Tag Archives: Circle

Thursday Trivia ~ New PPF and NSC Rules for NRIs

Who is a Non Resident Indian (NRI)?

Income Tax doesn’t directly define NRI. Section 6 contains criteria to consider Resident in India and provides that anyone who doesn’t fulfil this criteria is considered Non-Resident.

Simply speaking, the status of a person as a resident or non-resident depends on his period of stay in India. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March.

Who is a Resident of India?

An individual will be treated as a Resident in India in any previous year if he/she is in India for:

  1. Atleast 182 days in that year, OR
  2. Atleast 365 days during 4 years preceding that year AND atleast 60 days in that year.

An individual who does not satisfy both the conditions as mentioned above will be treated as “non-resident” in that previous year.

Old rule for Personal Provident Fund (PPF)

As per the provisions, NRIs are restricted to open a new PPF account in India. However, if they were residents while opening the account and subsequently became NRIs, they were allowed to make contributions into their said PPF account.

New Rule for Personal Provident Fund 

On 3rd October, 2017 Government came up with a notification namely Public Provident Fund (Amendment) Scheme, 2017

“Provided that if a resident who opened an account under this scheme, subsequently becomes a non Resident during the currency of the maturity period, the account shall be deemed to be closed with effect from the day he becomes a non-resident and interest with effect from that date shall be paid at the rate applicable to the Post Office Saving Account up to the last day of the month preceding the month in which the account is actually closed”.

As per this notification

  • When your residency status is changed to NRI, PPF account will be deemed to be closed, hence no further contribution would be allowed.
  • Interest on PPF would be now applicable to Post Office Saving Account which is 4% rather than prevailing interest rate of 7.8% until you close the account itself.

Old Rule for National Savings Certificate (NSC)

Similar to PPF, NRI cannot directly invest in NSC. However, if an NRI is allowed to continue existing investments till maturity date considering the account has been opened while being a resident.

New Rule for National Savings Certificate

When an individual becomes an NRI, his / her NSC account is deemed to be closed. Till the time an NRI actually enchases, the accumulated money in NSC certificate will earn an interest of Post Office Savings Account which is 4%.

It’s important to note that these rules are prospective in nature.

Suppose Mr. Ajay became an NRI citizen in 2014, he would have continued to enjoy the benefits till October 2017. Now after the amendment, Mr. Ajay would not be able to contribute to PPF Account or NSC certificate and his interest income would drop down to 4%.

In cases where, family of an individual also moves to a different country for employment purpose. If they fall into the definition of NRI, then similar rules would be applied for PPF and NSC.

How to withdraw money from PPF Account?

An NRI’s request to close PPF account can be processed by bank or post office only his / her signature is attested by an authority. The attestation can be done by a Gazette officer or PSU Bank officer.

An NRI should send a PPF account closing form to their relatives, friends, parents or financial advisor in India where they have NRE/NRO account. An authority letter must be attached allowing them to do withdrawal process by closing PPF account on behalf of an NRI.

Authorised person after getting attestation of the authority letter either from a Gazette officer or a PSU bank officer should proceed to the bank where PPF account is held. On verifying the authenticity of documents, bank will close the account.

– Jinay Savla

Thursday Trivia ~ Financial Thumb Rules To Remember (Part 3 / 3)

After completing his home work on financial thumb rules, Rohan was very excited to meet a financial advisor from Circle Wealth Advisors. Malvika had never seen Rohan so excited before, she nudged him saying, ‘seems like good old times (before marriage)!’ Recognising that sly comment, Rohan simply smiled and looked away.

‘Ting Tong’  house bell rang. Rohan looked at his watch, amazed to find the financial advisor on time. Malvika looked at him and said, ‘you think everyone like you is late?’ Rohan knew, he couldn’t say anything as of now. Malvika was amazed at the professionalism displayed by the financial advisor as they were expecting someone with a lot of forms to be signed.

After exchanging initial greetings, Rohan and Malvika got down to some serious discussion with the financial advisor.

Rohan : The rule of 100 minus age suggests that I should be in 70% equity as of now. Is that viable or should I opt a different strategy?

Advisor : Great question. As you are 30 years old, thumb rule suggests 70% in equity. However, a correct method to look at it would be to have a complete view on your financial health first and then assess what allocation do you require towards equity. It will aslo depend on your financial goals and risk profile to derive the desired equity allocation in the overall investments. Stock markets go through their own cycles, it would also be advisable to look at the valuation aspect at the time of initial allocation.

Malvika : How much should we save and how much should we keep as emergency fund with us?

Advisor : Ideally, your emergency fund should be somewhere between 3 to 6 months of your expenses. It helps to save for short term fluctuations of life. Suppose, there is some event and urgent cash is required or loss of job then at such times, an emergency fund comes to rescue.

Savings should ideally depend on your expenses. With such a dynamic lifestyle, we often find hard to save. However, a family should save around 15-20% of their gross annual income every year.

Malvika : Should all our savings go for Retirement planning? As we are also keen on upgrading to a bigger car.

Advisor : We need to discuss and note down all your financial goals. They are all your short term and long term goals, however big or small. You then need to prioritise those goals depending upon how important and reachable that goal is. For example a dream vacation may be less important than providing for your child’s education. We will work out the resource required to reach each goal and then depending on what is agreed we will start allocating funds to the most important goals.

Retirement planning generally requires a huge capital and hence may constitute a major allocation of your assets and investments.

Malvika : How should we plan for a car?

Advisor : The most popular thumb rule for buying a car is 20 / 4 / 10, which implies that a consumer should make a minimum 20% downpayment and the loan tenure should not be more than 4 years with expenditure (includes EMI, fuel cost and insurance) on a monthly basis should not cross more than 10% of the gross monthly income.

Another way to interpret this rule is that the cost of the car should not be more than 40% of the annual gross income of the consumer. We had written a Thursday Trivia on the same, you could look into that.

Rohan : How much debt we should take a family? Should we stick to 36% debt rule?

Advisor : 36% debt rule is a great rule to restrict us from taking excessive debt. However, we must try to put a goal lower than that. Sometimes, while buying a house, we take on excessive debt as it’s a dream come true. But a question to be asked is, do we really need to take on so much pressure for the same?

Rohan : When is the right time to invest in stock markets?

Advisor : Excellent question. Everyone seems to be wanting to time the markets, but even Warren Buffet refrains from doing so. So don’t worry about it, as I said earlier, it will depend on your asset allocation and risk profile. Once that is done, we will look into how much we should allocate in equity and debt.

Satisfied with those answers, Rohan and Malvika were clear with their financial thumb rules. Rohan had read Part 1 and Part 2 of Thursday Trivia on Financial Thumb rules and this discussion taught him a lot more. As the final greetings were exchanged, both asked the financial advisor to visit them again next week.

– Jinay Savla

Disclaimer : This particular series of Financial Thumb Rules is only meant for educational purposes. We do not in any ways recommend it, as the case may differ for investors per se.

Thursday Trivia ~ Save Tax upto Rs. 3 lakhs – New Provision on Taxation of Gratuity

Section 10(10) of the Income Tax Act, defines Gratuity as a payment made to an employee either at the time of retirement or leaving from job. However, it is given to an employee once he/she has completed 5 years of continuous service. It is considered to be a monetary reward for being in service with the company. Simply, it proves to be a retirement benefit to the employees.

The Payment of Gratuity Act was enacted in 1972. Earlier tax free limit on receipt of gratuity was Rs. 10 lakhs which the Central Government has now increased to Rs. 20 lakhs for private sector employees in an amended bill – the Payment of Gratuity (Amendment) Bill, 2017.

The amendment will be applicable from 1st January, 2016 in line with the norms set for Government employees. Basic exemption limit for Central Civil Services (Pension) Rules, at par with central government employees, which is Rs. 20 lakh.  Before implementation of the 7th Central Pay Commission, the ceiling was Rs.10 lakh.

Revised Rules for Gratuity Taxation as per Section 10(10) of Income Tax Act 

Gratuity paid to Government sector employees is exempt from Tax.

Impact of Tax Benefit

Employees covered under the Payment of Gratuity Act, 1972.

Mr. Ashish has worked for his organisation for more than 20 years now. He has received Rs. 16 lakhs as a gratuity payment.  His last drawn basic salary was Rs. 1.25 lakhs. How much of gratuity should be exempted?

As per the act, least of the following with be exempted.

  1. Rs. 10,00,000
  2. Actual Gratuity Received – Rs. 16,00,000
  3. Last drawn salary*15/26*Number of years of service – (1,25,000 x 15/26 x 20) = Rs. 14,42,308/-

Hence, Rs. 10 lakhs will be subject to exemption and Mr. Ashish would have to pay his tax on balance Rs. 6 lakhs.

As per the new rules proposed in Payment of Gratuity (Amendment) Bill, 2017, least of the following will be exempted.

  1. Rs. 20,00,000
  2. Actual Gratuity Received – Rs. 16,00,000
  3. Last drawn salary*15/26*Number of years of service – (1,25,000 x 15/26 x 20) = Rs. 14,42,308/-

As per the new amendment, Rs. 14,42,308/- lower of the above three will be subject to exemption. Taxable amount deducted from actual gratuity received Rs. 16 lakhs would be Rs. 1,57,692.

For employees not covered by the Payment of Gratuity Act, 1972.

Taking cue from the similar example, let’s calculate if Mr. Ashish’s organisation is not covered under the Act, least of the following will be exempted.

  1. Rs. 10,00,000
  2. Actual Gratuity Received – Rs. 16,00,000
  3. Average Salary * (1/2*Number of years of service) – Rs. 12,50,00/-

Hence, Rs. 10 lakhs will be subject to exemption and Mr. Ashish would have to pay his tax on balance Rs. 6 lakhs.

As per the new rules proposed in Payment of Gratuity (Amendment) Bill, 2017, least of the following will be exempted.

  1. Rs. 20,00,000
  2. Actual Gratuity Received – Rs. 16,00,000
  3. Average Salary * (1/2*Number of years of service) – Rs. 12,50,00/-

As per the new amendment, Rs. 12.5 lakhs will be exempt from tax. Taxable amount will be (Rs. 16 lakhs less Rs. 12.5 lakhs) = Rs. 3.5 lakhs.

– Jinay Savla

Thursday Trivia ~ Pros and Cons of holding an Investment Account in the name of Minor

“Why are you so worried?’ enquired Rajesh while getting up in the middle of the night. Naina was sitting near their newly furnished balcony with her laptop, coffee placed on the table. Her right hand placed over forehead clearly displaying some huge concern on her face. ‘Nothing really!’ replied Naina. However, it was not a very uncommon scenario as both of them were high flying professionals in their career and working through the night was a part of their life. But this time, something seemed different to Rajesh. He got up to see what Naina was working on and saw her staring at a wide excel sheet where numbers seemed to be dancing in themselves. A name flashed above all numbers – Aditya.

‘We spend so much money each month that we can’t even save for ourselves. Looking at our projections we won’t be able to provide an international education for him. I am trying to see where we can cut back on our expenses’ Naina said. ‘But we have already started investing in mutual funds from last many years’ countered Rajesh. ‘Yes, you can see those mutual funds becoming a BMW in our garage but that wouldn’t pay for Aditya’s education in future’ nagged Naina. Rajesh understood the silent message and called his friend Manish, a wealth manager for meeting them over the weekend.

‘I understand your situation. There is one way since Aditya is just 9 years old, you have an option to open an investment account his name. Both of you can contribute to that account every month and create that basket for his higher education.’ Manish suggested while sipping tea. ‘Investment in the name of a minor is possible?’ asked Naina. ‘Yes’ replied Manish calmly.

‘But you must look at both sides of the coin – ie. pros and cons of investing in the name of a minor.’ added Manish with a caution. ‘Most certainly’ replied Rajesh.

Pros

Wider Capital Base

‘How can create a wider capital base since no new money is introduced?’ asked Naina.

‘Perfect question. If your money is invested in 2 asset classes such as real estate and mutual funds, the base is comprised of 2 instruments. But when you buy gold, you have one more option to invest your money in the future. In the same way, by opening an investment account for Aditya, you give yourself an option to create a new basket. Slowly, when you will water this basket, you will see a wide base for your capital. This will not only help in reducing risk on your money but also serve as an allocation to different goals of your child when he grows up.’ added Manish.

Allocation towards a specific goal of child

‘Yes, we are already thinking about Aditya’s higher education and that’s precisely the reason why we want to start investing in his name.’ Rajesh said.

‘Absolutely, that’s a smart move to make. Why don’t you also start thinking about his marriage or invest for initial capital if he decides to start his own business? That way, you won’t have to wait for the last moment. Financial security will enable him to achieve more.

For that, you can start small. Create specific allocation of money towards each of his goals in such a way as to it compounds over time and helps you to save more in the later stages of your career. Retirement from a job is also an active truth that we all have to deal with’ Manish said with a smile.

Gift to Child

‘Would the transfer money be taxable in Aditya’s account?’ asked Naina.
Manish replied, ‘You can also show it as a gift to Aditya and since Gift Tax is no longer in force, it would not be considered for income tax purposes in the hands of your son. On a lighter note, it makes a lot more sense to gift him a strong future.’
Cons

Clubbing provisions

‘But would not be clubbed under my or Naina’s account for tax purposes?’ Rajesh asked while looking at Naina.

‘No. The transfer in the form of gift would not be considered as income in the hands of Aditya. Hence, he won’t be subject to tax on the same. However, any income generated from those specific assets would be subject to tax.

For example, you decided to invest his money in mutual funds and for some reason, decided to sell those mutual funds at a profit before the end of year 1. The short term capital gains arising from the sale of mutual funds will be clubbed with either your Naina’s account upon your decision.

Hence, taxation on different asset classes will be the same irrespective of a major or minor. Once again, it’s the income from the asset rather than merely your transfer which would be subject to tax.’ Manish said.

Flexibility for use of money reduces

‘Rajesh you will not be able to use that money to buy your Mercedes, remember that.’ winked Naina.

Manish smiled and said, ‘Yes, you can wish to use that money but then again you will have to go through the pain of taxation and transfer of that money. So flexibility to use this money will be reduced and bring about a strict discipline to stick to the goal allocated towards Aditya.’

Access to money is lost once child attains majority

‘Last question, when Aditya becomes 18 years old, how will the account operate?’ asked Rajesh.

‘Typically, an investment made in the name of a minor cannot be operated by the guardian once the minor becomes a major. Once Aditya will attain majority status, he will have to apply for a change of status in the investment. All the investment formalities such as PAN and KYC will have to be complied with.

Also, once Aditya is major, then you will lose access to that money. Now he will decide what he wants to do with it. Your instructions to the bank or investment account will hold no value. I am sure, Aditya will not misuse that money but it’s better to be vigilant about it and work accordingly at it.’ Manish replied to Rajesh.

Upon listening to the conversation, Naina handed over the excel sheet and along with it the concern of Aditya’s future to Manish and sipped a coffee with great satisfaction. Rajesh also now was happy to see Naina relaxed and thanked Manish for the same.

– Jinay Savla

Thursday Trivia ~ 5 Golden Nuggets for Every Young Star

It’s been 5 years since Rajesh started his full time job. In the past, he has done many part time jobs to support his education. Apparently, Rajesh comes from a very well to do family. But it’s his father’s wish to have Rajesh finance his own education and take care of his life ahead. It may sound hard but this has actually worked in his favor. There have been times in the past when Rajesh may have complained to his father innumerable times but his father didn’t seem to give it a second thought. As a result, today Rajesh is living a dream life just when his other peers are trying to get hold of their careers. But there is one problem. Despite of making a lot of money, Rajesh seems to be running out of money all the time. As usual, just like his peers, every month end he would look at his bills and say, ‘Mumbai – A City of Dreams’ and accept his fate that he will never be able to save anything. Just like what every son does, when faced with a problem the very first person to turn to is – father.

 

His father listened to the whole story with great patience. After a brief moment of silence, father said, ‘Rajesh just do 5 things that I say henceforth and money will never trouble you.’  Let’s look at those golden nuggets which changed Rajesh’s life forever.

 

  1. Save First – Spend Later

 

It’s not that people with the best careers or high income earning professionals have the most comfortable financial future post retirement. However, during the course of a career, everyone seems to think that way. The next job switch, promotion, bonus, commissions, etc. will lead to a better financial future, yet the reality is far from truth.

 

Rajesh was driven about creating a better career because of which he never gave enough thought to his money habits. His father gave him a small formula : Income – Saving = Spending

 

Budgeting for savings is equally important. Every month, a person is exposed to installments to be paid for home / office, car / bike, fees for children’s education and other adhoc expenses. Most of these expenses are directly debited from the bank. Hence, it’s wise to first decide how much to save and then spend.

 

  1. Emergency Fund

 

Rajesh’s father asked him, if he ever considered his job being lost? Answer was obviously No. However, Rajesh thought a lot of his colleagues stood the chance of losing their jobs. It’s a classic case of underestimating bad events that happen to a person and overestimating the same bad event happening to some one else. As a result, his father asked him if there was enough money in the bank to keep the house floating for 6 months if Rajesh ever lost his job. Again, the answer was No.

 

As a result, Rajesh now considered keeping an emergency fund which would sustain the expenses of his house for at least 6 months.

 

To add a small note, emergency fund should not be created for purchase of a gadget, downpayment for a car, or a vacation.

 

  1. Insurance

 

Everyone takes insurance when they start working. Usually, at start of career the cover seems to be adequate. But as life progresses, not many bother to look at whether their insurance cover would still be enough? Even the omega question of whether it’s a plain insurance policy or an insurance policy which has an investment option is never thought about.

 

On hearing this, Rajesh took a note of this and called up his insurance advisor to review his policy the very next day.

 

  1. Asset Allocation

 

Doctors always suggest every person to have a regular health check up done atleast once a year. However, it’s common to see very few follows such an advise. Most others visit a doctor only when something serious happens to them. When Rajesh’s father asked him to keep a wealth manager, the first sentence which he said, ‘I can’t afford a wealth manager, I don’t have enough money.’

 

More often than not, people miss out on keeping a wealth manager under a common notion that they don’t have enough money, just like they won’t visit a doctor because their health is not bad. In this notion, a person misses out on the fact that it’s important to start from somewhere. Starting small builds a solid foundation of future wealth. Also, it provides enough flexibility in terms of asset allocation.

 

Rajesh never thought about making investments in different asset classes. He always had invested his money in shares of a company suggested by his friends. A small fixed deposit was created just because bank managers had asked him to. Yet, he wasn’t aware about the return on investment in both his investments. When his father took a note of it, Rajesh replied with a stern voice ‘it’s not my job.’ To a large extent, he is right. It’s not his job to select a good company to invest or check out for any further options available. That’s where his father suggested on having a wealth manager look at it.

 

A plethora of investment options are available to every investor, such as mutual funds (equity and debt), commodities (gold / silver), portfolio management services, liquid funds, etc. Since, it’s not the job of every person, they don’t have enough exposure to the same. Even creating different allocation strategy with these investment options are not taken as seriously as they should be.

 

For more please read the asset allocation series we published some time back – Series 1, Series 2 and Series 3.

 

  1. Celebrate Life, Not Money

 

The real use of money is the very problems it helps to solve. Rajesh could never believe that in the very rat race of his career he had forgotten that it was his father’s birthday. Rather than celebrating a birthday, they were worried about his finances. To which his father asked, when was the last time he took his wife out for a long drive. Rajesh could barely remember, when he looked at his calendar it was already 6 months and they had not even taken a day off from work. Weekends were spent either sleeping or working.

 

If we are working so hard for money, does money work hard for us? Think about it for a while. If money is not working hard for us, then are we not missing out on the true golden nuggets of our life such as family, friends, life partner, children and our close confidants. When was the last time, you had a cup of tea with your friends without an inch of stress of work or when was the last time you played some sport with your children? That’s where it’s best to have an expert wealth manager who makes our money work hard for us, while we steal these little moments of life.

– Jinay Savla