Category: Personal Finance

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.
Read Also: Budget 2024: F&O Trading Gets More Expensive?

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.

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

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

It provides all the necessary details about trades executed and allows traders and investors to monitor various trades executed throughout the day.
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.
It explains the differential amount in gross gain / loss and net gain / loss (gross proceeds received before any deductions of brokerages, taxes, and charges).
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:

Contract Note Number
Trade Date
Name of the client
Address of the client
PAN of the client
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:

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.
Order Time – Shows the exact time the order was placed.
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.
Security or Contract Description – It mentions the name of the stock, futures, and options traded.
Buy (B)/ Sell (S) – Indicates the type of trade. It shows “B” for a buy side trade and “S” for a sell trade.
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.
Gross Rate – It represents the market price of the stock at which the order was executed.
Brokerage per unit – Accounts for the brokerage charged for each stock / lot.
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.
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.
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.

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.
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.
Brokerage – Commissions or fees charged by the broker for executing trades on behalf of the client.
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:

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.
Payment Gateway Charges – Charges levied for authorizing credit card or direct payment processing by the banks.
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.
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.
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)

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.
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.
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.
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.
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.

May 4, 2024

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

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

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

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

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.
Erodes trust in AI:
Repeated exposure to exaggerated claims can make people skeptical about the real power of AI technology.
Hurts reputation:
Companies caught AI Washing can damage their brand image and lose customer’s confidence.
Distracts from Genuine Innovation:
The focus on the hype can overshadow real advancements in AI Development.
Slows down the Progress:
If resources are wasted on AI Washing, it can slow down genuine research and development in the field.
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.

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.

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)

What is AI Washing?
AI washing is when companies mislead consumers about the extent of artificial intelligence used in their products or services.
Why do companies do it?
Companies use AI washing to make their products more innovative and appealing, hoping to fascinate customers.
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.
Is anything being done about AI washing?
Yes, there is a growing awareness, and some regulatory bodies are looking into misleading AI claims.
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.

May 1, 2024

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 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

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

Types of Ratios

There are four broad categories of ratios:

Liquidity Ratio – These ratios reflect the company’s ability to pay off its short-term liability / obligations.
Solvency Ratio – This is also known as the leverage ratio, which reflects the company’s ability to repay its long-term debt & obligations.
Profitability Ratio – This ratio shows the company’s ability to generate profit from its operating activities.
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.

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:

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.
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.
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

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).
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
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
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:

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

Gross Profit Margin = (Revenue – COGS) / Revenue * 100
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
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
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:

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).
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.
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.

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)

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.
How frequently should one carry out ratio analysis?
Ratio analysis should be performed on a regular basis, ideally, quarterly or annually.
How do we analyze the ratios?
One must compare the ratios with the industry average or other peer companies.
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).
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.

April 30, 2024

Top Economic Indicators: Overview & Importance

Have you ever imagined what makes the economy tick? Economists use a toolbox full of indicators to gauge the health of the economy. Learning about these indicators can help you understand the broader picture of the economy and make informed decisions about your finances.

Here is an analogy – your body has vital signs like temperature or heart rate. Economic indicators function similarly, providing important data points that signal the overall health of the economy.

In this blog, we will crack open the code on some of the most widely used economic indicators, explaining what they are and how they can help you see what is coming down the economic road.

Economic Indicators – An Overview

Economic indicators are statistical tools that provide information about an economy’s health. They are used by economists, businesses, investors, etc., to assess the current state of the economy and to make predictions of economic performance. There are many different economic indicators, but some of the most commonly followed include GDP, Unemployment Rate, Consumer Price Index, Interest rates, etc.

Generally, the Economic Indicators can be broadly classified into three categories:

Leading Indicators
These indicators tend to change before the overall economy does. They can provide advanced warning of future economic trends. For example, the number of building permits issued can be a leading indicator of future economic activity in the construction industry.
Coincident Indicators
These indicators change along with the overall economy and give a snapshot of the current state of the economy. For example, the unemployment rate is a coincident indicator of economic activity.
Lagging Indicators
These indicators change after the overall economy does. They can confirm trends that have already been identified by leading indicators. For example, the inflation rate is a lagging indicator of economic activity.

Top Economic Indicators

Let’s discuss some of the top economic indicators that economists and businesses track to gauge the health of the economy.

Gross Domestic Product

This is the total market value of all the final goods and services produced in a country in a given year. It is considered the broadest measure of an economy’s health. A rising GDP indicates economic growth, while a falling GDP indicates a recession. Generally, emerging economies such as India, Bangladesh, Indonesia, etc. have a higher GDP growth percentage as compared to developed nations such as the USA, England, etc.

Unemployment Rate

This is the percentage of the labour force that is unemployed and is actively seeking work. Low unemployment is generally considered to be a sign of a strong economy, as it indicates that economy is booming, businesses are hiring, and there are plenty of jobs available.

Consumer Price Index (CPI)

This is a measure of inflation. It tracks the average price of a basket of goods and services that are commonly purchased by consumers. A rising CPI indicates inflation, which can erode purchasing power and consumer confidence. A falling CPI indicates deflation, which can discourage spending and investment. A similar indicator used to measure inflation is the Wholesale Price Index (WPI), which tracks inflation at the producer level. Remember that CPI and WPI both are lagging indicators.

Interest Rates

These are the rates that banks charge from borrowers and pay to lenders. The central bank of every economy (RBI in India) uses interest rates such as Repo Rate, Reverse Repo Rate, etc. to influence the economic activity. Lower interest rates tend to stimulate the economy by making it cheaper for businesses and consumers to borrow money. Higher interest rates tend to slow down the economy by making it more expensive to borrow money.

Trade Balance

The trade balance measures the difference between a country’s exports and imports of goods and services. A positive balance (surplus) depicts that a country is exporting more and importing less, while a negative balance (deficit) indicates the opposite.

Performance of the Stock Market

The stock market performance can be an indicator of investor confidence in the economy. A rising stock market can indicate that investors are optimistic about the future of the economy, while a falling stock market can indicate that investors are pessimistic.

Importance of Economic Indicators

Big Picture View
Economic Indicators are like headlights, illuminating the road ahead. They provide insights into the current state of the economy and potential future trends, which is why they are widely used by Economists, Businesses, Governments, etc.
Informed Choices
Businesses use economic indicators to make strategic decisions. For example, a rising GDP might signal a good time for expansion, while high inflation might suggest rising prices. Further, Investors use them to analyse the investment risk.
Policy Decisions
Economic Indicators guide policymakers and central banks like the RBI. By analysing factors like unemployment or inflation. They can adjust interest rates or implement stimulus programs to promote economic stability.
Individual Impact
Even individuals benefit from understanding economic indicators. They can help you make personal financial decisions, like planning for retirement or navigating a recession. For example, a rising unemployment rate might encourage an individual to create an emergency fund.
Transparency and Accountability
Economic Indicators provide transparency into an economy’s health. This allows people to hold governments accountable for their economic policies.

Conclusion

By keeping an eye on these indicators, you will be better equipped to understand the economic climate and make informed decisions.

Remember, the economy is a complex system, so no single indicator tells the whole story. Looking at the combination of leading, coincident, and lagging indicators can give you a more well-rounded view of what is going on and an overall picture of the economy.

Frequently Asked Questions (FAQs)

What are Economic Indicators?
Economic indicators help in analysing the health of an economy.
How do interest rates affect the economy?
Interest rates affect the borrowing cost. Lower rates stimulate the economy by making borrowing cheaper, while higher rates slow it down by making borrowing expensive.
Do lagging indicators tell us what has already happened?
Exactly. The inflation rate, for instance, confirms a trend that leading indicators might have hinted.
Why are Economic Indicators important?
The Economic Indicators are important because they guide businesses, investors, and policymakers in making informed decisions about investments, spending, and economic policies.
Can Economic Indicators be misleading?
Yes, Economic Indicators can be misleading. Unexpected events or changes in how data is collected can impact interpretation.

April 30, 2024

Simple Interest vs Compound Interest? Definition, Formula, Pros, and Cons Explained

Understanding the difference between Simple and Compound interest is essential when making a financial decision. There are two ways to calculate interest when taking a loan or investing. Simple interest accumulates on the principal balance, whereas compound interest accumulates on the principal balance and the accumulated interest. Today’s blog will explain simple and compound interest definitions, formulas, pros, and cons.

Simple interest

Simple interest (SI) is a fundamental concept in the finance world. It is calculated on the principal amount and does not consider the interest previously accumulated.

It is an easy and direct method of calculating interest and is generally used for short-term loans or investments.

Formula

Simple interest calculates the amount that includes only the principal. The calculation involves the principal amount, interest rate, and duration of the loan or investment. The formula is:

Simple interest (SI) = (P x R x T) / 100,

Where,

P= Principal amount

R= Rate of interest

T= Time

Example

Assume that Mr. Khurana invested INR 2,00,000 in a fixed deposit for four years at a 7% simple interest rate p.a. Using the same formula, we can calculate the interest Mr. Khurana will earn from the investment.

By using the formula of Simple interest,

Simple interest= (2,00,000*0.07*4)/100

Then, SI = Rs 56,000.

At the end of 4 years, Mr Khurana will earn a total of Rs. 56,000 in simple interest.

Pros

Simple interest is easy to understand and implement since it does not provide interest on accumulated interest. Thus keeping the periodical interest constant.
SI allows for transparency to the borrower as the interest payments are easy to calculate and can be understood by all.
SI is very useful in short term investments as compound interest would anyway not be material on short term investments.

Cons

Simple interest leads to slower wealth accumulation, especially for long-term investments.
Simple interest may not be the most efficient option for people seeking high-return investments in the long term.
Simple interest doesn’t allow for the reinvestment of earned interest.

Compound interest

Compound interest involves calculating interests on both the principal amount and accumulated interest. It works on a snowball effect, causing your money to grow faster over time than Simple interest.

The bank or any financial institution allows for compounding daily, monthly, quarterly, half-yearly, or yearly.

Formula

A=P(1+r/n)^(n*t)

CI = A – P

Where,

“A” stands for Total Amount,

“P” stands for Principal Amount,

“r” stands for rate of interest,

“n” stands for the times of compounding in 1 period,

“T” stands for the number of periods

Example

Mrs. Chavi invested Rs 10,000 at the rate of 10% p.a. for five years.

Therefore, A = 10,000*(1+(.1/1))^(1*5)) = 16,105.1

& CI = A – P = 16,105.1 – 10,000 = Rs 6,105

Pros

It allows money to grow exponentially over time, as interest is earned on both the initial principal and the accumulated interest.
Compound interest can maximize your returns by allowing your money to grow multifold over time.
It can lead to substantial wealth accumulation, making it an ideal long-term investment strategy.

Cons

If borrowers are unable to make timely payments or only pay the minimum amount due, compound interest can lead to a debt spiral where the debt grows rapidly, making it increasingly challenging to repay.
Over time, compound interest can increase the total interest paid on a loan. As interest accumulates on both the principal amount and previously accrued interest, borrowers pay more in compound interest than simple interest.
Compound interest calculations can be complex and hard to understand compared to simple interest.

Conclusion

The concepts of simple and compound interest are essential for anyone dealing with investments, loans, and savings. Simple interest provides predictable interest amounts, making it suitable for those who prefer an easy technique, whereas compound interest comes with complexity but can multiply your money quickly. CI is best for long-term investors and has the potential for exponential growth over time. Simple interest is calculated only on the principal amount and does not include interest on interest. In contrast, compound interest includes interest on the total interest as well as on the principal amount.

Frequently Asked Questions (FAQs)

What is Simple interest?
Simple interest is calculated on the principal amount and does not consider the interest previously accumulated.
Which offers a higher return, Simple or Compound interest?
Compound interest provides higher returns than Simple interest in the long term due to its ability to provide interest on interest.
What are Compounding periods in Compounding interest?
Compounding periods in compound interest refer to the frequency at which interest is added to the principal amount, such as annually, semi-annually, quarterly, monthly, or daily.

April 24, 2024

Types of ITR: Which One Should You Choose?

Filing your taxes, a.k.a. Income Tax Return (ITR) in India, can be a tough task, especially with multiple forms to choose from. There are seven different types ITR forms available and each ITR form caters to a specific taxpayer category and income situation. Picking the wrong one can lead to delays, errors, and even penalties.

This blog is your one-stop guide to navigating the world of ITR forms as it breaks down the key features of each form and who should use them. By the end of this blog, you can confidently choose the correct ITR form and file your taxes smoothly.

Overview

ITR stands for Income Tax Return. It is a form you file with the Indian Income Tax Department to report your income earned during a financial year, i.e., April 1^st to March 31^st. There are two things: one is Financial Year (FY), and another is the Assessment Year (AY). The FY is the one in which you earn the income, and the AY is the one in which you have to pay taxes on the income earned in the FY. Confused? Let’s understand through an example:

Suppose, you are a salaried person and earned INR 10 lakhs in the Financial year 2023-24 (1 April 2023 – 31 March 2024). Now, you have to calculate your taxable income and pay taxes for FY 23-24 in the next year, i.e., FY 24-25. This next year is your Assessment Year (AY).

Coming back to the ITR form, it asks about your income sources, any deductions you claim, and the taxes you owe. The ITR lets the government know about your income from various sources like salary, businesses, property, investments, etc.

If you have paid excess tax during the year, you can claim a refund through the ITR.

Read Also: Types of Mutual Funds in India

Types of ITR

There are different ITR forms depending on your income sources and filing category.

Individual ITR (ITR 1)

ITR 1, also known as Sahaj, is the simplest income tax return form in India. It is designed for resident individuals with a specific income profile.

Eligibility

ITR 1 can be filed by a resident individual with income from salary or pension, one house property (excluding cases where loss is brought forward from previous years), other sources excluding lottery winnings and agricultural income up to INR 5,000. Your total income for the financial year must not exceed INR 50 lakhs.

Additionally, ITR 1 cannot be filed by an individual who is:

A Resident Not Ordinarily Resident (RNOR)
Non-Resident India (NRI)
Has a total income that exceeds INR 50 lakhs, along with the taxable capital gains
A director of the company
Owns and has income from more than one house property,

Also, it is mandatory to define the nature of employment while filing of return.

Individual ITR (ITR 2)

ITR 2 is another income tax return form used in India. Unlike ITR 1, it caters to a wider range of income sources.

Eligibility

ITR 2 can be filed by an individual or HUF who is not eligible to file ITR 1 and who:

Does not have income from profit and gains or profession and also does not have income from profits and gains of business or profession like interest, salary, bonus, commission by whatever name called, due to, or received by him from a partnership firm.
Have the income of another person like a spouse, minor child, etc., be clubbed with their income.

Additionally, any individual or HUF who receives income in the such as interest, salary, bonus, commission or remuneration from a partnership firm and whose total income for the year includes profit and earnings from a business or profession is not eligible to file an ITR-2.

From AY 2021-22, you can choose to opt for the new tax regime under section 115BAC in ITR-2.

Individual ITR (ITR 3)

ITR 3 Form relates to income earned via business or profession. It is used by an individual or a Hindu Undivided Family who has income under the head “profits or gains of business or profession” and who is not eligible to file Form ITR‐1 (Sahaj), ITR‐2 or ITR‐4 (Sugam).

Eligibility

Individuals and HUFs who have income from profits and gains of business or profession can file ITR 3.

This includes income from:

Sole proprietorship businesses like shops, consultancy firms, etc.
Professionals like doctors, lawyers, architects, etc.
Partnership firms.
Investments in unlisted shares.
Others such as Fees earned as a director in a company, House Property, Salary, etc.

ITR 3 is often called a master form because it allows reporting income from almost all sources, including business or profession, salary, capital gains, house property, etc.

Furthermore, if your turnover exceeds INR 2 crore or you claim certain deductions or exemptions, you are also required to maintain books of accounts and get them audited.

ITR 4

ITR 4, also known as Sugam, is an income tax return form designed for a specific category of taxpayers in India.

Eligibility

ITR-4 can be filed by a Resident Individual / HUF / Firm (other than LLP) who has:

– Income not exceeding INR 50 lakhs during the FY.
– Income from Business and Profession, which is computed on a presumptive basis u/s 44AD, 44ADA, or 44AE.
– Income from Salary/Pension, one House Property, Agricultural Income (up to INR 5,000)
– Other sources excluding winning from the Lottery and Income from racehorses.

What is the Presumptive Taxation scheme for filing ITR 4?

Section 44AA of the Income Tax Act (1961) mandates that, in certain situations and under certain conditions, an individual involved in business or the profession maintain proper books of accounts. To alleviate the difficulty of compliance for small taxpayers, the Income Tax Act has established a presumptive taxation structure under sections 44AD, 44ADA, and 44AE. A person using the presumptive taxation scheme may report their income at a set rate.

Additionally, a presumptive taxation scheme can be adopted by a resident in India carrying on a specified profession whose gross receipts do not exceed INR 50 akhs in a FY.

ITR 5

ITR 5 is designed for a specific set of entities distinct from individuals and HUFs.

Eligibility

This form is mandated for entities like firms, limited liability partnerships, associations of persons, bodies of individuals, artificial juridical persons, business trusts, corporate societies, etc.

ITR 5 requires detailed disclosure of financial information including income statement, balance sheet and other particulars related to the entity’s income and expenses, and consists of several schedules.

ITR 6

This form used in India by companies for filing their income tax returns.

Eligibility

Companies registered under the Companies Act, 2013 or 1956, are required to file ITR 6 if they do not claim an exemption under section 11 of the Income Tax Act, 1961.

Exemption under section 11 offers a tax exemption for income derived from property held for religious or charitable purposes. Companies claiming exemption would not use ITR 6.

ITR 6 caters specifically to the income reporting needs of companies, with relevant schedules to capture details like business income, expenses, and TDS.

The form consists of various schedules for different aspects of the company’s income.

ITR 7

ITR 7 is the form used for a specific set of entities different from individuals and regular businesses.

The form has been divided into Part A, Part B, and Schedules where Part A includes general information, and Part B includes a statement of the total income and tax computation for income chargeable to tax.

Eligibility

ITR 7 is used by entities that fall under specific sections of the Income Tax Act. These entities include:

Charitable and religious trusts created for charitable or religious purposes under Section 139(4A) of the Income Tax Act.
Political Parties with income exceeding the non-taxable limit come under Section 139(4B).
Research institutions claiming tax exemptions under section 139(4D) can use ITR 7.
Educational Institutions such as universities and colleges can file ITR 7 under section 139 (4D).

The entities mentioned above claim exemptions under several clauses and might not be subject to regular corporate tax filing.

Conclusion

The ITR forms in India report your income earned during a financial year to the Income tax department. There are seven different types ITR forms, each catering to a specific taxpayer category and income situation. Choosing the right ITR form depends on your income profile and the nature of your income sources.

It is suggested to consult with a tax advisor, especially in case of complex situations. Keep in mind that timely filing of ITRs is important to avoid penalties and avail benefits like claiming deductions. For most forms, you can easily file your ITR electronically through the Income Tax Department’s e-filing portal.

Further, if you’re having difficulty in calculating your taxable income, check our free to use Income Tax Calculator: https://www.pocketful.in/calculators/income-tax-calculator

Frequently Asked Questions (FAQs)

What are ITR forms?
ITR forms are used in India to report your income earned during a financial year to the Income Tax Department.
Which ITR form should I use?
The appropriate ITR form depends on your income profile. This includes sources of income and your total income amount.
What if I have income from capital gains or multiple house properties?
You will likely need to file ITR-2 or ITR-3 which caters to individuals and HUFs with these income sources. Further, it is advisable to consult your tax advisor to get a clear picture.
Can I file ITR forms online?
Yes, you can file most ITR forms electronically through the Income Tax Department e-filing portal.
How to calculate the taxable income?
One can use our free-to-use Income Tax Calculator

April 24, 2024

What is IEPF? Introduction, Reasons for Transfer, and Process of Claiming Explained

Shares are often bought, but many are never claimed or forgotten about. Money in these situations remains unclaimed for a long time. The Investor Education and Protection Fund (IEPF) was established by the Ministry of Corporate Affairs (MCA) to ensure that these unclaimed shares are transferred to and received by the appropriate individuals.

The purpose of this blog post is to explain why shares are transferred to the IEPF and how they can be claimed.

Introduction

The Investor Education and Protection Fund, or IEPF, was created on January 13, 2016, by the Central Government under Section 125 of the Companies Act 2013 to protect and educate investors. Contributions to the IEPF come from various sources, including unclaimed dividends, matured deposits, and other business assets. These funds are then used to support investors who have lost money due to dishonest business practices.

Why are shares transferred to IEPF?

Many businesses that turn a profit pay dividends to their owners. Shares that have not been claimed by the holder for seven years get transferred to the IEPF. Owing to this inactivity, the company’s legislation requires it to transfer the shares to the IEPF, along with any outstanding interest.

This transfer protects their interests by preventing the investor from losing shares due to inactivity in their account. The shareholder has full right to reclaim their share from the authorities.

Reasons why the holder may not claim dividends

1. It is not possible for you to receive the dividend if you misplace the shares you own or forget the details of your ownership.

2. Legal hires cannot claim assets in the event of a holder’s death if the nominees are unaware of them.

3. You will not be entitled to the dividend the firm declares if your investment records are incomplete.

4. The company will not be able to transfer the dividend to the shareholder if the shareholder’s registered bank account has changed over time and has not been updated with the firm.

Who can claim shares from IEPF?

Any shareholder whose unclaimed dividends and shares have been transferred to IEPF can claim their shares from IEPF. There is a limit of one consolidated claim per corporation per fiscal year. Before filing the claim with IEPF, the claimant must make sure the company has completed the share transmission procedure and issued an entitlement letter.

Amounts credited to IEPF

1. If not claimed by the holder, the unpaid dividend amount is transferred to IEPF.

2. The interest and other income received from investments are transferred to IEPF.

3. The redemption amount received from the preference shares remained unclaimed for more than 7 years.

4. The proceeds received by the IEPF from fractional shares sold as part of bonuses, mergers, and acquisitions.

Utilization of IEPF Amount

The IEPF authority can only utilize the amount lying with them for the below-mentioned purposes.

1. The fund can be utilized towards promoting investor awareness programs.

2. Making refunds regarding matured deposits, debentures, and unclaimed dividends to their holders.

3. The National Company Law Tribunal has sanctioned the reimbursement of legal expenses incurred in suits against debenture holders, members, or depositors.

4. Any other purpose incidental to the purpose mentioned above.

Process to get shares from IEPF

The process to claim the shares from IEPF authorities is as follows:

1. Online Application – First, you must fill out an online application form known as IEPF 5, which is available on the company’s official website, www.iepf.gov.in, under the head claimants. The form will ask you for your information, company details, etc.

2. After completing and submitting the form, you will receive acknowledgement slips and the reference number.

3. Physical Submission—Submit the acknowledgement slips along with essential documents such as the Indemnity Bond, Advance Stamped receipt, original shares, debt certificate, proof of entitlement, and Aadhaar card to the relevant authorities.

4. Send all the documents to the Nodal Officer of the company at their registered office.

5. The nodal officer will then verify your claim and send a verification report to IEPF within 15 days.

6. Your claim will be processed once IEPF receives the verification report.

7. After the company processes the claim, the stock will be transferred to the holder’s Demat account.

Conclusion

The Investor Education and Protection Fund (IEPF) is crucial for advancing financial literacy in India and protecting investors’ interests. In addition to distributing shares and unclaimed dividends to investor education and safety initiatives, the fund fosters a more transparent and accountable environment.

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Frequently Asked Questions (FAQs)

Why are shares transferred to IEPF?
Shares are transferred to IEPF because the shareholder failed to claim the company’s income and shares.
How can I check if I have any unclaimed dividends or shares lying with the IEPF?
You can search for unclaimed sums on the IEPF website by entering your name and PAN card information.
How long does it take to get the shares back from IEPF?
It generally takes 30 to 60 days after completing the verification claim.
What does IEPF stand for?
IEPF stands for “Investor Education and Protection Fund”.
Which form needs to be filled to claim shares from IEPF?
To claim shares from IEPF, you must first fill out the IEPF 5 form. Once completed, print the acknowledgement receipt and send it to the company’s nodal officer.

April 18, 2024

Category: Personal Finance

CTC – An Overview

Breakdown of CTC

Basic Salary

Allowances

1. House Rent Allowance (HRA)

2. Leave Travel Allowance (LTA)

3. Conveyance Allowance

4. Dearness Allowance (DA)

Employer Contribution

1. Provident Fund (PF)

2. Gratuity

3. Employee State Insurance (ESI)

Conclusion

Frequently Asked Questions (FAQs)

What is a CTC?

Why is understanding CTC important?

What is the difference between CTC and take-home salary?

Does a higher CTC always mean a better job offer?

Are there any taxes on CTC?

Overview of Income Tax Slab

Tax Regimes in India

Income Tax Slab as per new regime

Old Tax Regime Vs New Tax Regime

Tax Rates

Simplicity

Tax Implications

Example of Calculation under different Tax Regime

Conclusion

Frequently Asked Questions (FAQs)

Is the section 80C deduction still relevant under the new tax regime?

Can a salaried individual change the new regime to the old regime?

Is deduction u/a 80D applicable in the new tax regime?

When was the new tax regime introduced?

Which tax regime is better for me if I have a home loan?

What is Cost Inflation Index

The Base Year Concept

Cost Inflation Index Calculation

Benefits of CII for Investors

Conclusion

Frequently Asked Questions (FAQs)

What is CII?

Why is CII important?

Who decides the CII?

Is CII is applicable to all the assets?

Can I use the actual purchase price instead of CII?

What is a Contract Note?

Purpose of a Contract Note

Format of a Contract Note

A Contract Note does not contain the following details:

Conclusion

Frequently Asked Questions (FAQs)

Can a contract note be issued in an electronic form?

What time should the contract note be delivered?

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

Is the contract note provided free of charge?

Are margin details available in the contract note?

What Is AI Washing

Evolution of AI Washing

Tips to avoid AI Washing

Impact of AI Washing

Examples of AI Washing

Conclusion

Frequently Asked Questions (FAQs)

What is AI Washing?

Why do companies do it?

How can I spot AI washing?

Is anything being done about AI washing?

Does this mean that all AI claims are false?

Overview

Importance of Ratio Analysis

Types of Ratios

Liquidity Ratios

Types of Liquidity Ratios

Solvency Ratios

Types of Solvency Ratios

Profitability Ratios

Valuation Ratios

Conclusion

Frequently Asked Questions (FAQs)