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Clubbing of Income - understand do's and don'ts
Many a times it has been noticed that people with high income group invest their money in the name spouse or kids or in order to save in taxes. They believe that since their spouse or kid do not have any other income or have lower income, they will be able to save on taxes which otherwise would have been charged to them. But there are many provisions in Income Tax Act which can actually check these kinds of malpractices which lead to evasion of tax and not savings of taxes. These are covered under section 60 to 65 of Income Tax Act and are generally known as Clubbing of Income Sections. These sections state that under given conditions, income of others may be included in your income, even though it directly does not accrue to you. Following are examples of such clubbing provisions: Money invested in the name of wife is added to the income of the transferor. Income earned out of investments made in the name of minor child gets added to the income of the parent who pays higher tax. Let us go into the detail of these provisions There are certain exceptions to this: If income of minor is due to any manual work or on account of any activity involving application of his skill or talent. Income of minor suffering from any disability which is specified under section 80U of the Income Tax Act. How to avoid clubbing section The crucial point in clubbing is that an assesse cannot just part his part of income to other assesses (wife, kid, daughter-in-law etc) in order to save taxes. But there are certain ways where transfer of income can be done without actually getting into the trap of clubbing provisions. Let us look at few of them: From investment planning purpose, you can transfer your money to your wife and she can then invest the money in Liquid Funds offered by Mutual Funds for few days to few months depending on your cash flow need. The income from such will thus escape clubbing provisions and you shall get better return on taxation consideration. This article is only for your reference and before you use any of our above suggestions, please do consult your tax practitioner and investment consultant.
Its tomorrow that matters - An article by Mr. Prashant Jain
“It’s not where we are, but in which direction we are moving matters the most.” Till date you have been reading views of SLA but this time we thought you should read the views of someone whom we personally have very high regard – Mr. Prashant Jain. We happen to read his latest article and it is one of the best we have ever read. Just a brief introduction of Mr. Prashant Jain We would humbly say, please do read the article. If you are short of time, we would suggest that do read the excerpts of the article which we have cropped for you but in leisure, do read it completely. We can assure you that once you finish this article, you will only say that it’s really worth spending some time. Click here for Article specified ************ Good returns are seldom made on investments made in good times. Rather, good returns are typically made on investments made in adverse times. There is a fair value for listed companies, just like for companies that are not listed. In good times when the stock markets are doing well, companies typically trade above fair values and in adverse times when markets are not doing well they tend to trade below fair values. In the long run, markets do not sustain at either overvalued or undervalued levels, rather move close to fair values. This is why investments made in adverse times typically yield above average returns and vice versa. Relation between Market Valuation & Performance Besides, the fair value of markets / companies is not stagnant; rather it is increasing at roughly 15% p.a. This rate is broadly the same as the nominal growth rate of GDP since companies in aggregate represent the economy itself. India’s nominal GDP growth rate (real growth rate plus inflation) has been 14.1% p.a. since 1979. Current GDP growth rates over last 3 years of 16% p.a. (7.9% p.a. real growth and 8.1% p.a. inflation) are similar. It is not surprising therefore, that the Sensex has yielded nearly 15% p.a. returns from inception in 1979 till date. (At 16.6% CAGR over 1979 – 2012, 100 has become 16000 (160 times). This is the magic of compounding and that’s why it is said that time in the markets is more important than timing the markets.) Collective expertise at mistiming Buy low and sell high is what everyone suggests and that is what everyone would like to do. The reality however for a typical investor in equity markets / equity mutual funds is somewhat like this – buy high, buy more higher, buy even more even higher, buy less when market falls, buy lesser if markets fall more and buy nothing when markets are really down. This behavior is best illustrated by the following table. This pattern of an overwhelming majority of investors mistiming the markets repeatedly and consistently is a key reason for the unsatisfactory experience of the majority from equities and for the poor equities ownership in India. While there can be many reasons for this collective expertise at mistiming, the key reason probably is: A majority of investments in equities are not done with a long term view, despite the fact that the best that equities have to offer is only over long periods. This is unfortunate, as by investing with a short term view, investors are not benefiting from the compounding potential of equities. Sensex Vs Gold Difficult markets or bargain markets? Bargains are available only in challenging environments / in markets characterized by weak sentiment and seldom when the going is good / sentiment is strong. That’s why, from an investor’s perspective, a more appropriate way to describe the current markets would be bargain markets and not difficult markets. Times such as present, when the markets are not doing well should actually be looked upon as a window of opportunity for savers to invest more into equities, so that when the good times come, there are meaningful investments in equities to reap the benefits from. The lower the markets are, the bigger is the opportunity and the longer the markets remain depressed, better is the opportunity for savers. In a lifespan of investing of say 30-40 years, it is unlikely that the markets will provide many such windows. In the last 20 years there have been only 3-4 such windows. Sir John Templeton “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Needless to say, pessimism is all that one sees all around.
Are we playing 20 - 20 or test match
IPL season 5 is on and Indians are again gripping with cricket fever. When it comes to cricket, it is no less than a religion in India. So let us learn what this religion teaches us when it comes to personal finance. If I were to ask, which form of cricket you would like to relate to your personal finance – it is like 20-20 which gets over is 3 hours or is it close to test match which is long term in nature. We would certainly like to say that handling personal finance is like playing test match. It is long term in nature where we have to meet long term financial goals like retirement, kid’s higher education, marriages etc. Now lets us understand how to win a test match. I am sure you will agree that we cannot have similar strategy for 20-20 and for test match. Both need to be played with different strategy. So when it comes to test match, following strategies are important. 1. Balanced Team with Specialist Batsmen and Bowlers When it comes to shorter version of the game, there are more all-rounders than specialist but when it comes to test match, we go for specialist batsmen, bowlers and wicket keeper. Similarly, we need to have specialist products when planning for long term. Insurance and investments are like batsmen and bowlers. Go for specialist bowler both fast and spin. So we can say, go for specialist Insurance - term, accidental and medical. Imagine investments as batsmen. We need to have a proper openers and a solid middle order. Go for specialist Investments as PPF, Equities Funds, Debt Funds etc. Do not mix investments and insurance for long run. They don’t serve your purpose well. 2. Need for both defence and attacking skills In test match, you need to have both solid defence and good attacking skills whereas in 20-20, you only look for attacking. This is the reason, the same set of batsmen when playing 20-20, score 150 runs but when playing test match, they score over 400 runs. Look at asset allocation as attacking and defence mechanism. At times, when the bowler is weak, go for attack and when the bowler is strong, go for defence. Similarly, when markets are weak, go for attack and invest heavily in equity market and when markets are strong, go for defence, i.e., go for debt. But in real life, we do the opposite. 3. Patience is the key In personal finance, we need to make more money rather than fast money. We need to understand that there will be times when making money from investments will be difficult and that is the time to just hang out there and let the bad time pass. Patience is the key. Look at Sachin, Dravid, Gavaskar and all great batsmen we know. The key to their success was their patience and conviction. When it comes to investments in equities especially, we need to work on our patience. If you are convinced that Indian economy will grow better in future, markets will deliver returns. Currently, markets are not performing. In 2007, sensex was at 17000 levels and even today. But in last 5 years, Indian economy has grown close to 50%. Markets for long cannot ignore this growth factor. At times, your patience will get tested. 4. Need an experienced coach No matter how many great players are there in the team, we still need a coach who is experienced and have cool head. Similarly, you need to have an advisor who is experienced and can help you in your strategy-making. 5. Go for winning rather than going for Not losing Look at Indian team 5-6 years ago. They used to go for a match with a mindset that we should not lose a match rather than going with mindset that we have to win the match. The result was that they used to lose more matches than winning. In fact, at times, they used to lose matches which they could have easily won. But now, the story is something different. They believe that they can win the match and go in the field with an attitude that they have to win the match and not we are one of the best teams in the world. Attitude makes a lot of difference in your life. Do you look at the glass half full or half empty, it is your choice. In investments also, most of the people invest not for gains but for not losing money and become too defensive. They invest heavily in debt and at the end, lose the financial battle with monster called Inflation. All we need to have is the right attitude towards investments. Go for beating inflation which is the required run rate to win a match. If we make below required run rate, then winning the match would be just a dream. So at the end, we would only like to say that managing personal finance is also a management skill. It is not the best bat that makes the best batsmen but it is a good skills and strategy that is needed. Don’t go behind getting the best product rather understand the best skills of managing investments.
Why do we wait for confirmations!!
In the month of January and February, stock market gave over 20% returns. When sensex was at 15500 levels in 2011 end, there were people who were waiting for 14000 levels and were in cash or there were people who had redeemed money from equity and were hugely invested in FDs. It is very typical of many investors to miss out huge gains. In fact, rather than understanding asset allocations and goal based investment strategy, many still believe in timing the market.On the top of it, investors do give lot of importance to the news which flows around. Read the article attached which got published in The Economic Times few weeks back which shows how bad it is to predict the future course of market. Let us discuss something which is more practical than theoretical. How many of us invested in Gold in 2006 when it was trading at Rs. 5000-6000 per tola and believe that it will go to 28000 levels or how many of us actually invested in Silver when it was at Rs. 18000 per kg? How many of us invested in stock market when it was 3000 way back in 2003 or at 8000 in 2009? Not many would say that, except those who were regular investors thru SIP. In fact, many times when we discuss with investors, they tell us that they want maximum return. Maximum returnis just not possible in real world. Post mortem can give you best return but not in real world. Even the best of the financial experts don’t get it. We have to remember that Time and again, SLA Investment Centrehas stressed that investors should work on their disciple and invests regularly thru SIPs for their long term financial goals.Just to give you an example of how long term SIPs are beneficial, we have taken two simple diversified equity funds and their SIP return over last 7 years. We assumed that an investor started a SIP of Rs. 10000 in April 2005 and continued till March 31st 2012. In between, we witnessed 2 bear markets and two bull markets. We assume that current times are bear markets as well. Now starting from 2005 till now, 7 years are over and in terms of months, 84. In last 84 months, you have invested Rs. 8, 40,000/-. The below mentioned tables give you a year by year valuation of how SIP in these fund has done over a period of time. Now the table clearly shows that if one would held your nerves in 2009, he would have been a happy investor. Even those who keep investing in current bear market will reap the benefits. That’s the message we have always communicated and we will continue to focus on the same. Wish you a very Happy 2012-13 Financial Year.
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