Quitting job: Reduce your Income-Tax arrears

Most companies assume that you would be employed for the full financial year when you file the income tax returns. However often because of higher education (MBA), marriage or due to foreign opportunities the Income tax computation goes haw-wire. What makes things worse is that getting a refund is practically impossible and takes several years. So here are few tips to help you.
1. Be proactive: One of the primary reasons why Income Tax deducted by the employer is high is because the person had not communicated his/her intentions to the accounts department well in advance.
2. Collect all bills. Certain expenses like communications and medical reimbursements, LTA, company expense account etc which were incurred are tax deductable only if the employer’s form 16 reflects it. So don’t be lazy in submitting these bills.
3. India is in a progressive taxation environment. As a result as the income rises, so does the taxation rate. As a result if you are employed for only 6 months, don’t be surprised if your IT goes down by not 50% but 60-70%. This is the major source of IT arrears. There are 2 ways around it.
1. Inform your company well in advance that you would be terminating your employment in the mid year.
2. Reduce your IT projection so that the income tax gets revised downwards. This can be done by claiming for all the tax reliefs possible, even if it is fictitious. You can file that you intend to take a home loan (50,000/- tax relief) or donate money in one of the tax exempt funds. This will reduce your tax liabilities and IT arrears.
PS: Please consult your tax consultant.


Tax Saver Loans: rent receivables

If you own a residential/commercial property that has no debt on it and earns a steady rental income then read ahead.
Current Indian income tax rules promote tax savvy individuals to take on bank loans. However most individuals are in so much hurry to pre-pay their mortgages that they miss out on this opportunity.
Firstly government allows individuals to get tax rebate on 1.5 half lakh rupees of interest expense on home loan. So that is a cool saving of 50,000/- per annum in tax.
Secondly as per the current income tax laws, an individual has to pay income tax on the rental income. 15% of the income can be offset as maintenance. However if one takes a small loan against that property, then its interest expense can be deducted from the rental income and save tax.
One can get home loan for 8.25% p.a. and save tax using the above mentioned procedure, then effective interest rate would be 5.45% p.a. (tax rate of 33%). One can use this loan to clear the higher interest rate debt or reinvesting the money received in tax (and risk) free securities that earn a higher return one can save tax.
E.g.: post office PPF generates 8% per annum tax free returns.
PS: I am not an authorized tax consultant. So please check with your financial/tax planner before taking out such a loan.


Duties of a good Portfolio Manager

1. Quantify their clients’ risk tolerances and return needs by taking into account his liquidity, income, time horizon, expectations
2. do an optimal asset allocation and choose strategy that meets the clients needs
3. diversify the portfolio to eliminate the unsystematic risk
4. Monitor the changing market scenario, expectations, client needs etc and rebalance accordingly
5. lower the transaction cost by minimizing the taxes, trading turnover, and liquidity costs.
Have you chosen the right manager?

Investing review

Linkedin as an investment tool

Today morning a friend of mine asked me to research a small financial services firm (with a market cap of about 200cr). The low PE and numbers looked attractive, but due to lack of any analyst/media reports or any details about the track record of the promoters/top management, I could not decide about this company. Finally I used to find out the company profile, the professional qualifications of its key employees and found the website to be very useful.
I don’t know how many people use linkedin to investigate about the company they intend to invest in, but looks like in the services field I would be using it more often.
Have you also found any other investing use of social networking sites?


Argo vs Essar

If people start writing accounts of fraudulent public dealings of Essar group then it will fill volumes. However the media esp the print media has been always silent about them and public continued to get duped. Finally Argo Capital Management ltd has been successful in being able to convince a major daily (Financial Times Global Edition) to print the truth and break this mummm. (The ad was forwarded to me by my dear friend whose name I cannot take because it might conflict with her profession)
In 2006 Essar had went to court against Argo’s Cayman Island Branch. Here is a brief summary about it. So in 2010 Argo is finally having its own sweet revenge.
Prax had a wonderful theory: According to him, Big media houses officially get lucrative pre-placement/private deals. After that they promote these dubious offerings and cash out.


My mood swings in Stock Markets

PS: I don’t hold rights to this image, nor i know anyone who does.


Stock Lending

This nice article lists the various tax, procedural and legal problems associated with the current stock lending program



A friend of mine requested me to analyze this FPO and I go by my usual style:
There are always a 100 analyst reports which will tell you why one should invest in the stock. Hence I try to find out red flags, or reasons why one should not.
1. Please don’t look at the pre existing price of the stock because the govt share-holding is 98.36%. Which basically mean that there is hardly any shares for trading.
2. The company has made other profit of 884cr which has increased from 105cr over the past 5 years. This constitutes more than 10% of sales (not profit) Hence its EPS figures are under question.
3. When a company engaged in mining makes a profit of 4.3 thousand cr on a sales of 7.5 thousand cr, I become suspicious about how sustainable this high margins are
4. In a capital intensive industry like mining, the company has depreciation of less than 1% of sales. This raises question of how old the machinery is and how long will the company able to operate.
5. The company has 9.7 thousand cr of cash in its balance sheet. Which is more than 1 year of sales. WHY?????
6. PE of 39.22 of a company which has no plans to buy/operate new mines in the near future?
All this makes me think that the price of NMDC is unsustainable in the long term. One might still invest in the stock for listing gains.


Islamic Financing Techniques

Here are few of the commonly used investment techniques of leading Islamic banks.
1. Mudaraba: It is a partnership agreement where one partner provides the funds while the other manages it.
2. Musharaka: It is similar to the previous technique with the only difference being that the managing partner also provides with a part of the capital required. Hence there is a greater incentive to investing wisely.
3. Murabaha: Here the bank buys out the inventory/goods/assets and then later on resells it back to the firm at a pre-defined mark-up. Although the mark-up is very similar to the interest rate payable to conventional instruments, the bank bears the risk of obsolesce of the goods/services.
4. Ijara: This is a leasing agreement where the bank buys the assets and leases it back to its clients.
5. Salam: It is a forward buying agreement used for agricultural produce.
6. Istisna: It is used to finance construction or commission manufacturing projects. Here one party buys the goods and other party undertakes to manufacture them.


Fundamental Principle of Islamic Finance

The most interesting aspect is that almost all major religions in the world are against charging interest. Christianity and Judaism explicitly prohibit charging interest. Hinduism text is full of references of how evil it is. Till 12th century all across Europe charging interest was banned. Medici family of Italy exploited a loophole in the Bible to create one of the first modern banks (that charged interest) and soon afterward the entire world forgot how evil interests are. The Islamic banking seems to be the people in the world who still haven’t forgotten their religion.

In Islam all assets (money, land, property etc.) are considered a gift of god and so is the time. So interest (riba) is viewed as making profit solely due to passage of time by exploiting the plight of those in need by those in excess. A man should not be able to make money from the mere fact that he/she has and others don’t. This is against the fundamental principle of social, economic and political fairness and hence is against Islam.

To confirm with the Islamic principles of finance, one has to abide by Sharia. However it is an abstract form of law capable of adaptation, development and interpretation. The most acceptable form of Sharia used by the financial world today has evolved from the interpretation of the text of Quran, Sunna, ijma and ijtihad/qiyas by the 4 independent schools Hanafi, Maliki, Shafi and Hanbali. However because of the minor differences in opinions and thoughts most Islamic banks consult from time to time a religious committee of religious scholars which supervise their investment activities and make amends.

Following 3 principles are common between the 4 main schools:
1. Riba/Interest: Under Islam interest is banned. Instead it is replaced by a profit and loss sharing agreement. So in essence there is no guaranteed rate of return and the banker has to share the risk. So in essence a lender of capital should not make money which is calculated on the basis of how long the money was borrowed but on the basis of how useful the money was for the borrower.

2. Gharrar/Gambling: One should not bet on chance, uncertainty or speculation.

3. One should not invest in ventures that can destroy the humanity eg: alcohol.

Note: I am neither a Muslim nor an expert in the ways of Islam. Hence please correct me if you believe my interpretation had overlooked some important aspects.