Now Pay Tax On Your Provident Fund Interest Too If...

Till now ALL contributions -- both Mandatory and Voluntary -- to your Provident Fund account enjoyed TAX-FREE interest income (provided you had completed 5 years of service).

Besides, the interest rates on PF have typically been among the highest in the fixed-income schemes offered by the Govt. of India.

Therefore, people have often maximized their investment in their Provident Fund Account, by investing more than the mandatory limit as a Voluntary PF contribution.

This is now history.

As per the Budget 2021 announcements, 'employee' contributions ONLY up to a maximum of Rs.2.50 lakhs per annum would continue to enjoy the tax-free status [Important: See 'Note' later]. And, interest earned on the amount deposited exceeding Rs.2.50 lakhs, will henceforth be taxable.

As you would be aware, 12% of the basic pay + dearness allowance has to be compulsorily invested in your PF Account. In fact, this happens automatically. Every month your employer deducts this amount from your salary and deposits the same to your PF account on your behalf (together with the employers' own contribution).

In other words, your total contribution — i.e. 12% mandatory + VPF or Voluntary Provident Fund, if any — exceeding Rs.20,833 per month (i.e. Rs.2.50 lakhs per annum) will come under the tax net. The employers' contribution is NOT part of this specified limit.

Note: The Rs.2.50 lakhs tax-free limit is for cases where both the employee and employer are contributing to the PF A/c. In cases where ONLY the employee contributes to his/her PF A/c, the tax-free limit would be Rs.5 lakhs, and interest earned on the contribution in excess of Rs.5 lakhs per year would be taxable.

Of course, this budget proposal will impact mainly (a) the high-salaried individuals and (b) those who have been contributing over and above the 12% mandatory limit as Voluntary contribution to earn 'high' and 'tax-free' interest.

How would this work?

Simple! The 'excess' contribution will be maintained as a separate sub-account, just like any other bank fixed deposit account. And, EVERY YEAR, the interest earned on this 'excess' corpus will have to be included in your taxable income and taxed as per your slab rate.

This new taxation is applicable on all excess contributions starting from April 1, 2021.

PO Small Savings Interest Rates: Status Quo For Jan-Mar'21

As you would be aware, the Govt. had announced a massive cut in the interest rates on the various Post Office Small Savings Schemes for the 1st Quarter of FY'20-21 i.e. Apr to Jun'20 [Massive Rate Cut On Post Office Small Savings Schemes].

Thereafter, as expected, it decided to continue with the status quo for the 2nd Quarter i.e. Jul-Sept'20 [Small Savings Interest Rates: Pause After A Massive Cut].

No change in the interest was announced for the 3rd Quarter [Small Savings Interest Rates: No Change For Oct-Dec'20].

And now the Govt. has — vide its Office Memorandum F.No.1/4/2019-NS dated 30.12.2020 — declared that the same interest rates will continue for the 4th Quarter too. In other words, there is no revision in the small savings schemes interest rates for the period Jan-Mar'21.

(By now you would surely be aware that since the last few years the interest rates on Small Savings Schemes are reset periodically on a quarterly basis.)

Accordingly, the interest rates on various Post Office Small Savings Schemes for the fourth quarter of the Financial Year 2020-21 — i.e. Jan 1 to Mar 31'21 — are detailed below:

Public Provident Fund (PPF) : 7.1% p.a. [compounded annually]

5-year National Saving Certificate (NSC) : 6.8% p.a. [compounded annually]

Monthly Income Scheme (MIS) : 6.6% p.a. [monthly compounding and paid out]

Senior Citizens Savings Scheme (SCSS) : 7.4% p.a. [quarterly compounding and paid out]

Time Deposits
1-year Deposit : 5.5% p.a.
2-year Deposit : 5.5% p.a.
3-year Deposit : 5.5% p.a.
5-year Deposit : 6.7% p.a.
(All on a quarterly compounding basis)

5-year Recurring Deposit : 5.8% p.a. [compounded quarterly]

Kisan Vikas Patra : 6.9% p.a. [compounded annually] 
(The scheme will double your money in 10 years 4 months)

Sukanya Samriddhi Scheme : 7.6% p.a. [compounded annually]

Savings Deposit : 4% p.a. [compounded annually]

Note:
1. The revised interest rates apply only to the "new accounts" opened during the respective period (except PPF and Sukanya Samriddhi Scheme, where the new rate is applied on the outstanding account balance).

2. For the existing accounts under all other schemes, the contracted interest rate remains unchanged until maturity.

How Risky Is A Debt Fund? Check SEBI's New Risk-o-Meter.

Unlike an equity mutual fund that invests in the stock markets, a debt mutual fund invests in fixed-income securities such as Bonds, Debentures, Govt. Securities, Commercial Paper, Treasury Bills, Certificate of Deposits, etc. Therefore, it is comparatively speaking, a much 'safer' option than an equity fund.

However, 'safe' is rather a relative term. It doesn't mean that debt mutual funds have 'zero' risk.

Having said that, even if the risk is not zero, it is definitely quite LOW. Plus, you pay much LOWER TAX on the earnings than the conventional fixed-income products such as Bank FDs, Post Office schemes, etc. And, it offers other benefits too.

Therefore, if you choose your debt funds with care and diversify your investment across different categories and AMCs, you will definitely be much better of as compared to putting your money in the Bank FDs, etc.

By the way, debt funds are a lot safer than Co-operative Banks and Corporate Deposits, where you often invest your money to earn that extra 1-3% interest. Lots more people have lost their ENTIRE money in Co-operative Banks and Corporate Deposits vis-a-vis a few occasional MINOR losses in the debt mutual funds.

So, don't let this 'little' risk scare you into not investing in such an excellent investment option.

And, to make your job easier in choosing the most appropriate funds for your risk appetite, SEBI has introduced new guidelines 'Product Labeling in Mutual Fund schemes – Risk-o-Meter'. As per the same, the AMCs will have to first calculate the Risk Value of each debt scheme and then reflect the appropriate risk level by way a Risk-o-meter.

Even though the concept of Risk-o-meter is not new, there is a BIG CHANGE in how the risk level will be assigned to a particular scheme.

Earlier, for example, all credit risk funds were classified as having 'moderate risk'. However, as practical experience has shown, some credit funds had significant investment in low-rated illiquid securities, while some were invested mainly in the high-rated securities. So, logically, the first credit risk fund was far riskier than the second credit risk fund.

Such kind of problems have been addressed in the new SEBI guidelines. The AMCs will henceforth have to follow an elaborate process to calculate the actual risk in EACH scheme separately and assign a Value. And based on this Risk Value of the scheme, the level of risk will be depicted on the Risk-o-meter.

The Risk-o-meter will have six levels, viz.
- Low
- Low to Moderate
- Moderate
- Moderately High
- High
- Very High

Let's explore:

For simplicity sake, I will just highlight the concept and keep out the (messy) details. Those interested in the nitty gritty can refer to the SEBI Circular No.: SEBI/HO/IMD/DF3/CIR/P/2020/197 dated Oct 05, 2020.

There are typically three types of risks in a debt fund.

1. Credit Risk
This is the risk of default. If the company, where the scheme has invested a part of its corpus, doesn't pay the interest or repay the capital, it is a loss to the scheme. Consequently, the NAV will come down and your returns will accordingly be impacted.

SEBI has given a Credit Risk Value of 1 to Govt. Securities and AAA-rated investments; Credit Risk Value of 2 to AA+ investments; and so on up to Credit Risk Value of 12 to Below-investment-grade rated investments.

So, based on the weighted average value of each investment in the portfolio, Credit Risk Value of the total portfolio will be calculated.

For example, if all the securities in the portfolio are AAA, the Credit Risk Value of the scheme will be 1. And, if all the securities are below investment grade, the scheme will have a Credit Risk Value of 12. 

In other words, the lower the Credit Risk Value of the scheme, the lower is the risk of default.

2. Interest Rate Risk
As you may be aware, if the market interest rates go up, NAVs fall. And, if the interest rates go down, NAVs go up. So the NAV of a debt fund has an inverse relation to how the interest rates move in the market.

Further, the longer the tenure of the bond/security, the more is the impact on NAV. So, funds with shorter tenure investments in the portfolio will be less affected by the interest rate movements.

SEBI has given an Interest Rate Risk Value of 1 if the (Macaulay) Duration of the portfolio is less than equal to 0.5 years; Interest Rate Risk Value of 2 if the (Macaulay) Duration of the portfolio is more than 0.5 years but less than equal to 1 year. And so on, going up to Interest Rate Risk Value of 6 if the (Macaulay) Duration of the portfolio is more than 4 years.

In other words, the lower the Interest Rate Risk Value of the scheme, the lower is the risk of interest rate movement.

[Important: If you feel that market interest rates are near bottom and likely to go up in the future, it is best to invest in schemes with shorter tenure. But, if the interest rates are at near peak and likely to reduce in the future, it is best to invest in schemes with longer tenure. Capital appreciation in bond prices will give a significant boost to the NAVs. Read 'You Can Lose Money Even In The Govt. Securities' for more clarity on this interesting aspect.]

3. Liquidity Risk
If the mutual fund scheme can quickly sell its investments and without any loss, to meet any redemption request, it is considered as low liquidity risk. But if the investments in the scheme are difficult to sell or to be sold at a huge discount, the MF investor suffers higher liquidity risk.

SEBI has given a Liquidity Risk Value of 1 to Govt. Securities and AAA-rated PSUs; Liquidity Risk Value of 2 to AAA-rated investments; and so on up to Liquidity Risk Value of 14 to Below investment grade and unrated investments.

So, based on the weighted average value of each investment in the portfolio, the Liquidity Risk Value of the total portfolio will be calculated.


The overall Risk Value of the debt fund would then calculated by taking a simple average of Credit Risk Value, Interest Rate Risk Value, and Liquidity Risk Value. [Note: If the Liquidity Risk Value is higher than this average, then Liquidity Risk Value will be taken as the scheme's Risk Value and not the average.]

This Risk Value will then be mapped on the Risk-o-meter as under:
- Low: <= 1
- Low to Moderate: >1 to <=2
- Moderate: >2 to <=3
- Moderately High: >3 to <=4
- High: >4 to <=5
- Very High: >5

The Risk-o-meter of each scheme will be updated every month, based on the changes in the portfolio during the month. Any major change in the risk level will be communicated to the existing unitholders.

These guidelines will become effective from Jan 1, 2021.

CAUTION: The idea is good. However, mapping an average figure onto a Risk-o-meter will not adequately serve the purpose. Ideally, all three Risk Values i.e. Credit Risk Value, Interest Rate Risk Value, and Liquidity Risk Value should be displayed along with the scheme details.

Also, please note that Risk is just one of the various parameters that need to be evaluated before making any investment. Merely relying on the Risk-o-meter is not enough.

Small Savings Interest Rates: No Change For Oct-Dec'20

As you would be aware, the Govt. had announced a massive cut in the interest rates on the various Post Office Small Savings Schemes for the 1st Quarter of FY'20-21 i.e. Apr to Jun'20 [Massive Rate Cut On Post Office Small Savings Schemes].

Thereafter, as expected, it decided to continue with the status quo for the 2nd Quarter i.e. Jul-Sept'20 [Small Savings Interest Rates: Pause After A Massive Cut].

And now the Govt. has declared that the reduced interest rates shall continue for the 3rd Quarter too i.e. Oct-Dec'20.

(By now you would surely be aware that since the last few years the interest rates on Small Savings Schemes are reset periodically on a quarterly basis.)

Accordingly, the interest rates on various Post Office Small Savings Schemes for the third quarter of the Financial Year 2020-21 — i.e. Oct 1 to Dec 31'20 — are detailed below:

Public Provident Fund (PPF) : 7.1% p.a. [compounded annually]

5-year National Saving Certificate (NSC) : 6.8% p.a. [compounded annually]

Monthly Income Scheme (MIS) : 6.6% p.a. [monthly compounding and paid out]

Senior Citizens Savings Scheme (SCSS) : 7.4% p.a. [quarterly compounding and paid out]

Time Deposits
1-year Deposit : 5.5% p.a.
2-year Deposit : 5.5% p.a.
3-year Deposit : 5.5% p.a.
5-year Deposit : 6.7% p.a.
(All on a quarterly compounding basis)

5-year Recurring Deposit : 5.8% p.a. [compounded quarterly]

Kisan Vikas Patra : 6.9% p.a. [compounded annually] 
(The scheme will double your money in 10 years 4 months)

Sukanya Samriddhi Scheme : 7.6% p.a. [compounded annually]

Savings Deposit : 4% p.a. [compounded annually]

Note:

1. The revised interest rates apply only to the "new accounts" opened during the respective period (except PPF and Sukanya Samriddhi Scheme, where the new rate is applied on the outstanding account balance).

2. For the existing accounts under all other schemes, the contracted interest rate remains unchanged until maturity.

Can I Become Rich By Investing In Mutual Funds?

This article is contributed by Mr. Laxman Balagani.

People have always wondered how to get rich in the stock market fast and without any hassles. You should know from the outset that stock market investments are no get-rich-quick scheme that works for everybody.

As always, there is a sizable amount of skill, expertise and knowledge behind success stories in the market while the luck factor cannot be discounted as well. People have earned gains beyond their wildest dreams at times while some have lost all their money and hard-earned savings as well.

Such is the nature of the stock market and proper expertise counts above all else.

So if you are thinking how much money should I invest in a mutual fund to get rich, it all depends on your definition of rich.

The corpus that you are targeting should be carefully outlined. This cannot be the same as someone else. Do not blindly pick a number if someone else is doing it.

First analyze your lifestyle costs, household expenditure, liabilities and financial position currently. Thereafter, factor in the inflation rate and increase in household costs and other expenses by the time that you hope to get your amassed corpus in hand. Thereafter, make a provision for other financial goals, big-ticket purchases and emergency money. Add up the final amount likewise. Have some breathing space as well.

Once the number is clear to you, check out mutual funds and other investment avenues for accomplishing your financial goals. You should diversify your portfolio and invest for a longer duration in order to benefit from the power of compounding. Track your investments, do not miss payments and stay financially disciplined.

Is it worth investing in mutual funds?

Of course, you should consider investing in mutual funds that have offered good returns over the years including the SBI Focused Equity Fund for instance. Mutual funds give you a smaller-ticket entry into the world of financial investments. You can start investing in mutual funds through smaller amounts every month via systematic investment plans or SIPs. You can start your investment journey with an amount as less as Rs. 500 and gradually scale it up with increases in your income.

Mutual fund investments, particularly if you have a long term investment horizon and are patient enough to ride out temporary market fluctuations, can be quite rewarding. You benefit substantially by investing small amounts every month (which gives you averaging benefits) while the power of compounding helps you build a substantial corpus for the future.

Of course, choosing the right mutual fund is very important. Invest in fund-of-funds like the Franklin US Opportunities Fund and others only after doing your due diligence and homework on its type, investment style, expected returns and historical market performance.

The beauty of investing in mutual funds is that with SIPs, the risks are spread out and compounding ensures good wealth creation.

At the same time, along with diversifying your investment portfolio, you can earn tax-efficient and inflation-surpassing returns. Funds are managed professionally by experts who will naturally align their strategies and goals towards helping you earn considerable returns in the future. This is a major benefit of investing in mutual funds.

Key aspects that you should note

How fast do mutual funds grow? Experts usually recommend a period of 5-7 years for investments in mutual funds. Short-term investments come with their own fair share of risks and rewards and suit specific purposes. However, for building long-term wealth, the longer you hold onto your investment, the more lucrative it will be for you as mentioned earlier. Have an investment duration of 5-7 years as recommended or even more and you are likely to reap stellar rewards on your deployed capital accordingly.

You should know that there are various types of mutual funds that are available in the market nowadays. They are classified on the basis of various factors including the type of scheme, objective behind the investment and nature of the mutual fund scheme as well.

Upon classification on the basis of the investment goals, funds can usually be of various types like fixed-income funds, equity or growth funds, tax-saving funds, debt funds, ETFs (exchange traded funds), balanced funds, liquid funds or money market funds and even gilt funds.

Mutual funds may also be either open-ended or close-ended plans. When they are divided on the basis of their specific nature, they may be debt, equity or balanced types.

The fund value will be worked out on the basis of the NAV (net asset value) which is the specific value of the portfolio net of expenditure for the fund in question. This is worked out, post every business day by the asset management company or AMC that you invest with.

An administration fee will be charged by AMCs for covering brokerage, salaries, administrative and advertising expenses. This is worked out as the expense ratio. The lower this ratio, the lower your overall investment costs in mutual funds.

Loads may also be charged by AMCs which are essentially sales charges that are incurred by companies owing to costs of distribution. So make sure that you keep an eye on these costs before you invest in a mutual fund. Otherwise, higher expense ratios may eat into your overall returns and hinder profitability from your investment.

Keep the above-mentioned factors in mind while investing in mutual fund schemes available in the market.

Leasing - The Next Goldmine for Investors?

The world of investing is ever changing. Salaried Indians within the age group of 25-45 are now trying non-typical investment options which can help in maximizing their wealth. Yet, there are terrains which remain unexplored.

In this article, we will talk about how the world of business is moving towards leasing an asset, rather than owning it and how investment via leasing can be an excellent option for a retail investor.

The Asset Trend

The world is moving towards an asset trend where the end user, operator and owner of an asset are different. For example, Ola and Uber are two transport giants in India. However, neither of these companies own most of their cabs. The Ola/Uber cabs are majorly owned by a third party who leases it to the drivers for use. Here, the end user is you (the customer), the operator is the Ola/Uber driver who is the lessee and the third party is the owner, i.e. the lessor.

Let's talk about OTT (Over the top) platforms. Have you realized that the shows/movies that you watch on Netflix or any other online streaming platform is actually rented content? And ultimately, at the end of each month, you have to pay a fee to Netflix. This also eliminates your need to buy a CD/DVD from a brick and mortar store. The same goes for Spotify. Every month, the user has to pay a certain amount to consume content on the platform, which prevents them from buying tangible assets like music cassettes, DVDs etc.

Even software is rented now. Confused? Google Drive provides its own applications like 'Google Sheets/Doc/Slides' 'Google Forms' 'Google Contacts', which is an alternative to competitor products. For example, Google Sheets/Doc/Slide is a direct competition to Microsoft Office (a paid software). The data on Google Drive is stored on cloud and based on usage, you will have to pay a subscription fee. Which basically means, that now, leasing models are used on softwares, where after exceeding a certain data size limit, the user has to pay a fee.

And not just these things, when you look around you, a number of things are based on practical leasing models. Renting designer costumes, renting furniture from Furlenco, cars from companies like Zoom, Revv, laptops from RentSher, water purifiers from Drinktime and scooters from Bounce or Zyppare all examples of leasing.

You have a gist of how companies prefer to now adopt the leasing model on a larger scale. But have you thought of leasing as an investment opportunity? Let’s talk about it in detail.

Investment via leasing
The concept of leasing as an investment avenue is still raw in India. But there are platforms, such as, GRIP Invest, which are completely online and make the process much more simpler for retail investors.

These kinds of platforms act as a gateway between corporates and retail investors and through them, you can invest in assets leased to corporates and get a monthly IRR of 20+% pre-tax. For example GRIP recently collaborated with the popular furniture renting company Furlenco and e-scooter sharing app Zypp, through which investors were able to invest in furniture/e-scooters, which were leased to these companies.

The concept is quite unique because you become a partial owner of that asset and the company you lease it to pays you and the other co-investors a monthly rental amount.

What's Next?
According to the Global Leasing Report - 2020 by White Clarke Group, the global leasing industry has grown by a phenomenal 131%, in the last 9 years, whereas, the Indian leasing industry, which is relatively younger, has emerged as the fastest growing market with a growth rate of 60% between 2017 and 2018. The Indian market is estimated to hold great promise in the coming years.

A dynamic shift is taking place in the Indian financial industry, where more people are becoming aware of new investment avenues. However, to reap maximum fruit, a smart investor should clinch the existing opportunities in the market steadfastly.

Disclaimer: This is a Sponsored Post.

Govt.'s New RBI Savings (Taxable) Bonds At Floating Rate

Recently, with effect from May 29, 2020, the Govt of India has stopped taking fresh subscriptions under its hugely popular 7.75% Savings (Taxable) Bonds, 2018 scheme.

And, in its place, it has introduced the new Floating Rate Savings Bonds, 2020 (Taxable). This new scheme is open for subscription with effect from July 1, 2020.