2018 in perspective – life and finances

What with one thing and another, I have not written any blog post for quite a while now. At such times, when I feel lazy to pen down something, it is invariably the responses from the readers that gets me going again. Human ego is an amazing thing and just the feeling there are enough people to read your post is itself quite gratifying in many ways!!

2018 has been a very interesting year and I was looking at it in different perspectives in the last week. As I have written in several of my blog posts, one must look at life events and lifestyle choices in a holistic manner and plan for them – finance is a way to support these events and choices, so it necessarily plays a supporting role and not a determining one. In simpler words, availability of money and investing for the same is important but the key issue is what you are needing it for. It is this need for money that is unique to each individual, yet we often disregard this fundamental aspect. Viewed in this context, it makes sense to review the major life situations first and then look at the finances next.

To begin with, professionally the year was not really a very satisfying one for me. I had begun an assignment with an SME company under certain understanding but the owner of the company did not stick to his part of the deal. While I am sure these things happen from time to time, it was a first for me and to that extent a disappointing experience. A good learning will be to choose engagements more carefully next year. In terms of the venture idea I have been toying with, I did manage to get some ideas formulated and it is in a good spot to move ahead now, lot to be done next year. Overall though, both in terms of the activities and active income generation the year was not as good as I had hoped it would be.

On the personal front however, a lot of good things happened in 2018 and it was probably one of the best years for our family. At our stage in life a lot gets defined by how well the children are doing and this year both of them have excelled in their careers. My daughter Rinki completed her MBA from XLRI and has joined a company of her choice, where she is doing rather well. My son Ronju is in his last internship as part of his course work in BITS and he has already got a job offer. In effect, both of them are financially independent and do not need my financial support any longer. As a family, we were also staying together after a long time as both my children worked in Hyderabad for the past few months. 

Travel has been a constant theme for both Lipi and me, this year was no different. We started off with a trip to Khajuraho in February, went to Goa for a week in March with our children, visited Purulia in West Bengal for two short trips, had a family vacation to Bali in May, celebrated our silver anniversary with a Mauritius trip in September and wound up the year with an absolutely delightful trip to MP in December. As you can well imagine, all of this were rather expensive and my travel budget shot through the roof. Be that as it may, all the travel was great fun and I will do it again if I get half the chance !!

On that note, let me transition to my finances for the year. Despite my relative shortfall in active income, the cushion I had with my passive income was good enough for all my expenditure. The bulk of my cash inflows came from the below sources :-

  • Interest from Tax free bonds, InvIT funds and POMIS.
  • Dividends from Stocks and Equity Mutual funds.
  • Capital Gains made through maturity of FMP schemes.
  • Maturity proceeds of an LIC policy.
  • Rental income from my Chennai apartment.

Of course, there were other passive income such as from PPF and Debt funds but I have just let them grow as usual. Unless absolutely needed I do not want to utilize any of these for the next decade or so. For this year my passive income from part of my portfolio was enough to take care of my expenses with enhanced travel and even let me do some new investments in a secondary portfolio of stocks.

So far so good then, but what about the 2019 plans and beyond? Well, let me write about it in my next post.

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Should you invest in Tata Capital NCD’s

While debt investments are a must in any investment portfolio, in the current financial climate it is a somewhat difficult task to get the right type of returns. The tried and tested avenues are giving low returns right now and the ones with higher returns, such as some Corporate FD’s, come with their fair share of risks attached. In this scenario, people looking at fixed income for their regular retirement expenditure are the hardest hit.

Tata Capital Financial Services Limited ( TCFSL ) is a trusted name in the area of financial services and they are coming up with some Non Convertible Debenture (NCD) which may well be worth a look. Let us first look at the salient features of these NCD’s and then I will outline as to whether it will be a good idea to invest in them.

  • Issue size is Rs 6000 crores in secured redeemable NCD and the face value of each NCD is Rs 1000 . Unsecured, subordinate rated NCD part is Rs 1500 crores.
  • Issue opens today and will close on September 21st. However, allotment is on first come first served basis.
  • Minimum lot is 10 debentures and you can increase it by any amount thereafter.
  • The NCD’s will be listed in both BSE and NSE.
  • 3 year, 5 year and 10 year coupon rates for retail investors are 8.8 %, 8.9 % and 9.1 % respectively.
  • The 10 year NCD invests in Unsecured, subordinated, rated and listed securities.
  • Retail investors can invest up to Rs 10 lacs in this issue, HNI investors can put in more money than that. Coupon rates for both categories are the same.
  • Ratings of these NCD’s are AAA from both CRSIL and CARE.
  • You must have a Demat account to invest in these NCD’s.
  • Income from these will be treated as interest income and treated accordingly for the purposes of taxation.
  • Capital gains will follow taxation treatment for Debt investments – your slab rate without indexation if held for lass than a year and 10 % without indexation if held for more than a year.
  • There will be no TDS on paid out interest, which is annual in nature.

Based on the above, who should look at investing in these NCD’s? I think it will make sense to people who are looking for regular passive income, whether they are in the FI state or retired. Choose the secured route and 5 years tenure only, I am generally uncomfortable with unsecured securities.

For retired people who have maxed out their VVY, SCSS, Tax free bonds and PPF from where they get regular income and still need some amount to run their regular expenses, this can be a really good option. As the payout is annual, you can use it for goals which are annual in nature – examples can be a vacation, health insurance premium etc. The company is a completely trustworthy one and you need not have any worries about your payments. Go ahead and invest in this with confidence.

For others too, if you are looking at 89000 Rs every year for some expenditure, it will be a good idea to invest. It will work out the best for people in the 10 % or 20 % tax bracket. In any case you are having FD’s then it is a good idea to put the money here.

I will be happy to answer any queries on this investment.

Arranging for passive income in my changed life context

Life is dynamic in nature and ever changing, no matter how much you try to plan for it in advance. When your life circumstances change, there is a need for you to revisit your financial plans and related investments. In my case, I am already in an FI state, though with some active income and had to look into rearranging some of my finances, in the light of several life changes which took place this year.

Before getting to the passive income bit, let me outline the changes that have taken place this year, for me as an individual and for our family as an unit :-

  • Though I am still doing my Consulting practice, I am more keen to do Workshops now as opposed to regular engagements that are more time consuming. As such my active income will be potentially good but it will also be erratic.
  • My daughter Rinki has started her corporate career and is financially independent of me now. My son Ronju is doing two internships in his final year and gets paid for the same. So, for all practical purposes he too financially independent of me. He may do an MBA and I will fund it to some extent but that is a future issue.
  • Fortunately for us they are both staying in Hyderabad now, which has meant that my plans for shifting from here are currently on hold at least till July 2019.
  • The tenant of our Chennai apartment moved out in July and we were lucky to get a new one quickly. The rent from there continues to cover the costs of our flat here.
  • Though I had budgeted for travel in a liberal manner, in reality we spent more than our budget in the first few months of the year. This was due to a couple of family vacations within India to Bengal and Goa, and an international vacation to Bali.
  • The year is also our silver wedding anniversary and we plan to go to Mauritius for a week this month.
  • The overall impact of all of these have pushed up my expenses significantly.

If you have seen some of my previous posts, you will know that I was estimating an expenditure of 8 lacs per year apart from housing and children related expenditure. In the current context I think the figure of 8 lacs is an underestimation and we will need 10 lacs per year to fund the lifestyle we are aspiring for.

From the viewpoint of generating passive income of 10 lacs, this is my plan overall :-

  • 2.1 lacs from interest of Tax Free Bonds that I purchased in 2013-2014.
  • 1.1 lac from interest + dividend of InvIT fund.
  • 1.5 lac from dividends of MF schemes.
  • 1.5 lac from dividends of my stocks.
  • 3.5 lacs from capital gains of FMP / Debt fund redemption
  • 1 lac from capital gains from Stocks / MF

Note that I have not taken any PPF withdrawal into account as I plan to grow it till 2024 before I start that. I have also not taken into account any active income as I normally invest it into stocks.

I keep getting a lot of queries about my asset allocation and the instruments I have invested in now. Let me share that in my next post.

Deploying Retirement corpus – a case study

This post is inspired through a discussion I had some time ago with a long time friend. He was considering to get out of his current corporate job and wanted to set up a passive income stream that would take care of his regular expenses. When I pointed him to my posts on this topic he said that, while he had read those posts and understood the situation from my context, he needed to set this up from scratch.

The discussion set me thinking and I wanted to look at a situation which many people may be facing when they are nearing retirement or are considering an early retirement. While generalization is always difficult, a typical situation of such a person may be as follows.

  • The person has an own home which is fully paid for by now.
  • He has a PPF account for a long time but has not contributed the maximum in a regular manner. Current balance in the account is 24 lacs (say).
  • His children are either independent or in college. In the latter case he has made arrangements for the remainder of their education expenses through FD etc. This is not linked to the passive income that he wants to have.
  • Fixed deposit amount is 20 lacs, PO MIS is 9 lacs in a joint account.
  • PF and gratuity will come to 1 crore when he withdraws it.
  • MF portfolio is 20 lacs and stock portfolio is 6 lacs.

Based on this, how should the money be deployed so as to get a passive income of about 7 lacs a year? There may be many ways but the framework suggested below is a good one:-

  • Keep the current MF and stock portfolio intact for the long term. You may need it for situations such as long term care, beyond the age of 80.
  • New investments in PPF are not needed but keep the account active by paying a small subscription every year. This is your fall back mechanism if you suddenly need money for some unforeseen event. Also the interest of 1.8 lacs a year is tax free.
  • 9 lacs of PO MIS will give an interest of 68400 every year. Use this for your income.
  • FD of 15 lacs can be put in Senior citizen scheme if you are eligible. The interest from this will be about 1.25 lacs.
  • Divide the 1 crore obtained from PF and gratuity as follows:
    • 30 lacs in tax free bonds. This will give you an income of 2.3 lacs per year.
    • 30 lacs in some dividend paying debt scheme such as Monthly Income Plan or Balanced funds. This will give you an income of 2.4 lacs odd.
    • 10 lacs in a Liquid fund. Income from this will be about 70000 a year.
    • Rest 30 lacs can be put in FMP or other Debt MF (short term) in the Growth option. After 3 years you can use the capital gain for consumption and reinvest the principal amount. This is mainly for discretionary expenses such as a vacation abroad etc.

What about inflation? Well, you have enough hedges in the plan for that. PPF can be drawn into, LTCG from FMP or debt funds are there and equity part will hopefully grow. Also over a period of time the 7 lacs needed in current terms may not suffer as much from inflation as we think. However, even if it does, the plan above is likely to cover it.

Note that the above is a low risk plan where your passive income is pretty much assured. Other options where you put more money into equity are possible but they come with a higher risk. You do want peace of mind when you are at this stage in life!!

So with an overall asset base of 1.79 crore (plus house), you can comfortably generate a passive income of 7 lacs and take care of the future also. I hope this convinces people that you do not necessarily need 5-6 crores to have a decent retired life. More importantly, you can lead the life you need to lead at the right time for yourself and your family.

An asset base of even 1.5 crores, deployed creatively, may well be enough for this person to retire. Take this framework as a reference and arrive at your own plans for that.

Filing your returns this week? Show taxable income properly

First the good news – due to certain problems with the IT E-filing site, the deadline for filing IT returns have now been extended till August 5th. So, if you were one among the many who were late, you can still go ahead and file your returns now. While the penalty for filing delayed returns is only from next year, there are important reasons why you must do it on time. It is the right thing to do, you have a chance to rectify it if required, your refunds get processed quicker.

It is important to understand that you need to account for ALL income when you are trying to arrive at your taxable income in a Financial year. In fact, some of these incomes may well be exempt from taxes but it still needs to be declared in the form. In the terminology of Income tax, there are 5 heads in which you need to categorise your income. These are as follows:-

  • Salaries
  • House property
  • Profits or gains from Business or Profession
  • Capital gains
  • Other sources

Let us look into these income sources one by one. For most people filing tax returns, salaries are the bulk of their income. This will be your source, if you are employed by a company or business or another individual and get paid for your time. It does not matter whether you work full time or part time, as long as there is an Employee – Employer relationship, the income can be classified as salaries. When you need to give data for your tax filing purpose, note the following :-

  • Your Employer has to give you Form 16 which will record the total salary paid including the monetary value of perks, exemptions allowed for different allowances like HRA and Transportation, Exemptions under 80 C, 80 D etc.
  • The Form 16 also shows the total tax deducted as TDS and the tax liability. This is why some people think that is enough for tax return filing. However, this is not true as you will be having other sources of income in most cases.

Income from House property is relevant if you own one or more house property. You need to remember the following while filling up this schedule:-

  • Even if you are staying at the house, it still needs to be documented in the ITR returns. For self occupied houses the income will be nil.
  • If the property is rented you have to show the actual income from it. Many people think that for a single house there is no need to declare income – this is completely incorrect and you must never get into this.
  • Standard deduction on income is at 30 % and you can also charge for any taxes or other regulatory expenses incurred in the house.
  • Interest can be charged up to a maximum of 2 lacs per house.
  • After all these deductions from rent received during the year the total income from House property will be calculated.
  • If you have a single house and it is not occupied by you and not rented out, then you can take the income as nil.
  • If you have 2 or more properties there will be a deemed income from all other properties except the first one, even if none of them are rented out.

Most salaried people earlier did not have any income from business or profession but it is becoming more commonplace now. There are of course, many others who do not have a salary but have income from business or profession. While looking at income from this head, you need to keep the following in mind:-

  • If your Business turnover is more than 2 crores or your professional income is more than 50 lacs, you will need to maintain a set of Accounting books and these will have to be audited as per laid out procedure.
  • For others the business income can be taken to be 8 % of gross receipts in business and return filed accordingly.
  • For professionals with less than 50 lacs gross receipts, you can charge 50 % expenses and take the rest as income.
  • In case you are showing income on presumptive basis, as in the above 2 cases, you will not be able to charge any other expenses to the business.
  • If the above does not work well for you, there is always the option of maintaining books, getting them audited and filling up the returns in a more complex manner.
  • For example, if your business turnover is 1 crore but your profits have only been 2 lacs, you will have to maintain books and proceed accordingly.
  • For a professional earning 40 lacs but having 30 lacs as business expenses, it will again make sense to maintain books and show only 10 lacs as income.

Capital gains can arise out of the sale of any asset such as Real estate, gold, Equity, Debt etc. The important things to be kept in mind are as follows:-

  • Short term capital gains are added directly to your income, Long term capital gains will get indexation benefits.
  • For equity LTCG requires holding period of 1 year and is tax exempt. So if you sell your shares after holding them for a year, you do not need to pay taxes on your capital gains. However, you do need to report it.
  • For debt LTCG is applicable after 3 years of holding and indexation benefits are there. The tax on the Capital gain post indexation is 20 %.
  • In order to save on Capital gains you can put the gains in Capital Gain bonds.
  • For real estate, as long as you invest the capital gains to buy something new it will not be taxed.

Other income is literally everything else from dividends, interests, lottery earnings, winnings from horse races etc. Some common mistakes people do are as follows:-

  • Where TDS is not deducted at all, such as in Post Office MIS, you must declare the interest as taxable income.
  • Where 10 % TDS is deducted as in Bank FD, you must again declare the total interest earned. 
  • Even if no TDS is deducted as you have given form 15 G / H to the bank, the interest earned by you must be declared.
  • Interest exempted from taxes such as interest from Tax free Bonds etc need to be shown too at the appropriate locations.
  • Dividends are again tax free in your hands but need to be shown.

I hope with this you will be able to get all your income recognised correctly. After this you will need to look at taxes paid and if any other liability is there still. We will take this up in the next post as this is already too long.

My 2016 Income audit

As I had said in an earlier post, my expense audit of 2016 showed that it was by far the most expensive year of my life yet. This was somewhat unexpected as my initial idea was for Rinki to either take up a job or to get her B school education funded entirely through an Educational loan. In the actual event, I decided to fund her first year expenses and with several other discretionary expenses adding up, we ended up spending what we did.

While I have not been worried about the figure as it is not really representative of our future expenses, these still needed to be funded from somewhere. When I looked at the income sources from 2016, I was happy to see that I was able to take care of the significant higher expenses through my income and other planned sources, without having to take recourse of redeeming my investments in any unplanned manner. Not that it would have mattered a great deal but it is good to know that my current portfolio can withstand the shock of significantly higher expenses relatively well.

Let me state upfront that this was possible due to the fact that I had some active income in 2016. Of course, I worked full time only in January and then again from June to December part time. If you look at the overall time spent, it would have not been more than 25 % of normal working. In other words if the normal working days in a year are about 220 full days, I probably worked for 55 full days. As my earning out of it was more than 30 % my likely earning should I have worked full time, I guess I was quite productive.

My passive income is through multiple sources and will normally be able to take care of my expenses comfortably. A closer look at the passive income stream in 2016 reveals the following :-

  • Rent from the Chennai apartment was along expected lines and covered up our rent paid in Hyderabad, with a little to spare.
  • Interest from tax free bonds amounted to 2.16 lacs as planned.
  • FMP investment of 26 lacs were redeemed in the year. I have reinvested the principal amounts while using the capital gains as passive income. Amount of capital gain was equal to roughly 7 lacs in the year.
  • Dividends from stocks and some Mutual funds amounted to about 5 lacs in the year.

As far as the educational expenses for children went, I had planned it through some FD in their names which are outside of my net worth calculations. It was fortunate that this was planned liberally and I was able to use some of it for Rinki’s B school expenses. The rest of it was funded through my active and passive income. This will not be there next year as we plan to fund the rest of the XLRI fees through the sanctioned Educational loan from SBI. Ronju will still have 4 semesters to go in BITS, so we will have to pay through 2017 and 2018, but these are already planned for.

In overall terms despite serious changes in plans the expenses were managed through the income generated. By the way it looks, next year should be a lot better in terms of surplus money available to invest more. Realistically, 2018 will probably be the year when I can do without any active income at all.

Tax compliance – most people live in glass houses

This post is going to be politically incorrect and many will view it as a harsh indictment on most people. However, it will also be the complete truth and as usual, I do not care much about public opinion when I am writing these posts. Now that you have been given an early warning and have had a chance to stop reading, let me get on with it.

As all of us know there are only about 4.5 crore people in the country today who file their tax returns. This too is after a great deal of efforts by all relevant authorities, the figure used to be less than 2.5 crores only about 5 years back. Now out of this 4.5 crores there are many who pay no taxes, so the number of tax payers is only about 2.5 crores. Among these also, the number of people paying taxes less than 10000 Rs is significant. Now, it does not take a genius to figure out that there must be tax evasion on a massive scale here. Also, even the people who are paying taxes are probably not fully compliant.

Why do people, who are perfectly well educated and understand the importance of taxes do not take the right attitude of paying taxes. Well, the harsh truth is they want to keep the money themselves due to their wanton greed and crooked nature. However, since they cannot take that stance publicly, due to their own image and the inordinate fear of tax authorities, they will come up with several excuses that sound reasonably clever but are completely flawed in reality. Let us look at some of these :-

  1. Our tax rates are too high, cannot afford to pay so much. Yes, this used to be true decades back but the current rates are quite reasonable.
  2. Tax laws are too complex, do not want to get into it. Truth is that arriving at your taxable income and taxes is fairly simple and you have a slew of professionals who can help you with it.
  3. Taxes paid by me will not be used properly. This may or may not be true, but it cannot be a justification for not paying taxes.
  4. Chances of getting caught are not high. People giving this logic are of course admitting that they want to stay crooked as they probably will escape.
  5. Even after paying taxes I will be harassed by the tax authorities. Truth is only 1 % returns get taken up for scrutiny and that too if there are some red flags in them.

So who are the people who practice tax evasion on a massive scale? Almost all sections of society and some of the notable ones are as follows:-

  • Professionals like Doctors, Lawyers, Consultants, Architects who insist on getting paid by cash, maintain 2 sets of books and seriously under-report their income while seemingly being tax compliant citizens.
  • Small businesses which deal almost entirely in cash, have very little records and almost pay minimal taxes or no taxes.
  • Individual vendors like a Chaat wala or a Fish seller who are of course not in the tax ambit at all. Now, I have my full sympathy for their plight in life, which is tough to say the least, but as far as taxable income goes they need to file returns if their income crosses the threshold of 2.5 lacs in a year.
  • Small companies and big corporate who have stretched the tax laws to the limit, often quite creatively, to ensure their employees can avoid taxes as much as they can.
  • Individuals who rarely report the right income in terms of House property and other financial assets.

What about the people who do pay taxes more or less correctly? Well, firstly their numbers are really pretty limited, most of them are salaried people who can limit the TDS but cannot really avoid it. However, even here there are serious mistakes or malpractices that are common. Let me state a few of them :-

  • Many people getting rent from a house owned by them so not declare it properly. Some under-report it, some believe that for one house the rent does not need to be declared, some show the house as self occupied etc. The rule is very clear, any income you earn must first be reported, exemptions can be looked at later.
  • This is more tricky, but the law is that if you have 2 houses you need to declare some deemed rent for the second house and add it to your income. It does seem frightfully silly but if it is the law then it has to be followed.
  • Most people do not declare income from their Debt instruments such as POMIS etc where there is no TDS provision. The logic again is that it will be difficult for the tax authorities to find out !!
  • For FD where there is TDS, very few people declare the total interest income and pay the taxes beyond the statutory deduction of 10 %.
  • As far as LTC and Medical bills go the malpractices are quite legendary and most readers will be familiar with them.
  • Capital gains earned are often not reported at all or reported wrongly.
  • Savings bank interest are now exempt till 10000 Rs but all such interest earning must be declared and applicable taxes paid on the amount exceeding 10000 Rs.

Are you seeing anything here that you can identify with? If so, I would seriously suggest that you correct this when you are filing your returns next year. Do not listen to people telling you as to how you can avoid taxes, they are crooks of the first order. You should pay taxes properly because it is the right thing to do, not because you can get caught. In any case, with the IT enabling of records, it will become increasingly difficult not to be tax compliant, so you might as well make a virtue out of a necessity.

Not paying taxes due is a sure shot indicator of being a bad citizen. You can pay your dues and then question the government as to how it is using the taxes. They are accountable to you, just as you are accountable to the tax authorities.