Thursday, April 19, 2012

Are Indian Oil Companies Really Loss Making?

Petroleum Prices in India have been revised numerous times in the past two years. Everytime such a rise happens, the reason is explained as "To reduce the losses made by the Indian Oil Refining Cos". With global crude oil prices going up, this is probably the only option available for the Government & Oil Cos to minimize losses. Sounds Logical doesnt it?

Below is an Exceprt from one of the news websites after a recent petrol price hike decision by the Government.

"The public sector oil companies Indian Oil Corporation Ltd (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) stand to lose over Rs.130,000 crore this fiscal on selling diesel, domestic LPG and kerosene at prices below their cost of production"

The purpose of this Article is to analyze and find out if this is true...

Read the above Quote by the Indian Government again. You need to remember this statement in order to make sense of the subsequent information.

Are Indian Oil Companies Really Making Losses?

Though the Oil Cos and the Government claim that they are making/incurring huge losses, the financial statistics available in the websites of these respective cos depict a different story. If we combine the Net Profits (After Paying all Taxes to the Government) declared by these three cos put together works out to greater than Rs. 10,500 Crores in the Fiscal Year 2010-2011. The year before it was greater than Rs. 13,000 Crores.

They have paid Dividends of over Rs. 3700 Crores this year and the number was over Rs. 4700 Crores last year.

So, If put together, they make a profit of over 10,000 Crores and Pay-out Dividends of over 3700 Crores to their Shareholders, do you think that they are making Losses? Do you think that, if a Company is selling something at a price below their cost of production, they can make a profit of even ONE RUPEE?

Summary Financial Information - From the Respective Company Profit & Loss Statement - Available to Investors:

Financial Year 2010-2011:

Company NameReport Net Profit (After Taxes)No. of Outstanding SharesEarnings Per Share (EPS)Earnings Per Share (EPS)Dividend Paid (Including Taxes)
Indian Oil Corporation7445.48 Crores242.8 CroresRs. 30.67Rs. 30.672665.25 Crores
Bharat Petroleum1546.68 Crores36.15 CroresRs. 42.78Rs. 42.78577.24 Crores
Hindustan Petroleum1539.01 Crores33.863 CroresRs. 45.45Rs. 45.45550.99 Crores

Financial Year 2009-2010:

Company NameReport Net Profit (After Taxes)No. of Outstanding SharesEarnings Per Share (EPS)Earnings Per Share (EPS)Dividend Paid (Including Taxes)
Indian Oil Corporation10220.55 Crores242.8 CroresRs. 42.10Rs. 42.103665.17 Crores
Bharat Petroleum1537.62 Crores36.15 CroresRs. 42.53Rs. 42.53578.93 Crores
Hindustan Petroleum1301.37 Crores33.863 CroresRs. 37.43Rs. 37.43473.84 Crores

Now, ask yourself this Question


Coming Soon - An Analysis on the Real Price of Petrol & Diesel in India!!!

Disclaimer: The Whole Analysis above was based on publicly available information gathered from the respective company websites. If any information not available to the public was used to arrive at the Governments Number Quote for loss then, it is possible that the Authors analysis is incorrect. However, personally, when a company claims it is making losses, it usually does not declare profits in its Profit & Loss statement or declare hefty dividends to its investors. So, the chances of the above analysis being incorrect are minimal.

Friday, April 13, 2012

Health Insurance Customers - Know Your Rights

Are you one of those Indian Citizens who thinks that fighting with Insurance Co's is a Lost Cause? Are you one of those people who think that Insurance Customers are forced to accept the decisions taken by Insurance Co's? If so, this article is for you. In this article we are going to cover the basic rights that you and I have as Health Insurance Customers.

Right No.1 - The Premium Amount has to be Justified

Yes, the Insurance Company fixes the Premium for all Insurance Policies sold by them. But, this does not mean that they can just quote any number they want.

First of all, they have to submit their Premium Amount calculation details with IRDA when they register the Policy. If you jumped the gun and said "How will I know whether I am being Over-charged?", don't worry my friend. I am just getting to the Good Part.

There is something called a "Premium Chart" which every Insurance Company has to put up on their website. This will contain details on how the Premium Amounts will vary based on the policy holders age, claims history etc. Practically, premiums go up during renewal of Health Insurance policies if, the policy holders age goes up or if claims were made in the previous year. By knowing these details you can check the website and confirm if the premium you are paying is appropriate for the policy you are purchasing.

Tip: If you are still not sure of whether you are being over-charged, compare similar products offering similar insurance benefits from other Insurance Company's. The difference in premium must not be more than a few hundred rupees. For ex: If LIC Offers me Health Insurance worth 10 lakhs for Rs. 15,000/- per year and if ICICI Prudential asks me Rs. 30,000/- for the same policy, then either of the following is true:
1. ICICI Prudential is probably offering me much higher benefits than the policy offered by LIC
2. ICICI Prudential is over-charging me

Note: The above is just an example. I am right now working abroad and have practically 0 idea about the current prevailing Health Insurance policy premium rates in India.

Right No. 2 - Policy Renewal cannot be Refused without a Valid Reason

There are numerous cases where Insurance Co's reject policy renewals citing arbitrary reasons. For ex: they cannot refuse to renew your policy because you had claims last year. The following are the legitimate reasons for which policy renewals can be refused:
1. If the Policy Holder has crossed the age limit for the policy - maybe 65 or 70. This age has to be clearly and explicitly mentioned in the policy document
2. If the Policy Holder misrepresented facts or provided false details
3. If the Policy Holder did not pay his premium on time and the policy lapsed

In Short, if you are within the Age Limit for the policy, and have submitted all documents truthfully and have paid your premiums on time, the Insurance Company cannot refuse to RENEW your policy.

Right No. 3 - All Claims/Requests Must be Processed Within Deadlines

As per the guideliness set up by IRDA, all Re-inbursement Claim Requests must be processed/paid within 14 to 30 days of submission of all necessary documentation. Usually we will be asked to submit all original bills and receipts, letters from the hospital and doctors along with proof of holding the Insurance Policy to the Insurance Company within the timeline stipulated by the Insurance Co. In the policy it will be mentioned that all claims must be submitted within 'N' days from treatment completion (Usually 'N' will be 7 or 14 days). If the Customer follows the procedure and submits all necessary documents on time, the Insurance Co is supposed to settle the claim within 30 days.

Tip: If the Insurance Co does not settle the claim within 30 days, the policy holder has the right to claim interest on the payout if they have submitted all necessary artifacts on time

In case of Cashless Hospitalization, the amount is settled during the Treatment period itself, so this above Right is not applicable here.

Right No. 4 - Free Look Period

Every Insurance Policy has something called "Free Look" Period during which the policy holder can cancel & return the policy if they are not satisfied. In such cases the Insurance Co has to ensure that the Premium Amount paid by the customer is refunded after deducting any fees/charges as applicable. A point to note here is that, details of the no. of days in the Free Look period as well as the fees payable in case of policy termination during the Free Look period have to be clearly mentioned in the policy document.

In some cases, the Insurance Co may actually delay the approval of your policy until the free look period is over and so by the time your policy is approved, you cannot cancel or return it. This again is wrong.

If the Insurance Co does not refund your amount or does not approve your policy application during the "Free Look" period you can raise a Grievance with IRDA as explained in the previous article.

Some Good News to Wrap Up the Article

Of late, there have been numerous cases in the Health Insurance Space, file by customers against hte Insurance Co's. The Good news is that, there have been Several Judgements where the ruling was in favor of the Insured Individuals and directed the Insurance Co to pay the compensation immediately along with interest and fines.

The IRDA too has been very strict on Insurance Co's that delay claim settlement. Recently, they even pulled up the Government Owned New India Assurance Co for Overcharging of Premiums as well as Delay in Claim Settlements.

At the end of the day, we are not exactly where we must be ideally, but things are changing and changing for good. So, lets hope for the best in the coming years.

Insurance Regulatory and Development Authority (IRDA)

IRDA - Insurance Regulatory & Development Authority of India is the National Agency that governs and supervises the Insurance Sector in India. Remember the article on the stock market regulator SEBI? What SEBI is to the Stock Markets, IRDA is to the Insurance industry. The purpose of this article is to learn more about this Agency.

Establishment of Insurance Regulatory and Development Authority - IRDA

The Insurance Regulatory and Development Authority (IRDA) was formed by an act of Indian Parliament known as IRDA Act 1999. The purpose of setting up the agency, as stated in the Parliament is

1. To Protect the interests of Insurance Policy holders
2. To Regulate, Promote and Ensure orderly growth of the Insurance Industry

The Act was amended in the year 2002 to incorporate some additional regulations to further protect the interests of the Indian Citizens.

Does IRDA Govern Unit Linked Insurance Plans?

A lot of people think that Unit Linked Insurance Plans (ULIPs) are Governed by the Securities & Exchange Board of India (SEBI) because they invest in the Stock Market. Well, if you thought so too, you are incorrect.

SEBI was governing all ULIPs until 2010. But, in 2010, the Government of India ruled that Unit Linked Insurance Plans (ULIPs) are basically Insurance Products that provide an Investment advantage and hence will be governed by IRDA and not SEBI.

So, the Answer is - YES. IRDA Governs ULIPs

Chairman of the Insurance Regulatory and Development Authority (IRDA)

Mr. J Hari Narayanan is the current Chairman of the Insurance Regulatory and Development Authority of India. He has been the Chairman since June 2008.

Note: As of April 2012.

Purpose of Insurance Regulatory and Development Authority - IRDA

As outlined in the previous paragraph, the summary purpose of the IRDA is to protect the customer interest and to regulate the Insurance Sector in India. The following are the detailed purposes of the IRDA:

1. To Protect the Interest of all Insurance Policy Holders
2. To Ensure a Fair Treatment of all Insurance Policy Holders
3. To Enable the speedy and orderly growth of the insurance industry
4. To Set and Enforce Standards like Integrity, Fair Dealing etc in the Insurance Industry
5. To Ensure that insurance customers receive precise, clear and correct information about products and services sold by Insurance Co's
6. To Ensure Speedy Settlement of Insurance Claims
7. To Prevent Insurance Frauds and other Malpractices
8. To Serve as the Grievance Redressal Body for all Insurance Related Grievances

How The Insurance Regulatory and Development Authority (IRDA) Serves its Purpose

The Purposes elaborated above seem all nice and good. But, how does the Insurance Regulatory and Development Authority of India ensure that it serves its purpose? They do it by doing the following activities:

1. They Set the Rules & Regulations that all Insurance Providers in India must follow. If an Insurance Co does not adhere to all these Rules & Regulations, they will not receive the Registration which is mandatory to conduct Insurance Business in India
2. Set Basic Guidelines on Settlement of Claims, Insurance Premium, Insured Amounts, Surrender Value etc
3. Set the Basic Terms & Conditions (Contracts) of Insurance
4. Set the Qualifications & Code of Conduct for all Insurance Agents
5. Set the Code of Conduct for all Surveyors & Loss Assessors
6. Conduct Enquiries and Investigations including Auditing on all Insurance Providers, Intermediaries and Agents in the Business
7. Set the Form & Manner in which Books of Accounts will be maintained by the Insurance Co's
8. Regulating the Investment of Funds by the Insurance Co's
9. Setting Guidelines on Margin Requirements for the Insurance Co's and ensuring that they adhere to it
10. Setting Guidelines on the Fee's and other Charges that Insurance Co's can levy on the customers

The list os very long. I have just outlined the key activities of the IRDA.

Address of IRDA Head Office:

Insurance Regulatory and Development Authority
3rd Floor, Parisrama Bhavan, Basheer Bagh HYDERABAD 500 004
Andhra Pradesh (INDIA )

Ph: (040) 23381100
Fax: (040) 6682 3334

Grievance Redressal

The IRDA has set up the Integrated Grievance Management System (IGMS) to help the Policy Holders. Policy holders can Register Complaints with their respective Insurance Co's and if they do not receive a Satisfactory response, they can escalate the issue to the IRDA Grievance Cells. If you have a dispute in which the Insurance Co is being non-cooperative, you can raise your grievance to the IRDA Grievance Call Centre (IGCC)

IRDA Grievance Call Centre (IGCC) can be accessed through
A toll free number 155255 for voice calls
Email -
Address for communication for complaints by paper/fax:

Consumer affairs Department
Insurance Regulatory and Development Authority
9th Floor, United Towers,
Basheer bagh,
Hyderabad -500 029
Fax 91 – 40 - 66789768

How IRDA's Integrated Grievance Management System (IGMS) Works?

1. Policy holder needs to login in to and create a profile for registering a complaint.
2. Once the policy holder registers in to IGMS then details of complaint are passed on to respective insurance companies.
3. Policy holder can see the details of the branch offices of the insurance company while registering the complaint.
4. Policy holder receives the confirmation email after registering the complaint along with IRDA token no which will be used by IRDA and Insurance Company for tracking of the complaint through IGMS. A complaint registered through IGMS flows to the insurer’s system as well as the IRDA repository.
5. If the complainant is not satisfied with the resolution provided by Insurer, he/she can escalate the complaint for a review by IRDA for a potential violation of Regulations.
6. All the transactions between the Insurer, Insured and Remarks by IRDA are visible to the complainant.

Source: IRDA Website -

Friday, April 6, 2012

Income Tax Liabilities for Non-Resident Indias

One of my long-time friends Vadi asked for an article on Income and Taxation for NRI’s. So, here we are… The purpose of this post is to elaborate on the tax implications under the following 3 scenarios:
1. Someone who goes on short term visits Abroad
2. Someone who stays long-term Abroad
3. Someone who returns to India on a Permanent Basis after a long stint Abroad

Scenario 1: Short Term Visits Abroad

An Indian is considered an NRI (Non Resident Indian) if they stay outside of India for a period of 182 days or more in a single financial year. So, if you are someone who goes on short business trips abroad but overall stays for more than 182 days in a year in India, then you are not an NRI. In such scenarios, below is how you earn an Income:
1. Your Monthly Salary is credited into your Bank Account in India
2. You are paid an allowance to sustain yourself while Abroad

In such cases, the below Taxation Rules Apply:

Taxation in India:
1. The Income Earned in India (The amount that got credited into your bank account here) is fully taxable as per the Indian Income Tax Laws
2. Your employer will deduct the appropriate amount as TDS and remit it to the Tax Department
3. If the Allowance you received Abroad is used by you to sustain yourself and to meet your work obligations, then it is considered Tax Free as per section 10(14) of the Indian Tax Laws

Taxation Abroad:
1. The Taxation abroad depends on the country you visit. Each country has its own rules that govern income earned while staying in the country. You need to check the Taxation Laws of the country you are visiting to confirm this.
2. However, in most cases, if you stay for a short duration like 1 or 2 months, the tax will be minimal or even zero.

Scenario 2: Long Term Visits Abroad

If you are a Non-Resident India, who stays outside of India on long term, then below is how you earn an Income:
1. You do not get any Salary credited into your Bank Account in India
2. You are paid a Salary during your stay abroad

In such cases, the below Taxation Rules Apply:

Taxation in India:
1. As there is no Income earned in India, you have no Tax Liability in India
2. In some cases (esp. if you are sent Onsite), your employer will credit just the Provident Fund amount into your PF Account. This amount will definitely be lower than the minimal income requirement to pay taxes or file returns. So, you need not worry about this

Taxation Abroad:
1. As you are earning an income in foreign currency during your long-term stay abroad, the income you earn there is taxable as per the laws applicable in your country of residence.

Scenario 3: Returning Permanently to India

If you are an NRI who is returning permanently to India, then your Non-Resident Indian status will cease to apply. The moment you start earning an income in India you need to start paying taxes in India. However, if you are someone who stayed for a long time abroad you will definitely have saved up some money abroad. This could include investments, forex and any other assets as well. So, the below taxation rules apply for you:
1. The Income earned (once you return to India) here is taxable as per the Indian Tax Laws
2. Your employer will deduct the appropriate amount as TDS and remit it to the Tax Department
3. The moment you repatriate your foreign assets to India, they will be considered Wealth and as per the new Taxation Laws proposed by the Finance Minister in 2012, they are subject to Wealth Tax. You can visit the article titled Some More Bad News after Budget 2012 - Change to Wealth tax Rules in India to know more about this.

Repatriating Money from Abroad and the Tax Implications on the same:

In the previous section, we saw that, as an NRI you may own assets abroad. At some point you may want to bring that wealth into India. As you guessed, there will definitely be some tax implications when you repatriate that money.

As per the Indian Tax Laws:
1. Forex and other overseas assets held by the NRI while he stayed abroad can be continued to be held and owned even after you return to India.
2. You can repatriate this money anytime within 1 year of your return to India without attracting Wealth Tax in India
3. But, as explained in the post Some More Bad News after Budget 2012 - Change to Wealth tax Rules in India you need to start paying Wealth Tax on that wealth after the exemption period runs out.

Hope you found this useful!!!

Thursday, April 5, 2012

Foreign Exchange Regulations in India

These days, going abroad on work or for vacation is pretty common. In order to travel out of our country, we need the currency that the destination country uses. So, if you are going to the United States you will need US Dollars, if you go to Europe Euros and so on...

This article is about how much forex we can buy/keep and other regulations in India.

What is Foreign Exchange?

Foreign Exchange (forex in short) is the blanket term used to refer to the currencies of countries that are not our own. I am an Indian, so US Dollar, Singapore Dollar, Malaysian Ringets, UK Pounds etc are all Foreign Exchange for me. Similarly for citizens of those respective countries, the Indian Rupee is forex.

Purchasing foreign exchange

Foreign exchange can be bought from any authorised dealer, such as banks that deal in foreign currency. Besides these, money changers also provide exchange for business and private visits. Large banks like ICICI, HDFC, Axis Bank etc have a dedicated Forex department that deals with currency exchanges. If you give them Indian Rupees, they will give you the Forex equivalent to that amount. If the amount you are converting is less than Rs. 50,000/- banks will accept a cash payment. However, if the rupee equivalent exceeds Rs 50,000, the entire payment should be made through a crossed cheque or demand draft.

A point to note here is that, if your company is sending you on an official visit to any foreign country, they will take care of the currency conversion. You do not have to worry about it (Unless you feel, the amount they are giving is too small). For Personal Business Trips or for Vacations, it is our responsibility to get the currency converted ahead of time.

These days, all major airports have a currency converter. So, even if you forget to visit your bank to get the forex you want, you can get them in the Airport. However, the fee these guys at the airport charge will be a bit higher than the banks and the regular forex dealers.

Note: Foreign Exchange is not required for visits to Nepal and Bhutan.

How Much Forex Can I Obtain in a Year?

According to the Foreign Exchange Management Act 1999, foreign exchange up to US $10,000 in any financial year is allowed to be obtained, irrespective of the number of visits in the year.

The baseline/reference currency in almost all countries is the United States Dollar. So, irrespective of the country you are visiting, the forex you can carry is usually pegged at a US Dollar limit.

Unspent/Unused Foreign Currency

On return from a foreign trip, travellers must convert the unspent foreign currency back into rupees-currency notes within 90 days and travellers' cheques within 180 days of return. However, travellers can retain foreign exchange up to US $2,000, in the form of foreign currency notes or travellers' cheques for future use, provided it is unspent amount or a gift from a foreign resident.

I Repeat -


Are you thinking "The US Dollar is getting stronger day by day, why not retain my savings for a year or two and exchange it later when the dollar is much higher than now?"

Unfortunately, the purpose of this rule is to prevent just that. "Currency Speculation" is a rampant black market activity. If you wish to have exposure to forex and trade on them, there are numerous traders who offer forex trading services. Use them instead of holding on to physical foreign currency. It is illegal and can easily get you into trouble.

Mutual Fund Systematic Investment Plans (SIPs)

We have all heard of the term Systematic Investment Plan, more commonly known as SIPs very frequently. In any finance website or magazine, if you read an article about Mutual Funds, the term SIP will come up Invariably. I too have used that term very often, but we have never taken a deep look at what SIPs are and how they are useful to the investors. The purpose of this article is to do just that.

What is a Systematic Investment Plan?

A Systematic Investment Plan is nothing but a regular commitment from an investor wherein the investor agrees to invest a predetermined amount of money regularly (Usually every month) for a predetermined period (Usually 1 year or more).

Simply speaking, a Mutual Fund SIP is like a Bank Recurring Deposit with a difference that, the Mutual Fund will invest in the stock market while the Bank does not do so.

What is the Benefit of taking the SIP Route to Investing?

SIPs are most useful when the stock market isnt on a steady upward trend. In the current economic scenario, the markets are extremely volatile and you never know when the market will go up or down. So, if we choose the SIP route, it gives us the benefit of "Cost Averaging". In other words, since you are investing every month, you can take advantage of any dips in the stock market and accumulate additional units. This way, at the end of the SIP Period, you will end up with more units that what you would have accumulated if you had invested in one shot.

More importantly, parting with Rs. 5000/- every month may not look that difficult, but if you are asked to cough up Rs. 75,000/- in one month that will sound like a lot, wouldnt it? That is exactly why SIPs are easier than one time investments.

A Real Life Example:

Let us say Mr. X invests Rs. 75,000/- in ICICI Prudential Focused Equity - Dividend Plan on the 5th of January 2011. His best friend, Mr. Y feels that the SIP Route is the best way to go and signs up for an SIP for Rs. 5,000/- for a duration of 15 months that works out to the same Rs. 75,000/-. Let us now compare what happened...

Mr. X - The One-Time or Bulk Investor:

NAV As on 5th January 2011 = Rs. 17.11 per unit

Units Accumulated through One Time Investment of Rs. 75,000/- on 5th Jan 2011 = 4383.4 units

NAV As of 4th April 2012 = 15.68

Value of Investment as of today 4th April 2012 = Rs. 68,731.74/-

Dividend Income on 25th January 2011: Rs. 3287.55 (The Fund declared a Dividend of Rs. 0.75/- per unit on 25th Jan 2011)

Net Value of Investment as of 4th April 2012 (Including Dividends) = Rs. 72,019.29/-

Net Loss = Rs. 2,980.71/-

Mr. Y - The SIP Investor:

Below is a table that outlines the investments every month.

DateNAVInvested AmountNo. of Units
Total Units Accumulated in 15 months = 4925.968

Total Amount Invested in 15 months = Rs. 75,000/-

Value of SIP Investments as of 4th April 2012 = Rs. 77,239.19/-

Dividend Income on 25th January 2011: Rs. 219.17/- (The Fund declared a Dividend of Rs. 0.75/- per unit on 25th Jan 2011)

Net Value of SIP Investments as of 4th April 2012 (Including Dividends)= Rs. 77,458.36/-

Net Profit = Rs. 2,458.36/-

So, the Winner is "Mr. Y". As he chose the SIP route, he ended up making a profit of Rs. 2,458.36/- over the past 15 months on his investment of Rs. 75,000/- while Mr. X ended up making a loss of Rs. 2,980.71/-

How did Mr. Y defeat Mr. X?

The Stock Market throughout the year of 2011 was very choppy. If you see the NAV movement, it was going up and down on a regular basis. It was down in February, went up in March & April, Came back down in May and so on. Since Mr. Y, invested every month, he was able to take advantage of this movement and accumulated more units on months when the market was down. This way, he ended up accumulating more units than Mr. X. Since, all MF Investments are in units, as Mr. Y held more units than Mr. X as of today, his investment beat his friends.

Is SIP always the best investment option?

Actually No. It is the best option in choppy markets. Today, the BSE Sensex is in the 17600 range. Let us say it reaches the 21000 levels by end of the year, do you think that Mr. Y will beat Mr. X? Definitely NOT. Mr. X will beat Mr. Y hands down. So, in a bull market, a one time investment will beat an SIP because, the NAV is going to keep rising every month and you will end up accumulating lesser units every month. In such a scenario, a one time investment makes more sense.

The Verdict?

As of the current market scenario, the SIP won the battle and remains the winner. Until the Bulls start running in Dalal Street, it is better to trust the SIP than a one time Investment.

Happy Investing!!!

Wednesday, April 4, 2012

Section 80G of Indian Income Tax - For NGO's

In the Previous Article, we saw what the Section 80G is and how as tax payers we can utilize this section and reduce our tax liability by donating to qualified institutions. Any NGO in India, that is Registered under Section 80G, then donations done to that NGO by individuals is Exempt from Income Tax. This article is about, what an NGO has to do to qualify for this section.

Note: I know of a few friends who run small NGO's that help out the people in need in their localities. This article will be useful to those noble souls.

Section 80G for NGO's

As you might already know, an NGO can avail income tax exemption by getting itself registered and complying with certain other formalities laid down by the Government. Registering under Section 80G would be a good idea because, the Tax Benefits might help the NGO attract potential Donors.

Registration Under Section 80G:

If an NGO gets itself registered under section 80G then the person or the organisation making a donation to the NGO will get a deduction of 50% from his/its taxable income. The NGO has to apply in Form No. 10G As per Annexure-29 to the Commissioner of Income Tax for such registration.

A point to Note here is that, only 50% of the donation is exempt from Income Tax for the Donors for privately run NGO's. Only Government Chritable Foundations/Institutions are eligible for the 100% of the donated amount to qualify for Tax Exemption.

Documents the NGO has to Submit along with Form 10G:

The application form (10G) should be sent to the Commissioner of Income Tax alongwith the following documents:

1. Copy of income tax registration certificate.
2. Detail of activities since its inception or last three years whichever is lesser
3. Copies of audited accounts of the institution/NGO since its inception or last 3 years whichever is lesser.

Conditions the NGO has to Fulfill to Qualify under Section 80G:

For approval under section 80G the following conditions are to be fulfilled:

1. The NGO should not have any income which are not exempted, such as business income. If, the NGO has business income then it should maintain separate books of accounts and should not divert donations received for the purpose of such business.
2. The bylaws or objectives of the NGOs should not contain any provision for spending the income or assets of the NGO for purposes that are non-charitable.
3. The NGO must not work for the benefit of a particular religious community or caste.
4. The NGO maintains regular accounts of its receipts & expenditures.
5. The NGO is properly registered under the Societies Registration Act 1860 or under any law corresponding to that act or is registered under section 25 of the Companies Act 1956.

The whole point of Section 80G is to motivate citizens to donate to Charity to help the underprivileged people of our Country. So, the above rules and restrictions are laid down to ensure just that.

Section 80G of the Indian Income Tax

The new financial year has just started. All the Salaried employees among us would be busy submitting investment declarations or proposed investments to their respective employers to avail tax exemptions. One of the less commonly used sections of our Income Tax is "Section 80G". Not many of us know about this Section and most importantly most of us don't even use it. The purpose of this article is to throw some light on this section.

Section 80G

Section 80G of the Indian Income Tax Act of 1961 provide tax relief to the Citizens of India on the amounts donated as contributions to Approved Charitable Organizations. This means that, money that we donate to charitable organizations can be used to avail income tax exemption.

Who can Utilize Section 80G?

Any person, who earns an Income in India and files his Tax Returns in India is eligible to utilize this Section 80G.

Contributions that cannot be used for Section 80G:

Contributions to Political Parties in India or to any Charitable Organizations abroad are not eligible for Section 80G exemptions. Only donations made to prescribed organizations and institutions qualify for deduction.

Also, donation in Cash only is eligible for tax benefits. Any donations you do in kind like clothes, food etc is not eligible for deduction. So, if you visited an Orphanage and took up the food cost of all the residents for a week by spending Rs. 50,000/- this noble deed of yours will not get you any tax exemptions.

"All donations are not eligible for tax benefits. Tax benefits can be claimed only on specific donations i.e. those made to approved institutions and that too only when done by Cash or Cheque."

Documents Required to Avail the Exemption:

A signed & stamped receipt issued by the Charitable Institution is Mandatory to avail exemption under this Section. The most important requirement is the Registration number issued by the Income Tax Department under Section 80G. This number must be printed on the receipt. Without this the receipt is "Not Valid"

The Receipt must have your name in exactly the same format/spelling as in your PAN Card. Also, the amount donated must be written in both numbers and words.

Maximum Allowed Deduction under Section 80G:

Though donations to charitable institutions is a noble cause, there is an upper limit on how much amount we donate can be used for tax exemptions. The general rule is

"50% of the amount donated subject to a maximum of 10% of the Total Taxable Income of the Individual can be donated and exempted under Section 80G of the Indian Income Tax act of 1961".

A point to note is that, any donations done beyond the allowed limit is not considered for tax purposes.

However, there are some donations, where this limit of 50% of the donation does not apply. So, such donations can be exempt from your Tax Liability to the full amount (Subject to the 10% upper limit however)

For ex: If you donated Rs. 1.5 lakhs to the Prime Minister’s Relief Fund, 100% of your donation is eligible for tax exemption with an upper limit of 10% of your total salary. So, if your net taxable salary is 10 lakhs per year, 1 lakh of your donation will be considered for tax purposes and your total taxable salary will come down to 9 lakhs. But, the additional Rs. 50,000/- will not be considered for your tax calculation.

If you had done the same Rs. 1.5 lakhs donation to a registered NGO in your locality, then only 50% of the amount which is Rs. 75,000/- is exempt from tax. So, your total taxable salary will become Rs. 9.25 lakhs.

Donations that Qualify for Full Exemption

Donations done to Government Trusts/Funds like "The Prime Ministers National Relief Fund" or "The National Defense Fund" or "The Gujarat Chief Ministers Earthquake Reliefe Fund" etc qualify for this full 100% exemption. The list is very long and almost all of the Government Owned/Run Charitable Foundations feature in this list.

Private Charitable Institutions do not come under this category. The limit of 50% as explained in the previous paragraph is applicable for donations done to private charities.

Final Summary:

To Wrap Up, Donating to Charity is a Noble Deed and if that donation provides us with tax exemptions, then its even better. So, if you are one of those noble tax payers, who take pride in donating to Charitable Institutions, do it with your Head Held High and dont forget to Avail your Tax Exemption...

Happy Donating!!!

Sunday, April 1, 2012

SEBI’s New Rules on Managing Schemes and Disclosing Returns for Mutual Funds

We all know what a Mutual Fund is and how it works. Many of us even invest in Mutual Funds regularly. So, by now we must know who “A Fund Manager” is and also what the role of the “Asset Management Company (AMC)” is. This article is about the new rule that SEBI (Securities and Exchanges Board of India) has imposed on all AMC’s to ensure that the Customer Interest is well protected.

What are the New Rules?
Rule No. 1: - SEBI has instructed all AMCs to appoint separate fund managers for each of their schemes, unless the investment objectives of two schemes are the same and there is a 70% or more overlap in terms of asset allocation & portfolio.
Rule No. 2: - SEBI has instructed all AMS’s to disclose on their websites every month, the returns provided by a fund manager for all the schemes managed by him.
Rule No. 3: - SEBI has instructed that, if the difference in annual returns offered by two different funds managed by the same fund manager exceeds 10%, then the AMC has to disclose the explanation for the same on their website

Is this Rule Significant?

Of Course Yes. Lets see why:

It is practically very common to see two or more MF Schemes that are managed by the same fund manager. As investors, we trust the fund manager to make the wisest or best possible investment decision on our behalf. If the fund manager is managing multiple funds, the performance of some of those funds may suffer if the fund manager is overly involved in any of the other funds. So, it is in the best interest of the customer that, the fund manager gives his 100% interest and effort in managing his funds.

Why did SEBI do this?

SEBI as you might be aware, is the supervisory body of all stock market related activities in India. They may have given this ruling to:
1. Ensure that Customer Interest is protected
2. Ensure that a Fund Manager does not take contradictory positions in two different funds. For ex: The same guy may be managing a large cap and a contra fund. As per the investment objective of the large cap fund, he may be buying large cap stocks. But, due to market sentiment he may feel that large cap stocks may take a hit. As for the Contra Fund, he is free to take any position he wants, so he sells all his large cap holdings in that fund and buys mid & small caps. Isn’t this a conflict of interest? How can he be true to the investors of the large cap fund when he knows that large cap stocks are going to take a hit?
3. Ensure that Customers can easily track and compare the performance of funds managed by the same individual. If I see that one of the funds managed by a fund manager is giving stellar returns while another of his fund is performing in an average fashion, I will obviously decide to sell my holdings in the average performing fund and move over to the top performing one
4. Ensure that AMCs do not flout new schemes on the back of a fund managers credentials and then ignore the fund

At the end of the day, it is our hard earned money and it is the responsibility of such supervisory bodies like SEBI to ensure that the customer interest is protected at all times.

This will definitely come as welcome news to all investors of Mutual Funds.

Happy Investing!!!
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