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July 30, 2001, Chandigarh, India   
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Where to invest after US-64 fiasco
Market behaviour baffling |
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Educating consumers
NRI account Tax return
Banks, FIs have tax outstanding of over 900 cr
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Where to invest after US-64 fiasco With the equity markets continuing to remain a ticket for a roller-coaster ride, small investors have now begun to place top priority on relative safety. Detailed here under are some popular alternative investment avenues that are being explored at the moment:
Bank deposits Banks are controlled by the Reserve Bank of India and thus have to adhere to several policies and operational parameters. This means that one has the security of knowing that one’s money is in relatively safer hands. Moreover, all deposits up to Rs 1,00,000/- per individual are insured by the banks with the Deposit Insurance and Credit Guarantee Corporation. Most banks offer their own interest rates on Fixed Deposits, which are almost always higher than what one would get from a Savings Bank Account. Add to that the fact that interest is compounded once a quarter, and you’ve got a higher effective rate. The average interest on bank fixed deposits is approximately 9 per cent. Bank fixed Deposits are exempt from income tax up to a limit of Rs 9, 000/- under Section 80L, though TDS is applicable on interest earned on Fixed Deposits of Rs 10,000/- and above.
Bond funds An income fund or a bond fund invests the fund’s assets pre-dominantly in bonds/debentures issued by corporates, including financial institutions like IDBI and ICICI. Generally, the portfolio also comprises government securities, money market instruments like commercial papers and liquid cash deployed in the call money market. The interest earned by the fund from these investments is distributed as dividends in the dividend schemes or accumulated in the growth schemes. But unlike a fixed deposit, the return in debt schemes is not fixed at the time one invests, though this is offset by the corresponding benefit of liquidity and diversification. Under normal market conditions, over a longer time frame, the returns from an income fund can exceed those from a bank fixed deposit. Historic evidence suggests that one can expect a return of around 10 per cent a year, and since dividends are tax-free those seeking liquidity could go in for the dividend option. Bank deposits offer one truly fixed interest every month or quarter, but one loses out on interest if one needs to withdraw prematurely. Also, not all banks and companies are equally safe. On the other hand, income schemes of mutual funds offer you easy liquidity as well as diversification with similar medium-term returns, but uneven in the short-term. It would be advisable to have a mix of both — deposits and income funds, with the mix depending on what relative weights one assigns to safety, liquidity and stability. Historically, liquid funds yield lower returns than debt funds by around 2 % p.a. These schemes are advisable for short-term surpluses, or at times when interest rates are on the rise - in such a scenario, the fall in NAVs of liquid funds is generally lower than the fall in NAVs of general debt funds. Otherwise, general debt funds are ideal for investing for the medium term, all the more after the recent budget benefit of lower dividend payout tax. The tax-free nature of the returns (dividend schemes) is the added attraction, as it enhances returns as well as eases the procedural aspects of tax-paying.
Gilt funds The best way to play the gilt game is through Gilt funds. They are highly liquid, generate a decent rate of return (on an average around 11 to 13 per cent for the last financial year), and are safe. There are essentially short-term gilt funds and medium or long-term ones. If one is convinced that we are in a falling interest rate environment, one could then consider getting into a longer duration gilt or gilt fund. Thus, when interest rates dipped after the Budget, the NAVs of Gilt funds shot up and for a brief while they yielded a return of 30-40 per cent annualised. Of course, the reverse is also true. This implies that if interest rates go up, then gilt prices will go down. But then, one at least has the option of sticking it out until maturity. Rather than betting on interest rate movements - a hazardous occupation best left to the professionals - it is better to pick gilts or gilt funds based on your personal liquidity needs.
Infrastructure bonds If you are a first time investor then infrastructure bonds such as those by financial institutions too merit attention. The lock-in period here is three years and under Section 88, a 20 per cent rebate is permissible only on investments up to Rs 60,000. However, for infrastructure bonds, the limit is Rs 80,000. So one could either invest the full Rs 80,000 in infrastructure bonds, or if one has utilised the entire Rs 60,000 limit available under Section 88 for other investments like PPF and NSC, one could still invest an additional Rs 20,000 in these bonds. The three-year lock-in period means that an investor needs to invest Rs 80,000 for three years in a row and then reinvest the redemption proceeds that fall due after the stipulated period. This will take care of one’s tax saving needs for life, or at least until such time as there are changes in the Income Tax Act. However, in the current Budget, the maximum rebate under section 80 L has been reduced to Rs 9,000 only. If one has already exhausted this limit by making other investments such as fixed deposits in banks, then the interest from infrastructure bonds will be taxable.
PPF Public Provident Fund (PPF) account yields an interest rate of 9.5 per cent tax-free. PPF may have lost most of its sheen because of a cut in interest rate, but it continues to be a very viable investment option for those who are in no hurry to get their money back. If one already has a PPF account, then it is advisable to continue putting money into it. Moreover, one will be better off investing in PPF if one has already exhausted the Section 80 L limit of Rs 9,000. The interest income from PPF is completely exempt from tax.
NSCs There has also been a cut in the interest offered by National Saving Certificates (NSCs). It now offers 9.5 per cent compounded half yearly, though if one were smart enough to have bought an NSC before the Budget then one would continue to get interest at the rate of 11 per cent for the next six years, that is, till the time the NSC matures. On the other hand, by investing in an NSC now, one would get an rate of interest of 9.5 per cent for the next six years. However, unlike PPF, the interest income from NSC is not totally tax-exempt but is eligible for rebate under section 80 L of the Income Tax Act.
Kisan Vikas Patra (KVP) The term (doubling period) of these certificates purchased on or after March 1, 2001, shall be 7 years and 3 months. The rate of interest works out at 10.03 per cent. Premature encashment of KVPs can be made after a lock-in period of 2.5 years.
Post office scheme The Post Office Monthly Scheme was giving highest equivalent returns amongst those covered by section 80L prior to reduction in its rate from 13 per cent to 12 per cent payable monthly (with effect from, January 1, 1999), down to 11 per cent (with effect from, January 15, 2000) and further down to 9.5 per cent (with effect from, March 1, 2001). There is a terminal bonus of as much as 10 per cent ! Currently, the equivalent annualised return works out to approximately 11.25 per cent per annum.
RBI Relief Bonds These bonds, being issued by the Reserve Bank of India, are among the safest investment options for an investor. RBI Relief Bonds presently provide tax-free interest of 8.5 per cent payable half-yearly for a 5-year tenor. Cumulative options are also available where half-yearly compounding is carried out. Interest is payable twice a year on 1st January and 1st July of every year. The post-tax yield in this case on a cumulative basis for 5 years works out to more than 13 per cent assuming the applicant falls in the highest tax bracket. On the other hand, the yield to the holders opting for half-yearly intervals works out to be marginally lower on a post tax basis. Interest will be paid from the date of issue upto 30th June / 31st December as the case may be and thereafter half-yearly on 1st July and 1st January. The average interest on bank fixed deposits for similar tenor is approximately 10 per cent, which is taxable and unsecured. Thus, in comparison to Bank Fixed Deposits, RBI Relief Bonds are a much better proposition. In view of its various benefits, RBI Relief Bonds are a relatively safe place at the moment to take shelter and get some relief.
Company deposits Finance companies which have the highest credit ratings in the market offer interest rates which are far more attractive that those offered by banks. Therefore, instead of idling in a savings bank account, and earning lesser interest, one’s money could be invested in a company fixed deposit and earn more. Companies do not deduct tax at source up to an interest income of Rs.2,500 per annum. However, in case one’s interest payment exceeds Rs.2,500 per annum, all you have to do is fill in and submit Form 15H to the Company and no tax will be deducted! However, a point to remember: interest on Company deposits is fully taxable, unlike interest on bank deposits and some other investments covered under Section 80L. Moreover, the possibility that a company may default on payments is a real one.
Insurance policies While there are several insurance-cum-investment options that now offer equally good if not better returns in contrast with comparable investment avenues, they enjoy a big plus - life insurance. The most popular scheme on offer in this segment is LIC’s Bhima Nivesh which has several private sector clones too. Yet, at the end of the day, the money game is never a safe one and it would be in the best interest of investors to mix and match to suit their requirements and spread risk. The writer is a financial consultant based in Mumbai.
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by J. C. Anand Market behaviour baffling
The market behaviour is rather baffling. A number of companies have declared good first quarter results but their market prices have moved down. While the market indices like Sensex and Nifty move within a narrow range, the market rating of many blue-chip shares goes down. The small investor is still, and rightly so, keeping away from the market as further fall in the market is expected. The traders buy some shares in the morning and make an exit before market closes. The small investor has lost confidence in the market. While the options trading volumes are slowly picking up, the bulls have lost their premiums in the “futures” trading which closed last week. I do not expect any improvement in the market even during this fortnight; there may be a slight decline. The basis for this inference is not far to seek. The Indian economy is caught in the whirlpool of global slowdown and depression. But additionally, it has problems peculiar to it. The US-64 imbroglio has immobilised the UTI and dimmed its appeal to the small investors. This has also affected other mutual funds. With much reduced inflow of funds to the mutual funds, the market cannot expect them to be bulk buyers. In fact, in order to meet redemption pressure, many of the mutual funds and the UTI may have to unload their holdings in the market at an opportune time. We cannot expect the financial institutions and the banks to support the market after the CBI’s action against the former chairman of the UTI on investment in Cyber space shares. The economy too is not doing well. Good monsoon rains will certainly lift the agricultural output and raise our GDP but the industry is not doing well. Surveys have indicated that captains of industry are not very hopeful of early revival of industry. Banks report that there is not much demand for funds from the industry, and industrial growth rate has fallen. Let us see at some of the recent results declared by good and well-managed companies and the reception accorded to them by the market. Clariants’ net profit has gone up by 24 per cent but its market price has stayed put. Colour-Chem has also improved its results during the quarter but its market price has gone down to Rs 41-42 during the fortnight. Vikas WSP’s net profit has gone up by 24.46 per cent during the quarter and its EPS is now Rs 12-37 (for Re 1 face value share) but its market price went down from 20 to Rs 15 per share. Larsen and Toubro’s market price also went down despite good results. Aksh Optifibre’s net profit went up to Rs 1001.78 lakh from Rs 31.20 lakh for the quarter but its market price went down from Rs 120 to Rs 82 and closed at Rs 88. Sterlite Opti suffered a
similar fate. But reason for fall in the market prices of these shares was the Economic Times report that the Department of Telecommunication had rejected all the tenders invited earlier due to 50 per cent fall in the price of optical fibre internationally. The textile sector is indeed in dire difficulties despite good cotton crop. Fall in demand and price range of cotton yarn in Europe and other parts of the world have fallen. Competition from China is another negative factor in the international markets. Vardhman Group companies have declared poor results for the quarter. Vardhaman Spinning’s net profit has gone down to Rs 2.02 crore (from Rs 6.40 crore). Mahavir Spinning’s net profit has come down to Rs 7.01 crore (from Rs 13.55 crore) and that of Vardhaman Poly has plummeted to Rs 2.31 crore (from Rs 3.78 crore). As I expect further fall in the market, I do not propose any investment to long-term investors for the present. Let the market stabilise before any such recommendation can be made.
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by Pushpa Girimaji Educating consumers Consumer groups have begun to make their presence felt through a variety of consumer journals, magazines, fact sheets and campaign materials. The publications discuss issues of consumer concern, talk of various programmes of consumer education taken up by them and also bring out important orders of consumer courts, high court and the Supreme Court. In addition, groups like the Consumer Education and Research Society (CERS), Ahmedabad, and the Voluntary Organisation in Interest of Consumer Education (VOICE), New Delhi, also publish results of comparative testing of products taken up by them. What is even more interesting is the fact that consumer magazines are today not limited to publications by the consumer groups alone. Sometime ago, a journalist in Chandigarh launched a specialised consumer journal called “Consumer Censor” Meant to spread consumer awareness, it’s different from other consumer journals brought out by the consumer groups in that it carries advertisements like any other magazine and is available at the news stands for Rs 15. At the other end of the spectrum, even the ministry of Consumer Affairs in New Delhi brings out a consumer journal, titled “Upabhokta Jagaran”. Besides various government notifications, orders, laws and amendments of interest to
consumers, it publishes court orders and articles written by consumer activists. Two other very useful publications of the ministry are the directory on all consumer courts and consumer groups in the country. While “Common Cause” gives the reader information on a variety of public interest litigations filed by an NGO, “Keemat” reflects the magazine’s concentration in the area of health and food. An important feature of “Insight” brought out by the CERS is the redress of investor and other consumer grievances taken up by the consumer group. The Hindi newsletter brought out by the Consumer Unity and Trust Society, Jaipur, is meant basically to educate rural consumers. In several states, including Karnataka and Andhra Pradesh, consumer groups bring out tabloids, mostly in local languages, and these usually take up the local issues such as hike in power tariff or public transport fare. In fact some of these tabloids have been instrumental in bringing together consumers to fight many a battle against electricity board and water board. Some of them also play an important role during the general elections by initiating dialogues with the contesting candidates about their views on various consumer issues. Bringing out these magazines is not easy because the consumer groups do not take advertisements and barring out a journal. But they do manage to do a fairly good job of it despite constraints of manpower and finances. Most consumer journals are not priced publications and are distributed free of cost to the members-in-fact that is an added incentive to members. However, “Insight” is available to non-members too — you can either buy it at the news stands or subscriber to it. Similarly, you can subscribe to ‘Consumer Voice’. The quarterly “Policy Watch” by CUTS is also valuable on subscription. In addition to these magazines the consumer groups also bring out at regular intervals, small booklets on various issues. the Mumbai-based All India Bank Depositors Association, for example, brings out such booklets for the benefit of bank depositors. These cost about Rs 10 and are very useful. In the years to come, as consumer awareness grows, such magazines and publications are sure to grow in number. However, if the consumers are to benefit from them, they should be more easily available. Every consumer court, for example should have a small library attached to it and all these magazines should be available there. Similarly, every public library in the country should have a section devoted to consumer journals, books and magazines and all these publications should be there for every consumer to read. Besides the information that they give, these journals are also an important indicator of the growth of consumer movement in India and will chronicle this for posterity. |
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by R. N. Lakhotia NRI account Q: My brother has authorised me to operate his NRI account on power of attorney basis. From this Saving account I have invested some money in a government scheme for constructing a house in my name. Kindly let me know as to how I should account for such income in my income-tax return. — D.P. Singh, Amritsar You should have clear concept in your mind about money received from the bank account of your NRI brother. Two situations are possible, firstly, he might have given you a gift of the amount to construct your house or he might have given a loan to you. In case it is a gift, the sum is fully tax-free, in case it is interest-free loan then also there is no tax liability. In case the loan is interest bearing whatever amount paid as interest to your brother will be treated as his income. Please ascertain carefully and clearly whether you are required to make payment of the loan amount back to your brother. In case the answer is negative, then it can be treated as a gift by your brother to you. Obtain a gift letter from your brother to avoid any problem at a later stage.
Tax return Q: My total annual income is about Rs 85,000. I have been filing the income tax return for the last 4-5 years. I have now attained the age of 65 years. Please let me know if it is necessary for me to file the return this year also or I can now dispense with the same as I have become a senior citizen. If I have to file the return what proof regarding age is to be submitted. — Mrs Prem Lata, Chandigarh Even though you are a senior citizen, yet if your net taxable income is over Rs 50,000 in a year you are required to file your income-tax return even if the tax payable comes to nil because of tax rebate. The proof for senior citizen can be by of school certificate or a copy of the passport where in your date of birth is mentioned.
Residential plot Q: I intend to transfer my society’s residential plot (Solan) in lieu of a sum of Rs 4 lakh for which I have paid about Rs 25,000/- in 1985. Please tell me tax calculations and the amount payable as tax on this transaction if: 1) I open long term capital gain account in the bank and utilise whole amount for construction a house on my parental land in other town (Hamirpur) within a year; I don’t have any other house. OR II) I invest about 1.30 lakh on purchase of a vehicle and open the long term capital gain account in the bank for utilising the balance for construction of house on the parental land within a year. — S.C. Uppal, Ludhiana To avail tax benefit in respect of long-term capital gains on selling your residential plot, you can utilise the net capital gains amount in buying or constructing new residential house in terms of section 54 of the Income-tax Act, 1961. For investment in a new residential house, you may invest the capital gain amount only and thus there is no liability to capital gains. you will also be eligible for the benefit of Cost Inflation Index to calculate the long-term capital gains. If you invest the money in the vehicle, then you may be required to make payment of income-tax on a small portion of capital gains because there will be slight short-fall in investment of the entire capital gains amount. |
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Banks, FIs have tax outstanding of over 900 cr
New Delhi, July 29 Allahabad Bank, with an outstanding of Rs 284.30 crore, was closely followed by IDBI with Rs 266 crore dues during last fiscal, Finance Ministry sources said. Among leading banks, Canara Bank had a tax outstanding of Rs 73 crore while that of State Bank of Saurashtra amounted to Rs 63.04 crore, Indian Bank Rs 55 crore, Dena Bank Rs 47 crore, Andhra Bank Rs 21 crore, Punjab & Sind Bank Rs 17.59 crore and Tamilnadu Industrial Investment Corporation Rs 13.50 crore, the sources said. ICICI had a Rs 21.11 crore income tax outstanding till March 31, 2001 while its subsidiary ICICI Personal Financial Services had an outstanding of Rs 1.23 crore. “The outstanding taxes have accumulated because of several reasons such as litigation in appeals, stay granted by appellate authorities, pendency in Settlement Commission and BIRF and other reasons,” they said. Among the top 21 banks and FIs which defaulted on tax payments, at least six were state financial corporation from West Banegal, Kerala, Gujarat, Bihar and Tamil Nadu.
PTI
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