Update: Withdrawal of bank notes issued prior to 2005 extended till January 1, 2015

Subsequent to its advisory dated January 22, 2014 and as noted in our earlier post, RBI has extended the date for exchanging pre-2005 bank notes from March 31, 2014 to January 1, 2015. RBI has also clarified that public can continue to freely use these notes for any transaction as such notes continue to remain legal tender.

Exchange of notes - experience

While there has been minor hiccups while exchanging the notes with banks,carrying the printout of RBI's press release shall be handy at the time of exchange of notes.  Though the release says that there is no need to provide any details of depositor nor to have banking account with the bank where one is exchanging the pre-2005 notes, few banks are refusing to exchange the money and mandating to deposit the same in the account.

Where you able to exchange pre-2005 bank notes without any hassle?  Did your bank refuse to exchange the notes and mandated you to deposit the money in your account?  Kindly share your experiences in the comment section below.

Withdrawal of bank notes issued prior to 2005 by RBI

Update:  Read the updated news on pre-2005 notes here.

RBI has advised that it shall completely withdraw from circulation all bank notes issued prior to 2005 after 31^st March 2014.  Public shall be required to exchange such notes with banks from 1^st April 2014.  This facility of exchange shall be provided by the banks for customers as well as non-customers.  However, from 1^st July 2014, non-customers shall be required to furnish proof of identity and residence to the bank where the exchange is taking place, if such exchange is for more than 10 pieces of Rs. 500 and Rs. 1000 denominated notes.

How to identify bank notes issued prior to 2005

Bank notes issued prior to 2005 do not have year of printing on the reverse side.

The reverse side of the above bank note (click on picture to enlarge) do not have the year of printing.  Such notes shall be withdrawn from circulation after 31^st March 2014.

    

However, the reverse side of the above bank note states the year of print as 2011 (bottom middle).  Such notes shall continue after 31^st March 2014.

Things to be kept in mind

One needs to keep the following things in mind:

1. Withdrawal applies to all denomination of notes and is not restricted to Rs. 500 or Rs. 1000 notes.  Thus even if one has Rs. 10 or Rs. 100 note which is issued prior to 2005, then such notes need to be exchanged with banks.
2. Though such notes shall continue to be legal tender for the time being and can be used, it is advisable to exchange it with the bank at the earliest possible.
3. To avoid hassles, if one is exchanging the notes after 30^th June 2014, it is advisable to exchange it with the branch where one has account.  Otherwise proof of identity and residence needs to be furnish if the exchange is for more than 10 pieces of Rs. 500 and Rs. 1000 denominated notes.

RBI has provided short period to exchange such notes.  However, since this is an ‘advise’, there is a possibility of the deadline getting extended.  RBI needs to provide proper communication to all participants and to public at large to ensure that there is no panic on the street and adequate time is available to exchange such notes.

Photo Source: RBI Website

NEFT transaction charges rationalised by RBI

With effect from 1st August 2012, NEFT transaction charge for funds transfer upto Rs. 10,000 which used to be capped at Rs 5.00 shall be capped at Rs. 2.50.  Charges beyond this limit remains the same.

Following is the list of NEFT charges for various funds transfer limits:

• Funds transfer upto Rs. 10,000 - Maximum charge of Rs. 2.50
• Rs. 10,001 to Rs. 1 lakh - Maximum charge of Rs. 5.00
• Above Rs 1 lakh to Rs. 2 lakh - Maximum charge of Rs. 15.00
• Above Rs. 2 lakh - Maximum charge of Rs. 25.00

Above charges are exclusive of service tax.

Compulsory E-filing for taxpayers with income greater than Rs. 10 lakh

The income tax department changed the rules for filing returns in late March 2012, but I was not aware of the same, hence thought of highlighting the same.

The major change in the rules was for individuals and hindu undivided families (HUFs) having total income more than Rs. 10 lakh.  Such tax payers shall be required to compulsorily file their income tax return electronically.  

They have an option to file it electronically under digital signature or alternatively they can file it electronically and thereafter submit the verification of the return in Form ITR V.

This applies to all individuals and HUFs having salary income or any other nature of income and sum total of such income exceeds Rs. 10 lakh.  This is applicable for filing returns for the financial year 2011-12.

RBI maintains status quo

As against everybodya's expectation, RBI has maintained status quo and left repo rate and CRR unchanged.  Inflation weighed on RBI's monetary policy decision and RBI's press release stated that it "had frontloaded the policy rate reduction in April with a cut of 50 basis points."

Thus no significant change in interest rates offered on fixed deposits by banks is expected anytime soon.  Bachhat updated its page on FD interest rates on 15th June 2012.  Next update shall be around 15th July 2012, unless RBI acts on the rates between two monetary policies.

India - the country with least financially literate people??

Visa carried out an interesting survey early 2012 in 28 countries to guage the strength and weaknesses of financial education worldwide.  Five simple questions were asked like 

• Do you have and follow a household budget?, 
• How many months worth of savings do you have set aside for an emergency?, 
• How often do you talk to your children ages 5 - 17 about money management issues?, 
• To what extent would you say that teenagers and young adults in your country understand money management basics and are adequately prepared to manage their own money? and
• At what age do you think Govt. should require schools to teach financial literacy to children, so that they can better understand money management issues?

It was surprising to see that out of 28 countries surveyed, India stood 23rd, country with one of the least financially literate people.  Per the findings of the survey, only 35% of its population was termed financial literate.

Average savings set aside by Indians for an emergency is approx 1.9 months.  In addition, 41% of the younger respondents aged 18-24 were more likely to have no emergency savings at all compared to older respondents.

Families generally do not talk to their children about money and finance.  Indian families spends only 10 days a year as compared to global average of 19 days / year with their children discussing money issues.

43% of women said they do not understand personal money management issues.

This may sound surprising to many of us, but be practical and ask the above questions to yourself.  

When was the last time you made your household budget and followed it?  Do you even have emergency fund?  Do you know who much amount is available in emergency fund or ideally required?

One may argue that even though I do not do / know the above, I spend my finances rationally and am overall informed about by financial condition.  It is true that above questions alone can not determine whether you are financial literate or not, however it is also true that having a budget and keeping track of it, etc are the preliminary steps one needs to carry out in financial planning.

Are you amongst the one who does not keep track of your finances or do not know about emergency funds?

Source: 

1. Visa's http://www.practicalmoneyskills.com/resources/barometer.php

2. First post's news article

Backstage entry of loads in Mutual funds?

SEBI, in its yesterday's meeting allowed mutual fund distributors to charge Rs. 100 as ‘transaction charge’ per subscription.  This charge is applicable only if the investment amount is Rs. 10,000 and above.  In case, the investor is investing in a mutual fund for the first time, an additional amount of Rs. 50 can be charged (i.e. total transaction charge of Rs.150) since Know Your Customer (KYC) norms needs to be fulfilled for such new investors.  In case of SIP investments, the transaction charge can be recovered in 3 or 4 installments.  The transaction charge will be deducted from the amount invested.

Transaction charge is applicable only on purchases and not at the time of sale.  Further, if an investor purchases directly from the mutual fund company (i.e. online via their website or directly submitting the form in their offices), no transaction charge is levied since distributor is not involved in such cases.

How will it impact you?

Prior to SEBI’s ban on entry load in August 2009, 2% of the invested amount was deducted as load for equity mutual funds and for debt funds there was no entry load.  Rs. 100 per subscription for Rs. 10,000 and above works out to maximum 1% irrespective of whether you invest in equity or debt funds.  Hence the cost of investing in debt funds will increase and have impact on your returns, more so since the debt fund returns are generally in single digits.

Though this charge will allow distributor to recover transaction related costs, they still shall not be incentivised to sell more mutual fund products.  The commission they earn on ULIPs and other investment products are linked to the value of the transaction and shall be quite substantial in comparison to the transaction charges. 

Thus, this shall not compel distributors to sell more of mutual fund products and the objective of SEBI to ‘enable penetration of mutual funds in smaller towns’ by allowing the above transaction charge may still not be achieved.

Can distributors still mis-sell mutual funds to me?

Yes.  Distributors earns only if you invest more than Rs. 10,000 per subscription.  Thus there is a possibility that distributors will tell investors to investment minimum Rs. 10,000 in every mutual fund transaction.  Also, in case one is investing say Rs. 30,000, distribution will tell investor to fill three different subscription forms for Rs. 10,000 each thus pocketing Rs. 300 as transaction charges (Rs. 100 per subscription form).  There is no dearth of ideas to extract more money and many more will evolve as time progresses.

How can you avoid / minimize transaction charges?

The best way, and the one Bachhat recommends is to invest in mutual fund online.  This will not entail any transaction charge.  In case you are living in cities where mutual fund company’s investor offices are located, you can submit the subscription form directly in their offices.

Also Read - Your Guide to Invest in Mutual Funds

 

Alternatively, you must ensure that in case you are investing regularly, you minimize it by either making your SIP period longer (i.e. instead of renewing your Rs. 5000 SIP every 3 months, make it for 12 months, so that you incur transaction charge only one time instead of 4 times earlier) or ensuring that each investment does not cross Rs. 10,000.

Will this move of SEBI make you change the way you are investing in mutual funds?  Do share your comments below.

Exemption from filing income tax return: How much beneficial to Salaried Tax Payers?

Central Board of Direct Taxes issued a notification last week to exempt salaried tax payers with income less than Rs. 5,00,000 from filing income tax returns.  The move is in line with finance minister’s announcement in this year’s budget.  Though the notification states that it is applicable for returns to be filed for the financial year 2010-11, it is expected that this exemption will continue to be available in future.  There could be a possibility that this exemption in modified formed is included in Direct Tax Code itself.

Who will benefit from this exemption?

Sadly, due to various caveats in the notification, not many will be benefit from this.  Basic conditions to be fulfilled to be eligible to claim exemption are:

1.   An individual has to be a salaried taxpayer.

2.   He should have income only from salary and interest income from savings bank account (interest income from fixed deposits is not included)

3.   The interest income should be informed to the employer beforehand so that employer can deduct tax at source on the same. This condition is a bit strange.  First of all, no one knows the exact amount of interest income before the end of the year.  The most one can provide is the approximate amount of interest.  Any difference will lead to refund or payment of tax, in which case the exemption is not available.  Further the circular has been issued in June 2011 and the tax department presumes all such employees would have informed their employers last year about such interest income so that necessary tax has been deducted at source.  In short, if the interest income is not forming part of Form 16, then this exemption is not available.

4.   Such interest income should not exceed Rs. 10,000 in a year.

5.   The total income of the tax payer after considering all deductions (such as under Sec 80C and other deductions) should not be more than Rs. 5,00,000.

6.   An individual should not have received salary income from more than one employer.  So all job hoppers are excluded.

7.   In case, the tax payer has any refund claims, then this exemption is not available.

8.   Tax payer should report their PAN number to the employer.  So that it can form part of FORM 16 issued by the employer.

Only if one satisfies all of the above conditions, he can claim exemption from filing income tax returns.

In which scenarios this benefit will not be available?

Needless to say, in case you do not satisfy any one of the above condition, the benefit is not available.  Besides some obvious cases where the exemption shall not be applicable, few other cases can be:

1.   If one has interest income from fixed deposits (Who does not have such income these days?)

2.   If one changes his job during the year.

3.   If one has sold any shares or mutual fund or debentures during the year.

4.   If one has brought forward losses of previous years which he wants to carry forward for future years (for example capital loss, etc).  Income Tax Act mandates to file return in such cases to ensure availability of these losses for future years.  The notification is silent on whether this benefit will be available, if return is not filed.  To be on a safer side, one should file the return.

Further there are certain cases where it is recommended to file the return with income tax authorities.  For eg:  One requires to submit income tax returns for availing loan from bank or for obtaining visa.   Proof of filing tax return is an important document and generally should be available for all years.

 

Thus though the intention of issuing this exemption is good, not many will be able to reap benefit from it.  It would have benefited larger section of people if the conditions for source of income and payment of taxes were not so stringent. 

Ideally, if income of an individual is less than Rs. 5,00,000 and all the taxes are paid to the Government (either by way of tax deducted at source or by way of advance tax or by way of self-assessment tax) and PAN number has been quoted at the time of payment of these taxes, then he should be exempted from filing the return.  This could have benefited many more tax payers from the rituals of filing tax return.

Are you one of those lucky few who will benefit from this exemption?  Do share your views and suggestions in the comment section below. Thanks

EPF or PPF? – Implications of EPF rate hike to 9.5%

The Central Board of Trustees, Employees Provident Fund (EPF) have recommended an interest rate of 9.5% on EPF for the financial year 2010-11 as against 8.5% which was prevalent for last five years.

The question is whether this rate will be sustainable? Most probably no.

The fund will be achieving return in the range of 8.5% from its corpus and the additional outgo of Rs. 1,600 crores on account of the rate hike of 1.0% will be met by ‘hidden surplus’ cash of Rs. 1,700 crores which was discovered after a comprehensive analysis of EPF scheme’s accounts since its inception. Hence this entire amount will vanish after this year’s interest payout.

Second, a news report says that Company-managed PF trusts, which are required to match the rate declared by EPF, are not happy with this rate hike, since they find it difficult to earn more than 8% and employers will have to contribute additional funds to maintain the interest payout.

Third, the trustees have not yet decided on investing part of the corpus in capital market, which will enable them to achieve higher returns.

All this signals that, unless the trustees agree to park part of the corpus in capital market, it will difficult for them to sustain interest rate of more than 8.5%. Thus this rate hike of 1% will be purely one-time on account of discovering the ‘hidden surplus’ cash.

Which fund gives better returns - EPF or PPF?

Public Provident Fund (PPF), in which any individual can invest up to Rs 70,000 p.a., gives tax-free return of 8%. Now comparing that with EPF tax-free return of 9.5% for this year, it makes sense for salaried employees to contribute more (beyond the mandatory 12% of Basic + DA) to their EPF rather than in PPF for this year. So start pumping more to your EPF through voluntary contribution for this year rather than investing in PPF.

One interesting thing to note is historically the rate of EPF has generally been more than PPF.

Interest Rate Comparison

The above chart shows that most of the time the difference is of 50 basis points where as in some years, the gap widens to as much as 150 basis points. One basis point is one-hundredth of a percentage point. This can make substantial difference in a long run. Hence it seems to be beneficial to invest in EPF more rather than in PPF for retirement savings.  Here retirement savings is important, since tenure of EPF is till retirement, whereas tenure of PPF is for 15 years.

In other announcements, the Trustees have decided to hike the benefit under Deposit Linked Insurance Scheme from present maximum limit of Rs. 1,00,000 to Rs. 1,30,000. This is payable to family of employees who die while in service. It will be calculated at 20 times average monthly wages drawn in preceding 12 months, subject to the cap of Rs. 1,30,000. 

The trustees have also decided to close “inoperative accounts” (no activity in preceding 36 months) and no interest would be credited to such accounts. The number of such accounts is approx. 3 crores.