Loan Calculator

If you have taken a loan and have been paying EMIs, then at some point, you definitely must have wondered about how much loan amount you have paid back (including principal amount and interest). Also sometimes we might want to know what is the percentage of principal and interest a particular EMI is paying back. This information is needed either just out of curiosity or sometimes for tax calculations. It is always difficult to get this information from banks (how much friendly the bank is) on a periodic basis.

I was in the similar situation regarding my education loan (from UBI) and wondering how can I quickly find it out myself. I just found an excel sheet on the internet (don't remember the original source, if you know please let me know), which can be quickly used to find the entire loan tenure EMIs. It is an extremely handy tool. You can download the excel sheet from here.

You just need to enter the "Loan Amount", "Interest Rate", "Loan Period" and "Starting Date"

How to buy apartment in Bangalore - II

Here are some of the terminologies which everyone wanting to own an apartment should be aware of:

• Booking Amount : You see a project and if you like it, just to ensure that your claim gets higher priority you need to pay some money as booking amount to the builder (it runs typically in few thousands to lakh). You get some time to think over the option and to process the loan formalities. You can even cancel the booking getting back your money (minus some administrative charges which can be as high as 50%)

• Deviation : Actual building usually does not fit exactly as per the plan set initially. There is some deviation from the approved plan, which is allowed. Checking whether the deviation is beyond that value is helpful. The deviation can be horizontal or vertical. Different rules apply to each. Usually a 5% deviation is allowed.

• Registration : It is the process of getting the flat in your name after the construction. It is similar to registration of marriages or child birth. There is a good amount of money to be given to the government (and it differs across states).

• VAT + Service Tax : Although there is a talk of service tax being waved for home buyers, but it has still not been effective. These are the government taxes to be paid.

• Super Build Area : A builder usually not only charges you for the area you are going to live, but also charges for common areas like stairs or lifts. This area is charged for all flat buyers and is probably the single most earning point for the builder.

• Carpet Area : This is the actual area which you can use for living. Usually 85-90% of super built up area is carpet area.

• Built up Area : This is the area which is carpet area + area covered by walls etc.

• Cost per square feet : The SFT cost is always about super-built up area. It is misleading in the sense that you are paying the same amount not only for the area you will be using all the time (built up area) but also of the common area (like lift) which you would use very frequently.

• Floor Area Ration (FAR/FSI) : FSI is the ratio of total floor area of a building to the total plot area. This essentially implies out of total plot area, how much is used for construction. A smaller the value, implies large open areas.

• BDA : Bangalore Development Authority, govt body that authorises the construction of buildings in Bangalore. Official WebSite

• BMRDA : Bangalore Metropolitan Region Development Authority, this body approves plots beyond bangalore city limits. Official Website
  

• Pre-Launch Offers : A builder puts advertisements even before he gets the BDA approval (assuming it will be approved either by legal or illegal means). This pre-launch offer is to attract the buyers early enough. The best buy is always during pre-launch offers.

• Home Loan : Taking financial help from banks/financial institutions. Usually 85% of the total cost is approved for loan and the remaining 15% needs to be provided by the buyer. A trick used by builder to get you more than 85% loan is to show the bank a cost higher than what he sells you, so that you get 85% of higher projected value, ensuring you get more than 85% of the actual cost.


• Pre-EMI : EMI is the monthly outgo against any loan that you take. In housing loans, there is a concept of pre-EMI, where the actual EMI starts only after possession, but the builder has already taken money from bank (on your behalf) for construction. Since banks have already given (disbursed) the money, they want a simple interest to be charged till the time you start actual EMI. This is called pre-EMI. It is just an interest payment and it does not reduce your outstanding loan. This is total waste of your money. Sometimes builders are willing to share the pre-EMI on your behalf.

• Floating Interest Rate : The interest rate on the home loans. This is a compounded interest applied annually. It is called floating since the rate at any time depend on the prime lending rate (which in turn depends on so many economic parameters). So the interest rate can go up and down causing variation in the monthly installment to be paid to the bank. It is a huge blow during the rising interest rates. You can opt for fixed interest rate but they are usually higher than floating interest rates.

• Pre-Closure : If you have surplus money, you can close the loan earlier than the stipulated tenure. But banks usually charge some penalty for pre-closure.

• Approval Papers from builders : Parent deed, joint development deed, BDA approval, sanctioned plan, occupancy certificate, commencement certificate, registration of land, khata, tax paid receipts, clearance certificates from govt bodies like Electricity Board, Water and Sewage Board etc etc. These are typically the papers a builder should possess to avoid any legal hassels during the construction and to the buyers afterwards

• Possession Date : The actual date when you become a proud owner of a house

• Grace Period : A buffer of time after Possession date which accommodates any delay on either side.

• Premiums : Some builders, or rather all of them, ask for a premium for corner units or upper floors. In other cities, lower level floors cost more than the higher ones but in Bangalore it’s the other way around. This premium rate is typically 20/- to 50/- per sqft per floor.

How to buy apartment in Bangalore - I

When I came to Bangalore, the first thing that struck me is that everyone is (and literally everyone) is buying either a plot/flat or independent house etc. When you see so many people surrounding you looking out for 'investment opportunities' in housing/real-estate, somehow you are bound to get influenced. I was also caught into this 'rat-race'. The emotion that controls this rampant buying is the same emotion of human beings that plays a crucial role in stock-markets i.e. greed. I have heard so many stories of people buying flats at 15 lakhs few years back and the same flat now said to be costing more than 70 lakhs. The biggest mistake people do while buying a house is "not researching enough". I got into the same trap, but thankfully got out of it just loosing 10 K Rs (cancellation of booking amount).


In these series of posts, I will try to put my experience of "trying" to buy a flat in south bangalore. These tips typically apply for people buying their first house. Some of the general tips/gyaan would be useful for buying across the entire country.

• Fix your budget before seeing any property and stick to it at any cost (very difficult).

• Never think of buying the first house as investment. It should only be considered if you want to live in it.

• Don't think of "tax-benefits" while buying your first house. It only comes into picture when you are buying a house in a city of non-residence. Otherwise the tax-benefits of home loans will be compensated by no HRA benefits.

• I have heard this a lot "Always go for big builders, since that assures less pain", this is a myth. Buying a house is a lot of pain and efforts, it does not matters much whether the builder is big or small. All builders are crooks and are out their to make money
  

• Getting a good house is more luck than anything else. You got to be lucky to get a house without much hassel

• Big brand names do not necessarily mean higher resale value. What matters more is the location and the construction quality.

• Flats do appreciate in value but only up to a certain point. Say the original price is 2000/- per sqft at the time of booking. It might go to 2500/- by the time the construction is over and you register it (2 years). From that point on, the appreciation slows down a bit because it is now a second-hand flat. It might go to 3000/- (5-10 years) if the location is good but that’s generally the limit. After that the wear and tear on the flat bring the value down.

• Also the stories of astronomical price increase is in realty a myth. Imagine a 2BHK flat in say Bannerghatta Road (near IIM) costing 15 lakhs in 2002 (five years before) is now costing 70 lakhs (as per the market rate in the same apartment complex). But is that a real re-sale value of the flat? Do you think there would be any takers of the flat for 70 Lakhs when the same type of flat (in terms of quality/space etc) would cost me around say 30-35 lakhs near the same locality (Meenakshi Temple)? Since the real-estate market is on the upwards, a new buyer would always look at the new projects rather than buying a second hand flat. If the market goes down, then the projected cost of 70 Lakhs would also come down steeply.

• Always go for home-loans from reputed financial institution (even if you are capable of), since that ensures a cross check of documentations obtained by builders. For example, I booked the Ittina Mahavir project in electronic complex, HDFC refuses to give loan to any of the Ittina properties. When we enquired further, we got to know that there are lot of BDA notices against illegal activities from Ittina.

• Read all the documents before signing (even signing the booking form). It is easier said than done, since the marketing department of the builder will ensure that you get engrossed in the sugary talk so much that you believe anything he/she says and sign without reading.

• Go through agreement copy atleast 5 times with your family lawyer it’s almost 25 to 30 points and usually its mostly one sided.

• Make sure that following things have been put into agreement
• Builder will not demand for any other payments other than whatever has been specifically disclosed to the buyer in writing.
• Clear possession date in writing
• To avail housing loan from a bank or a financial institution of buyer choice. Usually they force you to get a loan from private banks

• Go and talk to the last completed project of the builder and talk to the owners.

• You may not be Vaastu believer, but purchase a flat which is vaastu compliance just to ensure its re-sale value.

There are so many things to keep in mind while buying a flat that you need to burn your fingers to actually understand everything. The most important point to keep in mind is not to get awed by the glossy advertisements from the builders (usually there is always some hidden constraints). Also don't ever think that if you dont book a flat now, you will miss the opportunity later. When I wanted to buy a flat in electronic complex, I talked to a friend, who has booked a flat at 2400 per SFT some nine-ten months back. So when I got an offer of 2350 per SFT, I booked it immediately thinking that this is the best buy I could ever get. Now few months down the line, I am seeing offers of 2100 per SFT also. If you do your research properly(which implies a lot of pain), you can get a good bargain even in the most "real-estate saturated pockets" of the city.

Active Vs Passive Investing

There is a very interesting discussion happening on Prem's blog. The moot point is that how much difference in returns one can make between passively investing (not your main livelihood) and actively investing. So if the difference is really huge, does it make sense to switch to active investment leaving your other income streams.

As per my thinking, all the number talk doesn't make sense unless you define "active investment". Do you consider job of a mutual fund manager an active investment? I would say no since he is getting a salary for making all the investment decisions and he is not directly affected by those decisions (of course his reputation will get a toss but he still will get the salary at the month end).

The moot question here is where it is good doing something as a part-time business or full-time business. A full-time business will require

a) Capital
b) Love for the business (termed as passion)
c) Risk-taking ability.

So the ups & downs of business will apply even to "active investing", and there will always be a learning curve. Nothing comes free (as in free beer).

Recurring Deposit

The income-tax filing is over for most of the salaried people and everyone now must have taken a sigh of relief with all the paper-work and headache now gone till the next year. It is really a great pain to collect a lot of money during the Feb-March period for putting it in various tax-saving schemes or paying life-insurance premiums for submitting the I-T proofs. It sometimes drains out almost entirely your salary to 'invest' in all these schemes.

Once you do that you make a promise to yourself that from next year I will save money from the very beginning so as to avoid such hassles, but every year it looks like the same old story. If you are stuck in such a cycle, then I assure you that you are not the only one.

The reason for most people not able to save money every month is because

a) People do not plan tax-saving unless made compulsory at year-end
b) There is no mechanism which automatically deducts certain portion of salary to be kept for year-end tax investments

I have realized that point (a) is very difficult for even the most disciplined financial planner. But there are always schemes which one can opt to materialize point (b). One such scheme is the recurring deposit offered by many banks.

For example UBI offers a recurring deposit at 9% PA for a period of one year. This for me a perfect way to put aside money every month in a non-risky investment earning a decent returns.

Let say I have to invest 1,00,000 Rs every year around Feb in various tax-saving policies. I opened a recurring deposit of 10,000 Rs from May for ten months. So in Feb I don't have to squeeze my other commitments to make way for the tax-saving schemes. It is very easy to time your recurring deposit maturity at the same time you would need funds. You can even open a recurring deposit in the same bank that your salary comes into and ask for a direct debt. This way every month you would have less money to spend, but that automatically will take care of your year end investments.

The same mechanism can be used for any of your short-term needs.

PS: Surprisingly for me, HDFC doesnt have recurring deposit scheme.

Back to Blogging

Life was bit busy for me in recent times and that is why I was away from blogging. The biggest motivation for blogging (any blogger would vouch) is the encouragement given by the readers. It not necessarily be praise all the time even brickbats are welcome. I was especially elated to see Gautam Satpathy putting up some comment here. I have been regular reader of his blog and it is sheer pleasure to read him. Hope I continue blogging and try to improve upon it.

EMI calculation using Excel

I mentioned the formula used to calculate an EMI, but putting values in the formula and calculating it is a cumbersome task. So I did some research in Microsoft Excel and found out that it can done quite easily in excel.

EMI calculation in Excel

Step 1: Open the excel sheet and locate the fx button

Step 2: In the pop-up menu, click on Financial Catergory

Step 3: In the Function Name click 'PMT'

Step 4: A box will appear as shown, fill in the values mentioned and voila you get the EMI.

Interest Component of the EMI

• Just choose the IPMT function instead of PMT

Prinicpal Component of EMI

• Just choose the PPMT function instead of PMT

How EMI is calculated!!

I decided to purchase a house in Banaglore (an extremely tough task) and the first thing that struck me is equated monthly installment or EMI. This is the single most important parameter while taking any kind of loan. This is the amount outgo every month from your personal finances which will cover both the principle as well as interest.

I talked to few people and everyone is bit confused on how EMI is calculated. It is really simple and just few steps would enable you to calculate EMI at your end.

So here is a rather simply formula for calculating EMI.

You would wonder why EMI is called "equated", the reason is that EMI is nothing but loan amount plus total interest divided by loan tenure. If that is the case then why this complicated formula. The reason is because as you keep paying EMI, some portion of EMI goes as interest but some portion goes as principal repayment. So if you pay an EMI of Rs10,000 for a house loan, not the entire Rs 10,000 would go as interest payment, but some portion goes as principal repayment, which essentially reduces the principal on which further interest is calculated. It is extremely important to understand what goes for interest and what goes for principal repayment.

It is very clear (for mathematically inclined) that when Loan Amount goes up, so does the EMI. Similarly if the interest goes up again so does the EMI, but if 'n' (loan tenure) goes up, EMI reduces. A note of caution, a low EMI for longer period does not necessary means a good bargain. A good bargain depends on your requirements as well as the total interest you pay over the entire loan tenure.

Another thing to keep in mind is whether the reduction in loan amount happens on monthly basis or yearly basis. Any loan which reduces the principal on monthly basis should be given preference. A monthly reduction implies less interest payment from next month onwards, definitely a huge savings.

Also usually interest rates comes in flavors of fixed and floating rates. A floating rate changes based on market's prime lending rate (PLR). A fixed rate stays fixed for the tenure of the loan. For a longer period of loan, my personal preference is always fixed interest rate, even if it is 1-2% higher, at least the monthly outgo is fixed, so planning of your outflows can be planned pretty well. I personally think that similar to rupee averaging for mutual funds, the floating rate almost remains same as fixed rate over a long tenure of loan. [The floating rate will go up and down and hence your monthly outgo]. And for short tenure loan, in a high interest regime, go for floating rate, but in a low interest regime choose fixed rate.

How to become Wealthy?

One of the best articles (by Clayton Cramer) I have ever came across. Go ahead read it and learn !!

Online Tax Filing

I recently stumbled upon the website of NSDL (National Securities Depositary Ltd) and got surprised to see the e-payment of taxes.



So clicked the link and found that anyone can pay the taxes online if they have netbanking facility with the mentioned banks.

If you are a salaried employee and have any outstanding tax to be payed, then instead of visiting a nearby bank branch you can directly submit the tax on-line using netbanking.

Dont confuse this tax-filing with return-filing (usually this is a common confusion). This facility is just to submit any extra tax (after TDS) that you are entitled to pay the government. This situation usually occurs (for salaried employee) if he has shifted job within a financial year and has not accounted for previous employer income to the finance department. So when you file the tax return you just need to provide a Challan Identification Number (CIN) obtained while paying the tax online. Pretty neat !!

It is definitely a welcome move from the income tax department.

Mutual Fund Offer Document

"Mutual fund investments are subject to market risks, please read the offer document carefully before investing"

How many times you have heard this or read this in all mutual fund advertisements? Well due to SEBI regulation every mutual fund will flash this warning. I personally think that mutual fund advertisements require a person who can talk at a speed of zillion words per minute before they recruit the guy to read the above statement.

Does anyone really read the offer document? SEBI mandates that as a customer you should read the offer document carefully.

What is an Offer document?

It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. But since it is such a huge document, people rarely read it in entirety.

Key Information Memorandum

So to overcome this distributors usually come up with a KIM. It is shorter than an offer document and provides precious details about the mutual fund. So when you get a KIM, what you should look for as an investor:

Investment Objective

Investment objective will tell you the fund's goal and rationale. This must align with your personal goal and risk profile. For example, you might be looking at a fund which will at the least protect your capital, so reading the investment objective will tell whether a particular fund ensures that.

Asset Allocation

What this essentially gives is the percentage of your funds invested in equity or debts.

Minimum Investment

What is the minimum investment a fund requires. You might be looking at a SIP of Rs100 per month but that might not be available with the particular fund.

Past Performance Data

Although every mutual fund house will keep the warning "PastPerformance is not an indicator of future returns" but that is usually not true. A fund's past performance is a key factor in deciding how a fund will perform. I personally think that everyone should stay away from NFO, since they dont have any past performance.

Every investors must read the historical performance of the fund, and he should be looking at both the long and short-term performance. A fund's performance over a period of time should match with their own investment goals. They must compare the fund performance against that of the benchmark chosen by the fund.

Entry and Exit Loads

This is another most important information, since heavy entry and exit load will eat up into your investment growth. There are also other charges like switching charges or recurring charges or management fees. Over a period of time they can be considerable amount, so be aware of them.

Hope all investors be more aware of the pitfalls of this fantastic investment scheme.

Car dealer tricks

Let me ask you one question, if you have to choose between the following loans for the car which one would you choose:

a) The dealer has a tie-up with various banks who provide you loan at the prevailing rate of 13% for five years and 13.5% for three years. Although it is a huge interest rate (on a reducing interest basis) but its the same across all the dealers of the city. Most banks asks you for a margin amount as a downpayment (something like 10 - 15% of the cost value of the car). The dealer provides you a discount of 10,000 Rs on a particular car model.

OR

b) The dealer has a specific tie-up with a government bank which provides you the same loan amount at 7.75% interest rate for three years. This is almost half of the interest rate in option (a). The dealer does not offer you the discount mentioned in option (a) and all other terms remains same.

Which one you would opt?

Well this is the true fact that came to light when I proceeded with buying a car in the city of Bangalore. I went to the Maruthi showroom (Sagar Motors @ Bannerghatta Road) and inquired about a particular car model. I was told the on-road cost as X Rs. I told them that I want to take up a loan of just Rs 1.4 lakhs and the remaining amount will be as a down-payment in cash (which was way higher than the 10% margin required by most banks). Surprisingly even with so large a cash down-payment there was no special discount. I was told about the exorbitantly high interest rates charged by banks (13% -14%). I went home and talked to few other dealers and everyone came up with the same figures with no additional benefit.

Then one day we got a call from a dealer who said there is a special scheme with UTI bank which will provide loan on an interest of 7.75% for three years. I was ecstatic but was little curious that how could a bank provide me with such a low interest rate when all other banks are charging such higher rates. I asked the details and sure they were providing the loan at aforementioned interest rates, just that the dealer mentioned that he wont give the 10,000 Rs discount for this scheme.

Always do your own EMI calculation

So I got suspicious and decided to calculate the EMI. For a loan of 1.4 L for three years at 7.75% rate of interest the EMI comes out to be Rs 4340, while for a loan of 1.3 L for three years at 13.5%, the EMI comes out to be Rs 4360. In essence both the scheme are more of less the same (just a difference of 720Rs over three years period). It is just a gimmick used by the bank and the dealer to fool the customer with flashing a 7.75% rate of interest. I would suggest do your own calculation everytime.

LIC Credit CardsI

I was rather amused by this news when I saw it on CNBC. A search on Rediff tells the entire story. This in a business jargon is called diversification, when an organization intends to move away from its core business domain. I am not very happy with the news. Looking at the history of LIC, you will notice that

Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

So the basic idea behind LIC is more benign in nature. And somehow I have personally been very wary of credit card companies (Why I hate credit cards or How credit card companies make money) , because their sole aim is to earn money with little care for the customers. So I see this as an evil move for a benign company taking towards becoming a money minded business. This might look like a philosophical and biased logic, but I guess it indicates the threat seen by LIC from the private players. With a 77% share of market, it is till numero uno, but it is facing stiff competition from private players.

I see the credit card move as a step to fight back the competition. Undoubtedly LIC has a strong distribution network, but that is because the name provides a "TRUST" to any customer. The biggest reason is the sovereign guarantee by the government. So a customer wont care much about from whom the policy is being taken and just the LIC name is enough to bring that trust. That is the reason it is still the numero uno insurance provider even amongst the youth. And fortunately it has kept pace with the changing times by being up-to-date with its customer services. The only way I would love LIC credit card if I can gain the same TRUST as LIC Insurance provider. I already have sufferred a lot with the private credit card players and dont want to add the agony with another one, unless LIC can keep its original objectives intact with the credit card business

Conduct business with utmost economy and with the full realization that the moneys belong to the policyholders

How to identify copy paste from your blog

Prem is doing a good job of identifying the best indian financial blogger and I was thinking about his post about why he is rejecting some blogs while nominating. He mentioned about some blog being copy-pasted blogs. I usually dont have much objection if someone copying from my blog (even if they dont quote the original source), but some people object strongly. If you are one of them and want to find who copy-pasted from your blog, then check out CopyScape. A good way to find who copied from your blog (or from where you copied the post!!). A copy paste is good if you can add some additional info or value to it.

Real Estate Prices Dipping

I was reading an article on businessworld about the dipping rates of real estate. I do not think that this is the usual demand-supply cycle and the real estate market is going through a dip. Everyone is still willing to buy a house, and with increasing number of young people joning rising industries, the earning power is increasing day by day and real estate is the most secure and profitable investment. Considering just the IT industry, nearly 1,20,000 IT graduates join the workforce per year, imagine the amount of young people earning good. Within two years of joining the industry on an average everyone wants to invest in buying a house. So the demand has not ebbed a bit.

The real reason for the slip in the real-estate prices is that with RBI soaking the liquidity in market causing increase in interest rates, the affordability of purchasing a house through bank loans has reduced significantly. With the early boom in the real-estate market, the prices have already touched an all time high and they just going north. A simple two bedroom flat in prime location of Bangalore might cost you not less than 30-40 lakh in a decent locality. This is simply outrageous. But with easy loans from banks, it was still affordable. Now EMI getting more than to Rs 1000 per lakh of loan, it simply has become impossible for a service class person to go for it. Compare that to the cost of renting, a similar house can cost me around Rs 11,000 per month on rent with all the facilities(fully-furnished including pool, gym etc). So everyone who wanted to buy a house is postponing the plans and following the wait n watch policy. Here are Bangalore prices from the businessworld article (prices from 2004 to 2007):

Preparation for packers and movers

I wrote a relocation guide mentioning some of the tips about moving from one city to another. This gap in blogging frequency is because of this relocation. I finally moved to Bangalore.

Bangalore Vs Kolkata

The biggest difference I find is the weather, it is a huge relief. Although traffic is said to be the nemesis of Bangalore, I still find it better than Kolkata, but the worst part is poor public transport. The auto-rikshaws are few and the drivers bluntly will reject (based on some weired logic) when you tell him about your destination. In kolkata at least you can get yellow-taxi (Ambassador painted yellow) to any destination (although costlier).

Agarwal Movers and Packers Sucks

In the comment section of my relocation guide someone warned me not to use the Agarwal Packers and Movers, but since the relocation is being done by my wife's office, which appointed them as the company for moving employees, I had no choice. I guess only one word can describe my experience, "pathetic". I simply could not believe that a famous company like this could do such a shoddy job.

My pathetic experience

Here is few points of my experience with them

• From morning 8:00 they finished at night 9:00 despite the fact that I do not had any major things to pack (no sofa, not much furniture, no car)
• They got just three persons, one of whom was doing both the paper work as well as packing
• I shouted at them three times since they were not packing in correct manner. A glass item needs to be provided proper cushion with paper and cloths and this basic thing they didnt knew.
  
• After doing half the packing they just went to some other near-by location without informing me. I was very pissed off by this.
  
• There were mistakes in the paperwork, which I did not expected in a professional movers and packers.
  
• When they said everything is packed, I searched in the house and found many things lying around. So I had to force him to create another carton pushing the remaining things in there. This was the worst experience anyone can ever get.
  
• After such a shoddy job, they still expected me to pay an "unofficial tip".
  

NEVER EMPLOY THIS COMPANY FOR YOUR RELOCATION IF YOU WANT TO REMAIN SANE.

I am now just waiting for my goods to reach me safely without anything missing.

Here is a short guide on what to look when packers and movers are at your house:

• Make sure you have separated the items you want to take with you like documents, jwellery and cloths
• Ask the company to send atleast four or five people. Not less not more
• Keep watch while the packers do their job. Instruct them when you think they are not doing the job properly. Keep asking them questions about how they are packing certain stuffs like almirah or fridge.
• Make sure they put plastic around vaulable goods like TV, Fridge, Sofa etc
• Instruct them not to pack what you want to leave. In my case they even packed my garbage box containing the garbage. I had to unpack that box and remove the garbage.
• Keep enough water and food for yourself during the packing. You will need it.

Micro-SIPs

I think this is enough for relocation, on a different note, ICICI and Reliance have introduced micro-SIPs for as low as Rs 50 per month. I am not sure how much beneficial this is for customers. This is aimed at people who cannt afford the previous lowest of Rs 500 or Rs 1000. Imagine the income group which cannt afford even Rs 500 per month, and how much value for them even a sum of Rs 50 would be? I would expect them to be a totally risk-averse category. Can a mutual fund house be able to tell them that their hard-earned money would be at the mercy of stock markets and the returns (even the original) is no longer guaranteed. I am really skeptical about the returns of micro-SIPs vis-a-vis other risk-free avenues. I can visualize that with plethora of micro-SIPs coming, lot of investors will be robbed of their precious money without much gains. It will be a boon to the mutual fund houses rather than those investors.

Mutual Fund Vs Investing in Stocks

I was reading an interesting post by Rohit, when someone posted a comment on his blog, ferverently opposing his involvement in mutual funds, given his knowledge about investing in stocks. Here are some of my thoughts :

• Investing in individual stock gives huge and quick returns.
• Mutual funds protects against any quick failures due to diversification.
• Investing in individual stock a lot of research for success.
• Mutual funds require little research, and no daily monitoring required
  
• Investments in individual stock costs you for the buy-in and the sell with brokerage fees, but leave you alone once you’re invested.
• Mutual funds generally cost less to get in, but slowly take away expenses over time.
  
• Mutual funds provides Rupee Cost Averaging through Systematic Investment Plan

Investing in stocks is a high-risk high-gain game requiring serious study, while mutual funds are for a more reserved investor and they wont make you rich in just few years. Mutual funds should be used as a foundation for investment strategy while investing in stocks should be for playing around.

Investment Books

I just came across the SeekingAlpha's Must-Read Investment Books, by David Jackson. The recommendations include a huge (its really huge) number of books ranging from the topics like "Money Manager's Experiences" to "Value Investing" to "Long-term investment strategies" to "Technical Analysis" (close to 45 books).

Does it really helps to read books and invest? I personally think no book can provide you the "real" experience of investing until you burn your fingers in the market. Then I found Rohit providing some insight into the book "You can be a stock market genius, by Joel Greenbaltt". He also recommends some other books.

Reading such books can provide you with some understanding of the markets and its past history, but no book can be tailor made to specific type of investors. This is because the investment goals are entirely different for different people and so is the risk-taking ability.

Relocatioin Guide

I am relocating to Bangalore from Kolkata. Any relocation, be it international, within-country or within-city has its financial implications. Within the past five years, I have done four within-country and six within-city relocation. Relocation is a complicated thing, because it involves pulling out an already existing set-up and establishing it at a new location. It not only has a professional angle (getting new job, new responsiblities in profession) but it also involves emotional trauma. I still remmeber my first job and the city I lived in and there are so many memories attached to that city (I met my wife there and courted her for three years). And relocation also has a financial angle, because if not considered properly it can dent a big hole in your pocket.

Here is a guide on what to look out for while in the relocation phase:

SCHOOLS

• This would be biggest concern for people who have kids.
• Check out the schooling cycle (usually in India it is June - March)
• Admission process is extremely difficult in good schools, so apply early and check out for contacts (Money doesnt always rule here, but contacts does, always)
  
• You will have to spend for fees, uniforms (most schools have uniforms), transportation (if your house is far off),
• Children attend "nursery" from 3 years to 4 years, LKG (lower kindergarten) from 4 to 5 and UKG (upper kindergarten) from 5 to 6 years old. Nursery and LKG are what is called "pre-school" in the US, and UKG is plain old Kindergarten. At 6, everyone goes to first grade (some schools call it first standard).
  

NEGOTIATION WITH EMPLOYER

• Negotiate with your employer to provide you with relocation charges (preferrably not through reimbursement method but direct contact with the packers and movers. This prevents your hassel to negotiate with movers and packers and to pay upfront charges right now. For an within-country charges, the companies can charge as much as 70-80K INR depending on items you own. Car transportation is always extra.
• It is also important to cross-check if the company will offer you escorts and vehicles during the house-hunting period. Also in some cities, the rental deposits are very high (esp in Mumbai and Banglore where equivalent of 8-10 months of rental needs to be deposited with the landlord). This can be huge amount considering the rentals of even 15K-20 per month.
  
• Talk to your employer about taking care of re-registration of your vehicles (esp if you own car). Even a simple bike re-registration can set you back by 10-15K INR. The road-tax structure in many states is weired that you have to pay 5-10 years bulk, even if you intend to stay just for one year.
• Hopefully your employer should cover travel expenses not only for you, but your immediate dependents too. Sometimes the employer offer a "travel allowance" which is a straight taxable amount given to take care of any spending during your relocation.

SELECTING MOVERS and PACKERS

• If your employer does not provide the relocation service then ask for "quotes" from various companies. Within India Agarwal Packers and Movers is very famous. They are reasonable. But I had once bad experience with them. They brought my bike with the clutch handle broken and since I was busy unpacking things, it got unnoticed until I wanted to drive it.
  
• Make sure you provide them with as detailed list of items you own as possible. Dont forget to list "computer" without listing "computer table". They are separate items. Similar it goes for TV and Fridge.
• Usually they have conditions like follow, it is good to pay that extra 3%, since the risk is borne by the carrier.
  

The Carrier on their agent shall be exempted from any loss or damage through accident, pilferage, fire, rain, collision, any other road or river hazard, we therefore recommend that goods be insured under carrier’s risk (F.O.V). While carrier’s risk, no individual policy / receipt from insurance co. will be given. The F.O.V is 3% of the total value declared.

• It usually take one day to cover 300 KM (in India) for any normal transport. So you know how much time it will take for your goods to arrive. It is good to go with the company that provides an online tracking system.
• If you want the company to keep your items for more days after arrival (because you still have to find a house etc), then you will charged extra. The companies charge hugely like INR 12 for one box (your entire package might consist of something like 40-50 boxes). That is like INR 600 per day.
  

Big Decision : What to do with the house & car

• A big decision needs to be taken if you own a house (either on finance or outright purchase). You can either sell it, keep it vacant or rent it out.
  
• A house that you own (not on finance) if sold will attract a capital gains tax. But interestingly if the sale proceed is use to buy another house for residential purpose then there is no tax. If you have house on finance, then you need to find a buyer. Get the loan transferred. Otherwise you can pay back the remaining amount entirely to the bank (with some pre-payment penalty) and then sell it.
• If you want to keep the house vacant, then you still have to pay the maintainence bill. Also a vacant house is considered as put on rent for the income tax purpose and hence liable for tax. A vacant house also needs to looked-after with so many cases of forceful acquisition or a breeding ground for illegal activities.
• If you want to rent it out, make sure you give it someone you know or atleast you have someone in the city who can keep a regular check on the tenants (atleast initially). One advantage of a second house is that, unlike a self-occupied house, the entire amount paid as interest on a home loan, even if it is more than Rs 150,000, can be deducted from the pre-tax income. Also, the amount spent on repairing and maintaining the second house is allowed as deduction from the income. So, you will finally pay taxes on the net income from the second house, which is annual rent (higher of actual and notional) reduced by municipal taxes, standard deduction (30 per cent of annual rent net of municipal taxes) and interest on home loan.
• If you are transferring you vehicle, then re-registration is real pain, since you need to get a NOC (No-objection certificate) from the RTO of the current state before you leave. Once you have the NOC, you need to apply for re-registration in the new state within 90 days. The registration will typically take 3-4 months and you have to shell close to 15K-20K INR. If you have an old vehicle, its better to sell it and get a new one in new place.
  

Disconnecting the ties

• Disconnect gas cylinder. You need to submit your cylinder and regulator with the gas agency and to show them the original papers. They will provide you a transfer certificate, which you will need when you apply at your desitination. Sometimes getting a new connection is very difficult, so dont loose this paper.
• Disconnect Telephony services (with BSNL/MTNL it takes time). With private operators also its not easy, a lot of hassel to disconnect the connection. So possibly apply early. With mobile connections, you can go to the destination city and change it there. Make sure to collect deposits if any.
  
• Disconnect other utility services like cable TV, Milk, Newspaper/magazine subscription.
  
• Talk to your landlord and discuss the return of deposits. In India, getting back deposit money is still not easy, landlords creates lot of problems while returning back money (despite having lease agreements).
  
• It is better to close saving accounts (unless banks like private banks advocate transfer). With new employer you usually have to open new account. With so many relocations, I had close to 7 saving accounts. Now I have closed three. It will be better to inform the bank of new address before you leave so that you dont miss any valuable communication. This can be done on the last day of your stay.
• It is usually good idea to search for the contact details of the all the services you might need at your new house before you leave using the internet (if you have one and do it before you disconnect). The services might include water purifiers, inverters, white goods, satellite radios etc. It is good idea to donate any potted plants to a local park.
  

Documents, Jwellery, Cloths

• Make sure that you keep aside the important documents, jwellery and cloths that you will need before you things arrive in the new city. Keep the important documents handy like gas transfer voucher or new company's appointment letter, you certificates etc.

Mixing Sarsawati with Laxmi

I recently read an interesting piece of news. Mumbai University might be listed on BSE and a retail investor can trade stocks of university. Sounds unusal, yes it is indeed unusal. There has been a hot debate going on on the campus about the positives and negatives of it, but I think, discussing about it, dreaming about it is totally different than actually implementing it. First, implementing it will be a mammoth task given the government control over it and then there is a question of advantages of such a move. The proponents claim that they can garner huge amount of corpus by public listing and can use it to push the university to higher levels. I have strong doubts, though the idea is interseting. A university can never be modelled on the lines of profit making business. A company can grow fast and move fast, benefitting its shareholders, but not a unversity. The biggest fallout could be commercialization of the courses. The authorities, bounded by vision of increasing shareholder's profit, would be bound to keep the courses only which has higher demand. There are lot of other negatives I can see when the prime motive for the univesity is to increase the profits. The article truly sums up by saying "Why mix Saraswati with Lakshmi?" Why, indeed.

What to consider before buying Householder Insurance

When you talk to old people, they usually have lot to praise about joint families and their advantages, but young generation needs more freedom than a nagging family members telling them what is right and what is wrong at each point of their life. So here we have the concept of nuclear families (mostly DINKs) gaining more and more acceptance. Also with most people the birth city is different from the work-city, so this is an accepted fact by everyone. But with nuclear families comes their own problems and the biggest one is that, even though the assets are bought at higher pace (due to increased earnings), but so is the risk of loosing it all in either accidents or a house break. How can someone prevent it or at least take precaution (financial) about it?

The most usual and simple answer is to take an insurance against household property. This is called a householder's insurance policy. Even I am thinking of taking one despite the fact that I do not own a house yet. What a householder policy might cover (an example) ranges from burgalry to Workmen's compensation act.

But what should one keep in mind while taking such a policy? Here is a brief guideline on what to consider before buying it:

• If you are insuring against house damange to fire or earthquake, make sure you dont just insure for the house's current price. Why? A house price also contains the land price. If say your house get destroyed in a fire or flood, as per the insurance policy, only the price of house infrastructure will be repaid, the land stays there, it doesn get destroyed so they wont give back the entire money. If you insure just against the house price, you are under-insured.
• Building and FFF (furniture, fixtures and fittings), for instance, should be insured on a reinstatement basis because in the event of a loss, both would have to be replaced at today’s cost of construction or replacement.
  
• Dont insure your house on basis of cost, rather insure it against the money you would need to build it today.
• A similar argument goes for household goods, if you insure it against purchase price then after depreciation you wont get much back in a claim.
  
• When you insure your jwellery or household electronic items, describe them as accurately as possible, with serial numbers or photographs taken.
  
• Also think about taking a Workman compensation policy cover. This is to cover charges that might occur to domestic servants in case of accidents or damages while working at your house.
• Read the burglary cluse carefully, it is mentioned that the house should not be vacant for long periods (one month or more) for claim to be refunded.

ICICI hikes service charges

It is a bad news. With everyone seems to be eating up your income, this is another setback to the banking customers. Private banks like ICICI & UTI have decided to increase the charges for services like ATM cash withdrawl & if customers fail to maintain the quarterly balance (Rs 5000). This will be applicable from July 1. ICICI has also increased charges for PIN regeneration and ATM usage of non-partner banks. ICICI Bank customers, who fail to maintain QAB, will now be able to avail of only five free ATM transactions as against the earlier six and thereafter they would be charged Rs 50 per transaction instead of Rs 25 per transaction earlier. According to banks the move is made to penalise customers who do not maintain the necessary balance or issues unnecessary cheques (penalty increased for cheque bounce). Currently there is no fixed guidelines set by RBI for "how much banks can levy such charges?" and usually this is fixed by the competition in the market. With the increase in education cess (3%) and the service tax of 12%, the effective income tax any way has shot up. With small things like ATM transactions now attracting huge fees, customers now have to rethink befire using banking services everytime.

Home Loans Squeezed

In another news, the FM has directed state-run banks to go slow on personal and home loans higher than 20 lakhs. With the rising interest on home loans, it anyway has become extremely difficult for individuals to dream of owning a decent house. So this is definitely a big blow to everyone who wants to own a house. Considering that the home rates are skyrocketing in metro cities like Banglore, Hyderabad and Delhi, dreaming about your own few hundred square feet has become more difficult.

Although the step is taken to curb inflation and ease out industries which are overheating, but I think the limit of 20 lakhs is just a bit low to even filter out average buyer. So the only choice for an aspiring owner is to visit the nearest private bank, which now can muscle around with difficult terms and conditions (which anyway are too convoluted). It looks like bad news all around.

MCX ties up with IIMA

This is a piece of new I read in ET today, I still wonder, are the commodities market so much booming? At least the retail investor is very very far away from it. Here is the news

THE booming commodities market has now caught the fancy of the premier B-school Indian Institute of Management, Ahmedabad. The institute plans to set up a commodities chair in association with the Multi Commodity Exchange of India (MCX). With this, the institute will now increasingly conduct focused research on different commodities, including the demand supply, production and trading patterns.
“We want to encourage good market research on commodities, so we have tied up with IIMA to set up a research chair at the institute,” said Joseph Massey, deputy managing director, MCX.
It is also talking to a few other IIMs for possible collaborations. The commodities market is already catching the fancy of the management schools. The IIMA, which recently held an agri festival ‘Amaethon’, also held commodity trading games as a part of the event this year. Many students from the PGP-ABM (post graduate programme in agri business management) are increasingly opting for careers in the commodities market.
Booming economy, good returns and fast expanding network of commodity exchanges have given momentum to commodities trading market.
The total commodity futures trading volumes in the last financial year have increased to Rs 37 lakh crore from previous year’s Rs 21.55 lakh crore.

Buying First House, Cheers!

THE government is planning to seek long-term loans from multilateral finance institutions like ADB and World Bank to provide credit to Indian housing finance companies at competitive rates. This would enable housing finance companies to provide home loans to customers at a much lower rate. This facility is being considered to provide cheap loans to first time home buyers.

“We are considering a proposal to provide housing finance companies direct access to cheaper credit contracted by the Centre from multilateral institutions for building infrastructure. Though the proposal is at initial stages of discussion, the issue is being pursued seriously to provide relief to home loan segment,” an official of housing ministry told ET.

A proposal from the housing ministry to offer cheaper loans to first-time home buyers is under consideration of the finance ministry. Once approved, the Centre would work out details of loan agreements with multilateral institutions for this specific use, the official said.

The new mechanism is being considered to cool down the cost of finance for the housing sector. If it materialises, the step would come as a major relief to consumers who have seen a spurt in interest rates due to high inflation.

Home loan rates have moved up between 200 percentage points and 300 percentage points since the last one year. The current cost of fixed rate home loans varies between 12% and 14%. The rates under floating option is slightly lower than this. Under the new system, housing finance companies could access funds at a much lower rates of about 5-8%. This would enable them offer home loans at less than market rates even if a premium is charged on funds secured from multilateral agencies.

While the housing ministry is taking forward the proposal, a Planning Commission working group had earlier suggested the same to give a boost to the housing sector.

Via [TOI]

SIP only in month end

I was reading an article in ET about how it is beneficial to go for choosing dates in SIP at the fag end of the month. The idea is that historical data reveals that NAV is always lower during the month end. So if your SIP is timed such that you buy units at the end of the month, you will get the units at lower NAVs compared to other days. The suggestion is to time the buying of units between 23rd to 2nd of next month. This has been corroborated by the following data and the saving can be as high as 3.5%.

I find this advice a bit counter-intutive. If you closely look the % saving is continuously reducing from year 2000 and there is as such no clearcut pattern. Also a retail investor chooses SIP primarily to enforce a disciplined saving. The risk-takers usually don't go SIP route and also those who have lump-sum amount to invest. SIP is particularly popular amongst the salaried people. Now if someone choose the SIP investment date at the fag end, it would most likely be a time when the salaries have been splurged away with all the purchases and expenses. This might lead to another problem of cheque bounce or direct-debt insufficient cash situation. The best time is to make it as soon as your salaries come, this way the money is already gone into saving.

Excel Based Mutual Fund Portfolio Tracker

Here is an excellent tool from Purna Chandra. He explains how to create an excel sheet based mutual fund portfolio tracker. He has generously allowed the excel sheet to be downloaded. Just remember that everytime you open the workbook, go to "NAVs" sheet and refresh the data. [Select anywhere in the table, right click and say Refresh Data].

Happy New Year !!

Welcome to the new year !! I am not talking about the calender year, but the financial year. An average person does not care much about it and why should he? He has already gone through the mind-boggling exercise of arranging income-tax papers and investments etc and now is a time to take a sigh of relief. In India most of us follow the "college habit approach" to investments. I remember during the college days we use to study for the exam only when it looks fast approaching.

Most of us adopt a similar approach while putting their money for investments. And the worst part is that almost everyone looks at investment as a tax-saving avenue. I would expect that if government withdraws tax-advantage out of investment schemes, no-one will want to put their money. This is sad because the goal of personal finance is to optimally use the money you earn during your working life and having a security against all mis-haps in your life. The goal should not only be to save the tax but to iron out the financial ups and downs in one's life.

April is a significant month financially. This is the time when an individual is either flush with year-end arrears credits/claims/reimbursements or in deep financial trouble due to heavy cuts on account of large end-of-year income tax payout.

So here is a short guide to mangae "April Blues" :

1) Start Early : It is easier said than done. As I was writing this I realised that I have to fill a tax-declaration for financial year 07-08 to my employer. Now this can be a good starting point. Take some time out of your busy life and spend on quality discussion with your spouse/family members on how you want to manage you finances this year. There are some investments you are "stuck" with like that insurance policy you took just to fill up the Sec80C quota last year. Think carefully on what you need and what you can manage this year.

2) Identify investments for tax-saving purpose and those for purely investment purpose. Look at the various sections. Here are some major sections for tax-saving

Section 10 & 17 : HRA Exemption, Medical Exemption, LTA Exemption etc
Section 80D : Medical Premiums
Section 80E : Higher Education Loans
Section 80C : LIC, NSC, PPF, Housing Loan, MFs etc etc (an upper limit exists)

Some sections would exist where you already have invested and have a committments like LIC premium or MF SIP route.

3) Make sure you understand the changes in the income-tax sections as announced in the budget. You can either talk to a financial consultant or check out internet for the new laws. For example, the section 80E for higher education loan has been changed which allow you to get higher educaation loan exemption benefit even when the loan is taken by your children or spouse.

4) Once you have the list of you out-goes for tax-saving purpose (which are almost mandatory), think of the inflows thoughout the year and the possible expenditure. Expenditure are of two types : Planned & Unplanned(which can be further divided as Unplanned Necessity and Unplanned Luxury). For example, if you are planning to take a abroad trip or you want to buy a car then plan for it now. These are planned expenditure. You can even put money into short-term investment options to offset any inflation or any excess in the estimated price. When you spend on impulse buying like you went to a mall and instantly liked a new mobile phone, you just go ahead and use that plastic money (a.k.a credit card), that is an unplanned luxury expenditure. Make sure you put brakes on such unplanned expenditure by having an upper limit on it and sticking to it.

I put brakes on such an unplanned luxury expenditure by following rules:
a) Spend all luxury expenses through credit-card
b) Fix an upper limit of maximum one-month salary
c) If we are about to reach that limit, then stow away all credit cards/debit cards into a locker at home. If you dont have the card handy, you cannt be impuslive in buying. Sometimes its inconvinient but thats the price I pay for splurging on other times :-)

You should also reserve some cash for contingencies like accidents or illness. That would be Unplanned Necessity.

5) Once you have chalked out your in-flows and out-flows, then you can easily know how much extra money you have. Some part of this now can be put into long-term options specifically tailored for investment purpose and not for tax-saving.

It looks like a lot of headache to plan, but once you do it, you will rest in peace (of mind that is)!!

PPF with ICICI !!

I realised that banking experience in India is still a long way to go. I had a PPF account opened with SBI in Noida but I could not contribute much to it. When I wanted to shift the correspondance address on the PPF account to my current hyderabad account, I was told that I need to transfer the account to a hyderabad SBI branch which took almost like two-three months. Now I have again shifted out of hyderabad and does not have patience to shift the account again. I wondered why no private bank offers a PPF account facility with a direct debt from saving account. This ensures a speedy and hassle-free saving to any PPF account. This also automatically puts a regular saving discipline.

After searching a bit I found that ICICI bank is authorised(PDF) is authorised by Ministry of Fianance to collect PPF money in select branches. So when I went to one of the local branch, the person there bluntly told me that we dont open PPF accounts. He told us to visit some other branch. When we went to one of the main branch in the locality, there also the story is repeated. We had to forced them to talk to the manager, who finally accepted that a circular has come but no one till now has asked us to open a PPF account. After a lot of argument and pain, I finally managed to open an account for my wife. But again we didnt got the direct debt facility.

Survival Guide on how to manage financial documents?

As the number of your service years grows and with marriage and other family responsiblities, everyone faces the problem of properly managing various documents (mainly financial) since these keep on growing. Noone is sure of when one will need which document. I am also slowly facing the same situation, the documents are piling up and I don't have a full-proof method for storing them.

So what are the requirements for managing documents:

a) An effective classification method
b) A fire/flood/theft proof method
c) Easy to access when needed
d) Easy to add/subtract documents when needed

I was trying to find some methods people use and came across The Noguchi Filing System or Neat Receipts or using softwares like Quicken, M$ Money or some people use the traditional shoe-box method.

The biggest problem with me is that I am never sure of which doument to keep until which time, while led me to keep everything forever. This leads to huge pile-up of documents which becomes really really un-manageable.

I have not came across any Indian government guidelines on how long to keep financial documents, similar to what US-government (IRS) suggests.

A few guidelines can be useful though

• Keep all the tax-related records for atleast ten years.
• Keep quarterly retirement/savings plan statements until you receive an annual
• statement. If the numbers match, shred the quarterlies and keep the annual summaries permanently.
• Keep the important bank records for atleast five years; shred unimportant documents immediately.
• Keep brokerage statements until you sell the securities.
• Most of the time you can shred bills once you get a cancelled check. Keep bills for big items permanently. Keep the bills if it involves a warranty period.
• Keep credit card receipts till it matches with your statements, then keep the statements for five years.
• PaySlips should be kept until you receive your Form-16 at year end.
• Keep house records permanently.

Remember: If possible, shred all financial documents when you get rid of them.

This is just a vauge guideline and individual discretion is solicited.

Tax Guide For First Timers

I remember the day, some few years back when I got a mail from my employer about submission of income tax-proofs. It got me into tizzy since that was the first time I had come under this process. A fresh graduate on landing a good job had never thought that goverment will play spoil-sport to him at the end of financial year.

With India shining, employement is rising and so is the entry level income. This is typically true of IT, ITeS industry where income level are sufficiently high for fresh graduates to seriously considering income-tax investments.

A first timer (I am only taking about service class first timers) should keep following things in mind:

1) Income tax calculation is NOT rocket science. A careful thought and study can easily unravel the mystry.
2) Do not make any un-informed decisions while saving for income-tax.
3) Usually employers deduct a portion of your income towards the tax every month. This is a good thing since this makes sure that you are not loaded with the entire income-tax at the end of year.
4) If your employer does not deduct any income-tax (which is extremely unlikely) then he is not showing you as a regular employee of the company on its payroll. Just confirm it.
5) Income tax rules change every year, so you should be aware of the latest rules for current financial year.

Some terminology which will be helpful for first timers:

Calender Year: January to December

Financial Year: April to March (currently income tax follows this cycle)

Income Tax: An amount of your income that goes to governement (what it does with that money is open to debate)

Tax Liability: The amount of tax you are liable to pay to government.

PAN : Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department. It is mandatory to quote PAN on return of income, all correspondence with any income tax authority.

Salaried Individual: You (this only includes your income)

Form-16: A form provided by your employer after all tax-calculation. This is the form that needs to be submitted to the goverment. It essentially tells what amoung of income you got and what amount of tax the employer cut and if there is any pending tax-liability.

Provident Fund: A fund set aside by government where an employer has to put certain portion of your income into it. Usually a same amount is put by employer on your behalf. So if 2000 INR is cut from your income and put into PF, then another 2000 INR is put by employer in your name into the PF. All the money in the fund belongs to you but only when you retire. So essentially government is making sure that even if act carelessely throughout your life without saving a single penny, you will have some amount of money in your PF account post retirement.If an employer makes you sign a declaration that you do not want a PF, do not sign it. Ask your employer that you need the PF.

Exemption: A tax-exemption implies that certain part of your income can be exempted based on certain criterion or if you spend your income on certain things (e.g. charity), you wont have to pay tax on the money you spent.

Deduction: If you put your money into some schemes or for some specific purposes, then you get a deduction

The main difference between 'exemption' and 'deduction' is that exemption is taken out before your gross taxable income is calculated, while deduction is reduce from gross taxable income to get the net taxable income.

Gross Taxable Income : This essentially is the amount you earned in this financial year.

Net Taxable Income: This essentially is the amount of your gross earnings that will be subjected to tax.


Income tax calculation is very easy, the confusion occurs because different people have different needs and different cases.

The indian income tax follows a progressive tax structure. The laws are made by Finance Ministry and modifications are made usually every year. The current tax-slabs are as follows:

Few important things to remmeber

a) There are various sections of Income Tax Act, few of which are important to know before you plan your income-tax saving.

b) The idea of providing income-tax deductions by the government is to increase the saving habits of an individual.

c) Investing for income-tax saving should not be confused with your other financial goals.

When you join a company, it usually asks you to fill "investment declaration". This is nothing but a declaration from you about how much investing/expenses you will be doing throughtout the financial year which can be accounted for tax-deductions or tax-exemptions. This declaration is just an estimate and has nothing to do with your final tax-investments. But it is usually best to be as close as possible to your actual investments. This is because all throughout the year your tax-deduction at source by the employer is done on this basis.

Around the timeframe of Dec-Jan, your employer will ask for actual proofs of investments for tax-calculation. This is the time-frame which is important, since in the coming Feb-March your income tax will be cut based on what proofs you submit. So if you fail to proivde any proof in this timeframe, your employer will cut taxes based on the fact that you have not done any investment (implying higher tax cut). In such a case, if you do invest in Feb-March, which is still in the current financial year, you will not benefit since the tax will already be cut. Although you will get your money back from IT department but that is a long-drawn process.

Then around March-June, your employer will give you a Form-16, which you need to submit to IT department. Once the Form-16 has reached you, your employer's responsiblity is over and now its time for you to submit it. If you loose it or are unable to submit, you will face penalty.

Some important sections under the current Income Tax Act for year April 2006- March2007 are as follows:

(Pic taken from the excel sheet by http://www.ynithya.com/taxcalc)

The most important for you would be :

a) HRA exemption: Your salary would have a component called HRA or House Rent Allowance. If you stay in a rented house, then you can avail this exemption. The formula is quite complicated

HRA Exemption = minimum of { 40% (50% in metro) of Basic+DA OR
HRA OR
rent paid - 10% of Basic +DA}

In most cities, the house owner refuses to give any receipt of the rent, then most people make fake receipts. Try to avoid such situations as far as possible.

b) Higher Education Loan Interest Payment Sec 80E : If you have taken education loan for higher studies, the EMI you pay consist of paying back prinicpal and interest. The amount of interest you paid in this financial year can be used as deduction under this section. Beware that just the interest repayment and not prinicpal repayment can be deducted.

c) Section 80C deduction : To increase saving from individuals, govt has decided to have a upper limit of 1 lakh INR investment under this section to be deducted from gross taxable income. Every scheme under this section (see list above) has pros and cons, so choose wisely. The following table will help you guide which investment has tax-benefit. The major change that has been introduced is that the interest/dividend generated from some schemes have become taxable making such schemes less attractive.

MIN is meaningless

It seems that government agencies work mindlessly. Check out this news about introduction of MIN (Mutual Fund Identification Number).

Investors putting in 50,000 rupees or more in a mutual fund from Jan. 1, 2007 will have to provide a mutual fund identification number (MIN) or apply for one, the Association of Mutual Funds in India (AMFI) said on Wednesday.

The idea of MIN is that "investors dont have to fill forms everytime they invest in various MF schemes and just quoting MIN is enough". On the first appearance it seems like a good step by AMFI to reduce paperwork and ease the investment process. Currently the MFs have to follow the Know Your Customer (KYC) norms which mandates them to ask for photographs, address proof and identification proof like passport or PAN. So the once a MIN is established, any investment in MF in any scheme can be done by just quoting MIN.

But I feel that it will just add more headache in allocating and maintaining the MINs. All investors usually provide a PAN number which is fast becoming synonymous with the social security number of developed countries (at least in terms of financial transactions). The PAN is obtained after proper identification of an individual after submission of photographs, residence proof and other such details. So I fail to understand what extra is achieved by introducing MIN. All major banking transactions need PAN number, any income tax details need PAN number, so I think all transactions can be cross-verified and checked using PAN alone. I feel that quoting a PAN number should be good enough to identify a person.