Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

Saturday, September 12, 2015

Tax wise, it’s best to lease the house yourself --- Sandeep Shanbag

Wednesday, 15 December 2010 


As I have been discussing with you, finally it looks like I would have to move to Delhi for around two years.
The main issue that concerns me is that of accommodation. Since this is a short-term assignment, I would need to lease a house. My company has very kindly offered me the option of either renting suitable premises on my own or they are willing to provide me with one. In the former case, I would be paying the lease rent and claiming the HRA deduction. On the other hand, if my company were to allot one to me, they would pay the lease rent themselves. Now, my dilemma is to do with the tax impact of selecting either of these options.
Upon speaking to a couple of people including my HR, and doing some research on my own, I confess I am more confused. Some of my questions are:
What is meant by perquisite value? Some say it is 20% and yet others maintain it is 15%
 Earlier, there used to be this system of fringe benefit tax (FBT) where the FBT paid by the company used to be recovered from the employee. Will the same principle be applicable in the case of perquisite tax?
 If I opt for paying the rent myself, is the entire rent deductible? If not, what amount is deductible?
Given the circumstances, could you suggest the most tax optimal course of action?
Dear Sanjay, 
It seems to me that you would be better off leasing the place on your own. But before I explain why, there are a couple of concepts that you should be aware of.
Firstly, under the present system of taxation, FBT is no longer applicable. The same has been replaced by perquisite based taxation.
FBT was a tax paid by the employer, whereas perquisites are taxed in the hands of the employees.
Now, because FBT had to be paid by the employer in respect of some benefits granted to the employee, in some cases, employers used to resort to the practice of recovering the FBT paid from the employee. However, now, since perquisites (benefits) are taxed directly in the employees’ hands, there is no question of the employer having to recover anything from the employee.
Secondly, though in the past (before FBT was introduced) the perquisite value of company provided accommodation used to be 20% of salary or lease rent paid, whichever was lower, as per a recent amendment, such perquisite value has been lowered to 15% of salary.
So now, if you were to opt for employer-provided accommodation, the same is taxable as per the provisions of Section 17 and Rule 3 as a perquisite in the hands of the employee.
The perk value in this regard (that will be added to salary), would be 15% of salary. “Salary” for the aforesaid purposes means basic salary, DA (if applicable), bonus, commission, fees and all other taxable allowances (excluding the portions not taxable) and any monetary payment by whatever name called.
So basically, almost the entire salary will come into play for calculating the perquisite tax. 
Therefore, this would be like paying an extra tax of 4.64% (30.9% of 15%) over and above your existing tax payable which would be disastrous.
Therefore, it would be cheaper (tax wise) to lease the apartment on your own. But here too, note that the entire rent that you pay may not be eligible for tax deduction. The reason for this is that the HRA exemption regulated by rule 2A is the least of the following:
 An amount equal to 50% of salary, where residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40% of salary where residential house is situated at any other place.
 House rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year
 The excess of rent paid over 10% of salary.
“Salary” for the aforesaid purposes means basic salary and includes dearness allowance if terms of employment so provide. 
Consequently, the entire rent paid may not be deductible. Even so, this deduction will serve to reduce your existing tax rate, whereas under the alternative, the additional perk tax will actually increase it. Therefore, other things remaining equal, it would be best if you pay the rent yourself instead of asking your employer to pay it on your behalf.

Adjusting losses can be taxing --- Sandeep Shanbhag

Tuesday, 10 April 2007 

Now that the financial year has come to an end, it is time to start preparing for filing of tax returns.

One very important aspect of the process of filing returns is the adjustment of losses. If such loss cannot be fully set off, the balance can even be carried forward for set-off in future years. It is necessary for every taxpayer to properly understand and take advantage of the facilities in this regard as this will enable the tax return to be optimised for minimum tax payment.

Inter-source adjustment

There are five heads of income under which any taxpayer can earn income - salary, house property, income from business or profession, capital gains and the residuary income from other sources. By definition, there cannot be a loss from salary and income from other sources. However, a person could suffer losses from other heads of income.

The first and foremost rule is that loss under one head of income has to be first adjusted against any income from the same head.

This is known as inter-source adjustment.

For example, say someone has two different businesses - one of which is loss-making, while the other makes profit. The loss from the first business can be set off against the profit from the second one.

Or, say you have two properties - one for self-occupation and the other one given out on rent. The loss from the first property (on account of the mortgage interest) can be set off against the rental income from the second property. The only exception in this regard has to do with long-term capital gains (LTCG).

Inter-head adjustment

Now, say after setting off the loss as above, there still remains some balance; this loss can then be set off against income from other heads. This is known as inter-head adjustment. For example, a taxpayer who has a single self-occupied house property bought on mortgage will necessarily show a loss. This is because the annual value of a single self-occupied property is taken to be nil and the adjustment of any interest will result in a negative value.

Now, such a loss may be adjusted against salary income or say income from business, if any. There are two exceptions to the rule of inter-head adjustment — losses under capital gains cannot be set off against income from any other head.

Loss from business or profession cannot be set off against salary income.

Carry forward of losses

Any loss that cannot be set off either against the same head or under other heads, because of inadequacy of income, may be carried forward to be set off against income of the subsequent year. Such a carry forward exercise may be done for 8 years after which, if the loss hasn’t yet been fully set off, it has to be written off and cannot be used for tax saving. The important point to note is that for carry forward losses, only inter-source adjustment is available in the subsequent years and not the inter-head one.

Adjustment of loss under the head capital gains

The first and foremost point to note about losses under the head capital gains is that they have a boundary, i.e., they have to be adjusted against other capital gain income only and other incomes are not available for the setting off. In other words, the inter-head adjustment referred to earlier is not available in the case of capital losses.

The second condition in this regard is that long-term capital loss (LTCL) can only be adjusted against long-term capital gain. Or putting it differently, short-term capital gain (STCG) may not be used to set off any long-term capital loss. However, short-term capital loss (STCL) can be set off against any taxable long-term capital gain or short-term capital gain.

In a nutshell, long-term capital loss adjustment can be only done against long-term capital gains, whereas short-term capital loss adjustment can be against any capital gains, long-term or short-term.

Lastly, if the income from a particular source is exempted from tax, loss from such a source cannot be set off. This means, any long-term loss on sale of shares or equity-oriented mutual funds cannot be set off at all as the long-term gain from the sale of these instruments is exempted. In other words, loss of profits must be a loss of taxable profits. Take the following example:

Now, LTCL from shares cannot be set off since the LTCG from this source (in this case Rs 60,000) is exempted. The LTCL from non-equity MFs of Rs 30,000 can only be adjusted against the LTCG from sale of gold. Therefore, only Rs 15,000 can be adjusted and the balance Rs 10,000 will be non-adjustable. Lastly, the Rs 40,000 STCL from sale of shares can be adjusted against the Rs 50,000 STCG and only the balance Rs 10,000 STCG would be taxable.
http://www.dnaindia.com/money/report-adjusting-losses-can-be-taxing-1090030

Sunday, July 12, 2015

બ્લેક મનીને વ્હાઇટમાં ફેરવવા નાના સ્ટોક્સમાં મોટી ગેમ

એનાલિસિસ - શ્રીવાણી આર


શેરબજારના નાણાંનો ઉપયોગ ટેરરીઝમ મની માટે થતો હોવાની અને ટેરરિસ્ટ શેરબજારમાં નાણાં રોકતા હોવાની આશંકાઓ તો ઘણા સમયથી ચર્ચાઇ રહી છે અને તપાસ એજન્સીઓ તેની તપાસ પણ ચલાવી રહી છે. જોકે, હવે મની લોન્ડરિંગની પાકી શંકા

જન્મી છે.

માર્કેટ રેગ્યુલેટર સેબીએ નાના અને મધ્યમ એકમો (એસએમઇ)ના શેર અને કરન્સી ઓપ્શન્સના ડેરિવેટિવ્ઝ ટ્રેડિંગની તપાસ શરૂ કરી છે. આ પ્રકારના ટ્રાન્ઝેક્શનનો ઉપયોગ મની લોન્ડરિંગ અને કરચોરી માટે થયો હોવાનો અંદાજ છે. ખાસ કરીને કાળાં નાણાં ધરાવતા લોકો એક્સ્ચેન્જિસના એસએમઇ ટ્રેડિંગ પ્લેટફોર્મનો દુરુપયોગ કરી રહ્યા હોવાની

શક્યતા છે.

ટ્રાન્ઝેક્શનમાં સહભાગી બનનાર સામેની વ્યક્તિ ખોટો ખર્ચ કે નુકસાન દર્શાવવા માટે કાયદેસરની આવકના અમુક નાણા બ્લેક મનીમાં ફેરવી રહ્યા છે. સૂત્રોના જણાવ્યા અનુસાર તપાસ અગ્રિમ તબક્કામાં છે. ઉલ્લેખનીય છે કે, નાના અને મધ્યમ એકમો સરળતાથી ભંડોળ એકત્ર કરી શકે એ માટે સેબી અને એક્સ્ચેન્જિસે એસએમઇ પ્લેટફોર્મ શરૂ કર્યું હતું. જોકે, કેટલાકે આ હળવા નિયમોનો મની લોન્ડરિંગ દુરુપયોગ કર્યો હોવાનું જણાય છે.

એક ટ્રેડરના જણાવ્યા અનુસાર સમગ્ર પ્રક્રિયા કંપનીની નોંધણી અથવા કાર્યરત ફર્મના લિસ્ટિંગની તૈયારીથી શરૂ થાય છે. ઉદાહરણ તરીકે, બ્લેક મનીને વ્હાઇટમાં ફેરવવા ઇચ્છુક વ્યક્તિને શેર રૂ.૨૫ના ભાવે ફાળવાય છે.

વાસ્તવમાં તે શેરના રૂ. ૫૦૦ ચૂકવે છે, રૂ. ૨૫ ચેકથી (કાયદેસરની આવકમાંથી) અને રૂ. ૪૭૫ રોકડા. ત્યાર પછી શેરનું મૂલ્યાંકન રૂ. ૨૫ નક્કી કરાય છે. આ તમામ પ્રક્રિયા લિસ્ટિંગ પહેલાં કરાય છે. કંપનીનું લિસ્ટિંગ શેર દીઠ રૂ. ૨૫ના ભાવે કરવામાં આવે છે.

લિસ્ટિંગ પછી પ્રમોટર્સ અને નજીકનાં વર્તુળો શેરનો ભાવ ઉછાળી રૂ. ૫૦૦ કે વધુ કરે છે. એટલે કંપની અનલિસ્ટેડ હતી ત્યારે રૂ. ૨૫ના ભાવે શેર ખરીદનાર રૂ. ૫૦૦ના ભાવે શેર વેચે છે. તે સારી રીતે જાણતો હોય છે કે, શેરનું મૂલ્ય નજીવું છે. તેને ટ્રેડિંગની કાયદેસરની આવક પેટે રૂ. ૫૦૦ કરોડ મળે છે. તેણે આટલાં જ નાણાં કંપનીના પ્રમોટરને લિસ્ટિંગ પહેલાં આપેલાં હોય છે. આવી રીતે બ્લેક મની વ્હાઇટ થાય છે.

જોકે, એક્સ્ચેન્જ પર શેરની ખરીદી કોણ કરે છે? સમગ્ર ડીલના હેતુને સારી રીતે સમજનાર ખરીદદાર અલગ ઇરાદાથી સક્રિય બને છે. તે બિલકુલ ઊંધી પ્રક્રિયા (શેર વેચનારથી) કરે છે. આ વ્યક્તિ એક્સ્ચેન્જ પરથી રૂ. ૫૦૦માં શેર ખરીદી મૂળ પ્રમોટર પાસેથી શેર દીઠ રૂ. ૪૭૫ મેળવે છે. એક્સ્ચેન્જ પર શેરની ખરીદીથી તેની કરપાત્ર આવકમાં ઘટાડો થાય છે. સમગ્ર સોદામાં પ્રમોટર મધ્યસ્થીનું કામ કરે છે. તે પહેલી વ્યક્તિ (બ્લેક મની વ્હાઇટ કરનાર) પાસેથી રોકડ લે છે અને બીજી વ્યક્તિ (વ્હાઇટ મની બ્લેક કરનાર)ને આપે છે.

ડીલ પૂરી થયા પછી શેરમાં વોલ્યુમ ઘટે છે અને શેર લિસ્ટિંગ ભાવના સ્તરે અથવા તેની નીચે ગબડે છે. કંપની ક્યારેક જ પ્રમોટર બદલાયા હોવાની માહિતી એક્સ્ચેન્જને આપે છે. એક્સ્ચેન્જના એક ભૂતપૂર્વ અધિકારીના જણાવ્યા અનુસાર કરન્સી ઓપ્શન્સની ગેમ વધુ સરળ અને સ્માર્ટ છે. ટ્રેડરના જણાવ્યા અનુસાર ટ્રાન્ઝેક્શનમાં કંપની સ્થાપવાની, લિસ્ટિંગ માટે અરજી કરવાની કે ડિમેટ ખાતું ખોલવાની જરૂર હોતી નથી.

ઉપરાંત, ટ્રાન્ઝેક્શન ખર્ચ પણ ઓછો હોય છે. આઉટ ઓફ મની ઓપ્શન્સમાં એકથી વધુ ટ્રેડ કરીને ઓપ્શન ખરીદનાર બ્લેક મનીનું વ્હાઇટમાં રૂપાંતર કરે છે. સમગ્ર રૂપાંતર એક કે બે સોદામાં થતું નથી. કોલ ઓપ્શન ખરીદનાર લે-વેચના સોદા કરે છે અને દર વખતે ઓછી રકમનું પ્રોફિટ-બુકિંગ પણ કરે છે. સમગ્ર ડીલ ઘણાં ટ્રાન્ઝેક્શનમાં કરાય છે, જેથી કોઈનું ધ્યાન ન ખેંચાય.

http://www.bombaysamachar.com/frmStoryShow.aspx?sNo=167158

Sunday, March 15, 2015

So many lobbies in Delhi, but none to bat for India --- R Vaidyanathan


http://www.dnaindia.com/analysis/main-article-so-many-lobbies-in-delhi-but-none-to-bat-for-india-1464044



New Delhi is like a huge five-star hotel, flooded as it is with lobbies of all types, shapes and interests. What is missing is an Indian lobby. We all know about Warren Anderson, former chief of Union Carbide during the Bhopal gas tragedy. He landed in Delhi and went to Bhopal.
Based on a non-bailable warrant, he was arrested and kept inside a guest house. Miraculously, its doors opened, and a flight took off by itself from Bhopal to Delhi and from there onwards to the USA.
Anderson left on December 7, 1984. Meanwhile, Adil Shahriyar, son of Muhammad Yunus — a close confidant of Indira Gandhi — was released from a 35-year prison sentence for illegal possession of firearms and drug trafficking following a pardon by president Ronald Reagan. Are the two events — the release of Anderson and Shahriyar — mere coincidences?
Rajiv Gandhi, who was also foreign minister in 1984, was apparently not aware of anything and a group of ministers (GoM) is looking into Anderson’s escape. Incidentally,  home minister P Chidambaram and surface transport minister Kamal Nath, who were ministers of finance and commerce respectively in 2006, endorsed a proposal to let Dow Chemicals — the current owner of Union Carbide — off the hook with regard to “remediation,” or the clean-up of the contaminated site. Both are part of this GoM!
Another example is more bizarre. Naga political and student groups have been starving the Manipuris for more than two months by blockading the state. Petrol sells for Rs200 per litre and everything is scarce. But the Centre is still requesting (cajoling/begging) Naga militants to lift the blockade.
Now imagine what would have happened if it was the other way round: the Manipuris blockading the Nagas. It would not have continued for more than one day. The global Baptist Church would have created a ruckus and many delegations of leaders from Europe and the US would have rushed to India and our PM would have been forced to go to the north-east to make amends. But Manipur can starve since they don’t have a lobby.
In Delhi, we thus have a US lobby, a Chinese lobby (even unelectable Jairam Ramesh lobbies for Chinese businesses), a Middle Eastern lobby and, of course, a Pakistani Lobby. Obama’s  visit reveals the power of the US lobby. It 
appears that in the last few days nothing of importance has happened in any part of the world. It’s just Obama all the way.
Then there are lobbies for the IT industry, for pharma, for liquor barons, for global arms merchants — lobbies for everyone from Aruba to Zimbabwe. But no lobby for India and Indians.
There are several reasons for it. One is our colonial genes. For our leaders, what is good for the US or Europe is good for India. We are physically here, but our minds are in Washington or London or Paris or Berlin. Our leaders in Delhi do not consider India as a civilisation but as a market. Indians are just statistics. As former foreign secretary MK Rasgotra put it succinctly in an interview on the Anderson escape: “If, let us say, this gentleman Anderson had been arrested and tried in India, would corporates anywhere in the world… would they look at India in those circumstances?” Maybe. But the citizens of Bhopal are obviously dispensable statistics. They don’t have a lobby. That’s why the PR official of Dow, Kathy Hunt, said that $500 as compensation is plenty for an Indian.
Secondly, most of our leaders are rootless wonders. We don’t have an elected PM. Our home minister cannot get elected without coalition support. Our finance minister got elected only once, thanks to tacit opposition support. Rootless wonders do not fully grasp the pulse of the people.
We have also emasculated all organs of the state — the CBI, the CAG, the bureaucracy, etc. All are reticent about acting and speaking for India. Telecom minister A Raja is still around, and so are Suresh Kalmadi and Ashok Chavan. It’s quite clear that many of our leaders have ill-gotten wealth stashed away in foreign tax havens. Whether it is IPL or the Commonwealth Games, tax havens have a role to play in funding domestic activities.
Of late, even sedition has become fashionable, thanks to the mobile, one-woman, republic of Arundhati Roy. She does not perhaps know that the original Booker was a slave trader in Guyana. So her hands are stained by cash from the slave trade. But she is weak in history and wants to alter geography. If her audience protests against her seditious remarks, they are at fault, not she. As for Anderson, he left in 1984 saying, “I am free to go home. Bye-bye.”
Nobody is going to even mention Anderson’s name to Obama. The former proved with a few words that we are a cactus republic. Don’t call it a banana republic. Banana is a great fruit and offered to the gods. In these interesting times, when treason is considered respectable, we do need a lobby for India in Delhi.

Why economy is growing despite jholawalas and Wall Streeter --- R Vaidyanathan

http://www.dnaindia.com/analysis/main-article-why-economy-is-growing-despite-jholawalas-and-wall-streeters-1424372

DNA / R Vaidyanathan / Tuesday, August 17, 2010 0:16 IST

The economic policies of UPA-2 are afflicted by a condition called multiple personality disorder. The diagnosis requires that at least two personalities routinely take control of the behaviour of a person with an associated memory loss that goes beyond normal forgetfulness. The economics of UPA-2 is caught in a pincer attack between jholawalas and Wall Streeters. The uber economic ministry — the unaccountable National Advisory Council — is flooded with jholawalas whose idea is that the state should spend till it bleeds. And still spend after that.
Programmes like the National Rural Employment Guarantee Act (NREGA), Sarva Shiksha Abhiyan, and the mid-day meal scheme are implemented through parallel channels of public-private partnership along with NGOs and panchayati raj institutions. The Centre transfers assistance directly to state and district-level autonomous bodies, and these transfers are outside state budgets. And such accounts remain unaudited and mostly unaccounted for. The Comptroller and Auditor General (CAG) has revealed that Rs83,000 crore of taxpayer money spent in 2008-2009 remains to be audited.
Herein comes the bonanza for the jholawalas. In the name of “inclusive growth”, a loot of government funds has been begun by NGOs who claim to represent civil society. Expenditure on welfare schemes is skyrocketing, but not accountability. For instance, the latest estimates are: ministry of rural development (Rs58,732 crore), ministry of HRD (Rs12,727 crores), ministry of health and family welfare (Rs7,468 crore), and ministry of agriculture (Rs3,191 crore).
The jewel is the rural development ministry’s NREGA, named after Mahatma Gandhi. When there are nearly 500 schemes named after Indira and Rajiv Gandhi, this also could have been named after them instead of involving that poor old man. This is the tyranny of the unelected and the unelectable. These NGOs have also become “unaccountable”. The traditional model is that children are taken care of by their parents and, later, parents are taken care of by the children. The new model is that both children and the old will be taken care of by the government.
The jholawalas want to create a society of entitlements wherein there are only rights and no duties. Unfortunately, many of them come from dysfunctional families and don’t know the role of family and community in our system. They depend significantly on foreign sources of funds but now have found a milch cow in the “inclusive” economic policies of this government. They are not institutional builders or value adders. The Jholawala Emeritus is Amartya Sen, who says no timeframe should be set for starting the Nalanda University of which he is in charge.
On the other side, the government is pushed by the Wall Streeters, whose claim to fame is crony capitalism. In their scheme of things, we need foreign capital for everything. The only bhajan chanted by the Wall Streeters is FDI and FII. They think this will solve all the ills of our economy. When small businesses cry for credit, the Wall Streeters say we offer credit derivative swaps. (The logic: if you don’t have bread, eat cake). Recently, the crony capitalists have proposed that business houses can own and run banks. The reason is inclusive growth. The jholawalas pretend to take care of the bottom 20% and the Wall Streeters the top 10%. What about the middle 70%? They are our growth story.
The good news is that we are growing in spite of these two albatrosses. The fastest growing sector is services. For instance, between 2004-05 and 2008-09, the service sector (with a 60% share in GDP) has grown at the real rate of more than 9%. The largest components are trade (9.42%), hotels and restaurants (9.88%), non-railway transport (7.8 %) and other activities like plumbing/painting, et al (9.7%). Even “unorganised” manufacturing has grown at 7.7%. These sectors have grown due to domestic household savings and not due to government policies or FDI. And all of them are predominantly partnership and proprietory family-owned firms. They get little credit from banks and government employees extort bribes from them. These are the sectors which are eyed by global predators since they are the fastest growing areas. Interestingly, they are supposed to be the traditional base of the main opposition party, the BJP. But I think they are neither aware of their base nor its growth.
The economic experts (figuratively speaking), torn between Aruna Roy and Montek Ahluwalia, are mouthing the cliches of the 1970s while the world has moved far away from those illusions. Both jholawalas and crony capitalists have found that this government is a kamadhenu — which can be milked to the limit. The most productive, hard-working segments carry on the growth story unsung. The ultimate irony is that UPA-2 is headed by an economist and advised by many economic experts.  

Sunday, January 25, 2015

What to do when taxmen come raiding -- Suresh Suran / DNA MONEY

The search and survey operations conducted by the income tax department, commonly known as income tax raids, have always been one of the worst nightmares of businessmen, high earners and corporates.
The reasons for this fear include heavy tax and penalty payments, possible devastating impact on the business, mental harassment faced during such raids, etc. Most of the fears are valid and the negative impacts are generally unavoidable, though the impact can be much lesser if the assessee has reasonable knowledge about various aspects of the raids.
Survey procedures
Generally, action under section 133A is called ‘survey’. However, the term survey is not defined in the Act, although the section refers to the power of survey. In the context of the Act, the term ‘survey’ means to collect information and data for the purpose of the Act on the spot, at the place of business or profession.
Although surveys are not feared as much as search and seizure operations, often it is considered to be a step towards such operations. Surveys are considered to be milder than search procedures mainly because this procedure does not involve confiscation of cash, jewellery or other assets, taking statements on oath, searching residential premises, etc.
Powers of income tax authorities while conducting the survey
- To enter the place of business during the business hours and in other places, only after sunrise and before sunset.
- To enter the place other than the business premises, if the assessee states that the cash, stocks, records and books of accounts relating to the business are lying there.
- In case of books of accounts — to place marks of identification on the books of accounts, to take extracts from such books of accounts and documents or records and to impound (confiscate) books of accounts noticed during survey w.e.f. June 1, 2002, after recording the reasons (remember, the survey teams have no power to seize assets). Budget 2008 proposes to extend the rebuttable presumption, which is currently applicable to search operations, also to books of account and other documents found in the possession or control of any person in the course of a survey operation.
In simple words, records in the books of account, other documents found during the survey operations will stand as facts unless proved otherwise. This amendment will take effect retrospectively from June 1, 2002.
- To make an inventory of any cash, stock and other valuables checked by them, to record the statement of any person, to collect information regarding the nature and quantum of expenditure incurred in connection with personal functions and events like a wedding ceremony and any other functions, to discover and production of evidence, etc - A survey can lead to a search only on the basis of information collected in survey, subject to fulfilment of certain condition of section 132(1). Normally, a survey is concluded on the same day, but if the situation warrants, it can be continued on the next day also.
- Authority can take the statement of person available at the place of survey (not on oath) if it is deemed that the statement may be useful or relevant to any proceeding under the Act.
- Similar to search and seizure, the tax officer cannot force the assessee to make any statement about his income or minimum income.
- Only an authority having jurisdiction over the assessee can conduct a survey.
Rights and obligations of an assessee being surveyed
- To permit entry to the IT officers after satisfying their identity.
- To afford facility to the tax authority to conduct survey, to cooperate during survey, to maintain equilibrium, to maintain a peaceful atmosphere.
- To assist in preparing an inventory of books of accounts or documents or cash or stock-in-trade or any other article or thing that may be found in the course of survey and to see that such inventories are detailed, exhaustive and authentic.
- To furnish requisite classification so as to let the income tax authority satisfy as to the assets found duly accounted for.
- To give statements truthfully and completely and avoid giving false or incorrect or vague answers.
- To sign the inventories and statements after carefully reading and vouching for its correctness and obtaining its copies.
- To extend facility so as to compete the survey as expeditiously as possible.
- To let the survey continue after business hours and to see that it is concluded on the same day and is not required to be resumed on the next date.
- To keep the place in an orderly manner so as to let the authorities perform their duties expeditiously.
- To keep and preserve copies of inventories, statements, and to contact the tax consultant immediately on completion of survey.
- To disclose all the material facts and to be guided by the advice of his CA or tax consultant.
- To undertake any other act or steps or retract or which may be deemed desirable by the CA or tax consultant on the facts and in totality of the circumstances.
- Not to hide such material aspects, which stand detected from the material found in the survey.
Dos and don’ts during the raids
The following dos and don’ts can assist in reducing impact of the dreaded procedure of raids.
- Maintain proper and updated books of accounts.
- Ensure that the benefit all the reliefs are availed.
- Copies of important documents like returns of income/ wealth filed, assessment orders, tax payment challans should be readily available.
- Investments made in assets should be properly accounted and supporting evidence should be available to substantiate the investment made.
- Statements recorded at the time of search are very crucial. Be cautious and careful while answering questions and person questioned should not panic.
- To be cooperative and cordial with search and survey teams.
Under license from 

Of China, Ponzi scheme and the Panda put -- Vivek Kaul

http://www.dnaindia.com/money/report-of-china-ponzi-scheme-and-the-panda-put-1281274

 “Wisdom always comes late,” I told her rather philosophically early on Sunday morning. “Are you still hallucinating?” she asked, making a reference to the 
late night drinking binge we had indulged in. 
“And by the time it comes, the damage has already been done.” 
“What comes?” 
“Wisdom.” 
“Oh. But why are we talking about wisdom early morning?” 
“Simply because we refuse to learn from our mistakes.” 
“Can you stop beating around the bush and tell me what is on your mind.”
“Yes Ma’m! Basically I had China on my mind.” 
“China?” 
“Yeah, China. The stock market in Shanghai has gone up by a little over 90% since early November last year. Now what is surprising is that China, over the years, has evolved as an export-driven economy which is highly dependant on exports to the western markets. 

With western economies collapsing, Chinese exports have also collapsed. In the month of June, Chinese exports fell by 21.4% in comparison to the same period last year. This has had an impact on the earnings of companies. Profits of large scale industrial companies based out of 22 Chinese provinces fell by 21.2% for the first six months of 2009. But despite this, markets have been rallying. Why is that?” 

“How would I know? You asked the question, you answer it!” she snorted. 
“Well, the People’s Bank of China, which is the Chinese central bank, has been printing money big time. The Chinese money supply has gone up by around 28.5% from last year. This newly-printed money has found its way into the Chinese economy, with the government-controlled banks lending a record 7.4 trillion yuan ($1.2 trillion) of new loans in the first six months of 2009. Now, to give you a sense of proportion, these new loans are equal to almost one-fourth of the size of China’s economy and a little more than the size of the Indian economy. When such aggressive lending happening, a portion of these loans is being actively used to speculate both in the stock and the property markets, leading to both these markets going up so soon so fast, without any connect with the economic reality of the day,” I explained. 

“And what is the economic reality of the day?” 
“The economic reality of the day is that things are not good. As I explained, Chinese exports have fallen and so have company earnings, but the stock market is still going up. Or take the case of the Chinese property market. The average price per square metre in China is more or less the same as the price in the US. This, despite the fact that the per capita income in the US is seven times the per capita income in urban China. Property prices in the US have fallen dramatically in the last two years, but that still doesn’t justify similar prices. Basically, the Chinese economy has become a giant Ponzi scheme.” 
“A Ponzi scheme? You love that phrase don’t you? To you everything looks like a Ponzi scheme!” she exclaimed.

“Actually, to tell you the truth, I did not figure this one out. Andy Xie, a former Morgan Stanley economist, who is now an independent economist based out of Shanghai, offered this insight around a week back. As I have told you earlier, the Ponzi scheme is named after Charles Ponzi, an Italian immigrant to the US. He launched an investment scheme in 1919, promising to double investors’ money first in 90 days, and later in 45 days. 

Investors got attracted to the huge returns the scheme promised. At its peak, the scheme had 40,000 investors who had invested around $15 million in the scheme. Ponzi had no business model in place to generate these huge returns. All he was doing was using the money brought in by the new investors to pay off the old investors. He ran his scheme till the money coming into the scheme was greater than the money leaving the scheme. One fine day, that stopped, and the scheme went bust.” 
“But what has that got to do with the Chinese economy and stock market being a Ponzi scheme?” she asked. 

“As I explained, the stock and property market going up has no link with economic reality. They are primarily going up because of all the money that is being lent and is finding its way into these markets. With all this new buying coming in, market prices are going through the roof. Such a market is akin to a Ponzi scheme. As a market starts giving good returns, more and more investors want to enter it. The money brought in by these new investors ensures that the price keeps going up and rewards the older investors, instead of any fundamentals, like in a Ponzi scheme. As Robert Shiller writes in his all-time classic Irrational Exuberance, ‘When prices go up a number of times, investors are rewarded by price movements in these markets, just as they are in Ponzi schemes.’ In addition, when the markets have been on their way up, investors tend to look at the recent past pattern and assume that the market will keep going up. They mistake probability for certainty.” 

“Hmm. That makes some sense. But tell me something, what makes Chinese investors so convinced that the markets will keep going up?” 
“Oh, that’s because of the Panda put.”
“Panda put?” she asked. 
“Yeah Andy Xie, the economist, I talked about earlier, coined this term. It refers to the investor belief that the government won’t allow the markets to fall. The popular belief these days is that the Chinese government cannot allow the stock or the property market to collapse before October 1, 2009, the sixtieth anniversary of the foundation of People’s Republic of China. So, the bull run is on at least till then. The other major factor influencing this belief is the fact that taxes from property sales account for a major portion of the income earned by local governments in China. So, it is in their interest to sustain high property prices. With this belief in place, retail investors are getting into the market big time, hoping to get rich overnight, as they normally do towards the last stage of a bull run. Even informed investors are gambling on the hope that they will not be in the last wave of buyers. 

In modern parlance, this is known as the greater fool theory, wherein investors invest because they feel that some greater fool could be depended on to enter the market after they have, and this would give them handsome returns. This explains to a very large extent why Chinese foreign exchange reserves have gone up by $185.6 billion to $2.13 trillion in the first six months of 2009 — the foreign investors bringing dollars into China to invest in the stock market clearly seem to be hoping that they are not in the last wave of buyers. This is a mistake investors always make, when they become a part of a stock market or a property bubble. “ 
“Interesting as always… But till when will this last?” 
“Oh that’ simple. It will last 
till banks keep lending and a portion 
of that money keeps getting diverted into the stock and property market for speculation.” 
“And till when will that happen?” 
“To get an answer to this question, you need to ask Zhou Xiaochuan.” 
“And who’s he?” 
“The governor of the Chinese central bank.” 
“But what is the moral of the story?” 
“Wisdom always comes late. Once a government starts a Ponzi scheme, it is very difficult for it to stop it. As 
Satyajit Das, the internationally renowned derivative expert said in a recent interview, ‘The only lesson learned is that no Ponzi game can ever be allowed to stop.’”  
 
(The example is hypothetical)

Thursday, July 3, 2014

When men think about attractive women, they intend to spend more money: Geoffrey Miller

“Consumerism has deep roots in evolution,” says Geoffrey Miller, a professor of evolutionary psychology at the University of New Mexico in the US. “Why would the world’s most intelligent primate buy a Hummer H1 Alpha sport utility vehicle for $139,771? It is not a practical mode of transport. It seats only four, needs 51 feet in which to turn around, burns a gallon of gas every 10 miles, dawdles from 0 to 60mph in 13.5 seconds, and has poor reliability.
"Yet, some people feel the need to buy it. Biology offers an answer. Humans evolved in small social groups in which image and status were all-important, not only for survival but for attracting mates, impressing friends, and rearing children. Many products are signals first and material objects later,” he explains.
Miller has most recently authored Spent — Sex, Evolution, And Consumer Behaviour. Excerpts from an exclusive interview with DNA:
One of the main points you make in the book is that 'consumerism is an evolutionary concept'. Can you explain that to our readers? 
Conspicuous consumption can be found throughout nature.  Almost all animals show off in some way. Offspring display their fitness to parents, to solicit food and care; males and females display to each other to attract mates. Other animals don’t show off their wealth, but they do show off the quality of their genes, bodies, and brains through traits such as the peacock’s tail, the bowerbird’s bower, or the nightingale’s song. When humans buy the most expensive and impressive consumer goods that they can afford — such as the Tata Indigo Marina rather than the Tata Nano — they are doing the same kind of showing off.
So, consumerism has deep roots in evolution. Here’s another one: Why would the world’s most intelligent primate buy a Hummer H1 Alpha sport utility vehicle for $139,771? It is not a practical mode of transport. It seats only four, needs 51 feet in which to turn around, burns a gallon of gas every ten miles, dawdles from 0 to 60mph in 13.5 seconds and has poor reliability. Yet, some people feel the need to buy it.
Biology offers an answer. Humans evolved in small social groups in which image and status were all-important, not only for survival but for attracting mates, impressing friends, and rearing children. Many products are products are signals first and material objects later.
You write “men increase the conspicuousness of consumption 
when they are most interested in mating.” Why do you say that? Why does it not affect women in the same way as men? 
We have done some experiments showing that when men think about attractive women, they intend to spend more money on conspicuous goods (expensive cars, watches, or foreign holidays) than on inconspicuous goods (washing machines, shampoo, headache medicine). Whereas when women think about attractive men, they intend to spend more time on conspicuous charity (volunteering to help the poor or sick) rather than on inconspicuous altruism (picking up trash when no one else is looking, conserving water when bathing).
So it looks like men are instinctively displaying their wealth more, while women are displaying their kindness more. In fact, many recent studies have confirmed that men increase the conspicuousness of their consumption when they are most interested in mating.
One of your central claims is that we buy many products in a semi-conscious attempt to increase the social and sexual attractiveness of certain personal traits. Why do you say that?  
When we first meet people, our physical appearance is most obvious, so we try hard to wear nice clothing, jewellery, and cosmetics. The whole cosmetics business is focused on helping women appear younger, more fertile, healthier, and thus better able to bear offspring. The evolutionary background of cosmetics is that in most primate species, sexual selection focuses very heavily on facial appearance. In assessing women’s ages, men apparently evolved to pay close attention to facial and bodily cues of ebing in the young-adult phase of peak fertility. So women could evolve to fake their fertility all the way from around age 12 to around age around age 60 — not just physically, but behaviourly.
For instance when Bill Clinton had an affair with Monica Lewinsky in 1995, Monica (born 1973) was twenty-two, near peak-fertility, whereas Bill’s wife, Hillary Clinton (born 1947), was forty-eight, with negligible fertility. One way of faking fertility across a broader age range is to apply cosmetics that amplify facial fertility cues that peak in young adulthood, such as plump lips, large eyes, prominent cheekbones, smooth and radiant complexion, thick and glossy head hair, and minimal facial hair. But once we meet people, we start judging their intelligence, personality traits, and moral virtues.
Are they bright? Kind? Faithful? To advertise these kinds of traits, we are unconsciously driven to acquire certain goods and services that are hard-to-fake signals of these traits — such as a degree from an Indian Institute of Technology (to display intelligence), a donation to the Wildlife Trust (to show kindness to animals).
“Like chivalrous lovers, the best marketing-oriented companies help discover desires we never knew he had, and ways of fulfilling them we never imagined,” you write. What do you mean by that? 
Marketing is about finding ways to profit in business by adding psychological value to products rather than physical value. If a business person can make a product work better as a display of a consumer’s traits, the consumer will pay more for it. For example, drinking tap water is not very good at showing anything special about someone. But it you drink ‘Glaceau SmartWater’ (a premium brand of bottled water), then you are demonstrating that you have extra money (it costs more), a slight understanding of French (Glaceau means glacier, and signifies clean, pure, cold water), and higher intelligence (because you drink ‘smart’ water).
So, when Coca Cola acquired that SmartWater brand a few years ago, it was recognising the benefits for water-drinkers of signalling these traits, rather than just quenching their thirst.

One of the points you make is that creation of culture is essentially dominated by six media conglomerates and four advertising holding companies. Can you explain that? 

I argue that most successful ideas are imposed top down by marketing in the interests of certain powerful individuals, groups, and institutions. It seemed clear that the most successful ideas — religions, political ideologies, languages, cultural norms, technologies — have been disseminated by churches, states, school systems and corporations with immense wealth and power. Even the proliferation of ordinary memes such as the buzz about films, new social and political issues, countries to fear this year, is dominated by six big global media conglomerates: TimeWarner, Disney, News Corp, Vivendi Universal, Bertelsmann and Viacom. These conglomerates relentlessly cross-promote their TV channels, films, magazines, and books through all available media.
For example, if TimeWarner owned Warner Bros releases a big-budget film such as The Dark Knight, it will typically be featured on the covers of Time and People magazines, reviewed favourably by CNN, and well-advertised on AOL. Of course, TimeWarner owns Time and People magazines, the TV channel CNN, and the website AOL. This is not conspiracy theory; it’s just good business sense and standard operating procedure. Apart from these big six media conglomerates, there are four big advertising holding companies: Omnicon, WPP, Interpublic and Publicis.
“Consumerism depends on forgetting the truth and believing a falsehood,” you write. Why do you say that? 
The truth that must be forgotten is that we humans have already spent millions of years evolving awesome effective ways to display our mental and moral traits to one another through natural social behaviours such as language, art, music, generosity, creativity, and ideology. Consumerism actually promotes a big lie that above-average products can compensate for below-average traits when one is trying to build serious long-term relationships with mates, friends or family. True, some products can mask personal defects in the short term.
For a 47-year-old single woman seeking mates, Botox can paralyze facial muscles to reduce wrinkles, hiding some signs of age. The treatment might lead a 31-year-old single man to ask her for a second date, which he might not have done had her true age been more apparent during a candlelit first date. However, that age will become apparent sooner or later. A second big lie that consumerism promotes is that products offer cooler, more impressive ways to display our desirable traits than any natural behaviour could provide.
Take the case of recent ad for L’Oreal lipstick called the Glam Shine Dazzling Plumping Lipcolour. It touted its “unique micro-crystal technology” and claimed that its “moisture-drenched formula with non-sticky texture delivers full, healthy lips with dazzling dimension and incredible shine.” This breathless techno-sensusalism could be rendered honestly as: “This lipstick will signal your libidinous desperation and imminent ovulation not only to your sexually jaded husband and teenage children, but to your male neighbours and household servants.” We’re seldom honest with ourselves about why we buy things, and advertising euphemisms don’t help.
What is the signalling theory and how does it impact advertising? 
If you want to make a decent profit, your product must have a special signalling value beyond its nominal function. If a product appeals to everyone, it cannot signal anything about the consumer, so consumers will simply comparison to shop for it on the basis of features and/or price. Let me give you an example. De Beers has recently begun advertising diamond rings for single professional women, by trying to introduce a new social convention: whereas traditional engagement rings are for the left hand, these single-woman rings are “right-hand rings.” At first, this sounds great: men buy diamond rings for their fiancès when they got engaged, but today there are many wealthy women who are not engaged, and who might nonetheless like a diamond ring.
However, signalling theory suggests this campaign may be counterproductive. If unengaged women start buying themselves diamonds rings and observers don’t bother distinguishing right from left ring-fingers, then diamond rings will no longer display that a loving man has spent two months’ salary on a woman. The diamond’s signalling power will evaporate.
Why does a brand like BMW sometimes advertise in mass circulation magazines given that it’s an inefficient way of reaching its target customers?
What we need to understand is that all ads effectively have two audiences: potential product buyers, and potential product viewers who will credit the product owners with various desirable traits. The more expensive and exclusive the product, the more the latter will outnumber the former. Thus, most BMW ads are not really aimed so much at potential BMW buyers as they are at potential BMW coveters, to induce respect for the tiny minority who can afford the cars. This explains why BMW sometimes advertises in mass circulation magazines: it is an inefficient to reach their target market of potential BMW buyers, but it is a very efficient way to reach the BMW coveters who might respect the BMW buyers.
What is feature creep? How does it help marketers?
Even products that used to be simple have now acquired such complex features that they have become reliable intelligence indicators. This is feature creep. This is driven partly by the need to make each new product model different from last year’s, but also partly by the consumer’s unconscious desire for a product that is right at the limit of his cognitive ability, and one that therefore functions as a credible cognitive display. Consider sewing machines. The iconic Singer Class 201 machines that were made between the late 1930s and the 1950s were hefty black metal appliances with a couple of dozen moving parts and a variable-speed pedal switch.
By contrast, the recent Janome Memory Craft 111000 sewing machine ($7,500 MSRP) is basically a computerised desktop sewing robot controlled by a 7.5 inch VGA touchscreen. It includes two USB ports for downloading .JEF format embroidery designs from a home PC, which it can then copy, paste, flip, rescale, and rotate using up to one gigabyte of onboard memory, before it sews them up at eight hundred stitches per minute across surfaces up to 8’’ to 11’’. Although easy and intuitive to use for basic sewing tasks, it would take an extraordinary mind to fully exploit its capabilities.

You write “more subtly, the iPod and the BMW 500i both contain the letter i to suggest the intelligence of their users.” How does that help?

Marketers more often than not confuse intelligence with wealth, status, taste, class, or education, and don’t understand the distinctive product attributes that bright consumers actually seek to display through their brightness. Marketing types don’t understand that tech savvy males unconsciously respond to product technical specifications not as useful features they’d enjoy, but as impressive properties that they’ll be able to talk about in impressively articulately, IQ displaying ways. The iPod provides an opportunity to explain the meaning of “160 GB” and “MPEG-4”, assuming of course, you know what these mean. The BMW 550i provides an opportunity to display one’s mastery of the cortex-sapping iDrive system and the built-in iPod and iPhone docks, and to explain the meaning of “double VANOS steplessly variable valve timing.”
The male buying them, thinks those features can be talked about in ways that will display my general intelligence to potential mates and friends, who will bow down before my godlike techno-powers, which rival those of Iron Man himself.

Tuesday, June 10, 2014

Are you a victim of loss aversion phenomenon? --- Chandni Burman

Poker players explained to me that there’s a particular moment at which players are extremely vulnerable to an emotional surge.
“I can’t get him and I can’t get over him,” said Ruma, when we caught up over the weekend.
“Oh, I thought you had gotten over that bugger,” I replied.
“Arre nahi, I keep going back to him, even though I know it’s not quite working out between us.”
“These creative types have too many mood swings darling. It is best to stay away from them, that’s the least I can tell you from experience.”
“One day he wants to marry me and the next day he says only weak men get married,” sobbed Ruma.
“Oh. That’s bad,” I sympathised.
“I don’t know what to do. This is getting way too depressing.”
“Hmmm. I think you have become a victim of loss aversion.”
“Loss aversion? Here I am telling you the problems of my life and you come up with this jargon. Tum bhi na!”
“I find this concept of loss aversion really interesting. Have some patience and hear me out. Okay?” I enquired.
“Hmmm. Okay. So tell me. What is this loss aversion?” she asked.
“It is essentially the tendency to hold onto a losing investment or bet.”
“I don’t quite get it.”
“Let me give you an example. You remember Ambar na, my ex?”
“Of course I do. Is he still chasing you?” she asked with a smirk on her face.
“Ha ha. Of course he is. But that is not the point I was trying to make. So Ambar had invested in a few stocks on the basis of some tips that he had got from gujju landlord. “Ekdum teen mahine main double hoga,” the landlord had told him.”
“Oh. And did that happen?”
“Well, it did not double, but it halved. He had bought the stock at a price of Rs45. And three months later the stock was quoting at around Rs24.”
“And then what happened?” she asked.
“He called me, like he always does, when he is in trouble, and told me the entire sob story. After hearing him out, I asked him to sell the stock, given that the prospects of the stock were not looking good.”
“Yeah. That made sense.”
“And then he told me that his plan was to buy more of the same stock. He felt that by buying more he would be able to 
average down the purchase cost. So once the stock price goes up he would be able to make good his losses more quickly.”
“Ah. So what happened?”
“Well the stock kept falling. He kept buying more. The last I checked the price had touched single digits and Ambar still 
hadn’t sold the stock.”
“Oh. That was rather stupid of him.”
“Yes it was.”
“But why this behaviour? Couldn’t he see it’s a losing proposition all the way?”
“He could not. He had become a victim of loss aversion or the tendency to hold onto a losing investment,” I explained.
“But what is the reason behind this?”
“Economists over the years have carried out a lot of research in this area and have concluded that people experience twice as much pain when they face a loss in comparison to the pleasure they experience when they make a gain.
V Raghunathan explains this phenomenon in his book The Corruption Conundrum and Other Paradoxes and Dilemmas. ‘The pleasure of Sensex going up from 10,000 to 20,000 was much less than the pain of its drop from 20,000 to 10,000, wasn’t it? In short then, losses loom larger than profits,’” he writes.”
“That makes sense.”
“ So there are two aspects to the whole thing. One, the inability to sell and cut losses, and two, to keep on buying more in the hope of averaging down the cost. This throwing of good money after bad is referred to as ‘sunk-cost’ fallacy.”
“Yeah, that was obvious.”
“In fact Tim Harford explains this rather well in his new book Adapt in which he talks about top level poker (a card game) players. “Poker players explained to me that there’s a particular moment at which players are extremely vulnerable to an  emotional surge. It’s not when they’ve won a huge pot or when they’ve drawn a  fantastic hand. It’s when they’ve just lost a lot of money through bad luck or bad  strategy. The loss can nudge a player going ‘on tilt’ —  making overly aggressive bets in an effort to win back what he strongly feels is still his money. The brain refuses to register that the money has gone. Acknowledging the loss and recalculating one’s strategy would be the right thing to do, but that is too painful,” writes Harford.”
“That explains it, I guess.”
“Yes. The term was coined by psychologists Daniel Kahneman and Amos Tversky. As they say, ‘A person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise.’”
“So the tendency is to catch a falling knife?”
“Yes Mam. In fact there is another beautiful example in the book A Mathematician Plays the Stock Market written by John Allen Paulos. Paulos shares his experience of investing in a stock called WorldCom, which at a certain point of time was the second largest telecom company in the US. In 2002, it came to light that the company was essentially boosting its earnings by resorting to accounting fraud. The stock price had started to fall even before that, when investors realised that analysts following the sectors had been writing trumped up reports on the kind of earnings US telecom companies would make in the future. The sector had built up huge overcapacity over the years and did not have much pricing power.”
“So what happened with Paulos?”
“As he writes, ‘By late summer 2000, WorldCom had fallen to $30 per share, inciting me to buy more. By this I don’t mean that there wasn’t a rational basis for investing in WorldCom stock...If you didn’t look too closely at the problems of overcapacity and the long distance phone companies’ declining revenue streams, you could find reasons to keep buying...Of course, for every facile invitation I extended myself to ‘average down,’ I ignored an equally facile warning about not attempting to ‘catch a falling knife.’”
“And he kept buying more stock!”
“Yes. In fact as he points out, ‘I kept telling myself that I’d incurred only paper losses and had lost nothing real unless I sold. The stock would come back, and if I didn’t sell, I couldn’t lose.’”
“Makes tremendous sense Chandni ji. But why have you been telling me all this?” she asked with tremendous concern.
“Oh, I thought it would be rather obvious by now. Isn’t it?”
“No. Today my brain is not working. I am missing him big time.”
“Hah. Well, you know the relationship is not working, but you don’t want to get out of it and cut your losses, because as long as you keep holding onto it, you still feel there is a chance. It might just work out is what you have been telling yourself. You are ‘averse’ to coming out of the relationship and converting your so called ‘paper’ loss into a ‘real’ loss.”
“Wo subah kabhi to aayegi!” remarked Ruma rather philosophically not wanting to get the point.
— The writer works in the financial services industry and can be reached at chandniburman@yahoo.com. Views are personal

Gift money to relatives to save tax --- Sandeep Shanbhag

We will discuss two tools, which, if used optimally, can save you heavy taxes. When used simultaneously, they create an amazing synergy in tax savings.


Read how Mr Mehta benefited by investing money in his parents’ and children’s names

In this article, we will discuss two tools, which, if used optimally, can save you heavy taxes. When used simultaneously, they create an amazing synergy in tax savings.

The first tool is your basic tax threshold. Readers would know that the first Rs 1,10,000 of income is exempt from tax.

For non-senior women, the limit is Rs 1,45,000. For senior citizens (65 plus), the limit is Rs 1,95,000. So far, so good.

The second tool that works hand-in-hand with the first is known as Section 56 of the Income-Tax (I-T) Act.

It basically exempts cash gifts between relatives. Though there is a long list specified in the section, for our purposes, suffice it to know that as per the Act, you, your parents, your brothers and sisters and your children are all relatives of each other.

Now, in order to understand how these two tools can be used for some smart tax planning, let’s take the example of one

Mr Mehta, who is 49 years old. He happens to be in a senior management job, which puts him in the highest tax bracket.

His retired parents live with him. His wife is a home maker. And he and his wife are proud parents of an 18-year-old daughter and a 20-year- old son, both of whom are studying in college.

Read Mr. Mehta’s profile once more, if you must, because it is important in our scheme of things. Also remember that some of the numbers that are going to be thrown up are astonishingly large. Don’t get thrown off because of that.

This is just the power of these tools at work. You can use them at any income level to suit your particular situation. What’s important is understanding the concept, individual numbers can always be plugged in.

Now, Mr. Mehta, like most of us, finds that all tax-saving investments in the world can help him save a maximum of only Rs 33,900. That’s not enough. His tax outgo is much more.

Moreover, every rupee of post-tax income that he invests, in say, RBI bonds, Bank FDs and Post Office MIS and the like is subject to the highest tax rate.

If he doesn’t want to pay tax, he is forced to take market risks by investing in equity shares or mutual funds.

However, he finds the stock market too whimsical for his liking —- while it gives a reasonably good return for a period of time, it is risky and volatile.

Already suffering from hypertension, no beta blocker in the world could prevent his pressure from outswinging the market.

It was at this delicate juncture that Mr Mehta was introduced to our tax planning tools by an old chartered accountant friend. This is what Mr. Mehta did after his brief, but illuminating, chat with his friend.

He gifted Rs 19.50 lakh to his father and a similar amount to his mother. This gifted money was invested by his parents in a bank FD, yielding 10% per annum.

This basically meant that both Mr Mehta’s father and mother earned Rs 1,95,000 as interest from the FD (10% of Rs 19.50 lakh). However, not a penny of this is taxable as it is not beyond the initial tax slab available to senior citizens.

In one stroke, Mr Mehta effectively made an income from Rs 39 lakh of capital tax-free in the family’s hands.

Hade he invested the funds himself, he would have paid full tax on it. However, since the gift was tax-free and the tax slab was available, this strategy could be put to work.

Now, Mr. Mehta finds that his children have some time to go before they start earning. His daughter can earn up to Rs 1,45,000 without having to pay tax and his son can earn Rs. 1,10,000.

But they aren’t earning as of now, are they? They are studying and will continue to do so for the next 5-7 years. So what does he do? He gifts them around Rs 14.50 lakh and Rs 11 lakh, respectively.

This money, in turn, is invested in a similar bank FD by the kids, thereby earning Rs 1.45 lakh and Rs 1.10 lakh, respectively. Of course, as explained earlier, no tax would be payable.

In effect, by using two simple tools that the I-T Act offers, Mr. Mehta had managed to make Rs 6.45 lakh of income tax-free for the family. Putting it differently, over Rs 64 lakh of capital was deployed.

However, the income therefrom was totally tax-free. Note that it is not Rs 64 lakh of income that is rendered tax-free, it is the income on a capital of Rs 64 lakh (around Rs 6.45 lakh) that is sought to be made tax-free.

Now admittedly, Mr. Mehta is an extremely rich man. He had Rs 64 lakh to spare in the first place before trying to make it tax-free. Not everyone will have this kind of money. However, the example given is an optimal one.

You can use a similar strategy with the funds at your disposal and the benefit you derive will be proportional. In other words, it’s not an all or none strategy…….use it to the best of your ability.

Also note that Mr. Mehta’s profile was an ideal one. Also, not every taxpayer will have his profile. You father may be having taxable income but your mom may not be working.

Or your children may be earning already. However, the idea is to use that particular element in the equation which applies in your case directly.

Beyond a point (barring ideas such as discussed above) tax saving is not possible. The worst mistake any investor could make is to invest with the primary objective of saving tax.

The question to ask is would you have made the investment if it didn’t offer tax saving? If the answer is no, don’t touch the investment.

It’s better to try and optimise, post tax income instead of making a sub-optimal investment just to save on tax. Or like Donald Trump says, some of your best investments are the ones that you don’t make.

Gift money to relatives to save tax