Indexation ... Double Indexation

As per the Indian Taxation law , whenever an asset has been held for the long term, "Indexation Benefit" can be availed by the investor when the investor finally sells the asset.

The term "Long Term" is different for different instruments.

• Stocks and Mutual funds,a period of one(1) year is considered long term
• House, Property a period of three (3) years is considered long term

When an asset is sold after the above mentioned period , the profits/losses that are made  are called "Long Term Capital Gains/Losses"

In case of Equity there is no Long Term Capital Gains Tax (LTCGT). But in case of other assets like Debt Mutual Funds, Property there is a Long Term Capital Gains Tax to be paid .

Long Term Capital Gains Tax (LTCGT) is computed as

• 20% of Long Term Capital Gains with Indexation
• 10% of Long Term Capital Gains without Indexation

What is Indexation ?
Capital gains would be usually calculated as

Capital Gain = Selling Price – Purchase Price

But fortunately government realised this is not a fair assumption because , rise in inflation usually eats into your profits . So in order to compensate for inflation , governments lets you increase your purchase price.

But arbitrary increase of purchase price cannot be allowed , so every year CBDT  (Central Board of Direct Taxes ) comes out with a Index value for Cost Inflation Index (CII). using this Index to reduce the cost of purchase is called Indexation

How is this index to be used
Capital Gain = Selling Price – Cost Inflation Indexed Purchase Price

How is "Cost Inflation Indexed Purchase Price" calculated
Cost Inflation Indexed Purchase Price = Purchase Price X (CII for current year / CII for year of purchase )

Suppose you bought a 370 day FMP on 28th March 2009 (Financial Year 2008-2009) for Rs. 50,000 and then it was redeemed on 3rd April 2010 ( Financial Year 2010-2011 )  for say Rs.70,000

Then the Cost Price = Rs. 50,000
Cost Inflation Indexed Purchase Price  = 50,000 x ( 721/582 )  = 61,941

Please note: Financial year is considered not the calender year . so thought it was only for a year ( 370 days ) that this money was invested, since this crossed two Financial year ( 2008-2009 to 2010-2011) , we are doing a "Double Indexation" here

So Capital Gain

• With Indexation  = 70,000 - 61,941 = Rs.8,059
• Without Indexation = 70,000 - 50,000 = Rs.20,000

Capital Gain Tax would be :

• 20% with Indexation       = 20%  of  8,058.5 = Rs. 1,611
• 10 % without Indexation = 10 % of 20,000 = Rs, 2,000

The Income tax payer can choose any of the two options , based on his option to pay less amount of tax.

So, the month of March each year see a heavy offerings of 370 days FMP by mutual funds to let investors take advantage of "Double Indexation".

Bonus Debentures

Dr. Reddy's Laboratories the pharma major has decided to issue "Bonus Debentures" , below is the gist of their corporate announcement.



"Dr. Reddy's Laboratories Limited has informed the Exchange that the Management Committee of the Board of Directors of the Company at its meeting held on March 24, 2011, has approved the allotment of 1,015,516,392 Unsecured Redeemable Non-Convertible Debentures of Rs. 5/- each carrying a coupon of 9.25% per annum, ("Bonus Debentures") amounting to an aggregate value of Rs. 5,077,581,960/- from the General Reserve by way of distribution as bonus, to the Members, based on their equity holding on the Record Date i.e. March 18, 2011, in the ratio of 6 (six) Bonus Debentures of Rs. 5/- each for every equity share of Rs. 5/- each held."

Corporate Announcement PDF

What does this mean:
If Instead of Bonus Debentures , if they had declared dividends , then it would have meant that each (1)share would have been eligible for 6 x Rs.5 ( 6  Bonus Debentures of Rs. 5/- each ) = Rs.30 as dividend

Now, instead of giving cash to the share holders , the company would issue FD ( Company FDs ,which are also called Debentures ) , so each share would now receive 6 (Six) Debentures of  Rs. 5/- each with a interest rate of 9.25% payable annually .Which means every year you would get Rs.2.775 as interest and these Debentures (Company FDs ) would mature , that is you would get your Rs.30 back in 2014.

These are called Bonus Debentures , because you did not pay that original Rs.30 , it was something the company invested in the Debentures , but in your name.

How does the company benefit :
The company would have needed money to expand their business or for some other business expense , so they normally would have , had to borrow from a bank , which could have charged them higher rate of interest . But with "Bonus Debentures" , they would get money at a lower rate of interest.

And it is also a way of treating/rewarding their share holders and hence enhancing their corporate image .

How does the share holder benefit :
The share holder finds that , company has invested in his name some money which fetches him 9.25% interest each year for 3 years , at the end of which he gets the Principal Amount too

The record date for this "Bonus Debentures" was 18th March 2011.

SBI Lower Tier II Bonds

SBI Bonds have listed on the Bombay Stock Exchange ( BSE ) and they are all trading at a premium. If the premium were to reduce , would be a good chance to buy, especially the "Series 4 Lower Tier II Bonds - Retail"

These are the BSE code of the listed bonds

SBI Bonds Listing Date: March 23, 2011 - Wednesday

Face Value of NCD: Rs.10,000/-

Series 3 Lower Tier II Bonds :9.75% Per Annum

Scrip Code: 961701

Scrip ID: SBIBIIIR

Series 3 Lower Tier II Bonds :9.30% Per Annum

Scrip Code: 961702

Scrip ID: SBIBIIINR

Series 4 Lower Tier II Bonds :9.95% Per Annum

Scrip Code: 961703

Scrip ID: SBIBIVR

Series 4 Lower Tier II Bonds :9.45% Per Annum

Scrip Code: 961704

Scrip ID: SBIBIVNR

Source : BSEIndia

Rupay

I had written in my article Indirect lesson from Wiki Leaks  about the risks involved on our over dependence on VISA and Master Card , to process our card transactions .

If you like to know more about, how VISA and Master Card work , please read this

National Payments Corporation of India , has finally woken up to this risk and has come out with a India specific card transaction gateway and has named it "RUPAY"

This is a good move, once formally launched , hope all our Nationalised and Private banks would enthusiastically adopt this , especially for the Debit Cards and Non international Credit Cards

This must see significant revenue saving for the banks , if NPCI , prices this service very conservatively .

Only risk involved is, will NPCI be able to stand up to the arm twisting that most of these MNCs resort to , using their government , when they find their dominance challenged in a foreign market .

So in this customer driven market . If we as customer demand that the Banks Issues us cards based on "RUPAY" , we may then give "RUPAY" a fighting chance to survive and thrive .

So watch out for the formal lauch of "RUPAY" .

Image: worradmu / FreeDigitalPhotos.net

SPARKLINES

Picture speaks a thousand words .

In Stock investing ,especially in technical analysis of stocks, plotting how a stock or an Index has moved over the last year , may be Month or may be all though the day is a good indicator of the investor sentiment about a stock.

You would not have to look far for such data , there could be lot of different websites that may provide you this information , but none as elegantly as the NSE website

NSE ( National Stock Exchange ) has a feature called "SPARKLINES", where not only are Indexes plotted but , every constituent stocks are plotted over a Intraday, 30 days , 365 days period . the different indices covered are ( click on the Index to see the chart )

• Nifty
• Junior Nifty
• CNX IT
• Bank Nifty
• Nifty Midcap 50
• CNX Realty
• CNX Infra
• ETF

You even find the ETFs listed on NSE plotted here. You can even click on the small "Post-Its" on the charts to see any corporate actions like dividend/split/bonus information.

Image: winnond / FreeDigitalPhotos.net

My learnings from Ramit

I follow a blog that is run by Ramit Sethi "Iwillteachyoutoberich.com" and two of his teaching that have profoundly influenced me are

• Automate your Finance
• Ask your Seniors

Automate Your Finance:
This aims at removing all the "Human Element" from the act of investing and tries to make it as mechanical a process as you can possibly think of . In my limited investment experience i have see that Human Elements like fear,greed,procrastination,laziness are the biggest stumbling blocks to disciplined investing and Automating your Finances focuses on removing these stumbling blocks.

Are you desirous of Automating your Finances , you can automate in these ways click here

Ask your Seniors:
This is about , learning from mistakes , more importantly, from mistakes of others .
Ramit suggests that you approach a person about 5 years your senior , may be a colleague or a friend or may be somebody in your family and ask them , if they had the chance to re-live last five years of their financial life again, what would they have done differently . how would their priorities be different , what investment they would have avoided , what investments would they have maximised .

Think about these two points , see how simple and yet how drastically can these alter your investment style.


Thank you Ramit for these insights.

Do they practice what they preach

This is a interesting discussion with some of the most respected Mutual Fund managers and we find that not all the Fund Managers practice what they preach .

Many of the Fund Managers , have not invested their own money in the funds that they them self manager . If such is the mindset , how would you expect the general public to invest their hard earned money in the Equity Markets

Interesting conversation , please do watch