Saturday, March 31, 2012

Budget 2012 - Income tax and Life Insurance

The Union Budget 2012 has been the focal point of the articles in our blog over the past few days. We have covered various aspects of Budget 2012 and the Tax implications on the Indian Citizen. Now, it is time to take a look at how the Budget 2012 impacts the Life Insurance section of Income Tax. Though there was no significant announcement about the Insurance Sector in our 2012 budget, there is one small change that waw tucked away in the corners of the budget. This change will have much bigger consequences. The purpose of this post is to cover those areas…

Before We Begin:

Insurance is nothing but an agreement between the insurer (The Insurance Company) and the insured (You) to pay an amount as compensation if any unexpected event occurs. This amount may vary from a few hundred to even a few crores. The maximum amount the insured person can claim depends on the amount agreed upon as per the insurance policy

To read more about Life Insurance Click Here.

What this Small Change?

All Regular Premium Life Insurance Policies issued after April 1st (Except Pension Plans) must offer a protection cover of at least 10 times the annual premium. Otherwise, they will not be eligible for Tax benefits under Section 80C.

Note: Until now, the mandated cover was five times the annual premium

What will be the Impact on the Common Tax Payer?

The Impact will be pretty big. All Insurance Policies, where the sum assured (In case of Death) is less than 10 times the annual premium will no longer be eligible for tax benefits under Section 80C of the Indian Tax Laws.

In other words, if your yearly premium is Rs. 50,000/- the protection cover in case of death must be atleast Rs. 5,00,000/- (5 Lakhs). Otherwise the policy premiums cannot be used for tax exemption under Section 80C.

Almost all Insurance Products (Except Pure Term Plans) will be affected by this ruling. Until this year, the mandated cover was only 5 times the annual premium and Insurance Cos created products that catered to this requirement. Now that the budget has changed this requirement to 10 times, most insurance policies will no longer be eligible for tax benefits.

The Impact will be:
1. We may have to look at availing fresh insurance policies to cover for the existing ones that we can no longer use for tax exemption which means – Additional Expenditure
2. What will we do with the existing policies that are no longer viable tax saving instruments? This will be a dilemma that everyone will have. Should I continue to pay the premium or should I surrender the policy? We will probably cover this as a separate post in future. For now, lets not worry about what to do with those policies.

What will be the Impact on the Insurance Company’s?

Insurance company’s will not have to come up with new products that meet the mandatory requirement of 10 times the annual premium worth of protection. The problem is, all those products that offer less than that, will no longer be useful to customers and hence they wont buy them. One of the primary motivating factors in the sale of insurance products it the tax benefit that comes with it. So, if by purchasing a policy, I wont get tax benefits, why in the hell would I buy it?

The impact will be:
1. Insurance Cos will have to come up with new products
2. There is mandatory approval period for any new policy that a company wishes to propose. IRDA takes some time to review the policy terms and approve it. So, in the meantime policy sales might take a hit
3. Policies that don’t offer this 10 times protection maybe targets for premature surrenders. Customers might choose to surrender their policies before maturity and insurance cos may face issues in meeting the liquidity demand if this number goes up.

Why did the Government Do This?

My Guess – To Prevent People from Using Insurance Policies as Investment

I have always been saying this “DO NOT CONFUSE INSURANCE AND INVESTMENT

Insurance Cos and Agents have been selling insurance products as investments for decades. The government feels that the primary purpose of Insurance Policies is to provide financial support to the survivors of the insured individual. Any proceeds they get if they outlive the policy is only of secondary importance.

Impact on Various Categories of Insurance Policies

ULIPs and Endowment Plans will be affected as follows:

1. Insurance Cos will be forced to increase the % allocation from the premium amount towards mortality charges (Actual life insurance coverage) to account for the increase from 5 times to 10 times
2. This effectively means that the actual amount available to invest is going to come down (If the same annual premium is to be maintained)
3. If the Insurance co as well as the customer want to maintain the same levels of returns, the annual premium will be significantly higher

Money-Back Plans – These are the plans that in my opinion that will be worst hit. These have effectively been sold as exclusive investment options and they provide very little life insurance coverage. It is possible that the premiums on these policies will go up significantly (much more when compared to ULIPs or Endowment Plans) or such schemes may be scrapped altogether because of the technicalities involved in maintaining 10 times insurance coverage as well as providing good returns on investment.

Pure Term Insurance Plans – These are plans that will have ‘0’ impact due to this ruling. As pure insurance products, they offer a much higher insurance coverage than what is paid as the annual premium. For a premium of Rs. 15,000/- I can get around 30 lacs worth of Insurance. That is nearly 200 times the Annual Premium.

Some Last Words:

If Investment is your primary objective in buying Insurance Policies – then you are better off purchasing investment products like PPF, ELSS etc. With this New Ruling, the returns offered by Insurance policies will come down significantly. As a result, they will start serving their main purpose “Providing Life Insurance”

When Buying a Life Insurance Policy “Focus on life cover, and not on the investment component

So, personally, I WELCOME THIS MOVE!!!

Friday, March 30, 2012

Know Your Rights - Loan & Credit Card Customers

How often do we read news in newspapers and websites about recovery agents from banks and credit card company's harassing customers? Quite often isnt it? With the Economy in the state it is now, a large number of people are in a bad situation. They have credit card outstanding or loans for which they are unable to repay the money.

Whenever we borrow money, it is our duty to repay it as per the borrowing agreement. If we do not, the lender has the right to take steps to recover his money. This may include possession of your property or even a formal police complaint against you. However, this does not mean that the lender can do anything they want to disturb you or your family.

As customers, we have Rights. The Banking Codes and Standards Board of India (BCSBI) has laid down a code of conduct for banks, including guidelines for the recovery of dues from customers. Banks have to make sure that they adhere to these rules. These rules are laid down in the interest of all of us "The Customers"

These guidelines are:

Guideline No. 1: The Bank has to give Sufficient Notice to the Customer

This means that, the bank is supposed to inform the borrower (Loan or credit card customer) about his dues and give him sufficient notice period for the payment. A bare minimum of 7 days has to be given to the borrower to arrange for the payments. i.e., A Letter must be sent to the customer atleast 7 days before the banks initiates any recovery proceedings against them.

Guideline No. 2: No Unwanted/Untimely calls

Just because you borrowed money from a bank, doesnt mean that they can call you anytime they wish and disturb you. A customer can be contact only between 7 AM to 7 PM. Also, during this time, any calls made by the bank must be recorded/documented. Another important point here is that, if you say that you are busy and cannot talk at some time duration during the day, the bank has to honor your request as far as possible.

Guideline No. 3: No Uncivilized Behavior

This is probably the most important guideline. The Bank Representatives or Recovery Agents are supposed to maintain civil behavior at all times. They cannot yell or use abusive language at the customer or his/her family members. They must also respect the customers privacy and must refrain from embarrassing the customer in front of others.


The customer has to right to file a police complaint if any of the bank representatives or recovery agents indulge in physical violence during the course of the recovery process.

Guideline No. 4: Customer has the right to Choose the Place where he/she is contacted

The Customer has the right to choose the place where he/she wants the bank to contact them. For ex: some people can be uncomfortable meeting with recovery agents in their residence and ask them to come to their workplace. In such a case, the bank has to honor the customers request.

If the customer has not specified any meeting place, the bank agent can go to his residence. If he/she is not available at home, the agent can go to his workplace.

Guideline No. 5: Reg. Repossession of Property

This guideline is mostly applicable in case of home loan defaults. In the case where a home loan borrower is unable to repay his dues, the bank can take possession of the property to recover any dues. However the guidelines here are:

1. The Bank must resort to repossession of property only as the last measure
2. The Bank must give a written notice to the borrower before they do so
3. The Bank must take reasonable care to ensure the safety and security of the asset they are taking into custody
4. The Borrower has the right to regain possession of their property before the bank sells it
5. The Bank must return any excess amount if any that is left after selling the property and settling their dues, to the customer

Guideline No. 6: Reg. Authorized Recovery Agents

The bank cannot just hire any random individual and send them to collect dues from customers. The list of individuals who are authorized to recover dues from customers must be made public. They must not only put up those details in their website, they must also make this information available through their bank branches.

Most importantly, any recovery agent visiting a borrower must have a valid authorization letter from the Bank and display his Identity Card prominently.


Guideline No. 7: Reg. Customer Complaints

The customer has the right to complain against any misbehavior by the recovery agents. If such a complaint is received, the bank must investigate the complaint thoroughly. If the bank fails to look into the complaint or if the customer is not satisfied with the banks response, the customer can take it up with the Banking Ombudsman.

If the recovery agent had indulged in physical intimidation, the customer can file a formal police complaint as outlined in Guideline No. 3.

As customers, it is our responsibility to know our rights and ensure the wellbeing and safety of our family and most importantly ourselves. So, we need to make sure that we understand these guidelines.

Thursday, March 29, 2012

Finally Some Good News - Budget 2012 and Impact on our Healthcare & Medical Expenses

Of late, there have been multiple articles in our blog that have carried loads of BAD News for us. "The Hike in Service Tax & Excise Duty", "The Scrapping of Sec 80CCF", "Changes to Wealth Tax Laws" etc. Finally, there is something minor that may some as good news for us.

Yes, you read me right. "Finally Some Good News". This News pertains to the changes to how we handle our medical and healthcare related expenses and claim tax deductions. Shall we see what they are?

Good News No. 1: Preventive Medical Checkups

The first good news is that, the law allows us to spend up to Rs. 5,000/- on preventive medical checks. This could be blood tests, cardio health checks etc.

However, a point to note here is that, this Rs. 5000/- is within the Sec 80D limit of Rs. 15,000/- Sec 80D is the section that covers premium paid on Medical Insurance.

How is this Useful?

1. If your medical insurance premium is less than Rs. 15,000/- you can get your health checked and utilize this amount to cover for the shortfall in the upper limit of Rs. 15,000/-
2. People are given a chance to invest on their own health and take up preventive healthcare checkups.

All you have to do is, undergo a preventive health check in a reputed hospital and submit the bill to your employer to utilize this feature.

Good News No. 2: Inclusion of Health Insurance Premiums paid for Parents

The second good news again deals with Sec 80D. This rule states that, an individual if paying the health insurance premium for his/her parents can claim up to Rs. 15,000/- as relief. Furthermore, if the parents are senior citizen the amount is Rs. 20,000/- (Senior Citizen is anyone who is above 60 years old)

How is this Useful?

Earlier Sec 80D covered only Self, Spouse and Children. Now, parents are included in the list too. So, we can claim an extra Rs. 15,000/- (or Rs. 20,000/- depending on our parents age) under this section for tax relief. This makes the total exemption under this section Rs. 30,000/- and Rs. 35,000/- respectively.

Good News No. 3: Medical Treatment on Dependents with Disabilities

Under Section 80DDB, any expenditure done on medical treatment of a disabled dependent is eligible for tax rebates. The limit is Rs. 40,000/- for normal dependents and Rs. 60,000/- for Senior Citizens. The Finance Minister has lowered the threshold of who qualifies as a senior citizen. Up until this year, the dependent had to be 65 years of age to qualify for this Rs. 60,000/- limit. From next assessment year, anyone above 60 years of age will qualify for this.

How is this Useful?

Individuals who have disabled dependents in the age group between 60 to 65 years will benefit from this ruling which allows tax exemption on an extra Rs. 20,000/- per year.

Overall Summary of the Good News:

1. Additional Rs. 5,000/- (Part of Sec 80D limit of Rs. 15,000) allowed on preventive health checks
2. Additional Rs. 15,000/- allowed as medical insurance premium for parents (Amount is Rs. 20,000/- if parents are senior citizens)
3. Age limit for Sec 80DDB lowered to 60 years to enable tax exemption for up to Rs. 60,000/- on the medical treatment of disabled dependents

Let us hope and pray that no one from our family falls sick or requires medical treatment. But, lets at least utilize the limits available on medical insurance premiums and get ourselves adequately insured just in case the unfortunate event of us anyone falling sick happens.

Happy Insuring yourselves!!!

Tuesday, March 27, 2012

Budget 2012 - Even More BAD News For Tax Payers - Sec 80CCF Scrapped

In the previous article we saw that, the change in income tax slabs doesn’t benefit us by much. I had also mentioned in that article that there isn’t much clarity about the Infrastructure Bonds that give us tax benefit under Sec 80CCF. It is now almost confirmed that Sec 80CCF is no longer valid from the next financial year. This means that, next year you wont be able to invest in Rs. 20,000/- in Infra bonds and save an additional amount on income tax. This article is about how this ruling affects us.

What is this Sec 80CCF?

The Section 80CCF covers investments in Infrastructure Bonds issued by authorized finance co’s that will be used for the infrastructure development of India.

Investments upto Rs. 20,000/- was exempt under this section, which means a tax saving of around Rs. 6000/-, Rs. 4000/- and Rs. 2000/- respectively for people in the 30%, 20% and 10% tax slabs.

What is this New Ruling?

As per the budget 2012, this Sec 80CCF is no longer valid. So, Tax Payers are left with only 1 lakh exemption under Sec 80C thereby bringing down the overall limit from Rs. 1.2 lakhs (80C + 80CCF) to 1 lakh.

Why Did the Finance Minister remove Sec 80CCF?

This Sec 80CCF was introduced two years ago for a period of 1 year to fund infra projects in India. However, it was extended for one more year during the previous budget (In 2011). However, this time around the the finance minister did not mention it in his budget speech. As expected, the Finance Ministry has let this Rs 20,000 deduction to lapse this year.

There is still not much clarity about why this happened.

What is the Impact of this Ruling?

Frankly speaking, removal of this segment does not impact people in the low or the high income group by much. People in the 5-6 lakhs income category will come under the 10% or at most 20% tax slab making the impact of this ruling minimal for them.

However, for investors with an income of up to Rs 8 lakh, the scrapping of Section 80CCF means that they will have to pay up to Rs 2,060 more tax next year. It will be tougher for female taxpayers, but the most severe blow is unfortunately for the senior citizens and the Very Seniors. These taxpayers will end up paying almost Rs 4,000 more as tax.

An Example Calculation:

Let us look at how someone with Rs. 8 lakhs income be affected depending on which category they fall into. A point to note here is that, I am only considering the Sections 80C & 80CCF for calculation. The person’s total income less investments in 80C & 80CCF is what is considered for calculations. All other deductions like house rent, transport deduction etc are not considered.

Tax Payer CategoryTax If 80C+80CCF Available (in Rs)Tax If only 80C Avaliable(In Rs)Additional Tax Liability (In Rs)
Senior Citizen61000650004000
Very Senior Citizen36000400004000

Note: A Cess is payable on top of the Tax amount which might further drive up the total tax liability

As you can see, Senior Citizens are the worst affected. They end up paying Rs. 4000/- as additional tax this year when compared to last year. Women are the second worst affected as they are paying an additional Rs. 3000/-. Very Senior Citizens and the Common Man are going to incur an additional burden of Rs. 2000/- this year.

Monday, March 26, 2012

India Budget 2012 - How the Change to Tax Slabs Affect Us

In the previous article "Budget 2012 - Income Tax Slabs Revised in India" we took a look at the changes to the Income Tax policies/slabs in India after the union budget 2012 that was released a few days back. You might be wondering how it affects us. We are going to take a look at few examples so that you can understand the impact better.

Before we begin:

All Calculations done below are done under the basic assumption that the individual has done no tax saving. He is paying taxes on his whole income as received. The actual numbers may vary from individual to individual depending on how much tax they save. There are many sections under which you can save income tax. You may want to visit the Article titled "Income Tax in India" and learn more about it.

Lets get started. We are going to compare the Tax savings of 5 people with income of 6, 9, 12, 15 and 20 lakhs respectively per year. They are split into 3 categories – The Regular Citizens, The Senior Citizens and The Very Senior Citizens.

For Regular Citizens – Men and Women aged below 60 years:

IncomeTax As per Old Slabs (in Rs)Tax As per New Slabs (In Rs)Tax Saved (In Rs)
6 lakhs52000500002000
9 lakhs12200011000012000
12 lakhs21200019000022000
15 lakhs30200028000022000
20 lakhs45200043000022000


Overall, though there has been a revision in the tax slabs, it doesn’t amount to more than Rs. 1000/- to Rs. 2000/- per month for a majority of Tax Payers. So, if you were in the dream of realizing a better take home salary after this budget, you are in for a unpleasant surprise. People who are in the Higher Income Range (Between 10 to 12 lakhs) are the ones that reap the most benefits in terms of % tax saved when compared to what they were paying up until this year.

Women enjoyed an additional Rs. 10,000/- income without taxes (Limit was Rs. 1.8 lakhs for men and 1.9 lakhs for women) until this year. The Finance Minister has eliminated this Bias towards women which some may welcome while some wouldn’t. Since the amount of tax women paid on this Rs. 10,000/- @ 10% was only Rs. 1000/- there wouldn’t be much of a difference eitherways…


For Senior Citizens – Men and Women aged between 60 to 80 years:

IncomeTax As per Old Slabs (in Rs)Tax As per New Slabs (In Rs)Tax Saved (In Rs)
6 lakhs45000450000
9 lakhs1150001150000
12 lakhs20500018500020000
15 lakhs29500027500020000
20 lakhs44500042500020000


There's nothing in this year's budget for the old-age population of India. There is no real benefit if your income is below 9 lakhs. As most senior citizens earning a pension or living off income from fixed deposits don’t manage to earn more than 9 lakhs, this revision in tax slabs doesn’t really make much difference.


For Very Senior Citizens – Men and women aged above 80 years:

IncomeTax As per Old Slabs (in Rs)Tax As per New Slabs (In Rs)Tax Saved (In Rs)
6 lakhs20000200000
9 lakhs900008000010000
12 lakhs18000016000020000
15 lakhs27000025000020000
20 lakhs42000040000020000


There's nothing in this year's budget for the Super Senior population of India. There is no real benefit if your income is below 6 lakhs. There is a marginal benefit for people whose income crosses that limit. But, as with Senior Citizens, the Super Seniors too don’t earn that much and hence, this revision in tax slabs doesn’t make much difference to them.


Overall Verdict:

The overall verdict from the Union Finance Budget, with respect to Income Taxes has been one of Disappointment. Though there is a marginal tax saving, the increase in Service Tax, Excise Duty and Wealth Tax means that, you will only end up paying more taxes this year than what you did last year.

To top this all, rising crude oil prices coupled with increase in service tax, will push the price of even the essential commodities which is going to make the life of the common middle-class Indian even all the more difficult.


Better Luck Next Time I Guess!!!

Budget 2012 - Income Tax Slabs Revised in India

After a couple of articles on bad news related to Wealth Tax and Service Tax changes after the Budget 2012, it is finally time for some good news. Remember the article titled Good News for Tax Payers in India where I had said that, this year the finance minister might revise the tax slabs? Well, the change to the tax slabs was not as big as what was suggested/expected. But, nonetheless, the tax slabs have changed and there is going to be some tax savings for all of us.

Lets get down to the details, shall we?

Changes in Individual Income Tax Rules:

The following are the main changes to the individual income tax rules as per the Budget 2012:

1. Minimum/Basic Exemption hiked to Rs. 2 lakhs.
2. Highest Tax slab (30%) is applicable if your income is greater than 10 lakhs
3. No discrimination between Male & Female Tax Payers. The Tax Slabs & Taxation Rates will remain the same for all regular citizens irrespective of Gender
4. Interest of upto Rs. 10,000/- earned by Individuals from their Bank Accounts is exempt from Income Tax
5. Up to Rs. 5000/- can be claimed as tax exemption for health checkup. This expense is part of the Rs. 15,000/- limit under Sec 80D (Medical Insurance Premium).
6. A new deduction of 50000 Rs also proposed for investment in equities through the Rajiv Gandhi Retail Equity scheme for individuals whose income is up to 10 Lakhs.

Points to Note Here:

1. Details reg. this new Rajiv Gandhi Retail Equity Scheme are still unclear. Who can invest, how the scheme will work etc is not yet known clearly. As and when clarity emerges on this scheme, we will cover it
2. The exemption of Rs. 5000/- for health checkup is part of the Rs. 15,000/- limit for Medical Insurance Premium. So, lets say you pay a premium of Rs. 12,000/- for medical insurance for your family, you can get a health checkup done for you and your spouse and claim up to Rs. 3000/- as part of Sec 80D.
3. There is not much clarity on Sec 80CCF "Infrastructure Bonds". The finance minister did not talk about this topic and explicitly mention that the tax benefits under this section will continue for this year as well. (This is important because, last year the finance minister said that this sec 80ccf will be applicable only for one year). However, he said that the government plans to raise around Rs. 60,000 crores through issue of tax free infrastructure bonds. So, I am assuming that sec80ccf will continue this year as well. Lets hope for the best.

Changes in Income Tax Rules for Businessmen holding Small & Medium Sized Businesses:

The following are the main changes to the income tax rules for individuals who own small to medium sized businesses as per the Budget 2012.

1. The Threshold annual turnover limit for businesses required to mandatorily maintain books of accounts and have an audit done has been raised from Rs. 60 lakhs to 1 crore
2. Businesses with a turnover of less than Rs. 1 crore can file their tax returns using the ITR-4 or ITR-4S (Also called the Sugam Form) instead of paying thousands of rupees to full time accountants & auditors

Points to Note Here:

1. Small and medium sized businesses were forced to hire a full time auditor/accountant to maintain their book of records as well as taxes due to the requirements laid down by the IT Department
2. Now that, this is relaxed a bit, small businesses can save around 20,000 to 25,000/- or even more on their fee towards these individuals.

Revised Tax Slabs – After the Budget 2012:

The following are the Revised Tax slabs effective for the financial beginning April 2012.

For Regular Citizens (Men & Women below 60 years Age)

Income Range (In Rs.) Tax %
Up To Rs. 2,00,000/- NIL (0%)
Rs. 2,00,001/- to Rs. 5,00,000/- 10% (Of the Amount that exceeds Rs. 2 lakhs)
Rs. 5,00,001/- to Rs. 10,00,000/- Rs. 30,000/- + 20% (Of the Amount that exceeds Rs. 5 lakhs)
Above Rs. 10,00,001/- Rs. 1,30,000/- + 30% (Of the Amount that exceeds Rs. 10 lakhs)

For Senior Citizens (Men & Women aged between 60 to 80 years)

Income Range (In Rs.) Tax %
Up To Rs. 2,50,000/- NIL (0%)
Rs. 2,50,001/- to Rs. 5,00,000/- 10% (Of the Amount that exceeds Rs. 2.5 lakhs)
Rs. 5,00,001/- to Rs. 10,00,000/- Rs. 25,000/- + 20% (Of the Amount that exceeds Rs. 5 lakhs)
Above Rs. 10,00,001/- Rs. 1,25,000/- + 30% (Of the Amount that exceeds Rs. 10 lakhs)

For Very Senior Citizens (Men & Women aged above 80 years)

Income Range (In Rs.) Tax %
Up To Rs. 5,00,000/- NIL (0%)
Rs. 5,00,001/- to Rs. 10,00,000/- 20% (Of the Amount that exceeds Rs. 5 lakhs)
Above Rs. 10,00,001/- Rs. 1,00,000/- + 30% (Of the Amount that exceeds Rs. 10 lakhs)

Note: A Cess of 3% will be added to the Tax amount payable by the assesse.

We will take a detailed look at how the revised tax slabs affect various individuals of the Tax Payer community in India in our next post.

Friday, March 23, 2012

Some More Bad News after Budget 2012 - Change to Wealth tax Rules in India

If you thought that the previous article on “Service Tax Increase” was bad news, then I am sorry to say that, you are mistaken my friend. This year, Wealth Tax is another area where the finance ministry has landed a solid right hand blow on the face of the Indian Citizen. Though the middle class Indian doesn’t have enough assets to qualify to pay Wealth Tax, even the higher income group, that pays a higher tax amount on their income and manages to accumulate wealth isn’t going to be happy with this new rules…

Do you remember the Article Are you an Innocent Tax Evader? In that, we had covered some basic mistakes we do as Tax Payers. We had covered Wealth Tax as one of those innocent mistakes. If you do not remember, please revisit the post to jog-up your memory.

Wealth Tax – To Revise:

All resident Indians are required to pay wealth tax and file a wealth tax return if their net wealth from assets exceeds Rs 30 lakh.

The Assets in this case include land, property, jewelry, cars, aircrafts, yachts and cash in excess of Rs 50,000. For Resident Indians (Resident Ordinary Residents - ROR), wealth tax is payable on all these assets, irrespective of whether they are located in India or abroad. For Non Resident Indians (NRIs), wealth tax is payable only on those assets that are located in India.

What is the New Change to this Law on Wealth Tax?

A new clause has been added to section 17 of the Wealth Tax Act. This section deals with 'wealth escaping assessment.' Under this section, if a taxpayer fails to disclose certain assets and pay wealth tax on those assets, the assessing officer has the right to open the taxpayer's returns for the last 4 years. In addition, if this net wealth that has escaped assessment is likely to be more than Rs 10 lakh, the assessing officer has the right to open returns for the last 6 years.

Also, now the new clause says that if the net wealth of the taxpayer that has escaped wealth tax includes any asset, including financial interest in any entity, located outside India, the assessing officer would have the right to go back and open tax returns of the last 16 years.

What is the Purpose of this New Ruling?

The intention of the new provisos is to bring to book all those tax evaders with significant assets in offshore locations or global tax havens.

Are you saying, Anand I am an NRI. I work in Gulf/USA/Singapore/Malaysia etc and so, this doesn’t affect me???

Unfortunately, as with any ruling by the Indian Finance Ministry, this is going to affect those NRIs too who are returning to India after a few years stay abroad.

Let us say, you worked in the USA for 4 years and are coming back to India. You bought some assets in the USA and still own them. While NRIs who have returned to India are exempt from taxes on their global assets for the first two years after they return (because their status is Resident but Not Ordinary Resident, RNOR, for those two years), they become Resident Ordinary Residents thereafter and must pay wealth tax on all assets including global assets.

So, essentially this becomes double taxation – Assets you purchased after paying all due taxes in the country of origin of your income, you are taxed on the same stuff after you return to India.

Now that is Sweet Right??? More Bad News makes life all the more better. Doesn’t it???

More Bad News after Budget 2012 - Service Tax and Excise Duty Increased in India

The past few days have been pretty chaotic in India. The Finance Budget for the financial year 2012-13 was released by our Finance Minister and ever since, the markets have become even more volatile than what it was before. The general sentiment across industries and sectors is that of “Disappointment”. One of the key proposals by the Finance Minister that is going to affect the Common Man in India is the “Hiking of Service Tax”.

This article is my take on how this hike in Service Tax in India will affect you and me.

Shall we get started??

What is the New/Proposed Service Tax & Excise Duty %?

The Service Tax and Excise Duty has been hiked from the existing 10% to 12%.

Note: This 12% is not uniform across all sectors. The actual Service Tax & Excise Duty % will vary in some sectors.

If you thought for a moment, “Hey, what will this Marginal 2% cost me? Not much I suppose” you are very wrong my friend. 2% may seem like a small or insignificant number. But, trust me; by the end of this article, you will change your mind.

What are the Things that this increase in Service Tax will affect?

This hike in service tax and excise duty is almost uniform across all sectors. Almost every single item you purchase may get costly. There are 17 items like Essential Education, Public transport and Services meant for Agriculture are exempt from this tax. Any other service is taxable at the prevailing rate %.

Some examples:
1. Telephone Bill
2. Eating Out – Restaurants
3. Gyms
4. Car Maintenance/Service/Rentals
5. Cable TV
6. Healthcare
7. Life Insurance Premium (Mortality Charges only)
8. Services like Catering & Photography
9. Real Estate Agents & Stock Broker
10. Courier Service
11. Salons & Spas
12. Jewelry
13. Holidays & Vacations
14. Etc.

Now, Go back to the previous paragraph and think if you still feel this 2% increase will not affect you by much.

Are you one of those stubborn people (like me of course) who take some more convincing? Did you say “Come on Anand, the list is pretty big, but the impact is only 2%? What difference would that make?”

Ya, Right… Read on my friend!!!

Impact of change in Service Tax & Excise Duty on various Sectors:


The Healthcare industry is already considered very costly and unaffordable by the middle class folks. Things are going to get worse. All visits to the doctors, diagnostic tests like Scans, CTs etc. are about to get costlier. A Scan that cost you Rs. 5500/- (5000 + taxes) last year will cost you at least Rs. 5600/- Now, if we consider the fact that the person who is buying the Scan machine would have paid a higher tax on the machine when he bought it, he is bound to increase the base rate on the scan and so, the number could go up to even Rs. 6000/- or more.

Life Insurance:

Life Insurance Policies are going to get costlier too. The service tax on the premium for policies where the mortality charges are explicit has also been raised on the charges. For other policies, the service tax on the gross premium for the first year has been hiked from 1.5% to 3%, while subsequent premiums will be taxed at 1.5%.

Automobiles – Cars:

Excise duty on Sedans that are longer than 4 meters has been hiked. It was 22% up until now and it will be 24% to 27% depending on the Car’s Engine capacity.


In Indian culture, gold and jewelry are an integral part of every marriage. If you are someone who is planning to get married this year (like me) this will come as real bad news.
1. Customs Duty on Gold & Platinum has been increased from 2% to 4%
2. Excise Duty on Gold has been increased from 1.5% to 3%
3. Customs Duty on all precious stones (Including Diamonds) is set at 2%

So, if we combine all these three taxes on a gold necklace with precious stones for your wife or fiancée, think of at least a Rs. 5000 or more increase in the overall price of the item.

Holidays & Travel:

If you are someone who goes on yearly vacations or someone who uses Air Travel frequently or prefers AC coaches in Trains, then there is more bad news for us.
1. Stay in Resorts and Hotels will attract a Luxury tax of 12.5%
2. Restaurant Bills will include the increased service tax of 12% (Instead of the existing 10%)
3. Service Tax is applicable on Air Tickets, Train Tickets (for AC coaches) and also for services provided by Travel Agents & Tour Operators

That is a whole bunch of bad news. Isn’t it?

Now tell me, do you still think this hike in Service Tax and Excise duty isn’t going to affect you by much?

If you are still not convinced, let’s take a look at a simple example calculation.

Monthly Recurring Expenditures:

The following are recurring expenses that we pay every month. Below is how the new service tax structure is going to affect us.

S.NoExpense DescriptionMonthly Expense@ Existing Tax %@ New Tax %
1Telephone BillsRs. 2000Rs. 240Rs. 288
2Eating OutRs. 2000Rs. 240Rs. 288
3GymRs. 500Rs. 60Rs. 72
4Car Maintenance & ServiceRs. 2500Rs. 300Rs. 360
5Cable TVRs. 250Rs. 25Rs. 30
6Stock BrokerRs. 1500Rs. 150Rs. 180
1. Telephone bill is calculated for 2 Mobile Phones & 1 Land Line
2. Eating out is at once every two weeks for a family of four at a decent restaurant
3. Car Maintenance is for a Mid-sized Sedan. We usually service the car once every 2 months, but for ease of calculation, I divided the number by two and put out a monthly number

Yearly Expenses:

The following are expenses that we don’t do every month, but nonetheless end up doing at least once a year. Below is how the new tax structure is going to affect us.

S.NoExpense DescriptionMonthly Expense@ Existing Tax %@ New Tax %
1HealthcareRs. 25000Rs. 2500Rs. 3000
2Life Insurance PremiumRs. 6000Rs. 600Rs. 720
3Holidays & TravelRs. 50000Rs. 5000Rs. 6000
4JewelryRs. 50000Rs. 1000Rs. 2000
5Family Functions (Catering/Photography etc.)Rs. 20000Rs. 2000Rs. 2400

1. Let us hope and pray no one in our family falls sick. But, with a family in which there are children and old age people, this is inevitable. Scans, X-Rays etc.
2. The Service Tax hike is only on the Mortality Charges for Life Insurance Premiums. I have just taken a rough amount of Rs. 6000/- as amount that may be the mortality charges. The actual number may vary based on your age and the type of policy you have taken
3. Holiday and travel is calculated for a family of 4 on a minimum of 3 day trip by AC coach in Train

Actual Impact:

Existing Monthly Expenses: Rs. 1015/-
New Monthly Expenses: Rs. 1218/-

Calculate for the Year:

Existing Monthly Expenses for 1 year = Rs. 12,180/-
New Monthly Expenses for 1 year = Rs. 14,616/-

Existing Yearly Expenses: Rs. 11,100/-
New Yearly Expenses: Rs. 14,120/-

Net Taxes – As per Existing % = Rs. 23,280/-
Net Taxes – As per New % = Rs. 28,736/-

Net Increase in Taxes Paid in one Year = Rs. 5,546/-

Are you still thinking that the Service Tax hike isn’t going to affect you by much???

Friday, March 16, 2012

Bad News for Salaried Class - Employee Provident Fund Rate of Interest Reduced

Yesterday, just a day before the Union Budget is to be presented in the Parliament, the Union Finance Minister dropped a bomb-shell on the Salaried Class of India.

What is that Bomb Shell?

Our Finance Minister has proposed/approved a 1.25% rate cut on the Interest offered on EPF deposits. For now on, the rate of interest will be 8.25% instead of the 9.5% that was offered so far.

How does this affect us?

Employee Provident Fund (EPF) is one of the main (if not only) sources of funds for retirement for a majority of the working/salaried class of India. So, a rate cut here means, millions of Indias salaried people are going to be adversely affected. A rough estimate puts around 5 crore or more workers throughout India will be affected by this Rate Cut.

What is Next?

Frankly speaking, only God Knows. Lets Hope & Pray that, this rate cut is scrapped or atleast partially scrapped to benefit the millions of middle class India's who depend entirely on their EPF savings for Retirement.

Monday, March 12, 2012

Credit Ratings offered by CRISIL & CARE in India

In the previous article, we had seen how to choose a Good Corporate FD for investment. Towards the end of the article, I had said that, there will be an article on the ratings offered by Credit Rating Agencies in India. Well, here we are…

Before we Begin - I have already covered Credit Ratings in detail in the following posts. You can visit them to learn more about what Credit Ratings are:

1. Credit Ratings – Explained
2. What is a Credit Rating?

What are the various Credit Rating Agencies in India?

The famous & reputable Credit Rating Agencies in India are:
1. CRISIL and

If you see any investment scheme like Bonds, Corporate FDs etc., chances are that, they are rated by either or both of these agencies.

Ratings by CRISIL

CRISIL like any other rating agency in the world, uses the alphabets A through D to signify the creditworthiness of the Issue. Ratings of FA or above (FAA and FAAA) are considered Investment grade. All lower ratings are considered non-investment grade and must be avoided. The various ratings available are:

Rating Safety Level Description
FAAA Extremely Safe (Highest Safety) This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong. This is the highest possible rating that CRISIL will assign any issue.
FAA High Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is strong.
FA Adequately Safe This rating indicates that the degree of safety regarding timely payment of interest and principal is satisfactory. Changes in circumstances can affect such issues more than those in the higher rated categories like FAA or FAAA.
FB Inadequate Safety This rating indicates inadequate safety of timely payment of interest and principal. Such issues are less susceptible to default than fixed deposits rated below this category, but the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments.
FC High Risk This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful. Such issues have factors present that make them vulnerable to default; adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal.
FD In Default This rating indicates that the fixed deposits are either in default or are expected to be in default upon maturity.
NM Not Meaningful Instruments rated 'NM' have factors present in them, which render the outstanding rating meaningless. These include reorganization or liquidation of the issuer, and the obligation being under dispute in a court of law or before a statutory authority.

Source: CRISIL India

Ratings by CARE:

CARE like any other rating agency in the world, uses the alphabets A through D to signify the creditworthiness of the Issue. Ratings of CARE A or above (CARE AA and CARE AAA) are considered Investment grade. All lower ratings are considered non-investment grade and must be avoided. The various ratings available are:

Rating Safety Level Description
CARE AAA Extremely Safe (Highest Safety) Instruments with this rating are considered to be of the best credit quality, offering highest safety for timely servicing of debt obligations. Such instruments carry minimal credit risk.
CARE AA High Safety Instruments with this rating are considered to offer high safety for timely servicing of debt obligations. Such instruments carry very low credit risk.
CARE A Safe Instruments with this rating are considered to offer adequate safety for timely servicing of debt obligations. Such instruments carry low credit risk.
CARE BBB Moderately Safe Instruments with this rating are considered to offer moderate safety for timely servicing of debt obligations. Such instruments carry moderate credit risk.
CARE BB Inadequately Safe Instruments with this rating are considered to offer inadequate safety for timely servicing of debt obligations. Such instruments carry high credit risk.
CARE B Low Safety Instruments with this rating are considered to offer low safety for timely servicing of debt obligations and carry very high credit risk. Such Instruments are susceptible to default.
CARE C Very High Risk Instruments with this rating are considered to be having very high likelihood of default in the payment of interest and principal.
CARE D In Default Instruments with this rating are of the lowest category. They are either in default or are likely to be in default soon.

Source: CARE India

Note: Rating agencies may include a “+” or “-” symbol along with ratings to indicate a relative position within the same rating category. For ex: a AA+ is better than AA which in turn is better than a AA-. However, even AA- is better than the other lower ratings.

Happy Investing!!!

Choosing a Good Corporate Fixed Deposit for Investment

In the previous article, we learnt what Corporate Fixed Deposits are, how they work and how useful they are to the investor looking for guaranteed returns with relative safety. This article is about how to choose a good Corporate FD for Investment and most importantly how to weed out impending disasters. After all, it is our hard earned money and we have every right to check and ensure that our money is not invested in a disaster.

To revise:
Corporate Fixed Deposits are similar to Bank Fixed deposits with the difference that, they are offered by corporations instead of banks. Typically a corporate fixed deposit offers much higher return than a bank FD’s, however it comes with a risk.
This is because corporate deposits are unsecured in nature and unlike bank fixed deposit it is not covered by a guarantee from the Deposit Insurance and Credit Guarantee Corporation of India, which assures repayment of Rs 1 lac in case the bank defaults.

Remember the Previous Post?

How to Choose a Good Corporate FD?

There have been instances in the past where companies that have offered very high returns but have defaulted on both interest and principal repayments. A lot of people have lost their money by investing in such schemes. So, as a smart investor, the onus is on us to study the company and make an informed decision before you make the investment.

Below are some basic things that we must check before we decide to invest in a corporate FD:
1. Check The company’s History – Any company that has a strong track record of successful performance and profit generation for a period of at least 10 years would be a better choice than a newer company that is yet to establish itself
2. Check the Company’s Repayment History – If the company has already issued such FD schemes, check if they have made timely interest payouts and proper principal repayment. It will give you a good idea as to whether they will do the same with our deposits.
3. Check the Issue Credit Rating – Credit Rating Agencies in India like CRISIL, CARE, ICRA etc offer credit ratings on such corporate FD issues. It will be a good idea to check the credit rating of the issue and choose one that is of a higher rating. These credit rating agencies make our lives easier by studying the company extensively before arriving at the rating. So, the chances are that a AAA rated deposit will be much safer than one with a AA rating, even if that means you earn a lesser rate of interest. Usually company’s with lower ratings offer higher interest rates to attract investors for the additional risks they are taking. So, unless you are an high risk investor, stay on the high risk rating grade of AA or even better AAA
4. Check the Sector Outlook of the Company – A company is rarely a standalone entity. The performance of a company is strongly tied to the performance of a sector as a whole. For ex: the Aviation Industry is going through turbulent times right now. Remember the Kingfisher airlines saga that has been going on for the past few months? With the whole Aviation sector going through tough times, chances are that, any aviation company that is coming up with an FD issue may face difficulties in honoring their interest payment commitments. So, make sure that you study the sector of the company and figure out if the sector is expected to perform steadily over the next 2-3 years
5. Choose a Medium Term Investment – Always select a 2-3 year timeframe while selecting Corporate FD options. Though some might consider 2-3 years as long term, in industry parlance, it is not really long term. By choosing such a tenure, you have the option to revisit your decision when it is time to redeem your investment. If you feel that the company or the industry as a whole isn’t performing well, you can let your investment mature and look for better options. This facility will be unavailable if you go for a 5 or 10 year investment option

I repeat, Credit Ratings are one of the biggest deciding factors while selecting such FD schemes. Investors should invest only in a company having AAA or AA rating. This way you can ensure that your investments are safe. After all, that is the whole point of going for fixed income instruments, isn’t it?

If you are not too sure about the various credit ratings offered by Rating Agencies in India like CRISIL or CARE, don’t worry, there will be an article very soon on that topic…

How to Identify a Potential Disaster?

As suggested at the beginning of this article, there are certain key indicators that can help us spot potential disastrous investments. Some of those signs are:
1. If the Company is offering an interest rate of 15% or more – This is a clear cut indicator that the company is desperately trying to raise money and is willing to offer an unusually high rate of interest to attract investors. Though 15% is a great number as an investor, it is very difficult for any company to pay out such high interests even if they manage to earn an extraordinary profit. So, stay away from such schemes
2. If the Company has a track record of defaulting on interest or principal repayments – This is another clear cut indicator that the company may repeat the same with our money as well. What is point of investing in a scheme that has a high probability of defaulting on the payments they owe us?
3. If the Company is below investment grade (Rated below A) – As mentioned in the previous paragraph, the credit rating is a very good indicator of the deposit schemes performance in the near future. Any issue that is rated below “A” is considered below investment grade and has to be avoided. Usually such a rating is given only if the company has a track record of defaulting on its payments. In such cases the company will offer unusually high rate of interest to attract investors (Either or Both points 1 & 2 will be true). So, stay away from such schemes

To Summarize:
Do your homework and ensure that you have all your bases covered before you make an investment decision. Corporate FD’s are a great investment option, provided you choose the right scheme.

Happy Investing!!!

Saturday, March 10, 2012

Private ATMs - Great News for Travellers in India

The title might seem not-so-relevant to a Banking & Finance Blog like mine. Isn’t it? But, as with many topics covered in this blog, this one too is related to the Indian banking industry.

Have you ever gone on a trip to any rural or semi-urban area of India? During such a trip, have you ever faced the difficulty of not being able to find an ATM to withdraw cash? I have been in such situations multiple times and most probably you would have too. This post is about some good news about this situation…

Why can’t we find ATMs in Rural Areas?

Operating an ATM involves a lot of money. You need some space to set up the machine, a security guard to safeguard the machine, electricity, computer networking etc. Banks accept this cost of setting up ATMs in cities and posh areas because, the number of customers who use an ATM in a city area is high and adds a lot of business value to the bank. But, if the same is the case with an ATM in a rural area, it is not cost effective for banks. That is why you cant find many bank ATMs in rural areas.

An Interesting Stat: There are nearly 90,000 ATMs in India. Of which approximately 80% or more are in Cities and Urban Areas.

So, what is this Good News?

The Good News is:
The Reserve Bank of India has allowed non-banking entities to own and operate ATMs across India.

Yes, if you want, you can purchase 10 ATM’s and install them in rural areas in your locality. That’s great news, isn’t it?

How will these ATMs work?

These ATMs will not be owned by any bank. Any bank ATM Card that is tagged to a service like VISA or MasterCard or any other service will be able to use the ATM and withdraw cash. These ATMs will be linked to all banks in India and will be able to service cash withdrawal requests of all customers irrespective of what bank they have an account with.

Why would someone want to set up an ATM Machine?

This will be a business opportunity for the individuals/corporations setting up those machines. The RBI has given permission to those entities that set up these private ATM Machines to charge for their service. So, anyone who uses the ATM Machine to withdraw cash will have to pay a fee that will go against the service which will be the profit for the company setting up those ATMs.

What are the Restrictions in Using these ATMs?

There are a few restrictions that need to be remembered before using such ATMs. They are:
1. Every transaction in such “Neutral” ATM is charged. The fee is payable by the customer to the owners of that ATM
2. This usage does not come under the “5 transactions in other bank ATMs” ruling of RBI. Your bank too may charge you for using the Neutral ATM

But, if you think about the situation, you are stuck in a rural area and need some cash, would you think paying lets say 100 or 200 rupees to withdraw cash as more important than getting the cash to meet your family’s cash requirements?

Who can Apply to Set Up these ATMs?

Any non-banking entity that wants to set up these ATMs must have a minimum net worth of Rs. 100 crores at the time of application. Also, they must maintain their net worth throughout their operation. This is one of the pre-requisites to receive the approval from RBI.

Will this be a Successful Idea?

I have seen such Private ATMs in USA and other developed Nations. They are very successful and are even set up in urban and city areas. However, this is a novel idea for a country like India. Only time will tell if this will be successful, but I think this will be a successful business idea because:
1. ATM Penetration in rural and semi-urban areas of India is very poor. Chances of us finding an ATM in such areas is very slim. So, if private non-banking entities set up an ATM Network, it will be very useful for customers
2. Though these private non-banking entities may charge you a fee for providing the service, once competition heats up among private players in setting up these networks, the fees may come down and become cheaper

All in all, this is a very good development and hopefully it will be Successful!!!

Thursday, March 8, 2012

Corporate Fixed Deposits

With the Interest Rate situation in the Indian Debt Markets at an all time high, options for good fixed income investments like Bank Fixed Deposits & Company/Corporate Fixed Deposits are ripe for the picking. All of us know what a Bank Fixed Deposit is. But, many of us do not know what a Corporate or Company Fixed Deposit is. The purpose of this article is to explain on what they are and how they can be a useful investment option for investors.

What is a Corporate Fixed Deposit?

A deposit made by investors with corporations for a fixed time period, for a predetermined/agreed upon rate of interest is called a "Corporate Fixed Deposits".

How are they different from Bank Fixed Deposits?

By the way they work, they are extremely similar to fixed deposit schemes offered by banks. The differences are:

Bank Fixed Deposits Corporate Fixed Deposits
Money accepted as deposits is used by the bank to grant loans to other loan customers Money accepted as deposits is used by the company to expand its business and meet its cash requirements
The Reserve Bank of India governs all these deposit operations done by Banks The deposits are not governed by the Reserve Bank
Rate of Interest is governed by the RBI RBI does not govern the Rate of Interest offered by the company
Very Low to Low Risk as the RBI will intervene if they feel any unstability in the banks operations Medium to High Risk as no one will intervene if they feel the company is unstable
Rate of Interest is lower than company FD's due to the relatively lower risk Rate of Interest is higher than bank FD's due to the relatively high risk
If the Bank defaults, the deposit insurance scheme from the RBI will be invoked to recover customer money If the Company defaults, the investor stands to lose his money
How does the Corporate Fixed Deposit work?

Company's/Corporations can raise capital by means of issuing Fixed Deposits to investors using the Section 58A of the Indian Companies Act. These deposits will be used by the company to fund its expansion, meet its day to day cash requirements etc. This is just like a regular loan that we may take from any financial institution. The company will make periodic Interest Payment (Usually Once a Year) to all the investors in return for the deposit they made with them. At the end of the deposit tenure the company will re-pay the money deposited to all the investors.

A point to note here is that, these deposits are unsecured. If the company is unable to perform as expected or starts making losses, the interest payments may be skipped and in the worst case, if the company declares bankruptcy, the whole deposited money may be lost.

This is exactly the reason why company fixed deposits offer a higher rate of interest (Usually 2-3% more than Bank FD's) to attract high risk investors who want better returns that what is offered by Banks.

How are Interest Payments made to the Investors?

The Interest payment is usually made depending upon the Investors choice. They can opt for Monthly or Quarterly or Half-Yearly or Annual Interest Payments. The company will declare upfront the mode of interest payment. It will either be through cheques mailed out the investors address or through ECS into the investors bank account.

Am I Saying that Investing in Corporate FDs is a Bad Idea?

In this article, you might have seen multiple references to these deposits being unsecured and that chances of losing the money are high if the company goes broke. If this had made you think that Investing in them is a bad idea, then you are wrong.

The point here is that, not all company's are mismanaged or go broke. There are numerous well-performing company's that raise capital by using this FD option. They do it because, it is usually cheaper than borrowing from banks. Banks usually charge a much higher interest rate than what these company's would pay on their corporate FD schemes. So, if the company is a well managed one, with a reputation of stable business and profit earning, then there is a very good probability that you will receive your interest payouts on time and that the company will meet its commitment to repay your deposit at the end of the deposit tenure.


Investing in Corporate FD's is a good idea if the company is good and has a history of good performance. In the subsequent posts, we will take a look at the good Corporate FD schemes that you can invest now and how to identify a good Corporate FD scheme from one that is an impending disaster

Happy Investing!!!
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