Category Archives: Finance

Widget, widget on the wall, Which is the Best Investment of all?

Finally the tool to compare investment options is here.

Its configured for Indian Tax Rates for FY 2017 -2018 and works pretty accurately – I tried to test as much as I could but feel free to point issues if you find some.

To use the tool simply input your Investment amount and the Total income before this investment. That will calculate your tax bracket.

Then choose the category of investment and input your expected rate of return and the tool will give you the comparative pre and post tax earnings.

Its that simple!

For applicable tax rates refer to – Capital Gains tax for NRIs- It’s not that simple

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Another Demonetization Coming?

The money changers in Arcade, Raffles place are again offering a rate better than the spot rate. The current spot is 47.20 and you could get 47.75 with the money changers.

Again the notes are all legit and there is nothing wrong that I could find.

Last time this happened, it was in October 2016 and the 1000 and 500 Rupee Notes were Demonetised in on 8th November 2017 (https://adityaladia.com/2016/10/11/cash-rate-of-inr-better-than-spot-in-arcade/)

I could not help but wonder if 2000 Rupee notes will soon be withdrawn and prove the rumours correct. If that happens where will Indian GDP go is anybody’s guess but till then if you are visiting to India then exchanging money in Singapore and carrying back is a profitable bet.

Capital Gains tax for NRIs- It’s not that simple

As an NRI, you would have wondered many times, what parts of your Indian Income are taxable and what are not and trust me you are not alone.

Under the Indian Income tax act, the tax rates, deductions from income, exemptions from taxation all change depending on the nature of income and residential status of the individual. With the ever changing tax provisions, even if you searched online the chances of finding the information you are looking for would not be easy and filtering out the tax provisions that are applicable to an NRI is even more difficult.

Not being able to find consolidated tax provisions on common investments used by NRI’s I decided to compile the information myself and hope that fellow NRI’s will find it useful.

NRI’s mostly invest in Fixed Deposits, Bonds, Mutual Funds, Stock and Property which would generally give rise to income under Capital Gains or Other Income (Bank Interest or Dividends) under the Indian Tax laws.

I have tabulated the provisions that an NRI should be aware of for FY 2017-2018 (click on table to open in new window)

nri-capital-gains

 

One of the most interesting things to note is that the basic tax free exemption is not available to an NRI on Equity Investments.  What that means is that if an NRI gained 2,50,000 Rupee by investing in stock market the whole 2,50,000 Rupee is taxable. If these gains are long term (asset held for more than 1 year) then there is no tax liability but for short term gains the tax rate is @ 15%. So an NRI would pay Rs.37,500 in taxes, the income would not attract any tax in hands of a resident Indian.

Another interesting fact to note is that the gains on redemption of Sovereign Gold Bonds are not chargeable to tax if held till maturity.

With difference in tax rules being different in different countries an investor should consider the tax domicile of the investment to maximise returns. In Singapore and Hong Kong the Capital gains, Bank Interest and Dividends are not taxable, however in USA and UK these income are taxable.

For example if an NRI bought a mutual fund in India that returned 20% over a period of 6 months then his gains would be taxed at a flat rate of 15% resulting in a post tax return of 17%. Buying this same fund in Singapore would have been as the gains are tax free and the investor pays no tax.

Similarly for bonds the interest is taxable in India and taxed at the marginal rate based on your income bracket but tax free in Singapore and Hong Kong.

E.g . An NRI whose total income is over Rs. 10 lac (30% tax bracket) buys a bond that pays 9% interest p.a. The post tax yield of this investment would be 6.3% . Add to it the cost of transferring funds to India of around 0.8%, the yield drops to 5.5%. If the plan is to remit the money back to Singapore on maturity, which will cost another 1%, the investment would yield 4.5% only.

These are just 2 examples to get you thinking. There innumerable scenarios that I can come up with based on different countries of residence and each individuals tax profile. All I would like to highlight is that an investor should not underestimate the impact of taxation and ancillary costs while making investment decisions and look at all aspects before making an investment decision.

Watch out for an investment comparison tool that I am working and will post it here very soon. Till then keep reading and sharing.

To Pay-off or Not to Pay-off?

For the past few days we have been debating whether it makes sense to pay off a housing loan in India by taking a cheaper interest bearing loan in Singapore and following the suggestion of one of the readers I decided to make a post dedicated to housing loans.
Before answering the question of paying off a more expensive loan with a cheaper one in Singapore, let me list down some of the aspects that can influence the decision.

  1. An interest payment on a housing loan tends to be around 2 to 3 % higher than the interest that one would earn on a NRE FD.
  2. The principal payment on a Housing loan is deductible from taxable income upto a amount of Rs. 150,000 per annum.
  3. The deduction on housing loan under section 80 C is subject to the overall limit of 150,000 which includes payments made life insurance payments, PPF, ELSS, Tax saving fixed deposits etc.
  4. The deduction under 80C for housing loan is only for the principal paid in a given financial year and not the interest portion of the EMI paid. Which means that tax benefit on account of housing principal payment will increase gradually over the term of the loan.
  5. The interest paid on the home loan is deductible under section 24 of the income tax act and if you look at the table below it would gradually decrease over the period of the loan. This interest is deductible upto Rs. 200,000 per annum.

Adding benefits under section 24 and 80C one could theoretically deduct Rs. 350,000 per annum of EMI paid subject to limits imposed by individual sections . Benefit under both sections is available to NRI’s.

The tax benefit can change over the period of the loan as the benefits under SECTION 24 and 80C can be revised as a part of the yearly budget exercise.

These tax deductions are beneficial only if one has taxable income for the year.

Another important factor to consider would be any penalty that your bank might impose for early repayment of the loan.

To help with further discussion, I have created the below widget where you can enter the amount of the loan, the interest rate, term of the loan and the year in which loan was taken to get the EMI and payment schedule (rounded to first integer).

If you observe then during the first few years one’s EMI mostly covers the interest payment and less of principal amount and the situation  reverses as the time passes by.

However the interest rate that one is paying remains constant throughout the tenure of the loan irrespective of whether it’s the first year or the last. By virtue of decreasing outstanding loan amount (principal amount) the EMI covers more of principal over time and helps pay off the loan.

Therefore it would be wise to take a cheaper loan in Singapore to pay off a expensive loan in India subject to:

  1. The total differential in interest rate is in favor of the cheaper loan.

E.g. If the current loan is at 9.6%, the loan prepayment penalty is 1%, the tax bracket in which the individual is 30% and total emi is less than 29k per month then the break even point for the new loan in Singapore would be a effective interest rate of 5.72%

2. If the person is in a lower tax bracket or has no benefit by way of deductions from housing loan then the break even point above would be 8.6%

3. The individual taking a personal loan in Singapore or any other country has relative certainty of continued cash flow or employment for the tenure of the loan.

Also one should remember that the loan repayment (interest and principal) of the loan taken in Singapore or any other country does not qualify for any tax rebates in India.

Other factors like expected future exchange rates, anticipated changes to tax laws, whether one has a fixed rate loan or floating rate facility and outlook of interest rates can also be considered but the more variable one adds the more complicated the decision making process will become.

In Singapore you can avail a personal loan upto 4 times your monthly salary. So if both husband and wife work you can get a bigger loan.

Citibank, in my experience tends to offer best rates for 6 months personal loan (if you have been a regular customer). Dbs and HSBC tend to offer the worst rates from what I have heard from acquaintances. Loans longer than 6 months tend to cost more from banks and tapping into into family, friends or Bullion backed facilities are other good alternatives.

The bottom line is that an expensive loan should always be paid off or replaced by a cheaper loan. The same applies if your investment yields less than the cost of home loan then sell off your investment  and reduce your debt first- remember every penny saved is every penny earned.

Indian Rupee – Real star or …

It’s a very interesting phenomenon every time SGD INR falls – people panic and there is a flurry of questions on SGD INR’s future. To me this anxiety is similar to a house owner checking on the market rate of the house they live, every week, and feeling sad if the latest transacted price in the neighborhood went down or celebrating if it goes up. In reality, this is just perceived loss/profit and is irrelevant unless the person is trading in properties and regularly buys and sells them for a living.

Anyway, leaving perceptions aside, lets look at how Indian Rupee has really performed against major currencies in the past 3 years before I turn my focus to SGD INR.

inr-summary

The Rupee has fallen against USD and JPY, against Chinese Yuan and Singapore Dollar its a flatline and the gains against EUR and GBP are not because Rupee has fundamental strength against them but because the 2 currencies have weakened due to their own issue – ECB monetary stimulus and Brexit vote respectively.

Also worth highlighting is Rupee’s inherent volatility where it went from 68/69 against the US dollar in Aug 2013 to 58 around Election time in 2014 and is back up at 67 mark – all in a matter of 3 years (refer comparative 1, 2 and 3 year charts at the end)

There is no doubt that the Rupee has been pretty stable in the past few months and the RBI has done a fantastic job of curbing the volatility in the face of BREXIT, expected US fed rate rise, Increasing Oil Prices,Redemption of FCNR deposits and escalating tensions with Pakistan.

But have the rupee or economic fundamentals changed to much in past few months? -I don’t think so.

India still imports 80% of its crude oil and as oil prices go up they would put a strain on the current account, the goods manufactured in China are still way competitive both in terms of cost and quality (maybe that’s why rupee is following the Yuan trajectory) and the NPA situation with Indian banks is still worrisome and could result in market turmoil.

Investing in NRE FD’s has generated stable returns depending on when one invested, refer – (https://adityaladia.com/2016/02/11/you-would-be-out-of-money-80-of-days-if-you-transferred-money-to-india-in-2015/) and would slowly stop being an attractive avenue as the interest rates in India go down.

Now coming to SGD INR, the current weakness is mostly due to flurry of bad news (or expectation management as I call it) on the economic and employment front. I have always maintained that the MAS is pro-active and lets the SGD adjust quicker to the market events as compared to what RBI allows or can allow with the INR.

All the expected or known negatives are already priced into Singapore Dollar and any other movement would be due to fed rate decisions. Even after the news of GDP missing estimates the SGD only fell around 1% which is very normal in the current volatile markets.

On the other hand there are a lots of factors for the Indian Rupee that needs to be priced in – merger of banks due to NPA’s, challenges for exports due to relatively strong rupee – China and other ASEAN countries, increase in crude oil prices, looming fed rate increase and of-course any escalation on the international borders with Pakistan.

As with the answer to keeping money in Singapore Dollar or remitting to India, the response is unique to every individual depending on their investment portfolio, diversification, cash flows and risk appetite.

48 would act as a very strong support and do factor in the cost of transferring money into India and remitting back, the cost of loan (if you are taking one) and tax obligations if you invest in property or stock markets when making any such decisions and don’t get stuck on specific numbers – transferring money at 49.80 is just as good as transferring at 50.

————————————————————————–
INR performance – past 1 year

inr-1-year

INR performance – past 2 year

inr-2-year

INR performance – past 3 year

inr-3-year

Cash rate of INR better than spot in Arcade

It’s hard to believe but it is true. Some money changers are offering a cash rate of upto 49.80 for 1 sgd in arcade building (raffles place). 

The current spot is around 48.40 which means if you go to these few money changers you gain around 2.5% over spot. 

How they are able to do this is beyond my comprehension but it’s true. I changed some money, checked on notes and everything is legit (atleast to my eyes) 

So if you are looking to change some money for upcoming travels to India then do grab this opportunity. 

SGD INR crosses 50!!

Finally the SGD INR RATE crossed 50, it’s taken 3 years for the pair to return back to this level and there is more appreciation to come.

In Aug of 2013 the Rupee was battered to all time lows and the RBI had a new Governor in Raghuram Rajan in September. The fiscal situation looked bad then with oil at all time highs and political uncertainty in India. With some bold policy moves (NRE FD’s and FCNR scheme) and good luck (falling oil prices) the RBI was able to reign in the fall and stabilize the foreign reserves situation.

But with global uncertainty in form of referendum on Britain’s exit from EU, the trajectory of Fed fund rate increases and increasing oil prices exit of RBI governor could not have come at a worse time.

The FCNR deposits of 3 years back are due for redemption between Aug and Nov of this year which would be a 20 billion USD outflow of reserves. Gold and Oil prices have bounced back from all time lows which will add to India’s woes.

If Britain decides to exit the EU then the global uncertainty will increase and any foreign firm will reevaluate their overseas investment plans which will include India.

What is most surprising is that a RBI governor who has been dead correct in warning the other federal reserves that cheap money policy is not a cure to global financial woes and has been instrumental in stabilizing the Rupee and control inflation is being let go due to political reasons – just because he decided to disagree with the government and force them to make the right policy changes he is being penalized.

Anyway the damage has been done and I would not be surprised if Rupee hits the 75 mark against the USD by November this year and if that happens SGD INR will be at 55.

However in the short term a range of 49 to 52 would be seen. For today I expect intraday volatility where after the initial fall RBI will try to stabilize the Rupee though a gradual fall in coming weeks should be expected as the international event unfold.

….. And remember 52 is not far away.

Indian Rupee is Overvalued and Chief Economic advisor agrees!!

Rupee is Overvalued and should depreciate – something I have been saying for 3-4 months now but for lack of time had not been able to do some research and share with everyone my thoughts behind the my assertion.

Reading the newspaper today I read Chief economic advisor Arvind Subramanian’s view as told to Economic Times,

“I think we have to be opportunistic, when there is a chance to allow it to drift down maybe a little bit it drift down but when lot of capital is coming in intervene to keep it stable,” Subramanian had said. “I agree that there is a part of the community out there that wants a strong exchange rate, but that would be very detrimental to our exports”

http://economictimes.indiatimes.com/news/economy/foreign-trade/government-hopes-rupee-reflects-its-true-value-finance-minister-arun-jaitley/articleshow/46695530.cms

The rupee has been stable against the dollar but has appreciated against a basket of currencies, severely effecting the exports competitiveness. India’s exports declined for third month running in February. Rupee has appreciated 22.4% against the euro in the current financial year. On a trade-weighted basis, and after adjusting for inflation, in February rupee was the rupee was over 24% overvalued against a basket of currencies of India’s six largest trade partners.

The below table shows the performance of Indian currency against major currencies and the Rupee has strengthened against every currency other than USD and Chinese Yuan, the direct impact of this strengthening is that exports to these countries be it Software, Services or Goods all become less competitive

INR comparitive chart 2015Now lets look at the competition – Countries that export goods and services to the nations above –  big ones being Indonesia, Malaysia, Brazil, Russia, South Africa and the currency of all these countries have depreciated against Indian Rupee giving an advantage to competition.

INR Comparitive Chart 2015 2I think it’s a perfect time for India to weaken the Rupee while Oil remains low to boost competitiveness of exports and fill up our foreign exchange reserves. At the same time build oil reserves so that even when oil prices move up we don’t have to strengthen the currency in tandem to prevent the outflow of petro dollars.

SGD INR: Post the Election Euphoria

Time flies and it’s already June – I can’t believe that the last I wrote about INR was in February and whole world was speculating on the outcome of the Indian elections. I did not expect the BJP to win with a full majority given the polarisation of votes, combined with regional politics and was expecting a hung parliament. 

Based on that I had predicted that the Rupee would fall back to the 63 mark against the USD and 50 against the SGD (SGD INR: A storm in making). However, to my delight, the BJP did get a full majority. This meant that the uncertainty of a hung parliament and issues cropping up from coalition government were instantly non issues.

The markets reacted favorably to a government formed by progressive and reform oriented leaders and pushed the Indian Sensex to all time highs of over 25,000 and Rupee appreciated quite quickly to the Rs.58 mark against the USD. With many a Indians residing in foreign countries who remit money to India the obvious question was – Is the rupee headed to 55 against USD and should I transfer money to India now?

My answer to many such questions was – “the fundamentals of the economy don’t change overnight just with a stable government and the real effect of policy changes would take months to materialise and I still expect Rupee to stay over the 60 mark against the USD”

One of the first places to start when looking at fundamentals is Implied Exchange Rate calculation. Over the past years the spot rate has tended towards the Implied Rate Line (chart below: using SGD INR)

SGD INR 2014

and the calculation suggests that the SGD INR would move back towards the upward trending implied exchange rate line as the RBI is going to hold the interest rates steady – the inflation is still alarmingly high.

Other factors that would be playing against the Indian Rupee would be:

1. Crop losses due to el Nino weather changes

2. Increase in price of crude if the tensions in Iraq escalate

3. Global slow down in the background Ukraine crisis and escalation in South China sea

As I write the Indian rupee has already crossed the 60 mark against the USD and 48 against the SGD and I maintain that the INR would move towards the 63 and 50 mark against the USD and SGD in coming months.