Tips to ensure your child becomes a financially savvy adult (ET 22 Oct 2012)

Here's how to hold your child's hand through the various monetary milestones in his life in order to ensure that he grows up into a financially savvy adult:

1) 5-6 years:

Kid's milestone: > Understand the concept of money.

> Know that money buys things, services.

Parent's role: > Help the child identify various denominations, sort coins by sizes, play money-based games.

> Take him shopping, make him pay for small things.

Pitfall: The child has a very small attention span. So if money learning is not made fun, he will switch off instantly.

2) 7-9 years

Kid's milestone: > Start the saving habit.

> Shoulder fiscal responsibility and make spending decisions.

> Set short-term goals.

Parent's role: > Buy him a piggy bank to collect change. Open a bank account for depositing monetary gifts.

> Start a weekly allowance. Fix the things you will not buy for him like candy, ice cream, etc. Give him the freedom to decide what he wants to buy.

> Explain how he can buy an expensive toy by saving as opposed to spending it on snacks on the first day.

Pitfall: If the kid finishes his allowance before the stipulated time, do not offer him an advance or pay for things he needs. He will never learn fiscal discipline.

3) 10-12 years

Kid's milestone: > Carry out financial transactions.

> Learn the value of money.

> Set medium-term goals.

Parent's role: > Open a bank account that allows your child actual transactions like signing a cheque or making deposits.

> Pay the child for minor errands such as washing a car or taking care of a younger sibling.

> Ask the child to buy shoes or gizmos fro savings.

Pitfall: The child is likely to lend money to his friends. Stress the importance of getting it back.

How earnest money impacts your tax (ET Wealth 8th Oct 2012)

You don’t have to pay income tax on earnest money received from a failed deal, but there are other tax implications you should be familiar with says M K Agarwal

When you buy or sell a tangible asset, there is usually some earnest money given by the buyer before he arranges for the full payment. This can range from 5,000-10,000 for a used car to a couple of lakhs of rupees for a real estate transaction. The payment is meant to seal the deal and the rules of arrangement are simple. If the buyer backs out, the earnest money given to the seller is forfeited. If the seller changes his mind, he gives back double the amount to the buyer. To ensure that both the parties play fair, there is typically an intermediary who is known to both. 
In normal circumstances, any amount received as advance for the purchase of an asset is a revenue receipt and is taxed in the year that it is received. What happens if the money is received from a buyer who fails to keep his commitment and the deal falls through? Will the forfeited amount become the income of the seller and will he have to pay tax on it? Under which income head will the amount have to be declared in the tax return form? 
As per Section 51 of the Income Tax Act, 1961, if the owner of an asset has received money by forfeiting any advance money for the asset, this amount will be deducted from the purchase price of the asset. This is the cost for which the asset was acquired or its fair market value (if the property was purchased before 1 April 1981). Suppose you bought a property for 10 lakh about 15 years ago, and two years ago, you decided to sell it for 40 lakh. The deal was struck and the buyer gave you earnest money of 2 lakh, but later backed out. The 2 lakh will be treated as capital receipt and you will not be taxed in that year, but the amount will be deducted from the purchase price of your property when you sell it in the future. In this case, the purchase price will be taken as 8 lakh ( 10 lakh— 2 lakh). 
In some cases, the deduction of earnest money from the cost price of the asset pushes up the capital gains tax of the owner substantially. In the example (How much tax...), the owner would not have had to pay any tax had he not forfeited the earnest money. The indexed cost of acquisition without deducting 50,000 from the cost price would have been 8.3 lakh. One would be better off including the earnest money in one’s income from other sources and paying tax on it. Is this possible? The law is silent on this because the earnest money is a capital receipt, not income. 
Also, the seller must know that this is a one-way street. If you backed out of the deal and paid the buyer 2 lakh compensation, it would be treated as a capital loss and not added to the purchase price of the property. You can claim tax benefit on this only if you were in the business of sale and purchase of the property. In such a case, the loss due to forfeiture would be treated as a revenue loss. 
Earnest money is usually a very small percentage of the total value of the transaction, but sometimes it can be higher than the cost price of the asset. Under Section 48 (read with Section 51), if the amount forfeited is greater than or equal to the cost of acquisition, the cost of the asset will be taken as nil. In one such case involving Sunita N Shah (2005) 94 ITD 492 (Mumbai), the forfeited amount was higher than the cost of acquisition. In such cases, the excess amount is considered capital receipt and is not chargeable to tax. The same ruling was given in the case of Travancore Rubber & Tea Co. Ltd (2000) 243 ITR 158, wherein the Supreme Court ruled in favour of the assessee. 
Tax impact on buyer In case the buyer defaults and the earnest money is forfeited, he will not be allowed to show it as a capital loss. This was the verdict in the case of CIT vs Sterling Investment Corporation Ltd (1980) 123 ITR 441. However, if the seller fails to honour the deal and pays the buyer double the compensation, this will be treated as capital gain because it amounts to relinquishment of a right by the buyer. In the case of CIT vs Vijay Flexible Container (1990) 186 ITR 693, it was held that giving up the right to obtain conveyance of immovable property amounts to transfer of a capital asset. 
What happens if the advance money was for the purchase of a commercial property? Can the loss be treated as business expenditure incurred by the purchaser? The amount cannot be claimed as revenue expenditure. In CIT vs Jaipur Mineral Develop Syndicate (1995) 216 ITR 469 (Raj), it was held that if the payment is made for the pupose of acquiring a capital asset, the amount lost upon forfeiture will not be considered as revenue loss though the amount may not have the same consequence or character in the hands of the recipient or beneficiary. 
How much tax does a seller pay? Mr X bought land in January 1987 for 2 lakh. He agreed to sell it to Mr Y in January 1998 and received 50,000 as earnest money. However, Mr Y backed out and his 50,000 was forfeited. Mr X sold the land on 1 January 2009 for 8 lakh to Mr Z. Here’s how his gains will be taxed: 
Purchase price: 2 lakh 
Earnest money received: 50,000 
Deemed purchase price: 1.5 lakh 
Indexed cost (in 2008-9): 6.23 lakh 
Selling price: 8 lakh 
Capital gain: 1.77 lakh 
Tax payable: 35,400 (20%)

The author is a chartered accountant and senior partner at Mahesh K Agarwal & Co and can be reached at mkcacs@gmail.com.

Fidelity Unitholders Get 30 Days to Redeem Holdings without a Fee (ET 10 Oct 2012)

SHAILESH MENON, MUMBAI 

Fidelity Mutual Fund, which sold its Indian assets under management to L&T Mutual Fund in March, will open a 30-day window from October 15 to allow unitholders to redeem their holdings without a fee. The Securities and Exchange Board of India (Sebi) mandates that mutual funds which have been acquired should give unitholders uncomfortable with a new fund management team the option to pull out without an exit load.

L&T Mutual Fund, part of the engineering-to-construction conglomerate Larsen & Toubro, had acquired Fidelity’s assets under management but did not rope in the fund management team. Now, a big worry for L&T Mutual Fund is that unitholders, who are clients of large foreign banks — big distributors of mutual fund products — may pull out money from Fidelity schemes during the 30-day period. 

Top officials of two leading foreign banks said L&T Mutual Fund is yet to garner support from foreign distributors. “We’ve not taken the mandate to sell L&T Mutual Funds as yet. Our audit offices are reviewing the fund house, their processes and performance track record,” said the distribution head of a foreign bank on condition of anonymity. 

Foreign banks sell only funds that are approved by their global audit committees, which usually prefer mutual fund schemes with a good track record or those belonging to Indian arms of international mutual funds. While Fidelity Funds appear on the distribution list of most foreign banks, L&T Mutual is a relatively new and ‘undertracked’ fund house. 

L&T Mutual officials, however, brushed aside these concerns. Speaking about distribution tie-ups with foreign banks, N Sivaraman, president & wholetime director, L&T Finance Holdings, said, “Revised empanelment process is on. I don’t see why foreign distributors would not want to sell L&T funds.” 

The fund management team and risk management of L&T MF have been beefed up to handle large investment inflows, he said. L&T Mutual recently hired Soumendra Nath Lahiri and Shriram Ramanathan as heads of equities and fixed income, respectively. “We’ve a good equities team now... Fixed income vertical has also been structured well,” Sivaraman said. “Critical segments like risk management and processes will be manned by the Fidelity team. There’s no need for investors to worry. Their money is in good hands.” 

Some distributors looking to make a quick buck could push clients to redeem during ‘no-load period’ and shift the proceeds to schemes of other fund houses. Rival fund houses are also looking at the ‘no-load’ window closely as fishing out Fidelity’s assets could be a cheaper way for them to acquire some assets. 

Fidelity Funds have returned well over the past 10 months and better still after the announcement of asset sale to L&T Mutual Fund. Equity funds like Fidelity Equity, Fidelity India Growth, Fidelity India Special Situations and Fidelity India Value have returned 20-30% since January, Value Research data show.

SEBI gives MFs time till October 31st for discontinuing SIPs, STPs under single plan structure (Cafe Mutual 3rd Oct 2012)

Ravi Samalad

AMCs get time till October 31^st to inform all their investors who will get affected due to SEBI regulation on implementing single plan structure. 

SEBI has acceded to AMFI’s request to allow fund houses to implement discontinuance of existing SIPs, STPs and dividend reinvestments under schemes which run separate plans for retail and institutional clients from November 01, 2012 instead of 01 October, 2012.

As per SEBI’s September 16, 2012 circular, AMCs are supposed to accept subscriptions only in one plan – either retail or institutional from 01 October 2012. The AMC has a choice to choose which plan they wish to continue. Take for instance, an AMC wants to accept subscriptions only under institutional plan. Thus, the retail plan needs to stop accepting fresh money or add units from 1^st October. However, the retail plan could have existing SIPs, STPs and dividend reinvestment mandates from investors. In this case, AMCs need to discontinue such SIPs, STPs and dividend reinvestments which would add units. However, implementing this rule was a tall order for AMCs in such a short span of time.

Institutional plans usually have a higher minimum application size. Thus, retail investors are not be able to invest in such schemes. In case an AMC wants to discontinue retail plan, they may lower the minimum investment size of institutional plan in a bid to attract retail investors.

From today onwards, AMCs have stopped accepting fresh subscriptions under the plans which they want to discontinue. These plans will never accept fresh inflows till the last investor redeems. These schemes would cease to exist thereafter. Now AMCs have one month’s time to inform all their investors about the new rule.

My Comments : It seems that our regulator has no other work other than increasing work of the Investors, Distributors and AMCs. After major changes in the KYC process, this step will lead to substantial increase in unproductive paperwork for all the entities involved in the process.

Explore loan against collateral like gold, shares to raise money at softer interest rates (ET 2nd Oct 2012)

Many of us opt for personal loans — when we can't (or don't want to) turn to friends or relatives for a soft loan — to tide over unseen shortfall in funds.

Sadly, most of us don't even consider other options available like loan against assets, shares, gold, property and so on. It is strange considering goldfinance companies have been on an overdrive in the last few years. Even moneywise, it makes perfect sense to take a close look at asset-backed loans.

Compared to the interest rate of 16% to 24% on personal loans, loans against assets come much cheaper at 12% to 14.5%. But the problem is you can't club all these asset-backed loans in one bracket. "Each one of these asset-backed loan has its own advantages and disadvantages.

You have to choose one of them only after analysing your needs in detail," says Satish Mehta, co-founder and director, Credexpert, a credit counselling entity. And the needs could be — the purpose of the loan, documentation requirement, time you have and how much money you want to raise.

PURPOSE OF THE LOAN

Loan against gold and securities work for relatively smaller amounts that you would like to pay off within a short timeframe. For example, if you are keen on a loan to fund your holiday, you may be better off borrowing against gold or securities.

But for larger expenditures, like a marriage, loan against property works better. Typically, repayment tenure is longer for a loan against property compared to a loan against gold, which helps fund larger expenditures.

For an average individual, market value of movable assets such as gold and securities is generally lower than the market value of the property. Hence in most cases large expenses are funded using loans against property. You can choose to take an overdraft facility against your house, where the bank approves the borrowing limit against a house.

If you plan it well, you can use this facility to meet any contingency, too. This works for those who do not have much of free cash flow each month and cannot maintain emergency funds. Though you may not use the overdraft, still you may have to pay the processing fee of around 1% of the overdraft limit.



DOCUMENTATION REQUIRED

Bankers differentiate between loans against movable and easily realisable assets, such as gold and securities, and loans against immovable and illiquid assets, like property. "In case of gold loans, lenders will be keen on 'know your customer' requirements than documentation pertaining to loan repayment ability," says Harsh Roongta, CEO, apanapaisa.com.