Monthly Archives: June 2008

Taxes

Many would be eager not to pay taxes to the government and save up. It is a good thought to do so but have you ever thought in these lines?

1. Why does government always give tax break when we are in debt and that too long term debt such as home loans and why not for personal loans?
2. Why does government give tax break for investing in mutual funds and not for shares?
3. Why does government give tax break for Insurance?
4. Why is tax deducted at source (for Salaried People)?
and ….

These are some of the questions that keep ringing me.. I don’t have any answers for these but all that I can understand is, the taxes are made by the Rich people to ensure that middle class people pay the taxes and they can manage to save up the taxes legally. Government ensures that they try to take out every penny from the people in order to provide facilities to the people. I don’t know how far this is true but the intension is this only.

What is meant by Tax Deducted at source?
That means Before you lay your hands on your hard earned money, government takes its share and provides you the left over. 🙂
Salaried class always gets the Tax Deducted at Source, in short TDS. Whereas the Business class always enjoys the money and at the year end pay the Tax to the government. Honestly Business class is a best way to earn and save up rather than the Salaried class.

Consider this situation: I am a Salaried employee and I need to organise a party for my friends. I need to do that with after tax money (Government takes its share). If I am a Business man and I want to throw a party then I would do that with the money which is not taxed and later I would write it off as a Business meeting expenditure. There are various options for Business man to avoid tax where as the Salaried class is not so blessed.

I can sense many loop holes for a business man. This draws me to a conclusion that Tax rules are made by the Rich and they have made sure to pay less and in turn burden the salaried class.

Many of us are bothered about taxes and we try to minimize the taxes as much as possible. I want to make few things clear.

1. Don’t invest your hard earned money to reduce your taxes.
2. Investment and Taxes should be two different things.
3. Make sure that you learn the basic tax rules that are required.
4. There are lot of loop-holes in the Taxes provided by the government for the good reasons, try to use them and ensure you don’t pay more in taxes.

There are various components in our pay slip such as Basic, H.R.A, and so on. Try learning what each one means and how it is taxed and learn means to minimize the tax as much as possible.

Just for an example:
For H.R.A:
If you are living in your own house and still you want compensation for House Rent Allowance then this is what you should do.

Pay your Parents or Grand Parents an amount every month as Rent. This is not illegal. By this way you will get your tax benefit and also if your parent’s income is less even they wont be taxed. To be on the safer side you pay the rent to a non-working parent in your family.

There are various loop-holes that is present. I don’t know many. I shall update you guys whenever I get these kind of information.

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Recurring Deposit

Let us discuss about Recurring deposit.

Recurring deposit schemes pay you a higher interest rate than the Savings account. Generally it will be higher by at least 2% or so. I have not enquired about the interest rates in every bank but I am sure it will be higher than 8%. You must be wondering why Recurring account interest rates must be higher than Savings account. This is due to the fact that Recurring account demands you to deposit the amount you agreed every month till the time you have agreed upon and you can’t withdraw the amount till the agreed time period ends. If you defer paying then fine will be charged. Generally it is the bank that decides the minimum amount that is required to be paid and mostly time period is minimum one year. There are several banks that provide this facility.

I don’t advise married people to go in for this because financial commitments might crop up every now and then and it is very hard to be attached to it. We can’t have a very strict regime, we prefer to have some relaxations but if you are single then this is the best way to start your savings habit. It forces you to pay and make sure that it is ECS (Electronic Clearing Scheme) and it should be deducted on the day of your salary (for safer side).

You start this way and I am sure by the end of the year you will thank me for doing it.

Hope you plan up your financial future.

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Investment

From today onwards I will blog about Investments. I have been investing for more than 2 years now. I will write more about my mistakes I did so that you don’t repeat the same mistakes.

Let me start the introduction:

What is an Investment?
Investment is related to saving for future or deferring the spending. My understanding is, we buy some asset in hope that we will get positive returns from that asset without us working hard. That asset can be anything like shares, real-estate, finance, business, buying precious metals, commodities and so on.

Usually for technical terms related to investments I prefer google.com and investopedia.com. They help you than anyone else.

What is meant by share?

When a Privately/Individually owned Company goes public then the company is split into finite number of financially equal units called Share.

Shares provide you a unit of ownership in that company. Owning a share does not mean you have control over the day to day activities in the company but you will also be given a chance to make vital decisions in the company proceedings.

A person having a share is called Shareholder. Some companies provide voting option for the shareholders i.e., they can vote while taking a decision along with the board and then depending on the votes the decision will be taken. Consider that, XYZ corp wants to buy AAA corp and every shareholder is given the voting authority. Then to decide whether to buy or not, A voting is held. Depending on the result the company decides to buy. Most of the companies provide this voting authority to its shareholders.

Shareholders does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends.

There are loads to know about shares and other financial instruments. I am not getting into depth of all those as it is not necessary for us. All that I will cover is how to get into stock market and that is my intension, before that I feel we should know certain things and I am doing that.

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Home Loan

I had an interesting discussion with my colleague regarding the house loan.. He had purchased recently a new house at his home town. I am very happy for him, just thought I will go through the scenario in my own terms.

He has taken a loan of 15 Lakh and total cost of the house was 20 Lakh. It is a double bed room house with two floors. I was curious to know the financial details of the plan but he was not that willing hence I cut down short. All that I learnt from the discussion was, the interest rate is 10.75%, tenure of the loan is 20 years and EMI is Rs.13,907. Just for calculation purpose I assume it to be Rs. 14,000. He also told me that he had taken the loan on floating interest that means it can vary according to the market and the fixed rate of interest at the moment is 13.50%. Another interesting thing that he said was he will get a tax rebate and also he is getting around 7k as rent from the property.

Now, he has to pay Rs.14K for next 20 years i.e. 20 *12 = 240 months. His loan amount is 15 Lakh but he will be going to pay, 14k * 240 = 33,60,000. That is more than the double amount.
I just pondered over and thought what is best way to handle this situation, rather if I was in his shoes what would have I done??

First thing, I would save up the rent and put the same amount in recurring deposit since I will get more interest than the savings account. I will at least deposit 6.5K in the savings.
Next thing I would plan is I will make a fool proof plan as to how to pre-close the loan without paying the EMI for next 20 years.

Consider the following situation,
For 1 year the amount paid is 14K * 12 = 1,68,000
For 5 years 14K * 60 = 8,40,000
For 9 years 14K * 108 = 15,12,000
For 10 years 14K * 120 = 16,80,000

From calculations it is clear that we are actually paying 15 Lakh loan amount in just 9 years. So if we don’t pay up after 10 years, financial institutions is not going to lose anything.

How to pre-close the loan: A not so detail plan
Consider that I save up at least 60K per year or 5K per month and also the rent amount 6.5K per month and that adds up to 78K. If the recurring deposit interest is 5% then the amount added is 82K. So total amount saved is 60K + 82 K = 1.42 Lakh.

In this situation if I can manage to save around 1 Lakh due to various other reasons which might come up, In five years I will save up 5 Lakh. If I make a partial payment of 5 Lakh to the house loan then the tenure will decrease at least by 3 – 4 years (Not sure of how many months).

The main aim is to pre-close the loan amount without actually paying for 20 years :).. This makes sense but it needs discipline to save up 1 Lakh in this fancy world, whatever is there in the world need not be at home :).. It is better to be frugal at times and save up rather than getting indulged in the worldly pleasures.

About Tax rebate, I don’t understand why does government gives rebate only if a person has loan, why does not it give rebate if we save up the money??? Government wants people to spend money and suffer from loans, it never expects the citizens to save up and enjoy the life. It tries to tax every other way and make sure that people suffer. Bad government, but citizens have to be smart enough to beat the government. :).. Try to be smart with your calculations and make sure you don’t have to be in trouble to get a tax rebate.

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Savings

It is very important to save up. If you plan to accumulate wealth you should do either of the following, spend little or earn more or save more.

We generally lack the habit of saving it is not that we don’t wish to save but somehow we don’t. This is mainly because we don’t focus on any short term or long term goals. If we do then we do save up money.
My friends were major spend thrifts, but the moment they realized that they wanted to do their MS in US without much financial support, their spending habits changed saving habit improved drastically. Their short term goal was to save up as much as they can so that they can have minimum amount to borrow from the banks for their education. But I never bothered about saving and I was spending as usual without any worries.

I am sure most of us don’t plan up anything. Just make up your mind to save up 20 – 40 % of your Income in a year. Don’t plan anything, just have in mind that you should save up this much amount per month and at last you might use it up for some good cause than you spending it away on useless stuff.

Since we don’t have discipline in savings. It is not a habit for us. We keep savings as our last priority in life. For us paying bill is more important than saving for ourselves hence we don’t save up any money.
I have a simple solution for this : I know that we can’t save up anything for ourselves by ourselves so better provide that job to someone else. How? Make sure you are forced to pay as a bill to your dad or mum or bank whichever you think is feasible and if you don’t give them that amount per month then you will be fined. If you think in these terms I am sure you will save up a descent amount of money at the end of the year which you can invest later.

How I Do?? Honestly I am pretty weak in this area and am still working hard. I want to save up as much as I can but I am not able to due to my stupid spending habits. I have started putting a check on my spending
habits and I have improved these days and I am giving money to my dad to save up for me (Not a big amount). I believe in “Small drops of water make a mighty Ocean”. Right??

If I get better idea I will keep you informed.

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