Earn Passive Income for a Desirable Lifestyle

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  • 8/8/2019 Earn Passive Income for a Desirable Lifestyle

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    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