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Monday, January 10, 2011

Dont forget the 'Wealth Tax'

With stock markets hitting an all-time high, property market looking up again, and the prices of precious metals such as gold and silver soaring like never before, the Indian economy is on a roll, giving a new fillip to the wealth of Indians. The Credit Suisse Research Institute’s inaugural Global Wealth Report, for instance, finds that total wealth in India has tripled in the past decade to $3.5 trillion, and could nearly double to $6.4 trillion by 2015, if the nation’s economy continues on its current trend. Similarly, the 2010 Asia Wealth Report, produced by Capgemini and Merrill Lynch , estimates the number of high net-worth (those with more than $1m in investable assets) Indians rose to 126,700 by the end of 2009 compared to just 84,000 in 2008, riding on the surge in market valuations and improved economic growth.

Clearly, wealth creation by Indians is in full swing and is also likely to be on the fast lane in the years to come. However, before you start basking in the glory of your new-found wealth, you will do well to remember that this might also require you to pay a different tax called ‘wealth tax’. Wealth tax, in fact, is an annual tax like income tax and is levied on the market value of the property for the benefits derived from ownership of such property, irrespective of whether the property derives any income or not.

“Wealth tax is charged on the net wealth of the tax payer, where net wealth means the aggregate value of all the assets, excluding exempt assets, belonging to the tax payer on the valuation date less the aggregate value of all debts owed by him which have been incurred in relation to these taxable assets,” says Girish Batra, chairman and managing director of NetAmbit Infosource & e-Services.

Wealth tax is currently levied at a rate of 1percent per annum of the net wealth exceeding `30 lakh on the valuation date (i.e. March 31). These provisions are governed by the Wealth Tax Act, which came into force on April 1, 1957. In fact, “every individual, Hindu undivided family (HUF) and companies are liable to pay wealth tax if the combined value of certain assets they own at the end of a fiscal year exceeds Rs 30 lakh. However, the scope of liability of wealth tax depends on the residential status and nationality of the tax payer,” says Vineet Agarwal , director, KPMG .

Thus, if your net wealth stands at `50 lakh, you will have to pay `20,000 as wealth tax for the given year.
Pensioners, retired persons or senior citizens have not been accorded any special benefits under the Wealth Tax Act. However, there are certain entities exempt from wealth tax, which include any company registered as a not-for-profit organization, any co-operative society, any social club, any political party and any specified mutual fund.
Currently wealth tax is payable on buildings/houses, including farm houses situated within 25 km from the local limits of any municipality or cantonment board (subject to certain exceptions), motor cars, jewellery, yachts, boats and aircraft, and cash in hand in excess of `50,000 for individual and HUF.

Thankfully, there are certain exemptions and exceptions available for taxable assets. For instance, one house, part of a house or a plot of land belonging to an individual or HUF is exempt from wealth tax. Similarly, residential property that has been let out for a minimum period of 300 days in the previous year does not attract wealth tax. Similar is the case with houses for residential or commercial purposes which form part of stock-in-trade as well as houses which the tax payer may occupy for the purposes of any business of profession carried on by him.

Motor cars used by the tax payer for business or running them on hire or as stock-in-trade are also exempt from wealth tax, and so is jewellery that forms part of stock in trade, as also gold deposit bonds. Yachts, boats and aircraft are also exempt if used for commercial purposes. “The Act also provides exemptions with respect to an individual who is either a person of Indian origin or Indian citizen and who must have returned to India from a foreign country for settling down permanently. The exemption is available on the money, value of assets brought into India and value of assets acquired by an individual out of such moneys. This exemption is available for a period of seven years after the person returns to India,” says Agarwal.

There are, however, stiff penalty provisions for non-payment of wealth tax. Under the Wealth Tax Act, concealing particulars of chargeable assets or furnishing inaccurate particulars thereof is construed as evasion. A penalty may vary from one to five times of the tax sought to be evaded. Tax evasion can result into imprisonment of the tax payer of up to seven years along with fine if the tax evaded is over Rs 1 lakh and up to 3 years with fine if tax evaded is lesser than `1 lakh. Delayed filing can result into a penalty of Rs 100-200 per day.

Wealth tax is required to be paid before filing the return of income. The due date for filing the wealth tax return is July 31 following the end of the previous year.

However, if your stress level has peaked, then here comes the breather. In line with the proposals laid down in the revised discussion paper, the Direct Tax Code ( DTC )) 2010 proposes to levy wealth tax at the rate of
1 percent on net wealth exceeding `1 crore (against the existing threshold limit of `30 lakh under the Act). “The proposed change is definitely a welcome step for high net worth individuals who will now have to pay tax on wealth in excess of Rs 1 crore,” says Agarwal.

Batra has a similar view. He says, “Keeping inflationary considerations in mind, it will be a positive step towards the tax payer which is genuinely required in present times. These current limits were fixed way back in 1992 and have not been updated since then. But due to inflation, the valuations have gone up considerably and, thus, the exemption limit does perform the required balancing act.”

Although from the point of view of the government, such a step would necessarily erode the tax base and would hamper the tax revenues from wealth tax. “But considering the fact that the present revenues are not very significant, it would be beneficial for the government too in the long run, provided the list of assets is made more exhaustive,” he adds.

It is, however, pertinent to note that while the proposed law may seem more liberal to many, the trouble is that it has included archaeological collections, drawings, paintings, sculptures, wristwatches worth over `50,000, besides cash in hand above `2 lakh, among other things, into the list that forms wealth. With this there would certainly be disputes over the valuations of these pieces as there is no uniform method to evaluate these things. In other words, there seem to be some taxing times ahead for HNIs! 

Curtesy: ET

How Inflation affects Sensex?

The inflation rate has started having an impact on the Sensex. The Sensex has started rocking because of the high inflation. With its widespread reach, inflation affects all aspects of the economy, and thereby the Sensex.

Last week, the markets fell after a sharp rise in food prices heightened concerns that the central bank may tighten the monetary policy more than expected. The financial stocks were among the big losers as higher interest rates could douse the demand for loans and squeeze the margins of banks.

The food price index rose 18.32 per cent in the 12 months to December 25, the highest in more than a year. The fuel price index climbed 11.63 per cent. In the prior week, annual food and fuel inflation stood at 14.44 per cent and 11.63 per cent respectively. The primary articles price index was up 20.20 per cent in the latest week, compared with an annual rise of 17.24 per cent a week earlier. The Wholesale Price Index, the most widely watched gauge of prices in India, rose 7.48 per cent in November from a year earlier, compared with 8.58 per cent in October.

Though overall, inflation moderated to 7.75 per cent in November from 8.58 per cent in October, food inflation has increased rapidly in the first half of December. High onion prices coupled with that of milk were blamed for high food inflation. This may lead to at least a 50 basis point rate hike in January by the Reserve Bank of India (RBI). One has to be prepared now for a much larger rate hike series than what one was expecting say a month ago. The RBI is scheduled to review the policy on January 25.

Quarterly corporate results due from next week are expected to show robust growth, and investors would be watching for management comments on outlook for direction. Inflation is one of the issues hurting the markets. Earnings should provide more cues on direction. Foreign funds have bought around USD 270 million of equity in the first two trading sessions this year, after pumping in a record USD 29.3 billion in 2010. According to the prime minister's economic advisory council chairman C Rangarajan, the inflation rate could be considered comfortable only when it comes down to four per cent.

He said the rate hike by the RBI will depend on the price behaviour during December and January. If the inflation rate comes down significantly, there may not be any need for action. On the other hand, if inflation remains sticky, then action will be required by the RBI. The RBI last year raised policy rates six times to rein in inflation. However, in its mid-quarterly review in December, the RBI refrained from raising rates since the system was facing a cash crunch.

It, in fact, announced measures to inject Rs 48,000 crores into the system. The RBI, however, cautioned that its measures should not be interpreted as a reversal of the tight monetary stance since inflation still continues to be a major concern.

The rising oil price presents a new inflationary phenomenon and further complicates the task of policymakers. While raising rates can do little to cap cost-driven inflation, it can help cool overall demand and contain inflationary expectations fuelled by a broad rally in the commodity markets.

Rising inflation leads to increase in interest costs, which affects the companies depending on debt finance as the cost of funds increases. This negatively affects the bottom lines of the companies.

Moreover, increase in prices leads to decrease in demand, which again affects the corporate bottom lines.
The purchasing power of people gets reduced. All these cumulatively have an adverse affect on the corporates, and thereby on the Sensex.  
 
Curtesy :  Ashish Gupta,ET

Why stock reports are given for free ?

Are you the kind who relies on research reports brought out by stock broking firms to invest money in the stock market? Well, think twice before you do that again.

Things may not be as straightforward as they appear. To know the real story behind the entire business of broking houses bringing out research reports, read on.

What is a research report?

These days most broking firms that serve retail or institutional investors have a research team. This research team mainly tracks stocks and identifies investment opportunities for investors.

Analysts research companies by understanding their business, meeting the company management and running numbers to check if the current price of the stock is justified. This research is communicated to both existing and prospective investors of the broking firm in the form of a report.

These reports typically carry a recommendation at the start, like buy, hold or sell. If the report flags a buy, the recommendation to the investor is to buy the stock. In case of a sell, the recommendation is exactly the opposite ie, to sell the stock.

A hold recommendation comes somewhere in between and is meant for those investors who already have the stock. The recommendation to them is to hold on to their current investment and not to buy more.

Why are research reports brought out?

There are various reasons for a broking house to bring out research reports. "Whenever a stock brokerage feels a stock is undervalued and clients could benefit by buying that particular stock, the reasons for buying the stock are put together in a research report," says Alok Ranjan, portfolio manager, Way2Wealth.

A stock is supposed to be undervalued, when an analyst feels that the current business prospects of the stock are not reflected in the price of the stock. Given this, they recommend that the stock should be bought because they expect the price of the stock to go up in the days to come.

There are brokers who primarily serve institutional clients. These brokers typically tend to cover large-cap stocks. They bring out reports to update clients on the impact of recent developments, future concerns or business opportunities. Stocks like Reliance Industries, Larsen & Toubro, Infosys and TCS are covered regularly by large broking houses.

These, of course, are some of the reasons why research reports are brought out.

 

Research does not pay

Bringing out a good report with a compelling investment argument is a time-consuming process. "An analyst could take anywhere between a week to month for making a research report," says Sadanand Shetty, V-P & senior fund manager, Taurus Mutual Fund.

Moreover, setting up a research team is a costly process for any broker. The cost involves buying databases which have the numbers necessary to carry out research. Hiring senior research analysts can also cost a bomb. And after incurring all these costs, a research report is given out free.

"Brokerage reports are available free in India, so research is a cost centre," says a fund manager with a domestic fund house. So, why do stock broking firms spend so much money to bring out research reports and then give them away for free?

So what's the real story?

We have seen the genuine reasons why stock broking firms bring out research reports. But there are other reasons as well. As Andy Kessler writes in the book, 'Wall Street Meat', "Companies report earnings once a quarter. But stocks trade around 250 days a year.

Something has to make them move up or down the other 246 days. Analysts fill that role. They recommend stocks, change recommendations, change earnings estimates, pound the table – whatever it takes for a sales force to go out with a story so someone will trade with the firm and generate commissions."

Reports essentially are a medium which allows the sales force of the stock brokerage to go out in the market and sell stocks. And how does that help? For this, investors need to understand the business model of brokers, says a veteran stock broker on Dalal Street. "The prime objective of a research report is to induce a transaction," he adds.

Every transaction gives broking income to the broker, which is his bread and butter. "A report is a tool to sell stocks," says a branch manager at a brokerage house.
 


The 'Buy' Recommendation

 In order to sell stocks to investors, it is very important for broking firms to keep coming up with buy recommendations on stocks. As Mitch Zacks points out in his book 'Ahead of the Market', "A buy recommendation has more value to a brokerage firm because it gets the brokers on the phone selling stocks to new clients and opening new accounts."

A buy report ensures that the broking house has a chance to make far more money than it ever would by putting out a sell report on a stock. This is because only those investors who have the stock will consider selling it, so the income will be limited to that extent. This, of course, does not hold for a buy report.

Also, at times, owners of stock broking firms own shares or the broking house owns shares for its portfolio management services' (PMS) clients. If a particular stock does not do well, it is quite possible that a broking firm may release a 'buy' report on the stock. This may tempt investors to buy the stock, thus boosting the stock price. This will give the owner or the broking house an opportunity to sell out of the stock.

What investors need to be careful about?

This, of course, does not mean that no research report can be trusted. Over a period of time, savvy investors learn to separate the wheat from the chaff. "The brokerage from where the report originates, tells me about the quality," says Alok Churiwala, a Mumbai-based broker.

While seasoned investors may be able to differentiate one report from another, retail investors have to trust their broker. So, what should a retail investor do? Some large brokerages these days carry disclosures on whether they own a particular stock, if they are recommending it. These reports also point out whether a sister firm of the stock brokerage has an investment banking relationship with the company. This is something that retail investors should look out for.

"For retail investors, the only way out is to check the past track record of the brokerage house and then decide whether to trust the reports or not," says Ranjan of Way2Wealth.

So, investors should thus be careful and do their own homework on the stock, rather than buy or sell because of an analyst recommendation. As Zacks says, "One of the biggest and most correctable mistakes you can make using analyst recommendations is to allow the recommendations as a means by which brokers can sell you a stock. You may not fully realise that the more you trade, the more money your brokerage firm makes."

 

Curtesy: ET

Afraid of inflation? Inflation-indexed bonds may bring respite


Inflation scares no one more than those living on interest income. The news that food inflation is hovering above 18% must be giving them sleepless nights. The trouble is that though interest rates have risen marginally lately, they are nowhere near the actual rate of inflation. Worse, the inflation number that is bandied about is mostly based on wholesale prices. If you actually include the consumer price-based inflation (considering we don't buy things from the wholesale market), things would indeed look unpleasant.


That is why we are all ears when there is talk about inflation-indexed bonds (IIBs). The Reserve Bank of India (RBI) has published a discussion paper on IIBs in December to obtain views from the public and market participants on the product.


Why are these bonds such good news?


Unlike your regular FD or bond, the principal is indexed (or adjusted) to the inflation periodically and the interest is paid on this inflation-adjusted principal. Simply put, your investment is hedged against rising inflation.


Also, the implications of having IIBs in place are much bigger. If these bonds really hit the market, one may soon have a host of products such as inflation-indexed pension plans, inflation-indexed insurance and mutual funds that may allow one to protect capital from the evils of inflation.

What's the interest




Still not clear? See the illustration: The government issues a 10-year bond with 3% interest to be paid semi-annually on 1 January 2011. Suppose you invest Rs 10,000. The first interest payout will happen on 1 July 2011, since interest is paid semi-annual. During this period, if the inflation is 5%, the inflation-adjusted principal on 1 July 2011 would stand at Rs 10,500 (10,000+10,000X5/100). Hence, the semi-annual interest payment (or real yield) for the bonds would be Rs 157.5 (10,500 x 1.5/100). Alternatively, if you have invested in a regular bond with the same interest rate, you would have got only Rs 150 (10,000 x 1.5/100). If inflation inches further, it would reflected in the principal invested in IIBs, but not in a plain bond.
Needless to say, that makes a huge difference to the return you make.


"Inflation-indexed bonds provide an option for portfolio diversification and would be particularly attractive to individuals with a low risk appetite. In a period of high and volatile inflation, they gain more currency," says Crisil's chief economist DK Joshi. The underlying inflation index reflects the true inflation in the economy for the bonds to work, says Joshi.


"Inflation-indexed bonds are definitely good for a set of investors looking for hedge against inflation. But I feel that acceptance of inflation-indexed bonds will take time," says Nandkumar Surti, chief investment officer, JP Morgan Asset Management. Experts like him think the long tenure of these bonds, lower coupon rate (or the rate of interest offered) and lack of awareness among retail investors may lead to the poor offtake of IIBs and in turn, may result in the government issuing these instruments infrequently.


According to experts, investors must be educated about the benefits of IIBs. For example, the coupon on these bonds is typically lower than that of fixed rate bonds as IIBs are aimed primarily at protecting investors from inflation.
Your inflation shield
However, as you get the interest payout based on the inflation-adjusted principal, your real returns may be higher than other fixed rate bond in higher inflationary times. The only time these bonds will fall out of favour is during deflation - when the principal can be eroded. That shouldn't worry us since we look far away from the deflationary scenario.


Experts also say IIBs can only become popular if they are pushed through retail investors. Also, they believe the tenure of these bonds shouldn't exceed five to 10 years as longer-tenure bonds are not favoured by retail investors, especially senior citizens. "There is no single preferred tenure for these bonds. The appetite for instruments with differing tenure will vary with the type of investor. I think the tenure should extend from medium (five) to long term (10-15) years to cater to diverse needs. I agree with RBI's proposition on this," says Joshi.


The US Treasury Inflation Protected Securities (TIPS) are issued for different maturities and denominations. As of now, you will have to wait to see what the central bank does eventually. The discussion paper says the banking regulator plans to issue IIBs in small lots and based on the experience, may consider expansion in the future.


Curtesy: ET 
 

Gratuity: Get Rs 10 lakh for not hopping jobs

How is gratuity calculated
Are you ruing your decision not to change jobs while your peers jumped more than two or three times to land fatter salaries? Don't worry, because patience is not only a virtue but can also be very rewarding in financial terms. If you have completed at least five years of service, you are eligible for a fat lump-sum payment in the form of gratuity when you are finally bidding farewell to a company. Your former colleagues, who changed every two or three years for lucrative new offers, will not be eligible for the same benefit.


Gratuity is one of the oldest employee-retention tool in the basket of HR managers. It used to be one of the three major retiral benefits along with Employees' Provident Fund and pension. The objective was to make it lucrative for an employee to stay in the company in the long term and reap benefits. But unlike the retention bonuses that companies now offer to select employees, gratuity used to be for all employees in a company.


However, gratuity has lost favour over the years because job-hopping has become a norm. "The average employee now changes jobs every 2-4 years," says Kris Lakshmikant, CEO and managing director of Bangalore-based HR firm Head Hunters India.

How much will you get
Besides, patience is in short supply in this era of instant gratification. "Youngsters today are more concerned with cash in hand than what comes to them after 10-20 years. They do not think of long-term benefits and give no significance to benefits such as gratuity," says Lakshmikant.


This can be a costly judgement error. Even with a small hike in your basic salary, your gratuity corpus can assume gigantic proportions over the long term. If someone starts his career at a basic salary of Rs 30,000 and gets a nominal 10% increment every year, his gratuity at the end of 20 years will be Rs 14.1 lakh (see graphic). However, the Payment of Gratuity Act , 1972, places a cap of Rs 10 lakh on the amount that a company has to pay as gratuity, although a company is free to give more if it wants to.


What's more, the tax exemption limit for gratuity has now been raised to Rs 10 lakh (see box), which makes this long-term benefit even more attractive. "You should consider the fact that a lump sum of up to Rs 10 lakh you get is tax-free while the raise in your next salary would be taxable. So when you decide to change jobs and there are only a few months left for entitlement of the gratuity, buy some more time from the new employer so that you are able to avail this benefit," says Veer Sardesai, a Pune-based certified financial planner.


Governed by the Payment of Gratuity Act, 1972, gratuity is a defined benefit plan. It is mandatory for companies with more than 10 employees on their payrolls to give gratuity to an employee on resignation, retirement and termination of service.


However, an employee is eligible for this benefit only on completion of five years of continuous service with the company. Say, you leave after working for three years and rejoin after sometime and work for another two years, you are not entitled to this benefit.
"There should not be any break by the employee from the date of joining to be eligible for the sum, though probation period, any leaves that you have availed and notice period served by you are not counted as breaks," says the HR head of a large corporate house.

But there are exceptions to this rule. The condition of minimum five years of service is relaxed in the case of death or permanent disablement of the employee.

Gratuity is calculated as 15 days' salary for each completed year of service. The salary includes your last drawn basic salary and dearness allowance but excludes all other allowances. For instance, if you have completed seven years of service and the last drawn monthly salary is Rs 45,000, you are entitled to a gratuity of Rs 1.8 lakh.

The gratuity rules are lenient when it comes to calculating the completed years of service. If one has put in more than six months during a year, it shall be treated as one complete year.

How gratuity is taxed


However, the rules are not so lenient for employees who do not fall within the ambit of the Gratuity Act. Their entitlement is based on the average salary of half a month for each completed years of service. Also, any period of more than six months is not considered to be a complete year here. However, if an employer wishes, you can be paid more than the entitlement. Typically, employers manage this liability by creating a trust or outsource this money into the group gratuity scheme of an insurance company.

It's important to note that this benefit is only for those on the company's regular payroll. If you are on a contract, there's no gratuity waiting for you even after 5-10 years of service. However, some organisations do offer employees who are on the payroll of a company but have been hired on contract full benefits if the contract is renewed and they complete the stipulated time frame. Ask your company for details if you are on a contract.

Of late, the gratuity component has found its way into the cost-to-company compensation packages of companies. Some companies offer gratuity to employees even though they may not have put in the required number of years.

Delhi-based telecom engineer Yogendera Kumar was in for a pleasant surprise when he recently switched jobs. "I got gratuity along with my final settlement. Though I had been told that I would be eligible for gratuity, I wasn't sure since the previous two organisations where I worked for a similar tenure didn't pay me any."

For companies, this is a good HR practice that makes them look like a great place to work in. This is especially important at a time when India Inc is struggling to find the right talent. Says an HR professional with a Gurgaon-based telecom company: "We have included the annualised cost of the gratuity in the package, so we pay that up regardless of employee serving us for five years or not."

 
Curtesy: ET