Month: May 2009

Short Review of few Mutual Funds

Posted on by Jagoinvestor

I did a short and crisp review of some mutual funds for a friend . thought of sharing this here.

Franklin India Prima Fund – Dividend

151/208 138/157 61/75 are the ranks for 1 ,3 and 5 year . Not a great one to cheer about .
Risk Grade: Above Average
Return: Grade Average

Tata Infrastructure Fund-G

Not a very old fund but its a good one. Infrastructure space can be a big hit considering 4-5 yrs time frame and with the blessings of UPA. Better diversify money in this space along with other infrastructure Mutual Funds.

With 25% CAGR returns since launch , its looks good.

Franklin India Flexi Cap Fund – Dividend

Numbers look good but there are better funds available.

Birlasunlife Frontline Equity Fund-Growth

Extremely good fund to have in portfolio. It has shown strong performance in all the time frame of 1 ,3 ,5 yrs and 30% CAGR return since launch. Better to stop Franklin India Flexi Cap Fund and redirect the money to this one.

HDFC Equity Fund – Growth

Again a good fund to have in portfolio.

What would I do If I were at your place.

– Stop Franklin India Prima Fund
– Stop Franklin India Flexi Cap Fund – Dividend (5k)
– DSPBR Equity or DSP Black Rock top 100 or HDFC Top 200
– Increase your Exposure in Birla Sunlife Frontline Equity Fund
– Share your 10k in UTI Infrastructure and Tata Infrastructure

Do you know difference between Divident and Growth options in mutual funds ?

General Recommendation

  • If the investment is for long term wealth creation dont go for Divident option
  • Monitor and review your mutual fund once every 6 months
  • Not sure if you are allocating money in mutual funds after understanding your Risk-appetite or not . Check that out, No Debt side ?
  • Do not have more than 5-6 mutual funds
  • Look at other sectoral mutual funds on banking and financial sector with long term view

look at a video explaining how to choose a mutual fund

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Disclaimer : Information taken from valueresearchonline.com and analysis and views are personal

Most important questions you should ask a ULIP agent

Posted on by Jagoinvestor

When an agent approaches you with ULIP product; before filling up forms, he should be explaining you What is a ULIP and how it works! You should ask him the following 6 questions to make sure you know what you are about to buy!

ULIP

1. What are the returns offered by this ULIP?

As per the rules of IRDA, an agent should explain you the workings of ULIP with an assumptive illustration earning 6-10% returns. However, if he claims that in the long term the policy is expected to give more than 10% then this information is not misleading.

But if he claims that the policy ‘WILL’ earn 18-20% or even Million% returns, you need to stay away from such agents!

2. What are the Charges applicable in this ULIP?

He should give you detailed Information on all the charges that are/will be applicable to ULIP. The important charge you need to know is Premium Allocation Charges.

If he doesn’t disclose any Charge that is applicable  then I am sure its not because of his dishonesty and no other reason. Ask him the company brochure mentioning the exact charges where all the charges are listed and explained in detail.

3. How does it suit my Risk Profile and fit in my requirement?

Before suggesting you the ULIP the agent should have asked you all the details about your Cash flow (Salary, Expenses) and your future goals with ULIP investment should be addressed.

He should also try to understand if you can take the risks associated with the ULIP. If he does not ask you these things then you ask him back why he has not asked you these questions. Get the word out of his throat!

4. How is it better than other ULIPS?

Ask him what is unique with the ULIPs he is recommending to you and make sure he does start all non-sense of Sec 80C benefit and high returns and all… Every ULIP has it! Ask him what are the special features with ULIP and how do they address your requirements.

If he claims that his company ULIP is the best and no other ULIP can match it then ask him for references if any states that. Just a plain claim from agents will not do. An agent must have enough knowledge to make you understand how to make best use of your ULIPS.

5. How does it score over Term Insurance + Mutual funds combination?

ULIPS are combination of Insurance and Investment produce, There is no point in taking it, if it cant perform better than Term Insurance + Mutual funds SIP. Switch benefits in ULIPS are the main benefit in ULIPS.

He must put pressure on that point, If not he is him self not aware of it. Refrain from taking the policy if he starts claiming that returns from ULIPS will be much higher than Mutual funds.

6. What was the performance during Market Crash?

Agents generally try to put up rosy picture and hence refrain from disclosing the funds performance in bad markets. If the fund has done bad, that is acceptable. Its investor responsibility to take care of switching and asset allocation.

So there is nothing wrong in performing bad in bad markets. Agents will first try to avoid the confrontation, but finally may tell you that they did bad and returns are very low. Ask him for exact number in return and try to find out how other ULIPS performed.

My personal Experiences

I have never come across any ULIP agent who has tried to sell the product in a professional manner. This has its own reasons like meeting Sales Target pressure or poor training to Agents. Anyways ,its not acceptable and can not be accepted . For so many years, Mis-selling is happening in India.

Conclusion :

Your hard earned money should go in proper investments. There should not be hurry in taking action. So don’t feel shy in asking questions once or twice or thrice, understand the product and its suitability with your requirement.

No product is good or bad, its only bad or good depending on your requirements. So be informed Investor and don’t fall prey to Idiotic agents.

Don’t do mistakes that are already done by tons of investors who took ULIPs for 3 years.

– To save tax
– Make exceptional returns from Stock markets
– Make them self believe its a happening product because it looks so complex

Please share with me if you have taken ULIP for wrong reasons
– Do you think that ULIPS will have any success in future… I feel yes

How needs and wants are different from each other?

Posted on by Jagoinvestor

One of the important aspects of Financial planning is spending money wisely. Now, what does it mean when I say “Spending money Wisely”?

All the expenses & spending activity we do can be classified under two sub heads ‘Needs’ & ‘Wants’. Improper handling of money happens when you spend too much on your Wants and too less on your Needs.

The aim should be to spend/save money for your needs and then take care of your wants. Once you prioritize all your expenses/goals in these categories, planning your finances becomes easy!

needs and wants

What is the Difference between Need and Want?

Needs:

A need is something which is essential for you irrespective of the financial situation/conditions. These are the things you have to take care first and only then comes other things which you can do without.

Needs Example

    1. House Expenses
    2. Child Education
    3. Saving money for Retirement
    4. Medical Expenses
    5. School/College fees and expenses
    6. Family Vacations and outings (in limit)

Wants:

These are things which you wish to have but they are not above your Needs. For example a Car is a Want when compared to your Child Fees or Education saving. You can live your life without car but Child Education is Vital and cannot be compromised.

Some people’s Wants can be a Need for others and vice versa. It all depends on personal life style and attitude. But the main point here is that you have to differentiate between your Needs and Wants at short to medium term time frame and Long term view.

Wants Example

  1. Extra Vacation
  2. Expensive clothes above your normal requirement
  3. Expensive Car or any vehicle above your budget

Note: Understand the point that Wants are not something which you should avoid but your Needs can/should not be compromised because of your Wants.

Watch this video to know the difference between Needs and Wants:

Why is it Important these days?

These days almost everyone live their life in a unplanned manner especially their finances are Unplanned in a Big Way. People spend first and think later/late about it. But money spent once will not come back.

Once you prioritize things well and have a proper road map on your spending pattern you can take care of your Needs first and then move towards fulfilling your Wants.

Let us take a case Study

One of my friend spends his money in a pathetic manner. He earns around 30,000 per month and is already in job from last 2 yrs. He spends a lot with his friends on parties on weekend and buys branded shoes which he is very fond off. Great …!! He does not understand the value of what small savings can do.

Just before the year end he asked me how can he save the tax and wants to invest some money.

On further inquiry I come to know that his Parents are dependent on him (though he is not sending any money at this moment to his home). So he needs good amount of Insurance, he has no savings till now! Finally he is not left with any money to even pay insurance premium this year (2009), not invest any money in some mutual fund.

What is the point?

This person has spent his money on all the things he wants and nothing on his needs- which are essential. He has violated fundamental rule of Financial planning which will affect him very badly.

Once all your needs are taken care of and if you are left with surplus, I, myself would encourage you to spend your money on satisfying your Wants like no tomorrow!! But first comes important things- you can live without your Wants, but not without Needs.

Imagine you are going for Golf Games and you are not left with money that is enough to take your Family out sometime on vacations.

 

First Step of Financial Planning : Planning

Posted on by Jagoinvestor

This post will tell you all about why Planning is the most important and first step in the process of Financial Planning!

Any action that is to be taken needs a proper and precise planning before implementing it. I have seen many people pinging me about their investment plans or decisions to take Term Insurance or Investment plan through mutual funds for next 10 yrs through SIP.

Financial Planning

I would like to congratulate them on their decision and action. They are ahead of most of the other people.

“A good plan today is better than a perfect plan tomorrow”

But is it enough? Is that all? Is that the initial step everyone should take? The answer is NO!! A lot of people have gone directly to the second level and skipped the very first basic level, which is Planning!

First Step of Financial Planning

The first step not making investments but planning for everything and then executing it, Why is planning important? Most of the time people concentrate too much on action and not planning. If you take actions without planning things, there will be lack of clarity ,and it will bring doubt in your mind about investment.

A friend of mine invested in mutual funds through SIP. For the last 6 months markets did good and his portfolio showed upward movement, later the market crashed and he stopped his SIP payments. I asked him why is he not continuing his SIP. To this he answered that markets are going down.

But he also said that he don’t need this money any sooner and he is making investments for his Child Education which is 12 yrs later and his investment is for long term in stock market.

His decision of starting investment is great, but investing without any planning and not knowing exactly why you are doing it is like driving without knowing were to go. You will eventually go somewhere, but that may not be your desired destination.

So what are the steps that needs to be taken before the action of Investment?

Knowing your Goals: First plan that why are you investing; what is the goal associated with your investment; Is it Buying Home? Buying Car? Vacation after 3 yrs, Retirement, Child marriage? etc…

Knowing your time frame, when you need money: This is very important because this will decide a lot of things

– The product you can invest in
– The risk you can take
– The amount you need to invest per month or year

This will make your path very clear, after this you just have to follow it without any doubt in mind.

Action and monitoring: Now you just have to take action and don’t doubt it again and again because you have cleared every doubt beforehand.

Case Study

Case 1: Unplanned Investment

Ajay is a regular reader of Jagoinvestor and after reading some articles on this blog, he decides finally that he will invest k per month through SIP

He starts a SIP with a mutual fund and now he is happy that he has been investing finally. He invests for 2 yrs and markets have gone up and down and at the end his investments are at same place where they started. So there is no appreciation in value.

He decides to take half the money out of his investments and uses in buying a car which was his plan from many years. Markets finally starts recovering, but as usual he realizes very late that this is the time to put money in markets (as all the general public realize this very late).

He starts his SIP again and now continues this for some years. He periodically takes money out of his investments on many occasions like for his vacation and his child education costs.

What is the problem with this approach?

– No predefined goals and hence no clarity on investment plan- No idea of how investment should be divided for different financial commitments and not investment as per risk-appetite and goal’s importance.

Conclusion: He started investments which was a good idea but Ajay jumped on the second step of the ladder. The first step was to plan for things.

Case 2: Planning everything

Ajay now knows that he can invest 20k per month and have to plan how to make proportionate investments for his financial commitments. He identifies his goals and how much money he would need for each.

He comes up with following things:

To do your own calculations, do it here

Now he exactly knows that for which goal where & how much he has to invest. There will be no distraction in between by equity markets going up and down or any other factors because in the start itself he has factored in all the possibilities. In short Now he has a clear path and he knows how fast or slow he has to walk on it. At the end if he keeps on walking on it the way he planned Success is guaranteed.

Conclusion

Planning your finances can be boring, but its vital and most crucial part of financial planning. A person who gives much time planning things has higher chances of achieving it. Take action is second step. Planning things in advance reduces doubts about certain things, provides clarity in financial life and hence reduces a lot of issues.

Question :

How much difference do you think will happen without planning as per your view?

Tax Exemption limit may be raised to 1.7-2.0 lacs

Posted on by Jagoinvestor

Today in morning newspaper, I read that in this budget Tax exemption limit may be raised to 1.75-2.00 lacs . What will that mean to a common person like us .

It simply means that we will be left with some extra surplus every year .

A male who has taxable salary of 4 lacs per year and has 1.5 lacs as exemption limit , pays around 40,000 as tax . Now , after the exemption limit is raised to 2 lacs (assumption) , there can be 2 scenarios .

Read How to calculate Tax and tax slab for year 2008-2009

Scenario 1 : Exemption limit is raised but tax rates are not . Current tax rate is not

10% for 1.5 – 2.5 lacs
20% for 2.5 – 5 lacs
30% for 5+ lacs

In this case , he will have to pay 35,000 as tax (assuming tax rates for 2008-2009) . This means a saving of 5,000 on tax from previous year .

Scenario 2 : Exemption limit is raised and tax rates are also adjusted. A common sense guess would be

10% for 2-3 lacs
20% for 3-5 lacs
30% for 5+ lacs

It must be something like that , this is the minimum we will/should get

In this case , the tax would be 30,000 , and savings would be 10,000 per year.

What can this small amount do ?

So we can save in range of 5,000 or 10,000 or someother amount depending upon the changes. What can be the value of this for us as investment point of view.

this money can be invested in a mutual fund through SIP monthly for next 30 yrs ,

5000 can make
14 lacs at 12%
29 lacs at 15%

10,000 can make
29lacs at 12%
58 lacs at 15%

Assumption is that the money can be divided in 12 equal installment and can be invested per month .

What do you think about this ?

Did you check video post for Basic formula’s in Personal Finance and How to choose Mutual funds ?

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Video post on Basic Formula in Personal Finance

Posted on by Jagoinvestor

This is a Video post by me , where I have tried to teach some basic formula’s for starters who should know important calculations using which they can calculate important stuff like Maturity value of Investment when they make SIP payments , or one time payments .

I am getting some questions like “I want to invest 2k per month for 10 yrs in mutual funds , Can i generate 20 lacs” type of questions . Seems like many readers do not know how to apply and use simple formula’s to calculate these stuff when they calculate how to generate wealth for long term . Often you might have felt that you have to depend on others for calculations , because you don’t know it themselves .

I have made a video myself where I explain 3 important formula’s which everybody should know .

1. Compound Interest
2. Annuity
3. CAGR

Lot of you might have learned this school , but many have forgotten it . So in this video post I have explained it with examples . I hope that it will help beginners or new readers . I am also giving a Calculator below the video where you can do your own calculations , If it gives any error , please go to the link I provide and calculate it there . I will also put presentation here , so that people who have very low bandwidth can view the presentation at least.

Presentation

Important Calculations In Personal Finance

View more presentations from manish.pucsd.

Embedded Calculator (click here if this gives some error)

 

 

How different Products can yield different post tax Returns?

Posted on by Jagoinvestor

This post will teach you how to take advantage of different products tax rules keeping in mind your income tax bracket. Different products can yield different post-tax returns for people in different tax bracket. FD’s return can be 7.2% post tax for you, but may be its 5.6% for me 🙁

Lets take an example to understand this post.

How different Products can yield different post tax Returns?

Two of my friends Ajay and Robert asked me what should they invest in for 2 year. They have Rs.1,00,000 to invest.

I recommended following products to them :

Ajay : Fixed Deposits
Robert : FMP’s ( Read what is FMP’s )

You must be wondering why did I suggest different products to them? Both have same risk-apetite, Age etc.

The answer lies in there tax bracket. The post tax returns depends on your tax bracket too. Lets see how.

Ajay Case

Ajay does not earn much, His annual income is less and he falls in 10% bracket.

Tax treatment of FD’s interest : Returns are added to your income and then its taxed as per your tax slab rate.

Now it means that tax on FD’s for him would be just 10%. Considering 8% interest.

Interest Received = 16,000
Total Tax paid = 10% of 16,000 = 1,600
Total Return = Rs 14,600

Robert Case

Robert earns well and falls in 30% tax bracket, hence FD will not be best for him, He will have to pay 30% tax on the Interest for FD.

Tax treatment for FMP’s : For Long term capital gains (more than a year), the returns from FMP’s are either taxed at 20% after Indexation or 10% without Indexation

Assumption : Lets day FMP’s provide indicative returns of 9% and lets also assume that they actually provide that return. then

Investment = Rs.1,00,000
Interest = 18,000
Interest = 10% of 18,000 = 1,800
Returns = 16,200

Note : I have not considered tax after indexation, please do it yourself. read this, Anyways it will be more than what he is paying without indexation.

Read What is Indexation Benefit ?

Why FMP’s were not better for Ajay ?

you might think that Ajay could have gone for FMP’s too. The returns are almost same and tax is also same, But you have to realise that FMP’s returns are not guaranteed ,they are just indicative.

Also FMP’s carry Default risk , then why to take extra risk, The only advantage he would have got is .5 or 1% extra returns but at the cost of the risk, which is not worth.

Why FD’s were not better for Robert?

Now this you know , obviously the tax to be paid on it would have been 30% as Robert tax bracket is 30% and hence he might have paid 30% tax on the returns from FD’s

Conclusion

So now you understand that a product can yield different post-tax returns for two people in different tax bracket

So when you do your investment planning, you must take these small details about tax, If you choose your investments considering your post-tax returns, you can make much better decisions, how ever this should come after an investment passes the 4 most important aspects of investments and GFactor basis .

I have started active blogging on my Technical analysis and options blog, I have suggested to go long in Satyam, Please read it.

– Go long in Satyam
– Detailed Analysis on Satyam

I came across a very good article called “What the IPL taught me about Investing”

 

Everything you want to know about Super Annuation

Posted on by Jagoinvestor

The only schemes that comes in your mind when it comes to retirement benefits are EPF, NPS & PPF. But there is one more scheme i.e. Super Annuation about which lot of people don’t even know. And those who know about it they don’t know how much corpus they have as their super annuation.

In this article I’m going to tell you what is super annuation and how to check your superannuation balance if your employer maintains it with LIC.

Super Annuation

First of all I would like to share with you an important thing, which one of my friend Subbu has figured out himself . Credit goes to him.

A lot of employees do not care to check there Superannuation amount, or they are not even aware that it exists. Knowing the amount of your superannuation can be helpful, because then you know that you have that much saving and hence when you plan your investments, you can factor in this information and take better decisions . This small amount make big chunks of your portfolio .

What is Superannuation?

Superannuation is a retirement Benefit by employer . It is a contribution made by employer each year on your behalf towards the group superannuation policy held by the employer. This is an important part of creating wealth for your retirement .

Features of Super annuation :

a) Superannuation Fund is a retirement benefit given to employees by the Company.

b) Normally the Company has a link with agencies like LIC Superannuation Fund, where their contributions are paid.

c) The Company pays 15% of basic wages as superannuation contribution. There is no contribution from the employee.>

d) This contribution is invested by the Fund in various securities as per investment pattern prescribed.

e) Interest on contributions is credited to the members account. Normally the rate of interest is equivalent to the PF interest rate. Read what is EPF and PPF ?
f) On attaining the retirement age, the member is eligible to take 25% of the balance available in his/her account as a tax free benefit.

g) The balance 75% is put in a annuity fund, and the agency (LIC) will pay the member a monthly/quarterly/periodic annuity returns depending on the option exercised by the member. This payment received regularly is taxable.

h) In the case of resignation of the employee, the employee has the option to transfer his amount to the new employer. If the new employer does not have a Superannuation scheme, then the employee can withdraw the amount in the account, subject to deduction of tax and approval of IT department, or retain the amount in the Fund, till the superannuation age.

Source : https://www.citehr.com

What happens with your superannuation after your retirement?

Once you get retired you can use the amount of your super annuation in 2 ways, either withdraw the total amount which will be completely taxable if withdrawn at once, or withdraw 1/3rd of it which will be tax free and convert the 2/3rd amount in regular pension scheme.

Tax will be applicable on the remaining 2/3rd of the superannuation amount and returns on it.

What happens if you resign?

This is the concern of most of the people today. When you resign the job, you can transfer your Super Annuation from your current employer to new employer and can continue it till your retirement.

If your new employer does not have the superannuation scheam, then you have 2 options, either withdraw all the money on which tax will be applicable, Or let it be in your superannuation fund and use it after your retirement as per the above mentions tax rules.

How SuperAnnuation is calculated?

The interest rate on Super annuation is similar to the interest rate applicable on PPF. Whereas the returns may differ depending upon the underlying insurance company and the superannuation scheam that your company has taken.

The interest in calculated and deposited to your account yearly. This is the interest paid by the insurance company and also your employers contribution.

Super annuation chart:

[su_table]

Years of Employment  Amount of Super Annuation 
  Less than 1 year   NIL
  Between 1 and 2 years   50% of the contribution + interest earned
  Between 2 and 3 years   75% of the contribution + interest earned
  More than 3 years   100% of the contribution + interest earned

[/su_table]

Interest Earned :

This is interest paid by LIC every year on the contribution by employer.

Rules of Superannuation on Maturity

Once the employee completes 3 years of service and works till his/her retirement, he/she can make use of superannuation balance as a form of pension. He/She can withdraw 1/3rd of the accumulated balance after retirement and the rest can be availed as monthly pension till end of life.

Steps for checking Superannuation balance online?

1. Go to licindia.com

2. Register for a user id and password.

3. Login.

4. Click on ‘Group Scheme Details’ tab.

5. Click on ‘member’ radio button.

6. Get the group policy number for super annuation from your company’s payroll department and enter ” in the policy number text box and click ok. (Talk to your finance department for getting the group policy number , this will be unique for all the employees of a company).

7. It will ask for LIC Id no and Date of Birth fields.

8. To get LIC Id no, call LIC branch with which your employer has a super annuation account and inform that you are calling from your company and provide your name to the LIC official. They will give your LIC ID No.

9. Since most companies had not furnished the date of birth details to LIC, enter ’01/07/1960′ / ’07/01/1960′ (forgot the order, try both n check) in the date of birth field.

10. You will get the policy enrolled and you can click on the policy number to view the details. The details will contain the accumulated balance till the last financial year. It also shows contribution made by your employer i the current financial year.

Are you able to see Superannuation Balance for yourself ? Were you aware of it ? Please share with us in comments section . Also please share if you find any discrepancies with the steps .

How to Calculate Net Present Value (NPV) and how to use it?

Posted on by Jagoinvestor

In this post we will talk about How to think and calculate Net Present Value of a transaction involving Financial Payment, and why its important to understand the concept.

net present value

Consider the following Example :

You have to lend Rs 1,00,000 to one of your friends and He is offering you following choices.

Choice 1 : He will pay you Rs 18,000 per year for next 10 yrs.

Choice 2 : He will pay you 13,000 per year for next 15 yrs.

Choice 3 : He will pay you Rs 8,000 per year for whole life.

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Which one should you choose?

Here you have to take a decision of choosing from one of the choices. The logical decision here will be to go for choice whose Net Present Value is Highest. You have to understand the time value of money. Rs.10,000 received today is much more valuable than Rs.10,000 received 10 yrs later, even Rs 15,000 received after 10 yrs.

So you have to see that which choice has the highest worth if you calculate its Value today.

So how do you calculate the Net Present Value in this case, where you have Rs X receivable every year for n years. Here you also have to consider present rate of returns which you can assume at 8%.

So We have 3 variables

X : Amount received per year

n : Number of years

r : Present rate of return

NPV = X * [(1+r)^n – 1]/[r * (1+r)^n]

Calculating through this formula, we get the Net Present Value of the choices as

1. 120781

2. 111273

3. 100000

Net Present Value of the last choice is simple , how much money do you put in bank today that will fetch you 8,000 per year forever? If X is the amount than at 8% interest you get 8,000, so

8% of X = 8,000

.08 * X = 8,000

X = 8,000 * (1/.08)

X = 1,00,000

If you see the total amount received in all the cases you will realise that the choices with lesser NPV will give you have higher Total amount.

For Case 1 : NPV = 120781 , Total amount received = 1,80,000

For Case 2 : NPV = 111273 , Total amount received = 1,95,000

For Case 3 : NPV = 100000 , Total amount received = Infinite (The amount is paid forever)

Calculate NPV for your self, see this calculator

But you have to understand that “Total amount received” is not important. What can you do with the money is more important? So the real Indicator is Net present Value of Money. You have to understand the Difference between Price Vs Value. Price is what you pay, Value is what you get. Value is important not Price.

Real Estate Case

If you go for a home which cost Rs 50 Lacs @9% Interest for 20 yrs. Your EMI will be around 45,000 per month.

I found this amazing Apna Loan , EMI calculator, Its nice

You will actually pay total of 45,000 * 12 * 20 = Rs.1.08 Crores.

Now you may feel that the cost of house is Rs.50 Lacs ,but the amount outgo is actually 1.08 Crores and may feel bad for this, But this is ridiculous. Because you are not paying 1.08 worth of money in your entire tenure, 1.08 is just a number.

Its worth is still 50 lacs only spread over 20 years and the numbers sum up to 1.08 crores.

If you calculate NPV of the Home loan money which you are paying , its exactly 50 Lacs . Calculate it with (.75% interest and 240 as tenure, as its a monthly and not yearly) .

Note : There can be other situations also where we need to calculate Net present value with a different formula, but for this post we are only discussing the examples and scenarios where you need to pay or receive a fixed amount after every fixed period for some tenure.

Conclusion :

You can also use this concept for taking decisions in scenarios where you have different choices of payments, choose the one which has lowest Net Present Value, like in the example we took , For the friends its more beneficial to go for the 3rd option.

So the moral of the story is that dont pass this post link to your friends with whom you have financial relations 🙂

Questions?

Should Banks state net present Value of the money customers pay as loan , so that people come to know that they are getting fair value for there money?

Read interesting note on Home Loan EMI, Read how Home Loan EMI is Calculated?

Readers, are you getting a horizontal scroll bar when you view this blog? If its irritating for many people I will fix it? It depends on your computer resolution how does it look to you, for me, it works fine.

How to Calculate Capital Gains and What is Indexation ?

Posted on by Jagoinvestor

In this post we will learn How to calculate Capital Gains or Losses. A lot of people make mistake in this . If you buy a house in 1995 at Rs.10 lacs and sell it at Rs.20 lacs in 2009. On how much profit will you pay the tax?

If your answer is Rs.10 lacs , you have no idea how to calculate capital gains. Read ahead to understand .

capital gain

What is Capital Asset ?

Capital Assets are the properties which can be held by a person . Some examples are Real Estate , Shares , Mutual Funds , Gold and Debt Funds. FD’s and other fixed returns Instruments are not part of it.

Taxation

For taxation of Capital Assets , read this : How to use your looses to Reduce Tax

How to Calculate Capital Gains ?

Most of the people think that

Capital Gain = Sell Price – Purchase Price

But , Actually the real formula is

Capital Gain = Sell Price – Indexed Purchase Price

What is Indexation ?

Indexation is a technique to adjust income payments by means of a price Index , in order to maintain the purchasing power of the public after inflation.

We must understand that prices in general also rises, so the actual prices should not be used while computing the profits , rather It should be Indexed as per Inflation in the country, so that people can get the real value from sale of there assets.

Indexation is used in Tax treatment for Debt , Gold and other asset classes

What is Cost Inflation Index (CII) ?

Year CPI
1981-82 100
1982-83 109
1983-84 116
1984-85 125
1985-86 133
1986-87 140
1987-88 150
1988-89 161
1989-90 172
1990-91 182
1991-92 199
1992-93 223
1993-94 244
1994-95 259
1995-96 281
1996-97 305
1997-98 331
1998-99 351
1999-00 389
2000-01 406
2001-02 426
2002-03 447
2003-04 463
2004-05 480
2005-06 497
2006-07 519
2007-08 551
2008-09 582
2009-10 632
2010-11 711
2011-12 785
2012-13 852

How to Calculate Indexed Purchase Price ?

Indexed Purchase Price = Purchase Price * (CPI for current year / CPI for year of purchase)

Once you have Indexed Purchase Price , you can subtract it from Sale Price and get your capital gains .

In some products Long term Capital gains is around 20% with Indexation and 10% without Indexation. In Equities Long term Capital Gains is exempt from Tax .

Let take an Example

Purchase Price 1000000
Year of Purchase 1995
Sale Price 2500000
Year of Sale 2008
No of Years 13
Purchase CII 281
Sale CII 582
Indexed Purchase Price 2071174
Capital Gain 428826
Tax with Indexation 85765
Tax without Indexation 150000

I hope the above example is clear . Below is the calculator I have created for you to calculate Capital Gain tax for your self. Just play with different numbers . Just enter the year of Purchase and Sale and It will figure out the CII (incase it does not, please put CII yourself)

Capital Gains Calculator
I have made a Calculator for you : https://public.sheet.zoho.com/publish/manish.pucsd/temp

Capital Gains Tax with Indexation and Without Indexation

There are some asset classes where you have the choice of using Indexation or not . This is true for debt funds and FMP’s. So the current rate is either 20% with Indexation or 10% without Indexation for Long term Capital Gains .

For Tax without Indexation, you simply find out normal profit (sale price – cost price) and then calculate the tax.

So you can calculate tax using both ways and then choose the one which is lower 🙂 .

How to save your Capital Gains Tax?

For people who are miser and do not like to pay lot of taxes , govt has provided some relief to them. Govt says that If you don’t want to pay tax on your capital gains, you can do following things to save your taxes.

Invest your Capital Gains in Real Estate: If you invest your Capital Gains in Real estate within 2 yrs, you will get the the exemption.

Invest in Capital Gain Bonds : There are some specific bonds issued under sec 54EC, some of them are NHAI or REC bonds. You have to invest in these bonds within 6 months. Generally the lock in period is around 3+ yrs. interest on NHAI or REC bonds is around 5-5.5% .

Tax on Capital Gains can be different for different People

Please note that Capital Gains tax can vary from one person to other person depending on which tax bracket he/she belongs to. It will also depends whether Tax with Indexation or without Indexation works out to be cheaper for him or not.

Note : For calculation purpose the Financial years are business year from April – Mar, Not Jan – Dec. If you buy in June 2009 and sell in Jan 2010, you are in the same year not 2 different years.

Conclusion

So, In this post we learned how you can calculate capital gains and also take advantage of tax benefits for saving your taxes on capital gains, Your aim should be to understand the process and learn about it, so that you can take informed decisions in your financial life .

No one should take advantage of your ignorance and also to take quick decisions and make rough calculations when there is a need. If you know these rules, you can take better decisions

Questions for you

Suppose you are age 30.
– In June, 2000, You buy 20 lacs Home
– In Aug, 2007, You buy stocks worth 10 Lacs
– In April, 2008, your sell your house at Rs 30 lacs
– In June 2008, your stocks have gone down in value are worth Rs.3 lacs now.

What should you do to avoid paying any tax on capital gains made from House?

In previous post I have discussed “What is NPS , New Pension Scheme” by Govt of India . Read it