What is “Undivided Share in Land” and why it should be in mentioned your agreement ?

Posted on September 16, 2013August 19, 2019 by Jagoinvestor

You bought your “Dream Home” and you are on top of the world. The joy and pride you have after buying your home is amazing. The property is at great location and the prices are appreciating, and you feel you are the Hero ! . Now you want to sell your flat for some reason and you are more than confident that you will get a buyer and the deal will take just few weeks and you will be bathing in cash from top to down.

Prospective buyers have started meeting you and they want to buy the property, but they are all rejecting it. They are “informed investors” who take care of every single detail and they ask you that killer question –

“Everything is fine, but where is your undivided share of land (UDS) in agreement?”

You are wondering whats going on, quite amazed only to realize later that you were only sold the building which is depreciating each moment, but “LAND” , which is the real thing is not owned by you.

You are SCAMED or FOOLED ! or both ! . Let me introduce to the term “Undivided Share of Land” or UDS as its called generally in real estate world and why you cant ignore this at any cost while purchasing properties.

What is Undivided Share of Land (UDS) ?

I will keep it short and simple. Undivided Share of Land is the share of land owned by you when you purchase the property. Basically when you buy a flat or apartment, you are buying two things

1. The constructed building – where you actually reside
2. The proportionate share on the land, where the whole property is built

The Price Appreciation in real estate actually is the appreciation in land prices, because technically the building will depreciate overtime. Its not that cement and concrete structure which is the prime thing, but the land. Have you ever thought what will happen if there is an Earthquake and the building collapses ? What is in future, the govt wants to acquire the land for some national project and wants to give compensation to you ?

Leave all that, imagine in future your building after many years needs to be redeveloped and a new construction has to happen. At that time, the amount of land you own will matter. Note that incase of co-operative societies, the Undivided Share of Land might be on the name of society and not on the home owner name, because they are share holder in the society, which is fine.

The sum of all the flat owners UDS has to be equal to the property land size. You should also know that the undivided share of land will be proportionate to your property area.

Example 1 – If there is land measuring 1,000 sq and there are 10 flats or equal size is constructed on that land, then each owner will have 10% of the land as his/her share.

Example 2 – Lets say there is a big township where 100 units of 2 BHK flats of 1,000 sqft and 50 units of 3 BHK measuring 1,500 sqft . Then the total constructed area is (100 units * 1000 sqft) + (50 * 2000 sqft) = 2,00,000 sqft . Anyone who owns a 1,000 sqft flat will have 0.5% share in the total land (Because 1000 is 0.5% of 2,00,000) and anyone who owns a 2,000 sqft flat (3 bhk) will have 1% UDS .

There has been cases where the builder has allocated less undivided share to flat owners and kept some part of himself and the original land owner (a lot of times, builder buy the land from someone else). Here is one such example

Current apartment which I am staying is 10 years old apartment. Building having total 24 flats. Whereas builder made total 26 undivided share. Other than 24 flat owners one share for builder and one share for Land owner. In the share of builder and Land owner they constructed few shops in building cellar. SOURCE

Important Point – The above example is for apartment system . If its a co-operative society, then the land share is equal for each member, irrespective of their property size.

What to check in Agreement ?

When you buy the property, your builder will give you a date when you have to come to registration office and all the agreement work will be done. Most of the times, builders are reluctant to show you the agreement copy. But they will be ready to share someone else agreement copy at their office or at the main site.

Just have a look at that agreement which is like a specimen or the format, on some of the page, you will see “Details of Undivided Share of Land” and it will be mentioned in percentage terms like “0.45%” or exact area in sqft terms. Just read the whole thing carefully.

Then when the actual agreement has to take place, you can then read the agreement in detail and make sure you look after this point in your agreement copy. A small tip here is that when builder calls you for registration, tell him you would like to come before 1 hour from the scheduled time and have a detailed look at the agreement, if possible also get a lawyer with you and have him look at the agreement.

So did you check your agreement copy and see how much Undivided share of land you own ?

Why “Forced Investing” is really good for your financial life ?

Posted on July 8, 2013November 26, 2019 by Jagoinvestor

A big reason why some financial lives are messed up is because there is no “accountability” factor in those financial life, you are not answerable to anyone, you are not required to report the progress of your financial life to anyone like you file your income tax returns each year. Because of this fact, most of the investors have to depend on their “will power” and “commitment”, but truly speaking – in real life it does not work! . Just promising yourself that you will “stick to your plan” fails like anything. Whats the solution here?

In my opinion, the solution is simple and amazingly astonishing – you take decisions which “forces” you to invest from time to time, you surrender to a situation which makes you pay due to some fear and compulsion, where you cant come out of it so easily.

Forced Investing is good

There are various decisions like Buying a House on EMI, Starting a SIP in a mutual fund, opening a Recurring Deposit, Buying a Policy which forces you to keep paying premium or installment over the years/months help you save money by “compulsion”. The product design is such that you get into a structure or an arrangement that makes you feel – “I have no option” . Most of the people will not be able to save any money if they do not rely on these “compulsive” investments and each month their money from saving bank account keep reducing the same way I saw audience disappear every minute while watching “Lootera” movie this Weekend (It really looted my Rs 400 bucks) .

Let me point out some scenarios which will make this point clear.

1. Forcing your brother to pay for Education Loan

Imagine, you have a spoilt brother/sister, whose mindset is not designed by God to “save” . Now you or your father have the money to fund the education cost for college. But instead of that, you tell him/her that there is no money and education loan is the only option, which he/she will have to pay back later once he gets a job. Now there is “compulsion” to pay this EMI, there is no escape from it. Out of whatever he/she earns, they will be forced to pay away with the EMI part and only the rest money will be there for them to “enjoy” and you can be sure that it will all vanish by the end of the month, which would have happened anyways even if there was no “compulsion to pay EMI”.

2. Taking Home Loan

This is Interesting , A lot of people are afraid of committing themselves home loan because they feel the insecurity of jobs or no potential salary hikes in future etc and because of this risk factor, they have not taken a loan till now, and the worst part is they neither have any money left with them over the years (which they might have paid in EMI, where has it all gone ?) .

A lot of people who took courage in the start and took home loan even if it meant stretching their financial life, would be able to confirm that because it was mandatory for them to pay the EMI each month, they did everything and anything to make it possible. The compulsion of paying the EMI over years brought some discipline and seriousness in them about their financial life.

3. Recurring Deposits & SIP’s

Try opening a Recurring Deposit of Rs 1,000 per month (option 1) and try to drop two Rs 500 notes in a piggy bank at home each month at the end of the month or the start of the month (option 2) and then see the results after 1-2 yrs. The compulsion and automation which a Recurring Deposit brings in your financial life can never be achieved by a piggy bank, simply because of the passive nature of recurring deposit or a SIP in mutual funds (the money goes and you are not even asked for it and some times you are not even aware that it happened). However, with the Piggybank model, each time you have to consciously take that action, and since you are Human, you fail at it. Any decision where “you” have to take “manually” take some “action” eventually have very high chances that it will not happen (on a consistent basis).

4. Investing in Child & Endowment Policies

I was arguing with a Certified Financial Planner on how one has to avoid those endowment policies and child plans which they feel are amazing financial products. He asked me – “Manish, I know that these policies are not going to give the best returns, but do you know most of the investors want some short term pleasure to invest. These endowment/ULIP/child policies give tax benefits and because they have penalty for discontinuing – there is a compulsion to pay each year and that makes them invest each year.”

Just saying – “SIP is better and Mutual fund is amazing” will create short term excitement for them, but at the end of the day they will not take any action because Mutual funds and other powerful products are highly liquid and investors fall to this and can not control themselves in front of short term requirements which comes in front of them”.

This made me realize , that most of the time policies which are illiquid can be good for investors (who are weak in controlling themselves) because they need some compulsion and fear to continue. You can see people redeeming their Mutual Funds to upgrade the car, but hardly anyone does that with an LIC policy. Right?

Try to incorporate “Compulsion” with every decision

The biggest take away from this article for you is that wealth gets built over years only when you are consistent and disciplined and there are financial decisions which can bring that “compulsion” element. It’s in your interest to take decisions which bring some kind of compulsion in your life. So next time you decide to save some money at home in a piggy bank or in your almirah, ask yourself will it bring any accountability, compulsion, and automation (where you are not involved manually), or should you open a Recurring Deposit or a SIP which will help you on those factors. You might want to have a look at our full-fledged paid video program on “Automation in your Financial Life” on our Wealth Club

If you are still wondering why these compulsive decisions help you grow wealth, understand the advantage of bringing compulsion in your financial life is that it changes your financial life equation from “Saving = Income – Expenses” to -> “Expenses = Income – Saving” . You first “save and invest” and then spend !

Let me know your views on this topic?

How you become a loser when you pay in black for your real estate property ?

Posted on June 6, 2013August 19, 2019 by Jagoinvestor

Naresh recently visited a new residential project in Pune which was ready for possession. The property cost was in his budget and he was about to finalize the deal. The total cost of property was around Rs 40 lacs. Stamp duty and Registration cost was to be paid separately which would take total cost to around 43 lacs. This was a bit heavy on Naresh pocket, so out of his regular habit, he inquired if there is any trick by which he can save some money on the deal ?

Bought house by paying in black

The builder was quick to give him a great saving advice – “Sir , You have to pay 6% stamp duty and 1% registration cost on the agreement price. Which comes to 7% of 40 lacs, thats 2.8 lacs additional, thats the reason the total cost comes around 43 lacs . Now if you want to save money, what you can do is pay some part of the deal in cash to us (means pay in black) and we will reduce the agreement cost by that much, that way – we will also save our tax on the black money part and you will save 7% on that cash amount. Like if you pay us Rs 10 lacs in Cash, then we will make the agreement for Rs 30 lacs only and you will have to pay stamp duty and registration cost on only 30 lacs which will be 2.1 lacs, and it will save you Rs 70,000 without doing anything extra ! . Cool na ! .”

The offer was tempting and Naresh fell for it, how cool is saving Rs 70,000 , all you need to do is pay some part in cash and lower the agreement amount in records. But do you understand, what is your loss in long term because of this kind of deal ? Let me break some hearts today, who have already done this mistake while buying their properties.

Stamp duty and Registration Costs

First understand that stamp duty and registration costs vary from one state to other state. For example – In Maharashtra, its 6% + 1% = 7% in total , so whatever is your total agreement cost , you will have to bear additional 7% on that amount as stamp duty + registration costs. Given the huge amount involved and the financial crunch every buyer faces at the last moment of the deal and hunger of builders to save every bit of tax, makes sure that buyers fall for this trick of paying huge amount in CASH (black money) and register the property at lower price just for few thousands (actually sizable if you look at it). This looks like win-win situation to buyers and they are pretty happy about it, however truly speaking, this is a loosing deal for the buyers in a very long run (if you are going to sell the property later) and only benefits the builders and let me now explain you why is it so ?

At the time of selling – The cost of house matters

I hope you are very clear that when you sell your property in future , you pay the tax on the profits made. And the profit is decided by your COST of the house and the sell price. So lower the cost of your house, the higher the profits on paper for you in future. You might be aware of the fact that indexation is applied in case of real estate transactions and 20% tax is paid on the profit.

Now lets take this same example we are discussing and see how much you save at the time of purchase and how much you loose at the time of selling , which can be in distant future. See the working below and try to understand the whole situation

How paying black money in real estate transaction can lead to loss in long term

In the example above you can clearly see that by paying Rs 10 lacs in cash, a person is able to save Rs 70,000 instantly. However they are not able to look beyond the obvious and visualize the kind of loss they will incur in future when they decide to sell the property. The same person will pay 3.4 lacs of additional tax in future because he/she paid Rs 10 lacs in cash years back.

Now there are few points which can be debated here like there can be changes in laws in future, or one can save the tax by investing in another real estate properties (which again depends on future laws) , but the point here is to educate you on the long term implications of this. Now if you fully understand the message of this post, you can take your decisions with full responsibility.

Whats your take on this ?

Is your Company Depositing your EPF money ? Are you Sure?

Posted on June 3, 2013August 22, 2019 by Jagoinvestor

I don’t want to shock you, but there are tons of cases where employer happily deducts your EPF amount from your salary, but they do not deposit it with EPFO. This goes on for years and one day you come to know that you are stuck ! , because there is no EPF money for you. Your employer has severe cash crunch or is about to shut down and now you have to run pillar to post to claim your money. The whole situation gets ugly and you feel cheated, because your company never deposited the Employee Provident Fund amount. Now you go to Police and file a case against employer. But this all can be avoided if you are careful a bit, from starting itself.

Employer not depositing EPF money

How about making sure your employer is depositing your provided fund money into your EPF account ? Before I tell you, how you can do that, let me first share with you some REAL LIFE cases where employer failed to deposit EPF money and employees are suffering ! . These are some of the examples shared by readers of this same blog over comments section in various of EPF related articles.

Case 1 – How Abha’s company didnt deposit EPF money for 2 yrs

Dear Manish,

Thanks for such an informative post. At last i do see some hope. Here is my situation:

Worked for this company A for almost 4 years and left them in Nov 2011 as they were downsizing…yes it’s been more than a year and half of torture they have given me thus far. Company is kind of closed now as I don’t get any proper response from them, CEO is just not bothered. Company first asked us to wait for 2 months to file the claim as it is a rule, did that patiently. Later came the story of change of PF office from one (under which it was originally registered) to another and that went on for several months

They kept saying PF offices are not coordinating among themselves, the real reason was even shocking and more disappointing, PF guys were not updating because this company didn’t not deposit our PF amount for long time (2 yrs appx), they however kept deducting the same from our salaries (was surprised how come there was no annual audit by PF office and how this company could continue doing so for this long), anyways they cleared things in January this year and said we have applied again. When filed a grievance online, PF person says we haven’t received any claim whereas this X employer says they have already applied. Don’t know what the real truth is but on the basis on experiences I have… most certainly it is the X employer at fault.

Another strange thing is, when I checked by balance online in January this year it looked fine (updated up to 2012… I do have SMS proof) but from last 2 times it saying updated up to 2010, I am worried if this employer has dome some mischief here too, is it possible for a company to take back money from an employee’s PF account or it is the issue with PF website?

I don’t want to apply for my claim via options you suggested above unless I see the balance updated. Thank you so much for reading thru my query/concern. Appreciate your feedback.

Regards,
Abha

(Direct Link)

Case 2 – Balaji Company asked him to Wait till they deposit the Employee Provident Fund money

Hi Manish,

I switched jobs in August this year. Before I quit the job, I had submitted form with my previous employer for withdrawing the amount in my PF account. I had not received the amount due till December. When I called my previous employer, they told that they have not yet deposited the money and I will have to wait till March 2013.

My question is, is what my employer did legal? How frequently should the employer deposit the PF money with the EPFO? I have been working with the organisation for little more than a year now.

Thanks for clarifying.

(Direct Link)

Case 3 – Sarabjeet Kaur company not replying her because they did not deposit EPF amount

I worked in an organisation for 2 years. They have not deposited the PF amount which they used to deduct it from our account. Its been 1 year I am asking them to refund the PF. They have stopped replying to the emails and have stopped answering everybody’s call. Is there any ways I can withdraw the amount? The firm is based out in Mumbai and I used to work in Delhi Branch.

(Direct Link)

Employer can be Jailed if they do not deposit EPF money

An employer has no right to deduct the employee share from salary and not deposit it with EPF. There can be any excuse or justification for this, because its employee hard earned money. Once the employer deducts the Employee Provident Fund money from the employee salary, its their duty to deposit it with EPFO , and if they fail to do so for any reason, its a crime.

Whatever is the case, you can always complain about it with the EPFO department and the concerned officer has all the rights to proceed the legal complaint against the Employer and in the worst case, employer can also go to jail, because what they did is a criminal offence under section 405/406 of IPC .

Here is a real life case Shrikant Bangur And Ors. vs Shree Synthetics Shramik Union – where employer did not deposit the EPF money and there was legal battle going on . Here are the 3 things which you can do against your employer.

1. Complain to CVO officer – You can also email your situation and case to the CVO (chief vigilence officer) at EPFO, who is appointed by Ministry of labour for EPFO to look after these kind of irregularities. You can email them at [email protected] . More at this link

2. File a Police Complaint – You can also file a criminal case, against the employer in police station which comes under the jurisdiction of your working office (not the registered one) . All you need to show them is the salary slip, which shows the EPF deducted, note that its always better to mail CVO about it anyways, so that the chances of local authorities influencing the matter will reduce.

3. Complain to Regional Provident Fund Commissioner (RPFC) – You should also complain about the matter to the RPFC officer if under the EPFO office, which will be investigated by him/her.

How Employers Deposit your EPF contribution to EPF account ?

How exactly your EPF money gets deposited in your EPF account ? Here is what I found on this website

Employees’ PF a/cs are maintained under these two different methods are –

1) All accounts are with O/o the RPFC

Every registered employer remits the Employee Provident Fund contribution by challans to the RPFC’s Bank a/cs. which in turn gets accounted in the respective A/c No.of every such employee. And the employer submits monthly returns to the RPFC showing the details, employee wise of contribution thus remitted.

Every such money is maintained by the RPFC who in turn disburses, thro’ the employer towards refundable loans, F & F settlements together with accrued interest to the respective employees. Once in a year a ledger sheet showing the transactions of any employee for one full year is issued to the concerned. Similarly from the PF contribution pension contribution is divided and remitted to the Pension a/c. of the employees thro’ a separate A/c. code. This method is the largest.

2) The other method is called “Exempted Establishments (PF Trust)”

An employer/company who employs more 100 employees on roll is eligible to apply to the RPFC for “exemption” from maintaining the EPF under the above said (1) method. RPFC grants the “exemption orders” under certain conditions after examining various aspects. After which the Employer sets up a EPF Trust to be run by Employer (employer’s nominees & Employees’ representative (Union nominees) which manages all the contributions of employees & employer (excepting Pension Fund which is never maintained by the Trust). A set of Bye laws, in the lines of EPF Act & Rules is prepared & duly approved by the RPFC for running the Trust.

This PF Trust money is invested in the Govt.approved securities for earning the assured interest from which accrued interest to the employees’ PF a/cs is credited. The Trust once in a year prints the Employees’ PF ledger a/cs and distribute to the concerned. The Trust accounts are audited by the CA and submitted to the RPFC. RPFC also periodically inspects the Trust a/cs and oversee. Monthly, annual returns in the Forms have to be submitted. The convenience under the Trust is quick disbursement of loans, withdrawals and F & F settlements to the employees. Surplus, if any never distributed but any shortfall is made good by the employer.

(Source)

How to find out if your employer is depositing your EPF contribution or not ?

Let me share with you some steps you should follow, to find out if your company is depositing your EPF contribution properly or not.

1. First thing is the do not rely on hearsay’s here and there. It might happen that you come to know from some one that your company is not depositing your EPF money, but it might not always be true . Delays happens at times .

2. Every month on 25th , your employer is suppose to send few documents to EPFO department to intimate them on

Form – 2 (for new member during the month)
Form – 5 (detail of new joinees during the month)
Form – 10 (detail of left employees during the month)
Form – 12 – (Details of money deducted from employees salary)

3. The best thing is to first contact your employer and ask them for a copy of these forms for last 2-3 months, do double check if they deposited the money or not.

4. As per my opinion, the best way for a common man and most convenient option is to file a RTI against EPFO and ask them all these questions . Mention your EPF account number, your employer Code and simply ask if your employer has been depositing your contribution or not.

Conclusion

Mostly the big size employers might be depositing the Employee Provident Fund money properly on time, but some of the companies which are small sized or whose owners and management teams are unethical might be into these illegal activities of not depositing employees hard earned money. Its always a good idea to spend some time to be assured, in-case you feel your company is one of those who are not depositing EPF amount with EPFO 🙂

Do you know of any case like this ? Also Please share this article with more and more people

Are Gold Saving Schemes from jewelers really worth investing ?

Posted on May 20, 2013August 22, 2019 by Jagoinvestor

Are gold saving schemes by jewellers really a great investment option? There are huge number of people who become part of gold saving schemes offered by jewellers, assuming that they are amazing deals which they should not miss! There are few advantages and disadvantages about these gold saving schemes. It’s important to understand them before you invest in those.

Ankur asked this simple question on our jagoinvestor forum which triggered this article

Lately there are ads coming on TV abt this Golden harvest scheme (GHS) from Tanishq, where you pay for 11 months and the company will bear the installment for 12 month to buy Gold. Any reviews abt the scheme?

Gold Saving Schemes

1. Most of the schemes are plain money saving schemes

The way a lot of gold saving schemes project their plan is as if you are buying real gold each month, but majority of them are just plain money saving scheme where you deposit a fixed amount each month for X months and in the last month the jeweler deposits the “bonus” installment and then finally you use the money to buy the gold jewelery at the price prevailing at that time! Not at the gold price the time of joining the scheme! So in practice the whole scheme becomes like a recurring deposit where you deposit some money each month. The bonus installment deposited by jeweler makes sure you get a return around 8-10% on the overall installment.

2. You cant redeem Money

Unlike recurring deposits, you can’t use the money accumulated in gold saving schemes for any purpose. The gold saving schemes make it mandatory that you have to buy gold jewellery and only gold jewellery, not even gold bars or coins. So in case you need money for some other purpose, you can’t use it. But you will say that it’s fine, because at times you also are offered “Zero Making Charges” under these schemes, but you miss reading the terms and conditions which says that it’s only on selected designs and models. What if you do not want to buy those designs? In that case you have to pay the making charges which are applicable and what happens if the design and model which you like have much higher price than you have accumulated? In that case you have to shell out more money. The making charges which you will pay will cancel out the 8-10% returns which you make on the whole scheme.

3. Not as safe as Recurring Deposit

Now as you have understood that gold saving schemes deep down are just like a recurring deposit. However they are not as safe as a banks recurring deposit, for the simple reason that jewelers are not as strong financially as banks and some jewelers actually deposit the money they get in schemes in banks as fixed deposits only. Some jewelers might even be using the money for their operating expenses also.

4. Gold saving schemes are designed to guarantee future sales

If you look into the design of gold saving schemes, it’s clear that it’s a way to assure future sales. People join these schemes, start saving money with jewelers and after 1-2 yrs, they will buy some thing from them. So if X people join the program, all X people will buy something at the end.

R.K. Sharma, executive director from PC Jeweller confirms this – “This scheme is a business building programme. By getting customers involved in this scheme, we ensure future sales. A majority of the times, people purchase a jewellery for a higher price than the amount invested. It is a sure shot business opportunity through which we seal our future sales.” – source

Some of the gold schemes in market

Gold Harvest from Tanishq
Jewels for Less from PC Jewelers
Shagun from Gitanjali
Kalpvruksha from Tribhuvandas Bhimji Zaveri
Gold Tree from GRT Jewelers
Jos Alukkas Gold Saving Scheme
Kothari gold deposit scheme
Gold Schemes – Bhima Gold

When you should join these Gold Saving Schemes ?

So given these fine points, there are few advantages to these gold investing schemes and there are conditions when you might want to invest in those. The first thing is that, a lot of investors who do not understand what are other kind of options for investment in gold like Gold ETF, e-Gold etc which are popular ways to buy gold online these days. Because of not having full information, investors get inclined to these schemes and invest on the name of “Gold”. However good part of these schemes is that, because of these gold schemes, they atleast develop the habit of regularly investing some money, which they would not have done otherwise. So these schemes can be your monthly gold investing plan in a way. These investors will not invest in gold ETF and simple recurring deposits anyways, so its better that they atleast invest in these gold investments schemes by jewelers atleast. So these schemes are good from that point of view.

Another reason when you can look at these schemes is when you have a marriage or function due in next 1-2 yrs and you might want to systematically invest some fixed money for the purpose of buying gold jewellery. Even in that case it makes sense to get into these schemes.

Have you invested in these kind of gold saving schemes online without understanding how it works? What are your comments on these kind of schemes?

Are Bank Lockers totally Safe & is Fixed Deposit really required to get one ?

Posted on May 6, 2013August 6, 2019 by Jagoinvestor

Today we are going to talk about “Bank Lockers” and how banks use unfair tactics by forcing customers to open a fixed deposit for a very large amount and that too for a long duration. It’s not uncommon to hear bank officials asking for fixed deposits of Rs 5-10 lacs in case you want to get a locker. That is just not allowed as per RBI and we will see what exactly the RBI guidelines say about it.

What is a Bank Locker and How does it work ?

Just like we have a saving bank account and fixed deposits to keep our money safely, we have “Safe Bank Lockers” to store our physical belongings like jewelry and various kind of important documents like WILL, Property Papers and other valuable items which you feel should not be kept at home.

There are always 2 keys for the locker, one key is with Bank and the other with the locker holder. The locker can only be opened when both the keys are used at the same time. Generally bank official applies the key and then leaves the locker room and only after he/she leaves, you should open the locker door and do what you wanted to do. The banks use very high quality, strong lockers (generally Godrej). So overall, this all makes sure that your locker is very safe.

Lockers are to be allotted on first come, first serve basis (as per rules) and in-case the lockers are exhausted, the bank is suppose to keep a waiting list of customers who have applied for the lockers and have to inform them when the lockers are free in the same order of application. If bank says that they do not have any lockers left at the moment, you can ask them for the “Waiting Register.”

Annual Rent for Bank Lockers and Security Fixed Deposit

Bank lockers come in different shape and sizes, which can be taken by customers depending on their requirement. For using the facility of lockers, you have to pay an annual rent which will vary depending on the size of the locker, the city (metro, urban, or rural). For most banks, the locker rent starts from Rs 750-1,000 per year and can go up to 5,000-10,000 for PSU banks and even 40,000-50,000 in case of Private banks (see the locker rates for bank for Baroda here) .

Is opening a Fixed Deposit mandatory for getting a Locker ?

Now lets discuss the biggest pain point of customers. Almost all of you might have faced this. When you go to open a bank locker, you are asked to open a Fixed Deposit for a large sum like 2-5 lacs for a long duration or asked to buy some policy (ULIP or Traditional Plan) saying that this is the rule for assigning the locker. However it’s just a plain lie and an unfair practice followed by Banks. A common man has no idea if the bank is correct or not and where to get the right information? So, I looked at RBI regulations on Banking and found out the exact rules.

And this is what I found – YES ! , Banks can ask for Fixed Deposits as security !

But, here is the catch ! .

As per RBI regulations, the bank can ask for a fixed deposit only to cover 3 yrs of locker rent and the breaking charges, not a rupee more than that and that too only from the new locker applicants, not old one’s already having a locker. Here is the RBI wordings from their notification

1.2 Fixed Deposit as Security for Lockers

Banks may face situations where the locker-hirer neither operates the locker nor pays rent. To ensure prompt payment of locker rent, banks may at the time of allotment, obtain a Fixed Deposit which would cover 3 years rent and the charges for breaking open the locker in case of an eventuality. However, banks should not insist on such Fixed Deposit from the existing locker-hirers.

To give you the proof one of the PSU banks – Bank of Baroda clearly mentions this fact on its website here

At the time of hiring the locker, bank will obtain a minimum-security deposit in the form of FDR from the lessee for the amount which would cover 3 years rent and the charges for breaking open the locker in case of such eventualities.

So, suppose you want to get a locker whose yearly rent is Rs 1,200 and the breaking charges for locker is say, Rs 100, then they can only insist on a Fixed deposit of Rs 3,700 (3 years rent + breaking charges); nothing more than that. Ergo, 3 years locker rent is going to be a very small amount, which almost anyone can afford, but banks lie to you and trick you by telling you to invest in a really large Fixed Deposit .You oblige for your own reasons. Banks do it to make sure they reach their monthly and yearly targets of acquiring new fixed deposits and selling useless policies like ULIPs and traditional plans (Note that banks are one of the channels for many companies to sell their products)

So next time you go to the bank for enquiring about lockers and bank officials don’t give you proper information, you can tell them about the rules and the notification from RBI. That should give some shock to the employees there and they might treat you a bit fairly. If still they do not budge, use the threat of RTI and banking ombudsman (and then actually use it)

Use RTI to resolve the Issue and Find Information

RTI is a powerful tool for a common man. We will see now, how you can use RTI against PSU banks. Next time when you go to a bank (I am referring to PSU banks here), tell them you want to have a locker (assuming you are having a saving bank account there already) .

When the bank staff tells you that they do not have any lockers available at the moment or try to impose some rules, you can tell them that you will find out things by filing an RTI application to the branch manager and also would quote his name in the RTI (stare on his name plate at the desk , he/she might be in horror). If they do not budge, then really go file a RTI after the incident. I would say better file a RTI before and once you get the reply from RTI, reach the bank with RTI reply letter itself.

When you file RTI letter, ask following things

How many lockers are installed in the branch ?
What is the size and volume of lockers and how many types ?
Rental amount per year for the Lockers ?
How many lockers are Unoccupied and available for allotment
How many people have requested for it and are on “waiting list” ?
What is your serial number in that waiting list (in-case you have applied for it) ?
Is there any requirement to make a Fixed Deposit for getting the Locker (YES/NO) ?
What is the amount of fixed deposit to be opened and what are the rules for it ?
In how many days a bank locker is allotted ?
Who is responsible to allot the bank locker in bank ? What is the name of the officer or designation ?

A weak person is always exploited in society, that’s the nature of life . When you appear as uninformed and too needy, anyone can take advantage of you, but when you appear as informed investor, who will not allow anyone to take advantage of his/her and who appears to be committed to be treated fairly, its tough for the other side to exploit then. Here is an instance on how Nikhil got the Locker facility with any FD at ING Vyasa Bank

I experienced a similar forced selling sometime back at ING bank. I wanted a locker and the Relationship manager said I need to make an FD of Rs. 100000/-. when I said NO. they said its a rule. I said there is no Rule book which mentions this. Rules are same for all banks and branches. the Relationship Manager stubbornly said ‘This is the rule of this branch’.

I just went to their website, found the no. of Chief compliance officer and spoke to the officer who helped me on this. After 2 hrs, I got a call from the same Branch of ING and they requested me to come to the branch and gave me a locker without any kind of FD!

Locker with Joint Accounts and Nomination

Just like saving bank accounts and fixed deposits, you can open a locker as joint account and with nomination facility, so that in case the demise or unavailability of the main locker holder, the joint holder can access the locker and operate it. Also in case the locker holders die (both joint holders), at-least there would be a nominee, who can get access to the locker by producing death certificate and filing up claim form.

There are tons of cases where locker was just owned by a single holder and when he died ,the family had to move mountains to finally get access to the locker. Worst, many families are not even aware about the existence of the locker and banks don’t take much interest in tracing down the locker family for many years (provided they have got the rent or have the fixed deposit linked to it).

Can bank open the Locker without your permission ?

In the worst case YES ! You need to operate your locker from time to time (at least 6 months to an year ideally.) Recently there have been cases when explosives and illegal things were found in lockers, which shows how lockers can be misused. When you are allotted a locker, there is proper KYC done by bank to make sure they know everything about you. They would place you in particular risk category like low, medium or high. If you are a high risk category person, you need to operate your locker at least once a year to make sure everything is fine. If you fail to operate your account for very long (depending on your risk profile), the bank will first remind you about the locker and will ask you reasons for not operating your locker. If you still do not take actions, the bank has all the rights to break your locker and give it to some one else, even if you are paying the yearly rent on time.

In case there is a genuine reason for not operating your locker for a very long time, you need to give it in writing to the bank mentioning the reason (like if you are now an NRI or if you are out of the city for a long time.) Also, if you fail to pay the yearly rent, they can break off the locker and re-allot it to someone else. Fair enough 🙂

Are bank lockers really safe ? Who is responsible if something goes wrong ?

Now this can be news to many, and a shocker, but in truth, Banks are not responsible for your bank lockers for any unforeseen events which is beyond the control of banks, provided they have done every due diligence from their side to protect it. You have to understand what exactly a locker facility is. The bank just gives out the space they have, on rent and make sure that its safe and secured professionally. They are suppose to make sure they have all the safety and security measures in place, to ensure that the lockers are safe and secure. So its more of a proprietor and a tenant relationship. In case there is a robbery (not in control of bank), Earthquake, Tsunami, Fire (which is not in control of bank) then bank is NOT responsible, or liable to compensate you.

Let me give you an example – If there is a robbery in the bank and your locker is one of the unlucky ones to get robbed, you lose it completely and the bank is not liable to compensate you for the reason that it wasn’t in their control to stop it, especially when they have all the security measures in place like a security guard, powerful lockers, CCTV cameras installed, and emergency alarms in place. The act of robbery is more of a unlucky event for them and you. (However there are some policies in market which insures the jewelery in your bank locker like this policy from Axis Bank). If you think that robberies in bank (with locker looted) do not happen in reality, I must tell you that it happens and has happened in past. Here is one such example.

Robbers recently broke into the strong room of a Punjab and Sind Bank branch in Jalandhar and emptied out 36 lockers in an incident that stands out as a grim reminder of the abysmally poor security infrastructure at financial facilities in the country. The incident is a reminder of a burglary at the Chirgaon branch of the Central Bank of India in Jhansi, Uttar Pradesh. As many as 45 lockers had been robbed in the November 2010 episode. (Link)

When you put your valuables in bank locker, the bank does not know what did you put in there, there is no record of it in writing with bank. That’s one reason, they can’t compensate you in case something happens to it (It could happen that you never had anything in locker and you can suddenly say that jewellery worth 10 lacs is missing! What’s the proof ?) However it does not entirely mean that banks are not liable to pay back or compensate the locker holders in every case!

Bank has to make sure they have done their side of safety measures and security

Bank is not responsible for your lockers only in case of those events which are totally not in control of bank and unavoidable, but only when they have done their share of work and security like I explained above. If banks fail to do their duty and then a robbery or some unforeseen event occurs, which results in your loss, then a customer can always claim that the bank is liable to compensate, because then the incident might have not happened or could have been avoided if banks did their part.

In another case, of Bank of India vs Kanak Choudhary, the customer had kept currency notes in locker which was eaten up by termites. Here the bank didn’t do their job of ensuring that the place is clean and safe. The customer was awarded the compensation.

Bank of India vs Kanak Choudhary

Here, the customer filed a case stating that termites had destroyed currency notes and important papers kept in her locker. The commission said that the bank “was bound to ensure that the respondents’ locker remained safe in all respects”, and awarded compensation to the customer.

Even in the robbery case shown above, the bank was found to be irresponsible and didn’t not do a lot of security measures, and definitively there was a chance of the robbery being unsuccessful if only bank had done their share of work, which means the locker holders would get compensation from bank, but then issue now is, how much compensation bank has to give and why when ? The matter would have gone to court and delays and frustration must have happened in that case.

But how much you can claim back from Bank ?

Not 100%, because you can never define how much you lost with 100% certainty. Banks themselves insure the lockers to deal with the loss in an extreme eventuality, so bank themselves get some compensation from wherever they have insured the lockers. So you can get some compensation from bank out the amount they themselves get, but to get back the compensation, you will have to show the receipts of the things which you claim was kept in the locker. Even in that case, you will not get 100% back, it will be some percentage, which can’t be defined. Also you can’t get back any compensation for the documents kept (as you cant define it’s value) and the currency notes if any. You can look at the youtube video above to see these points on claims you can get back.

While the risk is always there with bank lockers, note that this is an extreme eventuality. This information should be seen more of an awareness point, rather than a decision making criteria to choose or discard taking a bank locker. You don’t stop driving a car, just because there is a small chance of accident, right? In the same way, just because lockers are not 100% secured, does not mean you say that – “I will not go with bank lockers, because its not 100% safe.” Truly speaking it’s much safer than you bank almirah at least.

Some safety measures you should take for Bank Locker

You can never get rid of the complete risk, but you can ensure that you follow some best practices and common sense tips to make sure your bank locker is safe. Here are some good practice.

Always open your locker after the bank employee who accompanies you to the vault leaves the place.
Make sure your bank has all the necessary security measures, such as alarm system, iron-gated rooms, electronic surveillance via CCTV, etc.
Visit your locker frequently and ensure your valuables are safe. The RBI and banks expect frequent locker visits from customers.
Also, ensure the locker is properly locked before you leave the vault.
If possible, better have 2 lockers to diversify the risk (like one locker for valuables, and another for Documents)
If possible, always go with the bank where you have huge trust and comfort and its near your place, so that you can visit them often
Keep laminated documents in the locker, so that they are not damaged if you keep them for a very long tenure.
Always keep a record of what all you have in locker, so that in-case of eventuality, you can alteast find out what was lost and what was the worth
Demand a copy of the hire-purchase agreement for the locker so that the bank cannot ask for a higher rent in future
If a bank says the locker request is in the waiting list, ask for the waiting number
Demand a copy of the bank’s internal guidelines regarding lockers (their guidelines never mention fixed deposit as a mandatory condition)

I hope this articles has helped you understand almost everything about the bank lockers and how they work and different rules and regulations. Do you also have a bank locker ? Generally what all you keep their and how much do you trust your bank for the locker safety ?

TDS Guide – Everything you want to know about Tax Deducted at Source

Posted on April 25, 2013September 8, 2019 by Jagoinvestor

A lot of investors still do not understand what is the meaning of TDS (Tax Deducted at source) is and how it’s related to their taxation.

While the concept is very easy overall, I have seen that tons of investors still get confused when TDS is cut on their Fixed Deposits at maturity and they feel that they don’t need to pay any tax now, or feel that they don’t have to pay any tax on their Fixed Deposit interest just because it was below 10,000 and TDS was not cut.

So in this article, let me make sure that you are 100% clear about Tax Deduction at Source and what it means.

what is TDS and how it works?

What is Tax Deducted at Source?

TDS or Tax Deducted at Source is a tax collection mechanism by Government of India, where at the time of transaction itself, the tax is deducted by the paying party and directly deposited to the income tax department.

It’s assumed that the receiving party (one who gets the money) will have some tax liability. Now at the end of the year when you find out your tax liability, the TDS amount is the tax you have already paid and now you need only pay the balance amount.

So in a way, Tax Deduction at Source is a good thing for 2 reasons. You automatically pay a part of your tax liability and income tax department receives their tax collection. So TDS is always a mechanism, to reduce tax theft. Let me give you some very simple examples of TDS collections

Example 1 – Tax Deduction Source cut by Employer

When a company pays salary to employees, you must have seen that they pay the salaries after cutting the tax amount.

So at the start of the year itself, after the employee declares his 80C investments, HRA, LTA and other tax deductions which he will avail, the employer ‘estimates’ what will be the tax outgo of the employee and then each month they cut a certain amount as tax and pay directly to the income tax department.

And then at the end, the employee calculates his actual income tax liability to be paid. If the Tax Liability is more than TDS cut, he pays rest of the tax money and files the returns. If the Tax to be paid is less than the TDS amount, in that case he can claim for a refund in the tax returns.

Example 2 – TDS cut by Banks on Fixed Deposits

When you open a Fixed Deposit, you earn some interest in a year. Now the rule is that if the interest amount each year exceeds Rs 10,000 on your fixed deposits (across the different branches of the same bank also), the TDS has to be deducted by the bank.

Now a lot of people confuse this by paying the tax. The rule is that any amount you earn as interest is taxable. Even if the interest is Rs 100 or Rs 1000, you still need to pay the tax on that amount. Just that if the interest exceeds Rs 10,000, the bank will cut the tax directly and pay the tax to govt.

That will make sure that you pay your tax in advance itself (you know how difficult it is to pay tax when you have finished that money at the end). Note that TDS is also applicable in case of Sweep in Accounts and MODs (Multi option Deposit Scheme by SBI)

What about NRI Fixed Deposits?

In case of NRIs, the sad part for them is that there Tax Deducted at Source is cut @30% on any interest income earned on NRO fixed deposits (no limit of Rs 10,000 interest.)

Even if they earn Rs 1,000 as interest, they still pay TDS @30%. Note that the Fixed Deposits in NRE and FCNR accounts are totally tax-free in India, hence no Tax or TDS. A lot of NRIs send money back to India and invest in Fixed Deposits in their NRO account.

If they have to pay tax at the end, well and good, else they need to file the tax returns and claim it back. NRI’s should read this article on TDS applicability in economic times and also read this article to understand how NRI’s can claim exemption on TDS is applicable for you.

If you want to know more about the tax applicable on NRE, NRO and FCNR account then watch this video:

Make sure you quote your PAN

A lot of times, PAN card number is asked by banks or at other places before the payment is made to you. Do you know that there is a reason for it? If there are any TDS to be cut, they first check if PAN number of the receiving party is available or not.

If PAN number was given by the party, then the TDS is cut at a lower rate, but if PAN number is not quoted, then TDS cut is high.

For example, in the same Fixed Deposit amount, do you know that the TDS is cut @10% if PAN number is given, but if PAN is missing, then its 20% Tax Deducted at Source? These are the numbers of individuals (not companies, LLPs or corporate bodies.)

You should also know that in this budget Tax Deducted at Source @1% is to be cut for any real estate transaction above 50 lacs!

I want to invest where TDS is not applicable

A lot of investors try to invest in bonds, securities or at those places where TDS will not be cut. They do not understand that TDS is nothing but paying tax in a different way. I assume that they thought that if TDS is not cut, they don’t have to pay any tax, which is totally wrong.

All they are doing is taking the onus on themselves to pay the tax at the end. Or many might be finding ways to save the tax by various means suggested by their CAs.

A lot of investors also try to open a lot of small FDs and break it in the same bank but in different branches or in different banks too, but they do not know, that in this era of core banking, banks and tax officials can just punch your PAN numbers (yes, my CA told me this) and get all your tax-kundali and how much fixed deposits you have and how much interest you earned out of your investments.

So you need to pay your tax on those amounts anyway, whether TDS was cut or not. If TDS was cut, in a way it’s better because you pay the tax in advance itself and don’t have to arrange for tax amount at the end of the year. It really pinches at the year-end to arrange money and see it go into tax!

Make sure you ask for TDS certificates

Whoever cuts the TDS and pays it to income tax department has to issue you TDS certificates as the proof that you have paid the TDS. The document they give you is called the ‘TDS certificate.’ You would need this document if you want to show that the TDS amount is being adjusted in your tax payment.

Generally, as a rule, all the parties send the TDS certificates to you, but make sure you are proactive in asking’ it from them.

Myth: I don’t have to pay any tax if TDS is deducted

At a lot of times, it so happens that you don’t have to pay any tax at the end of the year and you already know it, but just because your deposits are earning more than Rs 10,000 of interest income, the bank cuts the TDS amount and then you have to claim it back by filing a return.

Case 1 – If Tax payable (TP) is more than TDS

In this case, if yearly TP is more than the TDS then the investor will have to pay the remaining amount left after deduction i.e TP – TDS = Remaining Tax Payable.

Case 2 – If Tax Payable (TP) is less than TDS

In this case, If yearly TP is less than the TDS then the investor will have to file for tax return because the tax which he was supposed to pay was less than the deducted tax.

Case 3 – If Tax Payable (TP) = TDS

In this case, if TP is equal to TDS then the investor will not have to pay any extra tax because the tax is already paid. However the investor will have to file for ITR toi show that he has paid the interest and is not liable to pay anymore tax.

Form 15G

All those people can simply submit Form 15G/15H to bank (each year) and then the bank will not cut the TDS (my father in law told me how Bank of Maharashtra guys in some particular branch still cut the TDS even if you deposit the Form 15G/H and how they are such a pain).

TDS tip – for salaried investors

Let me share with you a little tip which a lot of you might know already, but it will surely help new people. If you are a salaried employee, your employer must be deducting the tax each month already and you know that you don’t have to pay any tax at the end.

But now if suppose you already have made some fixed deposits or some investments, where the Tax was deducted, then you have already paid some part of tax liability.

Your employer is not aware that you have already paid some tax through TDS route. So in the Jan-Feb season when they finally ask for your investment proofs, you need to also give them form 192 and deposit the TDS certificates to your employer so that he can adjust the Tax paid and pay you back the extra amount. (March month salary is generally higher due to this money coming back and also because of HRA/LTA reimbursements).

I suggest you all follow this amazing thread on our Q&A forum where Ashal single has cleared so many doubts t on this topic

I hope you are now clear about TDS and how it works. If you have any doubts then put your query in the comment section.

Do not close your Loans – If you want to improve your credit score!

Posted on March 22, 2013August 22, 2019 by Jagoinvestor

Do you have a loan and want to close it as soon as possible? I know the answer is YES! . Everybody wants to get rid of debt and want to enjoy a debt free life. But, what if I give you a good enough reason to not close your loan and keep paying your EMI on time? And if I suggest you do that even if you have a lot of spare cash which you can use for paying of the loan. Lets see …

Improve your Credit Score - Do not close Loan

There are many people who are paying their previous loans, but when they apply for some new loan, its getting rejected because they have some bad credit record in past either due to settlement of some debt or because they have a bad payment record. This creates a very frustrating atmosphere, where you want to do something which you instantly make you a “good” customer. A big myth people have is that just because they have a loan going on, they are having a bad credit score, and because of this myth, they want to close off their existing loan.

However this is not true! Let’s see an incident which happened with Nagarajan

I was holding two home loans since 2000. I am a well paid professional drawing good salary, however due to frequent transfers my Post dated cheques were not replenished resulting in non-payment for over 6 months, Also due to some signature error a few times, cheque bounces happened, but they were repaid and corrected .

I dont posses any credit card. only debit cards were used regularly for any financial transactions. 6 months back a personal loan enquiry got rejected due to very bad credit score ( 450 only). so immediately I wound up all the loans ( 4 months ago). now I am loan free and no credit card holder. how long will it take to recover my credit scores ?

You would see how Nagarajan closed his loan thinking that his loan eligibility would increase because his credit score will improve. However what he did was totally wrong and the right thing was to just continue paying his existing loan. Lets see why.

Paying EMI regularly is a Opportunity to show your repayment capability

If you look a little deeper, you’d realize that your existing EMI payment is one of the only ways you can showcase your repayment capability. When you make EMI payment on time, this information is updated to credit bureau (CIBIL etc) by your existing lender and if done on a regular basis, it affects your credit score in positive way and also improves your credit report . Your Days Past Due (DPD) section in CIBIL report also gets positive because your recent information for last 36 months is there in the credit report.

So now I hope you are clear about the importance of paying your EMI on time on regular basis. Its one of the only ways you can build your repayment record and improve your credit score. Do you have a credit card or some kind of loan? If yes, then it might make sense to keep paying their dues on time just for making sure that you build your repayment history!

Can you share some thing related to this from your financial life ?

Gift Tax in India – Everything you wanted to know about rules and exemptions

Posted on March 4, 2013August 6, 2019 by Jagoinvestor

Do you know that, when someone deposits some money in your bank account, what is its taxation angle ? A lot of people take some loan from their friends for few months and then return it back, but never think twice about it from taxation angle? Your parents deposit some money to your bank account because you want to pay the down payment of your house. While it’s a help from your parents, have you ever thought if you have to pay tax on that amount or not?

In this article lets see all the aspects about these kind of transactions, when money comes and goes out of your bank account and what are the rules for income tax on gifts received from relatives or other people in India .

Taxation on Gifts

Let us first see what kind of situations we are talking about ?

You swiped your credit card for your friend Rs 20,000 purchase and then your friend paid back money to you by transferring it to your bank account.
You asked Rs 50,000 from your friend as loan and paid him back after 1 month.
You got Rs 50,000 cheque from your relative on your wedding.
Your father transferred some money you your bank account as help for some purpose.

These are few instances, which happens in our lives. But its very important for you to understand the tax implications in various scenarios and the possible issues which can come up in the future, if income tax department decides to scrutinize your income tax returns for example. By understanding the gift tax rules and precautions to take, you will be safe. So now, let’s look at 5 points which will help you understand rules about incomes tax on gifts in a better way.

By virtue of Section 56(2), any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under “other sources” subject to some exclusions . Below we are going to see all those exclusions and gift tax rules.

1. Upto Rs 50,000/year is not taxable

The first major rule which every person should know is that there is no tax to be paid on gifts received (cash or kind), if the amount of the gift is upto Rs 50,000 in a year. However if the total amount crosses Rs 50,000 . Then you will have to pay the tax on the total amount received (not additional). For example – If a friend of yours gifts you Rs 30,000 in a given year, you don’t have to pay any tax on that amount, as its below the limit of Rs 50,000 .

Now suppose you also get Rs 20,000 after that, still you don’t have to pay the tax as the total worth of the gift you got in the year was Rs 50,000 till now (less than the limit of Rs 50,000) . But now, if someone gifts you another Rs 10,000 . Your total gifts in a year is Rs 60,000, so you will have to pay tax on the total amount of Rs 60,000 , not just on additional Rs 10,000 . This Rs 60,000 will be included in your income and you will have to pay tax on this Rs 60,000, as per your tax slab. Note that this is exactly how the written law is.

Since 1/10/2009, Section 56(2) has been amended and the scope of ‘’gifts’’ will include even immovable properties or any other property besides sums of money under its ambit.

2. Any amount received by relatives is not taxable at all

Another rule for income tax on gifts, is that any amount received from specified relatives is totally tax free in the hands of recipient. So if a relative gives you gift in form of cash/cheque or in consideration, you will not have to pay any tax on the amount received.

Following is the list of relations which are considered as “relatives” for this

Your spouse
Your brother or sister
Brother or sister of your spouse
Brother or sister of either of your parents
Any of your lineal ascendants or descendants
Any lineal ascendant or descendant of your spouse
Spouse of the persons referred in above points

Example – So if you want to buy a house and your father/mother/sister/brother etc transfer Rs 20 lacs to your bank account. You don’t need to worry about the taxation part, because its a gift from your relatives and you will not have to pay any tax on this amount. However its a good practice to do the documentation for this, if the amount if pretty big like in this example. All you need to do is document this transaction on a paper which clearly states that who transferred the money and the reason for it, along with the signatures of both parties. In future, if there is any income tax scrutiny, this small piece of proof will be handy and will help you a lot.

Important – Note that, there is no income tax to be paid on the money received from relatives, however at times income clubbing provisions may apply, for example, if a husband gifts Rs 10,00,000 to wife, there is no ta to be paid by wife on Rs 10 lacs received, however when she invests that money and if any interest income is generated, it will be clubbed with husband income. Read all about income tax clubbing rules here.

3. Any amount received as Wedding Gift is not taxable

One of the few advantages of getting married is that any amount you get, as wedding gift is not taxable in your hands, either from relative or non-relative 🙂 . So even if you get Rs 1 crore as wedding gift from someone in your wedding, it’s not taxable in your hands.

Lets see some examples –

Suppose if your spouse parents give you some gift worth Rs 10 lacs on marriage, it will be treated as a wedding gift and will not be taxed. However, it is not clear by provision, whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should be sufficient if the gift is given just on the occasion of the marriage, means either on the day of the marriage itself or a day or two before or after. Practical common sense view would prevail in such cases.

4. Gift Tax on Movable/ Immovable properties

There is a valuation aspect involved in gifting of immovable properties

If the property is gifted without any consideration then if the stamp duty value exceeds Rs. 50000/-, stamp duty value will be taken
If the property is gifted for a consideration, then the actual value of the property will be taken

In case of other properties:

If gifted without consideration and fair market value exceeds 50,000, then the fair market value will be taken as the final value
If gifted for a consideration and the Fair Market Value (FMV) less consideration is greater than 50000, then the FMV less consideration amount will be taken as the value of the gift.

5. No tax on the amount received through WILL or Inheritance

When any sum of money or any property is received under a will or by way of inheritance, it is totally exempt from Gift Tax. So if you get a real estate worth Rs 50,00,000 and some other things worth Rs 30,00,000 through inheritance , you will not have to pay any tax on that amount received.

Be cautious about the take and give transactions

At times, we ask for money from our friends for some purpose and then give it back. One of the examples I can give is what I heard from one of the readers in comments section. He swiped his credit card for a friend for Rs 50,000 and then asked his friend to pay him back through online banking. Here if you see, the amount came to his account, however it was a reverse transaction and not actually a gift, so ideally this transaction should not be considered at all.

If its a small amount and can be justified with proofs, there is not much to worry about this. But in this case, lets say there is a income tax scrutiny, and tax inspector asks you about this “Rs 50,000” coming to your account. Now – You can clearly say that the money you got from your friend was a amount which you got back because you paid Rs 50,000 to him through your credit card. But just saying this will not be enough, He will ask you to prove it. Then you will have to bring your credit card statement, and prove to him that this was done by you for your friend and no one else.

gift tax rules in give and take

The point here is – no matters how truthful you are, there should be something you can show to income tax officers in case this is questioned. So for any transaction like this, which involves a big amount, its always a good idea to have a proof, like in the example I just gave, the credit card statement will be handy along with a small note, where you friend signs saying that you swiped your credit card for him and he will pay back the money through netbanking.

In this same case, If you ccan’tprove that this money was just a “reverse entry” , you can imagine the situation. Even if you were clean, the whole amount would be added to your income and you need to pay income tax based on your tax slabs on the ground of unaccounted income.

Another point, worth noting is that just because you have a reverse transaction, the other party can get into trouble. For example, suppose you give Rs 20 lacs to your friend, who wanted the money for buying a house and then your friend gives back those Rs 20 lacs in 3 months. Note that now there is a clear entry that you gave your friend Rs 20 lacs, so in future income tax department can reach you through your friend and ask you about this Rs 20 lacs and from where you got so much of money. They can ask you to justify the source of this money. So always keep these points in your mind.

How to document Gift transactions, Registered Deed or plain paper?

A gift deed is a deed, that is executed and delivered in which the donor transfers title to the receiver without any payment or considerations. It a document which transfer the legal title of the property to the donor, where the consideration is not monetary but is made in return for love and affection. There is indistinctness with respect to compliance of the gift deed at times, Whether a gift deed is required to be made in every circumstance

When it is required to be stamped OR get registered?

Gift made by way of cash or cheque does not mandatory requires to be executed through a gift deed. Writing a plain typed note on a paper will generally suffice. It is not required to be stamped and registration is also not needed. You may simply mention the names of persons, their relation and that the gift is being given out of love and affection.

Gift made by way of movable property is required to be made in stamp paper and stamped by the notary or court, and registration of gift deed is not required in this case. For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor. Gift of immovable property which is not registered is not valid as per law and cannot pass any title to the receiver.

Conclusion on Income Tax on Gifts received

As far as you make the transactions which can be justified, there is not much to worry, however its always a good and safe practice to document things on a paper with proper signatures. This will help you because income tax scrutiny can go back to many years of your life. The stronger your documentation and proof, the smoother will the situation be.

Thanks to Rishabh Parakh (www.rishabhparakh.com), a chartered accountant who helped me while this post and gave his inputs. He is founder director of Money Plant Consulting (www.moneyplantconsulting.net ) a leading Tax & Investment Advisory service provider in Pune.

Why you should stop looking at ‘Past Performance’ in Mutual Funds

Posted on February 21, 2013August 22, 2019 by Jagoinvestor

One day, a calf needed to cross a forest in order to return to its pasture. No one before this had ever ventured in to the forest. Without any rational, it forged out a long and difficult path full of bends, uneven ground and steep climbs. The next day, a dog took the same path following the calf’s footprints and a flock of sheep followed. As the path started taking some sort of visible shape, men started using the same and gradually, it became a well defined, accepted and the only way to cross the forest.

After many years, the trail became the main road to the village. Everyone complained about the traffic, cursed the long distance and treacherous turns, up and down hills but never thought of a better alternative. The old and wise forest smiled at how men tend to easily accept the way already open, without ever questioning whether it’s really the best choice.

In the same way, if you look at, the mutual funds’ investors. They seem trapped in a similar kind of concept called as – The Past Performance.

Past Performance as selection Criteria

Since quite some time, Past Performance has become a major criterion if not the Holy Grail of the mutual fund selection system. In fact, one of the leading business magazines in association with one of the leading rating agencies went ahead and mentioned “We take into account a much longer period for mutual fund evaluation as that can serve as a serious guide to future performance”… (Their long term means 3 years in this particular case and they used return and risk adjusted numbers for analysis)

Further, rather than challenging the concept, there has been a continuous debate if investors should look at 1-3 year performance or a longer period like 5 years to make mutual fund selections. The treacherous path to the village is already created.

Proponents of the long-history case argue that a long term analysis ensures that the performance is analyzed over various market cycles and if the fund has done well across the long term horizon, it stands a good chance to do so in future.

Sounds logical. Is it really?

I wanted to examine if it really works. For me and for others like me who would like to know the truth and may be many more whose investments have been in red, thanks to these ratings. I gathered historical data of equity mutual fund schemes and worked out the numbers. (3rd chapter of my first book also has same kind of data)

The results were startling !

The core of the finding is “Past performance hardly relates to future returns”… and here we are, pumping our hard earned money into mutual funds, depending on these ratings that rely heavily on the past returns generated.

Analysis Details

The top 5 schemes by their 1yr, 2 yr, 3yr, 4 yr and 5 yr returns were selected. Thus 5 portfolios consisting of Top 5 schemes were created.
The performance of these 5 portfolios was observed over the next 1 year (e.g. say for Dec-09 analysis, the return for 2010 was observed).
Steps 1 & 2 were repeated every quarter for the past 3 years. The objective was to establish if the relationship with past performance that exists consistently over the period of time.

Findings & Explanation

How to read this Chart ?

The graph shows 5 bars, each bar represents the average next 1 year return generated by the portfolio created on the basis of historical returns. The left most bar shows how much average return was generated by portfolio created on the basis of scheme’s past 1 year return; the second bar is the return of the portfolio created by past 2 year return and so on.

So say the analysis is done on Dec-09, the past 1 year refer to 2009 and the returns are calculated for 2010.The above graph shows aggregate returns of the analysis done every quarter.

The graph ‘suggests’ that the ranking by past 2 years is of greatest significance while the ranking by 5 years is least significant. Please note that this is just an observation and not a conclusion. Statistics is a sensitive subject and any data tortured, throws some outputs. It’s important to delve deeper and see if the outputs can be supported with reason and logic.

To validate if the inference really holds true and if it can be used for decision making, I dissected the data of all equity schemes into two parts: The Large Cap Schemes and The Mid/Small Cap schemes. The result of analysis conducted over Large and Midcap funds is presented in the charts below.

Take that. While the large cap funds ‘seem-to-be’ driven by their past 4 year returns, the mid caps ‘seem-to-be’ to be driven by their past 2 year returns. I have consciously quoted the word ‘seem-to-be’ as I can’t find a suitable reason to defend even these findings. There aren’t actually. For anything to be considered as a general rule, it should be consistently true. I couldn’t find that when I looked at individual analysis done quarter on quarter.

If I look at each analysis done across quarters, the 2 year return is not the significant driver of future returns always. A considerable number of times the other ones (1, 3, 4, 5 yr returns) gain importance. Just like “past performance” parameter, there are many other mistakes which an investor does in his financial life, and we have decided to talk on some other aspects like those in our upcoming workshop in Mumbai on 10th March. Incase you are in Mumbai, dont miss that event.

Dont use Past Performance to Predict Future

It is quite evident that the past returns cannot be a torch bearer for investment decisions. Following the past returns as a guide or using ratings that rely heavily on past returns is like shooting at a dart board in dark. For any doubts that remain, consider this

Reliance Equity Fund was the top performer in the Large Cap category in 2012, with a return of 41%. Did you know it was the worst performer amongst Large Cap funds by historical return? i.e. if you were in Dec-11 and would have picked up this fund’s historical analysis, it was the worst performer by 1y, 2y, 3y, 4y and 5y return.

Another best performer, SBI Bluechip Fund (2012 return: 38%), never beat more than 33% of its peers ranked by past 1y, 2y, 3y, 4y and 5y return as of Dec-11. Not surprisingly, a leading mutual fund star rating agencies top picks of 2011, underperformed the index in 2012. The agency boasts of using a good mix of longer period historical return and risk adjusted performance.

In my next blog, I shall discuss what can be the reasons of looking at past performance, where did the whole thought possibly evolve and where do things go wrong. The views expressed above are personal and for a change, I own them. All arguments and points welcome. I really value justified facts and accept only my wife’s opinions…!!!

PS: While I finished writing this, there is a news regarding S&P being sued for damages worth USD 5 Billion for misrepresenting the credit worthiness/rating of an issuer due to conflict of interest. (https://on.mktw.net/YRehB0)

Does it sound any bells?

About the Author

Sharad Singh, a serial-entrepreneur, has spent more than 14 years in the analytics domain and has done extensive big data work in finance. He runs Valuefy, an investment portfolio analytics firm that provides portfolio management solutions to BFSI clients. Valuefy has recently launched www.theFundoo.com, a niche portal that aims to make investment decisions easy and effective for individual investors. Sharad is an engineering graduate with PGDM from IIM, Ahmedabad.

Do you use past performance as one of the criteria when you select mutual funds ?