PPF Interest Rate: 11.48% effective yield on investing upto Rs 1.5 lakh for these taxpayers!

PPF Interest Rate: 11.48% effective yield on investing upto Rs 1.5 lakh for these taxpayers!

 

PPF Effective Interest Rate:

The interest rate on the Public Provident Fund (PPF) for the quarter ending December 2019 has remained unchanged at 7.9 per cent. If you think that it is too low an interest rate, then you need to look at the effective interest rate or the effective yield. At times, one may have to decide whether 8 per cent bank FD is better than investing in PPF?

Comparing the interest rate on a taxable investment with that of a tax-free investment is not the right way as one needs to look at the pre-tax yield of both of them.

For the bank FD or any other taxable investment, the pre-tax yield is its coupon rate of interest. But, as the interest income in PPF is tax-free, the effective rate of return for taxpayers is higher based on the individual tax rate. For someone in the highest tax slab paying 31.2 per cent tax, the effective yield is nearly 11.48 per cent. It is also referred to as the pre-tax yield, which means the return on an investment before any tax is applied on the returns.

Taxpayers need to pay a tax of either 5 per cent, 20 per cent or 30 per cent based on their income level. In addition, there is a surcharge of 4 per cent on the tax liability calculated on total income. So effectively, the tax rates are 5.2 per cent, 20.8 per cent and 31.2 per cent for the taxpayers.

The formula for calculating the PPF effective interest rate is :

Pre-tax yield = Interest Rate / (100-TR) * 100

(Using excel sheet, the formula can be put to use)

Here, the interest rate for PPF is 7.9 per cent while TR is Tax Rate.

31.2 per cent, the Pre-tax yield of PPF will be
= 7.9 / (100-31.2)*100 = 11.48 per cent.

Therefore, for someone having a tax rate of 31.2 per cent, the Pre-tax yield of PPF will be
= 7.9 / (100-31.2)*100 = 11.48 per cent.

20.8 per cent, the Pre-tax yield of PPF will be
= 7.9 / (100-20.8)*100 = 9.97 per cent.

For someone having a tax rate of 20.8 per cent, the Pre-tax yield of PPF will be
= 7.9 / (100-20.8)*100 = 9.97 per cent.

5.2 per cent, the Pre-tax yield of PPF will be
= 7.9 / (100-5.2)*100 = 8.33 per cent.

And, for someone having a tax rate of 5.2 per cent, the Pre-tax yield of PPF will be
= 7.9 / (100-5.2)*100 = 8.33 per cent.

What it means Your PPF account will fetch an interest rate what the government declares at the start of each quarter of the financial year. Illustratively, on an investment of Rs 1.5 lakh, at 7.9 per cent, the interest income will be Rs 11,850. The effective or pre-tax yield is only for illustrative purposes to help one decide between choosing a taxable investment or a tax-free investment.

For example, if someone paying 31.2 per cent tax finds an investment fetching interest rate higher than 11.48 per cent, putting money in it will sound better. In reality, taxable investments such as bank fixed deposit, bonds or debentures are fetching lower rates around 7.5 per cent. Further, if there are any taxable investments providing higher returns, there will be risks attached to it too.

As the effective yield for those in the 5 per cent, 20 per cent or 30 per cent tax slab is 11.48 per cent, 9.97 per cent and 8.33 per cent respectively, PPF can be one of their preferred investment.

PPF remains a time-tested investment avenue over several decades backed with a sovereign guarantee and comes with tax benefits such as tax-free return and investment being deductible under section 80 C of the Income Tax Act,1961.

Happy Investing

Source:Moneycontrol.com 

It’s Happening Right Now: The Rebirth of India

It’s Happening Right Now: The Rebirth of India

 

 Economic liberalisation of 1991 freed Indian companies of bureaucratic hassles.

The reforms opened the door to foreign markets.

They brought in a flood of foreign capital and technology.

They literally paved the way for India’s software sector. And gave birth to some of the biggest wealth creators like Infosys and Tata Consultancy Services (TCS).

Just one change could create so much wealth.

So, imagine the kind of wealth that could be created if such changes happen in at least five areas simultaneously.

I am talking about changes like…

 

Urbanisation

Some estimates suggest that 30 Indians move from a rural to an urban area every minute. But urbanization is also about smaller towns and cities getting urban infrastructure, boosting urban consumption trends.

Privatisation  

In a landmark decision in 2018, Indian private sector companies have been allowed to participate in defence manufacturing in a big way. This alone is expected to be an opportunity of over US$ 20 billion. Add to this, several billion dollars of foreign capital and private sector capital are coming into sectors like aviation, mining, banking and energy.

 

Formalisation

With the introduction of GST, the number of enterprises paying indirect taxes has gone up by 3.4 million, an increase of 50%. The bulk of the new entrants are small enterprises and intermediaries, which entered the formal economy.

 

Financialisation

Nearly two out of every three bank accounts opened in the world between 2014 and 2017, were opened in India. Four-fifths of Indian adults had bank accounts in 2017, compared with just 53% in 2014.

Digitisation

In 2017, the IMF lauded just two countries for the efforts in digitisation. India is one of them. Aadhaar, which covers over 89% of the population, cane be a gamechanger. The use of biometric technology to identify and authenticate individuals can reduce leakages and improve coverage of social programs.

As you see, these are not merely economic jargons. Rather, they are irreversible trends that are already paving a long runway for Indian companies.

Recognising these irreversible trends could ensure that you buy stocks that are poised to make the most of it.

Living through, what I call the Rebirth of India, would eventually entitle millions of Indian investors to their own chronological lottery.

And allow them to take the first step toward the investing opportunity of their lifetime.

Like how ordinary Japanese investors saw wealth creation in stock markets over a quarter of a century.

But Japan is not the only country to witness such a rebirth.

There have been several such instances in the past 50 years.

In each of these economic rebirths, businesses flourished and created massive wealth for their shareholders.

 

How You Can Profit from the Rebirth of India

 

 

Rebirth of India presents a once-in a lifetime opportunity to create real wealth in stocks, without taking undue risks.

Stocks of companies that ride the irreversible trends in India, will receive a big shot in the arm in coming years.

They could see their earnings multiply not just because of improved efficiency, better products or competitive pricing.

But also because of several economic, regulatory, and demographic changes acting in their favour.

Even if these companies just manage to keep up with the pace of change in India and retain their profitability, their earnings could still grow exponentially.

So, the Sensex may go up 3 times to get to 100,000 in the next decade. But the returns on carefully selected stocks may be much much bigger.

It’s all about being at the right place, at the right time and seizing the opportunity…

Of course, you could always settle for moderate gains, by betting on the index, for the next few decades.

But why would you do that?

Opportunities like the Rebirth of India may not come along again in your lifetime.

This could probably be your only chance to create massive wealth from stocks that you have always aspired for.

Therefore, knowing exactly which stocks to buy and when is as important as identifying the Rebirth of India as your chronological lottery.

By Tanushree Banerjee

(5 Minute Wrap)

Happy Investing

India Will Become a US$ 10 Trillion Economy

India Will Become a US$ 10 Trillion Economy

 

I find the US$ 5 trillion debate a bit strange.

India will inevitably become a US$ 10 trillion economy. So we will obviously pass US$ 5 trillion along the way.

The numbers are very simple really. If you hated maths in school, feel free to skip ahead to the part about Nirmala Sitharaman.

The size of our economy is US$ 2.8 trillion. To get to US$ 5 trillion, we need to grow by 78.5%.

To achieve this in 5 years, we have to grow by 12.3% annually.

To achieve this in 10 years, we have to grow by 6% annually.

I've put those 2 sentences in bold because I want to come back to them.

Note here, I'm talking about 'nominal' GDP i.e. inflation + the 'real' GDP you read about in the newspapers.

So let's quickly break this down. It's simple enough...

India's annual inflation target is 4%. The RBI has done a good job so far on this front. It's about 3% now.

You may have read about India's real GDP growing by just 5% in the last quarter. Now 5% is not bad per se. It's just that we would all like 8%+ growth.

So...

5% real GDP growth + 3% inflation = 8% nominal GDP growth.

Is this good or bad?

Well, it's about mid way.

Go back to those 2 bold sentences. 8% is right between 12.3% and 6%.

What does this mean?

It means, at the current growth rate - which no one is happy about - India will become a US$ 5 trillion economy in 7 to 8 years i.e. by 2026-27.

And we will become a US$ 10 trillion economy in 16 to 17 years i.e. by 2035-36.

There's nothing wrong with this but remember two things...

The government wants to achieve these targets sooner.

Our economy's growth rate currently is slower than what we can achieve as a nation.

And this brings me to...

Nirmala Sitharaman has the Worst Job in India

As a rule, I distrust all politicians. This rule has served me well in life.

But I think our Finance Minister is a good person.

Her heart seems to be in the right place and she does seem to care about the problems in the economy.

Unfortunately, she's new to her job.

Imagine a new employee in a large corporation. This new employee won't be handed any big responsibilities on day 1. She is expected to learn the ropes.

But India's FM was expected to hit the ground running and be responsible for a US$ 2.8 trillion economy which was already slowing.

They say the two hardest jobs in India are the captain of the Indian cricket team and the Finance Minister.

Honestly, I thought she would find the job difficult at first. I was right.

But it hasn't taken her too long to hit her stride...four months was all it took.

Today's newspapers are full of praise...and she deserves it.

I must say, she has surprised me...but in a good way. I never thought taxes would come down...but they have.

The stock market has already rewarded her decisions. The Friday rally on the bourses was truly historic.

I hope it's just the beginning of more reforms to come. We must not lose momentum.

What About the Slowdown?

Tax reform is a very important step in our journey to a US$ 10 trillion economy but it's not the only one.

I'm neither naive nor a cheerleader of the government.

But I've no doubt we are on the right path.

I'm glad people are talking about how the government is either improving their lives or not. It's far better than the conversations of earlier generations.

The role of the government, in the lives of ordinary people, used to be limited to periodic doles at the time of elections.

That's not the case anymore.

Step back and take a long-term view of what's happening in the country. You will see a very different picture to the one presented by the media.

The daily negativity will disappear and you will see hope in the eyes of ordinary people who are making better lives for themselves.

How the aam aadmi is increasing his income.

I want to write to you about specific examples of how and why I think the slowdown in our economy is temporary.

I want to share with you what see in my mind when we are a US$ 10 trillion economy.

It's not all milk and honey of course.

But it's far far better picture than the one I see now...and I look forward to it.

Until next time...

 

By Tanushree Banerjee

(5 Minute Wrap)

Happy Investing 

Bank Fixed Deposit Vs Post Office Time Deposit: How to choose best FD

Bank Fixed Deposit Vs Post Office Time Deposit: How to choose best FD

 

Best FD scheme: If you are looking to save money in a fixed deposit scheme, there are several investment options to choose from. From bank fixed deposits to post office time deposits, an investor can choose between the two of them or diversify in both of them. FD is available for as short as 7 days to tenure as high as 10 years. What you need to be sure about is the tenure or the period of FD scheme and then invest. But, before opening an FD scheme, one needs to be aware of certain factors for a higher interest rate and also the safety of money.

Let us see some important factors while choosing the best fixed deposit scheme:"Let us see some important factors while choosing the best fixed deposit scheme:

FD Interest Rate

The interest rate for short term deposits of 1 month or 1 year may be the same as that on deposits of 5 year or even 10 years. This is because banks fix interest rate based on several factors such as liquidity, demand of funds etc. However, whatever is the rate of interest, most banks provide an additional 0.5 per cent to the senior citizens who are above age 60. If there are family members who are above age 60, it could be better to invest in their name.

Online FD

Some banks provide the facility of opening online FD. It is not necessary to open a savings account in the same bank as some banks allow investing in FD online without account. Before opening online FD, it is important that you speak to the banker about the minimum and maximum amount, redemption proceeds, documentation etc.

Premature exit

Some banks have FDs without the facility of premature exit before the end of the original tenure. In such FDs, the rate of interest is generally higher than regular FD schemes with premature exit option. If you are sure that you will not need funds for the entire tenure, choosing FD scheme without premature exit will give best FD returns.

Safety of Bank

FD DICGC or Deposit Insurance and Credit Guarantee Corporation insures investor's bank deposits up to Rs 1 lakh including principal and interest amount per bank. However, even though the limit is Rs 1 lakh, it is common know-how that irrespective of the amount, the government ensures that depositors money remains safe. If you are thinking about how safe are bank deposits, then it is important to know about the DICGC scheme.

Company FD

Investing in company fixed deposits come with higher interest rate but the associated risk is also high. Some manufacturing companies and NBFCs offer higher rates but several of them have also defaulted in the past. Do not merely go by the ratings of the company as they may change over time.

PO Deposits

The post office (PO) time deposits are available for 1, 2,3 and 5 year period. The rate of interest on PO time deposits is currently higher than many bank FDs. Irrespective of the amount of deposit, the safety in PO time deposits is the highest as they are backed by a government guarantee.

Small Finance Bank FD Rates

The rate of interest in Small Finance banks is higher than what is offered by front line commercial banks. The Small Finance Bank FD schemes also come under the ambit of DICGC and one may diversify some amount in them too.

To sum up

The best FD scheme will be the one that gives you the highest interest rate for the tenure that you wish to lock-in the funds for and is safe. But, remember, FDs suit those who want a regular income and preserve capital. The post-inflation rate of interest is low in them and the interest income is entirely taxable without any tax benefits.

Choosing the best FD scheme may be easy but you may not be doing the best thing with your money!

Happy Investing

Source:Moneycontrol.com 

Public Provident Fund: What Rs 1.5 lakh a year may give you in 15, 20, 25 years

Public Provident Fund: What Rs 1.5 lakh a year may give you in 15, 20, 25 years

Public Provident Fund (PPF) investment: For those scared of market volatility, PPF comes across as a safe investment option with a bag full of benefits.

 

By investing the maximum limit of Rs 1.5 lakh per annum in PPF, you can accumulate a large lump sum. Although, the maturity period of PPF account is 15 years at present, you can extend the account for a period of five years each on request and continue investing and earning.

The following calculation will give you an idea of how much your investment of Rs 1,50,000 per year would grow into in 15 years, assuming the interest rate remains at 7.9 percent.

Public Provident Fund: Calculation chart at 7.9 percent interest

You can see from the chart above that Rs 1,50,000/year investment in PPF account can grow up to Rs 43,50,547 in 15 years if the interest rate remains at 7.9 per cent. Following the same calculation (as in the chart above), your annual investment of Rs 1.5 lakh in PPF account can grow up to around Rs 70 lakh and Rs 1.1 crore in 20 and 25 years respectively if the interest rate remains unchanged.

Happy Investing

Source:Moneycontrol.com