Go on a Tax-Free vacation

Leave Travel Allowance (LTA) is a type of allowance which is given to an employee by his employer to cover his travel expenses when he is on leave from work. Sometimes it is also known as Leave Travel Concession (LTC). LTA is exempt from tax u/s 10(5) of Income Tax Act, 1961. Only individuals whose employers offer leave travel allowance (LTA) can claim it. You would have to take leave and actually travel to be able to claim the exemption. The exemption must be claimed by submitting proof of your travel to your employer; you cannot claim it directly in your income tax return.

LTA covers journeys made by any mode–air, rail or road. You can claim up to economy fare to the destination for national carriers (in case of air travel) and AC first class rail fare (for rail travel).

Some employers may offer LTA as a reimbursement. In such cases the tax exemption is available only on the permissible fare amount. While the entire amount is reimbursed, the payment made to you in excess of the exemption allowed, is taxed like salary. When LTA is fixed as an allowance, the exemption is allowed based on the permissible fare, while the rest is taxed like salary. For example if your LTA is Rs 50,000, and your actual fare expenses are Rs 28,000 for four members of your family, but the economy class air fare is Rs 20,000, the balance Rs 30,000 will be taxed as salary.

The claim must be made for the fare of the shortest distance to the destination, even though you may have made detours and stops in between. Where the destination is not covered by rail or air, first class fare of public transport such as a bus may be claimed. The tax benefit applies only to travel fare, not for connecting taxis or hotel expenses.

You are allowed to claim exemption for yourself, your spouse, two children, dependent parents and dependent siblings.

LTA can be claimed for maximum of two trips in a block of four years. These blocks are not determined by your employment date, the government fixes them. The current block of 2014-2017 and expires on 31st December 2017.

As of now, LTA can only be claimed for trips made within India & overseas travel is not allowed for exemption.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Public Provident Fund…Did you know?

The Public Provident Fund (PPF) is one of the most popular savings vehicles in India. One of the reasons for this is the tax benefit it offers – it comes under the EEE (exempt-exempt-exempt) tax status. What this means is that at the time of investment, the interest earned, and proceeds received at maturity are all tax-exempt.

Here are some lesser-known facts about the PPF that can help you make a more informed investment decision:

  • PPF comes with a lock-in period of 15 years. As per the Public Provident Fund scheme rules, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made. It does not matter in which month or date the account was opened. For example you made your first contribution in June 2014. The lock-in period of 15 years will be calculated from the March 31, 2015, and the year of maturity, in this case, will be April 1, 2030.
  • A minimum contribution of Rs.500 per annum and maximum of Rs 1.5 lakh per annum is allowed. You either make lump sum or monthly contributions, but it cannot exceed 12 in a financial year. Any contribution made above Rs.1.5 lakhs is not eligible to earn any interest.
  • As the lock-in period of the scheme starts from the end of the financial year in which the deposit was made, if you make an annual contribution you make a total of 16, and not 15, contributions during the tenure of the scheme.
  • It is recommended that one must invest in PPF before the fifth of every month in case of monthly contributions (in case of cheque, ensure that the payment to PPF is received). This is because the balance taken for calculation of interest is taken as the minimum between the fifth day of the month and end of the month. In case lump sum annual investments, it is advisable to do it before 5th April.
  • Only a resident individual can open a PPF account and joint ownership is not allowed. However, a minor is eligible to open a PPF account with a guardian. A guardian can either be the father or the mother (not both) or a court-appointed guardian. A grandfather or grandmother cannot open PPF account on behalf of their grandchild except in cases where both the parents have died.
  • Non-resident individuals (NRI), Hindu Undivided Families (HUF) or body of individuals (BoI) cannot invest in PPF. Recently, government notified that the day an individual becomes an NRI, the PPF account will be closed. The interest paid from that date till the closure of the account shall be equivalent to the post office savings account i.e., 4%, as against 7.8% earned by PPF.
  • Even though PPF has a lock in period of 15 years, it offers partial liquidity through loan and partial withdrawals. You can take a loan after 5 years and the interest rate charged on the loan is more than 2% of the interest earned on the scheme. From the 7th year as you become eligible for withdrawal, then you are not allowed to take a loan. Also, a subscriber shall not be entitled to get a fresh loan until the earlier loan has been paid off along with the interest. Only one withdrawal is permissible during the financial year.
  • Since PPF comes under the EEE status, any withdrawals made before the expiry of lock-in period is exempted from tax. However, you are required to declare that you have withdrawn from PPF while filing your income tax returns.
  • A PPF account cannot be attached by a person or entity to pay off any debt or liability. Further, even a court order or decree cannot make a person liable to pay off his debts using money from his PPF account.
  • If you don’t make atleast a minimum contribution, i.e. Rs 500, in a particular financial year, your PPF account will become inactive. To revive an inactive account, you will have to pay a penalty of Rs.50 per year for the number of years the account has been inactive along with a minimum contribution of Rs 500 per year.
  • If you discontinue your account, then you will not be eligible for loans and withdrawals until the account is revived by making a payment of penalty fees and minimum contributions. However, the account will be eligible to receive interest as per the prevailing rate.
  • After maturity, a subscriber has the option to extend the maturity period of the PPF account in a block of 5 years. The account can be extended for ‘N’ number of blocks of 5 years each. It will continue to earn the prevailing interest rate even if you do not make any contributions. However, this extension must be given within a year of maturity.
  • A person has the option to transfer his/her post office PPF account from post office to banks (authorized by the government) or vice versa.
  • PPF accounts are exempted from the ambit of wealth tax.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Save taxes with a Home Loan…

Owning your own house is every man’s dream. It is a necessity & nothing beats it if you can also save some taxes in the process. Buyers can claim income tax deduction on both the principal repayment & the interest payment under different sections of the IT Act.

Tax Deduction on home loan Interest: (Section 24): The EMI of a home loan is divided into 2 parts, interest payment & principal repayment; Home buyers can claim a deduction of up to Rs.2 lakhs on the interest payment component if the owner or his family members resides in the house property.

Tax Deduction on principal repayment: (Section 80C): Home buyers can claim deduction on principal repayment for up to Rs.1.5 lakhs. One thing to keep in mind is that that property should not be sold within 5 years of possession or else the deductions claimed earlier will be reversed in the year of sale.

Tax Deduction for Stamp Duty & Registration charges: (Section 80C): Home buyers can also claim deduction for stamp duty & registration charges within the overall limit of Rs.1.5 lakhs. These can be claimed only in the year in which the expenses are paid.

Tax Deduction for 1st time home buyers: (Section 80EE): This section was recently added to the income tax act providing 1st time home buyers tax benefit upto Rs.50000. The cost of the home loan should be less than Rs.50 lakhs.

With home loan interest rates at near all-time lows and numerous benefits being offered by developers this can be a good time to invest in a new home for you.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

IPO bidding rules to maximize chances of allotment

Primary markets have been hyper-active over the last year & the pace has only picked up over the last couple of months. There has been 30 IPOs since last Diwali garnering over Rs.45,000 cr of which Rs.14,000 cr was raised in October 2017 & we have another ~Rs.20,000 cr worth IPO lined up in the first 10 days of November. Six stocks Avenue Supermarts, Shankara Building Products, Salasar Techno Engineering, CDSL, Apex Frozen Foods and Sheela Foam delivered multi bagger returns.

IPO investment is a good source of earning to the retail investor if selected properly. One check everyone can do is to look up the grey market premium on offer in the IPO. This information is readily available online. But even after due consideration of fundamentals and valuation of any IPO and subsequent subscribing, it is not necessary that one get share allotment. Thus, merely subscribing to any public issue does not guarantee for share allotment especially when the IPO is over-subscribed multiple times. To enhance the possibility of share allotment one should keep in mind the following things.

The chances of rejection are high in case if the applications are incomplete or filled with some error. So it is always better to fill the application form with due care. The application must be complete in every sense and no column is to be left blank.  Since January 2016, SEBI has made ASBA (Application Supported by Blocked Amount) mandatory for subscribing any IPO. Under this method, the money is blocked in the account linked to the application & the amount is withdrawn only in case of allotment. One simple process I follow to negate mistakes is to fill up the online ASBA form available on the BSE website. If you are careful filling up the form for the first time, on all subsequent occasions the data such as bank account number & DP a/c details can be recovered & updated thus chances of making a mistake are minimal.

Retail investors can tick the cut-off option which indicates their willingness to subscribe to shares at any price discovered within the price band. The cutoff price is at upper band in case the IPO is over subscribed.

Most importantly SEBI allows maximum 5 applications to any IPO from a single bank account to a retail investor. Also, a retail investor can bid for shares worth a maximum of Rs.2 lakhs in any IPO. It is always advisable to subscribe in minimum lot size but the number of application should be on higher side. Thus you can bid one lot each in the name of every family member in their DP account instead of bidding multiple lots in your name. This increases the chances of getting a higher allotment.  There is the draw of lots for allotment to retail investors in case any issue is subscribed multiple times. And the lucky investors get a bid of minimum one lot.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

SAMVAT 2074 … Festivities continue for markets

The Year in retrospect…
  • SAMVAT 2073 was a good year for the markets at it touched all-time highs & NIFTY was higher by ~18 % y-o-y crossing the 10k mark for the first time.
  • Markets were largely driven by domestic liquidity due to strong monthly inflows into equity mutual funds. Net inflows into equity MF in last 12 months were to the tune of Rs.1,15,000 cr.
  • FII inflows largely remained subdued with net inflows of Rs.5000 cr in the last 12 months.
  • The government on 8th November 2016 de-monetized all Rs.500 & Rs.1000 denomination notes & introduced new Rs.2000 & Rs.500 denomination notes.
  • GST was finally implemented from 1st July 2017. This is likely to boost the economy going ahead though there has been some slowdown initially.
  • Monsoons have been marginally below (5% below normal as per IMD) normal & what impact it has needs to be seen.
  • On the macro front WPI & CPI are at comfortable levels below the RBI guidance of 4%. IIP remained low, an ongoing concern.
  • Indian foreign exchange reserves crossed the $400 bn mark to touch a high of $402,246 bn as on 22nd September as per RBI, the highest ever that India’s central bank has amassed.
  • Departing from the tradition of presenting the Union Budget on the last working day of February, the budget was presented on 1st February. This was done so that the legislative approval for annual spending plans and tax proposals could be completed before the beginning of the new financial year on 1st April. The Cabinet also did away with the practice of having a separate Railway Budget, merging it with the Union Budget.
  • There has been 30 IPOs since last Diwali garnering over Rs.45,000 cr of which Rs.14,000 cr was raised this month only. Six stocks Avenue Supermarts, Shankara Building Products, Salasar Techno Engineering, CDSL, Apex Frozen Foods and Sheela Foam delivered multi bagger returns.
  • Interest rates over the last year have largely been stable with a downward bias as there was only one Repo rate cut of 25bps (from 6.25% to 6% currently) in the last 12 months. Bank interest rates though have been reduced by a larger margin due to excess liquidity in banks post demonetization & lower credit off take.
The Year ahead…
  • Going ahead in SAMVAT 2074 geo-political tension between North Korea & USA lingers.
  • Gold prices have been inching up due to geo-political tensions. Global crude oil (Brent) prices are expected to be range bound between $50-$60 through the year. Other commodities such as copper & steel are expected to inch up with a positive bias through the year.
  • The Indian banking system continues to be burdened by high NPAs, but we believe that we have seen the worst of it & with new measures like the Insolvency & Bankruptcy Code, improved profitability, economic growth & latest corporate restructuring, things should gradually improve.
  • Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover in H2FY18 will be closely monitored. With low bank fixed deposit rates, subdued real estate market (with high transaction cost) and stagnating gold prices, equities seems to be the most viable domestic investment avenue for investors. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.
  • Markets are currently at all-time highs largely driven by liquidity rather than macro-economic data or corporate performance. Valuations are on the higher side (SENSEX PE – 24X, NIFTY PE- 26X) and to an extent unjustified by past performance. Thus company performance & economic data which comes in over the next few months will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years. 

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

CDSL- Growing retail depository

Central Depository Services Ltd (CDSL) is one of the two depositories operating in India, which facilitate the holding of securities in electronic form and enable securities to be processed by book entry. It was originally promoted by BSE, which subsequently divested part of its stake to leading banks as its sponsors.
The Indian depositories market is shared by two players i.e. CDSL and NSDL promoted by BSE and NSE. The business is highly regulated with entry barriers in place, and hence, the market is likely to remain duopoly in nature. With little threat of new entrants coming in the incremental business is to be shared by both CDSL & NSDL and this makes the business model quite interesting.
The IPO of CDSL was the most subscribed in over a decade. The IPO was subscribed more than 170 times the number of shares on offer. CDSL has wide source of revenues, 35% from the annual issuer charges (which is recurring in nature) and 21% from transactions having some correlation with volumes in the markets. Another 13% comes from online data charges. As the capital markets remain buoyant, there has been an increasing trend of new listings, and thus, CDSL has generated 11% of its revenues from the IPO/ Corporate action charges. Hence, broadly speaking, the revenue base of CDSL is quite diversified.

 

 

Nearly 2.4 mn new demat accounts were opened in 2016, the highest since 2008, when 3 mn accounts were opened. According to the red herring prospectus of CDSL, new demat accounts grew at an annualized rate of 28% and 14% respectively for CDSL and NSDL between 2011-12 and 2015-16.
Retail investors have played a key role in providing incremental liquidity to the market for the long-term, and the retail holding in the BSE 500 companies has usually increased as and when a new firm has listed on the bourses. Retail investors’ holding went up to 7.83% in the quarter ending June 2017 from 7.66% in the previous quarter. The participation from the tier two and tier three cities has increased considerably in the past few months.
Retail investors are participating directly in the equity market through initial public offerings (IPOs) in larger numbers than in previous years. The average retail subscription in IPOs during the first six months of the current financial year was 11 times their allocated quota, much higher than in the past three fiscals when it was less than five times. Retail investors have been applying in IPOs through multiple accounts for bagging the shares of the companies where the grey market premium has been more than 20%. After the market regulator removed the allocation of IPO shares on a pro-rata basis, the chances of bagging minimum share allotment increased, as retail investors stand to benefit even after bagging half of the total shares they have applied for.

 

 
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’