Is buying a car an investment or a liability?

March is the month when the last instalment of advance tax becomes due. Many professionals try to maximise their tax benefits by buying capital assets to avail of depreciation benefits. That is one reason for high demand for 2-wheelers and 4-wheelers in March.

For salaried employees, March is also the month when last minute investments are made by many to avail of tax benefits. Is March a good month to buy a car? In this month's guest post, Nishit explains when and how to go about buying a car to maximise benefits. 

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We talk about investing and preserving wealth.  Buying a car is a necessity for many of us. Is it an investment or a liability?

The value of a car keeps decreasing with every passing day. The minute it is driven out of the car showroom a 10% depreciation happens. So, how does one maximise a depreciating asset?

The trick is to go for the right car at the right time. If one is buying a car with a time horizon of 5-6 years, then which month of the year a car is bought is immaterial. December constitutes the best month for a discerning buyer because of low demand.

April is also a lean month for car sales. Why is this so? Most of the buyers who file income tax returns as professionals (they constitute a major chunk of the car buyers), buy a car in the month of March to avail of depreciation benefits.

The pent-up demand peaks in March thanks to this tax benefit, and also because people tend to wait for tax policy after the budget In February. One can, therefore, get good discounts in April.

Next, what one needs to evaluate is the likely usage. For example if you are going to drive around 750-1000 kilometres in a month, you are better off with a petrol car. This is because the running cost with a mileage of 12 km comes to around Rs 6 a kilometer, whereas for a Diesel variant of same car it will be around Rs 4. Diesel cars are priced at least Rs 1.50 lakhs more than petrol cars of same make. So, your breakeven point is 50000 kms and 5 years by which time you will probably change your car anyway. Also, the Rs 1.50 lakhs saved can be invested and the profits used to pay for the petrol bills.

Another option, especially with Maruti cars, is to go for the Duo option where one gets a CNG tank in addition to a Petrol tank. The cost per kilometer is very low - about Rs 1.50–2.

The next option is whether one pays the entire amount in cash or takes a loan for the car. A full cash payment often entitles one to a bigger discount from the car dealer.

Also, there are a certain car models which are very good but a bit slow moving. One can always get a higher rate of discount here. If one is going to keep the car for a longer time, the make of the car hardly matters as long as it does not break down often. However, one has to also keep in mind the likely resale value of the car.

So, that in a nutshell is how one can maximize the returns on buying a car. Buy at the right time, at the right price squeezing out maximum discounts from the dealer.

Postscript: I just now read that Tata Motors is offering a guarantee to buy back your Tata Indigo Manza car after 3 years and giving you 60% cash back. This scheme looks interesting in the sense that a sedan usually depreciates 50-60% after 3 years. You are being charged only 40% of the car value.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Why FIIs are not going ga-ga over GAAR

What is GAAR, and why are FIIs so concerned about it? The General Anti-avoidance Rules (GAAR) are being introduced as part of the proposed Direct Tax Code 2010 (DTC 2010). Introduction of DTC 2010 is part of the tax reforms process that is expected to level the playing field for different categories of tax payers, and plug some of the loopholes through which tax revenues are vanishing.

There is a fine line between avoiding taxes and evading taxes. Proper tax planning using permitted provisions in the tax laws can lead to legal avoidance of taxes. Holding equity shares of companies for more than a year before selling them for a profit to avoid paying capital gains tax, or selling a piece of land and investing the proceeds in Capital Gains tax bonds are examples of legal tax avoidance. GAAR provisions will not apply to such transactions.

Blatant tax evasion - by hiding income from tax authorities or not paying adequate amount of excise duty by bribing excise inspectors or mis-labelling finished products as manufacturing waste - is punishable under current laws. GAAR provisions are not meant for such instances either.

GAAR is likely to prevent ‘aggressive’ tax avoidance measures that entail transactions which can not be classified as ‘normal business transactions’. In other words, if a transaction is entered into solely for the purpose of gaining a tax benefit and that transaction would not normally occur as part of the day-to-day business activities, then the Commissioner of Income Taxes (CIT) may invoke GAAR.

That seems to be a perfectly rational step in tax reforms. There is too much avoidance and too little compliance – as can be observed from the amount of taxes (not) paid by many entrepreneurs and well-known business houses. Also, several countries already have GAAR. So, why are FIIs so concerned about GAAR in India?

It is mainly because of the ambiguity in the provisions that may allow tax authorities to treat all tax planning efforts as something devious and slap penalties by attributing motives where none may exist. The onus is on the tax payer to first pay and then prove his innocence. Even after proving his innocence, he has to pay a bribe to get a refund. A murderer or rapist is considered innocent unless he is proven guilty!

More than the CIT’s power in invoking GAAR, FIIs are concerned about the retrospective application of GAAR. Tax cases that have already been decided in a tax payer’s favour or have become time-barred under present tax laws, can become subject to GAAR.

Last, but not the least, is the concern that transactions routed through Mauritius, with whom India has a Double Taxation Avoidance treaty, can become taxable under GAAR. Country to country treaties are covered under the Vienna Convention worldwide, and application of GAAR may violate the treaty. The treaty may need to be amended before application of GAAR.

The Finance Ministry have met a few times with different FIIs to explain that only ‘Post Office Box Number’ type Mauritius entities will be affected, and not genuine FIIs with a real business presence in that island country. But without any clear cut written law, FIIs are unsure whether they will be called upon to pay huge amounts of back taxes. This is one of the main reasons that FIIs had turned net sellers in April.

Hopefully, in the forthcoming session in Parliament the GAAR provisions will become law with the FII concerns clearly addressed. That would be a positive trigger for the stock markets.

(Note: I’m not a tax expert. The views are based on my understanding of the current situation.)

Is it worth investing in tax-saving bonds?

To reap the benefits of high interest rates prevailing in the market, many investors have been booking profits in the stock market and parking the proceeds in bank fixed deposits (FD). But the interest received from bank FDs is taxable. It is that time of year when advance taxes need to be paid. Shouldn’t investors be looking at saving taxes by investing in infrastructure bonds and tax-saving bonds?

In this month’s guest post, Nishit explains the basic difference between infrastructure bonds and tax-saving bonds, and recommends that investment in tax-savings bonds is definitely worth considering seriously.

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Tax-saving bonds are the flavour of the month. Let us try and ascertain if they are worth buying. Earlier in the year, Infrastructure Bonds were introduced. Some of those bond issues are still open. How are the current tax-saving bonds different from the Infrastructure Bonds?

For starters, to avail tax breaks in the infra bonds, the limit up to which one could invest was Rs 20,000. This Rs 20,000 would be deducted from your taxable income for the year. This would save about Rs 6,180 in the highest tax bracket. The interests from these bonds are not tax free and would be added to one’s taxable income in subsequent years. The interest rates offered were in the rage of 8-8.25% per annum.

The tax-savings bonds being offered now are of a different type. In these bonds, a retail investor can invest Rs 1 lakh for a period of 10-15 years. These bonds are offered by various government undertakings like REC, NHAI, PFC and are hence safe investments. The bonds offer tax free returns as the interest is not taxable. The interest rates are about 7.93% to 8.32%. This means if Rs 1 lakh is invested, then upto Rs 8,130 interest which one gets annually is not taxed. Over a period of 10 years, this amounts Rs 81,300 which is not taxed. To get equivalent returns from a taxable bank FD, the interest rate one should get is about 11.5%. There is no bank FD which falls under the ‘safe category’ offering such returns.

The REC issue is due to get closed on the 12^th of March, 2012 and one can definitely look at further similar issues hitting the markets. The benefit of such issues over the infrastructure bonds is that one can save a much larger amount of tax.

Details of REC issue as below:

There is another tax free bond in the market! REC or Rural Electrification Corp. Ltd. is going to raise Rs 3,000 Crore by selling tax free secured redeemable non-convertible bonds . The subscription will open on March 6 and close on March 12 , 2012. While it is being sold that the interest on the bond will be tax free, it is important that subscribers should know other aspect of this tax free bond issue.

Credit Rating : “CRISIL AAA/Stable” by CRISIL, “CARE AAA” by CARE, “ICRA AAA” by ICRA & “Fitch AAA (Ind)” by FITCH.

The Company has confirmed the following interest rates:

Tenure of the bonds	Other than Category III investors (i.e. QIBs & Corporates and Individuals/HUFs investing > 1,00,000)	Category III investors (Individuals and/or HUF investing upto Rs. 1,00,000/- in the issue)
10 years	7.93%	8.13%
15 years	8.12%	8.32%

Individual/HUF limit reduced due to a notification dated February 14 issued by Central Board of Direct Taxes (CBDT) clearing the issue has said that “any individual investing over Rs 1 lakh will be classified as high net worth individual (HNIs)”.

• Bucket size: The issue size would be Rs. 3000 Crores (shelf limit)
• Minimum Application: Rs 5000/-(5 Bonds of Rs 1000/-) and in multiple of Rs 1000/-
• Issuance Mode - Demat only
• Listing at BSE only
• Interest Payment – Annually
• Allotment on first come first served basis.
• Interest on the refund money will be at rate of 5% p.a.

Category of investors	Bucket size
Category I (includes QIBs and Corporate)	50%( 1500 Cr)
Category II (Individuals/HUFs investing > 1,00,000)	25% (750 Cr)
Category III (Individuals/HUFs investing < 1,00,000)	25% (750 Cr)

Tax Benefits:

1. The income by way of interest on these Bonds shall not form part of total income as per provisions under section 10(15)(iv)(h) of I.T. Act, 1961;
2. There shall be no deduction of tax at source from the interest, which accrues to the bondholders;
3. As per provisions under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition;
4. Wealth Tax is not levied on investment in Bond under section 2(ea) of the Wealth-tax Act, 1957.

Note: The investment limit for Category III investors has been increased from Rs 1 Lakh to Rs 5 Lakhs.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Should you invest in Infrastructure Bonds? – a guest post

Have you started investing regularly to avail of the various income tax benefits, or are you like most investors who leave their tax saving investments till the third week of March every year?

In this month’s guest post, Nishit suggests a tax saving investment that is not that well-known or well-publicised, but can provide quite decent returns.

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Diwali is just a week away. Many of us will be getting Diwali bonuses. What do we do with the money instead of blowing it up? Tax season is still 6 months away but it pays to plan early. There is an interesting Infrastructure Bonds issue of which not much is known about. Organisations like IFCI, LIC, REC, IDFC, IIFCL, SBI, ICICI, L&T have been allowed to issue these bonds.

This is the second year when the Government has permitted investment in Infrastructure Bonds of specified companies with tax benefits, subject to a tax exemption ceiling of Rs 20,000. This comes under Section 80 CCF, over and above the Rs 100,000 that can be tax exempt under section 80C. The bonds have a face value of Rs 5000, and can be bought by resident Indians and HUFs.

Power Finance Corporation has come out with a bonds issue with tenures of 10 years and 15 years. These bonds have a lock-in period of 5 years after which you can sell them on the Bombay Stock Exchange, where they will be listed in demat form. There is an option to hold the bonds in physical form too.

The 10 year bonds have a coupon rate of 8.5%, with two options of interest payments - either Annual or Cumulative. The 15 year bonds come with a coupon rate of 8.75% and with same two options as the 10 year bonds. The interest income on the bonds is taxable (under ‘Income from Other Sources’) but no TDS will be deducted.

Now, should one invest in them?

Assuming one holds them for 5 years, and gets a one-time tax benefit of Rs 6,180 in the highest tax bracket, a simple back of the envelope calculation shows one effectively saves Rs 1,236 per year. That works out to a ‘yield’ of 6.18% in addition to the coupon rate of 8.75% for a 15 years bond, which is equivalent to a pre-tax return of nearly 15%.

The above calculation assumes that one exits after 5 years and gets a similar tax break. The yield could be higher or lower depending on your tax bracket. Of course, one could continue holding till maturity of 10 or 15 years.

The bonds are secured against the immovable property of the company and PFC is a government Navratna - thus making it a very a safe investment. Whichever way one looks at it, PFC’s Infrastructure Bonds are a good investment because of the AAA rating, tax benefits, and the decent rate of interest. The bonds are open for subscription till Nov 4, 2011.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)