Personal Finance and Professional Management Fundamentals

June 8, 2008

Five Ways to Save Money By Investing

Systematic Investment Plans (SIPs)

This one is a favourite with most investment advisors, thanks to the lucrative returns on offer. A systematic investment plan (SIP) is a low-cost method of investing in the equity market, with a medium to long-term view (more than three years). This is the best option for all age groups, especially for the young and middle-age group, who are in the phase to build wealth.

SIP is good for youngsters and people in their 30s, but is not recommended for retirees and senior citizens. Also, although it is capable of
generating high returns, the element of risk constitutes the downside. After parking your money in an MF for three years, you can still end up with negative returns, if the market crashes.

Recurring Deposits With Banks

While recurring deposits (RD) is a popular instrument, rising inflation has taken away some of its sheen. The advantages of an RD with a bank include the low-risk factor — the returns are quite certain. It is suitable for people who do not have access to quality research on stocks and MFs or fall in the middle and low-income brackets, as taxes eat into 1/3 of
returns generated by an RD.

This means that people falling in the high-income bracket can consider more remunerative options. Also, this is an avenue that is worst-affected by inflation. In the current scenario, post-tax RD returns fail to beat inflation. It is for the riskaverse who don’t need to create wealth — taxation on interest earnings is a big negative. The liquidity that recurring deposit offers comes at a cost.

Post Office Recurring Deposits

Post office RD is superior to bank
RDs in terms of safety as it is backed by the government, but the returns are lower as well. Experts feel that it is suitable only for the low-income groups

Unit-Linked Insurance Policies (Ulips)

Unit linked insurance policies (Ulips) are avoidable, in general, cutting across age groups and income categories. Ulips come at a higher cost — they are, in a sense, the costlier versions of SIPs. While SIPs can entail a cost of 2-2.5% on your investment, Ulips can take away as much as 20% of your investment in the first year.

Pension Ulips are disastrous. They are good during the accumulation phase, but when you need to get annuity, they can result in real losses as you get a measly 3-5% (assuming this will be the rate 5-10 years hence, given a rate of about 6% now). To make matters worse, the inflow of funds will be fully taxable.

The only feature that may be counted as a positive is the lock-in period that they come with, which makes them suitable for those who are reckless spenders. Premium payments for Ulips can successfully force such people to follow a disciplined approach and save regularly.

Public Provident Fund

Public provident fund (PPF) is a fruitful avenue for those who are not in need of liquidity in the near-term and are looking to save for long-term goals. This is because it comes with a lock-in period of 7-15 years, which means that people saving for short to medium-term goals will find it of little use. You can invest between Rs 500 and Rs 70,000 in a PPF account every year.

PPF, which is deemed to be ideal for middle income and low-income groups, boasts of nearly zero risk, but yields decent returns. What makes it more attractive is the tax benefit (under Section 80 C) attached to it — an investment in PPF, thus, serves the dual purpose of saving and tax planning.

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May 15, 2008

Tips to Teach Money Management to Your Children

Managing money is as difficult as earning it. So, it’s always good to teach your child about earning and saving early. But using financial jargons like stock loans and investing will not bring the desired results. Instead, you should teach your child about money in an interesting manner and make it a fun-filled experience. Here are some tips:

Playing money
Educating kids through games is always a good option. You can teach your child about money management through board games, PC games or online games. Parents can interact with children over a game of ‘Monopoly’. This can be a productive, yet leisure-filled way of spending an evening together. ‘Monopoly’ is all about collection and payment of rent, as well as buying and selling of property. If your child is netsavvy, you can even play this game online, which comes with tokens and property auctions, as in the real game.

Another good board game is ‘The Game of Life’, which also has an online version. The main objective of this game is to opt for a lucrative career by getting the highest salary and signing off with a high net worth.

For internet addicts, there are several online games. A popular one is Practical Money Skills For Life, which is a collection of six games.

The first one is ‘Financial Football’, which is a quiz-style game packed with finance-themed questions. The second game is ‘Countdown to Retirement’, where you key in the career and lifestyle of your choice and you come to know if you’ll have a comfortable retired life.

The third one is ‘Ed’s Bank’, which is all about how you manage your pocket money. Then there is ‘Road Trip to Savings’, which requires the child to make decisions about income, expenses and savings to achieve financial stability

Different approach for a growing child
If you have a young adult at home, and if he/she has grown out of such games, you can try some real life techniques. If your child wants the latest bicycle, just don’t go and buy it. Ask the child to save money every month from his/her allowance. Then set a target that if he/she needs a bicycle at the end of six months, how much will he/she have to save every month to reach that target.

If your child reaches the target by the defined time, you can reward him/her with a one-time bonus which offers incentive to him/her to save even more.

Get over the piggy account
Another way you can impart financial education to high school or college kids is by opening a bank account in their name. Most private sector banks like ICICI Bank and HDFC Bank, as well as foreign banks like Citibank and Standard Chartered, offer accounts for kids.

Usually, the minimum deposit amount is Rs 5,000 and you can transfer the monthly allowance to your kid’s account. It helps if you have a savings account with the same bank.

Like any other savings account, even this one comes with a cheque book and debit card. Usually, debit cards have withdrawal limits of around Rs 500 per day, but this may vary from bank to bank. You can also set mobile alerts, which will allow you to monitor your child’s expenditure.

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April 3, 2008

What Kind of Funds Should You Have in Your Investment Portfolio?

What kind of funds should you have in your portfolio?

You should clearly know the rate of return you need to meet your goals.
More importantly, you should know how much risk you are willing to take in hard times to earn the returns you are targeting.

This will help you avoid more risk than necessary. The answers to these questions are not as easy as they seem, especially to the second question. It is easy to build a portfolio to achieve both these needs, if you know what they really are.

People often look at returns, ignoring the risk component. Most of us want an investment with high returns and no risk or less risk. Just like cigarette smokers who choose to ignore the warning that ‘Cigarette Smoking Is Injurious To Health’, investors, too, will look the other way when it comes to the caveat that mutual funds are subject to market risk. Investors tend to focus only on returns when investing in stocks and mutual funds. They must also look at the following:
  • What kind of stocks is this fund invested in?
  • Is this concentrated in a few stocks or sectors?
  • What is the standard deviation and beta (something that your advisor should be able to explain) of the fund?
  • What is the portfolio turnover of this fund? (does it buy, sell and churn its stocks very often)?

There are reasons why one fund earns more than another and the reasons can be any of the following:
  • High exposure to certain sectors or stocks
  • Calls taken by the fund manager have been spot on
  • Portfolio is concentrated or has a higher turnover
  • Market timing

However, the same reasons can go against the fund and its performance can suffer. Just because a scheme has been a hot performer does not mean it will continue to be one. Evaluate the performance over extended periods of time and not just over a quarter or so.

If your objective is income and capital protection, then a debt fund is more appropriate. You can also look at hybrid options with 80% debt and 20% equity (monthly income plans). Short-term funds that are required in a few weeks or months should be parked in liquid plus funds or floating rate funds. Finally, avoid costly mistakes such as chasing hot funds or top performers of last year and acting on the basis of some rudimentary talk about fund size or promises about unrealistic performance.

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October 2, 2007

Educating Your Kids Is No Child’s Play

From nursery to college, you need over Rs 21 lakh to just sponsor your child's education in the metros. This requires proper investment planning.

"It's a girl," says the nurse to the couple. The couple has been waiting for this moment for long and is elated! Be it a boy or a girl, all parents want to give the best to their child. The addition of a member to the family brings joy and cheer to everyone, but there are additional responsibilities too. One of them is giving the best education to your child, which requires a lot of money. From playschools to post-graduation, education costs are rising. Our estimates indicate that on an average, it can cost you Rs 21 lakh (at today's prices) to educate a single child from school to college. This includes expenditure on school fees, coaching classes, books, stationery and so on. If you have to include post-graduation studies as well (MBA, for instance), the cost may go up to Rs 98 lakh.

How long is the child dependent on you?

Before drawing up a financial plan, you have to know how long the child will be dependent on you? Hence, you have to start planning for your child from around six months before the baby is born to his/her estimated age of marriage. In some cases, it could be till the child continues to study.
Ideally, parents should have a buffer to take care of over-runs and contingencies. For example, Nitin Vijan's budget for his daughter, Vedika's, education looks like this: Rs 55,000 a year up to Vedika's junior college; Rs 3 lakh for her fouryear engineering course and Rs 20 lakh if she plans to pursue her masters in science or an MBA.

Expenditure graph

Estimates show that the expenses are higher (not necessarily on education) when the child is in the age bracket of 1-5 years. Subsequently, costs tend to lower once the child reaches the age of five years. Again, the expenditure mounts when the child touches 15 years of age. Parents spend in the range of several thousands up to a lakh just on coaching classes and tuition.
Says chartered wealth manager and certified financial planner Kartik Jhaveri, "Parents want to give the best to their child to prepare him/her for the board exams so that s/he can come out with flying colours. They do the same, but on an even larger scale for the 12th standard. In this case, it's more crucial if the parent plans to sponsor the child's professional course."

Graduating from college

Here, the expenses depend upon what course the child plans to pursue. Professional degrees such as engineering or medical are more expensive than regular graduation courses. Here too, there is another variant. If the child is studying in India, expenses may be under control. But if the child plans to pursue his/her education abroad, expenses can go through the roof. Finance options are available to fund overseas education.

Start early

It pays to start planning early to sponsor the education of your child. You can start with a monthly saving of Rs 8,000-10,000 which can go to your child's kitty. You should work towards a corpus of Rs 10 lakh and upwards. A Rs 10-lakh corpus will just take care of your child if s/he plans to do regular graduation. You have to keep aside this money and keep withdrawing from the returns generated from this capital.

Child plans may not be the best investments

Don't get tricked by an insurance broker who says high premiums (of a child plan) will fetch you the best returns for your child. You have to read the fine print to see if it's worth the money. In reality, it may be a high-cost product, yielding peanut returns, Mr Jhaveri adds.

Stick to simple investments

Diversified equity funds can do the needful. One of the advantages of these funds is that they give you the flexibility to withdraw whenever you want. Moreover, they're not time-bound, nor do they have a predefined investment where the money can't be touched till your child turns 18, says another wealth advisor under conditions of anonymity. You can exit from the investment if you feel you've made a wrong investment decision. Also, the returns are largely tax-free.

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It's time to take floating interest loans in India

A cumulative 4% interest rate hike for home loans in the past two years has caught many floating rate borrowers on the wrong foot. Yet, today, floaters seem the best option for new home loan takers, all thanks to near-peaking of rates. Any further fall in interest rates will also directly benefit them.

The news that HDFC has cut home loan rates by 0.5% on all fresh loans up till October 31 is all over the newspapers and TV channels. But existing customers are not affected by this and prime lending rate (PLR) has also been maintained at the original 14%. However, this report has cheered up new home loan takers. Home loan rates have seen several highs and lows in the past few years. Rates halved to 7% in '03 from 14% in '00. Then the floating rate curve began to go up and settled at 10-12% in January '07. That's almost a hike of 3-5% in the past four years. Now, what you need to know is whether the rising trend of interest rates will continue? Also, if you plan to go in for a home loan now, should you float or fix yourself at a particular rate? Industry experts say even today, a floating rate is a safe option for borrowers due to several reasons:

Interest rates may not rise much further

Most industry experts are of the view that the rates are likely to stabilize at these levels. A senior public sector banker explains any further rate hike will pinch customers' pockets even harder. "This, in fact, is likely to hurt the economy as a whole, since even the corporate sector will come under pressure. So, we do not foresee any further rate hikes. However, we will get an accurate idea only by November. So far, the credit pick-up has been low, which traditionally tends to peak only in the festive season beginning November. But there have been concerns about rising inflation and high liquidity, which may prompt the Reserve Bank of India (RBI) to hike the cash reserve ratio (CRR), which may impact the rates. Even in that case, the hike in rates will be very marginal, in the range of 0.25-0.5%," the banker adds.

True fixed rate comes at a high premium

After being impacted by the volatility of home loan rates, customers now feel it's best to opt for a fixed rate product. The obvious explanation being that although a partly-fixed rate typically is 1.5-2% higher than the floating rate, at least borrowers are spared from frequent rate hikes. But that's just one side of the coin. Says home loan expert and CEO Harsh Roongta, "As of now, it makes economic sense to go for a transparent floating rate. The gap between a pure fixed rate and a floating rate is almost 2.25%. It's too high a premium to be borne by a customer." Mr Roongta explains that unless floating rates touch 13-13.25%, borrowers need not worry and lock in at a fixed rate.

Your fixed rate isn't really that

In India, fixed is never fixed. So, it may just happen that your floating rate of interest on the home loan does not go down after an overall fall in interest rates.

Here, it is essential to explain the difference between a fixed rate and a true fixed rate.

A fixed rate which is linked to the money market condition has a reset clause. This implies that the bank or housing finance company (HFC) can tinker with the interest rate in extreme market conditions. State Bank of India (SBI) introduced the reset clause in August '05 and now, the period is two years. Other public sector banks like Canara Bank and Corporation Bank have a reset clause period of five years. To that extent, if there is a rate change during the period when the reset clause does not come into effect, the rates remain unchanged even if the floating rate interest rates go up.
On the other hand, in case of a true fixed rate product, the bank or HFC does not stand any chance to tweak the rate.
Few leading housing finance companies like HDFC offer the true fixed product. This product charges a higher interest rate than the partially fixed product.
All said and done, there is no single answer to the question: should home loan takers go in for a fixed or floating interest rate?
The answer changes from time to time. It would have been ideal if you fixed your rate at 7% in '03. That's because it is unlikely that interest rates will dip to those levels any time now.
Now, you should go in for a floating rate as interest rates have almost peaked. So, there is no reason for you to lock in yourself at a higher interest rate.
Also remember, your job is not over once you start repaying your home loan. You should ideally review your rates every six months.
That will help you to figure out an effective repayment plan for your home loan.

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September 10, 2007

Don't copy if you can't paste

A well-known motivational speaker, gathering the entire crowd's attention,
said, "The best years of my life were spent in the arms of a woman who wasn't my wife!"

The crowd was shocked!

He followed up by saying, "That woman was my mother!"

The crowd burst into laughter and he gave his speech, which was well received.

About a week later, one of the top managers who had the training decided to use that
joke at his house. He tried to rehearse the joke in his head, but it was still a bit foggy.

He said loudly, "The greatest years of my life were spent in the arms of a woman who was not my wife!"

Naturally, his wife was shell-shocked! After standing there for almost 30 seconds trying
to recall the second half of the joke, the manager finally blurted out, "... and I can't remember
who she was !"

As expected, he got the thrashing of his life time .... :))

Moral of the story: Don't copy if you can't paste.

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June 23, 2007

Pay Your Taxes Online

Online payment of taxes has been introduced to make your life as a taxpayer much easier. Paying taxes has never been simpler with the authorities introducing the mechanism of online payment. The use of electronic means to deliver services is not only an efficient and speedy process, but it also facilitates a transparent process for disseminating information and delivering it to the taxpayers of the nation.

Online payment of taxes helps you save time, is convenient and is paperless. You could be working in office or relaxing at home — the facility to pay your taxes is just a click away. To make use of this facility, all you need is an account with a bank that provides net-banking and also e-tax payment facility. State Bank of India, HDFC Bank, IDBI Bank, UTI Bank and Union Bank of India are some banks that provide the e-tax payment facility.

The procedure for payment of taxes online is simple and the userfriendly instructions make it even more attractive. To start with, you need to log on to NSDL-TIN website and click on the ‘e-Tax-online payment’ option. You will then be directed to a list of banks that provide the e-tax payment facility. Depending upon the bank you hold an account with, you need to click on the option and choose the tax challan applicable in your case.

If it is a tax deducted at source payment, challan No 281 will apply; else challan Nos 280, 282 or 283 will be applicable. Challan No 280 is used for payment of advance tax and self-assessment tax. Challan No 282 is used for payment of miscellaneous taxes like gift tax, wealth tax, estate tax, expenditure tax etc. Challan No 283 is used for payment of fringe benefit tax or banking cash transaction tax.

On opting for the challan type applicable, particulars such as the permanent account number (PAN) or tax deduction account number (TAN) as may be applicable, name and address of the taxpayer, relevant assessment year, type of payment and name of the bank will be displayed. These particulars will need to be filled in carefully, as an incorrect PAN/TAN (if it does match the records of the income tax department) will not allow further processing of the payment. The mandatory fields are highlighted and to ensure smooth processing, these fields need to be populated. You will then reach the net banking site provided by your bank where you hold your account and with the use of the allocated customer ID and password, the payment will be processed.

Once the process is complete and the bank processes the online transaction, you will be issued an acknowledgment indicating the challan identification number (CIN). After a week of making the payment, the status of the payment may be verified at the NSDL-TIN website under section ‘Challan Status Inquiry’. The alternate way to verify the payment of taxes is the online bank statement.

Apart from being relieved of the hassles of visiting the bank for paying taxes and the additional paper work, an added advantage is that online payment does not require attaching the acknowledged counterfoil with your return. Quoting the challan identification number is sufficient proof for the tax authorities. Imagine, not having to worry about the challan copies and the related paperwork.

As for your security concerns, the tax authorities assure the taxpayers that the transmission through the NSDL-TIN website is encrypted and is with the secure socket layer authentication.

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June 18, 2007

While Planning For Educational Expenses, Tackle Emergencies

While planning for educational expenses, make sure you set aside some amount to tackle emergencies. Here we highlight the need for a contingency fund.

With education expenses increasing over the years, a lot of advance planning is required to ensure that adequate sums of money are available to complete one’s course when required. Most people consider the funds that are required for fees and other expenses over the time period of the course and then provide for such funds. However, one must also set aside an additional sum to tackle any emergencies that may arise. Such emergency costs cannot be planned for. But care should be taken to ensure that a large part of the total expenses is not classified as emergency costs because this reflects poor planning.

As regards the basic expenses, fees have to be paid at the beginning of each financial year or as specified by the institution. Also, books have to be bought during a certain time period. Since these expenses are spaced out over various time periods, they reduce the burden on the individual. However, such a luxury is not possible in the case of a contingency fund. There is no surety as to when the need for such a fund may arise and hence, the fund has to be ready for use from the day of start of the education.

Once such a contingency fund has been created, one needs to decide the amount that has to be kept in it. If only a small amount is set aside in this fund, one may have to run around at the last minute for additional funds. This was the case recently when students appearing for their CFA exam had to bear the cost of flying to a neighboring country, as well as acquiring a visa, in order to sit for their exam.

While the amount set aside in the contingency fund should not be too small, it should not be too large either, as this will result in a huge sum being locked-in. There are no rules for this, but one way is to consider the contingency amount as a certain percentage of the actual cost of the educational course. This may be 5% or 7% or even 10% of the total fees; the figure depends upon one’s judgment of the expenses that may crop up.

Once the amount is fixed, one should ensure that this figure is invested in the right manner so that it can be used when required. Keeping this amount in a savings account is not a good idea because it will not earn much return. At the same time, this amount has to be invested in a place from where it can be withdrawn quickly if required.

Hence, two options are available for an investor. The first option is a simple fixed deposit with a bank where there is no lock-in. The other option is any liquid scheme of a mutual fund. Here, the growth option that generates capital gains is a better route, even though this results in a slightly larger tax impact. The higher tax blow is not a deterrent because the main reason for investing the money here is not to earn higher returns, but to earn some return while the money is lying around, waiting to be used in case of an emergency.

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May 3, 2007

Now Get Used To ITRs, No More Form 16,

What will the new tax return forms mean to you? Check out the new features and implications

Individual income tax return (ITR) forms have witnessed many changes over the past few years. This year, the government proposes to introduce new tax return forms, in lieu of the existing ones, including the Saral (Form 2D). In this connection, new forms have been drafted by the Central Board of Direct Taxes (CBDT). These forms are expected to be notified in mid-May.

New tax return forms

For assessment year ’07-08 (financial year ’06-07), the following forms are proposed to be introduced for individual/Hindu Undivided Family (HUF) taxpayers:

ITR -1: This form can be used by individuals having salary and interest income only and no other income. This form is primarily to be used by salaried individuals who do not have any other income except interest income.

ITR -2:
This form can be used by individuals/HUF having income from any source except from business or profession.
This form is to be used if besides salary and interest income, the individuals/HUF have income from house property, capital gains (short-term and long-term) and income from other sources.

ITR -3: This form is to be used by individuals and HUF who are partners of firms and don’t have proprietary business or profession. This form is to be used by partners of the firms for filing their personal tax returns.

ITR -4: This form is to be used by individuals/HUF having proprietary business or profession.
It will be interesting to note a few of the important features of the proposed forms for individual taxpayers, as follows:
No cash flow statement: Form 2F introduced last year required individuals to furnish their cash flow details.

Due to various representations made to the government, the said form was not made compulsory and an option was given to individual taxpayers to use other forms.
The new individual tax return forms do not contain any such requirement of furnishing cash flow statements/details. New requirement: Annual Information Return (AIR) transaction, a new requirement in respect of specified transactions, is being introduced in the proposed tax return forms.

Accordingly, an individual/HUF will be required to furnish information in respect of specified transactions undertaken by him, that are reported through AIR by the other parties.
Therefore, it will be important to take note of the transactions that are currently being reported to the tax authorities under AIR by companies, banks and mutual funds (MFs).
These include: cash deposits of Rs 10 lakh or more in a year in savings account (by banks); credit card payments exceeding Rs 2 lakh (by banks/ credit card companies); purchase of mutual funds for Rs 2 lakh or more (by mutual funds); purchase of bonds or debentures for Rs 5 lakh or more (by company/ institution issuing such bonds or debentures); purchase of shares for Rs 1 lakh or more (by company issuing shares through public or rights shares); purchase or sale of immovable property for Rs 30 lakh or more (by registrar or sub-registrar) and purchase of RBI bonds for Rs 5 lakh or more (by RBI).

Form 16 may not be filed: The individual tax returns have been designed to be annexure-less. Unlike in the past, no separate annexure for computation/other information is to be furnished along with the return. Therefore, it is likely that once complete information in respect of tax withheld at source as contained in Form 16 is furnished in the return, then Form 16 may not be required to be filed along with the return.
All the necessary information is to be furnished in the specified schedules of the tax return form only. These schedules also provide guidance regarding the step-by-step method of computing the taxable income under each head — salaries, income from house property, capital gains, etc.
Electronic filing: The individual tax return forms can be filed electronically, even though this has not been made compulsory for the current tax year.
Tax return preparer information : If the tax return has been prepared by a tax return preparer (TRP), then his/her name and identification is to be furnished in the tax return form. Further, the TRP is also required to sign the tax return form.

What’s the final word?

The basic information required to be furnished in the proposed return forms remains the same as the old forms. Nevertheless, there are a few important deviations which should be taken note of.


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April 14, 2007

Get A Cover For Your Loan Amount & Sleep In Peace

Insurance cover on unsecured loans not only ensures repayment of loans, but also spares the family of financial burden in case of accident or death.
Have you borrowed Rs 1 lakh to buy a sleek laptop? And have you ever imagined a situation where you are unable to repay the loan? The reason could be anything, ranging from physical disability caused by an accident, to a job loss. How will you then be able to afford an equated monthly instalment (EMI) of around Rs 9,000? Do you want your family to be burdened with your loan liabilities? The answer lies in shelling out some premium over and above the EMI and insuring the loan.

What do banks & NBFCs offer?

Personal loans from IDBI Bank and UTI Bank come with an insurance cover. In case of death or disability due to an accident, the principal outstanding is paid by the insurance company. In case of IDBI Bank, you can opt for an accident insurance cover from ICICI Lombard for a maximum of Rs 10 lakh. In case of loss of job, the insurance company pays the EMIs for up to three months.

If you opt for the cover, you need to pay a premium of around Rs 300 if the loan amount is below Rs 1 lakh. If the amount is above Rs 1 lakh, the premium is higher at Rs 575. You have to pay the premium upfront. The loan cover is valid for the entire tenure of the loan or your retirement, whichever is earlier.
An insurance company usually charges a premium of Rs 150 on an accident insurance policy. However, in IDBI Bank's case, the premium is structured higher than a normal accident insurance policy as it also accounts for job loss. UTI Bank offers a free personal accident insurance cover with personal loan. So, a customer is not expected to pay any premium as the cost is usually borne by the bank.
GE Countrywide, on the other hand, provides a personal accident cover, as well as term cover, on its personal loan. Personal accident cover is applicable in case of an accident resulting in 'death or total and permanent disability' of the primary customer. Term cover is applicable in cases of 'death or total and permanent disability' not necessarily due to an accident. In case of a personal accident cover, you can take a cover up to a maximum limit of Rs 7.5 lakh on a loan amount higher than Rs 75,000. If the loan amount is less than Rs 75,000, you can take a cover up to Rs 5 lakh.
The term cover is available for borrowers in the age group of 18-59 years. In case of death or permanent disability of the primary applicant, the insurance company (SBI Life) pays the outstanding, if the loan amount is below Rs 75,000, to GE Money.
If loan amount is higher than Rs 75,000, the borrower can take a cover up to a maximum limit of Rs 20 lakh if s/he falls in the age group 18-45 years. Similarly, for age group between 45 and 50 years, a borrower can take cover up to Rs 15 lakh and Rs 7.5 lakh for age group between 51 and 64 years. The insurance premiums can be built-in with your regular EMIs. The charges work out to 2.03% of the instalment if the loan amount is below Rs 75,000 and 3.54% of instalment amount, if you have borrowed more than Rs 75,000.

Is it necessary?

Payment protection insurance is very common abroad. Bankers say it is the best way to ensure financial protection to borrowers' families as this cover takes care of the repayment of the loan in case of death or total permanent disability of the primary loan holder. UTI Bank's vice president-retail assets Sujan Sinha, says, "Accident in today's fast life is a possible risk. So if you have an instrument, which covers your indebtedness and it does not involve any inconvenience like a medical test or anything, you must definitely opt for it."

Ensure that you have a loan cover plan that will take care of your repayment obligations and relieve your family of the burden in case of an unfortunate event. If you have taken a loan for a large amount, say a home loan, such a policy is a must.
Centurion Bank of Punjab's retail head, Vivek Vig, says, "We insist on customers opting for a term insurance cover along with unsecured loans. It will be a financial burden for the family to repay the loan in case of death of the borrower or permanent disability. As it is, dealing with death/permanent disability of the borrower is stressful for the family. The least the borrower can do is pay some additional amount over and above the EMI and opt for the cover."
He adds, "Just go a for a simple term cover. We don't suggest Ulip or a fancy insurance cover. If the borrower already has life insurance in his/her name, he need not take an additional cover with the loan." However, borrowers have not shown much inclination towards this. This is because our country is still under-insured, according to industry players.

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April 10, 2007

How To Gain From Losses in Stock Market

Are you aware of what the Income Tax Act says about setting off losses against other heads of income. Sonu Soni Iyer and Santdas Wadhwani explain the provisions

If, during a year, loss has been incurred in one source of income and there is profit in another source of income and both these incomes fall under the same head, for example, house property, business & profession, capital gains or other sources, then such a loss can be set off against that income while computing income tax.

Such a set-off is known as an intra-head set-off. Therefore, loss from one business can be set-off against income from another business; and loss from one house property can be set-off against income from another house property. To illustrate: Consider the case of Kavita who has incurred a loss of Rs 20,000 from her small business as a florist. But during the same year, she has earned professional income of Rs 300,000.

Since both incomes fall under the same head, i.e., ‘business & profession’, the loss of Rs 20,000 can be set-off against her professional income and Kavita’s total taxable income for the year shall be Rs 2,80,000.

Exceptions to the above are capital loss and loss from speculation business. Long-term capital loss is a loss incurred on account of sale of a capital asset, which has been held for more than 36 months. In the case of shares and listed mutual funds, the loss is considered a long-term loss if the shares have been held for more than 12 months.

Long-term capital loss can be set off only against long-term capital gains. If the individual’s longterm capital gains in the same financial year are insufficient to set off the entire loss, then the balance loss can be carried forward and set-off against the long-term capital gains of the next eight financial years.

However, long-term capital loss from sale of listed shares and equity-oriented mutual funds on which securities transaction tax (STT) has been paid cannot to be set off since the capital gains from these are statutorily exempt. Short-term capital loss can be set off against short-term capital gains as well as long-term capital gains.

Inter-Head Set-Off

Loss under one head of income can also be set-off against income under another head and this is known as an inter-head set-off. For instance, if an individual has suffered a loss from house property, it can be set-off against his salary income.
However, an inter-head set-off of loss is subject to the following exceptions:

Business & professional loss cannot be set-off against salary income. To illustrate: Consider the case of Dr Kapur who has incurred a loss of Rs 50,000 in his private practice. However, as an employee in a private hospital he has also earned a salary income of Rs 200,000 during the year. In this instance, the loss incurred by him in his private practice cannot be set-off against the salary income, but may be set-off against other heads of income in the same year.

Long-term capital loss can be set-off only against long term capital gains. Short-term capital loss can be set-off against short-term capital gains or long-term capital gains. Loss from speculation business can be set-off only against income from speculation business.

Carry Forward Of Loss

If a loss could not be set off entirely in one year due to insufficiency of income, then it can be carried forward to the next eight financial years and set off against incomes of those years falling under the same head of income. To illustrate, Gaurav has incurred business loss of Rs 50,000 during the financial year (FY) ’06 and has made a business profit of Rs 4,00,000 in the next financial year, i.e., FY07.

The loss of Rs 50,000 can be carried forward to FY07 and set off against Rs 4,00,000. Thus, Gaurav’s taxable business income for FY06-07 shall be Rs 3,50,000. However, the above law of carry forward of loss has the following exceptions: Business loss on account of depreciation can be carried forward for unlimited number of years.

Speculation loss can be carried forward only up to the next four years. Business loss and capital loss are allowed to be carried forward only if the income tax return is filed on time and therefore, in case a setoff of these losses is desired, the taxpayer must file the tax return before the due date.

Further, the individual who is claiming the set-off must be the same individual who has suffered the loss. One individual’s loss cannot be set-off against another individual’s income. Therefore, taxpayers are advised to plan their transaction in a manner that losses are effectively utilised to achieve the best tax results.


April 2, 2007

Financial Planning - Apply The Rules Of Thumb

Financial planning and products are all about number work, and most of it is fairly complex. It helps if there are certain guidelines to make life easy...

HERE are a few commonly used rules of thumb categorised into mathematical, financial advice and mythical.

Mathematical Rules

There are some rules that are true due to mathematical properties: Rule of 72: This rule (written as 72/r) helps one determine the number of years it will take to double money, where r is the annual compounded rate of interest. If a bank offers you 8% per annum compounded annual rate, then you can expect your money to double in approximately nine years. Similarly, in the earlier days of money doubling in five years, the implied annual compounding rate was around 14.2% p.a.

Real rate is twice ‘flat rate’:

Many agents sell loans at a rate which appears mouth-watering. But look closely and the fine print will say that the calculations are based on ‘flat rate’. Flat rate means that the interest is linearly (or simply) calculated, rather than on a reducing balance method.
For example, if you take a fiveyear (60 months) auto loan of Rs 3,00,000 and the EMI is, say, Rs 6,335, the total payment will be Rs 6,335 x 60 months = Rs 3,80,100, implying that the interest paid is Rs 80,100 over the next 60 months.
The wrong (or the flat) method of calculating interest is to say that the annual interest paid is Rs 80,100/5 years = Rs 16,020, and hence, the interest rate is 5.34% (Rs 16,020/Rs 3,00,000x100).
If you calculate the interest based on the reducing balance method, which is what banks actually do, then the real rate of interest works out to 10.18%, which is roughly twice (10.18%/5.34%=1.91) the interest rate that the agent will tell you. It is mathematically true that the real rate is approximately twice the flat rate.

Financial Advisors’ Rules

These rules help the advisor to devise a strategy for you.

Term + Mutual Funds > Ulips:

Bundling insurance and investments is typically not a good idea. A unit-linked insurance plan (Ulip) can be deconstructed into a term plan (pure risk cover) and an investment portion. Buying a term plan with the insurance company and investing the balance amount in mutual funds will typically result in a better performance.

Debt outflows should be limited to 50% of your income:

You would have noticed that banks offer loans of up to 48 times your monthly salary. Have you wondered why? Let us see: If you take a loan at 10.5% interest for 20 years, then the EMI per Rs lakh is Rs 1,000.
Assume that your monthly salary is Rs 10,000. Banks, following this rule of thumb will expect that you can pay up to Rs 5,000 as EMI. Hence, they can offer you a loan of up to Rs 5,00,000. Incidentally, this amount is approximately 48 times your monthly salary!
If the bank realises that you are paying EMIs on other loans (like car or education loan), they will reduce the quantum that you are eligible for, such that not more than Rs 5,000 of your income is used towards debt servicing. Anything more, and when the good times stop, you may be in a financial mess!

Mythical Rules

These rules have emerged to make life simple for the financial decision-maker. Since they are over-simplified, these rules very quickly lose their relevance on digging further. Be careful when using them!

100 minus your age in equities:

This rule states that the allocation of your portfolio in equities should be a decreasing function of your age. So, at the age of 30, you should be 70% invested in equities and at the age of 70, 30% of your portfolio should be in equities.
While this is a good starting point, the actual portfolio allocation should depend on your needs, upcoming milestones, special situations that you may face and your risk tolerance (ability and willingness). Hence, your advisor may recommend that even at the age of 30, you should be invested only 30% in equities, depending on your circumstances.
10 times your annual salary as insurance: The issue with life insurance, as opposed to non-life, is that it is very hard to put a financial amount to any one’s life. Hence, a rule-of-thumb says that your insurance should provide coverage worth 10 times your annual income: even if the life insurance corpus earns 10% return after you are no more, your family will get your income.
Again, this is a good starting point, but not complete. For example, it does not take into account inflation, the corpus that you have already built up and the change in circumstances once you are no more. A better way is to calculate the Human Life Value (HLV) or ascertain the liabilities that you have to meet and cover them all. Your financial advisor can help you determine the amount of insurance that you need.While it is good to have rulesof-thumb, it is important that you understand the underlying financial calculations. A detailed discussion on why your advisor is using a ruleof-thumb will give you an insight into your financial plans!


March 8, 2007

Impact of Fringe Benefit Tax Imposed on Esops

The proposed law effective April 1, ’07 has shifted the focus from employee taxation to employer taxation on Esops. The benefit arising at the time of exercise of shares by the employees will be liable to FBT at an effective rate of 33.99%. Correspondingly, any benefit on account of Esops as perquisites is out of employee taxation.

Potential FBT impact is uncertain around the value of FBT to be taxed in the employer’s hands. Let us consider an example where employee A and employee B are granted Esops on the same date, but they exercise on different dates. The exercise price is Rs 10.

Employee A exercises his options in year 3 when market value (MV) on exercise date is Rs 30 and employee B in year 4 when MV is Rs 40. The value of taxable benefit for FBT purposes will be Rs 20 and Rs 30 respectively. Therefore, even a different date of exercise could impact the FBT liabilility. Companies find themselves in a quandary as to which other factors may influence their FBT liability. In case of a globally mobile work force, there will be issues around double taxation where foreign companies grant Esopsto their employees. Foreign companies may be liable to pay FBT on Esops in India and the employee may suffer personal taxes in the home country on the same benefit, leading to double taxation.

Confusion also surrounds the impact of the proposed law on Esop variants such as restricted stock units and stock appreciation rights and nothing has been clarified at present. Some clarifications from the government in this aspect are necessary. Taxation of Esops in the hands of the employer is something which does not find precedent in other countries. In fact, it is surprising to note that the government has sought to bring Esops within the FBT ambit, as clearly these are not in the nature of collective benefits but are employee specific.

In the US, tax treatment of Esops depends on whether the stock option plan is qualified or nonqualified. Options provided to employees under qualified plans are not subject to tax at the time the option is granted or at the time the employee exercises the option and buys the stock. Tax is only levied as capital gains tax when the employee sells the stock.

Options provided to employees under a non-qualified plan are taxed when it is granted, if the option has a readily ascertainable MV at that time. The exercise of a non-qualified stock option triggers a taxable event. An employee recognises ordinary income in the amount of the value of the stock purchased, less any amount paid for the stock or option. When the stock is sold, the difference between the sale price and the MV at the date of exercise, if any, is taxed as capital gain.

Esops may soon be history

ESOPS may soon be history. The proposed amendment in Budget ’07 may even eliminate the whole concept of Esops from the Indian scenario.

Why Esops will not be attractive now: First, the employer will be burdened with an effective post-tax cost of 45.54%, which is a huge cost for any company as it will hit its bottomline. Second, the employer is being made to pay tax on the benefit derived by the employee due to appreciation in the shares due to market forces and not because of any cost incurred by the employer. For example, say a new start-up company had granted options five years back at the face value of Rs 10 each.

The company is now listed and its shares are traded on the Indian stock exchange. The employee’s exercise period has commenced and he is entitled to exercise his options and covert them into shares. Say, now the fair market value is Rs 120. Due to the proposed amendment, the employer will have to pay FBT on Rs 110 ( Rs 120 less Rs 10). Third, the exclusion from the taxability as perquisites has been removed. Therefore, effectively, it means that the benefit still remains a perquisite.

Accordingly, it may still be taxed as a benefit in the hands of the employee, besides FBT, resulting in double taxation of the same benefit. Fourth, in most of the countries, the benefit arising under Esops is taxed in the hands of the employee. Therefore, if this benefit is taxed both in India and overseas, then the employees will not be able to claim credit for the same under the respective Double Taxation Avoidance Agreements between India and other countries.

Then, many foreign companies grant Esops to the employees of their subsidiary companies in India. As clarified by CBDT earlier, FBT is payable by the foreign company only if it has employees based in India.

Therefore, an issue arises whether there will be no FBT in case of Esops granted by foreign company if there is no employee based in India. Further, it remains to be seen whether FBT is payable by the foreign company or the Indian employer. There are many interpretation issues in the proposed provisions which may lead to unnecessary prolonged litigation. For example, it as not been clarified whether the provisions will apply to new Esops or the FBT will get triggered even in respect of the old Esops where grants have been made in the earlier years.

If the second one is the intent of the proposed legislation then it will be unfair to the employers as they have been caught unawares and are being made to pay tax for the contractual arrangements (Esops) entered into with employees based on the prevailing tax law in the earlier years, i.e. when there was no income tax either for the employee (personal tax) or for the employer (FBT) when the Esops were granted.

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Now, Parents May Be Able to Claim Tax Benefits on Higher Education Loans for Children

The Union Budget 2007-08 has brought some good news for students pursuing higher education and for their parents. If the proposals stated in the Budget do fructify, it will be possible for a taxpayer to claim deduction on account of interest on education loan taken for one’s children or spouse.

The memorandum to the Budget specifies that: “It is proposed to amend Section 80E so as to allow the deduction of interest on loan taken by an individual for higher education of his relative also. It is also proposed to define the term ‘relative’ for the purpose of Section 80E so as to mean spouse and children of the individual.”

This amendment holds important implications. Currently, only an individual who has taken loan for pursuing his/her higher education is eligible for tax benefits. The relief is not allowed to parents, but to the student himself/herself when he/she starts repaying the amount.

Now, it has been proposed that the tax benefits can be availed of even by ‘relatives’. With this, parents/spouse can take a loan for their children’s/spouse’s higher education and claim tax relief on repayment of interest. This amendment will apply in relation to the assessment year ’08-09 and subsequent years.

This will be a major advantage for parents of children pursuing higher studies. They will be able to lower their overall tax liability by claiming deduction on account of interest paid on the education loan. For students, this means that some part of the liability on account of the loan will have been paid off by the time they start their career. However, industry players are yet to read the fine print and decide how to put the revised education loan scheme into practice.

Says a senior manager with a public sector bank. “At present, the loans are disbursed in the student’s name. But with the possible amendment, we have to see if the bank can sanction a loan in the parent’s name so that they can seek tax relief.”

The amendment also raises a few questions. One will be able to say something definitively only once the details are disclosed by the tax authorities and by banks giving out education loans.

Here, we attempt to answer, with whatever information is currently available, a couple of basic questions that could crop up in a few cases.

Is it better to take an education loan than finance it from one’s own pocket? Bankers say that demand for education loans has picked up, as the cost of higher education has surged by 20-50% in the past few years. Now, with the proposed amendment, bankers see a further rise in the demand for education loans.

Industry players say that many institutes demand a huge portion of the fees as an upfront payment. This could drain the savings and disturb personal finances of parents. An education loan is more attractive now as even parents will be able to seek a tax relief on the same.

Should the parent take the loan? “In the current situation, the bank always disburses a study loan in the name of the student who has signed up for a course. A parent can only sign as a guarantor for the loan,” says a senior manager with Andhra Bank.

However, banking sources also say that soon, a time may come when the bank will sanction loans in the parents’ name. In such cases, there are two ways in which a study loan can be repaid.

One option is that the parents can service the interest component of the loan during the study period of the student. In this option, both the parents and the student stand to gain. Parents can seek tax relief to the extent of the interest outgo and the burden of repayment reduces considerably on the student.

The second option is to start repaying the loan once the student takes up a job. In this case, the student repays the loan.

However, these deductions are available up to a period of eight years. Please note that you cannot claim any tax deduction if your employer gives you an education loan. This also applies for family or friends. You have to borrow from a bank or financial institution or approved charitable institution to claim tax benefits.

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March 6, 2007

What are Composite Loans?

Loans where a lender gives you money not only for procurement of land, but also for construction of a house, are termed composite loan.

Huge apartment complexes, luxury villas and independent bungalows have mushroomed throughout the city. Projects are getting overbooked in localities with business and industrial activity. Affordable interest rates offered by most banks have fuelled heavy activity in the real estate sector. Manoj intends to purchase a piece of land at an affordable rate. He may choose to either sell the land once its value appreciates, or build his own house after a few years. Will he be eligible for a loan to purchase a plot?

There is good news for people like Manoj. Banks offer loans at competitive rates for purchasing a plot. You can either construct a house on it, or simply hold on to the land as an investment. Some lenders insist that you have to construct a house within a year or two of purchasing the land. So, not only do they offer you loan to buy a piece of land, but also provide you money for construction of a house. A plot can be purchased purely for investment purposes. It appreciates and yields manifold returns. Loans where a lender gives you money not only for procurement of land, but also for construction of a house, are referred to as composite loans. Manoj can get as much as 85% of the cost of the land from bankers. The minimum loan amount is Rs 3 lakh for most banks. The loan tenure varies from one to 20 years. Also, most banks lend only if the site falls under the municipality limits. Additional sops like free accident insurance cover packaged with the land loan are also on offer. Shop around and compare interest rates, just like you would for a home loan. A difference of a few percentage points could translate into savings of a few thousand rupees.

Resident Indians, as well as non-resident Indians (NRIs), in the age group 18-50 years, with independent and regular source of income, are eligible to apply for these loans. For those above 50 years, some lenders impose certain restrictions like shortening of maximum repayment period, or co-obligation of spouse/children. Documents required for applying for a land loan include filled application form with photograph, identity proof, residence address proof, latest salary slip, form 16, six months’ bank statement and processing fee, if applicable. While banks lend for purchasing a site, some insist that the borrower must undertake to commence the construction of house, after completing all formalities, within a maximum period of 12 months, with or without availing of more finance for this purpose. The site value should not be more than 50% of the total project cost. The maximum repayment holiday permitted, including the construction period, is 24 months.

If the borrower fails to keep up the undertaking to commence construction within 12 months or sells the site, the loan is treated as misused and attracts interest at commercial rates; then the loan has to be repaid at once. Many other financial institutions do not bother whether you buy the land purely for investment purposes or desire to construct a house on it. Before you finalise the loan agreement, get a clear picture whether your bank has any such clause attached to it or not. To start his construction project, Manoj can either top up his existing loan or avail of a new construction loan. A composite loan scheme meets your requirement of both purchase of site and construction. Permitted margin money has to be maintained in both the stages of land purchase and construction. The portion of the margin towards construction has to brought in before the first disbursement towards construction.

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March 3, 2007

Make The Most Of Personal Loan

Personal loans are often taken for financing short-term needs or unforeseen expense. It is popular among borrowers as you need not state any reason to the bank. To top it all, you need not offer a collateral or have guarantors. All you have to do is submit a salary slip, proof of personal identity, residence proof and sign on a form. And the money is yours.


But there is more to the story. Personal loans, though easy, come at a high interest rate. So it is pertinent for you to know if you are the right candidate and have the right reason to go in for such a loan.


Renters: If you do not own a home, a personal loan may be the only option available for you. You also have the option of credit cards, but the annual interest rate works out to 35.4%, against a personal loan, which charges interest rate in the range of 18-25%.

Home equity utilised: If you have already used a lot of your home equity and still need a small loan, a personal loan can be a good choice.

Small loan amount: If you need a few thousand rupees, which you can pay off in a year, then a personal loan is a better option compared to using home equity or credit cards.

However, there is a catch here. Most banks do not let you repay the loan before 180 days. So, even if you end up getting some extra money to repay your debt, you are still stuck with the loan and the high interest rate.


For buying a consumer durable: You can opt for a personal loan to buy the latest LCD television or that cool music system. You may think of going in for a consumer durable loan, but the interest rate on personal loan is much lower than that on consumer durable loans.

A consumer durable loan comes at an interest rate in the range of 25-30%. In addition, the flexibility of duration and availability of various schemes make personal loans an attractive option.

Go for personal loan than your credit card: Opting for a personal loan may be a better choice than borrowing on your credit card if you want to keep your credit limit available for impulse purchases or an actual emergency requiring instant purchasing power. Often, borrowing money on your credit card carries a higher rate of interest than a personal loan.

To repay your credit card debt:
Assume you have revolving credit on your credit card at the rate of 2.95% per month. This amounts to 35.4% per annum.

Every time you swipe your card to make a purchase, your card is subject to this rate of interest. Eventually, you have to pay off your debt at an exorbitant rate. Instead, opt for a personal loan and clear all your credit card outstandings. That will weigh less on your wallet.

To service multiple loans: You could be servicing a consumer durable loan, revolving credit on your card and probably have even taken an overdraft on your bank deposit. Instead of servicing the debt at different rates of interest with different repayment tenures, you can consolidate it into one single source.

It will help you manage your finances better. But you have to check if the interest outgo will be much higher than servicing multiple loans. To determine this, calculate how much money you will need to repay all your loans. Check with the bank and ask them how much the equated monthly instalments (EMIs) will be on such a loan, along with the repayment tenure. If the EMI will be much higher than all your existing loans taken together, then avoid a personal loan, despite the convenience.


Qualifying criteria are usually stricter as there is no collateral. Most banks have eligibility criteria such as age limit, minimum educational qualification, number of years in the current company/residence and minimum net/gross annual income. Most banks maintain an approved list of companies. You will automatically get a loan if you are an employee of one of those companies. It also helps you to negotiate a better rate.

Personal loans are generally offered up to Rs 10 lakh, starting from Rs 20,000. Look out for closure charges, service charges and any other ‘hidden’ charges. Personal loans are expensive with higher interest charges than most other loans, except consumer durable loans.

You also need to verify if the interest component is being calculated on a monthly, weekly or a daily reducing balance method or on a lower period. Higher the frequency, lower is the interest rate charged.


Personal loan is popular as you need not state any reason to the bank

Opting for a personal loan may be a better choice than borrowing on your credit card, which comes at a higher interest rate than a personal loan

Instead of paying off your debt at an exorbitant rate, opt for a personal loan and clear all your credit card outstandings. It will weigh less on your wallet

Personal loans are generally offered up to Rs 10 lakh, starting from Rs 20,000. Look out for closure charges, service charges and any other ‘hidden’ charges


February 24, 2007

I-T exemption limit may be raised to Rs 1.5 lakh in 2007

Feb. 24 - With direct tax revenues being buoyant this year, taxpayers could look forward to some relief in the form of an increase in income-tax exemption limit from Rs 1 lakh at present to Rs 1.5 lakh per annum.

According to highly placed sources in the Government, since the income-tax rates are already quite low compared to many other countries at 10 per cent, 20 per cent and 30 per cent, there is little scope for the Finance Minister, Mr P. Chidambaram, to reduce them further.

On the contrary, by raising the exemption limit from Rs 1 lakh to Rs 1.5 lakh, he would be providing relief to a large category of the lower income group among taxpayers.

This would also result in letting off a large number of marginal tax payers from the tax net, particularly in view of the rising prices that have hit the household budget of the low and middle-income group of taxpayers, the sources said.

The move is also viewed as a sort of political sop in view of the forthcoming elections in several States, particularly Uttar Pradesh, traditionally a decisive State in the political formation at the Centre.

The total direct tax collections between April 1, 2006 to February 15, 2007 stood at Rs 1,61,777 crore which is 39.5 per cent higher compared with Rs 1,15,788 crore in the same period of the previous financial year.

During this period, income tax collections, including fringe benefit, securities and banking transaction tax, stood at Rs 62,040 crore.

This represents a 32 per cent growth over collections in the corresponding period of the previous year.

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February 4, 2007

A Guide to Middle Manager Survival

A Guide to Middle Manager Survival

In today’s world, restructuring and downsizing have led to the emergence of flatter organizations. Middle managers have been the most affected by these changes. Many management writers consider middle managers as “excess organizational baggage.” Ironically, middle managers are the most potential assets of the organization. Many organizations have the false notion that by removing these managers, they can restructure themselves better. To ensure continued survival of middle managers, a number of individual and organizational actions can be undertaken. These are listed below:

  1. Focus on important strategic issues: Middle managers should move away from the day-to-day operations (which can be delegated to the first-line managers) and devote their attention to the more important strategic issues.

  2. Think like senior managers: They should use their extensive knowledge to deal with more substantive issues that would lead to organizational benefit.

  3. Analyze why change is needed: They must understand the underlying causes for introducing change and how the organization should adapt itself in the light of opportunities and threats.

  4. Ensure greater participation: Middle managers have a great deal of technical expertise and a good knowledge of organizational processes. This knowledge should be disseminated throughout the organization.

  5. Manage change and people together: Middle managers should take the initiative for implementing change in the organization. They should act as mentors for those with lesser work experience.

  6. Utilize their role as intermediaries: Middle managers can comprehend the internal and external pressures faced by the organization. They can resolve conflicting issues by negotiating with the parties concerned.

  7. Implement the vision: Middle managers must attempt to convert top-level strategies into workable actions. They should take up the responsibility to implement the vision of the organization.

  8. Incorporate change into the organization: Middle managers must understand how to implement change in the organization. They should introduce work practices that bring in innovation and “shifts in thinking.”

In the words of Rory Chase, Managing Director of IFS International in Bedford, “The new role of the middle manager embraces three key areas: team leadership, change maker and facilitator.” There is no doubt that in order to survive in this rapidly changing era, middle managers have to make themselves indispensable.

Adapted from Steve Towers, "Re-engineering - Middle Managers are the Key Asset, " Online Newsletter, October 1996 (Page updated on 27 October 2002), The Institute of Management Excellence


January 1, 2007

Levels of Management

Top Management

  • Develops and reviews long-range plans and strategies.

  • Evaluates overall performance of various departments and ensures cooperation.

  • Involved in selection of key personnel.

  • Consults subordinate managers on subjects or problems of general scope.

Middle Management

  • Makes plans of intermediate-range and prepares long-range plans for review by top management.

  • Analyzes managerial performance to determine capability and readiness for promotion.

  • Establishes departmental policies.

  • Reviews daily and weekly reports on production or sales. Counsels subordinates on production, personnel or other problems.

  • Selects and recruits personnel.

Supervisory Management

  • Makes detailed, short-range operational plans.

  • Reviews performance of subordinates.

  • Supervises day-to-day operations.

  • Makes specific task assignments.

  • Maintains close contact with employees involved in operations.


October 14, 2006

Functions of Managers

Regardless of the type of the industry, the functions involved in an organization, or the organizational level at which one functions; every manager has to perform certain basic managerial functions such as planning, organizing, staffing, leading and controlling.

  • Planning is the process of setting goals, and charting the best way of action for achieving the goals. This function also includes, considering the various steps to be taken to encourage the necessary levels of change and innovation.

For example, if a company is planning for a promotional campaign, then the manager responsible for the campaign has to chart out actions that are in the best interest of the firm.

  • Organizing is the process of allocating and arranging work, authority and resources, to the members of the organization so that they can successfully execute the plans.

In many retail outlets, departments are organized (inventory department etc.), based on the nature of the job (product packing, grading, pricing, inventory etc.,)

  • Staffing consists of recruiting, training and developing people, who form part of the organized efforts to contribute towards organizational growth.

For instance, recruiting programmers and analysts for a company. Training and developing them to achieve organizational goals forms a part of the staffing activity.

  • Leading involves directing, influencing and motivating employees to perform essential tasks. This function involves display of leadership qualities, different leadership styles, different influencing powers, with excellent abilities of communication and motivation.

For instance, Sam Walton - founder of Walmart, leadership style was instrumental for the roaring success achieved by the retail giant. He always enjoyed interacting with his employees. He also made it a practice to visit each store, at least once in an year. He also insisted that the top level executives should visit the stores, and interact with employees.

  • Controlling is the process of devising various checks to ensure that planned performance is actually achieved. It involves ensuring that actual activities confirm to the planned activities. Monitoring the financial statements, checking the cash registers to avoid overdraft etc., form part of this process.

The Essentials of control activities are:

  • Setting performance standards

  • Determining the yard-stick for measuring performance

  • Measuring the actual performance

  • Comparing actuals with the standard

  • Taking corrective actions, if actuals do not match with standards


What is Management? Definition of Management

Harold Koontz and Heinz Weihrich define management as “the process of designing and maintaining an environment in which individuals, working together in groups, efficiently accomplish selected aims.”

Louis E. Boone and David L. Kurtz define management as “the use of people and other resources to accomplish objectives.”

Dalton E. McFarland defines management as “a process, by which managers create, direct, maintain, and operate purposive organizations through systematic, coordinated, cooperative human effort.”

Mary Parker Follet termed management as “the act of getting things done through people.”

Definitions by Follet and Louis E. Boone and Kurtz call attention to the fact that managers achieve organizational goals by getting others to do the necessary tasks. The other two definitions suggest that management is much more than “just getting the work done” and suggest the following aspects of management

  1. Managers carry out the functions of planning, organizing, staffing, leading and controlling: Henry Fayol was the first management thinker to outline the five basic functions carried out by managers. Every manager performs these basic functions. These functions are discussed in detail in the later part of this chapter.

  1. Management is essential to any kind of organization: Wherever there are groups of people working together to achieve some common objectives, it becomes essential to guide, organize and control them. The term ‘management’ applies to any organization irrespective of the size or nature of operations. The prime concern of a CEO of a multinational company, the General Manager of a hotel, the first-level supervisor, the manager of a cricket team and the student president in a college is to manage their people and resources effectively.

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