The finance minister has little to give to the salaried class in the Union Budget 2013. But he has given hopes that there is a likelihood of introducing inflation-indexation bonds something, that should make the middle class a bit happier.
In consultation with the Reserve Bank of India, I propose to introduce instruments that will protect savings from inflation. These could be Inflation Indexed Bonds or Inflation Indexed National Security Certificates. The structure and tenure of the instruments will be announced in due course, Finance Minister P Chidambaram said in his Budget speech.
But the bonds should be linked to consumer price index, feel experts. In the past year, the wholesale price index has hovered around six-eight per cent whereas the consumer price index has been around nine per cent. This has consistently eating into your income.
The bond, according to experts, could be designed in this manner. Say, the inflation 10 per cent and you invest Rs 10,000 at 12-15 per cent annually for 10 years. At the end of the first year, if the inflation stays at 10, you will make a gain of two-five per cent and that would be a real rate of return. The returns to be paid by this instrument will be reset periodically and both new existing investors will get the reset rate on the coupon payment date every year.
Of course, there could be a lag in the rates of return if the rates are not reset monthly. If the rate is computed, quarterly or half-yearly or yearly, it will be based on the average inflation rate in the past year or six months or three months.
The inflation indexation bonds could be similar to floating rate bonds or capital index bonds that existed earlier. These are meant to protect both your capital and interest against inflation. Also these bonds can help know the inflation rate in the coming year. This is a very good investment tool to save money for long term like for retirement or childrens education, says NS Venkatesh, Treasury Head of IDBI Bank.
In the wake of rising inflation last year, substantial amount of investments moved away from financial savings to safe-haven like gold resulting in higher import of it. This, in turn, led to current account deficit (CAD) widening to 4.90 per cent of GDP by end of September 2012. Industry experts believe that inflation indexation bonds can help move away household savings from gold.
In this financial year, that is 2012-13, the WPI has largely been in the range of about six-eight per cent. And the inflation is only expected to ease further. Hence, this may not be the right market for this product. Such products can be best taken advantage of when the inflation / interest rates are at the lowest level and are likely to start moving up as the rate of return also then looks up.
Vivek Mhatre, head of treasury at Union Bank of India says, Floating rate bonds could not be traded well as the interest rates and the benchmark were at same level giving very few trading opportunity for investors. Similar problems could plague the inflation linked bonds also specially in the present market conditions.
Also, given that the Indian investors psyche wants assured returns from debt instruments, they may stay away from this product because it does not give the assure returns ahead of investment like a bank deposit. Plus, given the prevailing uncertainty in the equity markets, investors continue to look for fixed returns. The rate of return is likely to be one-two per cent above the benchmark rate, it is still not assured.
Among the other changes that the Budget has proposed, there is some pain on the taxation front.
TDS on transfer of immovable property: In order to have a reporting mechanism of transactions in the real estate sector, it is proposed that every transferee, at the time of making payment or crediting of any sum for transfer of immovable property (not agricultural land) to a resident transferor, shall deduct tax, at the rate of 1 per cent of such sum if the total transfer amount is more than Rs 50 lakh.
Return of income filed without self assessment is defective: Many file returns of income without payment of self-assessment tax. Therefore, from June 2013 the return of income will be regarded defective unless a taxpayer has paid the self assessment tax with interest on or before filing returns.
Penalty for non-filing of AIR: Few specified transactions need to be furnished within a prescribed time by way of the Annual Information Return (AIR). If a person who is required to furnish AIR, fails to do so within the time limit, then he/she may be asked to pay Rs 100 per day for the failure period. From April, such individuals will have to pay Rs 600 a day.
Contributions towards NCF allowed complete deduction: Presently, donations made to the National Childrens Fund (NCF), is allowed 50 per cent deduction of the donated amount. But, from April 2014, you will be allowed to claim 100 per cent deduction for any sum donated to NCF.
In consultation with the Reserve Bank of India, I propose to introduce instruments that will protect savings from inflation. These could be Inflation Indexed Bonds or Inflation Indexed National Security Certificates. The structure and tenure of the instruments will be announced in due course, Finance Minister P Chidambaram said in his Budget speech.
But the bonds should be linked to consumer price index, feel experts. In the past year, the wholesale price index has hovered around six-eight per cent whereas the consumer price index has been around nine per cent. This has consistently eating into your income.
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While reports suggested RBI will link the bonds to WPI as Indias monetary policy decisions are based on it, industry experts believe CPI will be a better choice as it has an updated series. The government believes these bonds will serve as a better option compared to real estate and gold. And higher the inflation, higher will be your returns. Such bonds are already present in developed economies.
The bond, according to experts, could be designed in this manner. Say, the inflation 10 per cent and you invest Rs 10,000 at 12-15 per cent annually for 10 years. At the end of the first year, if the inflation stays at 10, you will make a gain of two-five per cent and that would be a real rate of return. The returns to be paid by this instrument will be reset periodically and both new existing investors will get the reset rate on the coupon payment date every year.
Of course, there could be a lag in the rates of return if the rates are not reset monthly. If the rate is computed, quarterly or half-yearly or yearly, it will be based on the average inflation rate in the past year or six months or three months.
The inflation indexation bonds could be similar to floating rate bonds or capital index bonds that existed earlier. These are meant to protect both your capital and interest against inflation. Also these bonds can help know the inflation rate in the coming year. This is a very good investment tool to save money for long term like for retirement or childrens education, says NS Venkatesh, Treasury Head of IDBI Bank.
In the wake of rising inflation last year, substantial amount of investments moved away from financial savings to safe-haven like gold resulting in higher import of it. This, in turn, led to current account deficit (CAD) widening to 4.90 per cent of GDP by end of September 2012. Industry experts believe that inflation indexation bonds can help move away household savings from gold.
In this financial year, that is 2012-13, the WPI has largely been in the range of about six-eight per cent. And the inflation is only expected to ease further. Hence, this may not be the right market for this product. Such products can be best taken advantage of when the inflation / interest rates are at the lowest level and are likely to start moving up as the rate of return also then looks up.
Vivek Mhatre, head of treasury at Union Bank of India says, Floating rate bonds could not be traded well as the interest rates and the benchmark were at same level giving very few trading opportunity for investors. Similar problems could plague the inflation linked bonds also specially in the present market conditions.
Also, given that the Indian investors psyche wants assured returns from debt instruments, they may stay away from this product because it does not give the assure returns ahead of investment like a bank deposit. Plus, given the prevailing uncertainty in the equity markets, investors continue to look for fixed returns. The rate of return is likely to be one-two per cent above the benchmark rate, it is still not assured.
Among the other changes that the Budget has proposed, there is some pain on the taxation front.
TDS on transfer of immovable property: In order to have a reporting mechanism of transactions in the real estate sector, it is proposed that every transferee, at the time of making payment or crediting of any sum for transfer of immovable property (not agricultural land) to a resident transferor, shall deduct tax, at the rate of 1 per cent of such sum if the total transfer amount is more than Rs 50 lakh.
Return of income filed without self assessment is defective: Many file returns of income without payment of self-assessment tax. Therefore, from June 2013 the return of income will be regarded defective unless a taxpayer has paid the self assessment tax with interest on or before filing returns.
Penalty for non-filing of AIR: Few specified transactions need to be furnished within a prescribed time by way of the Annual Information Return (AIR). If a person who is required to furnish AIR, fails to do so within the time limit, then he/she may be asked to pay Rs 100 per day for the failure period. From April, such individuals will have to pay Rs 600 a day.
Contributions towards NCF allowed complete deduction: Presently, donations made to the National Childrens Fund (NCF), is allowed 50 per cent deduction of the donated amount. But, from April 2014, you will be allowed to claim 100 per cent deduction for any sum donated to NCF.