EPFO shows a surplus after 7 years

Those who have entrusted their retirement funds to state run Employees' Provident Fund Organisation (EPFO) have a reason to rejoice. Thanks to the new professional Fund Managers, the fund will be able to pay its investors a return of 8.5% without dipping into its reserves. The Fund managers of EPFO are: State Bank of India, ICICI Prudential Asset Management LTD., HSBC Asset Management Co. Ltd., and Reliance Asset Management Co. Ltd. SBI generated the highest yield of 9.14% for the EPFO, followed by ICICI Prudential at 8.84%. The trustees of EPFO are expected to meet soon to decide the payout for the current year, which could be higher than 8.5% paid last year.

EPFO manages funds in excess of Rs.3 trillion. A large chunk of the funds are invested in Govt. securities and Public Sector bonds. The guidelines issued for investment by EPFO are: 25% in G-Secs, 15% in state Govt. bonds, 30% in public sector bonds. The returns in the second half of FY 2008-09 have been very good from fixed income securities because of the successive rate cuts announced by RBI.

Tax Planning for Salaried class

Tax Planning plays a very important role in 'Financial Planning'. The additional funds saved through tax planning can be utilised for wealth creation in the long run. There is reasonably good awareness amongst salaried individuals about Section 80C of IT Act. The following investments are eligible for deduction under section 80C (The maximum exemptions allowed are Rs.1,00,000 inclusive of deductions under pension plans covered under section 80CCC):

• Life Insurance Premium
• Provident Fund/ Public Provident Fund
• National Saving Certificate, plus accrued interest on it
• Tuition fees paid for children's education (maximum 2 children)
• Principal component of home loan repayment
• Equity Linked Savings Schemes (ELSS) of Mutual Funds
• 5-Year and above fixed deposits with Banks and Post Office

Insurance should be an important constituent of Section 80C. Going for term insurance, helps you to get a higher insurance cover at a lower price. The two other attractive options are PPF and ELSS. The maximum limit for investment in PPF account is Rs.70,000 per year, but it gives a handsome effective post tax return of 16.32% for the tax payer in the highest tax bracket, because PPF is an EEE scheme (not only is the initial investment tax free, but accrued interest and principal repayment is also exempt in the hands of the investor. ELSS is still a better option for those who can take higher risk. Although returns under ELSS are not assured, the average post tax return can be higher than PPF.

There are other attractive tax saving options as well:

Section 80D: An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of up to Rs 15,000 pa under section 80D. An additional deduction of up to Rs 15,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 per year.

Section 80E: Interest accrued and paid on Education Loan availed for self, spouse or dependent children is exempt without limit.

Section 80G: Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G.

Home loan: Individuals intending to buy a house should opt for a home loan. Interest payments of up to Rs.150,000 pa are eligible for deduction under Section 24. In case of joint home loan, each individual can claim deductions up to Rs.1,50,000 pa.

Salaried individuals can claim rent paid by them for residential accommodation, if HRA doesn't form part of their salary. This deduction is available under Section 80GG and is least of the following:
25% of the total income or, Rs 2,000 per month or, excess of rent paid over 10% of total income.

A reality check on the 'Indian Economy'

The unprecedented euphoria on our stock markets in the aftermath of UPA victory was quite unexpected. The rise in the markets on Monday can be attributed to excess liquidity in the system and partly to the short covering by operators. The big question is whether Indian economy is out of the woods? From now on the markets will tend to reflect the economic data which will be released in the coming days. The important events to be watched are: Release of GDP figures for the 4th quarter and FY 08-09 on 29th May (estimates vary between 5-7% for FY 08-09); The figures for the fiscal deficit for FY 08-09 are also significant. The US Federal Reserve has painted a gloomy picture for US recovery in the near future. The pending bankruptcy of US auto major General Motors may give a jolt to the US economy.

Let us gaze at the 'Crystal ball' to analyse the prospects of Indian economy. On the negative side, Moody's in their recent research report have said: “The positive sentiment is expected to be short-lived, as India essentially only started feeling the pinch of the global downturn in the December quarter and the worst is yet to come.” For the year 2009, India’s growth rate is unlikely to exceed 5%, but a recovery in the opening quarter of 2010 due to expected rebound of the US economy in the December quarter, should lift annual expansion to about 5% for fiscal 2009-2010, it said. On the positive side, CMIE expects India's GDP to grow at a healthy 6.6% in 2009-10. It also expects PAT of corporate India to grow at 77% during 2009-10, based on the assumption of oil sector reforms leading to a drastic cut in oil subsidy bill.

A number of leading indicators, such as increase in hiring, freight movement at major ports and encouraging data from a number of key manufacturing segments, such as steel and cement, indicate that the downturn has bottomed out and highlight the Indian economy's resilience. The investor sentiment has improved significantly and FII's have turned aggressive buyers on the Indian bourses. As long as the US $ continues to slip against the Rupee, FII activity will continue unabated. The next phase of growth is expected to come from rural markets with rural India accounting for almost half of the domestic retail market, valued over US$ 300 billion. Rural India is set to witness an economic boom.

Considering the above scenario, Indian stock market scenario has changed from 'Sell on every rise' to 'Buy on every decline'. However, small investors are advised to exercise abundant caution in the ensuing volatility on the markets.

'Jai Ho' for the electorate: Good Economics does pay

Most market analysts are pleasantly surprised by the clear verdict in favour of the UPA. It is a very good signal for the Indian economy in the long run. This result, that has come at a time when most poll analysts were predicting a hung parliament, is significant in more than one way:

• It's a victory of 'Jai Ho' over 'Bhay Ho'. The electorate have voted in favour of a positive election campaign, that focused on the issue of development.
• All those who fought on the development issue have received thumping victories irrespective of the Party line: Congress in Delhi, Rajasthan, AP, Maharashtra; BJP in Madhya Pradesh, Chattisgarh, Karnataka; JDU in Bihar; BJD in Orissa.
• Those playing divisive politics have been rejected by the electorate: Left front, BSP, SP, ADMK, RJD have lost massive vote share.
• The result is a victory of the clean image of PM, Dr. Manmohan Singh. Now he can focus on the development issues without the burden of allies like the Left front and Lalu.
• The decisive mandate may prove to be a watershed in the Indian politics. It has shown that good economics always pays.

The poll verdict may have laid the foundation of a strong long term bull run on Indian Markets. Although the economy may take a few quarters for revival, a stable Govt. augers well for the country. The markets will definitely greet the UPA victory with substantial gains in the near future. The going is likely to be positive till the Budget, after which it may retreat on global cues. It may be prudent to take partial gains in the sudden burst of euphoria. Long term investors can buy on declines, to ride the next bull run.

Investor Education and Protection Fund (IEPF)

Investor education is very necessary for promoting a healthy Capital market. The Central Government has established an 'Investor Education and Protection Fund', under section 205C of the Companies Act 1956. It was notified on 31st October 2001. The Fund shall be utilized for promotion of investors’ awareness and protection of the interests of investors.

The following amounts shall be credited to the Fund:

• amounts in the unpaid dividend accounts of companies (Remaining unpaid for more than 7 years)
• the application moneys received by companies for allotment of any securities and due for refund
• matured deposits with companies
• matured debentures with companies
• the interest accrued on the amounts referred to in clauses (a) to (d)
• grants and donations given to the Fund by the Central Government, State Governments, companies or any other institutions
• interest or other income received out of the investments made from the Fund.

Major activities undertaken by IEPF are:
1. Education programme through Media
2. Organizing Seminars and Symposia
3. Proposals for registration of Voluntary Associations or Institution or other organizations engaged in Investor Education and Protection activities
4. Proposals for projects for Investors’ Education and Protection including research activities and proposals for financing such projects
5. Coordinating with institutions engaged in Investor Education, awareness and protection activities.

Any voluntary organisation or association engaged in investor education and protection activities may register itself under IEPF. For more information on IEPF log on to the website: http://www.iepf.gov.in/

Importance of New Pension Scheme (NPS)

In India, less than 11% of the population is covered under the social security schemes of the Govt. Finally, Indians have a new investment option for 'Retirement Planning'. After a long wait of almost 5 years, the 'New Pension Scheme' - NPS has been notified by Govt. of India, and is open to the general public w.e.f. 1st May 2009 (Labour Day). It has opened new avenues of 'Financial Planning' for the 'Aam Aadmi'.

The NPS will be regulated by Pension Fund Regulatory and Development Authority PFRDA), which was established by the Government of India on 23rd August 2003 to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds. There is a move to bring all pension schemes, including those promoted by private insurers under the ambit of PFRDA at a later stage.

Salient features of NPS are:

• It is a system of fund management for retirement like the EPF, GPF and PPF.
• Anyone in the age group of 18 to 55 years irrespective of the sector in which he /she works .(govt as well as private sector) can apply for the new pension scheme.
• One can approach any one of 17 banks/fund houses like SBI, ICICI, IDBI, Axis, LIC, and many more through the 285 point of presence (POPs) to register and get a Permanent Retirement Account Number (PRAN).
• The minimum annual contribution to the new pension scheme has been fixed at Rs 6,000 in minimum 4 yearly installments. You can make any number of installations and any amount in the new pension scheme.
• The funds in the new pension scheme will be invested in Equity, debt instruments and government bonds.
• The new pension scheme does not guarantee a predefined fixed return. Returns depend upon the growth of the funds over a period of time.
• Three risk profiles have been envisaged under the scheme: 1. Up to 35 years (equity-50%, govt. bonds-30%, debt instruments-20%, 2. 35-60 years (equity portion is reduced, higher proportion invested in bonds/govt. securities), 3. Post 60 years (only 10% in equities and about 80% in govt. bonds).
• Regular pension is payable from age 60 onwards. Any exit from the new pension scheme before attaining the age of 60 years, you will be entitled to get 20% of the funds you have invested and the rest has to be invested in annuities with the insurance companies.