cost inflation index table for india

Indexation of cost is useful in case of capital gains that arise from debt funds or sale or property assets held beyond a period of 3 years. This enables individuals to calculate gains after adjusting the cost for inflation, which typically will reduce the amount of taxable gains.

Govt. has recently released cost inflation index table for India.

2001-02	100
2002-03	105
2003-04	109
2004-05	113
2005-06	117
2006-07	122
2007-08	129
2008-09	137
2009-10	148
2010-11	167
2011-12	184
2012-13	200
2013-14	220
2014-15	240
2015-16	254
2016-17	264
2017-18	272

fixed deposits or debt funds?

Fixed deposits or debt funds? Well, that's a question that I have heard quite a few times in recent days. They are different instruments and neither fixed deposits or debt funds can be completely ignored. Hence, you need to understand when to use what and the risk associated with them. 

Fixed deposits are the deposits done with financial institutions like banks against a fixed rate of return for a fixed period of time. And this is mostly considered risk free, although it's not, and can be broken easily these days via net banking and hence quite liquid as well. Why I say fixed deposits are not risk free - if your bank goes bankrupt, then irrespective of how many crores bank owes to you, you would only be entitled for a lakh or two. 

Debt funds are the mutual funds that invest debt instruments like bonds, debentures, government loans, structured loans etc. Read more on the details of types of debt funds.  

Below is a quick comparison of both the products 

	Fixed Deposits	Debt Funds
Rate of return	Gives you a fixed rate of return irrespective of market conditions	Gives you a rate of return which is typically higher than that of corresponding fixed deposit for similar tenure as the redemption period.
Associated Risk	Fixed deposits are considered risk free.	Since these invest in market debt instruments, they are considered riskier than the fixed deposits. The longer the tenure of the bonds the fund is investing in the higher the associated risk and higher the potential return
Liquidity	Fixed deposits now a days can be closed online. And many banks provide you instant credit of the proceeds - however the rate of interest applied would be for the period FD is held and some amount deducted as penalty for pre-mature closure	Liquid funds now a days provide you an instant credit option. All other funds would credit you the proceeds within a matter of 2-3 working days. Also, note that some debt funds have exit load as well if held below a given period. The units are redeemed at market NAV
Part Redemption	Some banks do offer fixed deposits with swipe out facility. Which means while withdrawal, only the amount short in your savings account would be pulled out from your fixed deposit. However, not all FDs are of this nature and can only be redeemed in full.	Debt funds allow you to put in and pull out as much money as you want and whenever you want.
TDS	Banks deduct 10% TDS from the fixed deposits every year and that is submitted to government. Hence, if you keep the money in FD for three years, every year you have TDS deducted from the interest accrued	There is no TDS deducted from mutual funds, the whole interest earned stays with you till the time you really go for redemption of the units. Hence, tax is deferred till redemption
Tax Treatment	Interest earned on Fixed deposits is simply added to your income and taxed based on your tax slabs. This is irrespective of the number of years you hold the fixed deposits.	Income from debt funds i.e. redemption value - invested value for the given units is short term gain if redeemed before 3 years else it is capital gain. Short term gains are added to your income and taxed based on your tax slabs. Capital gains are calculated with indexation benefit, and taxed at 20% irrespective of your tax slabs.

I beleive above comparison is good enough to help you make right decision to choose your vehicle of investments. 

Debt and hybrid funds

I have met few people recently who are aware of mutual funds and have been investing in them for quite some time, however it was surprising for me that they equate mutual funds to directly equity funds. They were not aware of the debt funds at all, leave apart the different categories of these funds and how they can leverage them.

Well this prompted me to pen down some basics on the debt and hybrid funds

What are debt funds?

Debt funds are basically mutual funds which invests full or part of their corpus in debt instruments like company bonds, govt bonds, loans to state governments, structured debts, debenture said etc. These instruments are rated by credit agencies (AAA and A1 ratings considered safer).

These instruments are slightly riskier than your fixed deposits and hence the institutions offering them compensate this risk by offering higher return. These instruments vary on maturity, the nearer the bond to its maturity the lower the risk and lower the premium. And hence, funds investing in bonds of longer maturity typically generate more returns than the ones investing in shorter maturity bonds.

Debt funds provide you an opportunity to earn more than your bank fixed deposits with tax benefits. From the tax benefit perspective just remember - for investment in debt funds for over 3 years your income is taxed @20% with indexation benefits.

Like equity funds there are both open ended and close ended funds. Most of the debt funds are open ended, however there are close ended funds typically called Fixed Maturity plans. They can only be subscribed during NFO's and can only be redeemed on maturity. FMPs are a very good alternative to fixed deposits in banks.

Debt funds on basis of debt maturity period

This classification is based on the maturity period of the debt instruments. It has nothing to do with how long you are holding the fund. 

Liquid Funds	Upto 91 days
Ultrashort term funds	Typically 91 days to 18 months
Short term funds	Typically 12 months to 36 months, sometimes even more
Income Funds	Really Flexible, 1 year to even 15-20 years

 Apart from this there are special funds that only invest in securities issued by central or state governments or provide loans to govt. These are called Gilt funds, Unlike bonds issued by companies, the chance of the Government defaulting on its loan obligation is significantly lower. 

Now, a combination of maturity and gilt nature provide the following options 

• Short term gilt funds 
• Medium-long term gilt funds 

All, the fund types mentioned above are the ones that only invest in debt instruments with no component of equities at all. 

Debt funds with mix of equity (Hybrid Funds)

These are basically funds that are classified as debt funds as they have major portion of their corpus invested in debt instruments and less in equity. Their tax treatment is same as that of any other debt fund. 

The classification here is based on the amount of corpus investible in debt and equities. 

  

Conservative Debt Funds	Upto 10% equity and rest in debt
Moderate Debt Funds	Upto 20% equity and rest in debt
Aggressive Debt Funds	Upto 30% equity and rest in debt
Equity oriented Debt funds	More than 65% in equity rest in debt

Now, since equity oriented debt funds have more than 65% in equity the tax treatment of them is same as that of equity funds. This is a very important factor to keep in mind while working with these funds. 

Asset allocation funds

These are special funds, where an investor does not need to bother about how much to put in equity and how much in debt. These funds makes the asset allocation decision between equity and debt based on the fund manager's view of the market direction and try to optimize the returns for the end investor. 

They are also called fund of funds and invest in other debt or equity funds. Note that due to this nature of these funds, they have a double incidence of expense ratio on your investments - one at the actual fund level and another at the asset allocation fund level. 

Arbitrage funds 

These funds aim to capture arbitrage opportunities in the cash and derivative market and invest some portion in the debt segment. In layman terms, since the market can never be in synch on the prices of the same stock at two different places - they take advantage of this difference. For instance, it's like you buy an item at flipkart on discount and sell the same on amazon at MRP, the delta/arbitrage is yours. 

I believe this gives you a holistic view of the debt and hybrid funds and would help in taking more informed decisions for your investments. 

Do you have a financial plan?

Irrespective of how much time you spend on your personal finances, or how much you earn or spend or save .. you should have a financial plan as soon as you get independent and start earning. Or at-least when you start a family.

I have seen people worrying much about small things, while not giving adequate attention to the long term goals. I remember discussing with a colleague who keeps tracking each and every penny that he spends on what ever he does. I don't say it's completely waste, but does it really have ROI? beyond some analytics on top of that data and an exact total you spend every month - what else does an individual get?

I would rather suggest to worry about bigger things like

• how much money do you need to retire?
• when do you actually want to retire?
• what are your recurring goals?
• do you need a term insurance?
• does your family needs a health cover?
• what are the key skills you have and how you can leverage them?
• and so on .. 

Beleive me smaller financial things in life would automatically fall in place. If you don't do it already, start thinking now about the buckets of investment. Allocate a specific amount to your monthly expense bucket and use whatever it has to do whatever you want. Rest all goes towards building corpus for your goals.

There are always two ways you can approach your investments

• Income - expense = savings 
• Income - savings = expense 

And second is the approach you should be really following. If you really want to meet your goals and want to measure if you can actually be there in time with right amount of money, I would suggest you start with following simple exercise

• Make some assumptions about the following - your date of retirement, the amount you want to retire with, rate of inflation, %age return on your savings. etc. 
• Start with your Networth
• And then cashflow statement 
• Determine your goals, how much you need by when for what?  
• And start measuring, do you save and invest enough to take you there?

Here is an excel that can help you with this basic exercise. 

how to invest in direct funds?

This post is relevant for you only if you have understood that you should be investing in mutual funds.

And if you are still here, let me ask you - do you know the difference between direct and regular mutual funds? If yes, and you are still continuing with your existing online portal to invest in regular funds for the sake of convinience, then you should read here to know how much more you will make if you go the direct way.

Once you have reached here, I am assuming you are convinced that you should be investing in mutual funds and you should be investing in their direct variants only. However, you would want to know where to start. 

CAMS	You can invest directly through KRAs like CAMS You can also do your Aadhar based eKYC at CAMS Investor Services provided by CAMSList of Mutual Funds serviced by CAMS Use their mail back services to get consolidated statement
Karvy	You can invest directly through KRAs like Karvy You can also do your Aadhar based eKYC at Karvy Investor Services provided by Karvy List of Mutual Funds serviced by Karvy Use their mail back services to get consolidated statement
MFutilties	Another central Agency that allows you to invest directly in mutual funds. https://www.mfuindia.com/  This also allows you to have one CAN number (Common Account Number), through which you can consolidate all your folios across KRAs.
Mutual fund Websites	If you have your KYC done and your correct email address and mobile number stored in the KYC, then you can directly register on mutual funds websites to start investing. some of the sites are like given below  Birla Sun Life mutual funds SBI Mutual funds  DSP blackrock mutual funds ... and many more

Note that all of these have online websites to do your transactions from and as well a mobile apps for both IOS and Android devices.

Personally, I have used the CAMS, mfutilities and mutual fund websites and they are all good. The one that i use most often is the CAMS website and their IOS app, which is really secure and good.

There are websites like coin from zerodha and moneyfront.in that allows investing in direct funds by charging a flat minimal fee monthly of Rs. 50 to 100, irrespective of the amount of transaction done. Hence, there is little cost to this convenience. 

Should i hold or sell my under construction flat?

I recently had a case (as on May 2017) where I am getting possession of a 3BHK flat at Bangalore within a month or two. Well, normally anyone should be really happy their flat is getting ready to move in, however I was a bit confused as I do not plan to stay there myself.

When I booked the flat in April 2013, I had plans to move in there. However, while it was constructing since all these years, things changed and I got a better deal which I leveraged and now that's what I call my home

While acquiring that I tried to sell this one, however could not sell it then as it was still constructing. Anyways … Now I am getting the possession and have two options: either I register and sell it now, Or I keep it on rent for next three years and sell it later (by the way, now the holding period is reduced to 2 years ) I was pretty much convinced that I should be selling that after holding period to avoid short term gains, and the key reason for that was I believed the moment I take possession the nature of property changes from "Right to acquire the property" to "actual property". And this would typically reset the counter for tax calculation.

However, when I posted this in a forum  Asan Ideas for Wealth a gentlemen suggested to have a private chat on the topic to discuss. I agreed and we had a call instead, got following arguments against what I believed

• Even though the nature of capital changes, its actually same. As otherwise, how else would you calculate the acquisition cost of the property itself. You always have to account for the transactions that are done for acquiring the right.
• The moment the flat is allotted, builder cannot legally transfer the same to anyone else as you have the right. Unless of course you forfeit the terms of agreement or cancel yourself. And this is the same right for which banks give loans, as this is legally yours and though they can't mortgage right but they eventually would be able to mortgage the property.
• There have been court rulings on this topic, and the view has been "Right to acquire the property" to "actual property" cannot be treated differently for purpose of taxation. You can do some reading by searching on cost of acquisition of under construction flats.

So, what does all this means to me. Booking amount was paid in April 2013 during pre-launch and the allotment of flat with flat number to me was done around Jan 2014. Hence, considering the second date (during first date I did not had flat number) I have completed three years of holding in Jan 2017, which means If I sell now I would make capital gains and not short term gains.

Hence, I decided to sell that (by the way I am yet to sell this, in case you are interested it's at Republic of Whitefield by Divyasree Builders)

To calculate the cost of acquisition, i should proceed as: Calculate the Indexed value of all the installments paid to the builder and add to that following 

• Cost of taking loan on the property
• Interest paid till that for the home loan on this property (note, since this was under construction i could have not claimed anything so far)
• Any other cost that can be directlly associated with the acquisition of property

Read more in cost of acquisition of house.

Now, once I would have sold the flat, I can either pay tax on capital gains or try to save them. Saving them would mean any of the following

• By investing in another property, which I would not do in any case
• Buy RECI or NHAI bonds. You can buy a max of 50 lakhs of these bonds and hold them for three years @ 5.25% annually. Though your principal gets tax free, you still have to pay tax on the interest you get from them.
• If you can arrange capital losses, you can set them against capital gains

This summarizes all we discussed. Hope this would be of some help. Post your thoughts or questions in case I have not covered certain aspects of the problem.

By the way, all this confusion was because our tax laws does not clearly indicate what should happen. 

Tax events on ESOPs

Many of the people in metro's today are employeed with multi national companies, and one of the common ways they reward their employees is by giving them stock ownership plans.

Typically these are given in the form of discounted shares that an employee can buy from his monthly salary upto a max limit which is decided based on his salary. They can have a vesting period, means they can only be redeemed only after say 3 years from the date of allotment. Many companies also offer a bonus share when this vesting period ends.

I have often seen that young individuals sell off these shares and use the proceeds to provide for that top end smart-phone or that vacation with friends. Many are not even aware how these stock ownerships are taxed in our country, I have spoken to few and their assumptions were their company has already taken care of tax by deducting from their salary, this is true for RSU's but not for ESOPS. 

Let's understand the tax implications based on an example. Consider an employee of company A purchases 15 stocks of 100$ market price, each at a discount of 40% with a vesting period of 3 years. At the end of these three years, employee would also get a bonus stock for every 5 stocks held. 

Let's see what are the tax events in this whole cycle

At the time of allotment	When the employee is granted the stock, his contribution for the stock purchase equals 60$*15 i.e. 900$ where actual market price was $1500. Hence, company contribution in this case for the purchase is $600. Now, as per income tax laws this is considered fringe benefit for the employee, and the taxable amount will be the total Employer Contribution. Luckily, in this case your employer is required to withhold the income tax due before making your salary payment. And hence you need not worry much as the tax arises but this is paid by company on your behalf and deducted from your salary
Dividends	Big or small, dividends are income for the individual. Now, dividend on stock of companies listed on domestic exchanges are completely free in the hands of stock holder. However, in case of foreign stocks, any dividends received by you will be subject to tax in host country (where stock is listed) and India. The reinvestment of dividend is also regarded as a deemed receipt. You will receive all dividends net of host country tax. However, you should be able to make a claim to the tax authorities for a tax refund, if that country has a relevant tax treaty with India to avoid double taxation.  The gross dividends (the dividend amount before tax withholding by host country) will be subject to income tax in India at your maximum marginal rate.  You are responsible for paying any tax due through your annual tax return or through advanced tax instalments if applicable.
At the time of Sale	Yes, you will be required to pay income tax on any gain arising when you sell your shares as follows: for shares held for 36 months or fewer at your individual tax rate And at 20% (plus Education CESS at a rate of 2% and secondary and higher education CESS at 1% on the total tax) for shares held for longer than 36 months. Where the total income of the employee exceeds INR 10,000,000, a surcharge of 15% would also be levied. In such cases, the tax rate would be 23.69%. Further, cost indexation benefit would be available. Now, in this case while calculating gains the cost of acquisition of shares is 100$ and not 60$, as you have already paid the fringe benefit tax for the employer contribution on the purchase. Since, most cases you sell the shares directly. You are responsible for paying any tax due through your annual tax return or through advanced tax instalments if applicable.
At the time of allotment of bonus shares	When the bonus share is allotted to you by the company. It's very similar to case one, and the value of stocks allotted can be considered as employee contribution. employer is required to withhold the income tax for this bonus share allotted to you. Tax treatment on the sale of these bonus shares is same as like any other share as mentioned above. Just the date of receipt of bonus is considered as date of purchase and the stock value at the time of allotment should be considered as the price of purchase.

I believe this puts fair amount of clarity for the ESOPs and now you should be better equipped to calculate taxes on your ESOPs.