Decoding - Direct Tax Code (DTC) of India

Today DTC has been placed in parliament. Last week it was approved by cabinet. The surprises:

Positive:
1. No long term capital gain tax if STT is paid (positive from its last draft as there is no long term capital gain tax now also).
2. STT remains for equity transactions.
3. Short term capital gains will taxed at 50% rate of one's tax bracket. So instead of 15% direct taxation, short term capital gain tax will be levied at 5%, 10% or 15%.
4. Mutual Funds and ULIPs have to pay dividend distribution tax of 5%.

Negative:

1. DTC is effective from 1st April, 2012 instead of 1st April, 2011. God knows why it has been tabled so early. Hope it does not go through ever changing drafts from here on (but no complaint if negatives are neutralized in n number of drafts)
2. DTC is way bulkier than it was originally thought of. One of the basic reasons of bringing DTC is to make tax in India simpler.
3. No tax exemption if you invest in ELSS (equity linked tax savings) mutual funds or ULIP.

Other facts:

1. Man and woman will have same tax slabs - that is no tax till taxable income of Rs 2L, 10% tax between Rs. 2L to 5L and 20% between Rs. 5L to 10L, and 30% above 10L (L = Lakh = 100,000, Rs. = INR = Indian National Rupee). For senior citizens first no tax needs to be paid till income of Rs. 2.5L in a year.
2. Corporate tax is now 30% instead of 33.22%. Foreign companies now pay 40% tax, it'll be same as their Indian counterparts and will be at 30%.
3. DTC also proposed to increase the minimum alternate tax (MAT) rate of companies to 20% of book profit from the current 18%. However, under the current Income Tax Act, adding up the surcharge and cess would take the current MAT to 19.93 per cent.
4. Home loan interest exemption (Rs. 1.5L) stays, list of 80C (Rs 1L) exemptions is now very limited and there can be further Rs 50K exemption for some insurance and other products.

DTC not so good for long term capital gain tax on Equity

If Direct Tax Code gets implemented on 1st April, 2011 - long term capital gain on equity instruments will no longer be tax free. Also short term capital gain is no more treated within 365 days from date of investment, it's 1 year from 31st March of that financial year. So if you invest on 2nd April, 2011 - you pay short term capital gain tax till 31st March, 2013 (almost 2 years). Though revised DTC gives some relief on indexation benefit (though not spelled out exactly how much) on long term capital gain, but it is still taxable.

So question is - should we book profit in our equity investments or continue past March, 2011? There are many scenarios - but one thing is for sure - if you need money in next 1 year or so and in a good profit on your long term equity investment - it's better to book profit during Jan-Mar'11. But if you don't need that money - let's think more..

But I'll still love DTC if they maintain those income tax slabs - 30% tax only if your taxable income is more than Rs. 25 Lakh that year. But not sure if they will keep that as they started making DTC more complex and in doing so government will start losing revenue. And when Government wants money - their soft target is salried class. But let's pray..

11% almost guaranteed return - July FMPs

Fixed Maturity Plans (FMP) are similar to Fixed Deposits of Banks with an indicative return usually higher than FDs. As inflation is going through the roof, FMPs are fast catching up in their returns (call it interest/gain in FD term). These FMPs are usually floated by Mutual Fund companies and usually close ended and remains open for investment for a couple of days to couple of weeks. These are usually much more tax efficient than FDs for higher tax bracket individuals. It's slightly riskier than FDs, but usually fund manager could return the indicative returns. For dividend option the tax outfo will be at around 14.6% DDT and for growth option it'll be either 11.2% or 22.4% with indexation benefits (Long Term Capital Gain). So for people with higher tax bracket where FD interest gets taxed at 34%, this is a better bet. Click on following table to see the latest FMP yields. 11% almost guaranteed return - great isn't it?

Pre-paid or Post-paid - which one is better? - off topic, but again - a penny saved is a penny earned and then a penny invested

Now on a slightly different topic - pre-paid vs post-paid mobile service. What do you think is beneficial for anybody who makes any amount of call? My research suggested - pre-paid is any time better for both frequent and less frequent callesrs and both STD and local callers. Compare this:

1. Minimum post paid rental for Airtel is Rs 249 which is for having the service calling others at a discounted rate of Rs.50 and STD @ Rs.1.50. On top of that there is a 12% (some decimals missed) tax on the total bill.

2. Pre-paid - Recharge for Rs 1111 and get Rs. 1250 worth of talk time (for lifetime custmers this is valid for lifetime). Then recharge Rs. 94 to get Rs. 1 STD (present in post-paid also) and Rs..60 M-M calls. So effectively you are getting full talk time and Airtel pays you rent of Rs. 45..:)

This is just an illustration and then both have their good and bad points - like post paid can enjoy GPRS 100 MB plan, pre-paid customers have to go for unlimited one etc.. Your comments are welcome.

FYI I am still a post-paid customer..:)

REIT, Real Estate Funds, Equity and general hello after long time

Sorry friends - could not post for a long time. In the last few months lot have been done on following things for the benefit of investors:

1. Entry load made to nil for any investor who are directly investing into any equity fund. Remember - you have to either invest directly by submitting form to the fund house or by incremental investments through their websites only. Even if you do online investment through other sites like ICICI Direct etc, you'll still be charged entry load.

2. REIT framework is frozen and should be out for investors in next 2 months.

In the mean time I could get a chance to invest in a REIT like structure from Milestone. It's called IL&FS Milestone Realty fund. So far they are doing well in paying the yields (rental returns). I got two quarters worth of returns so far. They started with 11% pre-tax return and latest one I got was @12%. After 4 years when they will sell the properties, we'll get the capital appreciation also. Not a bad one!!

Another nice fund they are coming up with, which is called milestone domestic fund series 2. They are expecting IRR of 30% in that one. It's 4 years (with an option to increase by upto 2 years) fund with a minimum investment amount of 20 Lakhs. If anybody has such amount - this may be a good one to invest. This is also certified by RBI. For more information you can check out http://milestonecapital.in/. Unlike other development oriented real estate fund this one is only for 4 years (others range from 6 years and up) and minimum investment amount is lower (others go as high as 1 crore - though I have seen it coming down significantly to 25L level nowadays).

Another good investment avenue is equity market in general with 3-5 years horizon. After Sensex came down and settling at 17K level, it may be a good time to enter. CITI has target of 18500 in 9 months, others say 20K in 1-2 years - which are not bad - of course not as spectacular as last 3 years - but hey, things which go up that fast had to come down. But now things are more rational - so go ahead for equity for slightly longer term view (3-5 years).

More to come...

Do you know - two ways to avoid fees for equity Mutual Funds

Two awesome ways to pay less or no entry load for MFs:

1. Put your money in a 0 load liquid fund of any fund house. Then do a STP (Systematic Transfer Plan) of minimum 4 times (can also be weekly for 4 weeks) to any equity fund of your choice of the same fund house. That way you don't pay entry load to those equity funds.

2. Pay 0 to 1% entry load to get into any index fund of a fund house and then do a "Switch To" any equity fund of your choice among the funds from same fund house. For that there is no entry load.

This is out of my reearch. Any comments are welcome.

Equity MF entry load to be waived - proposal by SEBI

Here is a that much sought after relief for Mutual Fund Investors in India. SEBI is proposing to remove the entry load by Mutual Funds if application has been directly placed to the MF houses or collection centers or through internet without routing through any distributor. We loose 2.25% everytime we invest in a equity MF and churn out a good portion of our money by that entry load which this MF houses pay to the distributors or agents. Let's all support this greatest idea. Send email to ruchic@sebi.gov.in supporting the idea. Hope SEBI makes it a law soon.

Following is the proposal from SEBI:

SECURITIES AND EXCHANGE BOARD OF INDIA
INVESTMENT MANAGEMENT DEPARTMENT

Proposal on waiver of load for direct applications in Mutual Fund schemes

Currently all investors irrespective of the mode of entry are required to pay the entry load.

SEBI has stipulated that the loads collected by the Asset Management Companies (AMCs) for each scheme have to be maintained in a separate account and can be utilized towards meeting the selling and distribution expenses.

As per industry practice the load is normally utilized towards meeting the agent/distributor’s commission. So, the entry load collected from the investor normally goes towards paying the brokerage/commission of the distributor through whom the application was routed to the AMC.

Keeping in view the interest of the investors SEBI is now considering giving a waiver in entry load for direct applications received by the AMCs i.e. applications received through internet, submitted to AMC or collection centre/ Investor Service Centre that are not routed through any distributor/agent/broker.

Interested people may send in their comments on this issue to ruchic@sebi.gov.in or by writing a letter addressed to SEBI, Investment Management Department, SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400051 on or before September 12, 2007.