Pocketful

Category: Personal Finance

  • RIAs vs MFDs: Who Is Better?

    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

    Mutua Funds 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

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

    Eligibility of a Mutual Fund Distributors

    1. The applicant must be above 18 years.
    2. 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).
    3. The minimum qualification must be class 10th or 12th with three years of diploma.
    4. Every corporate mutual fund distributor employee must be NISM VA certified.
    5. After obtaining the license, they are provided an ARN number.

    Registered Investment Advisors

    Registered Investment Advisors

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    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

    1. 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.
    2. 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.
    3. 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.
    4. RIAs are required to follow all compliance orders issued by the relevant authorities and maintain the required filings.

    Eligibility of RIAs

    1. SEBI mandates few specific educational qualifications to become an RIA, such as a post-graduation degree from a recognized university.
    2. The applicant must have at least five years of experience in providing financial advisory services.
    3. 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.
    4. 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.
    5. 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:

    ParticularsMFDRIA
    ServicesProvide 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-upMFDs 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.
    RevenueTheir 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.
    RegulationsMFDs are regulated by AMFI and SEBI.RIAs are regulated only by SEBI.
    Minimum Investment / FeesMFDs 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.

    Read Also: RBI Action On Kotak Mahindra Bank: Should You Invest?

    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)

    1. Can MFD charge fees from their investors?

      MFDs can earn only a commission from AMCs in which their clients invest.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

  • Buying vs Renting: Which Is The Better Choice?

    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

    Pros of Buying a house
    1. 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.
    2. 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.
    3. 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.
    4. 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

    1. 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.
    2. 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.
    3. 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.
    4. 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.

    Read Also: Which is Better: Fixed Deposit or Residential Property Investment

    Renting a 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

    1. Lower financial burden – Paying monthly rent will have less impact on your pocket as rent will be lower than your home EMIs.
    2. 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.
    3. No additional cost – While living in a rented house, you don’t need to worry about paying property taxes, repair bills, maintenance costs, etc.
    4. 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.
    5. 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

    1. Rise in Rent – The landlords generally increase the rent on an annual basis, but they can do so anytime in between.
    2. No Tax Benefits – Paying rent will not fetch you any tax benefits. However, one can claim an HRA deduction.
    3. 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.
    4. 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.
    5. 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

    Tax Benefit of Housing Loan
    1. 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.
    2. 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.

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    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

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

  • RBI Action On Kotak Mahindra Bank: Should You Invest?

    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

    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?

    Should you worry if you have 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.

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    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)

    1. 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.

    2. When was Kotak 811 launched?

      Kotak Mahindra Bank launched the Kotak 811 platform in 2017.

    3. 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.

    4. Who is the founder of Kotak Mahindra Bank?

      Mr. Uday Kotak founded the Kotak Mahindra Bank in 1985.

    5. 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.

  • Inheritance Tax: Past, Progression, And Controversy

    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.

    Read Also: Types Of Taxes In India: Direct Tax And Indirect Tax

    Did you Know?

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

    Evolution of Inheritance Tax

    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

    Inheritance tax 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.

    Read Also: Why Do We Pay Taxes to the Government?

    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)

    1. Does India have an inheritance tax?

      As of April 2024, India does not have a national inheritance tax.

    2. Why is inheritance tax being discussed again?

      Growing wealth inequality and aligning it with global trends are common discussion topics.

    3. What are the arguments in favour of inheritance tax?

      Common arguments include reducing inequality, ensuring fairness, and aligning with global trends.

    4. 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.

    5. 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.

  • Breakdown of CTC: A Detailed Analysis

    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

    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.

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    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.

    Read Also: Top Indicators Used By Intraday Traders In Scalping

    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)

    1. What is a CTC?

      CTC stands for the cost to the company. It is the total amount a company spends on an employee annually.

    2. 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.

    3. 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.

    4. 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.

    5. Are there any taxes on CTC?

      Taxes are levied on your take-home salary- a portion of your CTC after deductions.

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

    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 SlabTax Rate
    Individuals aged <60 yearsSenior Citizens aged above 60 but below 80 yearsSuper Senior Citizens aged >80 years
    Up to INR 250,000NilNilNil
    INR 250,001 to 300,0005%NilNil
    INR 300,001 to 500,0005%5%Nil
    INR 500,001 to 1,000,00020%20%20%
    Above INR 1,000,00030%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 SlabTax Rate
    Up to 300,000 INRNil
    300,001 to 600,000 INR5%
    600,001 to 900,001 INR10%
    900,001 to 1,200,001 INR15%
    1,200,001 to 1,500,001 INR20%
    Above 1,500,000 INR30%

    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

    1. 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.
    2. While the new tax system has reduced tax rates, it does not permit the use of the Income Tax Act’s deductions.

    Simplicity

    1. 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.
    2. The new tax system offers a simpler tax calculation; however, individuals may lose out on deductions offered in the old tax regime.

    Tax Implications

    1. 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.

    Read Also: What Is The Difference Between TDS and TCS?

    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

    ParticularsTax under Old Regime (INR)
    Salary800,000
    Less: Standard Deduction-50,000
    Taxable Income750,000
    Tax up to 250,000Nil
    Tax from 250,001 to 500,000 @5%12,500
    Tax from 500,001 to 750,000 @20%50,000
    Total Tax62,500
    Cess @4% on Total Tax2,500
    Total Tax including cess65,000

    New Tax Regime

    ParticularsTax Under Old Tax Regime (INR)
    Salary800,000
    Less: Standard Deduction-50,000
    Taxable Income750,000
    Tax up to 300,000Nil
    Tax from 300,001 to 600,000 @5%15,000
    Tax from 600,001 to 750,000 @10%15,000
    Total Tax30,000
    Cess @4% on Total Tax1,200
    Total Tax including applicable cess31,200

    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.

    Read Also: Types Of Taxes In India: Direct Tax And Indirect Tax

    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: Income
    Tax Calculator

    Frequently Asked Questions (FAQs)

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

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

    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

    Overview of CII

    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

    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.

    Read Also: What is Inflation? Meaning, Types, & Risks

    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)

    1. 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.

    2. Why is CII important?

      It helps in paying your tax on your actual profit, not just inflation-driven price.

    3. Who decides the CII?

      CII’s final decision rests with the Central Government based on the CBDT recommendation.

    4. Is CII is applicable to all the assets?

      CII generally applies to long-term capital gains tax on assets like property or stocks.

    5. 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

  • What Is Contract Note and Its Significance

    What Is Contract Note and Its Significance

    In the finance and the stock market, trust and security are very important for investors and traders. One such document that plays a paramount role in financial transactions is the Contract Note. This blog will help you understand the contract’s note definition, importance, and purpose.

    Understanding contract note is of utmost importance to all market participants, whether a newcomer or an experienced professional, as it prevents fraud and acts as a legal record for future purpose.

    What is a Contract Note?

    It is a legal document that records all the successful transactions the broker executes. It is provided by the broker whenever a trade has been executed. All types of transactions are recorded in a contract note, including equity and derivatives (instruments whose value depends on an underlying asset such as equity, commodity, currency, etc.). A contract note was first introduced by the regulator, i.e., SEBI in India.

    The SEBI also has prespecified the format of a contract note and the time by which it should be delivered by the broker that is within 24 hours of executing the trade.

    The contract note includes transactions executed with timings, profit / loss summary, charges, taxes, and many more important details.

    Example

    Sahil is an intraday trader. On December 10, 2023, he bought shares of a steel company worth INR 12,000 and 9,000 in a textile company. Within 24 hours of executing the trades, preferably by next morning, he will receive an email with a note attached that contains details of the trade executed – the number of shares bought, at what price, charges, taxes, etc.

    Read Also: Cost of Carry in Futures Contract

    Purpose of a Contract Note

    1. It provides all the necessary details about trades executed and allows traders and investors to monitor various trades executed throughout the day.
    2. It helps the traders get a summary of the trades and facilitates record keeping for both the parties (investors and brokers). A contract note can be presented if any fraud or dispute arises. Generally, complaints can be registered up to 6 months after the transaction date.
    3. It explains the differential amount in gross gain / loss and net gain / loss (gross proceeds received before any deductions of brokerages, taxes, and charges).
    4. Contract notes are mandatory to ensure compliance with the regulatory authorities.

    Format of a Contract Note

    The name of the trading member (Stock Broker) along with its address and SEBI registration number, is mentioned at the top of the contract note.
    The left side of the contract note includes:

    1. Contract Note Number
    2. Trade Date
    3. Name of the client
    4. Address of the client
    5. PAN of the client
    6. Unique Client Code (UCC) of client and many more details
    • Information regarding the exchange on which transactions took place is shown on the right side of the contract note, including the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) or Multi Commodity Exchange (MCX).
    • Settlement Number and Settlement Date under the respective exchange heads are also shown on the right side.
    • The main content of the contract note is shown after the above part on the right side. The content includes:
    1. Order Number – A unique number is created and assigned for each trade executed. This number will be different for each of the orders executed on the platform.
    2. Order Time – Shows the exact time the order was placed.
    3. Trade Time – This indicates the exact time when the order was executed on the exchange. Order time and trade time may be different due to the market momentum, exchange response time, etc.
    4. Security or Contract Description – It mentions the name of the stock, futures, and options traded.
    5. Buy (B)/ Sell (S) – Indicates the type of trade. It shows “B” for a buy side trade and “S” for a sell trade.
    6. Quantity – This shows the number of shares or lots (in case of options and futures) bought or sold. It shows a positive number when share / lots are bought and a negative number when shares / lots are sold.
    7. Gross Rate – It represents the market price of the stock at which the order was executed.
    8. Brokerage per unit – Accounts for the brokerage charged for each stock / lot.
    9. Net Rate per unit – Similar to gross rate/unit but there is a slight difference. The net rate per unit accounts for the actual price at which the trade occurred, excluding any brokerage fees.
    10. Closing Rate/Unit – This represents the closing price of the derivatives contract traded for mark to market settlement. The Mark to market settlement is daily settlement of profit and losses arising due to the change in the security’s market value.
    11. Net total before levies – Calculates the total amount liable to pay or receive after executing the trades. It excludes the fees like brokerage and taxes.
    • The second half of the contract note covers all the monetary aspects, including net payable/receivable, taxes, brokerage, and STT.
    1. Net payable/receivable – The last row indicates the net amount payable/receivable after all the levies and taxes. Note that Depository Participant (CDSL and NSDL) charges, call and trade charges are available in the ledger report and not specified in the contract note.
    2. Taxes and Charges – Taxes and charges are calculated based on the transaction value. It includes securities transaction tax, goods and services tax, stamp duty, exchange transaction charges, and SEBI turnover fees.
    3. Brokerage – Commissions or fees charged by the broker for executing trades on behalf of the client.
    4. STT – Stands for Securities Transaction Tax. It is levied on all transactions made on the stock exchanges by the Government. The STT rates differ based on the product segment.
    • Pay in / Pay out Obligation: This amount represents the debit and credit transactions. If a debit transaction occurs, it is denoted with a negative sign or vice versa.
    • Terms and Conditions: Contract notes may contain additional terms and conditions agreed upon by the parties involved in the transaction..

    A Contract Note does not contain the following details:

    1. DP Charges – It means Depository Participant charges, which are levied compulsorily by the depositories (CDSL or NSDL) when shares are sold from a demat account. The DP charges are not presented on the contract note but are shown in fund statements.
    2. Payment Gateway Charges – Charges levied for authorizing credit card or direct payment processing by the banks.
    3. Call and Trade Charges – Call and Trade is a service offered by many brokers that offers their clients to call a specific number and place an order to buy or sell shares. The charges depend on the broker and type of brokerage plan selected.
    4. Margin Details – Margin refers to the loan taken from the brokers to trade. The contract note doesn’t represent the margin details of the trades executed.
    5. Others – Outstanding positions of a client, details about past trades, etc.

    Read Also: What is Contrarian Investing?

    Conclusion

    The Contract Notes are paramount to investors and traders by providing documentation and keeping records of all transactions. Understanding and utilizing the components of a contract note effectively helps investors to safeguard their interests in financial markets. It helps the investors to understand the brokerage charges and accurately assess the cost of transactions. The guidelines and format specified ensure transparency and compliance with regulatory authorities that assist investors in making informed decisions.

    Frequently Asked Questions (FAQs)

    1. Can a contract note be issued in an electronic form?

      Yes, a contract note can be issued in an electronic format called an E-Contract Note (ECN) or a Digital Contract Note.

    2. What time should the contract note be delivered?

      As mandated by SEBI, a Stock Broker should issue a contract note within 24 hours of executing the trades.

    3. Can I get a contract note for the purchase of shares?

      Yes, a contract note from a stock broker should be received whenever a transaction takes place.

    4. Is the contract note provided free of charge?

      E-contract Note is provided by the broker via email for free of charges. Most brokers charge a fee for physical contract notes sent via courier.

    5. Are margin details available in the contract note?

      No, the contract note does not contain the margin details; instead, the margin statement is a separate document containing this information.

  • What is AI Washing? Definition, Tips, Evolutions & Impact

    What is AI Washing? Definition, Tips, Evolutions & Impact

    AI Washing and its impacts

    Ever feel like an intelligent appliance is not smart? Or maybe that AI-powered service seems suspiciously similar to a basic chatbot? You are not alone. Today’s tech world is buzzing with a term you might not be familiar with – AI Washing.

    In this blog, we will explore the deceptive world of AI Washing, where companies mislead consumers / investors about the role of artificial intelligence in their products. We will learn why this is happening, how to avoid it, and the impact it has on different segments of society. Let us unveil the truth behind the AI hype.

    What Is AI Washing

    AI Washing is a marketing trick that uses deception. Companies will claim a product or service uses advanced AI technology when it does not. They are trying to make their offering seem more high-tech and appealing to customers by hitching a ride on the growing interest in Artificial Intelligence (AI).

    This trick is more or less similar to greenwashing, which is when companies exaggerate their environmental efforts.

    For instance, a company might say their new vacuum cleaner uses ‘revolutionary AI’ to clean your floors. But it does bump around randomly until it hits everything, and that’s not very AI.

    There are a couple of reasons why AI Washing might be trending these days:

    • Artificial Intelligence is a rapidly growing field that is getting a lot of buzz. People are interested in it, and companies are well aware that by claiming their products are AI-powered, they can seek the attention of the customers and investors.
    • Many people do not have a clear understanding of how AI works. This makes it easier for companies to use confusing jargon and get away with AI washing.
    • If a product sounds impressive and futuristic, people might be more likely to buy it, regardless of whether the AI claims are real.

    Therefore, AI washing is popular because it preys both on the popularity of AI and the lack of widespread knowledge about how it works.

    Evolution of AI Washing

    Evolution of AI Washing

    With the rapid growth of Artificial Intelligence and Machine Learning in the 2010s, AI became a buzzword linked with innovation and progress. This created a market opportunity for companies to leverage the term, even if their products had little to no real AI integration.

    Various factors converged to make AI washing more prevalent.

    • Many consumers lack a deep understanding of AI, making it easier for companies to use technical jargon and create a mystique around their products.
    • The rapid pace of technological advancement can make it difficult for consumers to keep up. This allows companies to exploit the knowledge gap and make vague claims about AI Capabilities.
    • Some companies focus on flashy marketing campaigns over clear explanations of how their products work. This lack of transparency creates a fertile ground for AI washing.

    Tips to avoid AI Washing

    • Look for Transparency:
      Reputable companies that genuinely use AI will often be happy to explain how it works in their products. If information is scarce or shrouded in technical jargon, that may be a red flag.
    • Ask Questions:
      Do not be afraid to dig deeper. Research the company’s claims and see if there are independent reviews that shed light on the actual functionality.
    • Focus on the function:
      Instead of getting caught up in fancy AI buzzwords, think about what the product does. Does it solve a problem in a meaningful way? That is more important than any AI label.
    • Healthy Scepticism:
      A little doubt is a good thing. If something sounds too good to be true, especially when it comes to AI claims, it probably is. By asking the right questions, you can avoid getting swept away by AI washing and make informed decisions about the products you choose.

    Impact of AI Washing

    Impact of AI Washing

    AI washing can have negative impacts on several parties involved, including customers, businesses, and the AI Industry.

    1. Deception and Wasted money:
      Consumers misled by AI Washing might end up buying products that do not offer the promises stated which can eventually lead to frustration and a feeling of being cheated.
    2. Erodes trust in AI:
      Repeated exposure to exaggerated claims can make people skeptical about the real power of AI technology.
    3. Hurts reputation:
      Companies caught AI Washing can damage their brand image and lose customer’s confidence.
    4. Distracts from Genuine Innovation:
      The focus on the hype can overshadow real advancements in AI Development.
    5. Slows down the Progress:
      If resources are wasted on AI Washing, it can slow down genuine research and development in the field.
    6. Hinders Public Adoption:
      A public disillusioned by AI Washing might be less receptive to future AI applications, even beneficial ones.

    Overall, AI washing can create a climate of distrust and hinder the responsible development and adoption of AI technology. By being aware of AI washing tricks and tactics and demanding transparency, consumers and businesses can help ensure the ethical and productive advancement of artificial intelligence.

    Read Also: Scope of AI in Investing: Usage, Benefits, and Challenges

    Examples of AI Washing

    Examples of AI Washing
    • The US Securities and Exchange Commission penalised two investment advisory firms, Delphia and Global Predictions for falsely claiming their use of advanced AI in their investment decisions.
    • Coca-Cola’s Y3000 drink supposedly co-created with AI to have a unique taste, raised eyebrows at initial launch. The drink was a limited-edition beverage, and the company claimed that the drink’s flavour was developed using AI in combination with human input. The AI analysed the consumer data on emotions, aspirations, and flavour preferences to create a taste profile for the future. However, the critics pointed out that it was just a marketing gimmick with minimal AI involvement.
    • Retail giants like H&M and Zara have also been criticised for using terms like ‘AI-powered’ in their marketing campaigns without clear explanations of what mean in terms of their products.

    Read Also: Best Artificial Intelligence (AI) Stocks In India 2025

    Conclusion

    To wrap it up, AI washing is a threat to consumer trust. By educating ourselves and demanding transparency we can push back. Do not get swept away by the fascinating words of companies and focus on product functionality. Look for businesses that explain how AI is used and focus on tangible benefits. Together, we can create a tech landscape where AI is a force for good, not a marketing ploy. Keep in mind that the future of AI depends on us all being informed and empowered consumers.

    Frequently Asked Questions (FAQs)

    1. What is AI Washing?

      AI washing is when companies mislead consumers about the extent of artificial intelligence used in their products or services.

    2. Why do companies do it?

      Companies use AI washing to make their products more innovative and appealing, hoping to fascinate customers.

    3. How can I spot AI washing?

      Be aware of vague claims like ‘AI-powered’ or ‘intelligent’ and look for details on how AI is used.

    4. Is anything being done about AI washing?

      Yes, there is a growing awareness, and some regulatory bodies are looking into misleading AI claims.

    5. Does this mean that all AI claims are false?

      No! Real AI advancements are happening, but be careful of exaggerated marketing.

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

  • Ratio Analysis: List Of All Types Of Ratio Analysis

    Ratio Analysis: List Of All Types Of Ratio Analysis

    Have you ever had trouble making sense of the enormous numbers and information provided in a company’s financial reports? Before making any investment decisions, though, it is important to take financials into account because they reflect the company’s overall picture and can be used to analyse the future growth.

    In this blog, we will deep dive into the ratio analysis and how it can help you grasp a company’s overall fundamental image.

    Overview

    Ratio Analysis Guide

    Ratio analysis is a method of analysis that compares the financial data of a company. Financial statements, including the income statement and balance sheet, are used to extract the data, which are then compared to each other and help us identify investment opportunities.

    Through ratios, we can understand the raw & bland data of the balance sheet and income statement into actionable ideas.

    Importance of Ratio Analysis

    1. The ratio analysis gives us insight into the company’s historical performance, which we can use to forecast its performance in the future.
    2. Ratios can help you identify areas of weakness in the organization where more effort needs to be made.
    3. By examining the ratios, investors can decide whether to invest or not and create strategies accordingly.
    4. Ratio analysis can help investors in comparing a company’s performance with its peers and against the industry.

    Types of Ratios

    Type of Ratios

    There are four broad categories of ratios:

    1. Liquidity Ratio – These ratios reflect the company’s ability to pay off its short-term liability / obligations.
    2. Solvency Ratio – This is also known as the leverage ratio, which reflects the company’s ability to repay its long-term debt & obligations.
    3. Profitability Ratio – This ratio shows the company’s ability to generate profit from its operating activities.
    4. Valuation Ratio – This ratio reflects the intrinsic value of a company’s stock as compared to its current market price. It helps in identifying whether a company’s stock price is fairly valued, undervalued, or overvalued.

    Let’s have a deeper analysis of each type of ratio.

    Read Also: Explainer on Liquidity Ratios: Types, Importance, and Formulas

    Liquidity Ratios

    Liquidity ratios can be used to assess a company’s capacity to satisfy short-term obligations (debt that must be repaid within a year).

    Before granting a loan such as a working capital loan, the company’s creditors typically check this ratio to ensure the company can afford to repay it. An organization’s creditworthiness is harmed if it cannot pay its short-term debts on schedule.

    Types of Liquidity Ratios

    Generally, there are 3 types of liquidity ratios:

    1. Current Ratio :

      This ratio is calculated to evaluate the company’s ability to sell its short-term assets, such as inventory, and settle its short-term liabilities. It is also known as the working capital ratio.

      Current Ratio = Current Asset / Current Liability

      A greater than 1 current ratio indicates that the company has more current assets than its current liability.
    2. Quick Ratio :

      It is similar to the Current ratio, however, inventory is not taken into account for determining the company’s capacity to meet its short-term obligation. The Acid Test Ratio is another term for it.

      Quick Ratio = Current Asset – Inventory / Current Liabilities

      Generally, the quick ratio greater than 1 is considered a good number.
    3. Cash Ratio :

      Here, Current assets are limited to cash and cash equivalents.

      Cash Ratio = Cash and cash equivalent / Current Liabilities.

      The ideal cash ratio will be 1 or greater than 1.

    Solvency Ratios

    To assess a company’s capacity to settle its long-term debts, solvency ratios are computed. Creditors and investors use this ratio to assess the company’s ability to settle long-term obligations.

    Types of Solvency Ratios

    1. Debt to Equity Ratio – This ratio helps in assessing the company’s financial stability.

      Debt to Equity Ratio = Total Debt / Total Equity (Lower is better).
    2. Debt Ratio – This ratio evaluates the company’s debt-financed assets. A lower debt ratio indicates greater financial stability and less reliance on debt funding.

      Debt Ratio = Total Debt / Total Asset
    3. Interest Coverage Ratio – It measures the company’s ability to cover its interest expense by its earnings before interest and taxes, which is generally known as EBIT. A higher ratio signifies a strong ability to meet the company’s interest obligations.

      Interest Coverage Ratio – EBIT / Interest Expense
    4. Debt Service Coverage Ratio – This ratio assesses how well the business can use operational profits to pay its debt. It is measured by the amount of cash flow that can be used to pay down debt principal and interest.

      Debt Service Coverage Ratio = Net Operating Income / Total Debt Service.

    Profitability Ratios

    The profitability ratios are helpful in assessing a company’s profitability on several metrics, such as equity, sales, and assets. It allows us to assess how well a business uses its resources to generate profits. The higher the profitability ratios, the better it is for the company.

    Some commonly used profitability ratios are:

    1. Gross Profit Margin – It paints a picture of how a business effectively runs its manufacturing process.

      Gross Profit Margin = (Revenue – COGS) / Revenue * 100
    2. Net Profit Margin – It is computed as a percentage of revenue, which is what’s left over after all costs, including taxes, interest, operating expenses, and cost of products sold, are subtracted.

      Net Profit Margin = Net Income / Revenue * 100
    3. Return on Equity (ROE) – The ROE measures the company’s ability to generate profit from shareholder’s equity. Through ROE, one can estimate the return earned by the company on shareholder’s fund.

      Return on Equity = (Net Income / Average Shareholder’s Equity) *100
    4. Earnings Per Share – It is used to evaluate a company’s profitability on a per-share basis, or in other words, the amount of net income attributable to each outstanding share of common stock.

      Earnings Per Share = (Net Income – Preferred Dividends) / Average no. of outstanding shares

    Valuation Ratios

    These are used to calculate the intrinsic value of a company’s stock as compared to its current market price. This can evaluate whether a company’s stock price is fairly valued, undervalued, or overvalued.

    A few valuation ratios used by investors for evaluating a company’s stock price are:

    1. Price to Earnings Ratios – The P/E ratio means how much an investor is willing to pay for each rupee earned by the company. A higher ratio reflects that investors are expecting higher growth, but a higher PE ratio sometimes also suggests that a stock might be overvalued.

      Price to Earnings Ratio = Market price per share / Earnings per share (EPS).
    2. Price to Book Value – In this, the stock price of a company is compared to its book value per share. It indicates whether a company’s stock is selling above or below its book value.

      Price to Book Value = Market price per share / Book value per share.
    3. Price to Sales Ratio – This ratio helps us in comparing a company’s stock price to its sales or revenue per share. It reflects how much an investor is willing to pay for every INR of a company’s sales. The higher ratio suggests that the company is growing rapidly, although it also suggests that the stock is overvalued.

      Price to Sales Ratio = Market Price per share / Sales per share.

    Read Also: Ratio Analysis: List Of All Types Of Ratio Analysis

    Conclusion

    In summation, financial ratios are a valuable tool for assessing a company’s performance. A company’s capacity to pay off debt, make a profit, allocate resources effectively, etc. can be better understood by examining several ratios discussed above, including those related to profitability, liquidity, solvency, and valuations.

    Nevertheless, they have limitations and do not provide any valuable insights if used in isolation. Therefore, the best method to analyze a ratio is to compare it to the company’s peers to gain a better knowledge of it.

    However, before making any investments, do a thorough research after considering your risk profile. The ratios alone are not sufficient criteria for investing in any company.

    Also give this a read to boost your investing strategy – 5 points to considered before buying and selling any stocks.

    Frequently Asked Questions (FAQs)

    1. Are there any limitations of the ratio analysis?

      Yes, although ratios have their own merits, they also have a few limitations, such as ignoring inflation, qualitative aspects such as goodwill, etc.

    2. How frequently should one carry out ratio analysis?

      Ratio analysis should be performed on a regular basis, ideally, quarterly or annually.

    3. How do we analyze the ratios?

      One must compare the ratios with the industry average or other peer companies.

    4. What are liquidity ratios?

      Liquidity ratios assess a company’s capacity to satisfy its short-term debt & obligations (debt that must be repaid within a year).

    5. Is Return on Equity (ROE) a profitability or valuation ratio?

      The Return on Equity (ROE) is a profitability ratio that measures the company’s ability to generate profit from shareholder funds.

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

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