5 things to do to avoid the tax blues ... !!

It's a typical day in March when you see people running helter skelter to invest to save on taxes. And more often than not, they end up investing in products that are either not right for them or not worth investing at all.
You can, however, start saving on your personal income tax during the year, and make additional strategic moves as the year-end approaches. Here are some basic tips for saving on your taxes:

1. Invest and claim your deductions


Section 80C: There are various sections which offer you tax breaks, the most popular one being this one as you can claim up to Rs 1 lakh under this section and it offers you a wide variety of investment options. The options include Employee Provident Fund (EPF), Public Provident Fund (PPF) up to Rs 70,000 per annum, National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), unit linked insurance plans (ULIPs), school fees, and home loan principal repayment.
Section 80D: If you have taken a medical insurance plan for yourself, your spouse, dependant parents and dependant children, you can claim deduction up to Rs 15,000 (Rs 15,000 additionally for your parents' medical insurance is also available) under Section 80D for the premiums paid. The limit now has been enhanced to Rs 20,000 for senior citizens on the condition that the premium is paid via cheque.
Section 80DD: Expenses on the medical treatment of a dependent who is a person with a disability also qualifies for tax benefits under Section 80DD.
In this case, deductions up to Rs 50,000 can be claimed.
A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, certification by a medical authority is mandatory.

2. Interest component of your home loan

The interest component of your home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakh a year in case of self-occupied house.
One condition being that your house must have been financed by a housing loan taken after April 1, 1999.
It is also essential that the acquisition or the construction of the property is completed within three years from the end of the financial year in which the loan is taken.
The claim can be made even on loans taken for repair, renewal or reconstruction of an existing property.

3. Take a loss

If you've done well with your investments and are looking at significant short term capital gains, prior to year-end is the time to offset some of those short term gains by selling some of the losing investments.
If the stock is good, you could sell it on 31st March, say on March 31, 2010, and buy it back in the next financial year, say April 1, 2010; here of course there is the risk of price fluctuation.
Remember that you can carry forward short term losses from previous years' losses for the next 8 years.

4. Do some charitable donations

While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax.
You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act.
The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund. There is no restriction on the amount of charity.
However, donations must be made only to specified trusts and also only donations of up to 10 per cent of your total income qualify for such a deduction. Remember to get receipts.

5. Spreading your income

Normally, if you invest in your wife's or child's name, the income generated from such investments will be clubbed with your income and taxed accordingly. However, if you transfer money through a deed to a child who is over 18 years of age and invest in his name, then the income generated from such investment will not be clubbed with your income.
Instead, that will be clubbed with the income of your child/wife and taxed accordingly.
Cash gifts received from specified relatives are exempt from income tax and there is no upper limit.
Similarly, cash gifts of any amount and from anyone received during your child birth, marriage or any other specified event are totally tax-free. However, any cash received from a non-relative where the value is in excess of Rs 50,000 in a particular year will be considered as income in the hands of the recipient.
You should make sure that you have a record and valid receipts for all tax savings investments made in your name. You do not want to be running around at the last minute collecting all the documents required for tax filing.

Zero per cent schemes: How consumers get fooled

As a child when my first milk tooth fell, I was told to keep the tooth under my pillow at night. When I woke up the next morning, I was delighted to discover a one rupee coin instead of my tooth under the pillow. When I asked my parents about it, they told me that a tooth fairy had switched my tooth for a rupee coin during the night.

As a child the story had lots of appeal for me. Of course as I grew older I realised that there was no 'tooth fairy' and my parents placed that one rupee coin.

The stories surrounding zero per cent finance schemes are perhaps of the same genre. The old adage that 'there is no such thing as free lunch' aptly describes the zero-percent-interest schemes.

These schemes were widely popular till a few years back. RBI regulations advising banks to refrain from offering such schemes as well as the general withdrawal of major banks from consumer durables financing has meant that such schemes have not been in vogue for the last 2 to 3 years.

However there are several NBFCs (Non-banking financial companies) that continue to finance consumer durables purchase and also have zero per cent schemes. The main attraction of such schemes is that they influence you to purchase consumer goods that could be more expensive than your wallet size.

The lure of zero percent interest is an added attraction that makes you feel that 'YES' I am getting something free and thus I am able to buy a 'bigger and better' product. But that is just a smart way in which such schemes fool you. Here's how.

So how do these schemes work?

Unlike their names, most zero percent schemes have other costs in built. The biggest cost is that you forfeit the cash discount that you would have got otherwise from the retailer. Also you will be paying some processing/transaction fees and/or advance EMIs (equated monthly instalments).

So let us see how the costs stack up in a so called zero percent scheme.

Example: An LCD colour television costs Rs 48,000 and is available on zero percent EMI scheme for six months (thats is, there is a EMI of Rs 8,000 per month for six months). The consumer needs to pay a processing fee of Rs 1,000. If the customer had bought the same TV by making a full payment s/he could have availed of a cash discount of Rs 2,000 which s/he is not getting if s/he opts for the zero percent scheme.

So it works out like this:

Cost of television set: Rs 48,000

Amount paid/Cost incurred in advance:

Processing fees: Rs 1,000
Cash discount foregone: Rs 2,000
Total: Rs 3,000
Net finance received: Rs 45,000

Payment made by six instalments of Rs 8,000 each (aggregating in all to Rs 48,000 against finance received of Rs 45,000).

The effective interest cost works out to 23 per cent per annum.

Why consumers fall prey to zero per cent finance schemes

However the popularity of such schemes with consumers particularly in festive season cannot be denied. Market sources say that despite being costlier in some ways, consumers prefer to go for these staggered payment schemes and have been highly successful in pushing sales and expanding the market for the durables. This is primarily because of the fact that purchasing through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.

So are there any true zero per cent schemes? Yes there are.

Some of them are available on the much-maligned credit cards. The credit card that I have allows me to convert specific spends greater than Rs 5,000 into three-month EMIs without any cost or fees. This is the closest that hard-nosed bankers come to offering true zero per cent schemes. Some other major credit card issuing banks also have similar schemes.

All said and done, the best way to check if a zero per cent scheme is really worth it ask the following questions:

Any fees or charges?

If I pay full amount do I get a discount that I am not getting if I take the zero per cent scheme.

If answer to both the question is no then you have a true zero per cent scheme! So you can now zero in on your zero per cent schemes and spare yourself from being fooled.

Of derivatives and their benefits !!

Generally, financial markets around the world are volatile in nature and hence always mean risk for the players involved!

To reduce this risk, the derivatives were introduced. For the uninitiated, a derivative is a financial contract the value of which is "derived" from a long-standing security such as a stock or a bond, or even an asset, or a market index.

In simpler terms, the value of a derivative depends on the value of something else, which is otherwise called the underlying of the derivative. Hence, the value of the shares of a company is the underlying in the case of stock derivatives.

Similarly, it is the value of the index the underlying for an index derivative, and the value of crude oil the underlying for a crude oil derivative.

The value of the derivative also changes due to demand and supply but the primary mover of the change in value of the derivative is the change in the value of the underlying.

Various underlying assets

Derivates cover the entire gamut of trade and services available in the markets, from equities, equity indices, to commodities such as crude oil, cotton etc, to bullion like gold, silver and even weather derivates among others.

Types of derivatives

In India, there are many types of derivatives such as forwards, futures, options, swaps, warrants, LEAPS, baskets, and swaptions. However, the most common of all is the futures and options derivatives.

Futures derivatives

As the very name implies, futures derivative is a derivative contract that enables the buyer and the seller to pre-decide the quantity, rate and date of a future purchase of an asset. For example, A agrees to sell to B a futures derivative contract of XYZ company's 300 shares valued at Rs. 5400 after the expiry of 3 months.

On the expiry of 3 months, which is the pre-decided date, A, the seller of the futures contract gives to B, the buyer of the futures contract, the delivery of the XYZ Company's 300 shares at Rs. 5400.

Thus, any difference, increase or decrease in the value of the shares on the delivery date of the shares will not affect the futures contract as the rate has already been pre-decided.

That is, both the buyer and the seller in a futures contract must honor their commitments to make and take the delivery according to the terms of the contract this despite the differences in the buying or selling price due to market conditions.

Buying a futures contract does not involve any upfront cost however there is brokerage charges.

Options derivatives

Another widely used derivative is the options derivatives, which are more flexible than futures and works more in favor of the buyer of this type of derivatives.

As the name hints, the buyer of the derivatives is not obliged to take the delivery of the asset on the delivery date. In simpler terms, the buyer has an option to take delivery of the asset on the agreed date.

Obviously, the decision to take or not to take largely depends on the market price at the delivery time. If there is an increase in the market price of the asset, the buyer of the options derivatives would obviously exercise it and make profits.

And in this case the seller of the options derivatives must honour the option to deliver the assets. However, if there is a drop in the market price of the asset, the buyer may not exercise his option thus allowing it to lapse.

The pre-decided price fixed in the case of options derivatives for the exchange of asset is called the strike price. However, this exchange of asset is not exercised by the buyer and is instead sold in the market to make profits. This is primarily due to the fact that when the option price goes up it only makes sense to make profit by selling it instead of exercising it to exchange assets.

Considering the fact that options derivatives favor the buyer more and exposes the seller to the risk of price movement, the buyer pays the seller an option premium or option writer simply a fee for the risk involved for the seller.

Two types of options derivatives

Options are of two types: American and European. American options are more flexible as it enables to exercise the option any time upto the settlement date. In India, only American options are traded.

Unlike the American options, the European options allow it to be exercised only on the settlement date.

Use of derivatives

Perhaps the main use of a derivative is hedging the risk. That is by buying a derivative the cash flow is ensured and losses limited.

For example, an exporter expects earnings in foreign currency after a period of time but since the spending is done in the local currency as well he would also prefer to keep track of the earnings in the local currency to know the exact earnings.

And only on till the expiry of the period of time and based on the actual conversion rate prevailing at that time can the exporter know his actual earnings in the local currency. Since then an ambiguity persists with regard to the actual earnings.

In this scenario buying derivatives could help predict the actual earnings even after the period of time and despite the volatile conversion rates.

Apart from hedging, which is the chief reason why derivatives are used in the markets, there are other participants using derivatives but only for investments, stocks derivatives for instance. This actually injects liquidity into the derivatives system and hence is considered good.