Month: December 2019

5 changes in PPF rules which will impact you (PPF scheme 2019)

Posted on by Anuradha Singh

On 12th December, the Government of India has notified some changes to the PPF Scheme 1968. The government has replaced the earlier PPF Scheme, 1968 to the new Public Provident Fund (PPF) Scheme, 2019. You can view the following 5 min video I created on this topic.

Let us see what changes have been made –

1) Premature Closure allowed when residency status changes

OLD RULE – In 2016, the Government allowed premature closure of the PPF Account after 5 yrs, in case of account holders death, higher education of account holder, life threatening illness in family.

NEW RULE – As per new rules, two more condition is added.

Condition 1 : Now, a PPF account holder can close the PPF account after 5 yrs, in case of change in residency status (when you become an NRI or when NRI’s become resident) on the production of a copy of passport and visa or income tax return. However in that case, the account holder will earn 1% lower interest. This is great benefit to those NRI’s who are returning to India and want to redeem money from their PPF account, but they had to wait for 15 yrs lock in period.

Condition 2 : Now the PPF can be withdrawn to finance higher education of the dependent children of the account holder. For that one has to submit fees bills or confirmation of admission in a recognized institute of higher education in India or abroad

2) NRI investors might be able to open a PPF account

OLD RULE – As per old rules, it was very clear that NRI investors can’t open a fresh PPF account, however if they have an existing account they can continue holding it till maturity and then close it.

NEW RULE – However, the new PPF law is not clear on this. It does not restrict NRI investors to open the fresh account and it does mention if they have to close it on maturity. Hence looks like NRI investors can operate the PPF account in the same way the residents can. However in Form 1 (PPF account opening form) one has to give declaration that one is resident of India of not.

In that case, it’s unclear how NRI’s will be able to fillup form 1 to open a fresh PPF account. However it’s very sure that they are not required to close the PPF account on maturity and can continue it like any other investor.

3) Deposits allowed in multiple of 50 without limits

OLD RULE – Earlier as per PPF Scheme 1968, deposits were allowed in multiples of 5 with a maximum limit of 12 deposits in a 1 year.

NEW RULE – As per PPF Scheme, 2019 deposits are now allowed in multiples of ₹50 with no maximum limit on a number of total deposits that have been specified. In other words, you can make deposits to the PPF account as many times as you want, subject to the maximum limit amount.

Note – The minimum annual contribution of ₹500 and the maximum annual contribution of ₹1.5 lakh have been kept as it is.

4) PPF can’t be extended if there are no deposits made after maturity

OLD RULE – As per old rules, Once you choose to extend your PPF account on maturity with the option of “without deposits”, you could still choose to deposit the money when you renew if further after 5 yrs.

NEW RULE – However, as per new rules, once you have not made any deposits for 1 yrs after maturity, you will never be able to deposit the money after that in PPF account. All you can do is continue the PPF account and it will earn the returns till there is any balance.

Note : Once the PPF account is matured, you can renew it in the block of 5 yrs and if you want to continue depositing the money, you need to fill-up a form and mention specifically that you will continue your PPF account “with deposits”

5) Interest on Loan reduced by 1%

OLD RULE – Earlier as per PPF Scheme 1968, Interest on loan against your PPF Account was 2% per annum above the prevailing PPF interest rate. For example, if the PPF interest rate was 7%, you would have to pay an interest rate of 9% (7+2).

NEW RULE – As per PPF Scheme 2019, the interest on loan rate has been reduced to 1% per annum above the prevailing PPF interest rate. For example, if the PPF interest rate is 7%, you would have to pay a rate of 8% (7+1).

Note – In both cases, the interest is levied from the first day of the month in which the loan is taken to the last day of the month in which the last installment of the loan is paid.

Changes in the FORM of PPF

Apart from these changes above, now there will be just 5 PPF related forms which are as follows

  • Form 1 – Opening of Account form
  • Form 2 – Form for application for loan/withdrawal
  • From 3 – Form for application for closure of the account
  • Form 4 – Application for extension of account
  • Form 5 – Form for premature closure of the account

Here is a table showing how the old forms changed to new forms

[su_table responsive=”yes” alternate=”no”]

Name of the Form OLD Form NEW Form
a) Account Opening Form Form A Form 1
b) Contribution Form Form B Not specified
c) Partial withdrawals Form C Form 2
d) Account closure after maturity Form C Form 3
e) PPF Loan Form D Form 2
f) Extension Form Form H Form 4
g) Premature Closure Form N/A Form 5
h) Nomination Form Form E Form 1

[/su_table]

Conclusion –

So now you all know the updated version of the PPF Scheme. Do let us know your views on the article in the comment section. Till then keep sharing this article with your family and Friends and Happy Learning.

Learn how to save money to do what you love [PODCAST – 49 min]

Posted on by Jagoinvestor

Do you want to know how to save money to do what you love in life?

I recently did a 49 min audio podcast with Sanjay Khandelwal of The Break School. The podcast is mainly aimed at those who want to do something on their own by quitting their jobs, but they get stopped because of a lack of money & planning or fear of starting out. The podcast will also help those who want to know some of the best principles of savings and investing. Please listen to the podcast below

Here are iTunes link along with google podcast link

Here are the 11 things we discussed in the podcast?

  1. Why did you start Jago Investor ( 02 min, 48 Sec)
  2. Two biggest challenges in last 10 years in building Jago Investor ( 05 min, 43 Sec)
  3. What have been your 3 biggest learning as a personal finance coach? ( 06 min, 54 Sec)
  4. Have you come across people who wanted to quit their job and be freelancers or be on their own? What do you think holds them back?
  5. Is it just money or something more? ( 10 min, 47 Sec)
  6. What kind of habits makes people spend more and save less? ( 15 min, 11 Sec)
  7. Do e-wallets increase our propensity to spend ( 21 min, 49 Sec)?
  8. How can personal finance help? And how does it not help? ( 26 min, 11 Sec)
  9. Can you share 3 to 4 financial concepts that layperson must be aware of? (30 min, 30 Sec)
  10. How much money does one really need? (35 min, 33 Sec)Are there any misconceptions/Illusion that people have with respect to money? ( 39 min, 38 Sec)
  11. Can you suggest a basic Financial Plan for someone who wants to quit her job in two years and start a blog? What are the things that the person must look at? ( 41 min, 05 Sec)

Please share what you think about the podcast after listening to it?

What is Cost Inflation Index (CII)

Posted on by Team Jagoinvestor

Can you guess, what these numbers are for 200, 220, 240 or 264?

Don’t worry it is not some math thing. These numbers are used as measures to save you from paying higher taxes on the sale of any capital asset like real estate or gold. It’s the value of the “Cost Inflation Index” (CII) from the financial year 2012 – 13 to 2016 – 17.

Let’s understand what is this and how CII can be used to save tax?

What is the Cost Inflation Index?

Imagine you have bought a house in 2015 worth Rs. 2 Cr. and you are selling it for Rs. 3 Cr. in 2018. So, what will be the capital gain here? It is Rs. 1 Cr., can you imagine how much tax you might have to pay for it? That will be really a big chunk of the profit to be paid as tax.

To save you from heavy tax payments, the government has come up with CII. It is used for calculating the estimated increase in the prices of goods and assets year-by-year due to inflation.

With the help of CII, the cost of purchase of an asset will be indexed, in other words, it will be revalued or increased from its original price, considering the effect of inflation and will result in lowering capital gain tax payable on the sale of the asset.

How?? we will see later, but lets first understand…

Why CII is used in income tax?

CII is used for capital assets like real estate, gold, debt mutual funds or debentures. Asset class whose price will increase by a period of time as the value of money gets eroded due to the country’s inflation.

However, we record capital assets at cost price, despite increasing inflation, they exist at the cost price and cannot be revalued. Therefore, when these assets are sold, the profit amount remains high due to the higher sale price as compared to purchase price. This leads to a higher tax to be paid on capital gain arisen on their sale.

In the above-mentioned example, we all know that the value of 2 Cr. at the time of 2015 can not be equal to the value in the year 2018, it will be increased. The house purchased in 2 Cr. will cost much higher today, and the reason is “Inflation”.

And therefore, the Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over a period of time will lead to an increase in the prices of capital assets and eventually result in lesser capital gain and tax.

In simple words, CII helps in calculating Real gain =

Selling Price of the Asset – Inflation Adjusted Purchase Price of Asset

How the cost inflation index is calculated?

How will you calculate the Inflation Adjusted Purchase Price? If let on investor, each person will have his own view in inflation, hence the CBDT (Central Board of Direct Taxes) notifies a unique number based on their calculation on consumer price index every year in the official gazette, which is used for calculating the indexed cost.

Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.

Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the price of the same basket of goods and services in the previous year to calculate the increase in prices. How CII is calculated is not much of our use, but let us see, what are the rates notified?

What is the concept of the base year in the Cost Inflation Index?

For this purpose, the government has defined a base year i.e 2001 – 02. For all purchases before 2001, the factor used is the base factor which is 100.

Any capital asset purchased before the base year of the Cost Inflation Index, taxpayers can take the purchase price as higher of the “actual cost or Fair Market Value (FMV) as on 1st day of the base year. Indexation benefit is applied to the purchase price so calculated. FMV is based on the valuation report of a registered valuer.

Suppose a land was purchased in the year 1995. So, for calculating the indexed cost of acquisition, the fair market value of land in the year 2001 – 2000 will be considered for calculation of the indexed cost of acquisition.

Change of base year from 1981 – 82 to 2001 – 02?

Initially, 1981-82 was considered as the base year. But, taxpayers were facing hardships in getting the properties valued which were purchased before 1st April 1981. Tax authorities were also finding it difficult to rely on the valuation reports.

Hence, the government decided to shift the base year to 2001 so that valuations can be done quickly and accurately.

Chart of Cost Inflation Index

[su_table responsive=”yes” alternate=”no”]

Financial Year Cost Inflation Index (CII)
2001 – 02 (Base Year) 100
2002 – 03 105
2003 – 04 109
2004 – 05 113
2005 – 06 117
2006 – 07 122
2007 – 08 129
2008 – 09 137
2009 – 10 148
2010 – 11 167
2011 – 12 184
2012 – 13 200
2013 – 14 220
2014 – 15 240
2015 – 16 254
2016 – 17 264
2017 – 18 272
2018 – 19 280
2019 – 20 289

[/su_table]

Applicability of CII in capital gain tax calculation

The cost inflation index can be used for calculating long term capital gains (LTCG) for investments in securities and real estate.

Since LTCG is flat 10 % (above the gain of Rs. 1 Lac) for investments in Equities, hence it has no relevance for calculating LTCG for investments in shares and equity mutual funds. But, it is useful to calculate LTCG in debt-oriented mutual funds (especially Bond funds and Fixed Maturity Plans).

Debt Mutual Funds – LTCG can be claimed only if the holding period is more than 3 years.

Properties / Real Estate – In the case of property, LTCG can only be claimed if the holding period is more than 2 years.

How CII is applied?

When the indexation benefit is applied to the “Cost of Acquisition” (purchase price) of the capital asset, it becomes “Indexed Cost of Acquisition”.

[su_box title=”Calculation of Indexed Cost of Acquisition”]Indexed Cost of acquisition = Cost of acquisition * CII for the year of transfer / CII for the year of purchase or base year (in case of the asset purchased before 2001)[/su_box]

Let’s understand this with the help of the same example given at the start. You bought a house for Rs. 2 Cr in the financial year 2015 – 16 and sold it in F.Y. 2018-19 for Rs. 3 Cr. So, what will be the capital gain after considering CII?

CII for 2015 – 16 = 254

CII for 2018 – 19 = 280

Indexed Cost of acquisition = 2,00,00,000 * 280/254 = 2,20,47,244

Therefore, Capital gain = Cost of sale – Indexed cost of aquisition = 79.52 Lakh (3 Cr. – 2.20 Cr.) which would have been Rs. 1 Cr.withour CII.

Hence, taxed at 20% (rate for LTCG) saved on Rs. 20.48 Lakh i.e Rs. 4 Lakh approx.

I hope, this article helped you in understanding the concept of CII and its importance. Let us know what you think about CII and revision made by CBDT in the base year in the comment section.

How PMS (portfolio management services) works?

Posted on by Team Jagoinvestor

If you are a high net-worth individual, looking for investing in a professionally customized portfolio of stocks, then PMS (Portfolio management services) can be a good choice for you.

In this article, we will discuss everything about PMS – Portfolio Management Services.

What is Portfolio Management Services (PMS)?

PMS is a service targetted at HNI investors who have a high-risk appetite, and the minimum ticket size of the investment required in PMS is Rs. 50 Lakhs – as increased by SEBI recently.

A lot of investors want to have a direct equity portfolio and may want high returns by taking a huge risk. A lot of investors manage their portfolio, but not everyone might have all the expertise needed to manage the stock portfolio. For this kind of investor, PMS can be a good option to look for beyond equity mutual funds.

There are 3 types of PMS

Discretionary: Discretionary Portfolio provides the service provider a right to make decisions on behalf of the client, whether he wants to sell or buy the shares. He is not bounded to consult with the client.

Non-discretionary: The portfolio manager suggests investment ideas suitable to risk appetite investor, while the decision is taken by the client. The client at his discretion can select stocks or other investment products. However, the execution of trade is done by the portfolio manager.

Advisory: Under these services, the portfolio manager only suggests investment ideas. The choice, as well as the execution of the investment decisions, rest solely with the Investor.

Note: In India, the majority of Portfolio Managers offer Discretionary Services. Most of the portfolio management companies provide model-based services. A standard model is followed and a bit alteration is done for individual client preference.

PMS is an individualized pool of funds

When you opt for a PMS scheme, a bank account, Demat account, and trading account are separately opened in your name and all investments are made in your name only. Accordingly, any income or dividend coming out of the investment made will also be credited in your bank account and the shares will be held in the Demat account in your name.

It means you hold all stocks individually, unlike mutual funds, where there is a pool of funds managed by a fund manager and performance is evaluated based on per day NAV. Each fund performance is influenced by all the investors jointly based on their sentiments, whereas in PMS the behavior of individual investors is isolated from one another.

PMS agreement

When you opt for a PMS service, you need to sign an agreement, which specifies all the details of services to be provided along with strategies and models of portfolio to be followed by the portfolio manager. When you sign it, you give a power of attorney for operating your trading and bank account to the portfolio manager.

If you are having a Demat account, trading account and bank account, you have to open all of these again to avail PMS. So that a portfolio manager can clear power of attorney. Therefore, whenever dividend or interest income or any other amount is credited to the bank account linked to PMS, the portfolio manager will redirect that amount in your portfolio.

As per market regulator Sebi’s instructions, a portfolio manager is required to furnish performance reports to their clients every 6 months. Most portfolio managers give a username and password which can be used to login to their website and see the portfolio statements.

The fee structure in PMS

PMS has a high cost of maintenance as compared to any other investment option. It has entry load, yearly management cost as well as profit sharing. However, they vary from provider to provider.

1. Entry Load – When you opt for portfolio management service, you are charged an entry fee which is generally termed as the Entry Load or Set up cost. It is 1 to 3% or it may vary. It gets deducted from the amount of your investment.

So, as we said, to avail, this service minimum amount is Rs. 50 lakh. So, you have to keep aside Rs. 50 Lakh + 2 or 3% of set up costs to start investing in PMS.

2. Management Charges – This is a service charge for managing your portfolio. It may vary from 1-3%, depending upon the service provider.

3. Profit-Sharing Fees – If a PMS has profit-sharing agreements between the client and provider, in addition to other fixed fees, then this charge is based on such terms of an agreement. Some charge this fee-based in the hurdle rate.

The hurdle rate is a promised rate of return. If a portfolio has given more than that percentage, then 10% or any percentage will belong to PMS company. It means you have to share profit if your portfolio has managed to give returns above what was promised.

Apart from the charges mentioned above, the PMS also charges the investors on the following counts as all the investments are done in the name of the investor:

  • Custodian Fee
  • Demat Account opening charges
  • Audit charges
  • Transaction brokerage

However, the fees of the service providers are negotiable, so you can exploit it as much as you can. There is no standard norm defined for the PMS fee.

Advantages of PMS

  • A portfolio of stocks and debts monitored and professionally managed by an expert.
  • PMS promises to outperform benchmark i.e Higher returns than the benchmark in the long run.
  • You get to invest across asset classes – debt, equity, gold, and mutual funds.
  • No limit to the extent to which you can invest in a certain stock.
  • No herd behavior is followed by an expert, they keep your requirements in their mind and accordingly invests in the segment preferred.
  • Diversified as well as focused portfolio depending on investor’s profile.

Disadvantages of PMS

  • As per SEBI guideline Minimum investment required is Rs. 25 lakhs (From 1st Jan 2020 it will be increased to Rs. 50 Lakh) because of which a small investor won’t be able to enjoy services offered under PMS.
  • PMS providers share profits but not losses.
  • Long documentation procedure, you need to open a new Demat Account, trading, as well as bank, account for PMS.
  • High set up cost – you have to pay 1 or 2 % of your AUM i.e. the amount you want to invest, at the time of investment. Along with this you also have to pay yearly management cost.

How PMS are taxed in India?

PMS taxation has always been quite debatable in the past whether it should be treated as Business Income or Capital Gains, but from the last few years after a recent court ruling, it’s now clear that profits from PMS will be treated as normal Capital gains and equity taxation rules will apply.

This means that any short term capital gains (before 1 yr) will be taxed at 15% and any long term capital gains will be taxed at 10% (after 1 lac limit per financial year) without indexation benefits.

Difference between mutual fund and PMS

A lot of investors might wonder how much PMS is different than an equity mutual fund. Here is a video which talks about the difference between PMS and Mutual funds.

Also, here is the tabular comparison between PMS and mutual funds

[su_table responsive=”yes” alternate=”no”]

Basis of difference Portfolio management services Mutual Fund
Impact of sentiments Individual portfolios are isolated from other investors behavior The sum total of all the investors’ in fund impacts the overall performance of a fund
Limitation No caping on the purchase of listed stock. However, PMS can not invest more than 25% of AUM in unlisted equity shares. Caping of 10% of AUM of a fund in a single stock, it means a limitation on investment
Public Data on past performance No standardized terms of working & publication of data Standardized method of representation of data on the website of every fund house
Cost structure Variable or fixed fee structure (usually very high but negotiable) Fixed fee structure
Entry Load High set up cost i.e 1 or 2% of AUM of an investor is chargeable as set up fee No setup cost or entry load
Initial requirements Accounts required Demat + Trading + New bank account (new accounts are to be open if required by the PMS company) Existing Bank account
Required Minimum investment The Minimum ticket cost Rs. 50,00,000 SIP Rs. 1000

Lump-sum Rs. 5000

[/su_table]

We hope this article helped you to understand PMS in brief. Please comment on how you liked it and if you have any queries regarding PMS. In case you want to invest in PMS, we can also help you in that regard. Just email us at [email protected] and we will get back to you.

What does “more money” give you in life? (shocking replies inside)

Posted on by Jagoinvestor

What does “more money” give you in life?

I asked this question on twitter a few days back and gave 3 options to choose from. Here are the results

A total of 120 people voted on the question and I got the answer somewhere on the lines of what I have always believed in.

Are Happiness and Convenience the same?

A lot of people confuse “convenience” with “happiness” and hence believe that getting ultra-rich will make them very happy in life. They don’t realize that when they will get ultra-rich, they will be able to afford everything from nice house to amazing vacations, all the gadgets they want and fancy cars.

This all will make their life super easy and they will not be worrying about anything in life which can be bought with money.

But that’s not “happiness”, its “Convenience”

Money and Happiness

There are many books written on the topic of money and happiness and there is tons of research to conclude now that an increase in happiness you get out of having more and more money keeps diminishing over time.

So may be quite unhappy when you are poor because you are frustrated and have no idea where the next meal will come from.

Going from Rs 10,000 to Rs 1,00,000 (increase of 90,000) is very different than going from Rs 1,00,000 to 2,00,000.

Your life style will not drastically change if you earn 20 lacs a month instead of 6 lacs a month. But it surely is a big change from Rs 20,000 a month to 80,000 a month.

Out of 120 people who voted on my tweet, 76% people choose “more convenience” as their answer and only 12% choose “more happiness”. I am sure people who choose “more happiness” still need to see a good salary in life

I personally think that you surely need to aim to build great wealth and aim for huge income because more money will surely be better than less money in life. At least you have one less thing to worry in life and that is MONEY.
Around 12% people also voted for “more worries” as their answer. Money can also bring trouble in life at times, especially if you are not ready to share the fruits of wealth with others and if you have no idea how to extract happiness out of your money.

There are many examples on earth where people have done suicide and gone mad while their bank accounts had millions. Remember that unhappiness can come from various sources like relationships, health, how you feel about yourself, family issues and money.

What do you think about this topic?

Please share your thoughts about “What does more money give you in life?”.

Let me make it clear that above points are my personal thoughts about money and I accept that different people have a different experience in life which shapes their relationship with money. I would love to see how people think about this topic.