Category: Knowledge and Concepts

RSU, ESPP and ESOP – Understanding Meaning and Taxation

Posted on by Jagoinvestor

Most of the people who join their first job,  get benefits like RSU, ESOP and ESPP as part of their CTC package (infact this is how employers show a high CTC while recruiting).However most of the employees do not understand these things in the beginning. Over the next few months, they start getting some knowledge about these benefits as employee.

A lot of people confuse these 3 things with each other and often do not have a full understanding of what they mean and how they work and what are the tax implications when they exercise their benefits.We will now take each one of these and understand them.

employee benefits RSU ESOP ESPP India

In this articles lets understand all these 3 things – RSU , ESOP and ESPP in detail.

1. RSU (Restricted Stock Units)ESOP

RSU or Restricted Stocks units are very simple to understand. The Company gives company Stock to an employee without any conditions, however there is a vesting period involved. Vesting Period is the tenure for which you will have to wait, before you can claim those shares. So if a company gives you 100 RSU vesting in 2 yrs. That simply means that after 2 yrs, you will get 100 stocks of the company. It will be all yours and you are free to keep them or sell them after that. RSU’s are also a great way to reward the employees, like in 2012 WIPRO awarded 4.5 million RSU’s to its 1200 employees (mostly top management).

RSU’s are a great way to make sure that the employee stays with the employer for long term. Imagine a company, who gives 1000 RSU’s vesting in 4 yrs. An employee will thinking many times before changing his job, because if he leaves the job and moves to another company, then he will loose those RSU’s, which might be worth a lot of money depending on the stock price. I had myself got RSUs from Yahoo, when I joined them, but due to their declining stock price over so many years, RSUs were not a great motivator for me. It was just a bonus amount for myself.

RSU can also be given in phased manner sometimes, like 25% RSU each year. So if company is giving 100 RSU’s with condition of 25% RSU vesting each year, then 25 shares will vest in first year, then another 25% in 2nd year and like this, only after 4th year, an employee will be able to get all 100 stocks.

Its worth noting that if you leave a job, a lot of companies require you to sell your RSU’s in next few months. for example next 3 months.

2. ESOP (Employee Stock Options)

Employee Stock Options or ESOP are generally given by most of the big companies in India, especially IT companies which are listed outside India. ESOPs are nothing but “OPTIONS”, which are also in stock market in India (remember Future & Options?)

Let me tell you what Stock Options are in general. If a person has a Stock Option, he actually has a right to BUY a stock in future at a pre-decided price agreed at the time of giving those stock options. So in future whatever is the market price does not matter, you always have an option to buy it at the price which was agreed upon. In this case if market price of the stock is above the pre-decided price, then you can just exercise your options of buying the stock and instantly you will be in profit. If however, the current market price is less than the pre-decided price, then you choose not to exercise the stock option at all and nothing happens.

Let me give you an example. Let’s say that an employee joins a company on 1st Jan 2013. His company gives him 500 ESOPs with vesting period of 3 yrs and at the vesting price of Rs 200. What this means is that his vesting date is 1st Jan 2016 (after 3 yrs) , On that date, he has a OPTION to buy 500 stocks of the company at Rs 200 if he wishes. Now lets say on 1st Jan 2016 …

Case 1 – The stock price is Rs 800

In this case, the employee can exercise his option and he can get 500 stocks at only Rs 200 . At this moment, the employee will make a clean profit of Rs 600 each shares and a cool Rs 3,00,000 . Note that he does not have to pay anything here, when he exercises his option, he will automatically get his profit without putting anything from his pocket. It makes sense to exercise his option in this case, because vesting price is less than market price.

Case 2 – The stock price is Rs 130

In this case, it does not make any sense to exercise, because you will be in loss, because the price you have to pay is less than market price, so you let this option go.

Note : In case of stock options, you can never make any loss, it will always be some profit only.

3. ESPP (Employee Share Purchase Plan)

ESPP or Employee Share Purchase Plan is a benefit given by employer to its employees to purchase the stock of the company at a discounted price. In an ESPP plan, an employee has to contribute a part of this salary in ESPP plan each month. An employee can choose how much of his salary he wants to contribute by himself. It can range from 1% to 15% of his salary. All the money which he contributes gets accumulated for few months and then in one go, stocks are purchased for him at some discounted price. On what price the discount will be given depends on your company EPSS plan. However in general its the minimum of the prices in the start of the EPSS plan and at the end of the ESPP plan. Let me give you an example.

Suppose your company offers a ESPP plan twice a year which you can opt for, one window opens is Jan-June (where you can join in Jan only) and other is July to Dec (You can join in July only). So you will have to tell the company how much you want to contribute each month before hand. If you choose it to be 10% , then 10% of your salary will be cut for ESPP plan and you will get the rest in your hand.

Now suppose a person chooses Jan-June window and he is contributing 10,000 a month for this, then in next 6 months, he will accumulate Rs 60,000 for ESPP, and now at the end of the Plan he will be able to get the shares.

What will be the share price considered for him ? 

Let’s say that the stock price in the start of the plan (Jan month) was Rs 100 and the stock price at the end of the plan (June) was Rs 120. Then the stock price considered for him will be minimum of 100 and 120 , which is Rs 100 and on this he will get 15% additional discount and his final price would be Rs 85 only.

Note that this example is assuming that minimum of two is taken , your company EPSS might just consider the “starting price” or “ending price” .. So please look at your company EPSS plan in detail.

When to choose ESPP plan ?

ESPP is a great way to get the stock price at discount, but one should anyways take care of few things. If company’s future prospects look great in future, then one should buy the stocks anyway, so ESPP becomes a great deal where you sure shot get 15% discount. However if company’s prospects look bad in future, then you have to figure out if it’d make any sense to go for ESPP plan or  make a better use of your money elsewhere.

Below is a video from Salesforce which explains their ESPP plan, watch it to get a feel of how EPSS works ?

 

Taxation on RSU, ESOPs and ESPP

The taxation for RSU, ESOP’s and ESPP is governed by same rules, as all of them have to deal with stocks which a employee acquires and the taxation is pretty simple to understand. There are just two rules.

Tax to be paid in India

When you sell the your RSU/ESOP/ESPP (after vesting period is over) and get back the money, its your responsibility to pay the tax on the amount in India. How much tax is to be paid by you, depends on the nature of the gains. If you sell the shares before 1 year of acquiring the shares, then the gains are called Short Term Capital Gains (STCG) and if you sell the shares after 1 year, then the gains will logically be Long Term Capital Gains.

If stocks are listed in indian stock exchanges, then you have just have to pay 15% tax on Short Term Capital Gains and no tax on long term capital gains. However if stocks are not listed on indian stock exchanges, but some foreign country, then you will have to add the short term capital gains tax in your income and pay tax as per your slab rate, and 20% with indexation on the long term capital gains, which is the case when STT is not paid when the transaction is done.

Below is the simple table which will explain things to you

[table]

Listed/Gain-Type Short Term Capital Gain (Less than 1 yr) Long Term Capital Gain (More than 1 yr)
Stocks Listed on Indian Stock Exchange 15% Tax on Profits No Tax
Stocks NOT  Listed on Indian Stock Exchange Profits will be treated as your Income and taxed as per your Slab 20% with Indexation

[/table]

Incase Stocks are listed on Foreign Stock Exchange

In these cases, it might happen that when you sell your RSU, ESOP’s or ESPP, the tax is directly cut by the trading portal like etrade (in US) and you only get reduced number of units (after tax). After that when you take the money back in India, you might have to pay the tax on the income again if the double tax treaty is not available with that country.

I hope, you got a lot of clarity about RSU (Restricted Stock Units), ESOPs (Employee Stock Options) , ESPP (Employee Share Purchase Plan). These are some of the benefits employees get and understanding them is very critical for them. Please share if you have any of these benefits and if you had any confusion around them?

CIBIL marketplace – Get Customised loan offers based your credit score

Posted on by Jagoinvestor

CIBIL has introduced a new facility called “Cibil Marketplace“, which will act like a portal where a person can get customized loan and credit card offers based on his cibil score. Right now, what happens is – when a person applies for some kind of loan or a credit card, the lending institution checks his credit report and credit score and based on their internal criteria and rules, reject or accept the application and move to the next step .

cibil marketplace enter data

How does CIBIL marketplace work?

With CIBIL marketplace, the whole process is reversed. Here, you can find out which lending institutions are ready to give you different kind of loans, interest rates and other conditions based on your credit score. So a lot of lenders will participate in the cibil marketplace and will give their criteria and checklist, like what kind of customer they would like to offer loans. For example – A lender can say that they are ready to give Car loan @13% interest rate to a person having cibil score between 700-800 and @12% if cibil score is more than 800 . Thats one example .

Another lender can say that he is ready to give home loan to people who have credit score below 700 score, but on a condition that he should be working in a software job, however the interest rate would be as high as 15% – this is just an example of how it might look like. So this is how all the lenders will give their own criteria and when you enter the market place, after the filtering you will be shown only those lenders and loan offers which are exactly for your profile. So if you want to increase the number of loan offers, you need to improve your cibil score for that.

Right now the CIBIL marketplace is started with only Credit Cards. But very soon, you will see Home loans, Auto Loans, Personal Loans and even Business Loans on the portal. Just wait for some time or the next update from CIBIL on this.

How to Apply for Loan with CIBIL marketplace ?

Step 1 : You need to first visit Cibil Marketplace website. When you go there you need to fill in two information.

Step 2 : You need to enter your Control Number (which is 9 digit number that is mentioned at the top right of the CIBIL report) and your latest Credit Score, which should be maximum 2 months old. That means, if you had applied for a credit score long back (more than 2 months back) , you will not be able to use that data to enter CIBIL marketplace. You will first have to apply for a latest cibil score (You can get your cibil score online) and only then you will be able to enter the marketplace. One reason for this is that, cibil score and report keeps getting changed each month when banks update the customers information with CIBIL. So ideally if you know control number and cibil score of some other person, you can enter the cibil marketplace with that information and see all the data . Therefore make sure you dont share this data with anyone whom you dont rely.

cibil marketplace enter data

Step 3 : The next step is to go inside the marketplace. You can see different kind of loans section and how many lenders are ready to lend you in each section. For example you can see that only 1 lender is interested to lend in this example and that’s “credit card” section . As of now, only credit cards are offered as this is new facility. But in future you can see more lenders in different sections. All you need to do here is click on the kind of loan you want.

cibil marketplace enter data

Step 4 : After you choose the section, you can see the list of all the lenders individually with some information like Tentative Credit Limit offer, interest rate, fees, charges and other information. You can click on “Apply” button and instantly a small box will appear where you can apply for the loan there itself. Now this will be a kind of pre-approved loan because this is customized to your cibil score, but the next step will be the documentation check, which is part of the check in general . For those who would like to learn more about CIBIL and Credit Score etc, there is a detailed 40 min video course on our Wealth Club.

cibil marketplace enter data

So these are the 4 steps you need to do to take the benefit of CIBIL marketplace.

Few Important Points related to Cibil MarketPlace

  • You can choose only one offer in each category
  • While purchasing your CIBIL TransUnion Score (and CIR), please make sure you fill up your income details accurately. As this will ensure the offers that are displayed in your Market Place are the ones you are eligible for. Any incorrect income detail will mean incorrect offer eligibility and can be rejected by the lender at the time of verification.
  • It also depends how many lenders choose to participate in CIBIL marketplace. There might be lenders who choose not to.
  • Once you have selected an offer then the respective lender will get in touch with you. Please ensure the details entered by you in the CIBIL TransUnion Score (including CIR) purchase form is accurate. This will enable the lender to respond to you at the earliest. You can also provide alternate contact details while selecting and confirming the offer in the CIBIL Market Place.

Who will benefit with Cibil Marketplace ?

CIBIL marketplace is an innovative platform and will also be helpful to those people who have low cibil score and a bad credit report , but still want to go for some kind of loan, even if it means on certain terms and conditions. It may be the case that they might pay a little more interest, but that would be better than not getting loan at all. This platform might also be the first step in providing incentive to those customers who have excellent cibil score. They might get loads of loan offers from lenders with lower interest rates compared to normal customer. Only the time will tell how this platform will evolve.

Let us know what do think about CIBIL marketplace and is it useful for you ?

Gift Tax in India – Everything you wanted to know about rules and exemptions

Posted on by Jagoinvestor

Do you know that, when someone deposits some money in your bank account, what is its taxation angle ? A lot of people take some loan from their friends for few months and then return it back, but never think twice about it from taxation angle? Your parents deposit some money to your bank account because you want to pay the down payment of your house. While it’s a help from your parents, have you ever thought if you have to pay tax on that amount or not?

In this article lets see all the aspects about these kind of transactions, when money comes and goes out of your bank account and what are the rules for income tax on gifts received from relatives or other people in India .

Taxation on Gifts

Let us first see what kind of situations we are talking about ?

  • You swiped your credit card for your friend Rs 20,000 purchase and then your friend paid back money to you by transferring it to your bank account.
  • You asked Rs 50,000 from your friend as loan and paid him back after 1 month.
  • You got Rs 50,000 cheque from your relative on your wedding.
  • Your father transferred some money you your bank account as help for some purpose.

These are few instances, which happens in our lives. But its very important for you to understand the tax implications in various scenarios and the possible issues which can come up in the future, if income tax department decides to scrutinize your income tax returns for example. By understanding the gift tax rules and precautions to take, you will be safe. So now, let’s look at 5 points which will help you understand rules about incomes tax on gifts in a better way.

By virtue of Section 56(2), any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under “other sources” subject to some exclusions . Below we are going to see all those exclusions and gift tax rules.

1. Upto Rs 50,000/year is not taxable

The first major rule which every person should know is that there is no tax to be paid on gifts received (cash or kind), if the amount of the gift is upto Rs 50,000 in a year. However if the total amount crosses Rs 50,000 . Then you will have to pay the tax on the total amount received (not additional). For example – If a friend of yours gifts you Rs 30,000 in a given year, you don’t have to pay any tax on that amount, as its below the limit of Rs 50,000 .

Now suppose you also get Rs 20,000 after that, still you don’t have to pay the tax as the total worth of the gift you got in the year was Rs 50,000 till now (less than the limit of Rs 50,000) . But now, if someone gifts you another Rs 10,000 . Your total gifts in a year is Rs 60,000, so you will have to pay tax on the total amount of Rs 60,000 , not just on additional Rs 10,000 . This Rs 60,000 will be included in your income and you will have to pay tax on this Rs 60,000, as per your tax slab. Note that this is exactly how the written law is.

Since 1/10/2009, Section 56(2) has been amended and the scope of ‘’gifts’’ will include even immovable properties or any other property besides sums of money under its ambit.

2. Any amount received by relatives is not taxable at all

Another rule for income tax on gifts, is that any amount received from specified relatives is totally tax free in the hands of recipient. So if a relative gives you gift in form of cash/cheque or in consideration, you will not have to pay any tax on the amount received.

Following is the list of relations which are considered as “relatives” for this

  • Your spouse
  • Your brother or sister
  • Brother or sister of your spouse
  • Brother or sister of either of your parents
  • Any of your lineal ascendants or descendants
  • Any lineal ascendant or descendant of your spouse
  • Spouse of the persons referred  in above points

Example – So if you want to buy a house and your father/mother/sister/brother etc transfer Rs 20 lacs to your bank account. You don’t need to worry about the taxation part, because its a gift from your relatives and you will not have to pay any tax on this amount. However its a good practice to do the documentation for this, if the amount if pretty big like in this example. All you need to do is document this transaction on a paper which clearly states that who transferred the money and the reason for it, along with the signatures of both parties. In future, if there is any income tax scrutiny, this small piece of proof will be handy and will help you a lot.

Important – Note that, there is no income tax to be paid on the money received from relatives, however at times income clubbing provisions may apply, for example, if a husband gifts Rs 10,00,000 to wife, there is no ta to be paid by wife on Rs 10 lacs received, however when she invests that money and if any interest income is generated, it will be clubbed with husband income. Read all about income tax clubbing rules  here.

3. Any amount received as Wedding Gift is not taxable

One of the few advantages of getting married is that any amount you get, as wedding gift is not taxable in your hands, either from relative or non-relative 🙂 . So even if you get Rs 1 crore as wedding gift from someone in your wedding, it’s not taxable in your hands.

Lets see some examples –

Suppose if your spouse parents give you some gift worth Rs 10 lacs on marriage, it will be treated as a wedding gift and will not be taxed. However, it is not clear by provision, whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should be sufficient if the gift is given just on the occasion of the marriage, means either on the day of the marriage itself or a day or two before or after. Practical common sense view would prevail in such cases.

4. Gift Tax on Movable/ Immovable properties

There is a valuation aspect involved in gifting of immovable properties

  • If the property is gifted without any consideration then if the stamp duty value exceeds Rs. 50000/-, stamp duty value will be taken
  • If the property is gifted for a consideration, then the actual value of the property will be taken

In case of other properties:

  • If gifted without consideration and fair market value exceeds 50,000, then the fair market value will be taken as the final value
  • If gifted for a consideration and the Fair Market Value (FMV) less consideration is greater than 50000, then the FMV less consideration amount will be taken as the value of the gift.

5. No tax on the amount received through WILL or Inheritance

When any sum of money or any property is received under a will or by way of inheritance, it is totally exempt from Gift Tax. So if you get a real estate worth Rs 50,00,000 and some other things worth Rs 30,00,000 through inheritance , you will not have to pay any tax on that amount received.

Be cautious about the take and give transactions

At times, we ask for money from our friends for some purpose and then give it back. One of the examples I can give is what I heard from one of the readers in comments section. He swiped his credit card for a friend for Rs 50,000 and then asked his friend to pay him back through online banking. Here if you see, the amount came to his account, however it was a reverse transaction and not actually a gift, so ideally this transaction should not be considered at all.

If its a small amount and can be justified with proofs, there is not much to worry about this. But in this case, lets say there is a income tax scrutiny, and tax inspector asks you about this “Rs 50,000” coming to your account. Now – You can clearly say that the money you got from your  friend was a amount which you got back because you paid Rs 50,000 to him through your credit card. But just saying this will not be enough, He will ask you to prove it. Then you will have to bring your credit card statement, and prove to him that this was done by you for your friend and no one else.

gift tax rules in give and take

The point here is – no matters how truthful you are, there should be something you can show to income tax officers in case this is questioned. So for any transaction like this, which involves a big amount, its always a good idea to have a proof, like in the example I just gave, the credit card statement will be handy along with a small note, where you friend signs saying that you swiped your credit card for him and he will pay back the money through netbanking.

In this same case, If you ccan’tprove that this money was just a “reverse entry” , you can imagine the situation. Even if you were clean, the whole amount would be added to your income and you need to pay income tax based on your tax slabs on the ground of unaccounted income.

Another point, worth noting is that just because you have a reverse transaction, the other party can get into trouble. For example, suppose you give Rs 20 lacs to your friend, who wanted the money for buying a house and then your friend gives back those Rs 20 lacs in 3 months. Note that now there is a clear entry that you gave your friend Rs 20 lacs, so in future income tax department can reach you through your friend and ask you about this Rs 20 lacs and from where you got so much of money. They can ask you to justify the source of this money. So always keep these points in your mind.

How to document Gift transactions, Registered Deed or plain paper?

A gift deed is a deed, that is executed and delivered in which the donor transfers title to the receiver without any payment or considerations. It a document which transfer the legal title of the property to the donor, where the consideration is not monetary but is made in return for love and affection. There is indistinctness with respect to compliance of the gift deed at times, Whether a gift deed is required to be made in every circumstance

When it is required to be stamped OR get registered?

Gift made by way of cash or cheque does not mandatory requires to be executed through a gift deed. Writing a plain typed note on a paper will generally suffice. It is not required to be stamped and registration is also not needed. You may simply mention the names of persons, their relation and that the gift is being given out of love and affection.

Gift made by way of movable property is required to be made in stamp paper and stamped by the notary or court, and registration of gift deed is not required in this case. For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor. Gift of immovable property which is not registered is not valid as per law and cannot pass any title to the receiver.

Conclusion on Income Tax on Gifts received

As far as you make the transactions which can be justified, there is not much to worry, however its always a good and safe practice to document things on a paper with proper signatures. This will help you because income tax scrutiny can go back to many years of your life. The stronger your documentation and proof, the smoother will the situation be.

Thanks to Rishabh Parakh (www.rishabhparakh.com), a chartered accountant who helped me while this post and gave his inputs. He is founder  director of Money Plant Consulting (www.moneyplantconsulting.net ) a leading Tax & Investment Advisory service provider in Pune.

Credit Card Reward Points & Cash Back Comparison – Unearthed

Posted on by Jagoinvestor

Do you know which is the best credit card in India in terms of rewards points which you can redeem at different categories ? Have you ever wondered how different or close these credit card reward points are ? Let me take an example!

Ever thought the difference between how does 5X rewards from Standard Chartered differ from 10X rewards from Amex, ever wondered whether taking a 5% cash back is better than going for 10X rewards. Ever thought how can you save in excess of 16K per annum only by having a few cards in your wallet, well continue reading.

credit cards reward points in India

Every credit card company offers rewards in the form of Cashback / Reward Points to its customers. These rewards are funded by what is called as interchange. Interchange is transaction fees charged by the bank from the merchant. Its usually 2 – 3 % of every transaction. This is the reason, why some merchants ask an excess 2% if you tell them you would be swiping your card instead of paying them in cash (Read some must know points about your credit card).  Cash is the preferred mode for another reason and that is to save taxes, as every credit card transaction goes into the books of the merchant, but that’s a separate discussion and we’ll leave it to some other day.

A few disclaimers before I proceed. This article is about rewards points and how you can save maximum through credit cards. “A rupee earned is a rupee that earned 6 percent” – So lets save some money for all of you. Again the entire article has been based on my experience and research, so am open to suggestions and feedback. Also I haven’t included Airlines spend, as I still don’t fully understand the Points to Miles conversion for different Airlines.

Following are some of the points that I hope the readers will have a much better understanding of, by the end of the article.

  • Comparing Credit cards by their rewards proposition – If you have multiple credit cards, how to figure which one has a better reward structure?
  • Accelerated Rewards: Most of the credit cards have an accelerated reward structure. So how should that impact your spending pattern so as to maximize the rewards?
  • Wallet of Credit cards that one should own – Using the methodology explained above, this would be a list of credit cards that will help maximize your savings.

Credit Card Reward Points & Cash Back Benefits

Lets start of with , How should one go about comparing credit cards by their rewards proposition.  To understand this, there are two important concepts that one should be aware of

  • Earn Rate:  Earn Rate is number of points earned per amount spent.
  • Burn Rate:  Burn Rate is the Rupee value of a reward point.

For Example – For a HDFC Silver/Gold card, you earn 1 reward point for Rs. 150 spent, so the earn rate is 1/150. Whereas each credit card reward point of a silver/gold card is worth 15 paise or Rs 0.15 only. So the burn rate is 15 Paise. You multiply the two and you will get a metric which you can use to compare credit cards from different companies.

Using the Burn Rate and the Earn Rate, I have come out with a very simple metric  “Rupee earned per every Rs. 100 Spent” , which can be used to compare some of the top credit cards in the market.

Rupee earned per every Rs. 100 spent = Earn Rate (Calculated on Rs. 100 Spent) * Burn Rate

Also the comparisons below are based on the basic earnings. Most of the cards have an accelerated reward-earning proposition. We shall factor that when we calculate the monthly earnings from different spend scenarios. Also will show you how to create your own savings through your own spend numbers.

Example – 1

I will give you an example of how this metric would be useful to differentiate between two cards of the same bank or different cards across the bank.

hdfc credit card reward points

The above tables give us an idea of hdfc credit card reward points benefits in the market. If you look at the value proposition of different cards, they are vastly different in terms of Rupee Earned per Rs. 100 spent. Rs.100 spent on a HDFC silver/gold card will give you Rs. 0.10 whereas spending the same amount on Regalia will give you a Rs. 1.08 in terms of reward points. But again Regalia and Infinia are fee based cards and hence one needs to factor this in when computing the relative reward proposition of the card.

Example – 2

Now lets compare HDFC reward points with CITIBANK rewards points

hdfc vs citibank credit card reward points

If we compare the same metric Rupee Earned per Rs. 100 spent, Platinum and Ultima cards are decent options and in the premium segment HDFC provides better rewards.

Accelerated Rewards – Categories of Spend and Best card in each category

Apart from the basic reward proposition that’s present with every credit card, most of the cards in the market offer an accelerated rewards earning proposition. These accelerated rewards can be in a variety of forms. E.g. 5x rewards on Departmental Stores, 10X rewards on Online spends or a 5% cashback on Departmental Stores.

Now lets use the concept above and factor in the accelerated rewards propositions, (That some of these cards offer) to get to the best cards in each of the spend categories. The formula to calculate the rewards is a simple one: Just multiply the basic rewards earned above by the accelerated reward earning multiple.

Formula

Rewards Earned = (Rupee Earned per Rs. 100 Spent) * (Accelerated Reward Earning multiple)*Spend/100

Example – Rewards earned if you have spent Rs. 2000 on Citibank Rewards card.

  • For Citibank Rewards, Rupee Earned per Rs. 100 spent = Rs. 0.4
  • Accelerated Reward Earning : 10X on Departmental Stores
  • Rewards Earned = 10*0.4*2000/100 = Rs. 80

A few disclaimers here:

  • A few credit card companies even though offer accelerated rewards proposition but offer it only on select merchants. For e.g. Amex offer 10X rewards on its partner merchants, CITI rewards card offers it on select merchants, etc.. If you do not shop on these merchants then you won’t be earning any accelerated rewards. That’s the reason I prefer credit cards which offer a flat accelerated rewards structure so that I get the freedom of shopping wherever I want to
  • Also some of these accelerated rewards have a validity, which means have an expiry date. You are eligible for accelerated rewards only in that period.
  • Also I have a preference for Cash back as compared to reward accumulation, reason being two fold. First: Cashback impact my outflows directly as compared to rewards (where one has to go through the process of reward redemption and its benefits). Second: Its faster.

Keeping the above in mind, lets factor in the accelerated rewards to the basic rewards proposition of credit cards and figure out which card will give you the maximum advantage. Also the following will give you a chance to rate your card with respect to the cards available in the market.

The data has been collected from the sites and catalogues of different credit card companies. Since the accelerated rewards are mostly provided in specific categories, so we shall consider each category separately and figure the best card in that category.

Credit card reward points apparel

Winner – Manhattan Platinum Card

Even though it seems, owning a Citibank Rewards card will give you, Rs. 80 cash back, but that’s just superficial because the 5X rewards on Citibank card is limited to only a few stores. Lifestyle being the major one of them.For Manhattan Platinum card, even though the offer tells only about Departmental stores, it covers all kinds of retail spends. Spends in malls are covered by this offer

Credit card reward points stores

Winner – Manhattan Platinum

Again it’s a straight fight between Manhattan Platinum and Citibank Rewards. And Manhattan Platinum wins hands down.

Credit card reward points dining

Winner – Kotak Trump Card

Clearly Kotak Trump card is the clear winner. With you saving almost Rs. 600 per month if you are a heavy diner. There are a few finer points, that the total spends on Movies and Restaurants should be more than Rs. 4000. There are a few other cards, where the card issuing companies have a tie up with specific restaurants in different cities. Citibank being one of them where they have tied up with more than 200 merchants across India and offer a 20 % discount flat.

Credit card reward points fuel

Winner – Standard Chartered Titanium

Standard Chartered Platinum Rewards, Standard Chartered Titanium, IOC Titanium and ICICI Bank HPCL card are quite close in terms of the monthly earnings. But I like cashback more than earnings through reward points. Also the 5% flat cashback on any petrol pump as compared to IOC and HPCL for Citibank and ICICI bank cards respectively make Standard Chartered Card a winner in this category.

Credit card reward points movies

Winner – Standard Chartered Titanium

Standard Chartered Platinum Rewards, Standard Chartered Titanium, IOC Titanium and ICICI Bank HPCL card are quite close in terms of the monthly earnings. But I like cashback more than earnings through reward points. Also the 5% flat cashback on any petrol pump as compared to IOC and HPCL for Citibank and ICICI bank cards respectively make Standard Chartered Card a winner in this category.

Credit card reward points utility bills

Winner – Standard Chartered Titanium Card

Again , both the cards are equally good, but the additional condition of paying your bills via Citibank billpay turns my preference towards Standard Chartered Titanium card.

Carrying a similar analysis on categories of Movies and Entertainment and Utility Bills reveals that Kotak Trump card and Standard Chartered Titanium card emerge as the top card in the respective categories.

Wallet of Credit cards that one should own

Having done the hard bit of analysis, calculations and comparisons we come to the easier bit of creating a wallet of credit cards for you which will accelerate the reward earning and help you save a substantial amount over a period of time. To give you all an idea about savings that can be done by having this wallet, I have created a few scenarios and the respective savings.  One can create his/her own spend/rewards scenarios using the table below.

 

Category of Spend Name of the Card Value Proposition Monthly Spend Monthly Savings Annual Savings
Apparel Standard Chartered – Manhattan Platinum 5% Cash Back on All Departmental Stores Spend, (This includes all kinds of Retail Spends) 2,000 100 1,200
Departmental Stores Standard Chartered – Manhattan Platinum 5% Cash Back on All Departmental Stores Spend, (This includes all kinds of Retail Spends)  4,000  200  2,400
Dining Kotak Trump Card 10% Cashback on all Restaurants, 10% cashback on all restaurants  5,000  600  7,200
Fuel Standard Chartered – Titanium Card 5 % Cashback on Fuel/Telecom/Other Utility Bills  5,000  125  1,500
Movies and Entertainment Kotak Trump Card 10% Cashback on all Restaurants, 10% cashback on all restaurants  2,000  200  2,400
Utility Bills Standard Chartered – Titanium Card 5 % Cashback on Telecom/Other Utility Bills  3,500  175  2,100
 21,500  1,400  16,800

 

This is a guest post by Gaurav Thakur, who is currently working as an analyst with a mutual fund company. An IIT Kanpur alumnus, he has primarily worked in the financial services industry, working with Citibank India Credit cards for a couple of years and also spending time in Citibank’s personal loans division.” This article has appeared first on gaurav blog here.

Which credit card you have already and are you satisfied with your credit card reward points and cash back benefits ? Did you get any insights from this article on credit card rewards points ?

Days Past Due (DPD) section – What is the meaning in CIBIL Report ?

Posted on by Jagoinvestor

You might have seen a section in your Cibil Report which says DPD (Days Past Due). While Loan Status and Credit Score matter a lot when it comes to getting a loan approved or rejected, a big myth among people is that a clear report (without SETTLED or WRITTEN OFF status) and a credit score above 750/800 are the only two things that they need to get a loan.
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That’s not true. While a clean report and a good score are definitely primary level requirements for getting a loan approved, there are finer details which a bank looks at, before deciding if they want to give you a loan or not; and Days Past Due or DPD is one of those important metrics. Lets understand this then …

What is Days Past Due (DPD) on a CIBIL report ?

Days Past due or DPD means, that for any given month, how many months worth of payment is unpaid. And this information is for each account . Which means that if you have 3 different loans going on, then you will have DPD information for each of those accounts. For each account you can see Days past due information for each month for the last 3 years , i.e., 36 months.

You might already be aware that your cibil report contains the past 36 months of your credit information. Each and every month, your lender who is a member of CIBIL, will update the CIBIL with the latest information like Did you pay on time or not? How much outstanding loan do you have at that moment? How many months worth of loan is remaining and other micro details are shared on monthly basis by banks and lender to CIBIL. So each month, a new month’s data is added and the oldest month (36th month) is removed from the cibil report and this way a sliding window of 36 months data is available on your cibil report at any given point of time.

Example – Date 06-12 and DPD value is 90

If DPD value is 90 for a date say 06-12, it means in June 2012, the payment is due for last 90 days, which means 3 months dues! So you can now understand the the DPD in the last month (May 2012) would be 60 and for Apr 2012 would be 30.

When you default on any payment or do not make the full payment, this DPD value will start getting a number and it will be a negative thing. So if there is a cheque bounced from your side and the loan not paid on time, you can expect one entry of DPD for the latest month with value 30 – which says one month of dues are not paid. If you clear it on time before the next cycle comes, it will help you to improve your bad credit score and the DPD value for next month again will be normal, but if you do not make the payment and keep those dues , then the DPD value for the next month will increase to 60, which implies that from 2 months you have not paid the dues. See the graphic below to understand more examples of DPD

Days Past Due (DPD) example in CIBIL report

What does XXX means as DPD Value ?

There are certain values which can appear in DPD section and each of them has some meaning, however the safest values are 000 and XXX . If you have the value as 000, it means the dues are totally clear on that date and nothing is outstanding. And if the DPD value is XXX, then it simply means that bank has failed to report the data for that month to bank, and it does not impact you at all . At times instead of 000, the value can be STD which means that the dues are for less than 90 days . While any other number other than 000 is a negative thing, but make sure it does not go above 90 days , because then its super negative.

At times, some lenders also report DPD values in a different way, as per asset classification norms set by RBI. In that case, the values which appear under Days Past Due section are STD , SUB , DBT or LSS which denotes good to bad , where STD is good and LSS is the worst one. Here is what each of them denotes

 

STD (Standard) Payments are being made within 90 days. Note that any delay of more than 90 days is seen as Non Performing Assets (NPA) by banks
SUB (Sub – Standard) An Account which has remained NPA for upto 12 months
DBT (Doubt ful) The Account which has remained Sub Standard Account for a period of 12 months
LSS (Loss) An account where loss has been identified and remains uncollectible

 

Can DPD values be changed ?

There have been cases that lenders have rejected loan applications based on DPD information even though the credit report was clean and the score was quite good. And the common worry at the time is “Can’t I change my DPD information somehow?” and the answer is NO . You can’t change DPD information like you can change SETTLED or WRITTEN OFF status by taking some action. All you need to do is wait for some time and as time passes, new month information will get added to your report and old data will keep getting phased out. So if you have some bad DPD data before 12 months, then it will go out in next 24 months, and if you have some DPD data 2.5 years old, it will go out in 6 months period.

For those who like to learn through video’s, we have a 40 min course on Credit Report and Scores in detail on our Jagoinvestor Wealth Club, which will explain all the aspects of the subject in a clear manner and great detail

Did you understand the meaning of Days past due or DPD which appears in CIR (Cibil Report) ?

Are you following these 6 rules of great financial life ?

Posted on by Jagoinvestor

Everything in life has basic ground rules, which we should never forget. You can consider these ground rules as the pillars of your decision making activity. Even our financial lives have some ground rules to follow in order to have a great and enriching life. Over the last 5 years of writing this blog and having interacted with thousands of people, I can clearly conclude that more than making right decisions in financial life, you should focus on avoiding bad decisions. I have seen so many people who have been careful, not messed up things and their financial life quality is really awesome. They have not lost wealth due to foolish mistakes and live a clean financial life overall and while they feel lag behind others, I can say they are ahead of others in many ways. Yes – They have not taken awesome decisions, but the best part is they have not made terrible mistakes either. Lets explore more on this today

Pillars of a great financial life

6 pillers of great financial life

Now I am going to talk about 6 areas of financial life which are like pillers. If you are clear about these ground rules and start some serious work on all of them, your overall quality of financial life should go up. But having said that, its a long term activity !

1. Rule of Earning

“Do not depend on a single income. Invest and create a second/ third source of income”

So many people just never focus on this. A person in a job has just taken it as his fate, that his only source of income will be his Salary. For him alternate source of income other than his salary is like a distant dream which he can only see, but could not achieve. The same happens with a businessman at times. He depends solely on his business income. Why? Why not also have some other passive income from other non-core business area.

Atleast start thinking in that direction ? Lets Explore some extra income source. I dont say, it need to be some grand income, but lets make some start atleast, if not in action taking, atleast in thinking about it, I personally tasted some passive income from my first book royalty, while it was not a big one (opposite to what people think) , it atleast gave me some good feeling. Other than our business income, I had some source of income from other stream. Thats important ! . It can be a small income, not a grand one . Thats okay ! . Whatever is your specialization, you must be god gifted into some or the other thing in life, start sharing about it with world by writing about it, you never know when you start making fans for yourself and it might bring some opportunity to you in life. Nandish has written a nice piece of “Giving your Gifts to the world” on our Jagoinvestor Wealth Club, check it out . If you are damn good about something , why not offer consulting or accept freelance projects in your own capacity.

Forget all that, at minimum, If you are a person who comes home early, why not take some tutions to make few extra bucks. Its not about earning a little more, its about the habit of creating an extra income. You never know when, in the future when you might have to look at it seriously! . So the point is, go ahead and put a small seed in your head about “Creating Alternate income” .

2. Rule of Spending

“If you buy things that you do not need, you may soon have to sell things you need”

People are over spending. There is no doubt about this. Just look at your own expenses & write them down. Question each of your expenses, do you really need them? Is it out of necessity or just a desire which you can avoided altogether or atleast minimized? The answer will be in front of you. If you have not yet tracked where your money is going and if you are our special member at Wealth Club, you might want to download this Budget Template.

One of our Bangalore clients told us last year that he has seen a lot of his friends, who buy a car on the first day of getting the job! and mostly they dont need it. Its either to show off, or just that short term desire of own it, without thinking about long term aspects of it. Its just unplanned!. Then there are people buying 25 shirts, when they only need only 12. There are people, who don’t have the `haisiyat` of driving an Alto Car, but they have bought a Honda City just to show off !

It just violates the rule of spending!.

Slowly but surely, this will take them towards disaster. It will come as surprise (to them) one day. Spending is a core activity of your life. You earn so that you can spend it, nothing wrong with it, but there is a difference between spending and over-spending. Understand it today to make your future more robust.

3. Rule of Savings

“Do not invest what is left after spending, instead spend after you save/invest”

This is directly related to rule 2 above. If you do not control your spending, you can never be able to save much and then you will never be able to give your best for your wealth creation. Fix this clearly & prominently in your head. For most people the formula is

Saving = Income – Expenses

If you rely on the natural flow of life, you can never save. Life will give you all the reasons why you can only save amount X . At times Nandish tells me – “Manish , you know what, if you do not define the purpose for your money, money will find its own purpose” . This is very strong point , for a moment, just slow down and think about it. you will realise what it means. You need to control the flow of money and you have to create that flow yourself.

I just ask to most of the people to do this 1 min experiment. I tell them – “Imagine your employer says that from next month, you will get a salary cut of 10% and all you will get is just 90% in your income. For most of the people, will they not be able to live the same life as they lived till now ? If the answer is YES , then why are they waiting for ? Why not give that small salary cut to yourself as your gift to your financial life. You will enjoy this salary cut in coming years. trust me.

So your next task today is tell your family, yourself and your relatives that from now on you will be living on just 90% of your salary – PERIOD! . Start doing it and slowly you will see that magically – you will be able to manage things – Try it! It works! .Your assets , your net worth , and every bit of wealth comes from those tiny savings you consistently do for years. That’s the most important ingredient part of your wealth creation. If you do not focus on optimizing it, nothing else will work out!

4. Rule of taking Risk

“Never test the depth of the river with both your feet”

There is a very thin line between risk and calculated-risk. Calculated risk is the risk which is taken after due thought, and by accepting the future consequences and a thought full evaluation of how the odds are stacked.

If you invest a big sum of money in stocks, just because markets are going up and you do not want to miss the train, and just because that guy on CNBC said you should , then you are taking a risk. You will not be able to sleep at night for sure.

However if you look at the current market and tell yourself that – “Markets have not moved up from last 5 years, and this kind of situation in past have been proven to give great returns in next 5 years and you are economically ready to loose up to 30% of your money, and thats why you choose to invest in stocks, then its a calculated risk! . You have put some reasoning , thoughts and accepted the downside of that decision and hence you are taking that risk !

Taking risk is not a bad thing at all. It’s the only thing which can help you grow at exponential rate. Those who don’t take risks, just die a simple life most of the times. The best things in the life are on the other end of the Risk , its on the opposite side of it. So take risks, but always make sure they are calculated one ! . Over the long term, one an average, you will do great. Its proven already, I am just reminding you!.

5. Rule of Investing

“Do not put all your eggs in one basket”

Warren Buffet is not a very big fan of diversifying. All the money he has today, comes from stocks, but there is one simple rule he has followed – “Put all your eggs in one basket, if you know you are an expert of that basket and closely keep an eye on it”.

Most of us are not like Warren Buffet! . So lets not copy him. What if you have put most of your money in one single asset class or a property or a particular branch of a bank? or just a single stock. Things can go wrong, and when it goes wrong, you will cry out loud, but no will will be able to help. You will be helpless and will regret like anything.

As a best practice make sure that your wealth is not in a single place. Remember that portfolio diversification is mainly a tool of minimizing risk, not for maximizing returns, so don’t ask a stupid question like – “Will diversifying my money to different places increase my returns?” – The answer is “It might… or it might not!/. But properly done, it will surely minimize the risk of losing your wealth in future.” .

6. Rule of Expectation

“Control your expectations, and control your happiness – they are same thing”

One very dedicated reader of this blog – Pattu, who teaches at IIT Chennai, told me once that he does not expect equity to give him more than 8% of returns in long term and he always invests his money in equity, assuming that he will get 8% or better in long run. Anything more than that would be a bonus for him. I am sure that he must be happy all his life and will never be disappointed with equity returns.

In financial life, we expect agents to work in our favor, we expect financial products to give us amazing returns, we expect financial planners to charge less, but give an awesome experience (Like we give to our paid clients) , we expect life insurance companies to pay our family, even if we make some mistake while disclosing some important information, we expect our credit card to  forget the penalty for in-case we don’t pay on time, we expect government to decrease the tax rates.

If you look, we are an “expecting” machine in our life. I can say from my tiny experience of life till date, happiness and expectations are just the two different words for the same thing. If you want to get in control of your happiness level, just control your expectations in life. Stop the expectations from others, better control yourself and your expectations, because thats all you can control. not others.

Practice these 6 rules in your financial life

If you can master these 6 rules in your financial life, your quality of life will improve. Each decision of yours should originate out of these 6 piller rules.

What do you say? Which rule did you like the most? Share it with us in comments section…

Cheque Truncation System – New Benchmark for Cheques in Banks

Posted on by Jagoinvestor

It might happen that your cheque’s start bouncing and do not get accepted from Jan 1, 2013 . There is a new standard in banking called as Cheque Truncation System or CTS 2010 , which all the banks have to follow now. RBI has issued a circular telling all banks that they should only process and accept those cheques which follow CTS guidelines.

What is Cheque Truncation System or CTS ?

Its just a new improved structure for chqeues and a set of guidelines which will change the way cheques are being processed and cleared. Right now, all the cheques are sent directly physical to the other bank for clearance, but with this new Cheque Truncation System guidelines, the banks will send the digital version of cheques (read scanned image) to the other bank and the clearance will happen almost same day or very fast. Some of the features of CTS cheques would be

  • It would have the wordings “please sign above this line” at right bottom
  • All CTS-2010 cheques will have a watermark with the words “CTS INDIA”, which can be seen against a light
  • A bank logo will be on cheque with a Ultra Violet Ink , which can be seen only under UV Scanners.
  • The Cheque Truncation System 2010 enabled cheques will not allow any alterations. If there is any mistakes, the cheque will be invalid
  • “payable at par at all branches of the bank in India” text will be at the bottom of all the cheques
  • There will be IFSC and MICR code on the cheque
  • You will have to sign the cheque will a darker ink, so that your signatures are valid for scanning.

If you look at these features, you can simply see that these are required for digital processing and once these Cheque Truncation System enabled cheques arrive , the whole banking system will start clearing the cheques in a must faster time. This will improve banking and save paper 🙂 . Below is a sample of cheque which fulfil CTS criteria’s.

Cheque Truncation System CTS cheque sample

SBI has already told all its customers to get new cheques because all the old cheques will become invalid , In the same way HDFC bank and ICICI bank have also told their customers to get new cheque books.

What you must do ?

1. Replace your Post Dated Cheques

If you have given any post dated cheques to someone like for your home loan payments or for some other kind of payment, then its the time to replace them with fresh cheques else it will just bounce and you might have to pay the bounce charges

Deposit any Old Cheque now

At times, we accumulate old cheques and deposit them for clearing only after many days or weeks. If you have any cheque which is to be cleared, better deposit it and encash !

A lot of banks have also asked its customers to give return back the old invalid cheques at their branch and collect new cheques, not sure why they need old cheques , why cant they issue the new cheques directly ? Also note that the cheques will be sent to the last updated address only. Learn more about CTS here .

You already have CTS-2010 compliant cheque books ?

Note that RBI has directed all banks to issue Cheque Truncation System 2010 enabled cheque books already from last many months. So it might happen that your cheque books are already complaint with those standards . So please check it once and dont rush to bank to issue you new cheque books . Like one of the reader found out that he already has the right cheque’s .

Banks like ICICI Bank and Axis Bank had already started issuing CTS-2010 compliant cheque books since last year. So please verify whether cheque book you have a already CTS-2010 before rushing to bank to get a new one. After I placed a request for new cheque book, I found that my existing cheque book issued to me in Mar-2012 was already a CTS-2010 one.

I hope you are clear about Cheque Truncation System (CTS) and how your cheques will become invalid from Jan 1,2013

How Multi Level Marketing (MLM) schemes with Pyramid Structure works ?

Posted on by Jagoinvestor

Today we are going to talk about MLM or Multi Level Marketing Schemes which have a pyramid kind of model. For years and decades, these kind of schemes are active and a lot of people get trapped in these Pyramid Schemes and lose their hard earned money. In this article, we will see the common mechanism they work on and their characteristics. We will also create a dummy Pyramid scheme to show you the traps & pitfalls. Before we move ahead, get this fact that we are talking about those pyramid schemes which also have different levels of people one on top of other and where one guy pays money which gets passed on as reward to another.

Multi Level Marketing Plans

How Multi Level Marketing schemes work?

Multilevel marketing schemes are generally network based marketing schemes, in which a person has to add more people under him. The people obviously pay some money to “join” the business and then they add more people under them. In almost all the schemes, the person is incentivized for adding more people under them.

You all must have heard about the AMWAY business model, which is nothing, but a great example of Multi Level Marketing, while the business is legitimate and there is no fraud in it, still it also falls under a pyramid model. Even I have attended its meetings once when I was novice child :). The business model looked so easy, just pay Rs 5,000 to join the business and then keep adding more people to “business” and you get some percentage from the entire sales under your Tree. There are various ranks like Silver, Gold , Diamond etc., and the higher your rank, the more you make. Lot of people make money in it through legal way, and more you work harder , the money you can earn, but the point is , people who get in early make more money and the people at bottom struggle a lot.

Why most people lose money in Fraud Pyramid Schemes?

Guess what?!  A lot of people make money in these Multi Level Marketing business models, and they become the ambassadors of the business. They flaunt the cheques and the money they make and believe me, some of them are real!. They really do make money and we will quickly see more on that, but the point is, that the majority of the people lose lot of money and struggle in these kind of get rich quick pyramid schemes. And that happens, because there is a limit to adding people. You can’t add more people in the tree after a certain point and when the tree becomes bigger, than it’s trouble point, it’s reaches a  kind of saturation level when the biggest chunk of people who are at bottom lose all the money. Here is an example graph which will give you a good idea of what I am talking about.

How MLM or Pyramid Scheme Works

Example of SpeakAsia

You must have heard about the latest craze called Speak Asia Online! I will really not be surprised if you tell me that you were part of it! I will not be even surprised if you tell me you made lot of money too! That might happen if you started earlier! Because then, the scam was still in the making! If you joined at the end, you were at the bottom of the tree you lost your money. This is how it worked!

A person can join SpeakAsia by paying Rs 11,000 and becomes a “panelist.” He then starts getting 2 surveys per week and getting Rs 500 for filling up each of them. That’s around Rs 4,000 per month and 48,000 per year and that was how Speakasia was promoted by its member to lure other members. This was at the start and though the amount of money  coming IN was less than the amount of money which went OUT, and the whole model was unsustainable in long run, it was definitely sustainable in short term. Just think about it! Is it not easy to pay 10 smaller bakras if 100 bigger bakras join the next batch?

And after all that, it crashed! But still there are innocent people out there who claim that it was genuine and it worked for them. They are not wrong! It really worked for them and they made money, but that was part of the game. They wanted you to make lots of money so that you can bring more people in and then one fine day when they make a really big pile money that they can just vanish! Poof!

Breaking Relationships !

The biggest other bad thing about these pyramid schemes are how the relationships become sour and messed up when the person who is part of MLM tries to add all their friends and relatives into the MLM, suddenly they start looking at humans as “targets” , Here is one incident which happened with Shantanu 

I know about this as I faced these offers couple of times from my very close friends and relatives. And I know how hard it was for me to tell them “I am not interested”. Those who is a very extrovert in nature and also convince people more, like insurance agents can get success. But most people are in the other side only. In fact one of relative faced very tough challenge later on when people found his scheme a scam. Anyway, I think after such articles also these schemes will come in future and again many will trap in them also.

In one other incident, one of the Fraud scheme called as “Japan Life” made someone lose his girlfriend

Long time back in 2000, my girlfriend got stuck up in a similar scheme called “Japan Life”. They used to take 80,000 Rs. and will give you a magnetic mattress. She tried to get me in as well and I was almost about to get trapped but sanity prevailed and I escaped, however since I did not join, I lost my girlfreind forever. I remember this fraud came up in Star News and I could see so many people getting cheated. This was around New Delhi and surrounding areas

Some other popular Multi Level Marketing and Pyramid businesses which were actually a scam were GoldQuest, StockGuru , UniPay2U etc etc (add more name in comments section if you are aware about them). Moneylife has also done this story on Multi Level Marketing companies in Forex trading, Have a look at it.

Jagoinvestor MLM Scheme – Lets create a SCAM Plan right now

Let me know you how simple it is to create a pyramid scheme and it will look so attractive . You all know I have written a Personal Finance Book called “Jagoinvestor – Change your Relationship with Money.”

Now here is a scheme

  • Pay Rs 1,000 and become a member of the scheme
  • You get the book FREE on signup
  • Make a person join the pyramid scheme and get Rs 250 for each person
  • You can add any number of people to this scheme

You realize that if you add 4 people to the group, you will get a 1,000 bucks and a Free Book! So it’s extremely easy for you if you join the scheme early.

Let’s say 10 people join under me.

Level 1 – Add 10 people

So 10 people will pay 1,000 each and I will make Rs 10,000 total , and I will send back a FREE book to all the 10 people. I incur Rs 5,000 expenses and make a cool profit of Rs 5,000.

Level 2 – Add 100 people 

Now let’s see… Each of these 10 people persuade 10 more people under them, and 100 more people join the scheme. They will pay Rs 1,000 each to me;, that means Rs 1,00,000. I will spend Rs 50,000 for the 100 books , and I will be left with Rs 50,000. But out of this 50,000, I need to give a share to each member at level 1, for 1 person the incentive is Rs 250 , so for 10 people, the incentive is Rs 2,500 for each person at level 1, and because there are 10 people at level 1, I will have to pay Rs 2,500 to each at level 1, and I will have to share 50% out of 50,000, that’s Rs 25,000. But I still keep Rs 25,000 with me.

So now you can see, I made a total 5,000 from 10 people at level 1 and Rs 25,000 from 100 people at level 2. And each of the 10 person at level 1 made cool 2,500 from 10 people they added under them, they not only recovered their 1,000 back, but also got extra Rs 1,500 and a FREE book! Wow! This business model is amazing!

Level 3 – Add 1000 people 

So the business is expanding and the word is spreading and my book ambassadors are in the market advertising this scheme and showing the kind of money they are making and the free book they get! Dude! They also have a valid cheque with them! No fraud! . So the word has spread like wildfire now and everyone wants to join this business.

Now, lets say each person at level 2 adds 10 more people under them again, because the word is spreading about this awesome business. There will be 1,000 people at level 3, paying 10 lacs to me and I will incur 5,00,000 expenses. I will pay 2,500 to each person at level 3,  that means 2.5 lacs in total, but I will still keep 2.5 lacs with me.

Level 4 + 5 + 6 

Can you see, how it’s growing? And how people are making money? From 1 person to 10 people, and from 10 to 100 and them from 100 to 1,000? But what next? Level 4? Level 5? Level?

When this reaches level 6 , there will be 10 lakh people under this scheme and they will be paying 100 crores to me! . You guys are going to hate me at that level! . Because you will never see me again! . Neither will I send any more books to anyone!, Nor will I send any share to anyone. I will just run away and you wont be able to trace me! . Any person who would have joined in at the start would find it easy to grow and spread the business. But people at bottom will just not be able to do anything, they are the last batch of fools!

Real Life Examples related to Fraud Schemes

Krishna shares

During my College days there were 2 such schemes ( 7000/- & 1200/- each) introduced to me by my friends & asked me to join them. I explained them that they are highly unsustainable by using simple exponential formula (2^e). But still they thought i am a fool & not making money out of this wonderful Golden “Pyramid”. Thanks to God for that!!!. I just want to say that “User Pure Maths” before entering or dealing with any thing with your hard earned money. Be on your foot not on air.

Sam shares

In 2007, one of my good friend called me when i was out of station. “Sam, i have something great to share with you, when are u coming back? i cant wait to meet you etc etc”. I was kinda surprised and was very curious what he is gonna talk about. He took me to this office where many others showed cheques explained business model, asked me to buy some product and become a member. People were so promising that they will help me , let me grow & earn lots of money and all.. It was ‘Gold Quest International’. That day i made the biggest mistake of my financial life. They made me buy some Gold & Silver coin for Rs.38000 rupees using my credit card. After i joined i tried to reach out to some people in my circle and most of them are already part of it & others are not interested. To pay this credit card bill, i had to take a small personal loan. It was the initial days when i got into job and all these incidents made my financial position worst.

Sachin Shares

I lost 20 K in this MLM bullshit … it was with the name Cossets in Delhi . They arranged a huge pomp show in Siri Fort to show off the happiness of the people who had made money and became millionaires. There were multiple stores in Delhi where u cud purchase if u were a member Then some Ex army also got fooled joined in and invested smthng like 4-5 Lakhs his life savings got duped and then he made a case on the company . Phew Cossets was like GAYAB.

Suhas Shares

My brother was a victim of it late in 2002 in scheme(scam) called netkhazana.He lost around 17k at that time.And from that time I have got recommendations from freinds(?) and relatives(?) in to hell lot of schemes but never got into any because of the first bitter expereince. I suppose this schemes are gr8 if you have selfless people involved but that does not happen as the corpus grows to crores of rupees and people at top tempt to cut the goose.

Other Models of Scam

There are many other multi level marketing scams, which are not in a pyramid model, but they ask for money for some awesome investment based on some logic and then they really give back awesome returns to handful of investors, who spread the word about the scheme and them more and more people join the investment scheme and once it becomes very big, the person who started that scheme vanishes. The Govt is going to take some tough measures on these kind of fraudulent schemes. Here is a nice video which explains more about this.

Beware of these Get Quick Rich models

There are a hell of a lot of schemes and businesses running which show promises of making awesome returns from gold, stock market, real estate and many other kind of investments. They mostly will look really attractive and credible, but always remember that if someone is offering you anything better than bank fixed deposits, there is no doubt that there is some of the other risk involved. The bigger the potential return, bigger the risk.

Disclaimer : Note that we have just discussed how Network Marketing works and the basic mechanism. There might be various businesses and models which are making money, and might be good. This article just wants to bring awareness among people on the concept of pyramid schemes and they fool and loot majority of people in our country .

If you come across any Business like this, first make sure you check that its a member of India Direct Selling Association, which kind of gives a legitimate name and also they follow certain code of ethics. If its not part of this, I would say better stay away from it. Amway is part of it. So, not all Multi level marketing models are fraud, a lot of them are genuine also. Here is what Sunil shares about this

A Multi Level Marketing is different from Direct selling. Any company selling directly to the customer, removing all the supply chain management commissions behind, will be governed by Indian direct selling association, http://www.idsa.co.in (within India) and world federation for direct selling association, http://www.wfdsa.org . There are many companies like Avon Cosmetics, Amway, Oriflame, Herbalife, Tupperware etc.. registered under these federations. These companies work under the ethics defined by the IDSA or WFDSA and are very harsh on the people who dont adhere to these ethics. Many people reading this article will agree that the quality of the products they produce are amongst the best in the world. Many people are under the impression that these companies are similar to the other ponzi schemes.

Let us know what do you think about the concept of Multi Level Marketing and associated businesses. What is the biggest reason you think people fall for them and get trapped?

CIBIL Score 2.0 – An Improved version of Credit Scoring

Posted on by Jagoinvestor

CIBIL has recently come up with Cibil Transunion Score 2.0 which it calls an improved version of the CIBIL Credit Score. This new Credit Score will help in a better identification of new borrowers (having credit history of less than 6 months) and help classify them into risky and not-risky categories.

More about CIBIL Score 2.0

The biggest change here is that the CIBIL Score 2.0 is for new borrowers who have a short credit history, i.e. 6 months. So now there will be two classes of borrowers

1. Less than 6 months of credit history 

Any borrower having less than 6 months of credit history earlier used to get a score of 0. But with CIBIL 2.0 , they will get a score in between 1 to 5, where 1 represents high risk of default and 5 denotes least risk of default. This score between 1-5 will depend on parameters like 90 days overdue in any given month (for last 24 months), credit seeking activity (number of loan enquiries you make), type of credit (secured or unsecured) and the demographic (age , location etc.)

This move is going to help a lot of people who are very new to credit and have recently taken credit cards or have taken some kind of loan and need another loan. There have been instances that due to their short credit tenure, they didn’t have any credit score and a lot of bank rejected their applications for loan just because they didnt have one.

2. More than 6 months of credit history 

For those who have more than 6 months of credit of any kind, for them the credit score will be in range of 300 to 900 score, just like earlier. However, it seems like this scoring method will consider only higher scores like 800+ as the better score. As per this firstpost article, it says that an old score of 751-800 will now be equivalent to something like 662-697 in the new score version .

For borrowers with more than six months of credit history, the old scoring criteria 300-900 remains, but for the lower score you get. For instance, the old score of 751-800 will be equal to 662-697 in the present one.

The newer version is initially made available only for CIBIL’s 862 member banks and financial institutions, after which it will be available for the customers as well, he said, without giving an exact timeline for the completion of the process.

Cibil Score 2.0 is a better Score

This new CIBIL score is said to be a better indicator of someone repayment capability. It has been designed keeping in mind the Indian market and the way consumer behavior is changing from last some years.

 “CIBIL TransUnion Score 2.0 predicts risk more powerfully as this scoring model has been customized for the changing Indian market and consumer behavior. This scoring model will enable banks to better identify good customers, thereby enabling them to provide credit to more consumers and increase credit penetration and financial inclusion in the country.”

– said Mr. Arun Thukral, Managing Director, CIBIL

The new CIBIL score is tested by the company old random data and it seems to identify the risky customers in a more better way. Here is a snapshot of results I found out on transunion website. You don’t really need to understand this graph, just get that this identifies risky customers in an improved manner.

Old vs New CIBIL Score 2.0

Now, The credit institutions that have adopted the new scoring model will decide on customer’s loan application based on this new score. So it would be interesting to watch out the credit score banks ask for giving loans .

What do you think about this new cibil score 2.0 and the changes which has taken place ?

We are happy to share that we have got a great response to our newly launched Jagoinvestor Wealth Club some days back . There are already 140 members and we are giving the discounted pricing to only 300 people . We are excited to share that we are moving towards our vision of creating a great dedicated closed community. Join the club if you feel you need to be present there.

RGESS Tax Saving Scheme – Too Complicated !

Posted on by Jagoinvestor

RGESS or Rajiv Gandhi Equity Saving Scheme is the new tax saving scheme, for saving taxes. This is mainly  for first time equity investors in securities market. The whole idea for introducing the RGESS scheme is to promote an ‘equity culture’ in India as well as widen the  retail investor base in the Indian securities markets. Look at the below video where a discussion is going on RGESS.

Lets us look at some major points which defines RGESS

1. Maximum Investment Limit and Tax Saving

RGESS scheme is available only to those investors whose taxable limit is less than 10 lacs per year; and the maximum limit of investment is Rs 50,000 per year. The tax advantage will be available on only 50% of the amount invested –  which means that tax saving can be done only on upto Rs 25,000. Which means, if you invest Rs 50,000 and belong to 20% tax slab , you will be able to save 20% money on 25,000 (50% of 50,000) – a Rs 5,000/- tax saving.

2. Applies to new Investors Only

The RGESS Scheme is available only for “new investors”; defined as those whose PAN numbers don’t have equity transactions, which means either a person has not opened a demat account ever, or has opened a demat account, but have never invested in equity before the scheme came into effect. The investment can be done throughout the year, and not restricted to a one time investment, so investing Rs 50,000 in one shot or investing Rs 10,000 in 5 shots , both are eligible. But the big confusion is for those investors who already have equity investments through mutual funds, but do not have demat account ?

3. Lock In period of 3 years

This rule is a little messy. There will be 3 year lock in period for this investment. However if an investor wants to, he can collect “profit” part after a year of investment.  So for the entire first year, you cant sell your shares! And after the first year of investment, he can take out the profits if he so chooses. He can sell all his shares if he wants, but he will have to bring back the same amount through some other stock.  After first year, 2 more years of lock in will apply, and in this period, you have to maintain your balance at the end of first year, which should be minimum of the amount on which you claimed income tax or the balance at the end of the 1st year .

So if a person invests Rs 50,00 , and in next one year

Case 1 : His worth is Rs 55,000 , then he can take out 5,000 and after that he has to keep his balance minimum 50,000 (the amount on which tax exemption is claimed), if a person wants, he can sell off his shares totally, but then again has to come back with 50,000 investment in some other or same stock. He can take out the profits part (above 50,000) if he wants in these next 2 yrs

Case 2 : His worth is Rs 25,000 , then in this case, he has to maintain this 25,000 balance in next 2 years. If you are still unclear, Deepak Shenoy has done a better job in explaining this lock in part, in his article on RGESS.

4. Where can you invest for RGESS Scheme?

You can invest in stocks which belong to

  • CNX 100
  • BSE 100
  • IPOs of PSUs whose annual turnover is not less than Rs. 4000 Crore for each of the immediate past three years
  • Large Listed PSU’s
  • And any ETF , Mutual fund which are listed and traded in stock exchange and whose portfolio includes stocks which are eligible under RGESS

Should you invest in RGESS ?

Personally, I feel that RGESS has too many terms and conditions to follow, and is not that easy to understand for a common man. Especially a new investor who is anyways afraid of markets and his money being lost. The restriction of “can’t not sell at all in first year” is kind of scary, especially for those who are too risk averse.

Another bad point about RGESS is that it’s a once in a life time investment scheme. Once you become eligible for this scheme, for next year you will not be a “new investor” and hence wont be eligible, so its only for the fresh batch of new investors each year. The only positive point is that for those who were anyways going to take plunge in stock markets will get extra benefit of some tax saving and might instill some compulsory discipline of investing (lock in period).

Let us know what do you think about this RGESS Scheme (Rajiv Gandhi Equity Saving Scheme) , and if it interests you. Will it be a hit tax saving scheme or a flop one? What do you think?