Change in interest rates of PPF and other small savings schemes

Finance ministry has announced revised interest rates on public provident fund, national savings certificates and other small savings schemes.  These interest rates shall be applicable for financial year 2013-2014.  As we had noted earlier, interest rates of such schemes are now linked to market yields on government securities of comparable maturities and shall be revised every financial year.

Overall there has been a reduction in interest rates by 10 basis points (100 basis points is 1 percentage point) for all savings schemes except for saving deposits on which interest rates continues to be 4% and 1 year time deposits (8.2%).  Interest rates on PPF from April 2013 shall be 8.7% p.a. as against 8.8% p.a. earlier.

The table below summarizes the changes in interest rates:

Scheme	Existing interest rate	Interest rate w.e.f 1st April 2013
Savings Deposits	4.0	4.0
1 Year Time Deposit	8.2	8.2
2 Year Time Deposit	8.3	8.2
3 Year Time Deposit	8.4	8.3
5 Year Time Deposit	8.5	8.4
5 Year Recurring Deposit	8.4	8.3
5 Year SCSS	9.3	9.2
5 Year MIS	8.5	8.4
5 Year NSC	8.6	8.5
10 Year NSC	8.9	8.8
PPF	8.8	8.7

Overall there has been negligible change in the interest rates as compared to 2012-13.

Whether labeling makes it easier to invest in mutual funds?

Continuing with various regulatory changes in mutual fund space, SEBI earlier during this week mandated mutual funds to label their offerings.  The purpose of labeling is to address the issue of mis-selling by enabling investors an easy understanding of the kind of mutual fund scheme they are investing in and its suitability to them.

Changes suggested

With effect from 1^st July 2013, all mutual fund companies shall label their schemes on the following parameters:

1.  Nature of scheme: whether the scheme is to create wealth or to provide regular income and its time horizon - whether short, medium or long term.

2.  Investment objective: All schemes shall describe its objective in a single sentence along with whether it is an equity, debt or hybrid product.

3.  Riskiness of investments: which shall categorized the risk attached to return of principal amount.  To achieve this, SEBI has suggested colour codes as below:

·       Blue             – Principal at low risk

·       Yellow         – Principal at medium risk

·       Brown          – Principal at high risk

4.  Further all schemes shall have a disclaimer that if the investors are not clear about the suitability of the products, they should consult their financial advisers.

All key documents (such is Key Information Memorandum, Scheme Information Documents, etc) as well as scheme advertisements should prominently disclosed the above labels.

For example, Fixed Maturity Plan shall come with the below mentioned labeling.

Whether it actually simplifies the investment process for investors?

Though the intention of SEBI is good, one needs to see whether this simplifies the investment process for the investors.  It is difficult to categorize the investments based on risk.  One single rule cannot be applied everywhere. 

Are all debt schemes low risk investments?  For eg:  FMPs, in general, may have low risk of principal amount getting reduced but it depends on the kind of company the mutual fund scheme has invested in.  If the investment is in low quality / rated company, the actual risk coding should not be blue but yellow or may be brown in case of investment in junk papers. 

Nevertheless, this is a good attempt by SEBI to simplify mutual fund investing for investors.  These labels can be used as an initial screener to short list the schemes one wants to invest in, followed by more scheme specific evaluation.

What do you feel about the labeling of mutual funds?  Will this simplify your mutual fund selection process?  Do share your comments with us.

Bachhat on social networks

Dear Readers,

Bachhat - Harvesting Money is now on popular social networking sites.  Bachhat has been on facebook since some while.  Now we have also started a twitter handle for Bachhat.

The objective is to have more connections and interactions with our readers.

Twitter handle will primarily be used to provide instant updates on personal finance space.  Interesting articles on personal finance shall be shared on Twitter and Facebook page.

This blog shall continue to help you plan your personal finances effectively and efficiently.

Bachhat's Twitter Handle : @bachhat4u

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So why wait. Connect with us instantly and like us, share us and RT our tweets!

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Bachhat - Harvesting Money

Impact of Budget 2012 on Individual Tax Payers

I have tried to calculate the tax implications of various announcements made in Budget 2013 for individual tax payers.  The calculations are carried out for individuals for income slabs for Rs. 5 lakhs, Rs 7 lakhs, Rs. 10 lakhs, and Rs. 15 lakhs.

Do have a look at it.  But a word of caution, these calculations are based on various assumptions I have made and the final tax liability may be different for individuals having the same income.

Budget 2013 and Impact of taxes on your salaries

Time for prudence, restraint and patience

“In a constrained economy, there is little room to raise tax rates or large amounts of additional tax revenues. Equally, there is little room to give away tax revenues or the tax base. It is a time for prudence, restraint and patience.” 

This statement made by Honorable finance minister Mr. P.Chidambaram summarizes what is (or is not) in store for individuals in this budget.  There has been no change in the income slabs based on which tax is determined.  To benefit individuals who earn less than Rs. 5 lakhs per annum, a minuscule tax credit of rupees two thousand has been given.  Besides this there is hardly any permanent additional benefit for individuals in the budget.  Certain changes which shall impact your tax liability and determine your investments are covered below.

Interest on home loan eligible up to Rs. 2.5 lakh

An individual planning to purchase residential housing property shall get an additional deduction of Rs. 1 lakh on the interest amount paid to service the home loan.  However, this benefit comes with many riders.  First, this benefit is for individuals who do not own any residential properties at the time of sanction of loan amount.  Second, the value of such property should not exceed Rs. 40 lakhs.  Third, the home loan amount should not exceed Rs. 25 lakhs and it should be sanctioned in financial year 2013-14.  If the interest amount during the year is less than Rs. 1 lakh, the balance amount can be claimed in the subsequent year. 

Scope of RGESS widened

Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced in the last budget to attract new retail investors to invest in equities.  The scope of the scheme has been increased to cover listed units of an equity oriented mutual fund and individuals having total income upto Rs. 12 lakhs are now elligible to claim this deduction.  The deduction, which was earlier restricted for one year, is now available for 3 consecutive years from the date of first such investment.

Other changes which impacts your investment decisions

The securities transaction tax (STT) on equity oriented mutual fund has been reduced which shall lead to increased returns from equity mutual fund investments.

On the other hand, dividend distribution tax on debt oriented mutual funds has been increased from 12.5% to 25% discouraging debt oriented mutual funds with dividend payout option.

Any transfer of immovable property, other than agricultural land, of value equal to or exceeding Rs. 50 lakhs shall attract 1%  TDS on the property value.

Further it has been proposed that where any immovable property is received for a consideration less than the stamp duty value of the property by an amount exceeding Rs. 50,000, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of individual.

Commodity transaction tax has been introduced wherein sale of commodity derivatives (other than those involving agricultural commodities) shall attract transaction tax @ 0.01%.

On positive side, the finance minister has proposed introduction of inflation indexed bonds or inflation indexed national security certificates.  This shall give investor inflation adjusted interest returns and shall be a good investment alternative.  The tax free bonds, which provide tax free interest to the investors, shall continue to be issued in the next year.

(Concise version of the above post was printed in DNA's edition of 1st March 2013)