Category: Personal Finance

How to Improve Your Credit Score?

Have you ever been denied a loan because of your credit score? Or are you someone whose credit score is below 700? A bad credit score can hold you back from reaching your financial goals. But the good news is, you can take control and improve it!

In today’s blog, we will tell you the secrets to boost your credit score and uncover a world of financial opportunities.

Credit Score – An Overview

A credit score is a numerical indicator that reflects how likely you are to repay a loan on time (individual creditworthiness). It is based on your credit history, bill payments, current debt, and how long you’ve had credit accounts open. Lenders use credit scores to decide whether to approve your requests for loans and credit cards and what interest rates you will be charged. In general, the higher your credit score, the better your creditworthiness.

Credit Information Companies (CICs)

In India, credit scores are provided by credit information companies (CICs) licensed and regulated by the Reserve Bank of India (RBI). These CCIs collect and maintain credit information from several lenders and generate your credit report and score.

Below mentioned are the four major Credit Information Companies in India.

TransUnion CIBIL – it is the most prominent CIC in India and maintains the widely used CIBIL score. It was formerly known as the Credit Information Bureau. The company provides services to MSMEs, corporate, individual, and financial clients. It also serves banks, financial institutions, non-bank financial businesses (NBFCs), home finance companies, microfinance companies, and insurance companies in India.
Experian Credit – this is another major credit information company operating in India. It entered India in 2006 as a joint venture with Federal Bank, Punjab National Bank, Axis Bank, Magna Finance, and Union Bank of India. Experian Credit provides nationwide coverage with a database of more than 430 million loan records and has signed up more than 5,000 banking and financial organizations nationwide as members.
Equifax – Equifax is a major player in the world of credit information and is considered one of the ‘Big Three’ credit bureaus alongside Experian and TransUnion. They collect and analyse data on consumers and businesses, providing credit reports, analytics and other credit-related information to several companies. Retailers, utilities, government agencies, financial institutions, and other businesses are among the many industries they target with their solutions.
CRIF High Mark – CRIF High Mark is India’s leading credit information company, licensed and regulated by the Reserve Bank of India. It provides credit information, analytics, and scoring solutions to many clients, including banks, NBFCs, insurance companies, and more.

Factors that Affect Credit Score

Numerous factors affect the credit score of individuals; some of them are:

Credit Utilization Ratio: This compares your credit card balances to your total credit limits. It is the ratio of used credit to the total credit available. A lower ratio (~below 30%) is considered good.
Payment History: This is the most impactful factor on your credit score. It reflects how timely you have made past payments on loans and credit cards. A consistent history of on-time payments is important.
Credit Mix: This refers to your various credit accounts, such as credit cards, mortgages, or instalment loans. Having a healthy mix demonstrates responsible credit management.
Length of credit history: The longer your credit history, the better it shows lenders you have a track record of managing credit over time.

Additionally, internal credit models are statistical models developed and used by lenders. These models analyse borrower data to assess creditworthiness and predict the likelihood of loan repayment.

Lenders collect data on their borrowers, such as loan history, demographics, income, and other alternative data sources. Statistical techniques, such as logistic regression, discriminant analysis, survival analysis, etc., are used to analyse the data and predict defaults.

While statistical methods remain important, the credit scoring landscape is evolving. Machine learning algorithms, particularly random forests, gradient boosting, and deep neural networks, are increasingly used to predict default rates. Therefore, it is essential to maintain a healthy outlook across all possible factors to have a good credit score.

How to Boost Your Credit Score?

There are several techniques you can implement to improve your credit score.

Pay your bills on time, as this is the single most important factor in your credit score. Late payments can seriously damage your score. You can set up auto payments or reminders to help you track your bills.
Keep your credit card under-utilised. Ideally, you should aim to keep your credit utilization ratio below 30%. This shows that you are staying within your credit limit and that you can manage your credit responsibly.
Review your credit report regularly for errors because mistakes on your credit report can bring your score down. You can get a free credit report from the three major credit bureaus. If you find any errors, be sure to dispute them with the credit bureau.
Do not apply for too much credit at once. Whenever you apply for credit, a hard inquiry is placed on your credit report. These inquiries can affect your score for a short period. So, avoid applying for multiple credit cards or loans in a short period.
A secured credit card can be a good way to start building credit if you have bad credit or no credit history. With a secured credit card, you make a deposit that becomes your credit limit. Your credit score will improve as you use the card and make your payments on time.

Conclusion

Credit scores are a numerical representation of your creditworthiness, and building a good credit score takes time and effort, but the rewards are significant. Not only will you qualify for better interest rates, but you will also establish yourself as a reliable borrower. Understanding how credit scores are evaluated and their influencing factors is vital for your financial well-being.

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Frequently Asked Questions (FAQs)

What is a credit score?
A credit score is a numerical figure reflecting how likely you are to repay a loan on time based on your credit history.
What affects my credit score?
Multiple factors affect credit score, like payment history, credit card balances, credit mix, and length of credit history.
Who uses credit scores?
Lenders use credit scores to decide on loan approvals and interest rates.
Can I get a free credit report?
Yes, the major credit bureaus/CICs provide free credit reports.
What is a good credit score?
Generally, a CIBIL score above 750 is considered good in India.

May 31, 2024

Best Places To Park Your Short Term Money

We put in a lot of effort at work to earn money, and thus, it’s only natural to be able to access that money at a moment’s notice.

We make long-term investments to achieve long-term goals, but what about your immediate financial needs? This blog will explore the best ways of investing your extra cash so that you can earn some extra money!

Liquid Investments – Overview

Liquid investments are financial assets that can be quickly and readily converted into cash. They are integral to financial independence as they allow you to respond to unforeseen events without damaging your long-term financial investments.

A popular rule of thumb is that an individual should have a contingency reserve in the form of liquid money equal to six times their monthly expenses. This reserve allows the individual to be secure during financial emergencies and helps mitigate financial risks.

Investment Avenues

In the universe of finance, there are various options where you can park your liquid money and earn some return on it. Some of them are mentioned below.

Banks Savings Account

It is regarded as the easiest and safest place to park your short-term funds. Investing money into this vehicle can yield upto 4-5% annual nominal return (dependent on bank rates). It is appropriate for investors who prioritize liquidity as it is considered equivalent to hard cash.

Savings accounts are also extremely safe due to the DICGC (Deposit Insurance and Credit Guarantee Corporation) insurance of upto 5 lakhs. New investors with unstable incomes are drawn to this investment opportunity due to its high liquidity and safety.

Bank Name	Interest Rate
HDFC Bank Savings Account	Up to 3.5%
Axis Bank Savings Account	Up to 3.5%
Kotak Mahindra Bank Savings Account	Up to 4%
State Bank of India Savings Account	Up to 2.7%
Punjab National Bank Savings Account	Up to 3%

(As of 29th May 2024)

Bank Fixed Deposits

If you allow a lock-in period, bank-fixed deposits are a good alternative to savings accounts. Bank FDs often yield returns 2-3% higher than bank savings accounts. This higher interest rate comes at the cost of a lock-in period. A prepayment penalty can be enforced if you withdraw the funds from this investment during the tenure of the FD.

The interest rates offered depend on the length of the investment. Generally, the longer the term, the higher the rate.

Did you know?

Smaller and newer banks offer higher rates for fixed deposits than larger banks to increase their market size.

Bank Name	Interest Rate
HDFC Bank Savings Account	3% – 7%
Axis Bank Savings Account	3% – 7.4%
Kotak Mahindra Bank Savings Account	2.75% – 7.4%
State Bank of India Savings Account	3.5% – 6.25%
Punjab National Bank Savings Account	3.5% – 6.25%

(As of 29th May 2024)

Short-Term Debt Funds

A “Debt Fund” is a mutual fund based on the debt asset class. Typically, your money is invested in fixed-income instruments like short-term bonds, money market securities, and debentures. Mutual funds in the debt category typically give better returns than FDs. They are appropriate for investors who want to invest their money for a period of six months to one year. However, since they are traded on the market, debt funds experience significant volatility, but the risk is lower than a corresponding equity fund.

Scheme Name	2020	2021	2022	2023
ICICI Pru Short-Term Gr	10.65%	3.88%	4.66%	7.40%
HDFC Short-Term Debt Gr	10.96%	3.86%	3.53%	7.14%
UTI Short Duration Fund Dir Gr	10.97%	9.04%	4.41%	7.59%
Nippon India Short-Term Gr	9.48%	4.42%	3.20%	6.82%
ABSL Short Term Gr Reg	11.06%	3.84%	4.19%	6.90%

Arbitrage Funds

Arbitrage funds are a type of hybrid mutual fund that uses futures, a form of derivative investment, to generate returns similar to debt funds. This is how it works: the fund manager buys shares using your money and sells them later. The difference in prices (known as the spread) between the stock and its future contract creates a return. On average, these funds are able to generate returns between 4% and 8% annually.

Scheme Name	2020	2021	2022	2023
Kotak Equity Arbitrage Gr	4.33%	3.96%	3.42%	7.38%
Edelweiss Arbitrage Gr	5.25%	4.58%	5.11%	7.89%
Axis Arbitrage Gr	4.91%	4.61%	4.95%	7.68%
HDFC Arbitrage Gr	4.30%	4.17%	4.73%	7.78%
Invesco India Arbitrage Gr	5.02%	4.15%	5.85%	8.07%

Liquid Mutual Fund

Liquid mutual funds invest in treasury bills, corporate papers, and other money market instruments. These assets are called money market securities since they have zero to low risk and a maximum maturity of one year. With a return of 4% to 7%, the liquid fund provides a marginally better yield than a bank savings account. Since liquid funds are linked to market risk, investors may experience portfolio volatility during unusual circumstances; hence, returns on these products cannot be guaranteed.

Scheme Name	2020	2021	2022	2023
Axis Liquid Gr	4.33%	3.36%	4.95%	7.13%
ABSL Liquid Retail Gr	4.40%	3.38%	4.95%	7.19%
ICICI Pru Liquid Gr	4.39%	3.35%	4.85%	7.08%
HDFC Liquid Gr	4.11%	3.21%	4.77%	6.95%
Edelweiss Liquid Reg Gr	4.12%	3.23%	4.66%	6.85%

Conclusion

Investing your liquid money is extremely important. However, many factors need to be considered before choosing one investment vehicle. Therefore, it is advisable to consult a financial advisor before making such decisions.

Frequently Asked Questions (FAQs)

Are Liquid funds better than Bank Fixed deposits?
Investment in liquid funds offers higher returns than bank fixed deposits but also carries market risk.
What is the meaning of Liquid investments?
Liquid investments can be converted into cash immediately without a significant loss in value.
Why is a Liquid fund better than a Savings account?
Generally, liquid funds offer a slightly better return than a savings bank account because a liquid fund invests your capital in money market instruments, which typically yields better returns.
How does an Arbitrage fund work?
Arbitrage funds profit from the price difference between the derivative and cash segments of the market by simultaneously buying and selling securities in both markets.
What is the taxation on an Arbitrage fund?
Arbitrage funds attract equity taxation; if the holdings are sold within one year, they are taxed as short-term capital gain, attracting a 15% tax on profit. However, if sold after one year, they are considered long-term capital gain, attracting a tax rate of 10% over and above one lakh of profit.

May 30, 2024

Types Of Taxes In India: Direct Tax And Indirect Tax

Taxes are an inevitable part of our daily lives. No matter how hard you try, nobody can escape them. Hence, we should all at least understand their nuances to navigate our lives without any hurdles.

This blog will explain the complexities of the different types of taxes in India by breaking them down into easy-to-understand concepts.

Taxation in India

Taxes are obligatory charges or levies that the government imposes on individuals, businesses, and other entities to fund government expenditures.

The Indian taxation system has a three-tier structure, with taxes imposed by the central, state, and local municipal governments. Below is an outline of the two primary categories of taxes in India.

Direct Taxes

These are levied directly on an individual’s or company’s income. The person or entity on whom the tax is levied bears the burden of paying it. Some common types of direct taxes are explained below.

1. Income Tax

Income Tax is a tax levied by governments on the income generated by businesses and individuals. The imposition of income tax applies to a wide range of income sources, such as wages, salaries, investments, business profits, and even capital gains.

India has a progressive income tax system, which means people with higher incomes pay more of their income in taxes. Income is divided into slabs, each with a specific tax rate.

Additionally, India offers two tax regimes. The Old Tax Regime and the New Tax Regime. The new regime offers a lower tax rate but comes with fewer deductions. An individual can choose the regime that best suits his situation.

2. Capital Gains Tax

Capital Gains Tax is a levy imposed on the profit you earn from selling capital assets like stocks, real estate, or other investments.

When you sell a capital asset for more than its purchase price, you realise a capital gain, which the government taxes.

There are two types of Capital Gains Tax in India,

Short-term Capital Gains (STCG) – The STCG applies to assets held for less than one year. The short-term Tax rate for equity and equity-oriented mutual funds is subject to 15%.
Long-term Capital Gains (LTCG) – The LTCG generally applies to assets held for one year or more, although the holding period can vary depending on the asset. The LTCG tax rate is typically 20% on most assets. For LTCG on equity and units of equity-oriented mutual funds exceeding INR 1 lakh in a financial year, a concessional tax rate of 10% applies without the indexation benefit.

3. Corporate Tax

A Corporate Tax is imposed on a company’s profits. It is a substantial source of income for the government and is used to fund public projects and social programs. India provides a tiered corporate tax structure with varying rates based on the type of company and specific conditions. The corporate tax rate generally varies between 20% and 40% in India, depending on the company’s particulars.

4. Property Tax

Property tax is a levy imposed by the municipal corporation or local government real estate property. It is a revenue stream utilised to finance civic services and facilitate infrastructure development.

Indirect Taxes

Indirect taxes are levied on the consumption of goods and services. These taxes are usually hidden in the price we pay for a good or service. The burden of indirect taxes falls on the final consumer buying goods and services. Some types of indirect taxes are explained below:

1. Goods & Services Tax (GST)

GST is a comprehensive indirect tax levied on the supply of most goods and services in India. It replaced a variety of taxes that both the central and state governments previously imposed.

Introduced in July 2017, GST aims to streamline the indirect tax system in India by bringing several taxes under one umbrella. It also fosters transparency since it is imposed at the point of sale and displayed on the invoice. GST has multiple tax slabs ranging from 0% (exempt goods) to 28% (luxury goods).

2. Customs Duty

Custom duty is a tax levied by the Indian government on goods imported into the country. It is a fee that an individual pays to bring goods from overseas.

The individual or entity acting as the importer of goods brought into India bears the responsibility of paying the customs duty. The importer, in certain instances, may choose to transfer this cost to the consumer by incorporating it into the ultimate price of the product.

3. Excise Duty

Before the implementation of the GST in July 2017, excise duty held significant prominence as a historical tax in India. However, following the introduction of GST, the excise duty levy for most goods has been discontinued.

However, some products still attract excise duty. These include cigarettes, LPG, Beer, Electricity, Petrol, and Kerosene.

Uses of Taxes

We know that the government allocates the tax revenue it collects to finance a multitude of public services and programs that provide substantial benefits to the nation as a whole. However, the details of these expenditures still remain largely unknown. Here is a quick overview of the government’s spending.

Public Services

Education – government schools, colleges and universities.
Healthcare – public hospitals and clinics that offer subsidized medical care.
Law and Order – police forces, courts, fire departments, and emergency services.

Subsidies – essential goods and services like food, fuel, and fertilisers are subsidised to make them more affordable for low-income families.
Social Security Programs – schemes like pensions for the elderly and disabled provide a safety net.
Essential Services – a significant portion goes towards funding essential services like Defence and Infrastructure development.

Conclusion

Understanding the intricacies of Indian tax allows individuals to make well-informed financial choices. Whether you are a salaried professional trying to navigate through tax brackets, a business owner in the process of exploring deductions, or simply someone who wants to be more tax-savvy, having a solid understanding of these concepts will greatly benefit you in the long run.

Frequently Asked Questions (FAQs)

What are the two main types of taxes in India?
India has two major types of taxes – direct taxes levied on your income and indirect taxes included in the price of goods and services.
Are there any tax benefits or deductions available?
Yes, there can be exemptions and deductions to reduce your tax liability. You can explore options for investments, medical expenses, etc., as defined under different sections of the Income Tax Act.
What happens if I don’t pay my taxes on time in India?
Penalties and interest can be imposed on delayed payment of taxes.
Where can I get help with filing my taxes?
Tax professionals like chartered accountants can assist you with filing your tax returns.
Do I need to pay customs duty?
Yes, if you import goods from abroad. However, the tax amount will depend on the type of good, its value, and the country of origin.

May 30, 2024

RIAs vs MFDs: Who Is Better?

People have many goals in life, like getting married, having children, buying a dream home, etc. However, nobody knows how to properly plan for such events. This is where investment advisors come in, helping you with thorough financial planning. The problem is, many people confuse SEBI’s Registered Investment Advisors (RIAs) with Mutual Fund Distributors (MFDs).

Keep on reading; all your queries related to this will be cleared.

Mutual Fund Distributors

Mutual fund distributors, or MFDs, are individuals or businesses registered with the Association of Mutual Funds in India (AMFI) who serve as a middleman between asset management firms and investors seeking to purchase mutual funds.

An MFD offers an investment strategy tailored to your risk tolerance and has relationships with several asset management firms. They don’t charge their clients fees; instead, mutual fund firms pay them compensation for introducing investors to their products.

Duties of Mutual Fund Distributors

Assessment of the risk profile of the client and suggesting the best mutual funds.
MFD educates the investors about the various mutual fund schemes, their investment objective, and the risk associated with the fund.
They facilitate the investor’s completion of the necessary formalities to make them eligible for buying and selling mutual funds.
They also provide all the required support, such as portfolio reviews, market updates, etc.

Eligibility of a Mutual Fund Distributors

The applicant must be above 18 years.
To obtain the license from AMFI, the applicant must pass the NISM Series VA Mutual Fund Distributor Exam conducted by the National Institute of Securities Market (NISM).
The minimum qualification must be class 10th or 12th with three years of diploma.
Every corporate mutual fund distributor employee must be NISM VA certified.
After obtaining the license, they are provided an ARN number.

Registered Investment Advisors

According to the Investment Advisor Regulation of 2013, RIAs are financial advisors registered with the Securities Exchange Boards of India (SEBI) as individuals or companies. This registration enables them to provide investment advice to their clients. The only two fee models available to RIAs are fixed fees and asset under management or asset under advisory-based variable costs, as per the most recent change to the RIA Regulation by SEBI in 2020.

Duties of RIAs

The fiduciary duty of RIA is to act in clients’ best interest, which means they provide advice and recommendations that are solely aimed at benefiting the client without any conflict of interest.
They also provide a detailed document in which all the details related to fees, services, etc., are mentioned before entering into a contract with the client.
RIAs provide periodic reports to their client related to their investment performance.
4.The recommendations provided by the RIAs are aligned with the client’s risk profile and financial goals.
RIAs are required to follow all compliance orders issued by the relevant authorities and maintain the required filings.

Eligibility of RIAs

SEBI mandates few specific educational qualifications to become an RIA, such as a post-graduation degree from a recognized university.
The applicant must have at least five years of experience in providing financial advisory services.
The applicants must acquire a necessary certificate recognized by SEBI, named NISM Investment Advisor, for the Level 1 and Level 2 exams or a certified financial planner certificate.
If you are registering as an individual advisor, you must have a net worth of INR 5 Lakhs; if you are registering as a corporate investment advisor, you must have a minimum net worth of INR 50 lakhs is required.
After meeting all the eligibility criteria and completing the process, the SEBI issues an RIA number to the applicants, which acts as a unique identification number.

Difference between MFD & RIA

The significant differences between MFD & RIA are defined in the below mentioned table:

Particulars	MFD	RIA
Services	Provide facilities to investors relating to execution of mutual funds transactions, following the compliances related to KYC, etc.	RIAs provide advice and guidance on a client’s investment portfolio, tax planning, etc.
Tie-up	MFDs collaborate with all the mutual fund companies.	They do not have any particular connection with any mutual fund providers, as they provide only investment advice.
Revenue	Their major revenue comes from commissions from the asset management company in which their clients make investment.	They generate their revenue from advisory fees charged to their clients.
Regulations	MFDs are regulated by AMFI and SEBI.	RIAs are regulated only by SEBI.
Minimum Investment / Fees	MFDs do not set minimum investment criteria; these are set up by the mutual fund schemes in which they want to invest.	RIA may have some minimum fees based on the value of investors’ portfolios. This varies from advisor to advisor.

Conclusion

An MFD is a better alternative if you are starting to invest, have a small portfolio, and want a simple approach to mutual funds. On the other hand, if you have a larger portfolio, several intricate financial goals, and want complete financial planning, you should consider a SEBI Registered Investment Advisor.

In summation, a mutual fund distributor is a better resource for investors seeking advice and direction specific to their mutual fund investments. However, if a person has more complicated financial needs and needs help with estate planning, tax planning, etc., they should consider consulting with a Registered Investment Advisor (RIA).

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Frequently Asked Questions (FAQs)

Can MFD charge fees from their investors?
MFDs can earn only a commission from AMCs in which their clients invest.
How does RIA make money?
Usually, RIA charges fees based on the percentage of assets or fixed annual fees fromtheir clients for advising them on various financial aspects.
For comprehensive financial planning, whom should I approach?
If you are looking for comprehensive financial planning, you should contact a SEBI Registered Investment Advisor, who is licensed by SEBI to do such work.
What are the minimum fees for taking services from a SEBI RIA?
There is no minimum prescribed limit for taking services from a SEBI RIA as it varies from an investment advisor. However, the SEBI has two types of fees: the first one should not exceed 2.5% of assets under advice or a fee not exceeding INR 1.25 Lakhs per year.
Which certification exam must you pass to become a Mutual Fund Distributor?
NISM conducts an exam called NISM VA (Mutual Fund Distributor), which must be cleared to become an MFD.

May 27, 2024

Buying vs Renting: Which Is The Better Choice?

The majority of people in India live in rented homes, yet many aspire to own their own homes someday. They start saving early in their careers or seek home loans to make this dream a reality. However, due to the interest costs associated with these loans, they often postpone their plans and continue with renting.

Now the question is buying your dream house worth it? In this blog, we will discuss whether you should rent or purchase a home.

Buying a House

Purchasing a home is like realizing a dream. It is where you raise your family, create memories, and take pride in owning it. However, nowadays, the cost of buying your dream home can burn a big hole in your wallet. In India, it is common to assume that a home is a sign of well-being and stability within the family.

Pros of Buying a House

Building an Asset – The amount that you will be using for paying rent can be utilized towards paying some part of the home loan EMI and it will create an asset for life.
Tax Benefit – If you have a home loan, you can claim a deduction of up to INR 2 lakhs on the interest paid under section 24 for a self-occupied house and INR 1.5 lakhs under section 80C on the principal amount.
Permanent Resident – You do not need to worry about moving houses if the landlord wants you to leave, as you are the proud owner of your own home.
Emotional Security – Having your own house provides you with mental peace and stability as you can keep it as you want.

Cons of Buying a House

Expensive – Buying a house can be costlier than renting a house in most of the cases, as the down payment to purchase the house is very high. Along with this, you will have to bear the cost of monthly EMI.
Illiquid Asset – Real estate is often considered the most illiquid form of asset, which means if you need money, you cannot immediately sell your house.
Other expenses – If you purchase a house, you will be piled up with the EMI burden along with it; you will have to pay additional costs such as house taxes, water taxes, maintenance costs, etc.
Relocation – If you are looking to relocate to a newer location or you are transferred to some other location, then in that case it will get difficult for you to sell your house and shift to another house.

Renting a House

It means living in a home owned by someone else and giving the landlord a monthly rent payment. The owner of the property will give you the house in exchange for rent through a formal agreement that specifies the monthly rent and the length of time he/she will rent the property to you.

A house’s suitability for rental depends on a variety of aspects, including the number of bedrooms, preferred location, amenities, and budget.

Pros of Renting a house

Lower financial burden – Paying monthly rent will have less impact on your pocket as rent will be lower than your home EMIs.
Down Payment – If you are going for a rented house, then you are not required to make any large down payments initially. In renting, you are just required to provide only a security deposit which can vary from 1 – 6 months.
No additional cost – While living in a rented house, you don’t need to worry about paying property taxes, repair bills, maintenance costs, etc.
Easy to relocate – In case if you are into such kind of jobs in which transfer is frequent then relocating is much easier in the case of a rented house.
Flexibility of location – You can easily decide where do you want to live depending on proximity to your workplace or school, reducing your transportation costs.

Cons of Renting a house

Rise in Rent – The landlords generally increase the rent on an annual basis, but they can do so anytime in between.
No Tax Benefits – Paying rent will not fetch you any tax benefits. However, one can claim an HRA deduction.
Expense after retirement – If you are not able to buy a house while you are in your earning stage of life, then you might face a financial crunch after retirement as you will not have any source of income.
No Modifications – Even if you love to decorate your house, then you have no choice but to make any structural change without the approval of the landlord.
No emotional security – Owning your own home provides peace of mind and stability, freeing you from the worries of a landlord potentially asking you to move out. If you rent a house, you’ll miss this peace.

Tax Benefit of Housing Loan

Deduction of Principal Amount Repayment – You can deduct up to INR 1.5 lakhs from your primary amount paid each financial year under section 80C of the Income Tax Act. The highest deduction that can be made is INR 1.5 lakhs, regardless of the total principal that you pay over a year.
Deduction on Interest Paid – For self-occupied property, an individual may deduct up to INR 200,000 in interest each financial year.

Which is right for you?

The answer to this question is very individualized and depends on a person’s unique circumstances, including their financial situation and life aspirations. Renting is a less expensive choice that allows you to move about more easily than buying, even if buying a property might be a smart investment due to its high cost. Therefore, a person must weigh all the advantages and disadvantages before choosing to buy or rent.

Conclusion

There will always be debates about whether it is better to rent or buy a home. Some people think buying a house is a smart option since they will feel proud to own it. Some, however, will choose to rent a home as they lack the funds to buy a new one.

In summary, if you are financially stable, buying a home can be a good option. However, if you are not, taking on loan payments and other debts might lead to financial difficulty, making renting a more suitable choice. Further, it is advisable to consult your financial advisor before making a decision, as buying a home is a long-term commitment.

Frequently Asked Questions

What are the tax implications of renting vs buying a house?
Living in a rented house does not offer any tax benefits, although salaried individuals can claim an HRA deduction for the rent they pay.On the other hand, homeowners are eligible for deductions on their home loans.
I am a 25-year-old individual who got a new job with a salary of around INR 50,000 per month. Should I buy a home or live in a rented house?
As you have just started your career therefore, there are various other goals in your life which you are required to fulfill. Buying a house is a long-term commitment, hence you should consider all the expenses of buying a house or consider living in a rented house.
What financial factors are to be considered before deciding on renting and buying?
One must consider financial factors like upfront cost, loans, EMIs, property taxes, insurance and maintenance, and potential appreciation in the value of the property, etc.
I want to customize my home, should I go for renting or buying?
Owning a house allows you to personalize things the way you want, which you cannot do easily in a rented house as every time you need permission from the landlord.
Does buying a house create wealth in the long run?
If you are buying a piece of land, the value of it will generally appreciate over some time, but there are several other costs that comes with owning a house such as property taxes, and EMIs of the house. Therefore, one must consider all the factors before purchasing a home.

May 22, 2024

RBI Action On Kotak Mahindra Bank: Should You Invest?

You must have watched in the news that India’s central bank, the Reserve Bank of India (RBI), has taken action against Kotak Mahindra Bank. And if you have a Kotak Bank account, you must be concerned about what will happen to your savings.

Don’t worry—we’ve answered all your questions; simply read the blog to clarify the uncertainties.

Overview of Kotak Mahindra Bank

Kotak Mahindra Bank’s origins date back to 1985, when Uday Kotak started Capital Management Finance as an investment and financial services company. Later, in 1986, Anand Mahindra and his father, Harish Mahindra, invested in the company and renamed it Kotak Mahindra Bank. The company initially offered lease and hire-purchase services, as well as bill discounting. In 2003, it was India’s first non-banking financial institution (NBFC) to receive a commercial banking license from the RBI.

Further, in 2017, Kotak Mahindra Bank launched the Kotak 811 platform – India’s first full-service digital banking platform.

Did you know?

Kotak’s 811 draws its name from 8-11-2016, the day when the government announced demonetization in India. According to Uday Kotak, it was the day that changed India.

The Problem with Kotak Bank

The RBI audits all banks to ensure every bank maintains its online systems properly. The audit of Kotak Mahindra Bank has been ongoing for the past two years. In 2022 and 2023, the bank was found to have too many errors in its IT risk management and infrastructure, which could lead to data leakage. Despite many warnings from the RBI, the bank failed to address the matter promptly.

Then, on April 15, 2024, there was a system outage caused by an issue with their IT system, which harmed customers by preventing them from using UPI payment, debit cards, and so on.

The Reserve Bank of India imposed stern action on Kotak Mahindra Bank on April 24, 2024, by making a press release and prohibiting them from issuing new credit cards and onboarding new customers via digital channels. However, clients can open new accounts with the bank by visiting their branch, and there is no impact to the existing customers.

Further, The RBI will appoint an independent firm to audit the Kotak Mahindra Bank’s IT systems. The limitations will be released only when the bank resolves the concerns discovered during the audit.

Clarification by Kotak Mahindra Bank

Kotak Mahindra Bank published a statement following the RBI’s limitations. The Bank’s management wants to reassure their existing customers of uninterrupted services, including credit card, mobile, and net banking. They also said that their branches continue to welcome and onboard new customers, providing them with all the bank’s services other than the issuance of new credit cards..

Impact on the Stock Price

The following day, on April 25, 2024, the stock price of Kotak Mahindra Bank fell by around 11% due to this news. The company’s market capitalization fell by INR 10,225 crore in one day. On April 25, 2024, the company’s share price reached a 52-week low of INR 1,602 per share. Following this descent, Axis Bank became the 4th largest bank in India in terms of market capitalization, and Kotak Bank slipped to 5th rank..

According to the report issued by the National Payments Corporation of India (NPCI) in March 2024, Kotak Mahindra Bank is ranked 9th on the UPI remitter list, with a total volume of 703.56 million, of which 93.66% is approved.

Should you worry if you have an account in Kotak Bank?

If you have a bank account with Kotak Bank, then you don’t have to worry because you can continue using their bank account as usual. All services, including credit cards, will work uninterruptedly.

However, to open a new bank account with Kotak Mahindra Bank online or apply for a new credit card, you must wait until the bank restores its IT infrastructure and receives RBI approval to re-launch those services. Meanwhile, one can open a new account with the bank by visiting a physical branch.

Analyst’s view on Kotak Mahindra Bank

According to S&P Global, Kotak Mahindra Bank’s credit card portfolio expanded 52% yearly as of December 2023, compared to 19% loan growth.

This step may hamper the credit card business and cause the bank to rely more heavily on physical branches, harming credit growth and profitability. However, when it comes to the physical branches, as of March 2024, the bank has only 1,948 branches, which is significantly less than its competitors. In contrast, Axis Bank has 5,100+ branches, and HDFC Bank has 8,000+ branches.

Limitations on accounts opening digitally coupled with a smaller number of physical branches will hamper growth for Kotak Bank at least in short run. Many analysts and brokerage houses anticipate that the bank will take around one year to address the RBI’s IT related concerns.

Can RBI take action on any bank?

According to Section 35A of the Financial Regulation Act guidelines, the RBI can intervene if a bank is not operating efficiently or is caught in wrongdoing. It can take action in the public’s best interests, such as keeping the financial system clean and digital transactions running smoothly.

Conclusion

The RBI’s action on Kotak Mahindra Bank is in the interest of account holders, as the RBI does not want the customers to suffer in any way, whether in terms of service or data security. However, from an investor’s perspective, you must assess the numerous parameters associated with the company’s business plan. It is recommended that you contact your financial advisor before making any investment decisions.

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Frequently Asked Questions (FAQs)

What was the RBI’s action on Kotak Mahindra Bank?
The RBI has observed severe deficiencies in its IT system, which can lead to data leaks and scams and make its customers suffer. Therefore, in view of the interests of customers, the RBI has taken action by stopping the bank from issuing new credit cards and opening new bank accounts through online mode.
When was Kotak 811 launched?
Kotak Mahindra Bank launched the Kotak 811 platform in 2017.
Is it safe to keep my money in Kotak Mahindra Bank?
Yes, it is safe to keep your money in Kotak Mahindra Bank just like any other Scheduled Commercial Bank in India. The RBI has observed IT infrastructure-related issues that are not related to the company’s liquidity or creditworthiness.
Who is the founder of Kotak Mahindra Bank?
Mr. Uday Kotak founded the Kotak Mahindra Bank in 1985.
Should I invest in Kotak Mahindra Bank shares after the RBI action?
The RBI’s action on Kotak Mahindra Bank will impact its profitability because it cannot onboard new customers digitally. Hence, an investor should consider all the risk parameters and future growth before making any investment decision.

May 17, 2024

Inheritance Tax: Past, Progression, And Controversy

Have you ever thought what happens to your money after you are gone? In India, inheritance has traditionally been a way to transfer wealth across generations. But what about the tax implications?

In this blog, we will explore the history of inheritance tax, find out why it was eventually removed, and the ongoing debate about its potential return.

What Is Inheritance Tax

Inheritance Tax, also known as death duty in some regions, is a levy on assets or money that someone inherits after a person dies.

However, there is a subtle difference between inheritance tax and estate tax. Inheritance Tax is a tax on the value of the inheritance received by the beneficiary. In contrast, the estate tax is a tax on the total value of a deceased person’s estate before it is given to their heirs.

The objectives of the Inheritance Tax vary across countries, including generating government revenue, redistributing wealth, and preventing wealth concentration within families.

The tax is paid by the person who inherits the assets, and the amount of tax depends on the value of the inheritance and the relationship between the beneficiary and the deceased. Close relatives often get tax exemptions that lower their tax burden. Tax rates differ depending on the country and can be as high as 40%.

India does not currently have an inheritance tax. And if we talk about developed nations such as USA, there is no federal inheritance tax exists, although certain states impose their own. For example, states in USA such as Pennsylvania and New Jersey have inheritance taxes that apply to a broader range of wealth, irrespective of the federal threshold.

Did you Know?

Japan has the highest inheritance tax rate, i.e., 40%.

Evolution of Inheritance Tax

Inheritance taxes have roots in ancient civilizations such as Egypt and Rome. In the US, these taxes were introduced during the Civil War to raise revenue but were revoked soon after.

The 19th and 20th centuries saw a sharp increase in inheritance taxes globally, and many countries, including the US, implemented them to address wealth concentration and raise revenue.

However, inheritance taxes gradually lost favour among the government because some countries found them challenging to manage, while others considered them a barrier to investment and creating wealth.

From 1953 to 1985, India had an inheritance tax called the Estate Duty, introduced under the Estate Duty Act of 1953. However, India abolished its inheritance tax in 1985.

Why was the Inheritance Tax abolished in India?

The estate duty in India was introduced to reduce wealth inequality. It functioned like a progressive tax. People inheriting smaller estates were not subject to taxation. In contrast, those inheriting substantial wealth were liable to pay a higher percentage, with rates reaching as high as 85% for the largest estates.

For your reference, a progressive tax is a tax system in which the tax rate increases as the taxable income increases. In simpler terms, the more you earn, the higher the percentage of your income you pay in taxes, which is determined by the tax brackets.

The tax rate you pay depends on which bracket you fall into. Suppose you have an income within the 22% bracket. You will only pay 22% tax on the portion of your income that falls within the bracket, and for any income exceeding that amount, you might pay a higher rate according to the next tax bracket.

Despite its good intentions, the Estate Duty fell short for several reasons:

Many estates were not taxed because of a high threshold for consumption.
People started looking for methods to avoid paying taxes, such as concealing assets or engaging in benami property transactions.

Furthermore, discussions about reintroducing have emerged in recent years, which is fuelled by the following reasons:

The gap between rich and poor is widening, and some argue that inheritance tax helps redistribute wealth.
Many developed countries have the concept of inheritance tax, and some consider it a standard wealth management tool.
Taxing inheritances can generate revenue for the government, which can be used to create social programs that help those in need.

The Ongoing Debate

Sam Pitroda, the president of the India Overseas Congress, has caused trouble for the Congress party with his controversial comments about the inheritance tax. His remarks have been the subject of debates and intense criticism.

He caused controversy by advocating for an inheritance tax as a means of wealth distribution, citing its implementation in America. He stated that there is an inheritance tax in America where 45% of a $100 million estate goes to the children and 55% goes to the government.

Two national political parties in India, i.e., the Congress and the BJP, are arguing over the statement made by Sam Pitroda. However, the former clarified that the statements did not represent the party’s official stance and accused the BJP of trying to gain political advantage and divert attention during ongoing Lok Sabha elections.

Conclusion

To sum it up, India’s story with inheritance tax is one of a brief implementation, abolition, and a recent resurgence in debate. While there is no inheritance tax currently, the conversation surrounding its return highlights the complexities of managing wealth inequality and the government’s revenue. The future of this tax remains uncertain. We will have to wait and see how this exciting story plays out.

Frequently Asked Questions (FAQs)

Does India have an inheritance tax?
As of April 2024, India does not have a national inheritance tax.
Why is inheritance tax being discussed again?
Growing wealth inequality and aligning it with global trends are common discussion topics.
What are the arguments in favour of inheritance tax?
Common arguments include reducing inequality, ensuring fairness, and aligning with global trends.
Would I be liable to pay for the money I inherit?
Not directly, but you might pay tax on any income the inherited asset generates.
Should inheritance tax be brought back?
That is a matter of debate. You can consider listening to both sides’ arguments and then shape your own perspective on this.

May 17, 2024

Breakdown of CTC: A Detailed Analysis

Did you know your take-home pay is only part of the picture? In India, CTC can be up to 30% more than your net salary. In this blog, we will explain why CTC is important and what it entails.

CTC – An Overview

CTC stands for Cost to Company. It refers to the total amount a company spends on an employee in a year, which includes the employee’s salary and all the benefits they receive. Benefits can include health insurance, housing allowances, and more.

To calculate CTC, you add the employee’s salary and benefits. For example, if an employee has a salary of INR 50,000 per month and the company pays INR 5,000 per month for his health insurance and other perks, then, the employee’s CTC would be INR 55,000 per month or INR 660,000 per year.

CTC differs from an employee’s net salary (the amount they take home). Taxes and other deductions are reduced from salary.

Breakdown of CTC

Basic Salary

This is the fixed amount of money an employee receives before any allowances or deductions. It forms the core of your take-home pay and is subject to income tax.

Allowances

These are monetary benefits provided by the company to help cover employee expenses. There are numerous allowances; some of the key allowances are:

1. House Rent Allowance (HRA)

HRA is a part of your CTC that helps offset the cost of renting a house. It is a monetary benefit, and under certain conditions, it is partially exempt from income tax.

Here is an explanation of HRA:

HRA helps employees manage their rental accommodation expenses. The lowest of the following is the tax-exempt amount-
- HRA received from the employer.
- 50% of your base salary if you live in a metro city or 40% if you live in a non-metro city.
- Actual rent paid less than 10% of your base salary.
However, there are certain conditions for exemption, which are as follows-
- You are required to be lodging in a rented space.
- You must have rent receipts as evidence of the payment.
- The landlord’s PAN card details might be needed (if rent exceeds INR 1 lakh annually).

Furthermore, HRA is unavailable if you live in your own house or company-provided accommodation.

2. Leave Travel Allowance (LTA)

LTA is another component of your CTC that falls under the allowance category. It is designed to partially reimburse your travel expenses incurred during your leave from work. Let us take a closer look at LTA:

It aims to provide financial assistance for domestic travel during your vacation or leave period.
LTA is exempt from income tax under certain conditions, allowing you to save on taxes.
The exemption is available for two journeys in a block of four years. The lower of the following amount is exempted-
- Actual travel expenses incurred.
- LTA amount offered by your employer.
- Deemed travel expenses, which are calculated based on your salary and travel class.
LTA covers your travel expenses for immediate family (spouse, dependent children, and sometimes dependent parents and siblings). The mode of travel can be bus, train, or economy airfare.

Generally, you must submit bills and travel documents to your employer to claim the LTA exemption.

Furthermore, LTA is meant for domestic travel within India. International travel expenses are not covered.

3. Conveyance Allowance

Conveyance Allowance, also known as transport allowance, is a part of your CTC that helps you cover the daily commuting expenses between your home and workplace and is partially exempt from income tax.

Let us take a closer look at the Conveyance Allowance:

The main objective of conveyance allowance is to offset the cost of commuting to and from work.
The amount of conveyance allowance that is exempt from income tax is limited. In India, the exempt amount is INR 1,600 per month or INR 19,200 per year.
You do not need to submit any bills or receipts to claim the exemption for conveyance allowance.

4. Dearness Allowance (DA)

DA is a component of your CTC designed to address inflation. It is a monetary benefit provided by the government or some private sector employers to adjust your salary for rising living costs.

Let us have a quick overview of the dearness allowance:

The purpose of DA is to compensate for inflation and help maintain purchasing power over time. As the cost of essential goods and services rises, DA helps bridge the gap and ensure your salary retains its value.
The calculation of DA can vary depending on the entity providing it.
In India, for government employees, DA is a percentage of their basic salary and is reviewed twice a year – January and July, depending on the Consumer Price Index (CPI).
Also, private companies might calculate DA using their internal procedures or guidelines.

Employer Contribution

These are indirect benefits where the company pays on the employee’s behalf, which include:

1. Provident Fund (PF)

Provident Fund (PF) is a type of retirement savings plan that can be either optional or mandatory, depending on the structure and particular work circumstances. The purpose of PF is to provide financial security for employees after retirement.
Both employers and employees contribute a fixed percentage of the employee’s salary towards the provident fund. The contribution rates can differ by country and employment type.
An authorized financial institution or a government agency invests the contributions, and the employee can withdraw the collected funds under certain circumstances, such as medical emergencies. Additionally, the employee can withdraw the entire accumulated amount and the interest received upon retirement.

There are two types of provident funds.

Employee Provident Fund (EPF) – A Provident Fund scheme for salaried individuals in India.
Public Provident Fund (PPF) – A voluntary PF scheme provided by the Government of India and is open to all citizens.

2. Gratuity

An employer makes a one-time payment to an employee as a token of appreciation for their service, specifically after completing a long tenure with the company. It is a compulsory benefit under India’s Payment of Gratuity Act, 1972.

Individuals are eligible for gratuity if they have completed five or more years of continuous service with the same company.

The gratuity amount is calculated using the following formula:

Gratuity = Last drawn salary * (15/26) * number of completed years of service.

The last drawn salary is your basic salary and dearness allowance.
15/26 is the factor that represents 15 days’ wages for each completed year of service.
Number of completed years of service include any portion of the year over six months, regarded as a full year.

Additionally, there is a maximum limit on the gratuity payable. The cap is INR 20 lakh, which means you will earn a maximum of INR 20 Lakh even if the calculated gratuity amount is higher, and a part of the gratuity amount is taxable.

3. Employee State Insurance (ESI)

ESI is a social security program offered by the Indian government to a few employees and is managed by the ESIC (Employees’ State Insurance Corporation).

The main objective of ESI is to provide medical and financial assistance to employees and their dependents in case of sickness, temporary, or permanent disability because of employment, maternity, or death due to employment injury.

ESI applies to employees working in factories and other businesses registered under the ESI Act.
There is a minimum salary threshold for coverage. As of April 2024, employees earning up to INR 21,000 per month are generally covered under ESI.

Employers contribute 4.75%, and employees contribute 1.75% (for wages below INR 137 per day, employee contribution is nil.)

Also, employers must register their company with ESIC if they meet the eligibility criteria.

Conclusion

To wrap up, a deep understanding of CTC is essential for anyone negotiating a job offer or evaluating a compensation package. Once you familiarise yourself with various components like allowances and employer contributions, you can get a clearer picture of the total value that you receive from your employer.

Frequently Asked Questions (FAQs)

What is a CTC?
CTC stands for the cost to the company. It is the total amount a company spends on an employee annually.
Why is understanding CTC important?
Knowing your CTC helps you understand the total value of your compensation package, which ultimately allows you to compare job offers more efficiently and negotiate your salary confidently.
What is the difference between CTC and take-home salary?
CTC is the total cost to the company, while your take-home salary is what you receive after taxes and other deductions from your CTC.
Does a higher CTC always mean a better job offer?
Not necessarily. A high base salary with fewer benefits might be better for some, while a lower base salary with great benefits might suit others.
Are there any taxes on CTC?
Taxes are levied on your take-home salary- a portion of your CTC after deductions.

May 14, 2024

Old Regime Vs New Tax Regime: Which Is Right For You?

You have put in a lot of effort and made money, but you’re not sure which tax regime to choose, the new or the old one.

Don’t worry; we’ve got you covered. Read the blog to get all the answers to your old and new regime related questions.

Overview of Income Tax Slab

A taxation system that applies to an individual based on their income and taxes them based on different slabs is referred to as an income tax slab. An individual’s tax slab rises in tandem with their income. This taxation system is regarded as fair and progressive because an individual’s tax liability rises with their income, and lower income groups are exempt from taxes.

The Ministry of Finance modify / update the tax slabs annually, and they are announced at each budget speech.

Tax Regimes in India

In India currently, there are two types of tax regimes, i.e., Old Regime and New Regime.

Old Tax Regime – Before 2020, India had just one tax system. Under the Old tax system, you could deduct a variety of expenses from your income, such as house rent, travel expenses, medical expenses, tuition fees for children, etc. This would help you minimize your income and lower your tax obligation.

In the Old regime, the slab was determined by an individual’s age. Have a look at the below table:

Income Slab	Tax Rate
Income Slab	Individuals aged <60 years	Senior Citizens aged above 60 but below 80 years	Super Senior Citizens aged >80 years
Up to INR 250,000	Nil	Nil	Nil
INR 250,001 to 300,000	5%	Nil	Nil
INR 300,001 to 500,000	5%	5%	Nil
INR 500,001 to 1,000,000	20%	20%	20%
Above INR 1,000,000	30%	30%	30%

New Tax Regime – The Ministry of Finance announced a new taxation system (optional) for individuals and Hindu Undivided Families (HUFs) in the budget of the financial year 2020–21. However, if a person chooses to use the new tax regime, they will not be eligible to deduct things like HRA, LTA, Section 80C deductions, and so on. In fact, no deductions are available in the new tax regime apart from the standard deduction of INR 50,000 for salaried individuals and pensioners. Because there aren’t many deductions available under the new regime, many don’t like it, and not many have chosen it after its implementation.

Income Tax Slab as per new regime

Income Slab	Tax Rate
Up to 300,000 INR	Nil
300,001 to 600,000 INR	5%
600,001 to 900,001 INR	10%
900,001 to 1,200,001 INR	15%
1,200,001 to 1,500,001 INR	20%
Above 1,500,000 INR	30%

Old Tax Regime Vs New Tax Regime

There are a few major differences between the old and new tax regimes. Let’s analyze each one of them:

Tax Rates

Under the old tax regime, tax rates are higher, but an individual can avail of various tax deductions in sections such as 80C, 80D, 80TTA, etc.
While the new tax system has reduced tax rates, it does not permit the use of the Income Tax Act’s deductions.

Simplicity

Although there are many ways to save taxes under the previous tax system, it could be challenging to engage in tax planning. Further, sometimes people end up spending / investing their savings only to avail certain deductions.
The new tax system offers a simpler tax calculation; however, individuals may lose out on deductions offered in the old tax regime.

Tax Implications

The previous tax system levied taxes based on an individual’s income and allowed deductions, which favored higher-income earners.
2.The new tax system mainly benefits those with lower incomes and those who don’t want to claim any deductions.

Example of Calculation under different Tax Regime

Let us clarify the differences between tax regimes using examples to help you better understand the difference.

Suppose Mr. A is a salaried individual who is earning an annual income of INR 800,000 (salary). Let’s calculate the tax liabilities of Mr. A under different tax regimes:

Old Tax Regime

Particulars	Tax under Old Regime (INR)
Salary	800,000
Less: Standard Deduction	-50,000
Taxable Income	750,000
Tax up to 250,000	Nil
Tax from 250,001 to 500,000 @5%	12,500
Tax from 500,001 to 750,000 @20%	50,000
Total Tax	62,500
Cess @4% on Total Tax	2,500
Total Tax including cess	65,000

New Tax Regime

Particulars	Tax Under Old Tax Regime (INR)
Salary	800,000
Less: Standard Deduction	-50,000
Taxable Income	750,000
Tax up to 300,000	Nil
Tax from 300,001 to 600,000 @5%	15,000
Tax from 600,001 to 750,000 @10%	15,000
Total Tax	30,000
Cess @4% on Total Tax	1,200
Total Tax including applicable cess	31,200

From the above tables, we can conclude that if Mr. A opts for the old tax regime, his tax liability will come to INR 65,000; while he opts for the new tax regime, he will save INR 33,800.

Conclusion

In summation, it depends on individual-to-individual which tax system is better as each person’s net taxable income and amount of deductions is different. Both the new and old taxation system has advantages and disadvantages of its own. Choosing between the two will necessitate professional guidance from a tax adviser or a Chartered Accountant.

Further, if you want to calculate your taxable amount, explore our calculator: I ncome
Tax Calculator

Frequently Asked Questions (FAQs)

Is the section 80C deduction still relevant under the new tax regime?
No, deduction under Section 80C (up to INR 150,000) is not allowed when you opt for a new tax regime. It is only available in the old tax regime.
Can a salaried individual change the new regime to the old regime?
Yes, any individual who has opted for a new tax regime can opt for an old tax regime in the next financial year.
Is deduction u/a 80D applicable in the new tax regime?
No, an individual cannot claim a deduction under section 80D as the insurance premium paid towards health insurance is not applicable in the new tax regime.
When was the new tax regime introduced?
The Finance Minister, Nirmala Sitharaman, announced a new tax regime (optional) for individuals and Hindu Undivided Families (HUFs) in the budget of 2020-21.
Which tax regime is better for me if I have a home loan?
If you have a home loan or are looking to take one, then you should opt for the old tax regime. However, it still depends on the interest amount of the loan and your taxable income.

May 13, 2024

Cost Inflation Index (CII) For FY 2023-24: Index Table, Meaning, Calculation

In India, we have to pay the capital gains tax when you sell something you have had for a while and make a profit from it. But what if inflation has totally eaten away your profit? This is where the Cost Inflation Index, or CII acts like a saviour for Indian investors and makes sure that you are only paying tax on actual gains after adjusting for inflation.

In this blog, we will delve deeper into the world of CII, explaining its role in capital gains calculations, and how it benefits investors.

What is Cost Inflation Index

The CII is a tool used in India to account for inflation while calculating capital gains tax on the sale of long-term assets where inflation is defined as a rise in the prices of goods and services over time. This indicates that the same amount of money will buy you fewer items over time.

In India, the Central Government makes the final decision on the Cost of Inflation Index. The Central Board of Direct Taxes (CBDT), which reports to the Ministry of Finance, is usually involved in the process.

The CBDT is responsible for formulating and administering direct tax policies in India. They most likely evaluate data and economic trends before recommending CII levels to the government. The final notice of the CII for each fiscal year is subsequently issued in the official gazette.

Let us understand why CII is essential with an easy example:

Suppose you bought a property in 1990 for INR 1 lakh and sold it in 2023 for INR 50 lakh. On paper, you made a profit of INR 49 lakh. However, due to inflation, the actual purchasing power of INR 50 lakh is much lower than INR 1 lakh in 1990.

CIIs help address this difference by taking inflation into account and providing a fairer picture of your actual capital gain (profit adjusted for inflation).

The Base Year Concept

The concept of base year likely originated around the 18th or 19th century, coinciding with the development of economic theories.

The absence of a fixed reference point leads to less accurate comparisons in earlier times. The evolution of economic data collection resulted in a growing need for a standardized reference point.

Opting for a specific year as the foundational benchmark enabled the facilitation of comparisons pertaining to several economic indicators such as prices, production, etc.

In the 21st century, the importance of using a ‘normal’ year, free from major economic disruptions, as the base year became more recognized.

Now, many countries, including India, choose to revise their base year periodically, usually every 5-10 years. This allows them to take into account changes in the economy and enhance the accuracy of comparisons.

In this context, India’s base year was changed from 1981 to 2001 because of the following reasons:

Difficulty in valuing older Asset
By 2017, assets bought before 1981, the original base year, had probably been held for many decades. Thus, it became harder to find accurate data to determine the fair market value (FMV) of assets as of April 1, 1981, which eventually resulted in disagreements between taxpayers and tax authorities.
Efficiency and Accuracy
Using a more recent base year (2001) made it easier for taxpayers to use current data to assess the value of their assets—this simplified and improved the capital gains calculations.

Additionally, the change was implemented in the Finance Act of 2017, and taxpayers can calculate the cost price using either the actual cost or the higher fair market value as of April 1, 2001.

Cost Inflation Index Calculation

When calculating capital gains tax, you can use the CII to inflate the original buy price of the asset to its present value.

This reduces your taxable capital gain and lowers your tax burden.

The Indian Government publishes a CII table every year, which shows an index value for each year, with 100 as the base year. Let us have a quick overview of formula for CII:

Cost of Inflation Index = (Current year index / Base year Index) * 100

For example, an individual bought a piece of land in the year 2000 for INR 2 lakhs and sold it in 2024 for INR 10 lakhs. Here, the capital gain is INR 8 lakhs.

Now suppose, the CII for the year 2000 is 150, and for the year 2024 is 348.

Using the CII values, the adjusted buy price will be: (348/150) * 2 = INR 4.64 lakhs.

Eventually, your capital gain would be INR 10 lakhs (selling price) – INR 4.64 lakhs (adjusted cost) = INR 5.36 lakhs, which was 8 lakhs earlier.

Benefits of CII for Investors

The absence of the CII could distort an investor’s earnings as a result of inflation. Imagine selling an asset you bought decades ago for a seemingly high price. Nevertheless, owing to the impact of inflation, the adequate purchasing power of the money could be significantly lower. CII ensures your profit reflects the real increase in value and not just inflation-driven price hikes.
CII helps investors reduce their taxable capital gains since it lowers the difference between the selling price and the inflation-adjusted cost price by adjusting the original purchase price for inflation. This translates to a lower capital gain and lower tax liability.
CII can encourage businesses to focus on long-term growth and sustainability rather than short-term gains. By aligning investor incentives with long-term success, the economy may experience more sustainable and balanced growth.
CII serves as a safeguard for investors, ensuring equality in the tax system, and improving long-term investment results.

Conclusion

The CII is vital for India’s tax system. It promotes fairness and encourages long-term investment by combating the distorting effects of inflation on capital gains tax calculations. Whether you are a seasoned investor or just starting your investment journey, it is crucial to have a grasp of the CII and how it influences the taxation of your investments. Additionally, being aware of the CII can help you make better decisions to optimize your tax planning.

Frequently Asked Questions (FAQs)

What is CII?
The Cost of Inflation Index is a tool used in India to adjust the buy price of assets when calculating capital gains tax.
Why is CII important?
It helps in paying your tax on your actual profit, not just inflation-driven price.
Who decides the CII?
CII’s final decision rests with the Central Government based on the CBDT recommendation.
Is CII is applicable to all the assets?
CII generally applies to long-term capital gains tax on assets like property or stocks.
Can I use the actual purchase price instead of CII?
Yes, you can choose the actual purchase price or the FMV as of 1 April 2001 (whichever is higher) for calculating the cost price.

Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations

May 6, 2024

Category: Personal Finance

Credit Score – An Overview

Credit Information Companies (CICs)

Factors that Affect Credit Score

How to Boost Your Credit Score?

Conclusion

Frequently Asked Questions (FAQs)

What is a credit score?

What affects my credit score?

Who uses credit scores?

Can I get a free credit report?

What is a good credit score?

Liquid Investments – Overview

Investment Avenues

Banks Savings Account

Bank Fixed Deposits

Did you know?

Short-Term Debt Funds

Arbitrage Funds

Liquid Mutual Fund

Conclusion

Frequently Asked Questions (FAQs)

Are Liquid funds better than Bank Fixed deposits?

What is the meaning of Liquid investments?

Why is a Liquid fund better than a Savings account?

How does an Arbitrage fund work?

What is the taxation on an Arbitrage fund?

Taxation in India

Direct Taxes

1. Income Tax

2. Capital Gains Tax

3. Corporate Tax

4. Property Tax

Indirect Taxes

1. Goods & Services Tax (GST)

2. Customs Duty

3. Excise Duty

Uses of Taxes

Public Services

Social Welfare Programs

Conclusion

Frequently Asked Questions (FAQs)

What are the two main types of taxes in India?

Are there any tax benefits or deductions available?

What happens if I don’t pay my taxes on time in India?

Where can I get help with filing my taxes?

Do I need to pay customs duty?

Mutual Fund Distributors

Duties of Mutual Fund Distributors

Eligibility of a Mutual Fund Distributors

Registered Investment Advisors

Duties of RIAs

Eligibility of RIAs

Difference between MFD & RIA

Conclusion

Frequently Asked Questions (FAQs)

Can MFD charge fees from their investors?

How does RIA make money?

For comprehensive financial planning, whom should I approach?

What are the minimum fees for taking services from a SEBI RIA?

Which certification exam must you pass to become a Mutual Fund Distributor?

Buying a House

Pros of Buying a House

Cons of Buying a House

Renting a House

Pros of Renting a house

Cons of Renting a house

Tax Benefit of Housing Loan

Which is right for you?

Conclusion

Frequently Asked Questions

What are the tax implications of renting vs buying a house?

I am a 25-year-old individual who got a new job with a salary of around INR 50,000 per month. Should I buy a home or live in a rented house?

What financial factors are to be considered before deciding on renting and buying?

I want to customize my home, should I go for renting or buying?

Does buying a house create wealth in the long run?

Overview of Kotak Mahindra Bank

The Problem with Kotak Bank

Clarification by Kotak Mahindra Bank

Impact on the Stock Price