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Tax & Financial Hygiene

Due Dilligience

Do you brush your teeth every day? Most of us would be brushing at least once if not twice and we brush our teeth for various reasons which may be to feel fresh, not to smell bad or to protect our teeth from decay, germs and to protect our health.

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Surprising thing is that, most of us spend almost 8-10 hours a day to earn money either for one-self or for the organization that we work for, but most spend less than 10 hours a year to manage the money. So if somebody did have to go through the personal financials of most individuals it would be somewhat like a month old un-brushed, smelling, diseased and decaying mouth.

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Many may have a fancy car, plasma TV’s, club memberships and branded clothes but below all the packaging lies a desolate, desperate, lonely & insecure financial ‘you’.

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The first step to a successful & secure financial future is “financial hygiene”. So you need to bring out your toothbrush, paste, shampoo and other things and wash away the habits & practices that are eating into you wealth and build on practices that will assist to provide you a successful and secure financial future.

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One of the most important pillars of personal finance is to maintain “accounts” of your income & expenses. Most often we keep track of our income, however most of us do-not have an account of expenses. You may think that you do keep account of your expenses, but it is generally just an approximation. Between the approximation slips out large sums of money every month under the head of miscellaneous expenses and this amount can vary between Rs 2000 pm to Rs 75000 per month in cases.

Just in case you care able to plug this black hole, assuming you save Rs 5000 per month for 20 years in an investment* the amount will be close to Rs 50,00,000. So there goes Rs 50 laks just because we do-not maintain basic accounts of our expenses.

Maintaining accounts of expenses is not a very tedious task and you do not need to know some accounting package developed by NASA, it could just be a plain and simple diary or a spreadsheet on your computer which can be updated on a daily or a weekly basis as suitable. You are sure to see the change in the first 3 months itself.

Would you not like to spend you time in Mauritius with your family and children playing around not for a week but for a couple of months in a year and do things that we would like to do. If not Mauritius it could be any other favorite destination of yours where you are not forced to do anything and you are the king of your time, your own boss? We would definitely get this opportunity sometime in our life but it will either be when we are past our prime and in our 60’s or it will be for a week or two where we will need to get back to our profession or careers.

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Financial management “training” should start as early as possible and there is no stipulated time that it should only start after you are 30 years old or only after you have enough earnings and savings. Most business communities expose their children to financial management very early in life in varied degrees and the results are there to see. Financial management should ideally start with the first pocket money received or at least with the first pay cheque. However the insignificant the amount may seem and the need to spend may seem much larger, this exposes you to the basic principal of financial management which even most of the largest corporate houses try and balance.

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Resources are limited and requirements are unlimited. Hence you will need to “balance” your requirements to suit your long term objectives and manage your resources to their optimal best. Hence you should not go overboard with impulsive expenses or come under peer pressure to but that latest Audi or Rolex just because you want to impress people around you with it. Hence even for a professional who has just got a job, may want to splurge, but that bike he so much desired or many other things, but first gift that he can give to himself and his loved ones is toward a successful & secure financial future, by putting in the first deposit or the first SIP. You will see that this will go a long way to help you.

A basic fundamental that we have learnt in our childhood is not to put all our eggs in one basket and the same applies to financial products and investments. Hence “asset allocation” suitable to your profile is very important to a secure financial future. (Asset Allocation was discussed in details in previous issues of this journal)

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Another important factor is “tax management”. Most often a large part of our earnings are taken away by local taxes in various forms and income tax is one large head. If we do-not comply with the local tax laws not only we are risking penal charges but we are also risking legal expenses and harassment. The Indian tax laws provide many ways and means to stay compliant with tax laws and at the same time we need not pay too much in taxes. Even honest individuals may not be aware of these provisions and end up evading taxes or tax filing provisions.

As a “NRI/Seafarer” most of your income is tax free however due to lack of awareness many fall foul of the tax laws. In most cases we have seen that NRI/Seafarers are rather eligible for tax refunds however they become unwitting offenders and innocent criminals in the eye of tax laws in the country.

Most NRI/Seafarers other than the remittance income would have interest earned in a savings or a NRE/NRO account. Most would have property investments, maybe multiple properties or investments in the name of spouse or kids. Most of them would ideally be tax free for a typical seafarer however the same needs to be accounted for and declared in your income tax returns. The taxman may not be picking you up now but he can get a clear picture of your financial life by clicking a few buttons on his computer.

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One of the important functions of personal finance is “tax planning and tax management”. Most NRI’s and Seafarers baulk at the basic mention of the word ‘tax’. The prevalent notion often is ‘ignorance is bliss’. However in the real scheme of things, ignorance of law is not an excuse.

You off course don’t need to get worked-up with personal taxation and in the current scenario of tax laws, things are much simpler than say a decade back and we have seen that most NRI’s filing their tax returns instead of paying taxes end up getting a tax refund. We have tax files where the refunds have been processed in less than 30 days. One of our seafarer clients had never filed his returns and he came through a reference to us. When we actually filed his returns, we claimed a refund of close to Rs 48000. All these years, he had been losing this amount of money unnecessarily to TDS and taxes on his various investments.

Apart from the refund factor, it is mandatory in many cases to file your tax returns on an annual basis. Moreover it is a basic financial and tax hygiene factor to keep updated tax returns. Hence even if you don’t have a refund claim it is advisable to file your tax returns regularly. For NRI seafarers, the tax authorities are not asking you to pay tax (as per the current tax laws); hence it is just about filing returns in most cases. Moreover as most of your funds and assets are tax free, hence you should ideally declare all details as required by tax authorities without any worry. With the internet and digitization of records in the government organizations as it is they have access to most of your financial details. Concealing can rather put you into trouble than a transparent declaration.

With the internet age and the systems and processes used in the Income Tax Department, today, it is possible to file your returns sitting at home. Either you can do it yourself or it is advisable to use the services of professionals. Just mail your documents and he will file your return online, where-ever he may be located or where-ever you may be located, geographic locations are no more a constraint.

So the primary tenet of tax planning and tax management is to ‘file your tax returns’ regularly.

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Now most of us would definitely have investments in various asset classes, like real estate, fixed deposits, gold, mutual funds among many other asset classes. Often we compare various products before choosing an investment vehicle. We look into various factors of the proposed investment like most importantly the returns like interest rates or dividend or other factors related to returns. However we don’t ‘look at net of tax investment returns’ which is your tax adjusted returns or post tax return. Say for example an investment of Rs 50 laks in a taxable deposit at 10 % interest per annum may seem to be better than a tax free deposit at say 8.5 %. Vice-versa, a tax free deposit at 8 % may look better than a taxable deposit at 11 %. Both the cases may not be true. Hence it is important that before making an investment decision you should look into the net returns rather the gross returns. The net returns will differ from a case to case basis depending on the tax status. Hence for a person who is investing his first million it may be better to invest in a taxable deposit at a higher rate than a tax free deposit as he may anyway not be liable to income tax. Similarly, for an individual who is in the higher tax bracket it may make more sense to invest in a tax free deposit rather in the taxable deposit at a higher rate as the net post tax returns will be lower than in the tax free deposit. Moreover there are few investment options where you can take an indexation benefit which reduces tax liability to a large extent.

In few investments at times there are dividend options and incidentally the dividend earned is tax free in most investments in the hands of the investor.

As per income tax, a section of investments can earn you a tax deduction under various sections. Few of these tax deduction investments are in the EEE (exempt, exempt, exempt) mode. The EEE mode means that the investment amount can get you a tax deduction, the returns earned during the investment are tax free and the maturity is also tax free. This is like having your cake and eating it too. Even if the investments are not EEE, section 80 C provides a lot of investment options which provide you a tax deduction and will help you reduce your present tax liability and tax liabilities that may arise in the future. This will help in terms of tax as well as investments and savings. Various investments that provide you a tax deduction include insurance, provident fund, medi-claim, NSC’s among others. Look at a typical tax payer in the higher tax bracket of 30 %; say an investment of Rs 1 laks in an 80 C investment will provide him a tax savings of Rs 30000 (round figure calculation). Suppose he invests Rs 1 lak for the coming 10 years and gets a annual return of 8 %, his net of taxes return after 10 years turn out to be actually 12 % and that too absolutely tax free.

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Most of us invest in property and real estate and the government has also provided tax benefits on purchasing a home. If a property purchase is managed well, the returns can be humongous over a medium term. The government provides tax benefits for housing loan interest and principal payments. Hence ideally if you invest your funds in real estate, a portion of your extra interest outflow on the loan can be adjusted against the tax benefit that your receive. There is no right time to buy a property and most youngsters wait to move up in their careers before purchasing that duplex or villa, however, they should ideally buy what they can afford early in their career itself and the appreciation will automatically adjust against the inflation. We had a client in Mumbai, who was a 3rd Engineer and wanted a large ‘dream’ flat, however, with a restrain in his resources, he bought a small flat for Rs 25 laks 5 years back and now the same flat is worth almost Rs 100 laks. He can now comfortably sell this and move into a larger property suitable to him in Thane or Navi Mumbai without stretching himself. While he was working in an Indian flagship he also enjoyed the tax benefits on the housing loan that he was paying for.

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Another very important tool that many smart tax planners use is the HUF or the Hindu Undivided Family facility provisions as per tax authorities which provide great tax benefits in the long term. An HUF can be formed by a Husband (Karta), Wife and at-least 1 child. This becomes a separate entity from the taxation point of view and all the tax exemptions and benefits that incur to you will also incur to the HUF. The HUF also helps in terms of legacy planning and asset management. Another option that tax payers use often is the income and taxation of Spouse as per tax regulations. However it is seen that often this is done in contravention of the law and without understanding the provisions of the law. This can provide you tax benefits but please do understand the clauses before blissfully transferring funds or gifting assets to a non-employed spouse.

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One of the most important aspects of good tax management is to avoid last minute tax filing and decisions. It is most important to take a planned approach with sound information and advice to manage your tax file. During the course of our working life we will earn a lot of money; however earning money is one important thing and managing the money is an equally important function. We had a client, who was a Pilot, and he as had been working for years. However when we looked through his financial documents we were surprised to note that he did not have even Rs 10 laks in his bank accounts and that too at the age of 45 years after working for more than 2 decades. Then our team did a serious round of counseling for him and the family as he seemed to be heading towards a certain debt trap with foreseen expenses like children’s education just round the corner. Within 3 years of a couple of rounds of planning with him and his spouse he had met the first target of Rs 25 laks and now we are looking at a Rs 100 laks financial assets for him very soon.

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It does not take much time if done at the right time, however we tend to keep everything for the last moment and then rush in to meet the deadline. As they say ‘fools rush in where angels fear to tread’; so these large businessmen and tycoons are not fools that they spend so much time and effort to for their accounts and taxation apart from other regulatory requirements. It takes at most about 6 hours for a typical NRI or Seafarer to manage his tax matter in a year. Yes! Six hours, that’s all, and that too not in a stretch or in one day. So do take these six hours out from your busy schedule and plan your finances and taxes well to keep you in the best of financial health.

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