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Category: ABC OF MONEY MANAGEMENT

  • Personal finances tasks for March

    Personal finances tasks for March

    Because the month of March 2022 has already begun, Indian citizens must complete a number of financial responsibilities by the conclusion of the month. Several deadlines, such as the final day for submitting a belated or updated income tax return (ITR), the PAN-Aadhaar link, and others, are approaching in March. As a consequence, here are the six most crucial financial tasks to consider and do, if any are applicable to you.

    Calculate your advance taxes

    Missed the due date instalment of 15 March? You can still save some interest component by calculating the income for FY22 and paying taxes on or before 31 March 2022.

    Section 234C interest is levied on each advance tax instalment. So if you have not paid your advance tax instalments on time, you will have to pay interest at 1% per month.

    Section 234B interest is levied from 1 April till the date the tax is paid.

    If you directly calculate your tax liability at the time of filing of filing your return (which happens in July), you will have to pay interest under both section 234B and section 234C.

    So, it is advisable to compute your income and pay taxes on or before 31 March 2022.

    Filing belated or revised Income Tax Return (ITR)

    The deadline for filing a revised income tax return (ITR) is 31st March 2022. Following the epidemic of Covid-19, the government has extended the deadline for reporting updated ITRs for FY 2020-21 from December 31, 2021 to March 31, 2022. Also because the deadline for filing a belated or revised return for AY 2021-22 is March 31, 2022, you must submit your updated or belated ITR on or before that date to avoid a penalty under Section 234F of the Income-tax Act of 1961.

    Aadhaar-PAN link

    Following the government extended deadline from September 30, 2021 to March 31, 2022, Aadhaar linking with PAN is now possible till March 31, 2022. To avoid PAN becoming inactive, these two most important documents should be linked on or before the deadline. As a result of possessing an invalid PAN, you may be subject to a Rs 10,000 penalty under section 272B.

    KYC compliance of bank accounts

    The Reserve Bank of India (RBI) has set a deadline of March 31, 2022, for periodic updation of KYC in order to prevent restrictions on account operations for non-compliance. The account holder can avoid having his or her bank account suspended by satisfying KYC compliance.

    Making contributions towards your tax saving instruments

    As a tax saver, keep in mind that beginning in FY 2021-22, an individual can choose between the old and new tax regimes, making use of tax exemptions. As a result, it’s critical to make sure you’ve made the needed minimum contribution before the end of the fiscal year to keep your tax-saving instrument operational. As a result, you must ensure that you have successfully deposited the required contribution in your tax-saving instrument on or by March 31, 2022, or your tax-saving funds would become invalid and your tax liability for the fiscal year 2021-22 will be increased.

    For any queries, feel free to reach out to us at contact@vprpca.com

  • Loan against PPF account balance – Key features, pros and cons

    Loan against PPF account balance – Key features, pros and cons

    a glass jar filled with coins and a plant

    Public Provident Fund (PPF) is one of the most popular investment options in India, largely due to higher interest rates and complete Income tax exemption.

    However, a lesser known feature is that one can obtain a collateral-free personal loan against PPF balance available at 1% interest rate.

    We gain an insight on the key features, pros and cons of this product.

    Key features

    • The significant features of taking a loan against your PPF account are as follows:
    • Account holders can avail this loan facility between the 3rd and 6th financial year from when PPF account was opened. The loan ends in the 6th FY since starting from the 7th financial year, the PPF account can be partially withdrawn.
    • The loan amount is capped at 25% of the balance at the end of the second financial year preceding the year in which the loan was applied for.
    • Interest is charged at 1% more than the interest earned on the balance in the PPF account. Once the interest rate is set for a loan, this rate will be applicable till the end of the tenure.
    • In case the loan against the PPF account is not paid off within 36 months, the applicable interest rate will be hiked to 6% more than the interest earned on the PPF balance.
    • The principal amount needs to be paid off first, followed by the interest accumulated. The interest amount should also be repaid in two monthly installments or lesser.
    • If the principal is repaid within the loan tenure, but there is a portion of the interest amount that remains to be paid, then the outstanding amount will be deducted from the PPF account balance of the individual.
    • It is not possible to avail a second loan on the PPF account until the first one has been paid-off completely.

    Pros

    • No collateral or mortgage required – You will not be required to pledge any asset in the form of a collateral when taking a loan against your PPF account.
    • Repayment tenure of 36 months – The loan can be repaid within 36 months. This timeline is calculated from the first day of the month following the month in which the loan is sanctioned.
    • Low interest rates – This is one of the most significant benefits of availing a loan against your PPF account. Interest rates are far lower than those of traditional personal loans from banks.
    • Flexibility in repayment – The repayment of the principal amount of the loan can be done either in two or more installments (on a monthly basis) or as a lump sum.

    Cons

    • PPF loan is available at 1% interest rate but you will forego the interest accumulation on the loan amount. So the actual cost of a PPF loan is PPF interest rate plus 1%. At the current interest rate, a PPF loan would effectively cost you 8.1%.
    • The time period is very limited. It may not be practical for some investors to require funds at such an early stage, except in case of emergencies
    • You lose the compounding effect on the interest amount foregone due to the loan. WAs PPF loan is available in the earlier part (between 3rd and 6th FY), the compounding effect of the interest foregone will be much high at the time of maturity.
    • Cumbersome compliances: PPF is largely a Government instrument and availing this loan carries considerable paperwork and compliances, as compared to a personal loan which is available in 3 seconds nowadays!

    Conclusion

    All in all, the loan against PPF balance has numerous restrictions while giving an attractive interest rate.

    PPF should be seen as a retirement fund and withdrawals/ loan should be avoided, unless in case of emergencies.

    However, it can prove to be better than a personal loan where interest rates sore as high as 20% p.a.

    The information is purely general in nature and not intended to be an investment or financial advice. Please consult a professional for any advice before taking any action.

    We would love to hear from you. Write to us at contact@vprpca.com

  • Diversification – Why you should use it now

    Diversification – Why you should use it now

    two men shaking hands in a conference room

    The word of ‘Diversification’ seems long but it is not really complicated.

    It just builds on the famous saying – “Do not put all your eggs in one basket”

    In simple terms, diversification means spreading your investments so that your exposure to any one type of asset is limited.

    But why do investors fear diversifying?

    For starters – because they do not know anything about it.

    But before we dive into it, we must first accept the fact that the market is unpredictable. No one can predict what will happen in the market tomorrow, and if anyone claims to predict that – they are either lying or are God.

    So, the next best thing is to work with probabilities.

    And here is where diversification helps. It reduces the volatility of your portfolio over time.

    Why diversify?

    One of the keys to successful investing is learning how much risk you can tolerate in comparison to the returns you want.

    Invest your retirement nest egg too conservatively at a young age, and you run the risk that the growth rate of your investments won’t keep pace with inflation. On the other hand, if you invest too aggressively when you’re older, you could leave your savings exposed to market volatility, and run the risk of eroding your assets at an age when you have fewer opportunities to recoup your losses.

    The primary goal of diversification is not to maximize returns. Its primary goal is to limit the impact of volatility on a portfolio and help you sleep better.

    I would definitely not trade my good night’s sleep for any amount of returns. Would you?

    How to diversify?

    Financial advisors can make it complicated but at its root, it is the simple idea of spreading your portfolio across several asset classes like equity, mutual funds, debt etc.

    Even within those asset classes, you should diversify within sub-classes.

    Talking about equity, you can diversify by purchasing assets of companies in different industries.

    For debt, you can diversify between bank deposits, corporate bonds, government securities etc.

    How diversification can help reduce the impact of market volatility

    A study in the USA is a good example on the benefits of diversification. Look at the charts below, which depict hypothetical portfolios with different asset allocations.

    The average annual return for each portfolio from 1926 through 2015, including reinvested dividends and other earnings, is noted, as are the best and worst 20-year returns.

    The most aggressive portfolio shown comprises 60% domestic stocks, 25% international stocks, and 15% bonds: it had an average annual return of 9.65%. Its best 12-month return was 136%, while its worst 12-month return would have lost nearly 61%. That’s probably too much volatility for most investors to endure.

    Changing the asset allocation slightly, however, tightened the range of those swings without giving up too much in the way of long-term performance. For instance, a portfolio with an allocation of 49% domestic stocks, 21% international stocks, 25% bonds, and 5% short-term investments would have generated average annual returns of almost 9% over the same period, albeit with a narrower range of extremes on the high and low end.

    As you can see when looking at the other asset allocations, adding more fixed income investments to a portfolio will slightly reduce one’s expectations for long-term returns, but may significantly reduce the impact of market volatility. This is a trade-off many investors feel is worthwhile, particularly as they get older and more risk-averse.

    Regardless of your goal, your time horizon, or your risk tolerance, a diversified portfolio is the foundation of any smart investment strategy.

    History is witness to this fact.

    Thank you for reading.

    Feel free to reach out in case of any questions.