Budget 2017 is Unique – What can salaried class expect?

Budget 2017 is unique in many ways.

  • It’s the first time budget is being presented on first day of Feb instead of the last day
  • It’s the first budget after demonetization
  • It’s the last budget before GST kicks in
  • It’s a budget being presented just before one-fifth of the nation is scheduled to go to the polling booth

With much publicized and fiercely debated Demonetization, implemented just 3 months back, there are high hopes that Salaried class has from this budget. One of the key points in favor of Demonetization was to unearth the Black Money, which in-turn should result in expansion of the tax payer base. With increase in tax payer base, the immediate fallout should be reduction in effective tax rate. This could be done in multiple ways like

  • Tweaking the tax slabs. For eg like below
Tax Rate Income Slab Example of New Slab
Nil Upto ₹ 2,50,000 Upto ₹ 4,00,000
10% From ₹ 2,50,001 to ₹ 5,00,000 From ₹ 4,00,001 to ₹ 8,00,000
20% From ₹ 5,00,001 to ₹ 10,00,000 From ₹ 8,00,001 to ₹ 12,00,000
30% Above ₹ 10,00,000 Above ₹ 12,00,000
  • Tweaking the tax rate. Like introduction of a new tax slab of say 15%
  • Enhancing the limit in section 80C to say ₹ 2,50,000 from the current ₹ 1,50,000

Whatever is done, one thing is clear – reduction of effective tax outgo is one thing that is nearly unavoidable (both financially and politically) – and rightly so as it’s high time to reward the honest tax payers at the expense of those who have been evading taxes.

On the contrary, the real impact of Demonetization shall be know in FY 17-18 as this year, the impact has been for only a very short part of the whole duration. Thus the real impact on tax rate should happen in Budget of 2018 but today is going to be the pre-cursor to that. Stay tuned!!


Optimizing returns in lower interest regime due to Demonetization

Proof-of-the-pudding of the statement ‘…the things are not completely rosy as the rate of return on some asset classes is expected to come down as well…‘ mentioned in the previous blog of this series – Impact of Demonetization on Individual’s Financial Goals is that the interest rates on bank deposits are already seeing a downtrend (refer News here)

This reduction in interest rate is going to impact the other market instruments like debt market funds (that shall see a sharp rise in their prices), fixed return instruments (rates shall come down significantly), small saving schemes like PPF/EPF (interest rates shall be lowered as these are market-linked).

The above shall in-turn impact the accumulation of funds for individual financial goals. Before looking at measures to be taken to counter this, let’s look at the impact on accumulation of fund with decreasing rate of return



Below are some of the measures that one can employ in low interest regime staring in the face of investors.

  • Individuals with investable surplus could park the funds in either company fixed deposits (all of which have or are in the process of lowering their interest rates) or invest in long term debt mutual funds (that are expected to see a drop in yield thereby giving a good capital appreciation)
  • Individuals without investable surplus but with regular monthly flow could opt for Recurring Deposits (refer Protecting future investments against falling interest rates blog for details on how RD can be used as an instrument to lock-in currently available higher rate of return for amount to be invested in future)
  • For individuals with higher risk appetite, equity based mutual fund is expected to become darling of the market – given that there are expected to be very few avenues left for investing in future (for details, refer to next blog in this series – ‘Why Equity market should emerge as top investment destination post Demonetization?’
  • Revisit asset allocation and move to tax efficient avenues to enhance the net returns

As Henry Ford said – ‘If you always do what you’ve always done, you’ll always get what you’ve always got.‘ – it’s thus time to invest differently to tide over the changes in post-demonetization era.

Impact of Demonetization on Individual’s Financial Goals


As recommended in my first blog ‘Impact on individuals with this MODIfied India’ in this series ‘Impact of Demonetization on Personal Finance’; the stock market did witness a panic selling on 9th Nov. All those, who had heeded to the advice on buying in that fall, would be sitting on around 20%-30% profit by the end of the day, if invested in fundamentally strong stocks.

Since the Demonetization, a lot has been said and written about the impact of Demonetization on Economy. In today’s blog let’s try to understand the impact of this decision on Financial Goals of an individual.

One of the biggest impacts, that Demonetization is going to have, is that it shall weed out considerable amount of Black Money from the system. One of the bye-products of Black Money is high Inflation. With this cleaning up of the system, inflation is expected to drop considerably. In fact, we might even witness deflation for some time due to this, however, in medium to long term, the inflation shall be tamed.

One of the important factors impacting the financial goal is the rate of inflation. For a goal that is farther away, minor change in the inflation could lead to major fluctuation in the goal amount. Let us take the example of our old friend, Amit, who is now married and have a kid. Amit’s dream has been, to send his kid to a reputed college for a professional course. The current cost of the course is ₹25 Lacs, and the kid is expected to go for this course after 21 years. Assuming an inflation of 8% the cost of this course is going to be close to ₹1.26 Cr after 21 years. The following table depicts the difference in the end amount with various inflation rates.

Current cost of course ₹    25,00,000
Number of years to achieve the goal 21
Rate of Inflation 8% 7% 6% 5% 4% 3%
Cost after 21 years ₹ 1,25,84,584 ₹ 1,03,51,406 ₹ 84,98,909 ₹ 69,64,906 ₹ 56,96,920 ₹ 46,50,736
Difference when compared to 8% base ₹    22,33,178 ₹ 40,85,675 ₹ 56,19,678 ₹ 68,87,664 ₹ 79,33,848
Percentage saving compared to 8% base 17.75% 32.47% 44.66% 54.73% 63.04%

From the above table it is evident that the savings could be as high as 63% if the inflation drops by 5%. Even a 1% drop results in a saving of close to 18% in the amount needed at the time of admission. Amit shall thus be able to attain the goal by investing much lesser amount than he envisioned at the beginning.

However, the things are not completely rosy as the rate of return on some asset classes is expected to come down as well. To understand this, stay tuned for the next blog in the series – ‘Optimizing returns in lower interest regime due to demonetization’

Should you have any query related to any of your goals or above views, feel free to leave a comment.

Impact on individuals with this MODIfied India

9/11 of US changed US (and the world) forever and 9/11 of India shall go down in history as the day that changed India forever.

By now everyone must be aware of the decision of making Rs 500 and Rs 1000 currency notes illegal from 9th Nov, 2016.

This is expected to have an everlasting impact on Indian economy but also impacts individual’s financial goals and planning.

At the onset following is expected

  • Inflation should come down heavily
  • Property prices shall crash
  • Gold prices might crash – though the people holding physical gold would keep it closer to them than earlier
  • Due to liquidity crunch, there shall be all round selling in stock and bond market

There shall however, be good opportunities for tax paying citizens who have enough white money. It is recommended that one keep their cool and look for opportunities to invest.

Stay tuned for a series of blogs related to how you can make the best of this situation and uncertainty and ensure your financial goals are met earlier than expected.

Immediate tip – Invest in stock market and mutual funds on panic selling. 

8 reasons to not miss Sovereign Gold Bonds!!

Of all the precious metals, gold is most popular as an investment and is fancied from times immemorial.

Before delving further let us understand why should one invest in Gold.

  • Investment in gold is considered safest in uncertain times, as long term returns match the inflation rates.
  • Gold is considered as a hedge against vagaries of market – be it equity, crude oil or realty.

Traditionally, Indians have been investing in gold through jewelry. This was not exactly investment – try asking your wife to sell her jewelry when the price rises and you shall know J

With advent of other options like ETF, Gold became a popular investment avenue, however, there are couple of challenges that exist and have been addressed by Sovereign Gold Bond (SGB) scheme launched by Government of India.

This is 4th issue since SGB’s launch in 2015 and there have been major changes like tax exemption, reduction in minimum investment amount etc. that make this issue all the more enticing. The rate being offered is Rs 3,119 per gram for .999 purity gold. An individual shall be allotted the number of units (1 unit = 1 gram) in either a physical certificate format or in dematerialize format.

So what are the benefits

  1. Low minimum investment – One can buy 1gm to 500 gm gold (i.e. minimum investment is Rs 3,119)
  2. No risk and cost of storage – SGB shall be issued as Certificate of Holding or dematerialized form – as per individual’s preference. This saves Locker cost associated with physical gold. Moreover, there is no hassle of safety of physical gold from external factors like theft.
  3. No making charges or purity concerns – Each unit is equivalent to 1 gram or .999 purity gold. The rate that shall be paid on maturity shall be the prevailing rate unlike jewelry that comes with making charges and impurity cut.
  4. Regular return on Investment – Unlike any other form of buying gold, SGB earns an annual interest of 2.75% payable on 6 monthly basis on the initial investment amount. This should not be compared with return on any other investment as the value of gold would still be as per market and this is additional income. This income, however, is taxable.
  5. Liquidity – Maturity of bonds is 8 years. Exit option is provided from 5thyear onwards on date of maturity. Additionally, the bonds shall be traded on Bombay and National Stock exchanges (only if held in dematerialized form) making them highly liquid
  6. Guarantee – Bonds come with Sovereign guarantee – both for principal as well as interest.
  7. Collateral for loan – Bonds can be used as collateral for loans.
  8. Tax benefit – Unlike physical gold and ETF, there is no tax on capital gains if held till maturity. If sold after holding for 3 years, long term capital gain tax is applicable after adjusting for indexation.

Comparison of Physical gold, Gold ETF and Sovereign Gold Bonds

Comparison Chart Phsical Gold vs. Gold ETF vs. SGB

Points Physical Gold Gold ETF Sovereign Gold Bond
Returns Only Capital Appreciation Only Capital Appreciation Regular return at 2.75% fixed rate of interest in addition to Capital Appreciation
Safety Risk of handling physical gold High High
Purity of Gold Purity of Gold always remains a question High as it is in Electronic Form High as it is in Electronic Form
Capital Gain Long term capital gain applicable after 3 year Long term capital gain applicable after 3 year Long term capital gain applicable after 3 year. (No Capital gain tax if held till maturity )
Collateral against Loan Yes No Yes
Tradability / Exit Route Conditional Tradable on Exchange Tradable on Exchange. Redemption- 5th year onwards with GoI
Storage Cost High None None
Lock-in period None None Only till listed on Stock exchange

Based on above, an investment in SGB is highly recommended. The issue is currently open and closes on 22nd July, 2016.

Leave a message in case you have any queries related to SGB. Confused on how to invest?? – drop a mail to fintelligenceindia@gmail.com and we shall contact you shortly.

Cashless mediclaim – are you paying more than you should?

Facing a medical problem is a trauma, that is a drain on physical, emotional as well as financial health. Thanks to cashless medical claim facility, that takes care of the financial aspect (how much does it take care is a topic left for another day).

Many heath insurance policies come with the co-payment option for the want of lower premium. Co-payment is the payment that the insured agrees to make in the event of a claim. For example a policy can come with 10% co-payment, which means that the insured shall pay 10% of the total expenses while insurer shall pay 90%.

The Process – During discharge process, the bills are sent to TPA or Insurance company’s (IC) helpdesk for clearance on bills. While approving the amount, TPA/IC computes the co-payment amount.  This amount is collected by hospital directly from insured. Consumables used during the treatment, are not payable as part of the claim and are also recovered from the insured.

This is where the insured has to be extremely vigilant. The insured should be paying for consumables and co-payment percentage of the remaining amount, rather than paying co-payment on whole amount and consumables in addition to that.

Let’s use an example to understand the difference. Let’s assume that Amit’s father has been hospitalized and after spending couple of days in hospital, the total bill is ₹ 5,00,000 (Five lacs only). Let us also assume that the co-payment that Amit opted for while buying health insurance is 10%. This means that Amit is liable to pay ₹ 50,000 while insurance company is liable to pay ₹ 4,50,000. This is also specified when the approval is received by hospital for cashless settlement. Let us also assume here that in the bill of ₹ 5,00,000, ₹ 1,00,000 is consumables (the amount assumed is higher to analyze the impact of this).

Insured might be asked to pay the amount as follows ₹ 50,000 (co-payment) + ₹ 1,00,000 (for consumables). Thus total amount payable is ₹ 1,50,000, however, the actual amount should computed as follows

(A) Bill Amount = ₹ 5,00,000

(B) Consumables = ₹ 1,00,000 (to be paid by insured)

(C) Balance amount (A-B) = ₹ 4,00,000

(D) To be paid as part of co-payment (10% of C above) = ₹ 40,000

(E) Total amount to be paid by insured = ₹ 1,40,000

Savings in comparison with previous calculation = ₹ 1,50,000 – ₹ 1,40,000 = ₹ 10,000.

It is thus highly recommended to be vigilant at the time of claim settlement to ensure that hospital is not fleecing.


8 smart ways, beyond section 80C, to save substantial tax in 2016

Wish you a Happy, Healthy and Prosperous New Year. You being here means that you want to do something about high outflow of tax.

Tax deductions comprising section 80C, 80CCC, 80CCD are normal and something that are so obvious. But, there are ways beyond these sections that can help individual save decent tax – in a legal way, off-course – and this topic is all about these ways.

  1. Using non-earning or low-earning family members for tax saving – There are instruments that generate taxable income – like Fixed deposits, recurring deposits, NSC etc. Such instruments can be brought in the name of non/low earning family members like parents, adult children etc. However, note that an individual should not invest in the name of spouse, daughter-in-law and minor child as that is clubbed to individual’s income. This tip works till the time income tax rate applicable to other family members (in whose name investments have been done) is less than the tax rate applicable to the individual.
  2. Create an HUF – An HUF (Hindu Undivided Family) gives similar deductions as an individual and can lead to substantial tax savings. Income generated under HUF shall be eligible for standard deduction and additional savings leading to much better absolute returns. Creation of HUF is a separate topic however.
  3. Investing in the name of minor child – Income (Beyond Rs 1,500) generated on investments in the name of Minor child is clubbed to the income of parent with higher income. So instead of investing in instruments earning taxable income, invest in instruments that generate tax-free incomes like PPF and Tax-free bonds. The income generated would be tax-free without any limits.
  4. Home loan as a tax saving instrument – Loan on self-occupied property can help individual claim a deduction of 2 lacs against payment of interest (4 lacs in case of jointly owned property). Principal repayment is still part of section 80C.
  5. Buy a property and rent it out – Interest paid on a rented out property is a loss on property. This is by-far the only mechanism that can reduce a salaried individual’s taxable salary. The deduction available is unlimited.
  6. Education loan – Interest payment on education loan for higher studies for self, spouse, children or student, to whom, individual is a legal guardian is completely deductible from taxable income. There is no limit of such deduction.
  7. Rajiv Gandhi Equity Savings Scheme – Offers a deduction of Rs 50,000 for retail investors (with annual income less than Rs 12 lacs) investing in specified stocks or mutual funds. The lock-in period is 3 years under this scheme and this is available only the first time investment is made.
  8. National Pension Scheme – Though individual contribution to NPS account is clubbed to section 80C, but contribution upto 10% of basic salary made by employer is tax-free i.e. a person in 30% tax bracket can save upto 3.009% additional tax through this option. Specifically for FY 2015-2016 there is an additional rebate on Rs 50,000 invested in NPS resulting in an additional tax-saving of Rs 15,045. In case the employer is not providing NPS currently, maybe it’s time to ask for one.

May 2016 take you a step closer to your financial goals.

Happy Investing!!