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Capital Gain

CAPITAL GAIN TO KNOW CAPITAL GAINS LET US FIRST UNDERSTAND WHAT ARE CAPITAL ASSETS…? Capital Assets can be land, house property, building, trademark, leasehold rights, machinery, patents and jewellery. FOLLOWING THINGS ARE NOT INCLUDED IN CAPITAL ASSETS…, Agricultural land in a rural area in India. Stock on trade. Personal used items such as wearing apparels and furniture. Raw material and consumable stores held for the purpose of Profession or Business. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999. Special Bearer Bonds, 1991, issued by the Central Government. 6.5% Gold Bond, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government. Deposit Certificates issued under the Gold Monetisation Scheme, 2015. WHAT DOES TERM ‘LONG-TERM CAPITAL ASSET’ MEANS? Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. In respect of certain assets like shares which are listed in a recognised stock exchange in India, units of equity oriented mutual funds, listed securities like debentures and Government securities, Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months. In case of unlisted shares, the period of holding to be considered is 24 months instead of 36 months. With effect from Assessment Year 2018-19, the period of holding of immovable property (being land or building or both), shall be considered to be 24 months instead of 36 months. Capital Gain refers to profit that is earned by individual from the sale of a Capital Asset. The profits arising from the sales of the Capital Asset is taxed under the head “Income from Capital Gain”. DO YOU KNOW…? Capital Gain Tax is not applicable to the Inherited Property, as there is an only transfer of ownership and no actual sales. Any asset which is received by way of Will or Inheritance is totally exempt from the Income Tax Act, 1961. Capital Gain Tax will be applicable if the individual who inherit the asset decides to sell it. WHAT IS LONG-TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN..? Gain arising on transfer of long-term capital asset is termed as long-term capital gain. Gain arising on transfer of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain. CAPITAL GAIN TAX SLAB Asset Asset Duration Short Term Tax Rate Short Term Asset Duration Long Term Tax Rate Long Term Immovable Property like House Less than 2 Years As per IT Slab More than 2 Years 20% with Indexation Movable Property like Gold/Jewellery Less than 3 Years As per IT Slab More than 3 Years 20% with Indexation Listed Shares Less than 1 Years 15% More than 1 Years 10% Over and above Rs.100000/- Unlisted Shares Less than 2 Years As per IT Slab More than 2 Years 20% with Indexation Equity Oriented Mutual Funds Less than 1 Years 15% More than 1 Years 10% Over and above Rs.100000/- Debt Oriented Mutual Fund Less than 3 Years As per IT Slab More than 3 Years 20% HOW TO CALCULATE LONG TERM CAPITAL GAINS ON SALE OF HOUSE…? To consider long term capital gains we need to first calculate Indexed cost of acquisition and Indexed cost of improvement. Indexed cost of acquisition = Cost of acquisition × Cost inflation index of the year of transfer of capital asset Cost inflation index of the year of acquisition Indexed cost of improvement = Cost of improvement × Cost inflation index of the year of transfer of capital asset Cost inflation index of the year of improvement EXAMPLE OF LONG TERM CAPITAL GAIN.. On 01st April, 2010, Mr. A bought a house worth INR 50 lakhs. He spent INR 3.0 lakhs on improving the house and he sold it in September 2019 for INR 95 lakhs. His agent charged him INR 95,000. The cost of inflation index for purchase that was made in 2010 was 167 whereas, in the year of sale the cost inflation index was 289. Particulars Amount in INR Full value of Sales consideration of asset ₹ 95,00,000 Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.) ₹ 95,000 Net sale consideration ₹ 94,05,000 Less: Indexed cost of acquisition (5000000 * 289/167) ₹ 86,52,694 Less: Indexed cost of improvement, if any (300000 * 289/167) ₹ 5,19,161 Long-Term Capital Gain ₹ 2,33,145 Maximum up to ₹ 50 Lakhs can be invested in 54EC Capital Gain Bonds in a Financial Year to reduce further tax. i.e. in the above example if the entire long-term capital gain amount is invested in 54EC Capital Gain Bonds then there won’t be any tax payable. EXAMPLE OF SHORT TERM CAPITAL GAIN.. On 01st April, 2010, Mr. A bought a house worth INR 50 lakhs. He spent INR 3.0 lakhs on improving the house and he sold it in December 2011 for INR 60 lakhs. His agent charged him INR 60,000. The cost of inflation index for purchase that was made in 2010 was 167 whereas, in the year of sale the cost inflation index was 184. Particulars Amount in INR Full value of consideration (i.e., Sales value of the asset) ₹ 60,00,000 Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.) ₹ 60,000 Net Sale Consideration ₹ 59,40,000 Less: Cost of acquisition (i.e., the purchase price of the capital asset) ₹ 50,00,000 Less: Cost of improvement (i.e., post purchase capital expenses incurred on addition / improvement to the capital asset) ₹ 3,00,000

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Liquid Fund

Leave a Comment / Debt, Mutual Fund / Rajen Gala

LIQUID FUND Where do you invest your salary when you receive? Do you spend the entire amount of your salary as soon as you receive? Till you spend your salary where does your money lies. Do you know? If you park some portion of your salary in liquid funds till you actually require, the income earned from such investment will take care of some of your expenses. Liquid investment means any investment that can be easily converted into cash without having a significant impact on its value. What is Liquid Fund? Liquid Funds are open ended debt funds that invests in high-credit quality fixed income instruments with short term maturity. These debt securities comprise money market instruments such as government treasury bills, commercial paper, corporate bonds, certificates of deposits with maturity period up to 91 days. How do liquid funds work? Net Asset Value of liquid fund doesn’t fluctuate much as other funds. Units are allotted as per previous day’s Net Asset Value if application is received before 1 p.m. Withdrawal requests are processed in 24 hrs. For regular transactions, with click of a button you can transact for purchase, switch or redemption. What are the benefits of investing in liquid fund? Higher Returns than Savings Account/Fixed Deposits: Liquid funds are gaining popularity amongst the retail investors because of their ability to deliver higher returns when compared to investment in Bank Fixed Deposits or Savings Account. Also, their high liquidity makes them a better alternative to Savings Account, given that the returns are comparatively higher for liquid funds. There is no drop in investment value. No lock-in period : Withdrawals from liquid funds are processed within 24 hours on business days. No entry and exit load : Unlike Fixed deposits, there is no penalty for exiting or breaking them. Taxation : Tax benefit compared to savings account and fixed deposit. Indexation benefit if withdrawn after 3 years. Diversification: Risk is divided in Liquid Funds due to investments in various Corporates and government Securities. Is there any Risk associated with Liquid Fund? Although liquid funds are not entirely risk-free, however, they are low risk-low returns and less volatile instruments. As they invest predominantly in debt instruments, they are subject to interest rate risk and credit risk. A change in the prevailing interest rates may cause a difference in the price of the debt instruments. Interest Risk A jump in yields causes prices of bonds to fall because of which most debt funds suffer. When the interest rates rise, the bond prices fall, and when interest rates fall, the bond prices rise. The bond’s yield on a price curve is steeper as the duration of the debt instrument increases. Credit Risk Liquid funds also invest in non-government debt like commercial papers, corporate bonds, certificate of deposits among other instruments. If any bond or commercial paper, fails to honour the repayment, the instrument will be downgraded. When the creditworthiness of the issuer is reduced, it has a bearing on the bond price too. Downgrading of the issuer will lead to a fall in bond prices which will, in turn, affect the fund’s net asset value. Putting money in a fixed deposit may serve the purpose, but only to a limited extent. One of the big benefits of a fixed deposit is the safety. At the same time, one of the limitations of fixed deposit is often ignored, the money can be parked for a fixed period only, there is no flexibility regarding the period of parking. That is where liquid mutual funds could be considered.

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Time Value of Money

Leave a Comment / Financials / Rajen Gala

TIME VALUE OF MONEY Some people put their money in a bank account; some make investments in stocks and bonds. Different people follow different strategies to keep their money on the move. All of them consciously or unconsciously realize time is the biggest enemy of idle money. But what makes a rupee in our hands today worth more than a rupee tomorrow? What is so different about currencies made of paper that the value of the same amount of money diminishes with time….? So, the concept of time value of money always influences our decision about what we intend to do with our money. Well… You need not be a philosopher to understand the concept of time value of money. A ₹2000 note today in our pocket is worth more than a ₹2000 note that we may get after five years. All of us intuitively know that. But let’s try to understand what actually makes the present value of money worth more than the value of the same amount of money after five years. Remember… Money is just another name for new opportunities. The money that you have now can open the doors for many opportunities. Different uses of money may have different advantages. Some of these opportunities may look very small but some of them might really put you on the fastest track to the future. Here’s a new term for you to know! If you invest your money now, you would earn a return which would make your money grow in the next five years. But the problem is you can choose only one of the many equally advantageous opportunities. All of us try to use our money for the best possible opportunity. The advantage that we forego by not putting our money in another possible opportunity is what is called the Opportunity Cost of Money. For example… So, if you are investing your money in a 10 year bond that pays you 9% interest, then you are foregoing an opportunity of putting the same money in a 10 year term deposit that pays you 7% interest. In this case, your actual advantage is only the 2 percentage points more interest that you earn on your investment in bonds. But always remember that different opportunities have different risks. Investment in bonds may be riskier than investment in term deposits. So you should always compare the risk adjusted return to find out whether you are gaining or losing in making a particular use of money. It is better to eat your breakfast before inflation eats your money! Today you can buy two pizza’s for ₹300, but maybe after five years you would be able to buy only one with the same amount. So you have to think if I give you an option of either taking two pizza’s today or one pizza after five years, which option would you choose…? How can you use the concept of time value of money to make intelligent decisions about your money…? The first thing you must keep in mind is that you should never keep your present money idle. Money has to grow with time. Invest it in stocks or bonds so that the return is good enough to at least preserve its present value. And still better, take the mutual funds route to take advantage of professional fund management services. To Sum Up If you invest Rs. 5 lakhs now, what should its worth be after 30 years if you are earning 10% return per annum compounded annually? For your knowledge, let me tell you that Rs. 5 lakhs would be worth Rs. 87.24 lakhs after 30 years. Almost appreciated by 16 times. The concept of time value of money says that the value of money at present is worth more than the same amount of money in the future. By making appropriate investment decisions, we can make money grow with the passage of time.

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Nominee

Leave a Comment / General / Rajen Gala

Who is Nominee? As per law, a nominee is a trustee, not the owner of the assets. In other words, a nominee is only a caretaker of the assets. It Means The nominee will only hold assets as a trustee and will be legally bound to transfer the assets to the legal heirs. What is nomination and why it is important? Nomination is a process whereby any person who is the owner of the assets, appoints one or more Person(s) as nominee(s) respectively who can receive the assets wherever nominated after the death of the owner. Nomination is usually done solely for the purpose of simplifying the procedure for settlement of claims of the deceased and is an ideal tool to reduce hardships during the settlement of claims in the event of the death of the person who has done the nomination. Even it will ensure that the property does not remain unclaimed or become subject to litigation. Important Things To Remember While Appointing A Nominee Mention the Full Name, Address, age, relationship with the nominee. Do not write the nomination in favour of wife and children as a class. i.e. I nominate my wife. Instead give their specific names and particulars existing at that moment. If the nominee is a minor, appoint a person who is a major as a guardian giving his full name, age, address and relationship to the nominee. In the case of deposits with a bank the Reserve Bank of India (RBI) has clarified that upon the demise of an account holder, the nominee would receive the balance from the deceased\’s account, to hold \”as a trustee of the legal heirs of the deceased\”, and that such payment by the bank shall not affect the right or claim of any person against the nominee. With respect to mutual fund folios, on a cohesive reading of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, and the applicable forms, it can be understood that upon the demise of a mutual fund unit holder, the nominee will merely be holding it \”in trust\”, and the legal heir is free to make a claim over the folios against the nominee. In 2016, the Bombay High Court laid to rest the position of a nominee versus a legal heir in relation to the shares of an Indian company. The Court held that a nomination does not in fact, override the laws of succession in India. A nomination is made with a view to ensure that the estate of the deceased is protected until such time the legal representatives of the deceased can take appropriate steps towards succeeding to such estate. Thus, the nominee of shares of an Indian company is not the legal owner of the shares and therefore, the legal heirs of the deceased shareholder would have a rightful claim over such shares. In case of immovable property, the property can be transferred to the nominee but the actual ownership of the Immovable property clearly lay with the legal heirs of the deceased. Are there any exceptions to this rule? In relation to succession of insurance proceeds, it should be noted that there was a relevant change in insurance law, in 2015, whereby the concept of a \”beneficial nominee\” was introduced. The change provides that if a policy holder names his parents, or spouse, or his children, or his spouse and children, or any of them, as the nominee, such person(s) shall not act as a mere caretaker or trustee but shall in fact be treated as the ultimate beneficiary of the monies payable by the insurer, to the exclusion of other legal heirs. However, it is not mandatory to nominate a beneficial nominee, and if the nominee is a person other than those specified above, the general rule would prevail, and such nominee would hold the monies as a caretaker / trustee for the legal heirs. A Nominee and a Beneficial Nominee – what does it mean? A nominee is just the receiver of the money. He has to eventually hand over the monies to the legal heirs. He himself cannot consume the money unless he is the legal heir. In case of death of the life assured, benefits are payable either to the nominee(s) where a valid nomination has been registered by the company or to the legal representatives who obtain representation to the estate of the policyholder or to such person(s) as directed by a court of competent jurisdiction in India. A beneficial nominee is the end consumer of the money received under the insurance policy claim. Therefore, if you have made someone a beneficial nominee during the issuance of policy then in such case that beneficial nominee has the right to use money received during the claim settlement. Under the new Insurance act, Parents, Spouse and Children, if any one of them is the nominee in the policy, they automatically become the Beneficial Nominee and hence they can consume the monies too.

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