Infrastructure bonds: Some caveats

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The budget this year was a low-key affair, at least from the political arena, it is just the petrol prices that is causing some stir. So apart from the tax slab changes, that brings more money into pockets of salaried employees, there is additional tax saving investment avenue that is proposed in this year’s budget i.e. infrastructure bonds.

What is announced?
The government has allowed a deduction of up to Rs 20,000 on investments in long-term infrastructure bonds. The deduction is in addition to the Rs 1 lakh allowed under Section 80C of the Income Tax Act.

What are infrastructure bonds?
These are bonds issued by government and the fund collected is utilized to bolster the infrastructure projects


What is the income tax section under which deduction can be claimed?
The investment of upto Rs 20,000 can be claimed under section 80CCF.

How much can I save?
Not much and here is the caveat, the maximum investment that can be claimed for deduction is Rs 20,000 and if you fall in the maximum tax bracket of 30%, then the maximum you can save is just Rs 6,180 in a year.

Is this a new great thing done by the Finance Minister?
Not really, the tax deduction for investment in infrastructure bonds was available till 2005 under section 88 (but within the limit of 1 Lakh), but 2005 budget scrapped individual investment limits and created section 80C where you can invest in any tax-saving avenue in any proportion. The only new thing here is that now, the investment in infrastructure bonds is in addition to the section 80C exemption.

Why it is added back with such a small limit?
Well, here is another caveat. The infrastructure bonds are a low-risk investment and hence does not yield very high returns (7-8%). So with stock market showing master-blaster performance, most people started investing in equity linked saving schemes and the investment dwindled in the infrastructure bonds. This step is probably to bring back the interest in these bonds.

What are the other caveats?
1) It is still not clear if the private companies will be allowed to issue these infrastructure bonds.
2) The budget mentions that only “long-term” investment in infrastructure bonds quality for tax-break, but fails to define the “long-term”
3) The interest earned from these bonds is not tax-free (the older section 80L, which provided such tax-free interest had already been scrapped earlier)
4) The interest earned from these bonds may not be anywhere spectacular, due to it being a less-risky investment.

What do you suggest?
So, it may not be prudent to invest Rs 20,000 for “long-term”, which provides you a return of mere 7-8% interest rate (with taxable interests) with providing just a meager tax-saving of Rs 6180 per year. I would suggest a wait and watch policy, till the clouds get cleared on this new announcement. Since anyway the investments will only qualify from next-year onwards.

Time Value of Money

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You must have heard “Time is Money”, but do you know what is Time Value of Money? No… then blame the economists. I guess economists love to twist the common sense language into incomprehensible mumbo-jumbo to confuse the common junta.

(Picture courtesy Sam Fox)  Okay, here is another way to look at the this terminology: If you are offered 10,000 INR today or after one year, what will be your pick? Easy, huh. Only a nut-head would choose the later. But why? Well because money “NOW’ can be invested to earn more money later, or it can be utilized right now for any material gratification or who knows what will happen one year later!! What-ever the reason, everyone attaches some “time value” to the money.

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There are basically two reasons why people attach time value to money :

  • Possibility of growing the money over a period of time
  • Possibility of purchasing less in the same money over a period of time 

This simple concept becomes extremely complicated when we start applying this to practical situations. Here are some examples, where this concept is utilized:

1) How much is the present value of 100Rs paid after a year?

2) What is the monthly payment of a mortgage of Rs 200,000 at annual rate of 6% for 10 years?

3) If the investment scheme promises 10% annual interest, in how many years my present money of Rs 100 will get doubled?

4) In a different way,how much rate of interest should a scheme have if I need to double my money of Rs 100 in 5 years?

5) If I invest Rs 1000 for 20 years at 7% rate of interest, what is the final future value discounted back to its value today?

6) You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to draw out of your savings at the rate of Rs10,000 per year. How much would you have to pay in equal annual deposits until retirement to meet your objectives? Assume interest remains at 9%.

7) If you get payments of Rs 15,000 per year for the next ten years and interest is 8%, how much would that stream of income be worth in present value terms?

8) How much would you pay for an investment which will be worth Rs 60,000 in three years? Assume interest is 5%.

9) You are considering the purchase of two different insurance annuities. Annuity A will pay you Rs16,000 at the beginning of each year for 8 years. Annuity B will pay you Rs12,000 at the end of each year for 12 years. Assuming your money is worth 7%, and each costs you Rs75,000 today, which would you prefer?

10) You deposit Rs17,000 each year for 10 years at 7%. Then you earn 9% after that. If you leave the money invested for another 5 years how much will you have in the 15th year?

All these and many more questions can be answered correctly if you understand the concept of time value of money. If you are mathematically inclined, visit the wiki page or check out this video.

Superman syndrome

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I came across an interesting term called “Superman Syndrome”. [Picture Courtesy: frazer4eos] If you try to google the term, you will be surprised by the lack of single concrete definition. You may find many books with title containing this word, but not a single definition. But each definition essentially contains a similar idea which imply:

“the concept of a supernatural ability, desire, drive to outdo and to overcome.”

It is not a positive term but rather connotes a negative meaning implying the exhibitionist attitude of a person busy in showing off and satisfying other people’s desires eventually working so hard that the person looses important things in life.

 "Life is what happens while you are busy making other plans." --John Lennon

I looked back and realized that many times in the past I have done one of the following:

1) Insisted on paying entire bill for friends at coffee shops

2) Bought cloths just because others think they look good on me

3) Purchased those expensive high-end cellphones when I went with friends, just to show-off

4) Purchases lot of junk items just ahead of  guests coming, since this may impress them

These are all behaviors of “Superman Syndrome", which essentially made me do things that are not based on prudent and realistic decisions but an attempt to satisfy other people's expectations and desires. But I was still fortunate that I did not spent large amount of money on buying house or that expensive four-wheeler just because I can impress friends, but  many do.

If you have done any of these or are still doing it, then you need to be extra careful and really need to think about why you are spending money on satisfying what other's value?

I have heard of many people complaining about busy lives, late night conference calls, 24X7 email/phone connectivity and hard life with this new information age. The entire idea is that "control of you life will come from within you",  so getting out of superman syndrome is most important task you will do for yourself and your family.

Robert Kamm writes in his book "The Superman Syndrome: Why the Information Age Threatens Your Future and What You Can Do About It,"

"the Superman Syndrome is a dangerous workplace success formula that forces men and women to leap tall buildings and outrun speeding bullets -- at the expense of personal lives, families, children and even business productivity. This represents a major hypocrisy implicit in nearly every boardroom in America: The belief that we should be accountable to work but not to our families."

Whether you spend money or your personal time or energy to satisfy what other people value most is surely a suicidal tendency towards life. If you are trapped in superman syndrome, take some concrete steps and hard actions to come out:

Actions to save your precious time which can be spent with family

1) Keep in mind that you do not need to answer that every email 

2) 24X7 connectivity does not imply getting addicted to emails and social networking

3) Work in an "interrupt mode" rather than "polling mode" with information high-way.

4) Keep aside minimum non-negotiable 4-5 hours of quality time everyday with your family, friends and kids

5) Celebrate a "no-gadget" day every week or at-least every two weeks.

Actions to save your hard-earned money

1) Keep in mind that you do not need to pay the bill every time you go out with friends

2) Limit yourself to spending not more than say 1000 Rs for impressing others, rest all purchases should be your value based.

3) Promise yourself to take that shopping list before going out for shopping and sticking to it.

4) Find other activities with friends that leads to least buying (e.g. jogging in park, going to library etc)

5) If your friends expect you to buy things for you, get new friends

6) Share "Superman Syndrome" and its effects with friends and family, spread the word and awareness

You will get, what you genuinely want. It is never too late or too early to ask for good life.