Gift…. All you want to know about taxability!

Who doesn’t like gifts?

But…. Mind You! Tax authorities are waiting to catch you for a share in your gift.

Of course as tax on gifts received.

Did you know? With the amendment in Income Tax Act 1961, CBDT issued a circular saying, "Tax on gifts will be collected from the receiver of gift if the amount received exceeds Rs 50,000. Gift can be in cash or in kind. There is no exemption here.

Now, we can seek protection from this law. The Act says, gifts received from relatives for a specific occasion is exempt from tax irrespective of the amount of gift.

Who are defined as relatives?

They are

1.      Spouse

2.      Siblings

3.      Children

4.      Grandchildren

5.      Parents

6.      Grand Parents

All the above relatives of the spouse are also considered

Similarly, you can seek tax exemptions under Gift Tax for following occasions

1.      Gift under a WILL

2.      Gift due to death

3.      Gift from a local authority

4.      Gift from exempted categories of Public Charitable Trusts or institutions as referred in the Act  (Section 12AA and/or 10(23C))

All receipt other than those received as above will be taxed under the head of

“ Income from other sources” and taxed accordingly.

Keep an eye on these conditions and exemptions the next time you get a gift.

TDS On Immovable Property

The Finance Bill 2013, makes it compulsory for the Buyer of immovable property to deposit a part of sales proceeds which he is paying to the seller as tax with the government treasury under section 194 1A of the Income Tax Act 1961. This rule is applicable only when the sales consideration is Rs 50 lacs or more

As per Finance Bill of 2013, TDS is applicable on sale of immoveable property wherein the sale consideration of the property exceeds or is equal to Rs 50,00,000 (Rupees Fifty Lakhs). Sec 194 IA of the Income Tax Act, 1961 states that for all transactions with effect from June 1, 2013, Tax @ 1% should be deducted by the purchaser of the property at the time of making payment of sale consideration. Tax so deducted should be deposited to the Government Account through any of the authorised bank branches.

Facility for furnishing information regarding the transaction of sale of immoveable property and payment of TDS thereof is available on this website.

Detailed procedure, user friendly e-tutorial, list of Bank branches authorised to accept TDS and Frequently Asked Questions (FAQs) are available on this website for reference.

Points to be remembered by the Purchaser of the Property:

1. Deduct tax @ 1% from the sale consideration.
2. Collect the Permanent Account Number (PAN) of the Seller and verify the same with the Original PAN card.
3. PAN of seller as well as Purchaser should be mandatorily furnished in the online Form for furnishing information regarding the sale transaction.
4. Do not commit any error in quoting the PAN or other details in the online Form as there is no online mechanism for rectification of errors. For the purpose of rectification you are required to contact Income Tax Department.

Points to be remembered by the Seller of the Property:

1. Provide your PAN to the Purchaser for furnishing information regarding TDS to the Income Tax Department.
2. Verify deposit of taxes deducted by the Purchaser in your Form 26AS Annual Tax Statement.

In England, it is said, “If winter is here, should spring be far?” In India, we can say- if summer is here, would rainy season be far? Happy days for Equity will be back very soon.

Stock markets rise 300 points on one day, sink 400 points on another to rise by 500 points again! This has been the situation for the past month. However, the good thing to note is that the markets have not fallen below 19000 levels for a long time now. Which means, that with a little bit of positive news, the markets will surge. The positive news could be an RBI rate cut, rains starting off with a bang, Japan and/or US announcing more quantitative easing and infusing liquidity or any such news.

What about negatives? Scams, Poor corporate results, slowing economy, Political instability – all seem to be factored into the price. Don’t believe me? Look at the following.

Markets are at similar levels that they were in January 2008. However, average corporate earnings have grown by 40-45% over the last 5 years (taking a conservative 8% CAGR over last 5 years). Which means, Sensex is at a discount of almost 30% from the levels of 2008. Even if one feels that the market was overvalued in 2008- with a P/E of 21, and fair valuation is 18 P/E, then Sensex should be a 25000 and not 20000. But inspite of undervaluation, we all are glued to the level of 20000-a level where we feel, we should book profits-whether we have made any profits over the last 5 years is immaterial!

It is an excellent opportunity to buy Equity which is available at 20000 when it should have been at 25000. And the day the undervalued market starts to achieve a Fair valuation, the markets will rally as if there is no tomorrow!  Look at what happened to Gold-when gold came down from 30000+ levels to 26000-people flocked to buy and a further fall was arrested.

However, the same is not the case with Equity. Why? Because people feel Equity will vanish into thin air while Gold is Solid! Remember, in the Long Term- since 1979- Gold has given 9% returns while Equities have given 17% returns. Even if you consider the returns since Jan 2013- Gold has given a negative 12% return, while Equity has given close to 12% positive returns.

If you are worried about the daily fluctuations in the Stock market, use a DIYSIP in Front line stock. This gives you to flexibility to select your choice of stocks, invest consistently at various index levels and will give you a strong and good quality portfolio over a period of time.

But above all, remember- Real Estate is stagnating, Bank FD rates are down. Interest rates are coming down, so eventually India Inc is going to start borrowing and expanding again and Happy days for Equity will be back very soon.

FORGET REPO RATE CUTS FOR NOW

The Reserve Bank of India (RBI), which meets today for a mid-quarter review, is unlikely to relent. It will
hold the Repo rate at 7.25%.

A poll by a popular Hindi Business Channel puts the expectations of a Repo rate cut at 30% and a CRR cut at 25%.We think the RBI will simply hold its horses for the moment.

There were little expectations of any rate cut before the WPI data came in. The May WPI came in at 4.7%  against expectations of 4.8% and April’s 4.89%. The core inflation came in at 2.4%, much lower than April’s 2.8%. This favourable data has made some analysts dream of a cut.

We believe that the RBI is unlikely to get carried away by this data, as it more worried about the larger issue of debt money flowing out of the country.

Debt market investors look for higher yields with in their risk tolerance. It made sense of FIIs to invest in Indian paper as the yields were higher before the RBI began cutting rates. These rate cuts have made it less attractive to the FIIs.

More importantly, the yield on the 10 year US treasury has been risen from 1.7% to 2.25%.This has further reduced the attractiveness of the Indian debt. Add to that the risk of a depreciating currency. The cost of hedging the currency risk has gone up substantially further eroding the yield differential.

On top of this if the RBI were to cut the Repo Rate, the yield for existing debt investors will further go down. This will result into a selloff in the bond market and currency will plummet, which will hurt the equities markets.

Large sales in debt market will raise the yields for new debt investors. But they will stay in the side-lines, till they develop confidence in the currency that it is not going to further weaken from here.

The RBI will not take this risk. So any hope of repo rate cut is out of the window.

The RBI, however, could relent on a CRR cut. But here the central bank does not have the advantage of an improving data, which is there for a repo rate cut in the form of fall in the core inflation rate. Liquidity in fact has improved in the month of June. The advance tax has taken away some liquidity but this is temporary. But if the Government is serious on the food bill, then this CRR cut will also go out of the window.

A depreciating Rupee, food inflation and deteriorating Current Account deficit will all weigh on the RBI when it meets today. He is going to throw the ball back in the court of the Government to act. And if it does not act, then in 2014 the ball will be in our hands and we will act for sure.

VK Sharma

Why the Fed will not taper its Monetary Stimulus Program

The U.S. Federal reserve’s policy making arm, the Federal Open Market Committee ( FOMC) will go into a two day huddle on Tuesday-Wednesday to take a call on the interest rates. The biggest question on the minds of  investors and traders alike, cutting across asset classes and geographies, is whether the Fed will begin to taper its $85 billion asset purchase programme .

While this question has been on the mind of the investors for a long time, it really caught the fancy of the markets  when the minutes of the last FOMC meeting on April 30- 1st May were released on May 22. The minutes showed that some  members had urged that Fed tighten its stand from the June meeting itself.

In fact May 22 has been a watershed day in the global markets because volatility has increased since then  in the stocks, currencies and commodities.

However, we believe that the Fed is unlikely to begin tapering its bind buying programme in a hurry for the following reasons

1.    Economic data is far from encouraging
The non-farm payroll growth  for the month of May came in at 1,75,000.  Though this was greater than expectations, one must appreciate the fact that a three month average job creation at 1,55,000  is the lowest since October 2012, when the Fed began its QE3. The Unemployment rate increased to 7.6% from 7.5% in April, as more Americans began looking for jobs.

2.   Targets not reached as yet
The Fed has clearly stated two targets for itself before it begins to unwind. And those two targets are attaining full employment ( read an unemployment rate of 6.5%) and Inflation crossing the 2% limit. Both the targets are quite a distance away. The unemployment rate has been just discussed above and the inflation in the past twelve months is just 0.74%. The core inflation is at the lowest in more than 50 years.

3.   Budget Deficit continues to be an issue
 The budget deficit for the month of  May came in at  $138.7 billion. The expectation was for deficit of $110 billion. There is a hole in Uncle Sam’s pocket and the Bond buying by the Fed temporarily plugs that hole. At present the Fed is funding almost 75% of all treasury issuances. If the Fed was to stop printing, the investors will demand a higher yield, which the U.S. can’t afford at this time.

4.   Abenomics is failing
Japanese Prime Minister Abe’s agenda of a weakening the Yen has run into rough weather. While one could weaken the Yen but it was difficult to find takers for the Japanese bonds simultaneously. Who would buy the bonds of a continuously weakening currency?
The day the Bank of Japan paused in its approach, the markets sold off. The Nikkei plunged into bearish territory by falling 20% from its recent high before bouncing back on Friday.
The global markets were considerably disrupted by the change in stance of the Bank of Japan and the subsequent sell off in the equity markets. In this light it is highly unlikely that the Fed would want to rock the boat at this point of time.

If there is one valid reason for the U.S. Fed to taper its bond purchase programme, it  is that the Fed does not want to be blamed for creating an asset bubble.

After being  partially responsible for creating and blowing up the bubble that burst spectacularly in 2008, the Fed has now almost the full responsibility for regulation of the financial sector. Over these years, the Fed has taken measures to impart liquidity and stimulus to the economy in various forms. If the bubble bursts this time, there is no mistaking who holds the smoking gun this time. Therefore, the Fed would neither allow nor be perceived as abetting an asset bubble to inflate and then ultimately burst. It is this common sense that may prompt the Fed to think of cutting back its stimulus, when it actually does.
But that time has not come as yet. At its forthcoming meeting the U.S. Fed will just maintain the status-quo.

V.K.Sharma

Will Rain Gods inspire the Stock Market this year?

Monsoon has arrived. According to news reports, the Southern belt of the country has recorded higher than average levels of rains in the first week of monsoon. This could cheer certain sector stocks, which are currently reeling under the pressure of weak rupee, poor FII inflows and rising deficit.

June marks a very important month for the stock market. It gives an inkling on the future trend of the monsoon.

Monsoon and Market Saga

The co-relation between monsoon and the stock market may have weakened over the years as there are other national and global factors, which the stock prices.

However, India continues to be an agrarian economy and almost 60% of the farmland are rain fed. Hence good monsoon is a pre-requisite to the economy growth, which in turn impacts the stock market.

Hence it is always prudent to keep an eye on certain monsoon sensitive sector stocks.

Fertilisers:
A good monsoon is good news for fertiliser stocks. The rationale is demand for agricultural inputs including fertilisers rises when the farmers are cash rich. Their income is directly dependent on good crop output, which is a function of good rains.

FMCG
FMCG sales are primarily by consumption of rural India.
The purchasing power of rural India is directly linked to good agricultural income and monsoon. Hence normal monsoon can improve the purchasing power of rural India, which helps FMCG companies clock in higher sales figures.

Cement
Cement stocks have already started falling in the range of 1-2% on arrival of early monsoon. A good monsoon has a negative impact on Cement stocks
Traditionally cement despatches decline in June-September period because of a slow down in the construction activity during these months.

Auto
The FMCG-monsoon co-relation can be extended to auto sales as well. Poor monsoon means a further dip in the lacklustre auto market.

Almost 50% of the two-wheeler demand comes from Rural India. Secondly, if the farm out put falls because of deficient monsoon, the farmers will not invest on agriculture related equipments such as Tractors. Auto sector has already seen a sluggish period with flat sales reeling under the pressure of high fuel prices and interest rates

Beyond Stocks
Apart from a direct impact on certain stocks, a bad monsoon can play a spoilsport in several other ways. If the farm output declines on the back of a poor monsoon, it triggers inflationary pressures. This means higher input costs for companies and lower margins. From your perspective, higher inflation means a higher cost of living. This also limits the Reserve Bank of India’s (RBI) scope to lower interest rates, which will keep your EMIs constant. Needless to say, if RBI maintains a status quo on interest rates, it will drag down rate sensitive sector stocks such as banking, auto and real estate.

Rupee weakening and equity market bottoming cycle

Weakening of Rupee and Equity Market Bottoming cycle

The way the rupee has fallen over the last few days vis-à-vis the USD dollar implies it could get into a vicious cycle if the Reserve Bank of India (RBI) or the Central Govt does not take immediate and significant steps to control the current account deficit (CAD).

While a cheaper Rupee makes Indian stocks even more attractive for the Foreign Institutional Investors (FIIs), who are yet to meaningfully invest in India, it hits the existing FIIs by taking away a part of the earned appreciation in stocks.

If the Rupee keeps falling or stays at weak levels for long, the impending end to the monetary stimulus by the US could advance selling by the FIIs who would not like their stock appreciation taken away by currency fluctuations. In a sense, it could also later turn into a rush to the exit door. 

Currencies are strange animals that may be easy to predict for a certain period of time, but once they change trajectory, it becomes difficult to anticipate the extent of moves and the time when they would reverse direction. Only a few months back, few large MNC brokerages were bullish on the Indian Rupee putting a target of 52 to a dollar in 2013.

It is also very difficult to predict as to what measures will result in reversal of the mood. This is true especially when a lot of emerging market currencies are already facing pressure (South African Rand down 10%, Brazilian Real down 6%, Turkish Lira down 6% since early May 2013) in an era when the US dollar is anyway appreciating against most currencies. Further when the US and Japanese stock markets look tempting enough, the attraction of emerging market equities anyway is on the fading side.

While the street would want everything from liberal FDI regulation to curbs on Gold imports to faster policy making in the domestic industry/infrastructure space, one is not sure as to what extent the RBI has the flexibility to make large sharp interventions in the USD INR markets and to what extent the Government is keen to carry out the measures expected given that the ruling UPA faces a general election less than one year from now. 

In the recent past whenever the INR saw a sharp depreciation vis-à-vis the USD, once the process ended, the equity markets bottomed out. This happened in Mar 2009, in Dec 2011 and again in June 2012. Hence it could be rewarding to anticipate the end point of this Rupee weakening cycle. However in the past the weakening process continued for at least 4 months and in some instances went on till 14 months. In the current cycle we are just into the second month.

Let us anyway keep our eyes and ears open for such a bottom formation to happen in the equity markets

Sensex Chart

USD INR chart

Should YOU “Cash IN” on ongoing OFS?

There has been a spate of Offer for Sale (OFS) issuances in the past few weeks. This has opened up another avenue for retail investors, such as you, to invest in shares of good companies at a discounted price.

What is OFS?

Securities Exchange Board of India (Sebi) had introduced a regulation, which capped promoters’ holdings in private sector companies at 75%. The capital markets regulator had given a deadline of June to reduce the promoter holding to this stipulated level. As a result, the companies lined up these OFS issuances.

Through this process, the promoter could reach out to retail investor for buying a stake in his/her company. On one hand, the promoter will lower his/her stake in the company. On the other hand, retail investors, had an opportunity to buy shares of such companies, usually at a discounted price.

The concept of OFS is very similar to an FPO (follow on public offer). However, there is a marginal difference. It does not involve heavy documentation such as issuing of prospectus, filling out lengthy forms and waiting for investors after subscription of the issue. An OFS cuts out the time element, which makes it a convenient option for investors as well as the promoter.

Keep an Eye on the Price

In an OFS, a company can price it equal to the current market price or at a discount. At present, many companies sold stocks at a deep discount of 5-10% through their OFS. The company promoters were keen on luring the investors who were shy of investing in stocks after witnessing a recent crash in mid-cap stocks.

However, the current discounts have helped the promoters to regain investors’ attention towards the stock market. As an investor, such discounts give you a perfect arbitrage opportunity (gaining from price difference) in the short-term. If you are looking at these stocks from a long-term perspective, they can be good value buys at such prices.

Company Check

Some companies have even offered a discount of 40% on the floor price. But more need not be always better in such cases.
A share price has to be backed by a financially sound company, irrespective of its size. Hence run a check on the basic financials of the company. Look for research reports or analysts view on the fundamentals of the stock and the company.

Secondly check the past performance and the outlook on the sector and its peers’ performance.

Lastly check the promoter’s credentials before investing in a company. This will give you a fair idea if the OFS pricing is fairly valued.

Act Quick

Unlike IPOs, which are open for subscription for few days, OFS is open for subscription for one trading day. Hence do your homework and math on the company’s offer before the issue hits the market. This will ensure you spot the right opportunity and make an informed decision.