12 Personal Finance w w w. f i n a n c i a l e x p re s s .

c o m Saturday, August 21, 2010, New Delhi

FLOATING INTEREST RATES Tax

INCOME TAX

RIDINGTHERATECURVE
talk
PPF will continue to be Parizad Sirwalla

tax-exempt under DTC Gratuitybonanza

However, father-in-law is exclud-
edfromthescopethetermdepen-
Your dent. Therefore, you cannot
queries claim deduction under Section
80DD in respect of the medical
When interest rates are rising, you earn more from a floating rate FD.
G
RATUITYispayabletoanem-
When the rates fall, prepare for lower returns too ployee on termination of em-
ployment on superannua-
tion, retirement or resignation after
SaikatNeogi renderingcontinuousservicefornot
NEW BEGINNING less than five years. For death or dis-

Suresh Surana
I own a house in Ahmedabad,
purchasedinJuly1991.InOc-
tober 2001, I added another
floortothehousebyspending
Rs 7 lakh and Rs 50,000 were
spent on furnishing. Which
deductions can I avail of if I
want to sell the house in
FY11? AmitSinghal
Under the Income Tax Act,
1961, house property is a capital
asset and any gain or loss on the
same is liable to tax under the
head capital gains. Since you are
holding the property for more
than36months,youcanclaimthe
benefit of indexation on the pur-
chasecostandoncostof improve-
ments/additions. The gain/loss
on sale of house property would
becomputedbydeductingthefol-
lowingfromthevalueof salecon-
sideration:
■ Indexedcostof purchase
■ Indexedcostof improvement/
addition
■ Expenses on transfer of assets
However, no deductions can
be availed of for furnishing as it
is not a capital asset but a per-
sonalexpense.
I am working with a bank
and my family is dependent
solely on my income. In Feb-
ruary, I incurred a medical
expenditure of Rs 1,50,000
for the treatment of my fa-
ther–in– law, suffering from
cerebral palsy. Can I claim
deduction under section
80DD? Rahul Singh
Deduction under section
80DD is available in respect of
maintenance including medical
treatmentof adependentperson
with disability. Dependent in-
cludes spouse, children, parents,
sisters, brothers or any of them.
treatment of your father-in-law.
I am a salaried individual
working with the excise de-
partment. Writing books is
my part time hobby. During
2009-10 fiscal I received Rs
1,75,000 as royalty for a book
authored by me. Please sug-
gest whether the same is tax-
able or not? PuneetSharma
Under Section 80QQB of the
IncomeTaxAct1961,adeduction
is available against the royalty
incomeof thelowerof Rs3,00,000
or the actual income from royal-
ty, subject to fulfillment of speci-
fied conditions. Hence, the
amountreceivedbyyouwouldbe
available as a deduction under
Section 80QQB and would not be
subject to income tax on fulfill-
mentof specifiedprescribedcon-
ditions under the said section.
IhaveinvestedRs70,000inPPF
to claim the benefit of deduc-
tion under Section 80C of the
IncomeTaxAct.Currently,the
interest accruing on PPF in-
vestment as well as withdraw-
al is exempt from tax. I wish to
know whether it would be
taxed under the proposed di-
recttaxescode? VijendraS
Under the current IT laws, in-
vestment in PPF, interest ac-
crued on PPF and any
withdrawalfromPPFareexempt
from tax under EEE (exempt, ex-
empt, exempt) method of taxa-
tion. Also, as proposed under the
revised discussion paper on di-
rect taxes code, PPF would con-
tinue to be governed under the
EEE taxation method. However,
the final provisions on DTC are
yettobelegislated.
■ The author is founder of RSM
AstuteConsultingGroup
E
VER felt foolish locked into a
term deposit with a fixed rate as
interest rates climbed all
around? Till now, the only option
to get higher returns was to foreclose the
FDbypayingafeeandopenafreshdeposit.
However, floating interest rates on FDs,
which move in tandem with the change in
the bank’s interest rates are here, with the
State Bank of India (SBI) last week intro-
ducing precisely such a product. Starting
September 7, the country’s largest bank
will offer floating interest rates for fixed
deposits for one, three and five years.
If you open an FD with floating interest
rates, you earn more interest when the
bank’s interest rates rise. However, be pre-
pared for the downside as well. Your inter-
est income comes down when interest
ratesintheeconomyfall.Incontrast,if you
open an FD with a fixed interest rate, your
returns remain the same regardless of the
interestmovementsintheeconomy.
Analysts say the SBI move is well-
timed: Since interest rates are currently
rising, customers would be tempted to
open floating rate FDs, which fetch more
interest than fixed rate FDs where re-
turns are static.
Currently, almost all bank FDs offer
fixed interest rates, which vary according
to the tenure of the deposit. Floating rate
deposits, as the name suggests, do not car-
ry a fixed-rate: the interest rates on these
deposits are linked to a benchmark rate.
SBI has linked its floating rate to its base
rate. Base rate is the minimum interest
rate at which a bank extends loans to its
customers, which SBI has fixed at 7.5%.
Whenthebaserateisreviewedattheendof
a quarter, the floating rate linked to the
base rate will also change, leading to a rise
or fall in your interest income.
SBI has offered three choices of tenure
for its floating rate FDs: one-year deposits
at7%,three-yeardepositsat7.25%andfive-
year deposits at 7.5%. These contrast with
the fixed rates offered on FDs, where it of-
fers 7.25% for two to three years, which is
the same as the floating rate on a three-year
deposit. On the other hand, the fixed FD
Floating interest rates on deposits
State Bank of India Indian Overseas Bank
For 1 year For 3 years For 5 years For 3 to 5 years Over 5 to 10 years
7 7.25 7.50 7.24
■ In floating interest rate fixed
deposit, one earns higher
return if interest rates rise
■ If interest rate falls, your
returns also dip accordingly
■ The interest rate is pegged on
the benchmark rate of the bank
■ The interest rate will
be reset every quarter
All figures in %,
Source: Bank websites
rate between three and five years will yield
50basispointslessat6.75%.
However, SBI is not the first off the block
to offer floating rates on FDs. Indian Over-
seas Bank and Housing Development Fi-
nance Corporation already have floating
rateFDsonthesameprinciple.
Analysts differ on the scope of floating
rate FDs. Says Murli Prasad, a certified fi-
nancial planner: “One of the reasons why
retail investors prefer bank fixed deposits
is the promised returns. Since banks can-
not give any assured returns in floating
rate deposits, many small investors will
not prefer such products.” He adds that the
new scheme offered by banks will not at-
tract many senior citizens, who prefer the
guarantee of assured returns and form the
bulkof bankdeposits.
Other analysts say that since interest
rates are likely to rise further, it makes
much sense for investors to opt for this
product. In the last one week, many banks
have raised the interest rate on FDs from 75
basis points to over 150 basis points and ex-
perts say rates are likely to rise further. An-
alysts say in a rising interest rate scenario,
it makes less sense for investors to commit
money for a longer period of time. Fixed de-
posits is a good option for investors in the
7.48
low or middle tax brackets, mainly falling
inthe10-20%taxbrackets.
Bankers are optimistic that in a rising
interest rate regime, people with surplus
cashwillprefertoparktheirmoneyinfloat-
ingratedeposits.Traditionally,bankspaya
fixed interest rate on short-term deposits
and lend money to borrowers for longer
termsatfloatingrates.
Banks peg the interest rate on floating
rate deposits to the base rate, which is de-
rived from the yield on five-year govern-
ment securities (daily average for the last 6
months) for deposits with maturity period
of 3-5 years and 10-year G-Sec rate for de-
posits with maturity period of over 5 years.
The floating rate interest on deposits will
beresetonceeveryquarter.
The floating interest rate deposit can be
closed before maturity, for which banks
will levy a foreclosure charge of 1%. Cus-
tomers will also have the provision to con-
verttheexistingfixedinterestratedeposits
to floating rate deposits by closing the de-
posit prematurely and opening a floating
ratedeposit.Theinterestrateontheprema-
turelyclosedfixedinterestratedepositwill
be payable at the rate for the period the de-
posit has remained with the bank without
deductinganyforeclosurecharges.
ablement,thetimelimitiswaivedoff.
Any death-cum-retirement gratu-
ityreceivedbyanemployeeof thecen-
tral government, state government,
local authority and defence services
in accordance with the prescribed
scheme/rules, is not taxable. For pri-
vate sector employees, gratuity is ex-
empt subject to limits. However, it
depends on whether it is received
from an employer who is covered un-
der the provisions of the Payment of
Gratuity Act (POGA), 1972, read with
the Income-Tax Act, 1961 (Act). While
most organisations fall within the
ambitof POGA,certainprivatesector
companiesmaynotbecovered.
Organisations covered under POGA
POGA applies to every factory,
mine, oilfield, plantation, port and
railway company. It also applies to
every shop or establishment covered
under the Shops and Establishments
Act/regulationsof astate,inwhich10
ormorepersonsareemployedorwere
employedonanydayof thepreceding
12 months. Further, the central gov-
ernment can also prescribe any other
shop or establishment. A shop or es-
tablishment to which POGA applies
would continue to be covered, even if
thenumberof personsemployedbyit
subsequentlyfallsbelow10.
Amount of gratuity under POGA
Gratuity is to be computed at the
rate of 15 days of wages last drawn by
theemployeeforeverycompletedyear
of service or part thereof in excess of
sixmonths.Incaseof employeesearn-
ing monthly wages, the calculation is
for26days.Certainothercomputation
methodsareprescribedforspecificin-
dustries/ sectors. With effect from
May 24 this year, the government has
increased the limits of gratuity
payable from Rs 3.5 lakh to Rs 10 lakh.
Now, employees are eligible to receive
gratuity up to Rs 10 lakh which is also
tax-exemptif calculatedasabove.

Meaning of wages under POGA

Earn passive income for a desirable lifestyle

knowledge one possesses, while
someothersfocusonaffordability
power. An old professor of mine
Your money believes he is wealthy since he
does not remember what he owns
Sanjiv Mehta
— it was discovered that he has
amnesia. The definition, which I
wealthy by our definition. So,
everybody can be wealthy and fi-
nancial planning is beneficial
for all, irrespective of net worth.
Passive income is the income
not dependent on active employ-
ment, resulting from rent, inter-
a return of 9% on an annualised
basis, he will be making Rs 4.7
crore. At 10% return, that
amount goes up to Rs 6.3 crore.
Each one additional per cent
adds significantly because of
the power of compounding. At
being harnessed well abound. A
47-year-old CEO of an IT software
company, bogged down in his job
hadlittletimetoplan.Couldhere-
tire at 55withgoalsof good retire-
ment and only child’s education?
An analysis showed that proper
apartment. He buys one with a
combination of 20% down pay-
ment and rest 80% as home loan.
He channelises a significant per-
centage of his monthly savings to
return his home loan as EMIs. Af-
ter a few years, his net worth will
Wages mean all emoluments
which are earned by an employee
while on duty or on leave in accor-
dance with the terms and conditions
of his employment which are paid or
payable to him in cash. It includes
dearness allowance but does not in-
clude any bonus, commission, over-
time wages, any other allowance etc.
Income Tax
For those employees not covered
under POGA, the gratuity is exempt

H
aving two professions, of
a physician and of a
wealth manager, I am in-
evitablyaskedtocomparethetwo:
which one adds more value?
Physician’svalueadditionisobvi-
ousanddoesnotrequireanyelab-
oration.Personalwealthmanage-
ment too has potential to enrich
andempowerindividuallives.
To elaborate, we should be
clear about the definition of a
wealthy person. Traditionally,
people associate wealth with net
worth; some even relate it to the
ratethebestandthemosteffective
is:Apersoniswealthyif hisorher
passiveincomeissufficienttosus-
tain a desirable lifestyle. Two
words are important here, ‘pas-
siveincome’and‘desirable’.
The word ‘desirable’ makes
the concept specific to each indi-
vidual. For example, a very high
income person wanting to but
unable to own a private jet, will
notbewealthybythisdefinition.
In contrast, a salaried person
who wants to educate his chil-
dren well and is achieving it, is
est, short-term and long-term
capital gains, dividends and roy-
PASSIVE INCOME CAN ENHANCE ECONOMIC VALUE
alties. The power of passive in-
come is huge. For example, a
25-year-old initiating his career
expectstoearnanaverageof Rs1
lakh every month, earning a to-
tal of Rs 4.8 crore in his career
span of 40 years. If he were to
save only 10% of what he is earn-
ing every month, and generates
11%, the amount is Rs 8.3 crore
and at 12% it is Rs 11.7 crore. The
surprising conclusion is that
passive income can easily ex-
ceed active income. Of course,
activeincomeisimportantsince
it is the source. However, by har-
nessing passive income, an indi-
vidual can enhance his total
economic value significantly.
Examples of passive income
investment of his existing and fu-
turesavingsachievesallgoals.Im-
plementing a few easy steps, he is
well on his way to achieve finan-
cialfreedomatdesiredage.
Another example is that of a
just-retired 65-year-old, who has
to replace active monthly income
with a passive stream. It is possi-
ble to structure a solution where
an assured monthly cash flow is
generated and at the same time
surprisingly, his total portfolio
value grows. A 27-year-old, about
to get married, wants to own an
be lot more because of asset cre-
ation as compared to if he were to
rely totally on his active income.
Passive income puts us on an
acceleratedpathof financialfree-
dom, a choice to do what we enjoy
doing and achieving our swad-
harma — using our natural gifts
forothersandus.Italsoenablesus
to lead a consistent lifestyle. The
soonerwestart,thebetteritisdue
tothepowerof compounding.
■ The writer is founder of
www.financedoctor.in
up to the prescribed limits in the Act.
Recently, tax ceilings have been en-
hanced to Rs 10 lakh from Rs 3.5 lakh.
This amendment is applicable to em-
ployees who retire, or become inca-
pacitatedbeforeretirement,orexpire
or whose services are terminated on
orafterMay24,2010.Thisisawin-win
situation, where not only is the em-
ployee is entitled to an enhanced gra-
tuity,buteventheenhancedamountis
tax-freetotheextentspecified.
■ The writer is partner, Tax and Regu-
latory,KPMG

INTERVIEW: TRIDIB PATHAK

S E N I O R D I R E C T O R E Q U I T I E S , I D F C M U T U A L F U N D

Follow asset allocation framework, stay invested

Veteran fund manager Tridib Pathak,
senior director at IDFC Mutual Fund,
says irrespective of market conditions,
retail investors must have faith in the
longtermgrowthprospectsof Indiaand
itscapitalmarkets.Inanexclusiveinter-
view with FE’s Saikat Neogi, he under-
linesthatinvestorsshouldnottrytotime
markets and invest depending upon
one’s risk appetite and goals. Excerpts:
Given that there is large-scale re-
demption from mutual funds, what
should retail investors do?
Irrespectiveof marketconditions,we
always advise retail investors to have
faith in the long-term growth prospects
of Indiaanditscapitalmarkets.Second-
ly, investors should not try to time mar-
kets,asnoonecan.Thirdly,oneshouldbe
invested for the long term in equities, at
least three years. One must follow an as-
set allocation framework, so that one in-
vestsdependinguponone’sriskappetite
andgoals.Onecanalsoavoidmarkettim-
ingbyperiodicallyre-balancingassetal-
location according to one’s framework.
How do you think emerging mar-
kets like India will perform in the
long-term?
India’s relative position as an in-
vestment destination has improved a
lot over the past two years and it has
emerged as one of the few countries
with continued high growth and with
comparatively better financial health.
Led by favourable demographics, ris-
ing personal income levels, low indebt-
ednessanddomesticcentricity,India’s
high growth is secular. All of this, is in
the context of a developed world,
which is struggling to grow and is fac-
ingstructural,andnotcyclical,issues.
So, the long-term case for Indian equi-
tymarketsisquitepositive.
What is the outlook for equities in
the short-term?
In the short to medium term, we
think that there are four factors which
determine equity markets outlook –
valuation, sentiment, liquidity and
earnings. Valuation-wise, we are trad-
ing at fair levels. In the short run, we
feel there is not much scope for any up-
side in valuations which are already at
about 17 times one-year forward earn-
ings. Sentiment and liquidity depend
onhowtheglobalmacro-risksshapeup
and how that affects risk appetite. On a
medium-term basis, both sentiment
and liquidity should be favourable for
India. In the short- to medium term,
earnings growth and earnings up-
gradesareverycrucial.Whilewedonot
think that there will be any significant
earnings upgrades in the short term,
we think continued strong economic
growth and a resultant upgrade in cor- result, we will see increasing diver-
porate earnings forecast over the year gence in performance among sectors
will be the key drivers for Indian mar- and among companies within a sector.
kets from here on. On a domestic eco-
nomic growth basis, we are fine. The What are the international factors
actual delivery of growth will be the which could damage investor confi-
key and inflows will continue to be di- dence in India?
verted towards fundamentally sound The biggest risk to investor confi-
companies, which have been able to dence and thus Indian equity markets,
keep the faith of investors with sus- is the global macroeconomic condi-
tained operational performance. As a tions.Thedevelopedworldisfacingre-
alstructuralproblems.Sovereigndebt
levels, total debt levels and fiscal
We always advise deficits of the developed world are
retail investors to reaching unsustainable levels. Most
have faith in the developed countries are having total
debt more than triple the size of their
long-term GDP and their fiscal deficits are rising
growth prospects fast. This situation has developed over
years of low savings and dependence
of India and its on cheap debt. Further, the developed
capital markets.. world has attempted rampant stimu-
investors should lus over the last two years while trying
to revive economic growth. But it is in-
not try to time creasingly appearing that their eco-
markets and be nomic growth is becoming dependent
on continuation of the economic stim-
invested for long ulus. But this will lead to further wors-
term in equities ening of fiscal deficits and debt levels.
Thus,wehaveseenwidespreadfearsof
a sovereign default, Greece being a
case in point, and also of a banking cri-
sis. These fears have ebbed recently.
However, what is becoming clear is
that the developed world faces
prospects of slower growth for a pro-
longed period of time. Most of Europe
has adopted austerity measures to
rein in fiscal deficit; but this may lead
toslowereconomicgrowth.
Which are the sectors that will
stand to gain from the slowdown in
Europe?
In our portfolios, we run a theme
‘Beneficiaries of Global slowdown’ in
which we invest in companies/sec-
tors which may benefit from a slow-
down in global growth. There two
kinds of such companies/sectors —
ones who may benefit from lower in-
put costs due to lower commodity
prices like autos, consumer goods, oil
marketing companies and secondly,
ones who may benefit from increased
outsourcing as the developed world
searches to cut costs like pharma out-
sourcing and IT services.