Sunday, July 21, 2013

Are you liable to Wealth Tax?

Wealth Tax!!

Very few tax payers’ in India have heard of it and still fewer pay it.

However, ignore it only at your own risk!

As per Indian Wealth Tax Act, 1957, wealth tax liability arises if market value of some assets (net of liabilities) exceeds Rs. 30 lacs.

The wealth tax act is supposed to bring into the tax net unproductive, non-essential & idle assets held by an assessee.  Two of the biggest obsessions of Indian investors—property & gold thus are naturally included in the definition of wealth and thus are subject to wealth tax. For example if you  own a second house which is not self-occupied nor is given out on rent, then the(market) value of such second house as on the valuation date(net of any liability to acquire such second house) will be subject to wealth tax. Gold, silver, whether bought, gifted or inherited forms part of computation of wealth.

Under Sec 2ea of wealth tax act, 1957 the following “assets” will be included in the definition of wealth:-
  • any building or land appurtenant thereto (hereinafter referred to as "house"), whether used for residential or commercial purposes.
  •  motor cars
  •  jewelry, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum or any other precious metal
  • urban land         
  • yachts, boats and aircrafts (other than those used by the assessee for commercial purposes) ;
  • cash in hand, in excess of fifty thousand rupees, of individuals and Hindu undivided families and in the case of other persons any amount not recorded in the books of account.


Following assets will be exempted from being included in the computation of net wealth chargeable to tax:-
  • One house(at the option of the assessee where he owns more than one house) or part of the house belonging to the assessee

Net wealth to include certain assets (section 4)

In computing net wealth in the hands of an assessee as on the valuation date, following assets inter alia will also be included in the his hands:-
  • assets held by spouse of such assessee to whom such assets have been transferred whether directly or indirectly otherwise than for adequate consideration or with an agreement to live apart.
  • Assets held by a minor child(not being disable child)

Computation of wealth tax
Section 3(1) lays down that wealth tax shall be computed for every assessment year. Such wealth tax shall be computed on the net (of liabilities) wealth in excess of Rs. 30 lacs at the rate of 1% of such net wealth.

As wealth tax accounts for less than 0.25% of total direct taxes and is minuscule in the total revenue collection.(Last year, it contributed Rs 866 crore to the total revenue collection of Rs 1,038,036 crore). This may be one of the reasons why this tax is not taken very seriously by taxpayers & department alike because the Central Board of Direct Taxes is busy with other, more important, ones, such as corporate tax, income tax, service tax and excise.

However there is a stiff penalty for evading wealth tax. Incorrect declaration of wealth can invite a fine of up to 500% of the evaded tax.


Sunday, July 7, 2013

Why Mutual Funds?

Somehow we always know what we should have done in the past with our investments. But when it comes to taking action now, we are clueless. We think for example that we must have booked some profits when the stock market was at its peak in January. We did not know it then, but know it surely now. We ignore that we have the benefit of hindsight, and almost believe that there has to be a way to figure out what seems so obvious. The truth is that there is no such nice little way to make money, and investors will quarrel with this known wisdom, as they use past data and show how money could have been made.

It is useful to think about ways and means of keeping the level of the market from swaying our investment decisions completely. If your favourite restaurant runs a discount on its Mexican menu, you may not choose to have it for breakfast, lunch and dinner, only because it is cheap, isn’t it? You would surely think that whether you are hungry, and whether you like Mexican cuisine are more important than the rock bottom price. Importantly, your choice of what you will eat will be driven by you, rather than what is on offer. We need to bring that common sense principle into investing as well. To an investor who hates any loss in the value of his portfolio, equity markets are a no-no even if the index is at a very attractive level. Just as my father will refuse to have pizzas for dinner, and my daughter will cringe at porridge. Therefore step one is to ask whether we like to be in the markets at all, and understand why we want to be there. If we figured that what we do with our investments has to stand on its own, driven by our needs and preferences, half the battle is won.

Sadly, just as we sneak in a samosa even as we are working out the fat, we find it so tough to actually implement what is good for us. There are well known behavioral traits that we have, which come in the way. Many of them bias our judgment and our decision. We may like to invest some money into equity at the current levels, having seen that corporate profits are healthy and fundamentals are good. But we will be worried about the fall in price that we have seen. It is so important to see some rise in price, before we buy, because we are led by our recent experiences. We are enthusiastic buyers when markets have moved up, and when everyone else seems to be buying. We seldom buy cheap. Somehow we think it has to be a good thing to do, if many people are doing so. Then, we like what we buy and refuse to accept that we could have a loser on hand. When we see prices falling, we convince ourselves that prices will somehow recover to our price. We are very much clued to our price, that it becomes some kind of mental benchmark. But the market does not know this and is unlikely to care. So we tend to keep losers, and refuse to reckon the loss. If we bought at Rs. 100 and the price fell to Rs. 20, we lost 80%. When we continue to hold what we bought, and hope it will go back to Rs. 100, we are expecting a 400% increase – not realistic isn’t it? At every decision to buy or sell, we need to fight the bias to implement what is good for us, and many of us find it tough to do so.

The moral of the story is, we may have a nice little strategy of investment, but if it is driven only by the level of the market, and not by our needs, there is a risk. That risk becomes higher, when our decisions about the markets are biased and our thinking about the market and the way we make our decisions are far from optimal. When we combine the craving for the right time to buy into the market, with the biases that we suffer, we could put our investments in danger.

There are two things we could do, if we accept that this is a problem, and that we need to do something about it:-

1.       We have a plan that we implement, without caring about where the market went.
2.       We let professionals manage our money, so the call on markets is not biased.

The mutual fund choice is sensible, because it enables us to implement disciplined investing in our own way, leaving the "market watch" to the fund managers. And having the fund managers to watch your money is a nice way to side step the bias. A fund manager is bound by investment processes and risk controls that take care of bias we will suffer when we deal with our own money. Have you noticed that your kids, who cringe about writing one-page of handwriting practice during the holidays, happily do 7 subjects a day in school? There is something about organization, process and discipline that makes a job which is complex for you, simple for others, and makes implementation a breeze.

Free your investments from bias. You will thank yourself.