January 19, 2009
Strange isn’t it! With out doubt majority of U ‘ll declare 14.16% as lower Tax than 33.99%. Some of u may be thinking what I’m talking about? My dear friends my question is quite interesting & a valid one. Let me clear u what I’m asking?
All of us already aware that Div. Distribution Tax on Debt based MFs is 14.16% where as STCG Tax on debt funds for a person in the highest Tax slab is 33.99%. Now think again on my question & answer.
Now read below to find the truth –
I assume there r 2 investors Mr. Sharma & Mr. Kapoor. Both r in the highest Tax slab of 33.99%. Now both have a surplus saving of 10L Rs. Which both want to invest in secure debt funds. There is a debt fund available for investment
@ NAV of 10 Rs. for both Growth as well as Div. payout option. Mr. Sharma opts to invest
in Div. payout option. While Mr. Kapoor has some other plans & invest in Growth option. From 10L Rs. each has been allotted 1L Units. On 364th day, the NAV of the fund for both option is 12 Rs.
Div. pay out option – The fund announces a div. pay out of 10% per Unit i.e. 1 Rs. per unit.
A. Div. Amount = 1*No. of Units = 1*100000 = 100000 Rs.
B. Total amount withdrawn from fund including Div. Distribution Tax = 100000/0.8584 = 116496 Rs.
C. Hence DDT = B-A = 16496
D. Per Unit of fund, the impact of Div. = 116496/100000 = 1.165 Rs.
E. Post Div. NAV of fund = 12-1.165 = 10.835 Rs.
F. Value of investment after Div. distribution = E* 100000 = 1083500
Growth Option – In parallel to Div. amount of 1L Rs., Mr. Kapoor decides to book STCG. Here is his calculation
A. No. of UNITs redeemed for STCG = 8833.8
B. Redeemed amount = Per Unit NAV*A = 12*8833.8 = 106005.6
C. Per UNIT STCG = 12-10 = 2 Rs.
D. Tax on C @ 33.99% = 0.6798 Rs.
E. Total STCG Tax = A*D = 6005.6
F. Redeemed amount net of STCG Tax = B-E = 100000 (Equal to Div. Received under Div. pay out option)
G. Total No. of Units remain = 100000 – A = 91166.2
H. Value of investment post STCG = G*NAV of UNIT = 1093994.4
Now all of us can look, DDT (@ 14.16% ) is higher than STCG Tax (@ 33.99%) due to which the value of investment is higher for Mr. KAPOOR.
So it’s now for all of U guys to decide what to do in case of investment in Debt funds.
The above calculation once again proves that don’t look at the nos. for what they appear at first glance, just dig deep & u ‘ll see another truth.
January 3, 2009
If the insurance compnay from which i ahve taken a policy closes down, what will happen to my policy? Is there any policy from the government which will protect my policy?
Answer – Dear Friend, I can’t tell u about future as no one knows what lies in future but we can certainly get an indication from history. Some 4 years back there was a Life Ins. co. in India named AMP SANMAR, which was a joint venture between AMP Life insurance Co. of Australia & Sanmar Group from South India. Due to several reasons, both co. decided to part ways & intimated IRDA for their willingness of exiting the business. IRDA intervened & asked Reliance Life Insurance Co. to Take over the business of AMP Sanmar Life Ins. Co. & here comes the most customer friendly act of IRDA in favor of policy holders. Reliance was told to keep older policies run as per the previous Terms & conditions as agreed upon by AMP Sanmar & rel. can’t changed these midway.
Another example – Earlier the Gen. ins. business of HDFC was a JV of HDFC & Chubb, later on chubb decided to exit the JV, IRDA allowed HDFC to run the Co. solo till it find another partner & now this co. is known as HDFC ERGO, where ERGO is the new JV partner.
I hope the above examples ‘ll clear ur doubts. Yes failure of Ins. co. due to extra ordinary high claims or consecutive losses on its investment portfolio (this is not on ULIP but for traditional policies) AIG’s case is an example.