Less known ways to manage Income tax India

I was searching for some ways to manage my taxes and I found some  ways to manage my taxes.

These are not routine ones that’s why I wanted to list them so that others can benefit. All these come with points to be kept in mind, before using.

HUF

(Hindu Undivided Family) This is specific to Hindus. A married person can create a HUF and can receive Rs 50000 max as gifts per year into it in the form of gifts.

The process to open a HUF is as follows

Get a PAN card. For this one can apply online with relevant proofs. Card will be sent directly by post by NSDL.

Karta should get a Stamp made stating that he is the Karta of the HUF. He has to use this any time he transacts in the name of HUF.

Then open an account in the name of HUF in any bank. Then route the gifts into that account. The money can be invested similar to any other person.

Karta Can also take loan for any purpose with valid proof and manage such funds.  Also any ancestral property can be kept under HUF and the income can be accounted under HUF.
Advantage with HUF is additional PAN card which helps in reducing tax out go.

Gifts from Relatives

Gifts from blood relatives are tax free in the hands of receiver. Thus, if one takes gifts from parent brothers etc, if one maintains proof, the gift money can be shown to be tax free.

Adult children

Adult children can be used as a good tax saving tool. In fact, with proper management, an adult son/daughter can act as an earning member even if she/he is not earning. Gift some money to them and get it invested in their name. Thus one can get tax advantage and also one can initiate adult son into the wonderful world of finance.

There is one more issue here. Adult in Indian context is one who completed 18 years. For income tax purpose, even if one is becoming adult, he will be treated as adult for that whole year. Thus if one is completing 18 by say Feb 28, he can get money and act as an adult from April 1^st onwards. This can be used by a parent for managing tax.

Parents

If parents are not in taxable limit, this also can be taken advantage by gifting them and investing on their behalf. Online banking facility will further ease the process.

Will update this list in a future post.

Frugality - In day to day life.

One route to wealth is frugality. Frugality, as I understand is reducing personal requirements to the extent possible. Don’t get me wrong. I am not hinting at renouncing all worldly pleasures etc.

All requirements, I feel, can be splits into wants and needs. Needs are essentials which can not be foregone. For example, food, clothing etc. Then wants are things which are good to have, but not essential. For example, one can have a decent clothing which is a need. But designer wear is want.

I think, many of us confuse one to the other. A car can be requirement(this itself can be a point of contention). But car may be required, to meet certain social status norms. For that one can spend a reasonable to unreasonable amount. For a newbie, an entry model car may be sufficient. But if one opts for a sedan which can be 2-3 times the base mode, one has to finance it from one’s resources. Thus, one needs to differentiate between wants and needs. Another aspect which skews our judgment in this connection is societal pressure. When a colleague at a similar level purchases a bigger car, one things(falsely) that he too show off his wealth.

When one takes a purchase decision, one can think if one can get the same service with a lower price else where. This search takes time. Thus, one needs to control one’s urge to buy something on today basis. Generally, one gets a better deal, if one studies the purchase and takes an informed decision. However this is not required for all purchases. If I want a pen for Rs 10, spending an hour  researching  may not be worth it. Thus one has to optimise and use this technique only where substantial gains are possible. Routines help in this situation. Zero down on some brand of pen, paste, rice etc and purchase same brands for purchase till one gets some issue with those products. This will help save lot of time in regular purchases. One can counter this, by saying one misses variety in this process. But I believe, that will be a minor price to be paid for the time saved.

Then comes high value purchases. These are the situations where one can save substantially by proper research. It is quite possible that we go to a supermarket and like a fridge or AC. One way to go ahead with purchase is to book it immediately. I follow a different way. Once I want to by some object, I research about various brands comparing them on factors like cost, maintenance and service levels. There are many websites which provide this type of services. One can make full use of them. Once service level and maintenance issues were understood, one can check the lowest price of the piece on net. There are many sites which provide same object for different prices and one can chose the lowest one. When a standard object is purchase(LG 1.5 Ton AC), the item will be same across distributors and some could give discounts based on their logistical efficiency. Currently, the online stores are providing lower prices compared to brick and mortar stores.

This process cannot guarantee purchase of a good which lasts for a very long time with zero maintenance. Same is true for immediate purchase mentioned at the beginning. However, this process can  reduce occurrence of such incident. However, this process needs some effort from individual.

Also, continuous check of one’s purchases should be done, at least till some control is achieved. For example, I reduced non essential purchases reasonably and now my month end surplus(salary – expenses) is generally constant. I will route this amount to investing for the future. This worked for me quite well.

Please comment if you have some different views on the topic or the process.

Public Provident Fund or PPF

This is an interesting and useful wealth creation instrument. Any Indian citizen (an individual and not HUF) can open a HUF account in post office or some recognized banks. A PPF account can be opened as soon as a child is born. Currently (2014-15), per person limit is Rs 1.5 Lakhs. The limit ideally is per person (including all his dependent minor children). But in banks or post office, they are not checking this rigorously. Hence, if one has 2 dependent minor children, he will not be objected to invent (deposit) 4.5 lakhs (1.5 for self + 1.5 for either minor children).

However, for income tax rebate, only Rs 1.5 Lakhs is considered.

As per rule, if one deposits more than 1.5 lakhs, there will be no interest for the additional amount.

The attractiveness of PPF is its EEE concept, it is exempt from tax at the time of deposit(in the year or deposit), during the growth phase(when the corpus is earning interest) and when the account matures and the subscriber withdraws the amount.

However there are some conditions. The account is open for 15 years (There are rumors that the period may be increased to 20 years with higher rate). The amount cannot be fully withdrawn before 7^th year after which some partial withdrawals are allowed. In post office one has to go physically and deposit and in banks one can use account transfer. One has to keep depositing at least Rs 500 per year for the tenure of the account.

After completion of 15 years one can withdraw the money entirely or extend the account for a period of 5 years. This 5 years extension can be done any times subsequently.

The interest rate is yearly announced and is reasonable. Many other details can be had from the following wiki entry.

http://en.wikipedia.org/wiki/Public_Provident_Fund_(India)

If one is looking for a steady risk free income, this is a good instrument to be considered. Also this can be used even if one is having employee provident fund account. Also, 15 year lock in creates some discipline and help compounding to take place. Also this is the only instrument which gives such return over a long period.

Wealth creation

The process of wealth creation consist of the following steps

1.      Identifying and maximizing investible surplus

2.      Investing available surplus in an efficient manner with periodic review.

I wrote about the first aspect in my previous posts (http://ap16j55.blogspot.in/search/label/Personal%20Finance)

Once the surplus is identified, next step will be to invest the same.

There are various instruments for investing one’s surplus based on risk appetite and time horizon. And the returns are a proportionate to the risk.

In India various instruments that are available are as follows. (similar products may be available elsewhere too). They are FDs, PPF various types of mutual funds etc.

FD can be used by people who want to protect their principle at all costs even at the cost of interest.

PPF has yearly limitation and lock in period.

Mutual funds have various hues, from which one can select as per one’s requirements.

All mutual fund companies provide a way to invest directly with them. It requires a one time registration with the fund house and subsequent transactions can be made online.

Thus the way to wealth depends on the above two steps. Of these second one can make or break total effort. Hence one needs to study carefully, all the options available and make an informed decision.

Personal Finance Continued

Accumulation of corpus

For a salaried employee, initially it may be difficult to find surplus cash to invest. This is because, till this time one would have identified and may be using various avenues to deploy the salary on a monthly basis.

To get surplus, there are two ways in this situation. First, increase income sources and second reduce expenses. First one may be difficult and may take time. The second one is more redily doable.
For controlling expenses, one needs to take a closer look at the cash flow out(expenditure) to identify avenues where one can save without compromising on quality of life. If quality is compromised, there is a great chance of the measure initiated, may not be implemented consistently. One can see this effect in diet resolutions of an individual. If one starts dieting suddenly and without much commitment, the measure will be abandoned sooner or later.

While studying expenses, one can identify spend based on needs(like groceries, school fees etc) and wants(commute by car, mobile plans) and nice to have(eating out, movies etc). When auditing, it can start from third and go to the first. In this audit one needs to identify how much of an expense can be reduced without compromising on quality. This audit will point to avenues where one can check and reduce expense without much loss to quality of life.

This is not a one time exercise and is to be repeated regularly to improve the disposable income which can be channeled to build corpus.

I tried this method myself and could cap my monthly expenses at a level, which remains more or less same month after month. This leaves me with a decent sum to invest and increase my corpus.

Please share your comments / suggestions.