Invest in gold for better & safe returns -Looking out to invest in Gold? Go for paper gold!

Gold has been treasured as a valuable commodity for as long as one can remember. With the shifting sands of time, it has evolved as an important asset class. From barter trade to jewellery investment and now paper gold, the sheen continues and its universal appeal is intact. Gold has proven to be a safe-haven investment option not only because of it being a hedge against inflation but also due to its low correlation with other asset classes such as equity and debt. Gold has provided annualised returns of 19% over the past 10 years vis-à-vis 17% by the S&P CNX Nifty. It has also given positive returns for every calendar year for over a decade. In India, where gold buying is an integral part of social and religious customs, investors now have the option of buying gold in dematerialised or paper form. Paper gold not only offers the convenience of holding the yellow metal in an electronic form with greater price transparency and purity but also negates the risk of storage and theft. Further, with the launch of the CRISIL Gold Index, investors now have a standard benchmark for gold prices in India.
Three paper gold options in India
Gold ETFs - are passively managed mutual funds that invest in standard gold bullion (99.5% purity). Investment in gold ETFs requires opening a demat account with a broker registered with the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). The expense structure for gold ETFs is in the range of 0.5-0.75%.
Check out the performance of Gold ETFs
Gold mutual funds - are fund of funds (FoFs) that invest the corpus in either their own gold ETFs or a foreign gold fund which is the mother fund. Gold mutual funds provide investors the facility of systematic investment plans (SIP) wherein they may invest in gold regularly and avail benefits of rupee cost averaging, i.e. buying more units when prices are low and less units when prices are high. The expense structure for gold FoFs is in the range of 1.5-2.25%.E-gold - is a product launched by the National Spot Exchange Limited (NSEL wherein gold can be purchased in the electronic form in denominations as small as 1 gram and can also be converted into physical gold
Why is gold popular?
Hedge against inflation - Gold has demonstrated its ability to generate returns higher than inflation and thereby acting as a strong hedge
Safe haven investment - Gold is considered as a safe haven asset to invest in times of uncertainty on two counts, one, it has given positive year-on-year returns in the past 11 years and two, other asset classes have been more volatile with equity, debt even giving negative returns in some yars .

Table  1  Performance  of  gold,  equity  and  debt
Asset  Class	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
Gold	4.82	23.27	15.77	0	21.41	21.77	17.15	28.04	20.99	23.44	32.53
Equity	-16.18	3.25	71.9	10.68	36.34	39.83	54.77	-51.79	75.76	17.95	-24.62
Debt	25.25	21.66	11.54	-2.87	5.71	5.01	6.8	23.22	-6.37	6.18	5.05

Calendar year point to point returns Gold returns calculated from LBMA (London Bullion Market Association) prices converted to Indian Rupees
Equity returns calculated for S&P CNX Nifty index, Debt returns calculated for CRISIL Gilt index
Years marked in red indicates bearish phase in equity market
Diversification - Gold as an asset class offers twin benefits: diversifies an investor's portfolio and limits the downside risk in times of uncertainty. As reflected in Table 1, gold has provided the highest returns in four out of the five years in the bear phase indicating the superiority of the asset class in times of equity market turmoil. Further, Table 2 shows seven scenarios of investing across asset classes - equity, debt, gold over a 10-year period. While a singular investment in gold (Portfolio F) has given the highest returns of 19%, it goes against the thumb rule of portfolio diversification. In the composite portfolios, the highest returns of 18% were delivered by quity and gold (Portfolio D). Further, the most diversified Portfolio C (equity + debt + gold) performed better than Portfolio E (equity + debt), which shows adding gold helps earn better returns and reduce downside risks.
 

Portfolio	Asset class	Investment in  2002	10-year Returns	Profit earned	Value in  2012
A	Debt	30,000	7%	27,704	57,704
	Total	30,000	7%	27,704	57,704
B	Debt	15,000	7%	13,852	28,852
	Gold	15,000	19%	67,731	82,731
	Total	30,000	14%	81,583	1,11,583
C	Equity	10,000	17%	36,890	46,890
	Debt	10,000	7%	9,235	19,235
	Gold	10,000	19%	45,154	55,154
	Total	30,000	15%	91,279	1,21,279
D	Equity	15,000	17%	55,335	70,335
	Gold	15,000	19%	67,731	82,731
	Total	30,000	18%	1,23,066	1,53,066
E	Equity	15,000	17%	55,335	70,335
	Debt	15,000	7%	13,852	28,852
	Total	30,000	13%	69,187	99,187
F	Gold	30,000	19%	1,41,416	1,71,416
	Total	30,000	19%	1,41,416	1,71,416
G	Equity	30,000	17%	1,10,670	1,40,670
	Total	30,000	17%	1,10,670	1,40,670

 
Tax implication on various forms of gold investment
Gold ETFs and gold FoFs are subject to long-term capital gain (LTCG) tax of 10% without indexation and 20% with indexation if held for more than a year and taxed as per individual income tax slabs for short-term capital gains (STCG) if held for less than one year. LTCG is taxed at 20% in case of physical gold and E-gold and investors need to hold them for more than three years to qualify for the same. STCG is taxed as per the individual tax slabs if sold within three years. In addition to this, wealth tax of 1% of the market value of the assets exceeding Rs 30 lakh is charged on investment of physical gold and E-gold.
Conclusion
Gold as an asset class plays a very important role in an investor's portfolio as it not only provides stability to returns but also gives an opportunity to maximise wealth over a longer time frame. Further, moving from purchasing physical gold to buying gold in paper form through mutual funds has its own advantages of transparency in pricing, purity, convenience as well as no storage risk. However, in the short term, gold prices can be volatile due to demand-supply concerns and economic conditions owing to which investors need to adopt SIPs over longer time frames of five years and beyond. The percentage allocation to gold will depend on an investor's risk and return objectives.

Use the credit card slip to pay tip at hotels and restaurants

MUMBAI: For patrons of high-end restaurants, credit cards provide an opportunity to tip without having to rummage in wallets for small notes. Also, if one has a guest, adding a tip amount to the charge slip provides the payer some privacy. But the one thought that has probably gone through the mind of most patrons is how is this addition to the billed amount processed by the card company long after the card is swiped and authorization received.
Many fear that this is a system loophole. After all the card has already been swiped, the bill amount punched and authorized and the cardholder even receives a text message confirming the debit. But there's nothing amiss here. It is in fact a secret window that card companies have built into the payment system to ensure that the card is not shunned because of the waiter's concern over tips. And cardholders can rest assured there are enough safety features to prevent misuse.

"Adding tips to the credit card slip is an accepted practice worldwide. This is a feature built into the payment system where at the end of the day the merchant can make an adjustment of 10-15% of the invoice amount," says Uttam Nayak, country head for Visa. According to Nayak, unscrupulous merchants cannot inflate the bill because the system will not authorize beyond 10-15%, depending on what the preset limits are. The downside to the feature is that a large tip on a small bill for say two cups of coffee is likely to get rejected for the same reason.

This facility is available on almost all cards, but there are certain debit cards which require a pin authorization where subsequent adjustments are not allowed. So, if a waiter says that a particular card is not accepted, it is quite likely that's because the card is not amenable to subsequent revisions.

What happens to the tip money after it gets into the hotel's account depends on the hotel's policy. According to Swarendra Sahay, director-food and beverage, Hyatt Regency in Mumbai, most hotels have a service charge which is pooled in and distributed across staff - from the waiter to the front-desk staff to the chef to the manager. But, if a guest tips over and above the service charge, this too is pooled in, but distributed only to the restaurant staff. Sahay said this policy is followed in 18 of Hyatt's hotels across South West Asia. In some restaurants the waiters get to keep the cash tips.

Adding tips to the charge slip is a feature that is available only in hotels and restaurants. These establishments have special machines and the print-out of the charge slip has a separate column for tips. "The facility to top-up the amount is only there in POS machines in restaurants," says Amrish Rau, MD, ICICI Merchant Services. He adds that in case there is a dispute the onus is on the merchant to prove that there was a genuine intent. "The restaurant owner has to produce the charge slip and if it is clear that there is no overwriting the payment is made to the merchant," says Rau. For those who are really paranoid about unauthorized tips being added, Rau advices that the cardholder strike out the space for tips below the authorized amount but adds that there have not been any such dispute that comes to his mind.

According to Visa's Nayak, it is features like these in the payment system that facilitates well-oiled retail commerce in the US. "Two businesses which take a pre-authorization from the cardholder to charge their cards for any future are car rentals and hotels."

In case of car rentals, the company can take the risk of allowing the customer to retain the car for a longer period or to allow them to drop the car at a distant location. For hotels, the pre-authorization allows guests to check out by merely dropping their key at the reception desk while a cash-paying guest would have to wait until his room was checked.

How to get your home loan rate lowered

When Delhi-based Mahendra Gupta opened the recent letter from the housing finance company, there was both good and bad news for him. The dismal bit of information was that the 20-year home loan he had been repaying since 2008 still had 22 years to go. Despite four years of regular repayments, the loan tenure had been extended because of the rise in the home loan rate from 10.25% in 2008 to 13% now.

The good news was that Gupta's lender was ready to convert the loan to a lower rate if he paid a one-time conversion fee. He paid Rs 7,300 and got the interest rate lowered to 10.5%. "My loan tenure came down from 272 months to 166 months. It was a straight gain of almost nine years," gushes the 35-year-old.

Gupta can consider himself lucky. Not every lender offers its customers this option. Worse, very few keep their customers updated about changes in interest rates or how they impact their repayment schedules.
Most banks just go by the wording of the loan agreement, which says the lender can increase the rate and accordingly extend the repayment tenure. If the term cannot be extended, the bank raises the EMI amount or asks the borrower to pay a lump sum.

Be a proactive borrower
You need to be proactive about your loan repayment and check the interest rate you are being charged. When the base rate was introduced, home loan customers thought they would get more transparent deals from their lenders.

However, many banks continue to discriminate between old and new customers, charging the existing ones a higher rate than that being offered to new borrowers.

If you are being charged a higher rate, ask your bank to convert it to the rate applicable to new borrowers.

Don't assume your bank will not listen to your request. A slowdown in growth and intense competition in the housing finance sector have pushed banks to the wall.

Home loan growth slowed down from 15% in 2010-11 to 12.1% in 2011-12.

More importantly, the RBI has abolished the prepayment penalty levied by banks and housing finance companies. So, shifting to another bank is not as costly as it used to be.

"The RBI move has boosted borrowers' ability to negotiate," says Kapil Narang, chief operating officer, Ameriprise India, a financial planning firm.

Banks are willing to negotiate, especially if the borrower has a good repayment history. If a bank refuses to budge, a mild threat of shifting the loan to another lender can work wonders.

"There are instances where banks have offered to cut rates when the clients expressed their intention to transfer the loan to another bank," says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm.

Balance tenure is crucial

Keep the remaining term of your loan in mind when you sit at the negotiating table. When Gupta got his interest rate converted to 10.5% from the earlier 13%, his tenure of 22 years and 8 months was cut down by 8 years and 10 months. Remember that if your loan has less than 10 years to go, the benefit may not be as spectacular. As the table shows, the benefit progressively reduces if your balance tenure is lesser.

A 1.5 percentage point cut in the rate will shave off nearly five years from a 20-year loan, but it will reduce the tenure by just 1 month if the loan has only five years to go. Since you are paying a conversion fee upfront, the change may not lead to any significant gain. Go for it only if the reduction is at least 2 percentage points and your loan has more than 10 years to go.

Cut the tenure, not the EMI

When the interest rate on your loan is lowered, don't make the mistake of reducing the EMI. It's a tempting thought because it eases the pressure on your monthly budget.

However, lower EMIs mean longer tenures and higher interest costs. Instead, bring down the tenure of the loan. "Our standard advice is to avoid reducing the EMI amount. As far as possible, one should opt for cutting down the loan tenure," says Patel.

Only if you genuinely find it difficult to pay the EMI, should you opt for a lower instalment.

This is especially true of individuals who have taken a large home loan on the basis of a projected income, but have not got the kind of pay hikes they expected.

Also, double-income families, where one spouse has lost a job or stopped working, may find this option useful.

Besides, you should check if the new rate that is being offered to you is linked to the base rate of the bank. Make sure it is not a promotional rate that is being offered to new customers. Banks offer low rates to attract customers but hike the rate after 2-3 years. Since home loan tenures are typically 10-15 years, don't go by just the short-term benefit offered on the loan. The loan agreement should clearly specify the spread between this rate and the bank's base rate.

The cost of change

Don't think you can opt for a new and lesser interest rate for free. This conversion entails a minor cost, with banks charging 0.5-1.5% of the outstanding amount (see graphic). It is also a fairly straightforward procedure, which can be completed with one visit to the bank branch.

However, switching to a new bank is a lot costlier and requires more paperwork. Even if your previous lender does not levy a prepayment penalty, the new lender will demand 0.5-1.5% as processing charges. There is also the convenience aspect. You will have to go through the entire process of submitting documents-proofs of income and identity, and PAN card, etc. Therefore, do a cost-benefit analysis before deciding to convert or switch to another lender.(ARTICLE FROM LEADING NEWS PAPER)

When and how much tax is deducted at source?

Caution teaches us to never count our chickens before they are hatched. When it comes to income tax, you shouldn't be too sure even after they've been hatched because the taxman is quite likely to walk away with some.Whenever you invest your hard-earned money or make a profit, don't assume that you will be entitled to receive the full amount or returns. The taxman is waiting to snip away at your earnings, and to make sure you don't turn into an evader, knowingly or unknowingly, the tax will be cut at source, even before you get the money.

The tax deducted at source, or TDS, as it is more commonly known, is applicable on earnings from various financial instruments, which range from the interest earned from bank accounts to rental income. Here's a guide to help you know when TDS is applicable.

When is tax deducted at source?

There is no uniform rate for TDS. The amount of tax deducted depends on the source of earnings. So, it can range from 1% for sale proceeds from selling a house, to 30% for winnings from a horse race. Here's a look at how much TDS is cut from your earnings.

Salary

This is probably your first brush with TDS. At the beginning of the financial year, or when you join a new organisation, your employer will ask you to fill an investment declaration form. This will include the maximum tax deductions allowed under Sections 80C, 80D and other tax-saving instruments. If, despite all these deductions, your salary is above the exemption limit, TDS will be cut from it every month.

Lottery winnings
Money won in a lottery, puzzle competition, reality show or a horse race is subject to the highest TDS rate of 30%. "If you win Rs 50 lakh in a game show, you will only be able to take home 70% of your winnings or Rs 35 lakh," says Homi Mistry, partner at Deloitte Haskins & Sells. The TDS is applicable even on non-cash winnings. So, if you have won a car worth Rs 10 lakh, you will only be able to claim it after you pay Rs 3 lakh as tax.

Bank accounts
Two years ago, 37-year-old Arun Tilwankar, who runs a pharmacy in Hyderabad, opened a bank fixed deposit with Rs4 lakh. His aim was to build a corpus that he could use to overhaul his shop's software system. To his surprise, the maturity value that he received this year was less than that he had expected. Tilwankar's mistake was that he did not take into account the TDS that is applicable on interest earned from bank fixed deposits and savings accounts.

If the interest you have earned from your bank FD is above Rs10,000, you will receive it after the bank deducts tax. This exemption limit also applies to interest earned from a bank savings account. Don't think you can outsmart the taxman by opening accounts or FDs in different branches.
"Customers tend to avoid TDS by splitting fixed deposits at various branches, but they cannot avoid paying taxes. The TDS process in banks is centralised as we have core banking in place. A uniform ID is given to the customers based on their PAN numbers, which helps us track the total interest they earn from various fixed deposits across branches," says S Govindan, general manager, personal banking, Union Bank of India.

 

Property

Whether it is rental income or the money that you get after selling a house, you will receive the final amount only after tax is deducted. However, you can avail of exemptions in both cases. If the rent you receive is less than Rs1.8 lakh a year, no tax is deducted at source. Beyond this limit, 10% of the income is cut as TDS. However, the advance deposit paid by the tenant is not taken into account for this limit.

It's possible that there is more than one owner of the flat and that all of them share the rental income. The benefit of the exemption limit will depend on the type of ownership, whether it is joint or co-owned. "In case of co-owners, where the specific share of the property has been decided, the limit of Rs 1.8 lakh can be claimed separately by each owner.

However, joint owners, who don't have a clear demarcation of share in the property, can't claim this exemption separately," says Suresh Surana, co-founder and director at RSM Astute Consultants, an accounting and auditing firm.

If you are selling a property, the tax will be deducted at the rate of 1% if the deal is above Rs 20 lakh in a rural area, while in urban areas, the limit is Rs50 lakh. This will be applicable from October this year.

Superannuation fund and debentures
If you withdraw money from a superannuation fund, it is added to your income, and if your total income is above the taxable limit, TDS will be applicable on the amount withdrawn. "However, this does not apply if the money is received when the beneficiary retires or in case of his death," says Mistry. In the case of debentures, interest income up to Rs 2,500 is exempt from tax deduction. From July, this limit will be enhanced to Rs 5,000 and the interest earned above this limit will be subject to TDS at 10%.

Gold and silver
To keep a check on the circulation of black money, the finance minister recently announced in budget 2012 that from July onwards, cash used to buy bullion worth more than Rs 2 lakh will have to pay taxes upfront. Adds Mistry: "If you buy gold or silver exceeding Rs 2 lakh, the seller will collect 1% tax from you at the time of purchase."

How to save on TDS
You can take advantage of some provisions in the Income Tax Act, which will help you reduce your tax liability. For instance, no TDS is applicable on the interest earned from a recurring deposit. So, if you want to build a corpus and can invest monthly, open a recurring deposit rather than an FD. However, once you receive the maturity amount, it will be added to your income and you will have to pay tax on it.

If your income is below the taxable limit, but the interest earned from your deposits is above Rs 10,000, you can request your bank not to cut tax. "For this purpose, you can submit form 15 G and 15 H (for senior citizens) to the bank at the beginning of the financial year," says Govindan. You can ask for this form when you open an FD at a bank.

What to watch out for
"It is a myth that if TDS has been paid, you needn't take that income into account. TDS should be considered as an advance tax payment. When you file your return, you have to calculate the total income and the tax bracket you fall under, to determine the balance tax to be paid. So if you consider TDS for rental income, it doesn't mean that you exclude this income from your return. If your income is taxable, you will have to pay the differential tax," says Surana.

Also, don't think you can avoid paying taxes by not declaring your permanent account number (PAN). If you fail to do so or mention it incorrectly, the TDS rates in case of bank deposits will be applicable at a higher rate of 20%. Also, do not misuse the form 15 G/H facility or you will be penalised.

Keep track of the TDS that you have paid through Form 26AS. All the taxes that are cut on your behalf by a bank, an individual or an organisation are listed in this form, which is also called the annual tax statement. Ensure that there is no mistake in the TDS amount or any missing taxes, otherwise it would be considered unpaid by the income tax authorities.