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8/8/2019 Earn Passive Income for a Desirable Lifestyle
1/1
RIDINGTHERATECURVE
Saturday, August21, 2010,New DelhiPersonal Finance www . f i n a n c i a l e x p r e s s . c o m12
Iowna housein Ahmedabad,
purchasedinJuly1991.InOc-
tober 2001, I added another
floortothehousebyspending
Rs7 lakh and Rs50,000were
spent on furnishing. Which
deductions can I avail of if I
want to sell the house in
FY11? AmitSinghal
Under the Income Tax Act,
1961, house property is a capital
asset andanygainor loss onthe
same is liable to tax under the
headcapitalgains.Sinceyouare
holding the property for more
than36months,youcanclaimthe
benefitof indexationon thepur-
chasecostandoncostof improve-
ments/additions. The gain/loss
on saleof house propertywould
becomputedbydeductingthefol-
lowingfromthevalueof salecon-
sideration:
Indexedcostof purchase
Indexedcostof improvement/
addition
Expensesontransferof assets
However, no deductions can
beavailedof forfurnishingasit
is not a capital asset but a per-
sonalexpense.
I am working with a bank
and my family is dependent
solelyon myincome.In Feb-
ruary, I incurred a medical
expenditure of Rs 1,50,000
for the treatment of my fa-
therin law, suffering from
cerebral palsy. Can I claim
deduction under section
80DD? RahulSingh
Deduction under section
80DD is available in respect of
maintenanceincludingmedical
treatmentof adependentperson
with disability. Dependent in-
cludesspouse, children,parents,
sisters, brothersor anyof them.
However,f ather-in-lawis exclud-
edfromthescopethetermdepen-
dent. Therefore, you cannot
claim deduction under Section
80DD in respect of the medical
treatment of your father-in-law.
I am a salaried individual
working with the excise de-
partment. Writing books is
my part time hobby. During
2009-10 fiscal I received Rs
1,75,000asroyalty fora book
authored by me. Please sug-
gestwhetherthe sameis tax-
ableornot? PuneetSharma
Under Section 80QQB of the
IncomeTaxAct1961,adeduction
is available against the royalty
incomeof thelowerof Rs3,00,000
orthe actualincomefrom royal-
ty,subjectto fulfillmentof speci-
fied conditions. Hence, the
amountreceivedbyyouwouldbe
available as a deduction under
Section80QQBand wouldnotbe
subject to income tax on fulfill-
mentofspecifiedprescribedcon-
ditions under the said section.
IhaveinvestedRs70,000inPPF
to claim the benefit of deduc-
tionunder Section80C of the
IncomeTaxAct.Currently,the
interest accruing on PPF in-
vestmentaswellas withdraw-
alis exemptfromtax.I wishto
know whether it would be
taxed under the proposed di-
recttaxescode? VijendraS
UnderthecurrentIT laws,in-
vestment in PPF, interest ac-
cr ued o n PP F a nd a ny
withdrawalfromPPFareexempt
fromtaxunderEEE (exempt,ex-
empt, exempt) method of taxa-
tion.Also,asproposedunderthe
revised discussion paper on di-
rect taxes code, PPF would con-
tinue to be governed under the
EEE taxationmethod.However,
the final provisions on DTC are
yettobelegislated.
Theauthoris founder of RSM
AstuteConsultingGroup
SaikatNeogi
EVER felt foolish locked into a
termdepositwitha fixedrateas
interest rates climbed all
around?Tillnow,theonlyoption
to get higher returns was to foreclose the
FDbypayingafeeandopenafreshdeposit.
However, floating interest rates on FDs,
whichmove intandemwith thechangein
thebanksinterestratesarehere,withthe
State Bank of India (SBI) last week intro-
ducing preciselysuch a product.Starting
September 7, the countrys largest bank
will offer floating interest rates for fixed
depositsforone,threeandfiveyears.
If youopenanFD withfloatinginterest
rates, you earn more interest when the
banksinterest rates rise.However, bepre-
paredfor thedownsideas well.Yourinter-
est income comes down when interest
ratesintheeconomyfall.Incontrast,if you
openanFD witha fixedinterestrate,your
returnsremainthesameregardlessof the
interestmovementsinthe economy.
Analysts say the SBI move is well-
timed: Since interest rates are currently
rising, customers would be tempted to
openfloatingrateFDs,whichfetchmore
interest than fixed rate FDs where re-
turnsarestatic.
Currently, almost all bank FDs offer
fixedinterestrates,whichvaryaccording
tothe tenureof thedeposit.Floatingrate
deposits,as thenamesuggests,do notcar-
ry a fixed-rate: the interest rates on these
deposits are linked to a benchmark rate.
SBI has linked its floating rate to its base
rate. Base rate is the minimum interest
rate at which a bank extends loans to its
customers, which SBI has fixed at 7.5%.
Whenthebaserateisreviewedattheendof
a quarter, the floating rate linked to the
baseratewillalsochange,leadingtoarise
orfallinyourinterestincome.
SBI has offered three choices of tenure
forits floatingrate FDs:one-year deposits
at7%,three-yeardepositsat7.25%andfive-
yeardepositsat 7.5%. Thesecontrastwith
the fixed rates offered on FDs, where it of-
fers 7.25% for two to three years, which is
thesameasthefloatingrateonathree-year
deposit. On the other hand, the fixed FD
ratebetweenthree andfive yearswillyield
50basispointslessat6.75%.
However,SBIisnotthefirstoff theblock
tooffer floatingrateson FDs.IndianOver-
seas Bank and Housing Development Fi-
nance Corporation already have floating
rateFDsonthesameprinciple.
Analysts differon thescope of floating
rateFDs.Says MurliPrasad,a certifiedfi-
nancialplanner:Oneof thereasonswhy
retailinvestors prefer bankfixeddeposits
is thepromisedreturns. Sincebankscan-
not give any assured returns in floating
rate deposits, many small investors will
notprefersuchproducts.Headdsthatthe
new scheme offered by banks will not at-
tractmanyseniorcitizens,whopreferthe
guaranteeof assuredreturnsandformthe
bulkof bankdeposits.
Other analysts say that since interest
rates are likely to rise further, it makes
much sense for investors to opt for this
product.In thelast oneweek,manybanks
haveraisedtheinterestrateonFDsfrom75
basispointsto over150basispointsandex-
pertssayratesarelikelytorisefurther.An-
alystssayina risinginterestratescenario,
itmakeslesssenseforinvestorsto commit
moneyforalongerperiodof time.Fixedde-
posits is a good option for investors in the
lowor middletax brackets, mainlyfalling
inthe10-20%taxbrackets.
Bankers are optimistic that in a rising
interest rate regime, people with surplus
cashwillprefertoparktheirmoneyinfloat-
ingratedeposits.Traditionally,bankspaya
fixed interest rate on short-term deposits
and lend money to borrowers for longer
termsatfloatingrates.
Banks peg the interest rate on floating
rate deposits to the base rate, which is de-
rived from the yield on five-year govern-
mentsecurities(dailyaverageforthelast6
months)fordepositswithmaturityperiod
of 3-5 years and 10-year G-Sec rate for de-
positswithmaturityperiodof over5years.
The floating rate interest on deposits will
beresetonceeveryquarter.
Thefloatinginterestratedeposit canbe
closed before maturity, for which banks
will levy a foreclosure charge of 1%. Cus-
tomers willalsohavethe provision to con-
verttheexistingfixedinterestratedeposits
to floating rate deposits by closing the de-
posit prematurely and opening a floating
ratedeposit.Theinterestrateontheprema-
turelyclosedfixedinterestratedepositwill
bepayableat theratefor theperiodthede-
posithasremainedwiththe bankwithout
deductinganyforeclosurecharges.
GRATUITYispayabletoanem-
ployeeon terminationof em-
ployment on superannua-
tion,retirement orresignationafter
renderingcontinuousservicefornot
lessthanfiveyears.For deathordis-
ablement,thetimelimitiswaivedoff.
Any death-cum-retirement gratu-
ityreceivedbyanemployeeof thecen-
tral government, state government,
local authority and defence services
in accordance with the prescribed
scheme/rules,is not taxable. Forpri-
vatesector employees,gratuityis ex-
empt subject to limits. However, it
depends on whether it is received
froman employerwhois coveredun-
dertheprovisionsof thePaymentof
GratuityAct(POGA),1972, readwith
theIncome-TaxAct,1961(Act).While
most organisations fall within the
ambitof POGA,certainprivatesector
companiesmaynotbecovered.
Organisationscovered underPOGA
POGA applies to every factory,
mine, oilfield, plantation, port and
railway company. It also applies to
every shopor establishmentcovered
underthe Shopsand Establishments
Act/regulationsof astate,inwhich10
ormorepersonsareemployedorwere
employedonanyday of thepreceding
12 months. Further, the central gov-
ernmentcanalsoprescribeanyother
shop or establishment. A shop or es-
tablishment to which POGA applies
wouldcontinueto becovered,evenif
thenumberof personsemployedbyit
subsequentlyfallsbelow10.
Amount of gratuity under POGA
Gratuity is to be computed at the
rateof 15daysof wageslastdrawnby
theemployeeforeverycompletedyear
of serviceor partthereof inexcess of
sixmonths.Incaseof employeesearn-
ingmonthlywages,the calculationis
for26days.Certainothercomputation
methodsareprescribedforspecificin-
dustries/ sectors. With effect from
May24 thisyear, thegovernment has
increased the limits of gratuity
payablefromRs3.5lakhtoRs 10lakh.
Now,employeesare eligibleto receive
gratuityuptoRs10 lakhwhichisalso
tax-exemptif calculatedasabove.
Meaningof wagesunderPOGA
Wages mean all emoluments
which are earned by an employee
while on duty or on leave in accor-
dancewiththeterms andconditions
of hisemploymentwhicharepaidor
payable to him in cash. It includes
dearness allowance but does not in-
clude any bonus, commission, over-
timewages,any otherallowanceetc.
IncomeTax
For those employees not covered
under POGA, the gratuity is exempt
uptothe prescribedlimitsin theAct.
Recently, tax ceilings have been en-
hancedtoRs 10lakhfromRs3.5lakh.
Thisamendmentis applicableto em-
ployees who retire, or become inca-
pacitatedbeforeretirement,orexpire
orwhoseservicesare terminated on
orafterMay24,2010.Thisisawin-win
situation, where not only is the em-
ployee isentitledto anenhancedgra-
tuity,buteventheenhancedamountis
tax-freetotheextentspecified.
Thewriteris partner,Tax andRegu-
latory,KPMG
PPFwillcontinuetobetax-exemptunderDTC
Having two professions, of
a physician and of a
wealth manager, I am in-
evitablyaskedtocomparethetwo:
which one adds more value?
Physiciansvalueadditionisobvi-
ousanddoesnotrequireanyelab-
oration.Personalwealthmanage-
ment too has potential to enrich
andempowerindividuallives.
To elaborate, we should be
clear about the definition of a
wealthy person. Traditionally,
people associate wealth with net
worth; some even relate it to the
knowledge one possesses, while
someothersfocusonaffordability
power. An old professor of mine
believes he is wealthy since he
doesnotrememberwhathe owns
it was discovered that he has
amnesia. Thedefinition, which I
ratethebestandthemosteffective
is:Apersoniswealthyif hisorher
passiveincomeissufficienttosus-
tain a desirable lifestyle. Two
words are important here, pas-
siveincomeanddesirable.
The word desirable makes
theconceptspecifictoeachindi-
vidual.Forexample,a veryhigh
income person wanting to but
unable to own a private jet, will
notbewealthybythisdefinition.
In contrast, a salaried person
who wants to educate his chil-
dren well and is achieving it, is
wealthy by our definition. So,
everybodycanbewealthyandfi-
nancial planning is beneficial
forall,irrespectiveof networth.
Passiveincomeisthe income
notdependentonactiveemploy-
ment,resultingfrom rent,inter-
est, short-term and long-term
capitalgains,dividendsandroy-
alties. The power of passive in-
come is huge. For example, a
25-year-old initiatinghis career
expectstoearnanaverageof Rs1
lakheverymonth, earning a to-
tal of Rs 4.8 crore in his career
span of 40 years. If he were to
saveonly10%of whatheisearn-
ingeverymonth,andgenerates
areturnof 9% onan annualised
basis, he will be making Rs 4.7
crore. At 10% return, that
amount goes up to Rs 6.3 crore.
Each one additional per cent
adds significantly because of
the power of compounding. At
11%, the amount is Rs 8.3 crore
andat12%itisRs11.7crore.The
surprising conclusion is that
passive income can easily ex-
ceed active income. Of course,
activeincomeisimportantsince
itis thesource.However,by har-
nessingpassiveincome,an indi-
vidual can enhance his total
economic value significantly.
Examples of passive income
being harnessed well abound. A
47-year-oldCEOof anITsoftware
company, boggeddownin hisjob
hadlittletimetoplan.Couldhere-
tireat55withgoalsof goodretire-
mentand onlychilds education?
An analysis showed that proper
investmentof hisexistingandfu-
turesavingsachievesallgoals.Im-
plementinga feweasysteps,he is
well onhis way to achieve finan-
cialfreedomatdesiredage.
Another example is that of a
just-retired 65-year-old, who has
toreplaceactivemonthlyincome
witha passive stream. Itis possi-
bleto structurea solution where
an assured monthly cash flow is
generated and at the same time
surprisingly, his tot al portfolio
valuegrows.A 27-year-old,about
to get married, wants to own an
apartment. He buys one with a
combination of 20% down pay-
ment andrest80%as home loan.
He channelises a significantper-
centageof hismonthlysavingsto
returnhishomeloanasEMIs.Af-
terafewyears,hisnetworthwill
be lot more because of asset cre-
ationascomparedtoif hewereto
relytotallyon hisactive income.
Passive income puts us on an
acceleratedpathof financialfree-
dom,achoicetodowhatweenjoy
doing and achieving our swad-
harmausingournaturalgifts
forothersandus.Italsoenablesus
to leada consistent lifestyle.The
soonerwestart,thebetteritisdue
tothepowerof compounding.
The writer is founder of
www.financedoctor.in
Earn passive income for a desirable lifestyle
Yourqueries
SureshSurana
When interest ratesarerising, youearnmore fromafloatingrateFD.Whentheratesfall,prepareforlowerreturnstoo
FLOATING INTEREST RATESINCOME TAX
Your moneySanjivMehta
Taxtalk
ParizadSirwalla
Veteranfund managerTridibPathak,
senior director at IDFC Mutual Fund,
says irrespective of market conditions,
retail investors must have faith in the
longtermgrowthprospectsof Indiaand
itscapitalmarkets.Inanexclusiveinter-
viewwith FEs SaikatNeogi,heunder-
linesthatinvestorsshouldnottrytotime
markets and invest depending upon
ones riskappetiteand goals.Excerpts:
Given that there is large-scale re-
demptionfrommutual funds,what
shouldretailinvestorsdo?
Irrespectiveof marketconditions,we
always advise retail investors to have
faithin thelong-termgrowthprospects
of Indiaanditscapitalmarkets.Second-
ly, investorsshouldnot tryto timemar-
kets,asnoone can.Thirdly,oneshouldbe
investedforthe longtermin equities,at
leastthreeyears.Onemustfollowan as-
setallocationframework,so thatonein-
vestsdependingupononesriskappetite
andgoals.Onecanalsoavoidmarkettim-
ingbyperiodicallyre-balancingassetal-
location accordingto onesframework.
How do you think emerging mar-
kets like India will perform in the
long-term?
Indias relative position as an in-
vestment destination has improved a
lot over the past two years and it has
emerged as one of the few countries
with continued high growth and with
comparativelybetter financialhealth.
Led by favourable demographics, ris-
ingpersonalincomelevels,lowindebt-
ednessanddomesticcentricity,Indias
highgrowthis secular.Allof this,is in
the context of a developed world,
whichis struggling togrowand isfac-
ingstructural,andnotcyclical,issues.
So,thelong-termcaseforIndianequi-
tymarketsisquitepositive.
What is theoutlook forequities in
theshort-term?
In the short to medium term, we
thinkthattherearefourfactorswhich
determine equity markets outlook
valuation, sentiment, liquidity and
earnings.Valuation-wise,we aretrad-
ing at fair levels. In the short run, we
feelthereisnot muchscopeforanyup-
sidein valuationswhicharealreadyat
about 17timesone-yearforwardearn-
ings. Sentiment and liquidity depend
onhowtheglobalmacro-risksshapeup
andhowthataffectsriskappetite.Ona
medium-term basis, both sentiment
and liquidity should be favourable for
India. In the short- to medium term,
earnings growth and earnings up-
gradesareverycrucial.Whilewedonot
thinkthat therewillbe anysignificant
earnings upgrades in the short term,
we think continued strong economic
growthanda resultantupgradeincor-
porateearningsforecastoverthe year
willbe thekeydriversfor Indianmar-
kets from here on. On a domestic eco-
nomic growth basis, we are fine. The
actual delivery of growth will be the
keyand inflowswillcontinueto bedi-
verted towards fundamentally sound
companies, which have been able to
keep the faith of investors with sus-
tained operational performance. As a
result, we will see increasing diver-
gence in performance among sectors
andamongcompanieswithina sector.
Whatarethe international factors
whichcoulddamageinvestorconfi-
denceinIndia?
The biggest risk to investor confi-
denceandthusIndianequitymarkets,
is the global macroeconomic condi-
tions.Thedevelopedworldisfacingre-
alstructuralproblems.Sovereigndebt
levels, total debt levels and fiscal
deficits of the developed world are
reaching unsustainable levels. Most
developed countries are having total
debtmorethan triple thesize of their
GDPandtheirfiscaldeficitsarerising
fast.Thissituationhasdevelopedover
years of low savings and dependence
oncheap debt.Further, thedeveloped
world has attempted rampant stimu-
lusoverthelasttwoyearswhiletrying
toreviveeconomicgrowth.Butitisin-
creasingly appearing that their eco-
nomicgrowthisbecomingdependent
oncontinuationof theeconomicstim-
ulus.Butthiswillleadtofurtherwors-
eningof fiscaldeficitsanddebtlevels.
Thus,wehaveseenwidespreadfearsof
a sovereign default, Greece being a
caseinpoint,andalsoof abankingcri-
sis. These fears have ebbed recently.
However, what is becoming clear is
that the developed world faces
prospects of slower growth for a pro-
longedperiodof time.Most of Europe
has adopted austerity measures to
reininfiscal deficit;but thismaylead
toslowereconomicgrowth.
Which are the sectors that will
standto gainfromtheslowdownin
Europe?
In our portfolios, we run a theme
Beneficiariesof Globalslowdownin
which we invest in companies/sec-
tors which may benefit from a slow-
down in global growth. There two
kinds of such companies/sectors
ones who may benefit from lower in-
put costs due to lower commodity
priceslikeautos,consumergoods,oil
marketing companies and secondly,
oneswho maybenefitfromincreased
outsourcing as the developed world
searchesto cutcosts likepharmaout-
sourcingandITservices.
S E N I O R D I R E C T O R E Q U I T I E S , I D F C M U T U A L F U N D
Follow asset allocation framework, stay invested
INTERVIEW: TRIDIB PATHAK
Gratuitybonanza
We alwaysadviseretailinvestorstohavefaithinthelong-termgrowth prospectsofIndiaanditscapitalmarkets..investorsshouldnottrytotimemarketsandbeinvestedforlong
terminequities
PASSIVE INCOMECANENHANCEECONOMICVALUE
NEW BEGINNING
For1year
7For3years
7.25
St at e Ba nk o f Ind ia I ndi an O ve rs ea s Ba nk Floatinginterestrates ondeposits
Infloatinginterestratefixeddeposit,one earnshigherreturnif interestratesrise
Ifinterestratefalls,yourreturnsalso dip accordingly
Theinterestrateispeggedonthebenchmarkrateofthebank
Theinterestratewillbereset everyquarter
For5years
7.50For3to 5years
7.24Over5 to10 years
7.48
Allfiguresin%,Source:Bank websites