Human Life Value- How to calculate your HLV

How to calculate your HLV

Every individual wishes to provide for his family/dependants, in the event of him meeting with an eventuality. Despite that, not many indulge in the exercise of determining their Human Life Value (HLV). If providing for your dependants is a priority, then calculating the HLV is an exercise that you must indulge in.

Although the concept of HLV is something that you must have heard on multiple occasions and from various sources (especially from insurance agents), how it is calculated remains a largely lesser-known topic. Secondly, given that there are multiple methods for calculating the HLV only adds to the confusion.

The most common and widely accepted method involves taking into account the total income that the individual is expected to earn over the remainder of his working life, expressed in 'present' Rupee terms. In other words, calculations are made to figure out, what is the present value of the total monies that the individual would have earnt over the rest of his working days.

Our view on how HLV should be calculated, however, is quite different. We define HLV as the sum total of the monetary values of all future needs an individual's spouse and dependents have of him, along with the values of all outstanding liabilities. In short, while the conventional way of calculating HLV is by accounting for the 'income', we choose to follow the 'expense and financial commitment' route, which in our view is more objective and realistic.

But only understanding the concept of HLV is not enough. The next step is to understand how the same is calculated. In this article, we outline a 6-step strategy, which will help you in determining your HLV.

 

Step 1: Determine the tenure over which you wish to provide for your dependants

The first step is to decide the horizon over which you wish to provide for your dependants. For married individuals, the horizon ideally should be the remaining lifespan of his/ her spouse. For this, you will need to assume the life expectancy of the spouse and then deduct it from the current age. The resultant figure is the time frame over which you will have to provide for your spouse. For instance, if the current age of your spouse is 30 years and you expect him/her to survive until the age of 70 years, then you have to provide for another 40 years (70 less 30).

 

Step 2: Account for your dependants' life stage events

In the process of determining the HLV, you will have to make certain estimates. One of them is to determine your dependants and the amounts that you wish to set aside for them. If you are married, the dependants will typically comprise your children and your spouse. You will need to determine, what percentage of the monthly household expenditure your children account for and till what age they will remain dependent on you. This is important since once the children start earning, they are unlikely to be dependant on you. Beyond that, you will only have to provide for your spouse (in case you have no other dependents).

Also, you have to account for other expenses, for example a) Money you wish to set aside for children's education , b) Money you wish to set aside for children's marriage. This is important because these are typically the kind of events that you would like to ensure that your children don't miss out on, even in your absence.

 

Step 3: Account for your current household expenditure

Calculate your current household expenditure; more importantly find out, of that, how much you spend on yourself. For example, let's assume that your monthly expenditure is Rs 25,000, of which, you spend Rs 5,000 on yourself. Now, in case you were to meet with an eventuality, your dependants' monthly household expenditure would be the balance i.e. Rs 20,000 (Rs 25,000 less Rs 5,000) per month or Rs 240,000 per annum. This figure (after adjusting for inflation) will be your dependants' future household expenditure i.e. the sum that you wish to provide for.

 

Step 4: Factor in the impact of inflation on expenditure

The next step is to determine the future household expenditure. For the same, you will have to factor in the impact of inflation on household expenditure. It must be noted that adjusting expenditure for inflation is an essential part in the process of calculating HLV. Inflation is a situation wherein too much money chases a limited number of goods. This leads to a fall in the value of money. Inflation is also expressed as a rise in the price level. As a result, a higher amount needs to be spent to buy the same objects/goods. So over longer time periods, it becomes pertinent to factor in the impact of inflation on expenditure.

 

Step 5: Determine the present value of the expenditure

After arriving at the future expenditure, the next step is to determine its present value (a Rupee spend in the future, is worth less than a Rupee today; this is the impact of inflation). In other words, you need to compute how much your total future expenditure works out to in present monetary terms. For doing the same, you have to discount future expenses, using an assumed rate of return; generally the rate of return on low risk securities/deposits is considered as the discounting factor. This will give you an idea as to how much amount you will have to keep aside, to provide for your spouse/dependants in your absence.

 

Step 6: Consider the present value of outstanding liabilities and medical expenditure

The process of computing the HLV is not complete without accounting for your outstanding loans/liabilities (like your housing loan or car loan, for instance) in present value terms. This needs to be taken into account because it will aid your dependants in paying off debts/liabilities in your absence. This will ensure that they don't have to sacrifice any amenities provided by you during your lifetime. Besides, the amount that you wish to set aside for medical expenditure also needs to be added to the present value.

The amount arrived at the end of this process is your Human Life Value.

Finally, calculating the HLV is not a one-time event. While calculating HLV, you have to make few crucial assumptions such as the inflation figure and the low risk rate of return, which are not fixed and are bound to change. Furthermore, changing lifestyle could also necessitate a change in the expenditure. This makes the HLV a moving figure. Hence, it is important that you revisit your HLV calculation every year, preferably with the help of a financial planner to ensure that your dependants are adequately provided for at all times. Source - PersonalFm

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Mutual Funds - How could a FMP gives a negative returns?

Why FMPs turn negative?

Fixed maturity plans (FMPs) were an innovation designed mainly to give investors a fairly certain rate of return in the backdrop of interest rate instability. FMPs are close-ended debt funds (investments can be made only during the new fund offer period) with a fixed maturity horizon (i.e. the investment maturity, which is fixed, is declared at the outset). They invest across debt instruments to arrive at a pre-determined yield. The pre-determined yield is the indicative yield that FMPs usually declare before hand at the time of new fund offer period (NFO). This way, investors are aware as to how much return their investment will deliver on maturity.

FMPs target the given yield by staying investing in the portfolio of debt instruments till maturity. Given the structure of FMPs, investors have an impression that their returns are always in positive terrain and that they can never turn negative. However, investors would do well to understand that by virtue of being market-linked, there is a possibility of debt investments going negative intermittently. So there could be phases when investors could find the net asset value (NAV) of their FMP investments dipping over a day or a week.

At Personalfn, we have seen investors get worried every time their FMPs slide into negative terrain. The fact is, because it's an FMP, you don't need to worry (assuming that there the quality of the portfolio is top notch). Since the fund manager has a fixed investment tenure, the intermittent dip in the portfolio value is temporary and will get ironed out over time.

 

Why do debt funds turn negative?

A matter of intrigue for investors is how a debt fund can give a negative return. Usually, these are the investors who have been told that debt instruments can only move in one direction – upwards. To be sure, this is a fallacy. While relative to their equity counterparts, debt instruments do not venture into negative territory as often, they do when the situation warrants it. Debt instruments and by extension debt funds and FMPs are prone to a downturn particularly when there is pessimistic news on the economic front (i.e. inflation, interest rates among other factors).

 

An illustration

Still confused how a debt instrument can turn negative? A brief illustration should unravel this. For instance, let's assume that a bond (we will call it Bond A) has a coupon rate of 8%. Suppose there is an increase in interest rates and the new bonds (Bond B) are issued with a coupon rate of 9%. With the introduction of Bond B at a higher coupon rate, the yield on A will adjust higher. This will result in a fall in the price of Bond A (since bond yields and prices are inversely related). Consequently debt funds that hold Bond A will be impacted. When there are many bonds like this in a debt portfolio, the cumulative impact on the NAV is negative.

 

Why FMPs are not at a risk

FMPs are structured in a manner so as to achieve the indicative return or yield on maturity. The operative word over here is 'on maturity' not in the intermittent period. Since they lock-in the yield at the time of investment and stay invested till maturity, the intermittent market fluctuations do not impact their maturity proceeds.

 

What should FMP investors do?

First and foremost do not get ruffled every time your FMP witnesses a dip in its value. However, there is something that you can do i.e. check whether the FMP is invested in instruments with the highest credit rating (like AAA or sovereign for instance). Since indicative portfolios are released by the fund house before the launch of the FMP, you have this opportunity before investing in the FMP. That way you can ensure that you earn a high yield at lower risk. Of course, if you find all this confusing and feel the need for professional assistance, your financial planner is best suited to help you identify the right FMP. Source- Rediff

 

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Mutual Funds - FMPs: Don't ignore the risk

FMPs: Don't ignore the risk

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It's that time of the year, when fund houses roll out their FMP (fixed maturity plans) products in response to the attractive yields on corporate bonds. Expectedly, investors view FMPs as a means to clock a higher return at relatively low risk (actually many investors believe there is zero risk in an FMP). While this is mostly true, some points about FMPs are noteworthy.

For the uninitiated, FMPs offer a relatively certain return despite their market-linked nature. They (usually) invest in highly rated securities (like 'AAA' rated corporate bonds) over a defined investment tenure.

From the investor's perspective, FMPs are relatively transparent on two parameters, return and investment tenure, both of which are very critical for the fixed income investor.

FMPs are able to offer a relatively certain return (over a defined tenure) because they have a fairly good idea about the yield on the debt investment at the time of investing. Moreover, they plan to remain invested in the debt investment till maturity.

By doing this, they 'lock the yield'. For this reason mainly, FMPs are a one-time investment opportunity for investors i.e. they are open only at the time of the NFO. And once invested, investors in the FMP can only exit prematurely on paying a heavy exit load (which can be as high as 2 per cent).

A question uppermost in the minds of investors is -- why FMPs launched by several fund houses at the same time have varying yields. To begin with, the yields do not vary by a significant margin. For the same tenure, the yields on debt instruments (with comparable credit ratings) are usually in a range, which is why FMPs of a similar tenure have comparable yields.

However, if you find that yields on a particular FMP are noticeably higher (compared to that of others with a similar tenure), then it's time to look at the portfolio. You can request for the indicative portfolio, which will have a list of proposed debt securities along with the ratings.

If the securities have the highest rating (for instance 'AAA' or equivalent) then you know that the fund manager is not taking on higher risk to give you that extra yield. However, if you see anything less than 'AAA' (or equivalent) then you will have the answer to how the FMP has a higher yield than its peers; it's because the fund manager is taking on credit risk.

Another risk that investors must factor in before investing in an FMP is the yield, which at best is indicative. Based on the situation in the debt markets, it is possible that the fund manager may not get the opportunity to invest in debt instruments with the yield indicated by him at the time of launching the FMP. Investors would do well to treat the yield for what it is i.e. indicative and factor in the odd deviation.

At this stage investors are probably wondering why FMPs give a negative return intermittently. So long as they are invested in debt instruments with a top-notch credit rating, they are meant to give a positive return (or at least that's what they have been told).

To be sure, despite being invested in the best quality debt instruments, fund managers only take care of the credit risk; they are still exposed to interest rate risk. However, they reduce the interest rate risk by staying invested in the debt portfolio over its tenure.

To that end, fund managers are indifferent to the swings in the NAV (net asset value) because they plan to remain invested in the portfolio till maturity. Since the investor is also expected to remain invested in the FMP till maturity, he should ideally be indifferent to the intermittent volatility (if at all) in the FMP's NAV.

 

Before investing in an FMP:

1) Request for the FMP's indicative portfolio. Look out for debt instruments with less than AAA (or equivalent) rating. In our view, FMPs are ideal for investors who want to generate a competitive return at lower risk. So if the fund manager is taking on credit risk (by investing in lower rated paper), the investment proposition of an FMP loses its appeal and conservative investors must re-consider investing in it.

2) Treat the yield as strictly indicative. While we are not suggesting that the FMP will fail to deliver the return indicated by it at the outset, but given how debt markets work, there is always a chance that the FMP may deviate marginally from its indicative return. As an investor, factor in the variation.

3) Investors must be sure that they intend to stay invested in the FMP until maturity. Only then can they afford to be indifferent to the intermittent volatility in its NAV.

Originally published on Rediff

 

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8 key ratios for picking good stocks

The following 8 financial ratios offer terrific insights into the financial health of a company -- and the prospects for a rise in its share price.

1. Ploughback and reserves

After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback.

Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.

The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.

Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.

Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.

Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.

As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.

Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.

The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.

 

2. Book value per share

You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.

The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds.

If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.

Book Value per share = Shareholders' funds / Total number of equity shares issued

The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company.

Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.

Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth.

The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.

 

3. Earnings per share (EPS)

EPS is a well-known and widely used investment ratio. It is calculated as:

Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued

 

This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend.

The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.

This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.

Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback.

Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.

 

4. Price earnings ratio (P/E)

The price earnings ratio (P/E) expresses the relationship between the market price of a company's share and its earnings per share:

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.

P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.

For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.

On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.

Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.

To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.

All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?

The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects.

If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.

 

5. Dividend and yield

There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends -- capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.

It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- it doesn't really matter whether it comes from capital appreciation or from dividends.

A wise investor is primarily concerned with the total returns on his investment -- he doesn't really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.

Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.

On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.

On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.

Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company's shares. This relationship is best expressed by the ratio called yield or dividend yield:

Yield = (Dividend per share / market price per share) x 100

Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.

Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each.

If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.

The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.

Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.

 

6. Return on Capital Employed (ROCE), and

 

7. Return on Net Worth (RONW)

 

While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.

While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:

 

1. Return on Capital Employed (ROCE), and

2. Return on Net Worth (RONW).

 

Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company's efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.

 

Return on capital employed

Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).

The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.

The operating profit of a company is a better indicator of the profits earned by it than is the net profit.

ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.

 

Return on net worth

Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.

ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.

The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.

 

8. PEG ratio

PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.

For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.

The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.

As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.

The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.

[Excerpt from Profitable Investment in Shares: A Beginner's Guide by S S Grewal and Navjot Grewal.]

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Buying stocks? Follow these 4 steps

Once you have done the hard work of accumulating a nice little kitty for yourself, rebalance the portfolio in favour of safer instruments to be insulated from market risks.

Anil Shah, a businessman in his late fifties, is a seasoned investor. He has been rather successful in his investment strategies for the past few years.

The result: a good corpus both for the family and his business venture. In fact, he is in a financial situation where he can look at "safety-first" instruments to park his wealth and retire.

However, there is an uncanny knack among many of those, who create wealth through stock markets, to continue playing the game.

The heady mix of picking a winner and making money on it is something many successful investors want to continue to achieve. And this need often, leads to their peril.

Shah is no exception. Having tasted blood in the stock markets, he is very happy investing in a bull market and make quick bucks.

Conversely, ask him about his five to ten year investments in the markets and he is quick to say, "I am not interested in equities for that long."

The basic idea is to make money in bull markets and staying away from market in bearish phases.

By January 20, 2008, Shah had built a portfolio of Rs 10 crore (Rs 100 million), from a mere Rs 50 lakh (RS 5 million) portfolio in 2001. This was achieved through aggressive investment in the futures market. And even on January 21, his exposure was entirely in the futures market. However, in the next few days, the markets crashed. His portfolio now: just at Rs 4 crore (Rs 40 million).

Seven years of astute stock picking and taking risks had completely gone down the drain for Shah: a common phenomenon when greed takes over and the focus is purely on maximising returns.

A lot of investors in the equity market are not happy with decent returns (as can be expected from any stock in the long run) and go too aggressive. What gets overlooked in this pursuit is the excessive risk that you expose your overall wealth too.

So what should be done when you have accumulated sufficient wealth to address your goals? - the answer surely will be different in different stages of life. But it's important to put a number to it at some stage in life and once you have achieved it, take the following measures:

Avoid costly mistakes: Stay away from risky offerings, whether it is futures or commodity trading, and for that matter, trading in general.

Understand equities as an asset class: Any promise of more than 15 per cent, based on past performance, should be seen with a lot of caution. Higher the returns, more the risk. However, considering the current level of the market pessimism, one could probably make higher returns of between 12 per cent and 15 per cent, but only in the long term (10 year to 20 year timeframe).

Firstly, you should accumulate a certain level of wealth, based on your goals, liquidity needs, current income and time horizon. Once you have achieved that, it's time you balance your asset allocation and move to instruments that will give lower returns but keep you investments safe. Besides keeping your money safe, it will also make sure that you sleep  omfortably in turbulent markets. Also, have patience with the part of the wealth that you are playing the market with. If there is a 30 per cent slide, there is no real cause of concern.  Equity investors must realise that such downturns are a part of the capital markets. However, if your portfolio is down 50 per cent or more, take a re-look at your overall investment strategy.

Keep only a small percentage of your portfolio in high-risk high returns kind of transactions, but only if you have the stomach for constant fluctuations.

Old hands in the market would tell you that the pain caused during the Harshad Mehta regime  and more recently, the Ketan Parekh times when investors went the whole hog by investing their lives' savings in the market for a quick buck, only to find them completely wiped away in the days to come.

Many, however, have the tendency to forget the pain cause by the last fall, and would participate in the next rally with renewed energy. It is important for such investors to remember that before they take that plunge, a proper asset allocation should be done.

Follow these two simple, yet cardinal rules while investing, "make as few mistakes as possible" and "control your greed and fear" and you will not be disappointed. It's not just about your investments but it is also about you. More than your investments, its how you behave in bullish and bearish markets that will determine where you end up several years from now. The writer is director, MyFinancial Advisor. Rediff Money

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What is a Pay Commission? How will it impact Indian govt?

What is a Pay Commission? How will it impact govt?

The Sixth Pay Commission submitted its report to Finance Minister P Chidambaram on Monday. The commission is headed by Justice B N Srikrishna. The recommendations of the commission, when accepted, would provide a bonanza to over 4.5 million central government employees.

So what is a Pay Commission? And what are its implications? Read on. . .

 

What is a Pay Commission?

The Pay Commission is an administrative system/mechanism that the government of India set up in 1956 to determine the salaries of government employees.

The First Pay Commission was established in 1956, and since then, every decade has seen the birth of a commission that decides the wages of government employees for a particular time-frame.

The second Pay Commission was set up in August 1957 and gave its report in two years. The third Pay Commission, set up in April 1970, submitted its report in March 1973.

The recommendations of the Fourth Pay Commission covered the period between 1986 and 1996. The Fifth Pay Commission covered the period between 1996 and this year.

The Union Cabinet, under the stewardship of Prime Minister Manmohan Singh, approved the setting up of the 6th Pay Commission to revise the payscales of central government employees in July 2006.

The 6th Pay Commission is headed by its Chairman Justice B N Srikrishna, and has Ravindra Dholakia, J S Mathur and Sushama Nath as its other members.

The Pay Commission was supposed to submit its report in 18 months.

 

Why was there a hue and cry about the Fifth Pay Commission?

Because the implementation of the Commission's recommendations ravaged the finances of the central and state governments.

The central government declared salary and allowances hikes for its approximately 3.3 million employees, and insisted that the state governments too revise the pay of their employees as per the Commission's recommendations.

The result: Before the Fifth Pay Commission recommendations came into effect, the central government's wage bill (including pension dues of Rs 50.94 billion) stood at Rs 218.85 billion in 1996-1997.

It shot up by nearly 99 per cent to Rs 435.68 billion in 1999-2000.

 

What about the state governments?

The state governments' wage bill went up by 74 per cent to Rs 89,813 crore (Rs 898.13 billion) in 1999 from Rs 51,548 crore (Rs 515.48 billion) in 1997.

Economists say that almost 90 per cent of a state's revenues go into paying salaries.

The impact of the Fifth Pay Commission was so brutal that some 13 states did not have money to pay salaries in 2000.

So peeved were some state governments that last year states like West Bengal, Bihar, Orissa, Assam, Manipur, Meghalaya and Mizoram sought a mechanism under which the Centre could not announce a pay revision without consulting the states.

They also sought the Centre's help in offsetting the impact of the Fifth Pay Commission and a national wage policy to replace pay commissions.

 

So the Fifth Pay Commission just recommended hiking salaries of government employees?

No, and therein lies the problem. The government only implemented the monetary benefits part.

Some of the Fifth Pay Commission's other recommendations included slashing the government workforce by 30 per cent; abolishing 350,000 vacant posts and reducing the number of pay scales from 51 to 34, none of which were implemented.

The Commission also suggested that the grant of salary hikes to employees be linked to issues of downsizing government, efficiency and administrative reforms.

 

Did the Fifth Pay Commission affect the economic reform process?

The jury is out on that. But two years ago, the World Bank held the Fifth Pay Commission as the 'single largest adverse shock' to India's strained public finances.

The global body said India's civil service was 'not unduly' large, but there was a 'pronounced imbalance' in the skills.

In its review, the Bank added: 'There is a pronounced imbalance in the skills mix since 93 per cent of the civil service comprised class III and class IV employees for both the Centre and various states.'

 

So what led to the Sixth Pay Commission?

For the last four years, Communist leaders and trade unions have been demanding the setting up of such a commission.

In 2005, the government set up a committee to study the demand.

The committee, headed by Cabinet Secretary B K Chaturvedi, turned down the request for constituting the Sixth Pay Commission. The committee said the Centre might not be able to bear the additional burden and the states were just recovering from the impact of the Fifth Pay Commission, whose recommendations were implemented in 1997.

The Twelfth Finance Commission also urged the government to stop the practice of increasing salaries by appointing pay commissions every 10 years.

 

So, why the turnaround?

This is what Prime Minister Manmohan Singh had to say in early 2006: 'We have decided this. The last pay commission was set up in 1994. The time has now come for a new commission. We are preparing for it.'

Congress sources say the rising political pressure from the Communists -- key partners in the United Progressive Alliance coalition -- has prompted Prime Minister Singh to announce the new pay commission.

 

What about the drain on government finances?

New Delhi now argues the Sixth Pay Commission will not adversely affect the states as they are sitting on cash surpluses. Finance Minister P Chidambaram's Budget 2008-09 had hinted that the financial impact of the Sixth Pay Commission would be about 0.4 per cent of Gross Domestic Product, similar to the Fifth Pay Commission award of 1996. Given that the Budget 2008-09 has projected GDP at Rs 5,303,770 crore (Rs 53,037.70 billion) in 2008-09, the impact of the award may well be Rs 21,215 crore (Rs 212.15 billion). Source- Rediff

 

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Market Analysis- Will the stock market sink further?

Will the stock market sink further?

The confluence of greed and fear may sound cliched by now, but the Indian stock markets have become prey to the very phenomenon over the past few months.

The Reliance  Power public issue is a case in point. Just when it was open for subscription, people from all walks were willing to buy its shares for Rs 450 and were optimistic of their ability to sell them at almost Rs 1,000 upon listing.

Not a shred of the company's fundamentals has altered, but the same market is now pegging its value at around Rs 310 levels now. The intent is not to suggest that the stock is fairly or under-valued at these levels, but the instance reflects the drastic change of market sentiment.

The euphoric one-way upward trek of the BSE Sensex from the 15,000 levels to its peak of 21,207 took more than seven months, while the plunge downward did not even take fifty trading sessions (about two months).

The US-led global credit crunch is finally taking its toll, and every other major bank is dipping into the red. There are signals hinting at a slowdown in earnings, and hence, the risk appetite of investors has nearly vanished.

This has led to a revision in the valuations, so far shaving off anywhere between 25-50 per cent of stock prices that prevailed three months ago. Even then, the fall still persists. Investors are bound to worry about whether there is still more pain left, or the worst is over.

Going by the insight of the experienced, the so-called bear phase may not last as long as the bull-run did, but it will trigger a range-bound phase for a few months, before a reversal of trend.

Besides, the priority now is not to return to the previous peak as much as the reversal of the current down-trend in order to limit the losses.

In India's case, it will also need to prove to the world that its economy is largely decoupled from the global economy with a conviction that India's domestic consumption will continue to drive its growth. Only then, will foreign investors find solace and perhaps, start pouring money to buy Indian stocks.

 

Uncertainty ahoy

With the wholesale erosion in valuations, investors are facing a dichotomy of attractive buying opportunities against the fear of stock prices falling below these levels. The indecision that crops up makes one question both the macro as well as microeconomic prospects of India.

On the one hand, the economy is likely to continue growing at over 8 per cent while on the other hand, there are fears of a slowdown in corporate earnings, capital expansion plans being postponed, rising cost pressures and risks from foreign exchange exposure of companies.

Putting these factors in perspective, it gets more difficult to figure out the direction that the markets may take over the coming two to four quarters.

 

Fundamental solace. . .

In spite of a slowdown in the US, there is little possibility of the Indian economic growth being impacted drastically. First, Indian economy is driven strongly by the domestic consumption boom.

Since a large part of the contribution to the GDP is derived from services, which continues to grow consistently, the overall growth will remain buoyant.

"Even though the short-term outlook may be uncertain, the long-term outlook for India is positive. In FY09, India's economic growth is likely to remain between 8-9 per cent," says Andrew Holland, managing director - strategic risk group, DSP Merrill Lynch.

 

. . . but some worries

On the industry front, mid-sized and small corporates could get impacted. The noise is more than the expected negative impact on account of foreign exchange-based derivatives. Larger companies are likely to have better risk management systems in place.

Besides, smaller and mid-sized businesses are expected to face more difficulty in raising funds for expansion plans, as credit flows may remain limited to larger companies due to a conservative approach and higher risk premiums. The restrictions, imposed earlier, for raising funds via the ECB route has only added to the woes.

"The global financial system is getting risk averse, increasing the cost of credit, which might lead to some slowdown of major capacity expansions that were planned. Robust corporate earnings, witnessed for the last 12 quarters, would get moderated due to rising cost pressure arising out of commodity inputs as well as wage inflation," comments Balasubramaniam A, chief investment officer, Birla Sun Life.

 

What next?

"We are probably, globally, near the bottom," as Andrew Holland puts it. However, it is still unknown how long the US slowdown will linger on, and thus its impact on the rest of the world, including India.

This leads to an uncertain environment eclipsed by high volatility, as far as the Indian stock market is concerned.

But Abhay Aima, country head, equities and private banking, HDFC Bank , too, has a consoling view: "there may not be a directional correlation with the US economy since a slowdown in the US would mean the need to cut costs, which in turn would mean more outsourcing. So, even if the short term appears shaky, the longer term is good."

Focusing on the direction that the markets could take, Nirmal Jain, chairman and managing director of India Infoline  says, "Recovery may start from the month of April with corporate earnings starting to flow in."

Going a step further, Aima suggests that valuations are fair now, and it appears to be a good time to buy. One can expect 12-15 per cent returns over 12 months.

Thus, even though the markets may not have bottomed out yet, there are ample investment avenues for the coming year, till the bulls find their way back to the bourses. Overall, because of the strong domestic growth over a long period to come, the global economic slump is likely to remain just a temporary setback for India.

 

Pick and choose

Due to the volatility on the streets, stalwarts unanimously recommend a strategy of focusing on asset allocation for realistic returns to investors, rather than trying to time the market.

Advantage India: It is clear by now that those sectors, which derive their growth from the domestic consumption in India are likely to have an upper hand compared to those dependent on exports and global demand.

The likely winners are fast moving consumer goods, consumer durables and, multinational pharmaceutical companies, which are expected to introduce newer products in the domestic markets.

For FMCG, while growth prospects continue to be good and valuations reasonable, the budgetary moves will enhance consumption. Higher disposable incomes along with softer interest rates should also benefit the consumer durables sector, which so far has been lagging.

Among others, telecom companies are also expected to witness consistent growth in demand, although valuations may appear slightly rich, which is due to the better visibility of growth in the sector.

Automobiles is another sector that looks good, where valuations have taken a big knock. Notably, most of these sectors carry a far lesser earnings risk, providing cushion during a market downfalls, if things get worse.

Infra plays: Apart from the massive investments (about $500 billion) planned towards creation of new infrastructure during 2007-2012, with the coming year being an election year, greater infrastructure spends are likely, which should prove gainful for the infrastructure-related players, power equipment makers and well-established larger utility companies.

As an economist suggests, given that India's domestic savings rate is high at 32-33 per cent, its dependence on external funds to finance the infrastructure creation is less - this indicates that such activities are unlikely to witness any slowdown.

Bigger the better: Though an ideal time to get rid of unworthy small- and mid-sized stocks is the peak, it is better late than never.

Apart from unworthy stocks, there will be other vulnerable plays. Investors may want to reshuffle their portfolios to get rid of small- and mid-cap technology companies dependent on discretionary spend from the developed markets, textile companies with high exposure to foreign exchange risks and the stocks from the real-estate space.

Small- and mid-cap stocks are typically more volatile, besides their ability to raise resource (vis-a-vis bigger players) is also less. Hence, these could be avoided - unless one is too confident about the fundamentals and growth prospects of a particular company. Since large-cap stocks tend to bounce back first as the market turns around, a higher exposure to them should help.

Contra bets: The healthcare and information technology sectors have been major underperformers on the bourses, and for reasons well known.

Within the healthcare space, especially the large domestic multinational drug manufacturers, analysts cite the multi-billion dollar opportunity arising from drugs going off-patent in the US during FY09-FY10.

Given the past track record, the opportunities and low valuations, taking a bet on these should lead to gains. In IT too, valuations are relatively low as compared to a year ago.

Again, experts say that a slowdown in US would require companies to cut costs, which could bring more business for Indian companies, and hence, recommend large IT companies.

Tad riskier: Although there are risks of some impact of the credit crunch and the yet-unknown forex derivatives exposure, valuations appear far more reasonable with regards the banking (specially public sector) and financial services sector. Risk-takers may want to look for the turnaround in sentiments for this sector.

 

Economist speak

Shubhada Rao, chief economist, Yes Bank - Indian economy in FY09

While growth drivers remain intact, the uncertainty arising out of global financial markets along with domestic factors like higher inflation and therefore higher interest rates will begin to impact growth.

We expect economy to moderate to about 8.3 per cent growth in FY09. While consumption has remained weak, India's 5-year track record of capital goods expansion reflects strong investment intention.

In recent months however, we do see a marginal moderation in domestic production of capital goods. The weakness in consumer durables is bottoming out and we may expect some revival in consumer durables going forward.

 

Sujan Hajra, chief economist, Anand Rathi - The math of India's GDP growth

Even though the consensus for FY09 suggests there is a significant slowdown expected in growth, but one cannot be sure of it.

Advance estimates indicate agricultural growth to remain at 2.7 per cent for FY08 and the trend rate is 4 per cent. This creates a base effect. So, in FY09 agricultural growth is highly likely to be at around 5 per cent because of the base effect. In terms of contribution to the overall GDP growth, 85 basis points should come from agriculture in FY09. Even an average monsoon can deliver this.

In services, there has not been much impact and they are still growing close to 11 per cent. Besides, there is no major reason for services to slow down, especially considering that the Sixth Pay Commission is due.

Last time, just the impact of the Pay Commission added 50 basis points from the government sector, so similar impact should also come this time. Services account for 55 per cent of GDP, hence, growth in services should account for 6 per cent GDP growth.

Industry, despite the slowdown, is still growing at 8-9 per cent. Next year, it could grow by 7.5-8 per cent. Since industry accounts for 27 per cent of the GDP it is likely to contribute 1.4 per cent to the overall GDP growth. Summing all this up, a total estimated 8.3-8.5 per cent growth looks pretty likely next year.

 

The US impact

It is noteworthy that decoupling of India's economic growth with industrial nations has already begun since 1985. India has been growing at a much higher rate than others.

But, there is a direct relation in the direction of growth. There is no denial of the fact that if there is a serious slowdown in industrial nations, then India will be impacted. But, the impact on India will be much less than other emerging markets due to their higher dependence on the US. India is likely to be driven more by the growth in domestic consumption.

Another impact is in terms of capital flows. India is still dependant on foreign funds for growth to some extent as the gap between domestic savings and investments is less than 2 per cent of the GDP. However, most of fund requirement is met through internal savings, which is as high as 34 per cent.

However, the foremost reason that India is less prone to the ill-effects of a global slowdown is that consumption accounts for 67 per cent of the GDP, while investments account for as high as 33 per cent, and a growth of 20 per cent is witnessed here, over the last few years. Therefore, the stimulus to sustain economic growth is available back home, even in the forthcoming years.

Source- Rediff Money

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The 10 biggest falls in the history of Sensex

The 10 biggest falls of the Sensex

The Bombay Stock Exchange benchmark Sensex sank by 951 points on black Monday on panic selling by funds, triggered by weak global cues. Similarly, the wide-based National Stock Exchange's index Nifty dropped by 243 points to 4,503.

The government meanwhile said that Indian stock markets are taking cues from the United States and Asian markets, even though the sub-prime mortgage crisis has only moderately impacted the credit and financial flows into the country.

The 10 largest falls of the Sensex

1. Jan 21, 2008 ---    - 1,408.35 points

2. Mar 17, 2008 ---    - 951.03 points

3. Mar 3, 2008 ----    - 900.84

4. Jan 22, 2008 ---    - 875.41 points

5. Feb 11, 2008 ---    - 833.98 points

6. May 18, 2006 ---    - 826.38 points

7. Mar 13, 2008 ---    - 770.63 points

8. Dec 17, 2007 ---    - 769.48 points

9. Oct 17, 2007 ---    - 717.43 points

10. Jan 18, 2007 ---    - 687.82 points

 

"The sub-prime mortgage market crisis will not directly affect us, because except one private sector bank, which has made its exposure, none of our public sector banks has any exposure to sub-prime mortgage market," Finance Minister P Chidambaram said in his reply to a debate on the Budget 2008-09 in Rajya Sabha.

"But, when crisis moved from sub-prime mortgage market to housing market, and now housing market to the credit market, there is impact upon India. There is impact in terms of credit flows and financial flows. But, at the moment, I believe that impact is second order impact and a moderate impact," he said.

As regards the stock markets, they take cues from developments in the US and Asian markets, he added. "In fact, we  now have to track what is happening in Asian markets. Hong Kong, Tokyo and Shanghai open before Indian market opens, and if you watch closely, you will find what is happening in Asian markets is impacting the Indian stock market," he said.

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India Taxation- Budget 2008 Impact - 17 tax-free incomes for you

17 tax-free incomes for you

The following are 17 important items of income, which are fully exempt from income tax and which a resident individual Indian assessee can use with profit for the purpose of tax planning.

1. Agricultural income

Under the provisions of Section 10(1) of the Income Tax Act, agricultural income is fully exempt from income tax.

However, for individuals or HUFs when agricultural income is in excess of Rs 5,000, it is aggregated with the total income for the purposes of computing tax on the total income in a manner which results into "no" tax on agricultural income but an increased income tax on the other income.

Agricultural income which fulfils the above conditions is completely exempt from tax. The manner of calculating tax on total income and agricultural income, is explained in the following illustration:

 

Illustration

For FY 2008-09 (assessment year 2009-10), a male individual has a total income from trading in textiles amounting to Rs 1,52,000; besides, he has earned Rs 40,000 as income from agriculture.

The income tax payable by him will be computed as under:

    * On the first Rs 150,000 of the taxable non-agricultural income: Nil

    * On the next Rs 40,000 of agricultural income (falling under 10% slab): Nil

    * On the next Rs 2,000 of taxable non-agricultural income @ 10 per cent: Rs 200

    * Income tax on aggregated income of Rs 152,000 + Rs 40,000 = Rs 192,000: Rs 200

 

 

2. Receipts from Hindu Undivided Family (HUF)

Any sum received by an individual as a member of a Hindu Undivided Family, where the said sum has been paid out of the income of the family, or, in the case of an impartible estate, where such sum has been paid out of the income of the estate belonging to the family, is completely exempt from income tax in the hands of an individual member of the family under Section 10(2).

 

3. Share from a partnership firm

Under the provisions of Section 10(2A), in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm is completely exempt from income tax since AY 1993-94.

For this purpose, the share of a partner in the total income of a firm separately assessed as such would be an amount which bears to the total income of the firm the same share as the amount of the share in the profits of the firm in accordance with the partnership deed bears to such profits.

 

4. Allowance for foreign service

Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India, rendering service outside India, are completely exempt from tax under Section 10(7). This provision can be taken advantage of by the citizens of India who are in government service so that they can accumulate tax-free perquisites and allowances received outside India.

 

5. Gratuities

Under the provisions of Section 10(10) of the IT Act, any death-cum-retirement gratuity of a government servant is completely exempt from income tax. However, in respect of private sector employees gratuity received on retirement or on becoming incapacitated or on termination or any gratuity received by his widow, children or dependants on his death is exempt subject to certain conditions.

The maximum amount of exemption is Rs. 3,50,000;. Of course, this is further subject to certain other limits like the one half-month's salary for each year of completed service, calculated on the basis of average salary for the 10 months immediately preceding the year in which the gratuity is paid or 20 months' salary as calculated. Thus, the least of these items is exempt from income tax under Section 10(10).

 

6. Commutation of pension

The entire amount of any payment in commutation of pension by a government servant or any payment in commutation of pension from LIC [Get Quote] pension fund is exempt from income tax under Section 10(10A) of IT Act.

However, in respect of private sector employees, only the following amount of commuted pension is exempt, namely: (a) Where the employee received any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive; and (b) In any other case, the commuted value of half of such pension.

It may be noted here that the monthly pension receivable by a pensioner is liable to full income tax like any other item of salary or income and no standard deduction is now available in respect of pension received by a tax payer.

 

7. Leave salary of central government employees

Under Section 10(10AA) the maximum amount receivable by the employees of central government as cash equivalent to the leave salary in respect of earned leave at their credit upto 10 months' leave at the time of their retirement, whether on superannuation or otherwise, would be Rs. 3,00,000.

 

8. Voluntary retirement or separation payment

Under the provisions of Section 10(10C), any amount received by an employee of a public sector company or of any other company or of a local authority or a statutory authority or a cooperative society or university or IIT or IIM at the time of his voluntary retirement (VR) or voluntary separation in accordance with any scheme or schemes of VR as per Rule 2BA, is completely exempt from tax. The maximum amount of money received at such VR which is so exempt is Rs. 500,000.

 

9. Life insurance receipts

Under Section 10(10D), any sum received under a Life Insurance Policy (LIP), including the sum allocated by way of bonus on such policy, other than u/s 80DDA or under a Keyman Insurance Policy, or under an insurance policy issued on or after 1.4.2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20 per cent of the actual capital sum assured, is fully exempt from tax.

However, all moneys received on death of the insured are fully exempt from tax Thus, generally moneys received from life insurance policies whether from the Life Insurance Corporation or any other private insurance company would be exempt from income tax.

 

10. Payment received from provident funds

Under the provisions of Sections 10(11), (12) and (13) any payment from a government or recognised provident fund (PF) or approved superannuation fund, or PPF is exempt from income tax.

 

11. Certain types of interest payment

There are certain types of interest payments which are fully exempt from income tax u/s 10 (15). These are described below:

(i)  Income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf.

(iia) In the case of an individual or a Hindu Undivided Family, interest on such capital investment bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e. 7 Capital Investment Bonds);

(iib) In the case of an individual or a Hindu Undivided Family, interest on such Relief Bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e., 9 per cent or 8.5 per cent or 8 per cent or 7 per cent Relief Bonds); (iid) Interest on NRI bonds;

(iiia) Interest on securities held by the issue department of the Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949;

(iiib) Interest payable to any bank incorporated in a country outside India and authorised to perform central banking functions in that country on any deposits made by it, with the approval of the Reserve Bank of India [Get Quote] or with any scheduled bank;

(iv) Certain interest payable by Government or a local authority on moneys borrowed by it, including hedging charges on currency fluctuation (from the AY 2000-2001), etc.;

(v)  Interest on Gold Deposit Bonds;

(vi) Interest on certain deposits are: Bhopal Gas victims;

(vii) Interest on bonds of local authorities as notified,

(viii) Interest on 6.5 per cent Savings Bonds [Exempt] issued by the RBI, and

(ix) Stipulated new tax free bonds to be notified from time to time.

 

12. Scholarship and awards, etc

Any kind of scholarship granted to meet the cost of education is exempt from tax under Section 10(16). Similarly, certain awards and rewards, etc. are completely exempt from tax under Section 10(17A), for example, Lakhotia Puraskar of Rs 100,000 awarded to the best Rajasthani author, every year under Notification No. 199/28/95-IT (A-I) dated 22-4-1996.

 

Any daily allowance received by a Member of Parliament or by an MLA or any member of any Committee of Parliament or State legislature is also exempt from tax under Section 10(17).

 

13. Gallantry awards, etc. -- Section 10(18)

The Finance Act, 1999 has, with effect from AY 2000-2001, provided for complete exemption for the pension and family pension of Gallantry Award Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and also other Gallantry Award winners notified by the Central Government.

 

14. Dividends on shares and units -- Section 10(34) & (35)

With effect from the Assessment Year 2004-05, the dividend income and income of units of mutual funds received by the assessee completely exempt from income tax.

 

15. Long-term capital gains of transfer of securities -- Section 10(38)

With effect from FY 2004-05, any income arising to a taxpayer on account of sale of long-term capital asset being securities is completely outside the purview of tax liability especially when the transaction has been subjected to Securities Transaction Tax (STT).

Thus, if the shares of any company listed in the stock exchange are sold after holding it for a minimum period of one year then there will be no liability to payment of capital gains. This provision would even apply for the old shares which are held by an assessee and are sold after the Finance (No.2) Act, 2004 came into force.

 

16. Amount received by way of gift, etc -- Section 10(39)

As per the Finance (No. 2) Act, 2004, gift, etc. received after 1-9-2004 by an individual or an HUF whether in cash or by way of credit, etc. is being subjected to tax if the same is not received from a stipulated relative. Section 10(39) provides that the amount received to the extent of Rs 50,000 will, however, be exempt from the purview of tax payment.

Similarly, amount received on the occasion of marriage from non-relatives, etc. would also be exempted. It may be noted that the gift from relatives, as specified in the section can be received without any upper limit.

 

17. Tax exemption regarding reverse mortgage scheme -- sections 2(47) and 47(x)

Any transfer of a capital asset in a transaction of reverse mortgage for senior citizens under a scheme made and notified by the Central Government would not be regarded as a transfer and therefore would not attract capital gains tax. The loan amount would also be exempt from tax. These amendments by the Finance Bill, 2008 apply from FY 2007-08 onwards.

[Excerpt from How to Save Income Tax through Tax Planning (AY 2009-10) by R N Lakhotia and Subhash Lakhotia, two of India's top taxation experts.

 

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