Finance Minister Pranab
Mukherjee’s recent
budget announcements
have come as a relief to the
taxpayer. Under the revised
tax structure, incomes
between Rs 1.6 lakh and Rs 5
lakh will attract 10 per cent
tax, while on incomes
between Rs 5 lakh and Rs 8
lakh, 20 per cent tax will be
applicable. For incomes
above Rs 8 lakh, a rate of 30
per cent will be levied. The
threshold for tax-free income
remains unchanged at Rs 1.6
lakh. These tax concessions
will put more money in the
hands of consumers.
The revision in income tax
slabs will increase the takehome
salary of an individual
earning 10 lakh per annum
by Rs 50,000. This means
that if he was earlier able to
afford to pay EMIs for a loan
of Rs 10 lakh, thanks to his
increased disposable income,
his eligibility for a housing
loan has now increased by
approximately Rs 5 lakh. The
new tax slab would certainly
bring a smile on the face of
the aam aadmi.
For example, Ramesh, a
resident of Delhi, earns a
gross salary of Rs 1,00000
per month (Rs 12,00000 per
annum). His salary structure
and investments are as
follows:
■ Basic – Rs 40,000
■ HRA – Rs 35,000
■ Conveyance – Rs 800
■ Medical reimbursement -
Rs 1,250 (or Rs 15,000
annually)
■ House Rent – Rs 15,000
■ Investments under 80 C -
Rs 1,00000
Therefore, his taxable
annual income is Rs 9,43,400.
While Ramesh would have
paid Rs 1,87,020 under the
old tax structure, he would
now pay Rs 1,37,020.
Thus, Ramesh will now
have Rs 50,000 (or Rs 4166.67
every month) more at his disposal.
With the additional liquidity,
Ramesh can either
make further investments or
increase his home loan
affordability by that amount.
This means he can now afford
to buy a house that costs Rs
4.5 lakh more (calculated
basis an 8.25 per cent interest
for a 20-year loan).
The writer is CEO and MD,
Rupeetalk.com

In the months following the introduction of stricter norms, it appeared that FMPs had lost their attractiveness. But they have staged a remarkable comeback. The Indian mutual fund industry, which until October 2008 was riding high on the bull run in equities, was halted in its track by the global liquidity crisis. Almost all mutual fund schemes came under redemption pressure, but Fixed Maturity Plans (FMPs) were hit particularly hard. In 2008 many FMP new fund offers (NFOs) had been launched, taking advantage of regulatory loopholes.

Highlights

SEBI’s special lending window and stricter guidelines help FMPs survive the difficult times Their revival was made possible by debt, liquid and liquid plus funds that performed poorly in the volatile market conditions To draw maximum benefits from FMPs, one needs to remain invested for a long term

But once the crisis struck, these very loopholes — indicative yields, unregulated portfolio declarations, and average maturity mismatch — resulted in a systemic breakdown for FMPs as panicky investors withdrew money from them. Finally, the Securities and Exchange Board of India (Sebi) had to intervene. To provide immediate relief, it opened a special lending window for mutual funds and later followed up with stricter guidelines for FMPs. Besides plugging the regulatory loopholes, it also made it mandatory for all closed-ended funds, including FMPs, to be listed on exchanges.

Read: Impact of Online Mutual Fund trading on Exchanges

Sebi regulations and their impact

The new Sebi regulations initially had a crippling impact on FMPs. FMPs were major contributors to the Indian mutual fund industry’s total assets under management (AUM). But investments in FMPs started dwindling after the new regulations took effect as institutional investors, the biggest patrons of these funds, stayed away from them.

On the positive side, listing of FMP schemes rid fund managers of liquidity-related worries (caused by sudden and large redemptions). With monthly portfolio declarations being made mandatory, there was greater transparency. The ceiling on allocation to a particular company led to more diversified portfolios. Exposure to risky real-estate and non-banking finance companies was curtailed. And finally, with disclosure of indicative yields being banned, there was less pressure on fund managers to invest in riskier securities in order to produce outsized returns.

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New FMP era

With the passage of time, however, fund managers have learnt to live with the new regulations. In fact, FMPs appear to have been rejuvenated. Between February and April 2009, 40 NFOs of FMPs were launched in which cumulatively mopped up Rs 6,000 crore from the market. Leading from the front were Reliance Mutual Fund and SBI Mutual Fund which raised Rs 2,000 crore and Rs 1,000 crore respectively. This strong showing helped FMPs find their feet again. The quality of investments has also improved as fund managers have refrained from investing in risky assets, including securitised debt.

Benefits of FMPs

FMPs are an attractive option in the current market scenario. Why? Debt instruments, which were favoured by investors for their extra returns over fixed deposits, have lost their sheen in the current volatile conditions. Returns from liquid funds and liquid plus funds have dipped to around 3-4 per cent and 5-5.5 per cent respectively after Sebi restricted them from investing in securities having maturity greater than three months. FMPs, by contrast, are exhibiting a lot of promise.

Besides, FMPs also offer investors tax benefits. Investors can avail of double-indexation benefit to improve their post-tax returns. For example, an FMP launched in February 2010 and having a tenure of 15 months can avail of double-indexation benefit for fiscal years 2010-11 and 2011-12.

Strong performance

In the past, FMPs caught investors’ attention as most funds beat their indicative yields as promised. It is assumed that since FMPs mostly invest in debt and debt-equivalent securities, their returns would range from 8-10 per cent. However, this is not the case. The top 10 mark-to-market (MTM) gains among FMPs (see table) range from 15 per cent to as high as 72.2 per cent. The MTM returns are mainly on account of the decline in interest rates, which has resulted in an increase in bond prices. Even the annualised returns of some of the schemes are startling. Schemes such as ICICI Prudential S.M.A.R.T.’s Series F, Series G and Series H have given annualised returns of more than 30 per cent.

Table: FMP Schemes with High MTM* Gains in 1-year Category
Scheme	Launch Date	1-Year Return (%)	Annualised Returns	YTD (%)
ICICI Prudential S.M.A.R.T.Sr G – 36M Ret	Nov-08	72.2%	59.65%	72.6
Birla Sun Life Equity Linked FMP Series A Ret	Jul-08	47.21%	8.81%	13.5
ICICI Prudential S.M.A.R.T.Sr F – 36M Ret	Oct-08	35.65%	29.84%	38.6
ICICI Prudential S.M.A.R.T.Sr H – 36M Ret	Dec-08	34.15%	34.90%	34.9
DWS FTF Series 50 Plan A	May-08	33.73%	6.98%	11.9
DWS FTF Series 43 Reg	Feb-08	25.28%	3.76%	7
DWS FTF Series 50 Plan B	May-08	20.5%	8.35%	14.3
Birla Sun Life Equity Linked FMP Series B Ret	Jul-08	19.85%	11.98%	18.5
Reliance FHF V 3Y Plan Series I Retail	Sep-07	15.94%	10.67%	26.7
Reliance FHF IX-Series 10 Inst	Jul-08	15.16%	13.24%	20.5
* Mark-to-market                                                              Source: www.valueresearchonline

Had investors been allowed to exit, as they could till December 2008, many would have preferred to take these gains even if it meant paying an exit load. But the lack of trading volume on the stock exchanges prevents them from doing so.

Since the central government and the central bank are likely to withdraw the monetary and fiscal measures provided during the crisis period, interest rates are likely to move up in the coming months. Since this will lead to a decline in the value of debt papers, returns are likely to be more moderate in future.

FMPs were pulled out of the morass by stricter Sebi regulations and improved market sentiments. They are now once again looked upon by investors as an attractive investment avenue that offers attractive returns along with tax benefits. But remember, if you want to reap maximum benefits from FMPs, you must stay invested in them till maturity.

If you are single, with little or no responsibility and like to live life king size, chances are you do not have a systematic savings plan. Most single or unmarried people are so caught up living a good, happy, responsibility-free life that they ignore the need to build up a corpus for their twilight years.
If this has not yet made you sit back and think, then try and ask yourself the following questions:
“Do I have enough money to tide over a few months in case of a job loss?”
“If I fall seriously ill, do I have the funds to cover medical expenses or am I covered for major illnesses?”
“If I met with an accident and became disabled, who would take care of my financial affairs and me?”
“To whom would my wealth be transferred, after I am no more?”

If you do not have answers to the above questions, it is time you take a serious look at reorganising your life and your finances. Since you are single, with just one source of income, it is imperative that you look at a comprehensive financial plan as early as you can. After all, you have to face every financial concern on your own, with no support of a spouse. Now let’s get down to business, and start from the very beginning.

1. Prioritise your finances
Identify your short-term and long-term financial goals. A short-term goal could be purchasing a car or a house, while a long-term goal could be building a retirement corpus. Take a look at your current savings and investments and make a note of all your expenses and indulgences. Once you have these things noted, make an income/expense statement and look at your spending habits. Writing down your expenses will provide an insight at how much you are spending and on what. If you find your expense side to be heavier, it is time to prioritise your expenses and ensure that you tilt the scale to make your ‘income’ side heavier.

2. Build a safety nest
If you ever happen to lose your job, you do not have another income as a cushion (like most married people do). Make this your first priority, even before you look at achieving your short-term goals. Experts opine that keeping aside six months’ living expenses are crucial to tide over a rough time. Keep this money in a liquid asset, like a fixed deposit or a short-term debt fund. And, don’t give in to any temptation to use it for a purpose other than what it is meant for.

For a Comparative Analysis of Fixed Deposit Rates, Click here

3. Reduce your debt
If you have any debt, look at reducing it at every opportunity you get. First, get rid of credit card debt, if you have any, as you pay a higher interest on it. Then look at prepaying your loans. Any extra income (like a bonus or any arrears) should be used to prepay debt. The sooner you are debt free, the better.

4. Create a good portfolio of investments
Once you have your goals in place, chart out a savings and investment plan. Create a good portfolio by investing in different asset classes like equities, debt, alternatives. Since you are single, you can afford to take a few risks and invest more in equities. Invest systematically through mutual funds, by setting aside an amount every month. This will bring in discipline and help you take advantage of the cost of averaging, if you are investing in an equity fund.

5. Build a retirement corpus
You will need much more money to survive in your twilight days. The cost of living will be much higher and though your expenses may not be as high as today, you may need much more to live a good life due to the effects of inflation. Hence, it is advisable to start building a retirement corpus as soon as you can. Maximise your contribution to the Public Provident Fund (PPF) account (it is currently Rs. 70,000 p.a.). Contribute extra to your Employees’ Provident Fund account (you can make a voluntary contribution up to 100 per cent of your basic pay). Invest in a Pension Plan and build a healthy corpus of investments that you can fall back on. After all, you do want to continue with the lifestyle you are used to.

6. Look at insurance

a) Life insurance
Not all singles require life insurance. But, if you have dependant parents or siblings, you are advised to seek insurance. The amount of insurance would depend on the needs of the dependants. Go in for a vanilla term plan, where the coverage is greater and the premium much lower than other insurance plans. Moreover, a policyholder can cancel the policy easily once the requirement ceases.

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b) Health insurance
This is one of the most important aspects of financial planning for you. Even though you may be covered through your employer, as a single you must invest in a health policy on your own. This will ensure you are covered for any medical emergency in case you are in the midst of a job change or if you face a job loss. Taking additional riders to cover physical disability and critical illnesses is also highly recommended. Even though you may pay a higher premium, it will be well worth it in the event of any unforeseen eventuality.

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7. Think about giving a Power of Attorney
All singles need this. In case you fall ill and cannot take care of your finances, you need to rely on someone who can do this for you. Appoint a trusted person to do the job and give him/her the power of attorney for your finances and health care. You will enable this person to take critical decisions for you, in case you cannot do so yourself. However, exercise caution while selecting this person. After all, you are granting him/her full legal access to your assets and heath care decisions.

8. Look at estate planning
Unlike married couples, who may have natural heirs to pass on their assets to after their death, without making a legal document, singles may not have this flexibility. As a single, you have to decide who should be the beneficiary of your property or assets – your parents, relatives, friends and/or some charitable institutions – after your death. It is important to draw up a estate plan, for which you need to approach a lawyer to draft a will and zero in on a person to execute this will. After all the planning that you have done, you would not want your assets to end up in the wrong hands.
Now that you have known the basics of financial planning, you may want to approach a professional financial planner to draw up a plan or start working towards achieving each point mentioned above on your own. Whichever way you may choose to go, do so immediately. Why wait to achieve financial freedom?

Sujay bought a flat in January 2005 and sold it in August 2009. Since he held the property for more than three years, the asset became a long-term asset and the gain, a long-term capital gain. Now, Sujay is worried about the capital gains tax that he has to pay on the gain. He is told that capital gains savings bonds can save him from paying the tax.

What are capital gains savings bonds?

Capital gains savings bonds are a specific type of bonds used for tax-saving purpose. But these are different from regular tax-saving bonds, i.e., only those investors who have a capital gain and would wish to save the tax that has to be paid on this gain can use these bonds. On the other hand, this is not useful for all those who would like to earn tax-free income because these bonds will not provide tax-free income.They are notified by the government and are issued for a specific need and hence might not be useful for everyone. The institutions that issue these bonds are NABARD, NHAI, REC, NHB and SIDBI.

Who can use these bonds?

Any person including individuals, companies, partnership firms and others can use these bonds to save capital gains tax. Here, we shall focus on individuals and their needs.

• All those who have a long-term capital gain and need to pay a tax on it can consider these bonds.
• The bonds are actually useful in cases where there are long-term capital gains from the sale of assets like property or gold and the taxpayer is required to pay tax on the transaction.

Remember, the bonds are not useful for long-term gains made on sale of shares on the stock exchange because this anyway has a zero tax rate.

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Let’s take Sujay’s case now:

If Sujay’s capital gain after considering indexation on the property is Rs 5 lakh,

the capital gains tax he needs to pay will be Rs 1 lakh (20 per cent (without cess) of the gain)

He can save the entire or part of the tax by investing the entire or a part of the Rs 5 lakh in the capital gains tax savings bond.

If he invests a part of the entire gain, say, Rs 4 lakh then deduction will be available on this amount and the tax would have to be paid on the remaining Rs 1 lakh. In this case, the tax payable = Rs 20,000, which means a savings of Rs 80,000.

Conditions to avail tax benefit

To avail tax benefit under Section 54EC on an investment in the capital gains savings bonds, the following conditions have to be met:

• The gain has to be long term in nature. It cannot be used to save short-term capital gains.
• The investment into the bonds has to be made within a time period of six months from the date of the transfer of the asset.
• A maximum of Rs 50 lakh can be invested in the bonds, so there is a restriction on the amount that can be claimed as a benefit also.

What are the options for Sujay?

Sujay can consider specified bonds issued by the Rural Electrification Corporation (REC) and the National Highway Authority of India that have been notified by the government for the purpose of tax saving.

Let’s explore REC issue:

The REC issue consists of bonds that mature in a period of three years and cannot be sold till that point of time. The issue details are as follows:

• Each bond is for a sum of Rs 10,000. The minimum application will be for 1 bond while the maximum can be for 500 bonds.
• These bonds are non-transferable and the date at the end of the month in which the bonds are taken would be considered as the date of allotment.
• The current rate of interest on the bond is 6.25 per cent which is paid on an annual basis on June 30, each year.
• At the end of the three years, the bond will be redeemed at par.
• The interest earned on the bonds will be taxable in the hands of the individual. So the income on the bonds is taxable but investing in the bonds can save capital gains tax for the taxpayer.

Rajiv, a ICICI Bank customer, received a call from the bank executive informing him about ‘Advantage Deposit’ – a new product with dual benefits of a fixed deposit and a mutual fund. Now, Rajiv’s curiosity is roused as he has invested consistently into various fixed deposit schemes. But he is not gung ho about its ‘investing in equity funds’ part as he has lost a fortune in the recent market meltdown.

What is ICICI Bank Advantage Deposit scheme?
It is a combination of a traditional Fixed Deposit (with monthly interest payout) and Systematic Investment Plan (SIP) of a Mutual Fund. The interest payout credited into one’s savings account will be reinvested into SIP directly.

Should Rajiv give it a look?
Yes. People like Rajiv who don’t want to risk their investment, yet like to earn better returns should consider this product, for it offers an investor the safety of a fixed deposit and the returns of an equity fund. In addition, it counters equity-market fluctuations through SIPs.

What are the terms? Can it be renewed?
Firstly, an investor would need to open a savings account with ICICI Bank. As Rajiv already has an ICICI bank account, he doesn’t need extra efforts. The deposits are available from minimum of one year to a maximum of 10 years. There is an option to renew the scheme at the prevailing deposit rates after maturity.

Will it be a prudent decision to invest in it?
Under this scheme, the minimum investment in SIP is Rs 1,000 per instalment. So Rajiv has to make sure that his total investment in Advantage Deposit earns a monthly interest of Rs 1,000 or more minus TDS.

Let’s see:

The concept of ‘Advantage Deposit’ scheme is not new, in fact it is borrowed from the scheme (already present in the market for quite some time) whereby a lump sum investment is done in a mutual fund’s liquid fund or debt fund, and a fixed amount from it is transferred to an equity fund, also known as Systematic Withdrawal Plan (SWP). Thus here we will compare both these schemes for better understanding.

Case 1: Let us consider the five-year term deposit in the scheme, with 8 per cent interest rate.

Hence, to generate an SIP amount of Rs 1,000 per month net of TDS in this scheme, the investment amount should be Rs 1,67,320. Now let us assume that Rajiv’s SIP amount of Rs 1,000 was invested into ICICI Prudential Dynamic Plan (starting from Sept 2004), so at the end of 5th year (Aug 2009) his final SIP amount would have been Rs 99,088, and the total maturity amount, Rs 2,66,408. (Note: we have considered historical returns for the Plan and the past performance may not be repeated.)

Case 2: If Rajiv had made a similar investment of Rs 1,67,320 into ICICI Prudential Liquid Plan Fund (as on Sept 2004) and made a systematic transfer (also known as SWP) of Rs 1,000 into ICICI Prudential Dynamic Plan as an SIP amount, the final fund value including Liquid Fund and Dynamic Plan would have been Rs 2,57,490.

Note: ICICI Pru Liquid Plan Fund is considered as it is as safe as a bank deposit since its average maturity period is up to 91 days as per a recent SEBI regulation.

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Comparison: In Case 1, the compounded annualised return is 9.75 per cent over a period of five years while in Case 2, it is 9 per cent. Since we have already factored in the TDS effect in Case 1, 9.75 per cent is the net annualised return post tax deduction while in Case 2, the investment in Liquid Fund will also earn interest income which invites tax at the rate of 10 per cent with indexation or 20 per cent without indexation. Since we have not considered the tax aspect here, the return will further decrease.

A few things to consider:

• The minimum SIP amount of Rs 1,000 net of TDS requires an investment of Rs 1,67,320 which may not be a feasible amount for small investors. But, for an investment less than Rs 1,67,320, since the interest earned will be less than the minimum SIP amount of Rs 1,000, the shortfall in SIP amount will be covered from the balance in the savings account to which the SIP amount is debited.
• In case of premature/partial closure of the fixed deposit, the SIP will continue to be debited to the depositor’s savings account, unless the depositor informs the Mutual Fund/Registrar of withdrawal of the original mandate.