Apply compounding to your life – Secret of creating a great financial life

To create wealth, you have to first get in touch with the power of compounding. I am not just talking about the mathematical concept here, but making the “compounding” your way of life. You will understand what I am talking about as you move forward.

Today’s write-up is close to my heart.

It is not just an article, it is about someone experiencing breakthrough in his overall life. I thought of sharing some of the conversations we exchanged with one of our clients, because there is something important to learn from it and it has the power to strengthen your journey as an investor.

Power of Compounding in your life

What happens if you just improve by 1%?

Nothing !

Yes, nothing will happen to you if you improve your skills, attitude, salary, net worth, relationship by 1%, but when you improve it constantly by a small margin for a very long time? What happens if you do that for 365 days?

Then?

Here is what happens!

You bring a drastic change in any area because you are allowing the compounding to work there. See the image below …

Let me share an incident with a client where he emailed me about himself and how he wanted to improve. Below is the conversation. Please go through the full conversation till end.

Here is the first email, which hit my mailbox

Dear Nandish,

I am one of your financial planning clients and I would like you to coach me in the area of money. I am a competent person, have a solid work experience and also earn decent money each month but still my financial life is a mess”. Can you please help me find the solution to my problem?

I tried hard to get the answer but failed to crack this issue.

Thanks

XXXXXXX

And here was my Reply

Dear Client,

Thanks for writing to me and for showing trust in me. I may not have a readymade solution for your problem but I can surely help you to see your situation under a different light.

Before I suggest you anything I have a simple question to ask:

Question: Tell me how many areas in your life you have you been consistent with from last 5-10 years time?

In Service,

Nandish

To this the client replies back …

Dear Nandish,

I really can’t figure out any such area from my life where I have been consistent from last 5 – 7 years.

Let me know what I need to do now.

XXXXX

My Reply

Dear Client,

I invite you to look into your life and check for yourself, maybe what is missing in your life is the power of compounding, compounding as a way of life and not just mere as a concept. The majority of people know compounding only as a concept. There are very few who experience the real power of it.

The Situation you are into may sound like a mystery to you but in reality it is not.

Now, getting this insight is not enough and so I have an assignment for you for the Next 1 year.

Assignment:

If you really want to experience the power of compounding you will have to take-up 3 more areas along with the area of money. Compounding is all about expanding your capacity as a person and so it is important to pick some more areas. Pick any four areas in your life which are new to you and engaging with them will help you to practice the power of compounding for the Next 1 year.

I would like to hear back from your experience exactly after a year from now and not before that.

If you are game for this assignment let me know.

I want you to just not have amazing ideas but also focus on the action part and execute what you are thinking because only that action will bring the compounding into action, Check the image below and you will get what I am trying to say.

Reply from client

Dear Nandish,

Thank you, coach. I am a game for this assignment.

My 4 areas

1. Health: Will join gym and work with my trainer
2. Music: I always wanted to learn Guitar but never started
3. Quit Smoking: I would like to get rid of my smoking habit
4. Money Management: Complete actions as per the plan and start my sip of 25k pm for next 1 year

Thanks, Nandish. Thanks for coaching me and for giving a sense of direction to my life. I will let you know my experience exactly after a year.

Thanks once again. Thanks a lot.

Excited Client

XXXXX

I then received his reply, exactly after a year.

Dear Nandish,

I am one of your most excited and enlightened Financial planning clients, remember you gave me an assignment 1 year back to practice the power of compounding.

Here is the assignment you gave me

Assignment:

If you really want to experience the power of compounding you will have to take-up 3 more areas along with the area of money. Compounding is all about expanding your capacity. Pick any four areas in your life which are new to you and engaging with them will help you to practice power of compounding for the Next 1 year

My Life has completely changed the day I started doing the assignment. I created a journal for all four areas and started to capture my experiences. Before I share about my assignment I just want to say I am extremely happy as an investor and in each and every area of my life.

Here are some of the highlights from each area:

• Health: I joined the gym the very next day and the first thing I did was hired a personal trainer. I shared with him about my assignment and he chalked out a well designed 1-year exercise plan for me. We decided to exercise 5 Days a week along with a specific diet plan. The first month was tough to follow but I slowly daily exercise started to become an integral part of my life. My strength , stamina, and overall fitness have gone to a whole level in last 1 year. I would like to thank you and my personal trainer for getting me started.

• Music: I joined the music school; again the first month was difficult. In the start, I could not even hold the guitar. I was not comfortable with the guitar and even the guitar was not comfortable with me. My Music sir always emphasizes on one word “PRACTICE”. My sir kept reminding me that practice leads to compounding and eventually it leads to mastery. I slowly started playing songs and now music really relaxes me from all the noise out in the world. I am so happy I got connected to music, it has taught me many things in last 1 year.

• Quit Smoking: This was the hardest of the all. Initially, it looked impossible for me to quit smoking but I really wanted to get rid of my smoking habit and I started putting efforts. I decided not to hold the cigarette between my two fingers, no matter what. I also shared about my project with my friends and family members and they really supported me a lot in this area. My commitment to fitness and music also helped me a lot to get rid of my habit. I can now call myself a non-smoker. I am free, completely free from my habit of smoking and it feels great.

• Personal finance: Happy to share all the personal finance actions that you suggested in the plan are complete. I took help of your team and completed all the required actions. I also started my sip as per the commitment I made. Today, my financial life is in sync with my dreams, goals, and aspirations. Thanks to you and your team for all the support and guidance. I realized that personal finance is all about actions; it is not about worrying about future or regretting about the past. I can say in this area things have shifted and things are moving in the right direction. I am happy in the area of money.

Thank you for assigning a wonderful project to me, I keep sharing with my team and other about the power of compounding and I keep getting people coming and sharing their results with me. Thank you for bringing the magic back into my life.

Conclusion

Can you see the real power that resides in the word “compounding”? It is not about how your money grows but how you grow as a person. Pick any 4 areas in your life and start engaging with them. The more you engage, the more you will grow in those areas. Don’t take only one area because one single area takes a back seat very easily.

Now tell me which area you want to improve and start working on improving it by 1% each day or even a week. Watch out this video below to get a more detailed idea on this

Many of you may be new to investing or equities do not get scared try out this assignment and see what happens after 1 year. Make power of compounding your way of life and don’t just know it as a concept. Do share your views in the comment section; most importantly I would like to hear about your 1 year project which will help you to practice power of compounding.

From 1st Oct, Insurance policies will be issued online (even renewal policies)

Starting 1st Oct, 2016, all the insurance policies are going to be issued in electronic form.

Yes, you heard it right

Few years back IRDA had come up with the concept of 13 digit e-Insurance Account (eIA), where an investor had the option to convert their existing physical policies into demat form, but till now it was not mandatory. However now things have changed and starting 1st Oct,2016 it has become compulsory.

Now, every insurance company has to issue all kind of insurance policies in online format. So if you are buying any kind of insurance policies (life, health, motor, pension policies and all kind of general insurance policies too) you need to have an e-Insurance Account (eIA) and the policies will be issued in demat form only in that account.

This will be true even for renewal policies. So even if you are not buying any fresh new policy, at the time of your policy renewal this will apply to you

Under which cases, is this e-insurance account mandatory?

This e-account is required only if the annual premium crosses Rs 10,000 for most of the policies like term plan and health insurance or if the sum assured is above 5-10 lacs. The exact requirement is as follows for various kind of policies (source link)

How to open e-Insurance Account?

Step 1 : Choose the Insurance Repository

There are 5 registered insurance repositories in the country, licensed by IRDA, out of which you need to choose one. These are …

• CAMS Repository Services
• SHCIL Projects Limited
• Central Insurance Repository
• Karvy Insurance Repository
• NSDL Database Management

Note that you can choose any one of them, and there won’t be any difference, other than level of service. At the backend, everything will be same. Also if you are not satisfied with your insurance repository provider service, you can switch to another one later.

Step 2 : Fill up the form and submit the documents

The process now is very simple, once you have decided the repository company, all you need to do is fill up the form and attach your KYC documents and submit it to their office in your city.

CAMSrepository also has an option where you can first fill up the form online and then download the filled form. I think it will work for most of the people and save the time. If you want to fill the form offline, you can download e-insurance account opening form here

Following are the documents you need to submit

1. e-Insurance Account form (fill by hand OR filled online one)
2. Date of Birth Proof (PAN , Passport, Voter Id etc)
3. Photocopy of ID proof (PAN or Aadhaar Card)
4. Photocopy of Address proof (Aadhaar, Passport, Electricity or Telephone Bill etc)
5. Cancelled cheque
6. Passport size photograph

Note that the cancelled cheque is required so that the information of the bank account is captured before hand, Any maturity proceeds or claim amount will be paid in this same account. Ideally this should be the same one from where the insurance premium is paid, but not mandatory.

All the major insurance companies like LIC, ICICI, HDFC and others have already joined hands with this facility.

Checkout this short video created by CAMS team

Once you submit the documents, it will just take few days to open the account.

If you need the detailed list of the documents required, you can view this PDF document (2nd page)

The concept of Authorized Representative

A special feature called “Authorized Representative” is introduced in this e-insurance account where an investor can assign someone trustworthy or close to be AI (authorized representative) who will be able to access the details of the account in case of death of the policy holder. This is different than the nominee.

For example, I can give my close friend name and details in AI section ask him to have a look at all my details in case I am dead and ask him to communicate things to my family as per my plan.

Features and Benefits of e-Insurance Account (eIA)

Let me know share some benefits and key points of this e-insurance account and how it will benefit the overall insurance industry as well as the investor, even though it may look like another hassle to you right now

• FREE account – This account will be 100% FREE account for investors, there are no charges or maintenance fees to be paid by anyone. One person will have only a single account (like PAN)
• All policies at one place – This will be the single point of contact for investors to view, download and manage their insurance policies, be it life, health, motor or any travel insurance policy.
• No KYC repetition while buying new policies – After doing the KYC first time, you won’t have to do it again and again when you buy new policies. All you would need to do is mention your eIA number and buy the policy.
• Get reminders – You will get reminders for your policy maturity, payment reminders and any other important updates.
• Single place to update your KYC – IF you want to update your mobile, address or other details, you will just have to update it in e-insurance account and not in each policy individually.

Understand that with this initiative, the insurance companies will simplify their process and a good amount will be saved as there won’t be lot of paperwork involved (printing of documents, courier etc) and that’s why insurance companies will fund this initiative and will keep it FREE for investors.

Converting your existing physical Policy in Electronic form

I know you must be thinking what will happen to my existing policies which I have bought till date? So, there is a simple process to convert them online.

Once you open the e-insurance account, you can apply for conversion of your existing policies into online form (its good that you do it before hand, because at the time of renewal it’s going to happen anyways going forward)

As per Cams repository FAQ point 18, you can just mention your policy number and it will be converted into online format

18. How do I convert my existing paper policy into electronic form?

If you already have eInsurance account, log in to your eInsurance account, click on “ePolicy conversion” and enter your policy number, name of Insurance company that needs to be converted into ePolicy. In the next few days, your policy will be converted into ePolicy.

How to withdraw your PPF account money anywhere in India? Here is the Process

Today I am going to share very interesting and rare information related to PPF with you all.

Have you ever wondered how can one withdraw their PPF money without visiting the base branch (from where PPF was opened)? A lot of people open PPF account in one city and then move to another city. It’s really a headache to travel to another city just for the sake of closing the PPF account or withdrawing the money either at maturity or partially.

I tried to see if this is problem which PPF holders face, and I found that a lot of people search for “Can I withdraw PPF from any SBI branch”? Which means that this is widespread query and I decided to write on this.

There are many articles and people on internet who will tell you that you need to visit the base branch only to withdraw or close your PPF account, but recently I figured out that its not true and there is a process using which you can close or withdraw PPF money from any city without visiting the base branch where you opened the PPF account.

I want to share with you today that its a big myth and its actually POSSIBLE.

Few days back, I got in touch with Priyesh Sampat, Legacy & Succession Counsellor from Mumbai, who has handled hundred of PPF related cases in past. He shared with me how is it possible to withdraw money from PPF account without visiting the original branch and he has seen it work in real life for his old clients.

He was very helpful and shared many insights and his experience on this topic. I thank him for that.

Steps to withdraw from your PPF account from a different city

Before I share the steps for PPF withdrawal from a different city, I want to mention that the steps below is applicable when you have your PPF account with SBI or some other public bank like PNB, Vijaya Bank etc.

The steps below will not work in case you have PPF with Post office, in which case you first have to transfer your PPF from post office to SBI bank and then you can take the following steps.

Step #1 – Arrange your KYC documents

The first step is to make sure you arrange all your KYC documents like

• Form C – For PPF withdrawal
• Cancelled Cheque – The account in which you want to money to be credited
• Your Identity & Address Proof
• Your PPF passbook (incase it is available with you)

Do not sign these documents at the moment, because these need to be signed in presence of the bank officials. You can download PPF form C here

Step #2 – Go to a local branch of the bank

The next step is to visit the local bank branch of the city where you reside or are present and talk to the staff there. Tell them that you want to withdraw your PPF, but its base branch is in some other city, so you want them to attest the documents.

They will ask you to sign on the documents in your presence and might also put their signature or seal on the documents confirming that your attestation is complete. Also request the attesting banker to mention his/her name and signature code issued by RBI. This is make the attestation complete in all regards.

Step #3 – Send documents to Main Branch using Speed/Registered post

Once the bank staff completes your verification and attestation, it might happen that they keep the documents and tell you that they will themselves send the documents to the main branch, in which case take an acknowledgement from them which has their signature and seal, so that you have the proof that you gave the documents to local branch.

Otherwise, you yourself will have to send the documents to the base branch where you opened your PPF account by speed post or registered post.

It’s important that you use speed/registered post so that you have a confirmation when the documents are delivered. Also as post office is a govt organization, you have all the records and you can also find out information using RTI later.

Step #4 – Get PPF money credited in your account by NEFT/RTGS

Once the original branch gets your documents, they will process them and credit back your PPF maturity amount by NEFT/RTGS.

In earlier days the banks used to hand over the Pay orders or DD which was supposed to be received by a person, but now with NEFT/RTGS facility the money is transferred electronically.

So the process for PPF withdrawal is very simple as explained above, but let us see some finer details or cases now

Can I use the same process mentioned above incase of partial withdrawal?

The answer is YES . The above process is not just for the PPF withdrawal at maturity, but even in case of partial PPF withdrawal after completion of 7 yrs.

I have PPF in Post office, how can I withdraw?

As I mentioned above, the above process will work only in case you have your PPF with a PSU bank, so the first step is to transfer your PPF account from Post office to the PSU bank. The steps are already mentioned in this article . Read the comments where many people have shared how they successfully transferred their PPF accounts to PSU banks.

I am an NRI, how can I withdraw my PPF account from outside India?

If you are an NRI, first thing you should know that that you cannot extend your PPF account after it matures in 15 yrs period. I am sure most of the NRI’s keep travelling to India every year or once in a while if not every year. So whenever you visit India next time, you can follow the same process which is given above.

However, if you still want to try withdrawing your PPF from abroad, let me share you the process which is not guaranteed to work always, but it’s already tried by Priyesh on one of her NRI clients and it worked for them.

The process for PPF withdrawal by NRI

Basically the PSU bank can only process your PPF withdrawal request if your signature are attested by an authority, which can be the PSU bank itself (which will need your presence) or some other authority.

If an NRI has an NRE/NRO account in a bank (a good bank balance or relationship with bank will be a plus), then they can follow this process

• Courier the documents to India in the city where you have the NRE/NRO account. Make sure you send these documents to a person (relative, parents, siblings etc or friends)
• Give an authority letter mentioning that you are allowing the person to follow this process on your behalf
• Ask the person to go to the bank where you have NRE/NRO account and ask them to attest these documents (mainly the signature part) . At this step you can expect the friction, because this is not a standard process.
• Once the attestation is done, then you can ask your person to visit the PSU bank for PPF withdrawal and they might accept these documents which are attested by your bank.

Note that Priyesh has done the same steps for one of her NRI client and it worked because the NRI was giving a very good premium each year to the bank and bank was more than happy to “help” the client 

Why can’t you withdraw PPF from any branch?

Truly speaking I have no answer for that.

I know that with the advancement of technology, the PPF withdrawal process should be smoother now and it should be possible with a button of click, but as of now it’s not the reality.

A lot of people still wait to travel to their base branch city where they opened their PPF and follow the process. However many investors never withdraw their PPF because they are not clear if it’s possible or not.

It was my attempt to bring this process in notice of yours so that you can at least try this and see if it works. If someone has done something different and successfully withdrawn their PPF from a different city, please share that with me in comment section and we will add it in the main article.

Demonetisation: 5 things to learn about managing personal finances.

Demonetisation: 5 things to learn about managing personal finances.

Though the exercise is unlikely to be repeated any time soon, demonetisation offers some takeaways that should form the cornerstone of your financial strategy. 

1. Don’t wait for a crunch to budget or spend wisely 

The first takeaway from demonetisation is also the mainstay of every financial plan: save and spend according to a budget. During the current crisis, people have been forced to first take care of their critical expenses, investments and bills, before considering discretionary expenses, while entertainment and frivolous purchases have been completely done away with. The restricted inflow of cash means that saving has become a priority, as does sticking to a tight budget. While one need not curtail one’s finances to such an extreme in the normal course, it is this forced discipline of budgeting and prioritising one’s spending that will help you reach your financial goals with ease. So have a healthy dose of discretionary expenses, but not befo re you have saved and invested. 

2. Don’t hold too much cash; invest it 
If you’ve been stashing money at home to fend off an emergency, rethink the strategy. Cash does offer flexibility and you should have 3-6 months’ worth of expenses at hand. But even this amount should be invested in short-term debt funds, liquid funds or sweep-in savings accounts linked to fixed deposits. If, however, you have a copious amount lying idle, know that you are eroding its purc hasing power. The money is not growing and inflation will allow you to buy fewer things with the same amount some years down the line. Besides, you are forgoing the high returns you could have earned by investing it in, say, equity, for long-term goals. Also try to make most transactions cashless and retain only a small amount of cash at home. 

3. Don’t change asset allocation in a panic 
Panic is virtually a default reaction in times of financial crises or une xpected developments like demonetisation. Though Indian investors have wisened up since the 2008 economic crisis, many are still rushing to the security of gold and debt after the 8 November announcement. This is yet another opportunity to remember that asset allocation should be changed only in line with your age, short- and long-term needs, risk appetite and proximity to life’s goals. While one should rebalance from time to time to retain the desired asset allocation, do not take erratic decis ions and risk your investments by reacting to short-term aberrations. 

4. Keep pace with tech to handle your finances 
It pays to keep pace with technology. Literally, as demonetisation has proved. Though banks and other institutions have been pushing online and mobile transactions for a few years now, demonetisation may prove to be the inflection point. Even as people are rushing to download mobile wallets and register for Net banking and online transactions the clear learning is that it is critical to keep track of the latest tech upgrades. The people who were already paying their bills via Net banking or mobile wallets, and using credit cards, did not suffer as much as those who weren’t. It’s high time then to shift to mobile banking, downloading apps for financial transactions, and learning about online transfer of funds. It will not only increase your ease of transactions, but also cut down on time and help save money. 

5. Buy your kid a piggy bank, give pocket money 
The final takeaway from demonetisation is to provide your child a piggy bank and a regular supply of pocket money. The children who already have these proved to be a boon for their parents during the current crisis, with lower currency and loose change helping tide over the difficult time. The learning, however, is not to rely on this stash as a contingency fund since these minuscule savings are unlikely to help you during a bigger financial crisis. On the other hand, the habits of regular saving, discrete spending, making their own purchases and focused saving for small goals will inculcate financial discipline in kids. They are not only likely to manage their finances better as adults but also handle crises with greater equanimity. 

How to declare unaccounted money under the new Garib Kalyan Yojana and the watch-outs

Declaring unaccounted income under the new Pradhan Mantri Garib Kalyan Yojana will be a 3-step process going by what is mentioned in the Taxation Laws (second amendment) Bill 2016 . What's more, it's not applicable for money made from illegal activities and hiding facts may lead to loss of benefits and tax paid under the scheme. 

Steps to avail the Pradhan Mantri Garib Kalyan Yojana: 

i. Declaration can be about cash or deposits 

The declaration under the scheme can be made regarding unaccounted cash or deposits held with RBI, any bank (as defined in the scheme), head post office or sub post office or any other entity which may be notified for this purpose by the government. 

Obviously, a person with black money wanting to avail the scheme will not continue holding the money as cash because the demonetised notes are of no value unlessdeposited in a bank/post office. Consequently, the person will end up having to deposit the cash in a bank or post office and then avail the scheme for the deposit. 

ii. Pay taxes and make the deposit 

The person will have to pay 30% tax on income, 33% surcharge on tax, 10% penalty on income (as per the scheme rules) totalling to nearly 50% of the income to be declared under the scheme. The person would also have to comply with the other rules of the scheme such as depositing 25% of the amount to be declared, in the Pradhan Mantri Garib Kalyan Deposit Scheme 2016. This deposit would be without interest and be blocked for four years. 

iii. Make the declaration along with payment, deposit proof 

After depositing all the above at (ii) the person has to declare the income through a declaration to the Principal Commissioner or the Commissioner notified in the Official Gazette for this purpose. This declaration will have to be filed in a form and verified as prescribed by the government. 

The declaration of the income will have to be accompanied by the proof of deposit of the tax, surcharge and penalty as well as the interest-free deposit of 25% of income under the scheme. 

Further, the amount of undisclosed income declared under this scheme shall not be included in the total income of the declarant for any assessment year under the Income-Tax Act. This means that once a declaration is made under this scheme then this income cannot be called into question again subject to the other rules of this scheme. 

Watch Outs 

i. Scheme not available for income from illegal activities 

This scheme is not available to persons involved in or indicted in the specified manner in any illegal activity as covered under the following Acts: 

The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; 

Chapter IX or Chapter XVII of the Indian Penal Code; 

The Narcotic Drugs and Psychotropic Substances Act, 1985; 

The Unlawful Activities (Prevention) Act, 1967; 

The Prevention of Corruption Act, 1988; 

The Prohibition of Benami Property Transactions Act, 1988 and the Prevention of Money-Laundering Act, 2002; 

Any person notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992; 

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. 

ii. If facts are hidden then benefit of scheme & tax paid are lost 

If the declaration is made by misrepresenting or suppressing facts then not only will the declaration be void but the tax etc paid will also not be refunded. As per the amendment bill, if the declaration is made by misrepresenting or suppressing facts or without paying tax, surcharge, penalty or without depositing the amount in the Deposit Scheme as per rules, such declaration shall be void and shall be deemed never to have been made under the Garib Kalyan Scheme. Importantly, any tax and surcharge paid under this scheme shall not be refundable. 

iii. Other proceeding regarding income disclosed will end 

Once certain income has been declared under this scheme then the declarant will not be allowed to continue or file any appeals regarding any other assessments regarding the same income. Also, the person cannot claim any tax-related set offs or reliefs in relation to this income. 

Proposed black money tax changes decoded: What you need to know

Proposed black money tax changes decoded: What you need to know 

With the introduction of an Income Tax Amendment bill in Parliament today, the government has proposed a new income disclosure scheme under the name of the Pradhan Mantri Garib Kalyan Yojana 2016 and simultaneously proposed plugging certain loopholes in the Income Tax Act which could have been exploited by black money holders. The government has offered the carrot – the least tax option of the Garib Kalyan Yojana – and shown the stick and closed the loopholes: the hiked tax and penalties under Sections 115BBE and Section 271AAC and Section 271AAB. 

If unaccounted income is declared under the Garib Kalyan Yojana, then the concerned person pays 30% tax on the income so disclosed plus 33% surcharge on the tax paid plus 10% of the income disclosed as penalty taking the total tax incidence to about 50%. Additionally, 25% of the disclosed income will have to be compulsorily placed in interest-free deposit scheme for four years. Refer table below. 

Further, the income tax amendment bill also proposes to plug certain loopholes in the IT Act which may have been exploited by black money holders. As per tax experts, those depositing unexplained cash in their bank accounts post demonetisation could have tried to pass off that as income of the current financial year i.e. FY2016-17 and pay tax at the normal applicable slab rate which would be 30% in most cases plus the applicable surcharge (on income over Rs 1 crore) and 3% cess 

However, this bill proposes to amend Section 115BBE to plug this loophole, says Sonu Iyer, Tax Partner and People Advisory Services Leader, EY. As per the proposed amendment, with effect from 1.4.2016 in case of unexplained cash/assets/investments etc a 60% tax plus 25% surcharge (of the tax payable) will be levied – totalling to 75% tax approx. Additionally, 10% of this tax would also be leviable as penalty under section 271AAC if undisclosed income is not offered in return by taxpayer and detected by Tax authority subsequently. 

Tax and penalty Provisions for search and seizure have also been made stricter by amending Section 271AAB. In case, unexplained assets/cash is found with you during a search and seizure raid then apart from the tax and surcharge under the amended Section 115BBE, penalty under section 271AAB will also be levied. This means that in case a person holding black money does not declare it on his/her own and instead the unaccounted money is found during a raid then a penalty of 30% of income will be le vied. This means that in case a person holding black money does not declare it on his/her own and instead the unaccounted money is found during a raid then a penalty of 30% of income will be levied if the concerned person admits the tax evasion at the time of the raid and in any other case (if he does not admit at that time) the penalty would be 60% of the unaccounted income, says Iyer. 

Here’s how the proposed tax changes would impact tax payable on disclosure of say Rs 5 lakh unaccounted income, as per Iyer of E&Y. 

Provisions for taxation & penalty of unexplained credit, investment, cash and other assets 

TAX (Section 115BBE) 
Flat rate of tax @60% + surcharge @25% of tax (i.e. 15% of such income) + cess @ 3% of tax & surcharge. So total incidence of tax is 77.25% approx. 

(No expense, deductions, set-off is allowed) 
Example: If Rs 5 lakh is the unexplained credit, investment, cash and other assets, 60% tax is Rs 3 lakh plus Rs 75,000 plus cess @ 3% of tax & surcharge Rs. 11250 which is equal to Rs 3,86,250 lakh i.e. 77.25% of unexplained credit, investment, cash and other assets 

PENALTY (Section 271AAC) 
If Assessing Officer determines income referred to in section 115BBE, penalty @10% of tax payable in addition to tax (including surcharge) of 77.25%. 
Example: In addition to Rs 386250 lakh, Rs 30,000 is to be paid. 
Total tax plus penalty: Rs 4,16,250/-. This comes to 83.25% of the total unaccounted income disclosed. 

Penalty for search/seizure cases 

Penalty (271AAB) 

(i) 30% of income, if admitted, returned and taxes are paid 

(ii) 60% of income in any other case 

Example: Say, income undisclosed and thus seized or searched is Rs 5 lakh. 

(i)30% of Rs 5 lakh i.e. Rs 1.5 lakh 

(ii) 60% of Rs 5 lakh i.e. Rs 3 lakh 

Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) 

Undisclosed income in the form of cash & bank deposit can be declared: 

(A) Tax, Surcharge, Penalty payable 

Tax @30% of income declared 
Surcharge @33% of tax 
Penalty @10% of income declared 
Total @50% of income (approx.) 

There is no cess applicable in case of the Garib Kalyan Yojana, Iyer adds. 

(B) Deposit 

25% of declared income to be deposited in interest 
free Deposit Scheme for four years 

Example: Say, income undisclosed is Rs 5 lakh 

A.Tax will be 1.5 lakh, surcharge of Rs 49,500, penalty will be Rs 50,000. Total is Rs 2,49,500 i.e. nearly 50% of undisclosed income. 
B. Over and above A.; Rs 1.25 lakh will be locked in for 4 years without accruing any interest. 

Total tax & penalty payable: Rs 2,49,500 

Sudhir Kapadia, National Tax Leader, EY India says “ There has been much speculation about the abilities of some unscrupulous taxpayers to find silver lining in the ongoing demonetisation of high denomination notes to wash black money into white at the standard normal marginal rates of income tax(30% plus surcharges and cess) without attracting any penalties. This would have been possible under the recently amended general penalty provisions where under for under-reported income, a penalty of 50% of tax was prescribed and for mis-reported income, a penalty of 200% of tax was prescribed. The concern was that if a taxpayer were to voluntarily declare unaccounted income in the ongoing fiscal year and include such unaccounted income as “ unexplained” income in the tax return for the year, there may not arise any penalties as there would be no question of under-reporting or mis-reporting. This is now sought to be decisively curbed by imposition of an effective tax cost of 75 %(tax plus penalties) going up t o 82.5%( if Tax Officer determines such unexplained income). On the other hand, a special disclosure regime(PMGKY) has been announced where under undisclosed cash and bank deposits, if voluntarily declared, would result in a total tax burden(including penalties) of 50% plus a requirement to deposit 25% of declared income as interest free for four years. It is expected that considerable amounts of unaccounted cash and bank deposits will come under this alternative PMGKY scheme as the base case outcome of 75%/82.% tax would make the risk of later detection much higher for such taxpayers”. 

Alok Agrawal, Senior Director, Deloitte Haskins & Sells LLP says: It appears that those who choose to declare their unaccounted cash under the Pradhan Mantri Grabi Kalyan Yojana 2016, will have to pay a tax at the rate of 30 per cent of the undisclosed income. Additionally, a 10 per cent penalty will be levied on the undisclosed income and surcharge called PMGK Cess of 10 percent (33 pe r cent of 30 per cent). This tax, surcharge and penalty would aggregate to 50 percent of the relevant amount. It is interesting to note that under the Income Declaration scheme, the declarant was required to pay an aggregate tax, surcharge and penalty of 45 percent of the undisclosed income. 

He further says: It is also understood that the law will be amended to provide for a flat 60 per cent tax plus a surcharge of 25 per cent of tax (15 per cent), i.e. an aggregate tax of 75 per cent for the ones who do not declare under the PMGKY but whose income is assessed by the Revenue authorities. However, the assessing officer may decide to charge a 10 per cent penalty in addition to the 75 per cent tax. Also, if the current provisions of penalty on under-reporting of income at 50 per cent of the tax, and misreporting (200 per cent of tax) which were introduced in the 2016 Budget will remain and no changes are being made to them, one would need to examine the fine print to see the situations that fall under these provisions as compared to the ones liable to the 75% tax-cum-surcharge and 10 percent penalty. 

Should you invest in ESPP plan? Here are 2 critical points everyone should know

Today we will talk about various aspects of ESPP Plan? We will also see if it really makes sense to invest in your employers ESPP plan or not, and what are the pros and cons of that.

For those who have no idea about ESPP, its full form is Employee Stock Purchase Plans and It’s mainly an offer from your employer to buy the stocks of the company at some discounted price.

How does ESPP Plan look like?

Let me give you a rough idea of how an ESPP plan looks like. Under this plan, your employer might offer the discount of 15% of the stock price, and you can contribute some part of your salary for purchase of ESPP.

This might run for 3 or 6 months and then at the end of the period, all the money which you have paid, will be used to purchase the stocks at a discounted price (It might be the current market value or the lowest of the period, it all depends on your companies offer plan)

• So you get the stock at a discounted value
• You invest the money for X number of months
• The stocks are purchased at the end of 3/6 months period
• You get the stocks on your name

Is ESPP Plan worth?

Now let’s come to the main point. Is investing in ESPP plan worth? Should you do it? Is there any catch?

Below is an example of Salesforce ESPP plan, where they are offering 15% discount and the offering tenure is 12 months (employee will pay for 12 months), while the purchase will happen every 6 months.

Now the main question is – “IS IT WORTH?”

and the Answer is ALMOST ALL THE TIMES.

Yes, most of the times, it makes sense to invest in ESPP plan because you get the stocks at a good discount and if you sell it off after they are allotted to you, you will make a good enough profit (15-20%) in most of the cases, unless things go really bad.

In some cases, you might want to think hard before you invest in ESPP plan offered by your employer.

Point #1 – At the end of the day, you are buying a Stock

ESPP is nothing but a plan where you buy a STOCK. Hence the price of the stock will move up or down. So if the stock does not do well, you will not be able to make good profit and your hard earned money will not give you the desired returns.

Imagine a stock which is on decline or not doing well. Your ESPP plan will give you the stock at 15% discount of the lowest price (mostly the latest price) . Not every time, people sell it off immediately, and keep holding it. Now if the stock price does not come above your purchase price and you kept on holding it, you might suffer good amount of loss.

Look at Yahoo, as an example (I worked there for more than 3 yrs). Imagine people who bought ESPP of Yahoo and kept on holding it? Even if they got it for discount, does not mean that they will make profits.

So don’t get emotional and look at your company stock and see if as an outsider. Check out what are the future prospects, Is it promising? Does your company find its place in most of the mutual funds portfolio?

Point #2 – Your Income and Profits come from same company

You earn your income from your company, and now your portfolio is also linked to same company. If the company is doing very well, your income will rise and so will your portfolio value. But what happens if things go bad?

• What happened to Satyam?
• What happened to Enron?
• What happened to Yahoo?

If someone worked in companies above, they lost their jobs. And at the same time, their stock prices were either worthless or reached the lowest value and they suffered huge losses. The snapshot below was taken from this website, which talks about Enron collapse.

The point is, when you invest in an ESPP plan, all your eggs are in same basket. If things work out and your company does well (Google, Facebook), you will enjoy the benefits of promotions, income rise and your stocks value rise, but in the other case, it will be the opposite and it’s not going to be the best situation.

Conclusion

At the end, you need to ask yourself about the prospects of your current company where you work? Do you think it’s going to be great in coming times? If Yes, then not just ESPP, you can even go for ESOP’s and other plans from your employer.