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| 1. Home is where many
tax saving options still dwell |
Buy a home, go for joint ownership if you are
two salaried persons, buy a second property, or even sell the existing
one...if you plan well, there are various options to save tax on
hard-earned money.
The Indian economy has been witnessing a boom
in the recent past. However, rising property prices and growing interest
burden on home loans are worrying buyers. The Budget has not offered
any relief, but you can still make ample use of the existing provisions
to save substantially on property investments. Here’s how…. |
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Buying a house |
To live in his own home is everyone’s dream. However, buying
a home is always a personal decision and one that needs lots of
thinking on his part. Where on one hand he looks forwards to be
a proud owner of a home, he is bogged down with an array of confusing
questions on the other. There are several tax benefits however,
when buying a house, you would do well to consider the following.
(a) It’s always advisable to go in for
a housing loan. Interest paid on home loans can be deducted from
your taxable income up to a maximum of Rs 1.5 lakh. This can be
a double bonanza in the case of joint ownership. If the joint
owners equally bear the interest burden, each gets a deduction
up to Rs 1.5 lakh.
However, the total deduction cannot exceed the
actual interest paid by the joint owners. So, if the total yearly
interest liability is, say Rs 4 lakh, and the property is equally
owned by three people, then each gets a deduction of Rs 1, 33,333.
(b) Principal repayment up to Rs 1 lakh is allowed
as a deduction from your taxable income under Section 80C provided
the loan is borrowed from a recognized financial institution.
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| OWNING TWO OR MORE HOUSES |
These days it’s not uncommon
to see people owning more than one property. While interest paid
on loan taken for a single property is eligible for deduction up
to Rs 1.5 lakh only, no such ceiling is prescribed for a new loan
taken to purchase a second property. Thus, if your rental income
from the second property is Rs 4 lakh and the interest expense on
loan taken for the second property is Rs 2.5 lakh, then your income
from house property shall be calculated as below:
1. By claiming deduction for the entire interest expense of Rs 2.5
lakh, you can substantially reduce your tax liability.
2. Had there been no deduction of interest expense, you would have
had to pay tax on Rs 2.8 lakh instead of Rs 30,000.
However, if your second house is lying vacant, generating no rental
income, you can still claim deduction for the interest paid. There
will nevertheless be a notional rental income and the interest will
be deducted from this income. |
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| SELLING PROPERTY |
To minimize tax outflow while
selling a property, take into account the following.
(a) A property or house held for under three years
is termed as a short-term capital asset and does not attract any
tax incentive. However, if you sell the property only after three
years, it is a long-term capital asset, which is eligible for some
tax relief.
(b)Selling property attracts capital gains tax.
However, if you invest the proceeds from selling the property into
buying or constructing another house, the taxman exempts you from
paying taxes. But keep in mind the following:
• If you intend to purchase a new house, do so either one year
before or within two years of selling your existing property.
• If you are constructing a new house, then ensure that it
is done within three years of the sale of the earlier property.
You can start construction even before the transfer of the existing
property. However, ensure that it is completed within the stipulated
time.
• If you have already sold your property, and could not acquire
a new house before the due date for filing tax returns, you can
deposit the money in the ‘capital gains deposit account scheme’
with any nationalized bank.
(c) Even those who do not want to buy a new house
can avail of some tax benefits. All you need to do is invest the
proceeds from the sale of the property in capital gains bonds issued
by NHAI or REC within six months of the deal. The maximum investment
permitted in such bonds is Rs 50 lakh, and these bonds can be redeemed
only after three years from the date of investment. |
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| 2. Is the budget good for you
and the country? |
This budget primarily focuses
on social sectors, health and education. On an overall positive
side, the Budget offers significant income tax exemptions to the
salaried, which will help put more disposable income in the hands
of consumers.
Union Budget has made the taxpayers happy by increasing the thresh
hold exemption limits for individuals, women & the senior citizens.
Not only the exemption limit, tax slabs & rates had also been
modified resulting in lower income tax for the financial year 2008-09
than the financial year 2007-08. Neither the interest rates on traditional
small savings instruments like NSC, PPF nor are the deductions u/s
80C of income tax act has been increased to encourage the savings.
Service tax exemption limit has also been increased from Rs. 8.00
lacs to Rs. 10.00 lacs to give the relief to the unorganized sector.
As the government is moving towards implementing the Goods &
Service tax regime, the rates of service tax had not been increased.
With the implementation of VAT in some states of the country &
the others to follow, the government had reduced the CST from 3%
to 2% with its policy of gradual reduction in the central sales
tax. Custom duty peak level had also been untouched to give protection
to domestic industry. The government had lowered the custom duty
on steel scrap imports from 5% to NIL duty to contain the steel
prices in the country. Excise duty had been lowered from 16% to
12% for buses, small cars & two wheelers & it had been reduced
to 8% in the case of Pharmaceutical sector. This will result in
the lesser cost to the end user & medicines shall be cheaper.
Finance Minister had increased the allocation on agriculture, health,
infrastructure & ultra mega power projects which will result
in growth.
The major jolt the Finance Minister had given is the proposed waiver
of loan of small farmers aggregating to Rs. 60,000/- crore by the
Nationalized Public sector Banks. The government should have taxed
the big farmer’s agriculture income & had used the resources
to give the relief to the marginal farmers who are indebted and
are unable to repay the loans. This is to create vote bank. By writing
off the debt shall affect the bottom line of the PSU bank to that
extent. If the finance minister proposes to give subventions it
will drain the budget resources i.e. paying out of the honest man
collections like income tax, service tax & excise etc. Major
PSU bank had gone public by diluting the government stake &
had come with public issues/follow-on public offer at premium through
book building process. Thus eroding the wealth of public at large
who had put money in the share capital of the PSU banks. Announcement
of such packages is not in the interest of the shareholders of the
banks. Increasing the rate of short term capital gains to 15% from
10% shall affect the already sluggish stock market & shall put
spanner in the fund raising spree of the corporates on the one hand
& reducing the market capitalization of the existing stocks
on the burses by vanishing the shareholders wealth who had been
lured by big brands like reliance power & the grey market premium
manipulations.
The automobile sector was happy
with the Budget recommendations. Duty on two-wheelers has been reduced
from 16 per cent to 12 per cent, while excise duty for small cars
has been cut from 16 per cent to 12 per cent.
In spite of huge collections of direct taxes than the estimates
for the fiscal year 2007-08 the finance minister had not given relief
to the corporate sector on account of reduction in the rates of
fringe benefit tax nor on the scope of fringe benefit tax. The budget
was bold but could have been bolder. The corporate taxes could have
been reduced. Non-reduction of dividend distribution tax, surcharge,
cess & MAT shall have dampening effect on the stock markets
& Net Asset Values of the mutual funds schemes and Unit Linked
Insurance policies of the Life insurance companies.
Even the Banking Cash Transaction tax had not been proposed to be
withdrawn from the financial year 2008-09. As regards personal taxation
the taxpayers are happy on account of increase in the exemption
limit & decrease in the rates of tax. In spite of corporate
sector being the major contributory in achieving the budgeted targets
of tax collections, had not been given relief in terms of reduction
in the corporate tax, fringe benefit tax, dividend distribution
tax & the MAT.
Through
this years budget the finance Minister had used a formula to find
a balance between the growth rate and political reality |
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| 3. NET, SET, GO |
Technology has altered our lives
and habits significantly, enabling efficiencies and facilities like
never before. We book air and train tickets on the Internet and
have long stopped standing in queues and depending on booking agents.
We browse through our telephone bills to skim call durations for
any misuse. We buy and sell equity shares on our online trading
accounts, in a matter of minutes, while being tuned to the market
and prices from wherever we are. We search our mail history from
email folders and snigger at someone who prints emails. We cannot
remember the last time we sent a snail mail. However, when it comes
to our money, are we using Internet Banking for all the efficiencies
it enables? |
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| ANYTIME, ANYWHERE |
The ability to access our account
at anytime and from anywhere is invaluable. We can check our balances,
transactions and complete our payments for bills, EMIs, credit cards
be it from your office, home or while traveling. We can monitor
excess cash and convert it to deposits. We can get alerts and reminders
for what is due to be paid and plan our cash flows better. An Internet
Banking account makes it irrelevant to consider where we are and
where our bank branch is. |
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| 24×7 SURVEILLANCE |
| Our Internet Banking account is under our direct
monitoring ease, at all times. We are able to check and confirm transactions
and detect anything amiss, immediately. The risks in transit of payment
instruments like cheques are eliminated. The transaction details are
always up-to-date, without our having to wait for periodic printed
account statements. The earlier we are able detect and report any
error in transactions, the better. |
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| BETTER INFORMATION TRACKING |
Internet banking keeps us well
informed about the status of our transactions. From account opening
status, to funds pending transfer into or out of our accounts, we
are fully informed on the status of our transactions and are in
complete control. Most online accounts come with facilities to query,
which enable getting the information we need from our transaction
histories.
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| SECURITY FEATURES |
Internet banking is designed
for a high level of security of information. Notice the URL featuring
‘https’, rather than ‘http’ and the lock
icon. Online activity does not leave a trail in the history folders,
so it cannot be accessed after we have logged out. If someone were
to make multiple attempts at guessing the password, the account
is locked out after a few attempts. An account left unattended for
a few minutes also gets inactivated. We also can check for any activity
in our on-line account, by reading the last log-in details and correlating
it to our latest online banking activity. |
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| BEST PRACTICES |
Best practices for safe Internet
Banking are simple. Access your account from the bank’s web
site (by typing the URL in the browser window). It is important
to remember that a secure site should not be accessed from hyperlinks
in a document or e-mail. Keep your username and password well guarded.
Writing them down or leaving them accessible is risky. Changing
passwords regularly helps, more so if the account has been accessed
from a shared computer. Always log out and close the browser window
to end a session.
There is world of speed, safety, convenience and efficiency to discover
through your bank’s Internet Banking facility. Have you logged
in yet? |
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| FAQs |
Can the Internet Banking
facility of one bank be used to transfer funds to an account in
another bank? Yes. Online bank accounts can be enabled
to do such a transfer. One can also use the query facility to check
the status of completion of such a fund transfer.
How can idle funds be utilized with the Internet banking
facility? Unused balances in the account can be converted
into longer term bank deposits in a jiffy. Some online banking accounts
are also linked to trading and investment accounts, to which funds
can be allocated. Users can switch to the investment portal and
complete the investment transactions for which money has been allocated
from the bank account.
What are the transactions done using an Internet account?
The facilities depend on the bank and the type of account.
Payment of bills, transfer of funds, creation of deposits, payment
of EMIs and credit card dues and several non-financial transactions
such as request for account statement and cheques book can be done
online. |
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| 4. Five tips to make sure your
retirement money lasts till the end |
With so much at stake when planning
a retirement income stream, it pays to take a step back and see
whether your plan takes into account the major obstacles to retirement
income adequacy. When you take this big-picture view, consider the
five major challenges most retirees face: the potential for outliving
one’s assets; the threat of rising living costs; the impact
of increasing health-care costs; uncertainty about the future level
of Social Security benefits; and the damage to long-term financial
security that can be caused by excessive withdrawals in the early
years of retirement. Understanding each of these challenges can
lead to more confident preparation.
Standard & Poor’s suggests you consider
these five risks to your retirement income, including outliving
your assets and higher health-care costs. |
| Points to Remember |
• Today’s retirees
have to assess several threats to enjoying a financially comfortable
retirement. These include the potential for outliving their assets
and the corrosive effects of inflation on future income.
• A sound retirement income plan needs to address specific
risks, such as longevity, rising health-care costs, and excessive
withdrawal rates, that can lead to premature depletion of assets.
• Demographic trends are likely to put added stress on government-run
programs, including Social Security and Medicare, which help retirees
balance their budgets.
• The goal of retirement income planning is to create a sustainable,
predictable stream of income that also has the potential to increase
over time. |
| Examining the Issues |
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| Longevity |
While most people look forward
to living a long life, they also want to make sure their longevity
is supported by a comfortable financial cushion. As the average
lifespan has steadily lengthened due to advances in medicine and
sanitation, the chance of prematurely depleting one’s retirement
assets has become a matter of great concern.
Inflation varies over time, as well as from region
to region and according to personal lifestyle. Through many ups
and downs, US consumer inflation has averaged around 4% over the
50 years ended December 31, 2006. If inflation were to continue
increasing at a 4% annual rate, a dollar would be worth 44¢
in just 20 years. Conversely, the price of an automobile that costs
$23,000 today would rise to more than $50,000 within two decades.
For retirees who no longer fund their living expenses
out of wages, inflation affects retirement planning in two ways:
It increases the future cost of goods and services, and it potentially
erodes the value of assets set aside to meet those costs—if
those assets earn less than the rate of inflation. |
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| Health Care |
The cost of medical care has
emerged as a crucial element of retirement planning in recent years.
That’s primarily due to three things: Health-care expenses
have increased at a faster pace than the overall inflation rate;
many employers have reduced or eliminated medical coverage for retired
employees; and life expectancy has lengthened. In addition, the
nation’s ageing population has placed a heavier burden on
Medicare, the federal medical insurance program for those aged 65
and older, in turn forcing Medicare recipients to contribute more
toward their benefits and to purchase supplemental insurance policies.
Because of the higher cost trends affecting private
health insurance, the same retiree relying on insurance coverage
from a former employer will have to allot nearly $300,000 to
pay health insurance and Medicare premiums, as
well as out-of pocket medical bills, according to a Money magazine
report |
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| Excess Withdrawals |
The decision about how much
money may be safely withdrawn each year from a retirement nest egg
should take into consideration all the risks mentioned above. But
retirees also must consider the fluctuating returns that their personal
savings and investments are likely to produce over time, as well
as the overall health of the financial markets and the economy during
their withdrawal period. |
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| Addressing the Risks |
While the risks discussed above
are common to most people, their impact on retirement income varies
from person to person. Before you can develop a realistic plan aimed
at providing a sustainable stream of income for your retirement,
you will have to relate each risk to your situation. For example,
if you are in good health and intend to retire in your mid sixties,
you may want to plan for a retirement lasting 30 years or longer.
And when you estimate the effects of inflation, you may decide that
after you retire you should continue to invest a portion of your
assets in investments with the potential to outpace inflation.
Developing a realistic plan to address the financial
risks you face in retirement may seem beyond your capabilities.
But you don’t have to go it alone. An experienced financial
professional can provide useful information, as well as valuable
perspective on the options for managing successfully what may stand
in the way of your long-term financial security. |
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| 5. Buyback lifts demand for
stock, improves return on assets |
| Just as issuing shares means offering equities, a
buyback means just the reverse. When a company announces a stock buyback
or repurchase, it’s time to take a close look at what’s
behind the action. Let us learn about buyback of stocks in detail. |
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What is buyback? |
| It is the process of taking back shares from the
market. Companies usually buy back shares at a premium to the current
market price. Two most commonly used ways employed by the company
are to buy back from the open market or from shareholders at a fixed
price on a proportionate basis. |
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| Why buyback? |
There are several reasons a company may want
to buy back shares of its own stock, some of them for the benefit
of the stockholder, while others have less altruistic purposes.
Here are some of the reasons, both good and bad that a company
might do a stock buyback:
- If a company is sitting on a large sum of cash and must decide
how to invest it, one of the options is to distribute part of
it to shareholders. Companies can do this either of two ways:
as dividends or buy buying up outstanding shares. If the company
chooses to buy up shares, stockholders benefit even if they
don’t sell by the reduction in outstanding shares.
- If a company’s stock is suffering from low financial
ratios, buying back stock can give some of the ratios a temporary
boost. Key ratios like earnings per share (EPS) and price earnings
ratio (PE) look better because they are based on the number
of outstanding shares. Reduce the number of shares and even
though earnings don’t change, the EPS looks better.
- Companies buy back stock is to cover large employee stock
option programs. The effect of these programs, which were out
of control during the tech boom of the late 1990s, was to dilute
the stock and shareholder’s equity. Buying back shares
reduces dilution and increases shareholder value.
- Some companies buy back shares as protection against unfriendly
takeovers from other companies. By gathering outstanding shares
off the open market, the company makes it more difficult for
a raider to take control.
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| How does the company benefit? |
The company
is able to improve its return ratios by doing buyback. Also, it
is able to reduce excess cash reserves. Buybacks let the company
to pass on extra cash it may have to shareholders. |
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| How do shareholders benefit?
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Experts say the benefits may
not be obvious ones but buyback increases the demand for the stock
which may in turn boost the share price. One obvious gain for the
shareholders is the premium they get by handing over shares to the
company, provided the company decides to buy from the shareholders.
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| How is buyback price determined?
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| Companies use the average closing
price for a particular period immediately before the buyback announcement
to determine the buyback price |
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| Is it compulsory? |
| As per Sebi guidelines, the decision
to accept or forgo the buyback offer lies ‘exclusively’
with the shareholders. |
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| Conclusion |
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Stock buybacks can be great for stockholders if done because
that is the best use of cash and the price is right. However, watch
out of financial slight of hand that seeks to cover up weak ratios
or poorly managed employee stock option plans.
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