Q & A contd

Q- Why are bank fixed deposits giving negative returns ?

Ans- This may be startling but it is true. If you consider return on bank deposit after deducting income tax on interest

Let us consider by example. Interest on one year bank fixed deposit of SBI is 5.10 % per annum.It means that if you deposit Rs 1,00,000 in SBI fixed deposit, it will become Rs 1,05,100 in a year. But if you are in highest slab rate of income tax, then income tax on this interest will be Rs 1530 and then you will get Rs 1,03,570 on maturity of your fixed deposit.
Now consider the other silent thief i.e. inflation which is trending at above 5 % per annum now. Now after deducting Rs 5000 from your yield, real value of your fixed deposit after a year will be Rs 98,570.
What this means that after one year your purchasing power will be less by almost Rs 2000 and so your effective return from one year SBI fixed deposit is about "minus 2 %". In case of saving bank account, the real rate of return is " minus 3 %".
So, if you have to get real return on your fixed deposit, taking into account income tax and inflation, you are required to invest in a fixed deposit that earns at least 8 % per year.

How to manage retirement money to increase your pension ?

Ans - Suppose on retirement, you got a lumsum of Rs 50,00,000 and your monthly expenditure is Rs 20000. If you deposit Rs 50 lakh in bank fixed deposit you will get Rs 2,50,000 per year considring after tax return of Rs 5 %.It means your monthly expensiture of Rs Rs 20000 per month will be managed..

Consider your expenditure after 10 years. At 5 % rate of inflation your monthly expenditure will be Rs 30,000 ( Rs 20000 * 1.5 ) approximately i.e. Rs 3,60,000 per year.Now your fixed deposit return of Rs 2,50,000 will not be able to meet it- in that case you will have to dip in your retiremnt Kitty which you may have kept for medical or some other purposes.
Now consider the other situation. Assuming you are paying your monthly expenditure by withdrawing from your Kitty, you will require Rs 24,00,000 for ten years. Rs 26,00,000 left with you, if you invest in equity mutual fund it will grow to Rs 67,60,000 ( at 10 % return ).
So in first case your retirement kitty will contnue to be Rs 50,00,000, in second case it will be Rs 67,60,000.Interest from this will be able to meet your increased monthly expenditure of RS 30,000 after 10 years.
So, suggestion is that- first you calculate the amount you require for monthly expenditure in next ten years. Keep this amount in Fixed Deposit and invest the rest amount left with you in equity mutual fund. This will bring you an amount more than your original amount and you will be able to meet highly monthly expenditure.

This is very simplistic calculation just to drive the point that it is necessary that you invest a part of your retirement kitty in equity mutual fund. Rough suggestion is that the money you donot need in next five years, you should invest in equity mutual fund.

Can I transfer my mutual funds to my daughter ?

No you cannot gift your mutual funds to your daughter to your daughter straight way.

First you will have to sell your mutual funds and then buy mutual fund in name of your daughter. But here is also a catch. Mutual fund companies accepts cheque only from account in name of mutual fund buyer. It means that bank account from which you are buying mutual funds should be both your and your daughter's names.
Also if you sell your mutual funds to buy fund in your daughter's name you will have to pay income tax.
So what is the way out - there are two ways . First buy mutual funds in joint names I.e. in name you you and your daughter in either or survivor mode - in this case even if you buy funds your daughter can withdraw money whenever she needs.
Second option is - give your daughter's name as nominee in mutual fund account. In this case, after your demise she will become owner of mutual fund. But in this case also you will have to execute a will mentioning that she will be owner of your funds after your death.

Question - My brother not giving my share in house purchased by my father, what are the options ?

If negotiations fail, you can file title suit in local civil court. It is a legal remeady that can save you from lot of acriminous push & pulls-

Any member of family can file partition suit if he is aggrieved by not getting rightful share in ancestral property.
Partition suit is filed only after a legal notice has been served and disregarded by opposite party.
No legal document is required to file partition suit, it is just enough to mention the name of property.
After petition suit is filed, it becomes the resposibility of the co-sharer to prove how the propeerty does not belong to you or you have received your right share.
If there are several heirs and not all of them willing totake part in such partition suit, it is not required for all share - holders to file suit, any one of them can file partition suit.
Limitation period to file the suit is 12 years from the date when one becomes entitiled to share of property.
Minimum 3 years is required for procedure to complete - but it can take more than that for case to finalise.

But if there is no means to acuire your rightful share in property then it is better to go for partition suit than to forget your share.

I have gifted money to my major son, what will be consequences ?

Ans - You are perfectly wise in gifting money to your major son as your son has not to pay any gift tax on the money received.Consequences of this action will be -

After the gift, money will be of your major son. Although he has not to pay any gift tasx, but if your son earns any interest or capital gain on this money afterwards he will have to pay income-tax on it. Interest or capital gain earned on this gifted money will not be clubbed with your income.
However if the son is minor, then interest or capital gain earned on this gifted money will be clubbed with your income.
If you gift money to your wife, anything earned on this money will be clubbed with your income.
According to provision of income-tax, any some of money can be gifted to blood relatives and receiver is not required to worry about paying gift tax. Blood relatives include spouse, brother or sister, any lineal ascendent or descendent of individual or spouse.
But if any gift is received from non-relatives and it is above Rs 50,000, then amount of gift is included in the income of gift taker as other income and he will have to pay tax on it.
Among relatives , it is assumed that income tax has already been paid by the gift giver and any tax on this amount will be double taxation. However in case of non-relatives, gift is taken as transfer of concealed income- tax evasion.

So, feel free to take gifts from your relative whether in cash or kind - you will not have to pay any gift tax on it. Have if you invest this money earns anything on it afterwards, you are required to pay tax on it. As a precaution, always make a gift deed.

When one has to pay capital gain tax on selling of agricultural land ?

There is no tax on selling of agricultural land. However it all depends on which land is agricultural land. As per income tax rules, a land is agricultural land if it is -

Within 2 km from limit of municipal area for a town with population between 10,000 to 01 Lakh.
Within 06 km from the municipal limits for a town with population between 01 lakh to 10 lakh.
Within 08 km from limit of municipal area for a town with a population above 10 lakh.

If your land is outside this limit then only this is agricultural land, otherwise you will have to pay capital gain tax on selling of land.

If land is in your possession for more than three years, then tax on selling of land ( Long-Term Capital Gains Tax) will be 20 %. In calculation of profit, increase in purchase price due to inflation is taken into consideration (indexation cost)

Capital gain tax can be saved by investing proceeds in -

residential property
Agricultural land
Capital gain bond.

What is REIT ( Real Estate Investment Trust )?

REIT is a type of mutual fund but it invests only in those Real Estate properties that gives rental income. Whereas mutual fund generally don't invest in real estate directly.
Generally it is difficult for small investors to invest inreal estate as it requires large amount of money and due to its legal complications. REIT is ideal for small investors as minimum investment amount is Rs 50,000. So, now small investor can now hope to invest in commercial real estate in towns like Bangluru, Delhi.
REIT invests 90 % of its fund in rent generating properties and have to distribute 90 % of its income to subscribers twice in a year. REIT income is likely in the form of dividend which will be tax free , in addition to capital aapreciation and interest income.
REITs are listed on stock exchanges so it will provide liquidity to investors. Expected return from REIT is expected in the range of 8 -14 %. as commercial leases are of more than 10 years duration, REITs are less volatile than equity, gold or Fds.
REIT will be available in demat form and will be regulated by SEBI.
REIT was recently in news as India's first REIT by Embassy Office Parks, Banglore had come out with IPO ( Initial Public Offering). But it is prudent to wait for sometime before investing in REIT.

Should I be a guarantor to a loan which my friend is taking ?

Bank and other lending institutions generally ask for a guarantor to loan from the borrower. Generally we agree to be the guarantor to the loan taken by some other person- be it friend, relative or colleagues.
Everything goes smooth as long as borrower repays loan regularly, but if he defaults in payment, bank or lending institution will send you notice to pay loan taken by some other person. They can also forfeit your asset to recover that loan.
If you are guarantor to a loan, it will appear in your CIBIL credit score statement. It means that your credit limit will be reduced by the amount you have guaranted. It will also affect your credit score.
So, beware of being guarantor to other person's loan and read documents carefully before signing it. Because once you become guarantor, it will be sole discretion of lender/bank to free you of this responsibility.

Look Beyond Bank Fixed Deposits