. 6,000/-
Interest earned in 3 years = Rs. 5194.24/-

Net Profit on Investment = Rs. 11,194.24/-

Average profit per year = Rs. 3731.41/-

Which is approximately 18.7% returns every year. Considering the fact that, the inflation is @ 10%, your investment would have grown at a handsome rate of 8% every year.

If you are in the highest tax bracket (30%) then these infrastructure bonds are a definite YES as part of your portfolio. A SAFE AND SOLID INVESTMENT OPTION.

If you are in the medium tax bracket (20%) then you can have a decent allocation (say Rs. 10,000 every year) as part of your portfolio. A SAFE INVESTMENT OPTION.

If you are in the lowest tax bracket (10%) then it is better if you stay away from them.

Happy Investing!!!
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