Tax evasion

Tax evasion is pretty widespread in India, and a lot of chartered accountants make a living out of suggesting creative ways to evade tax for their clients and channeling their "black money". I really don't understand why can't the government come up with ways to tackle it, when all of us see it and know how it is being done. I seriously believe the problem with this is "political will", since a lot of politicians will probably be at the receiving end.

Instead of being too negative about this, I was trying to think if there is some way to incentivize paying taxes. Can we offer something to tax payers, so that they feel good about paying taxes? I think one way to do that is to offer perks, for which the sole eligibility is being in a certain tax bracket. I feel we as Indians do crave for prestige and social stature and our tax department could exploit that to lure a few more eligible tax payers to pay up.

For example, we could have some convenient reserved parking at critical locations where parking is usually hard to find (connaught place!!), which is only accessible to people who pay more than certain amount in taxes. There could be free bypass lanes in all toll booths all over India for tax payers above a certain limit. There could be reservation for admissions in premier institutions. There could be exclusive premier residential enclaves where the eligibility to buy is based on your income tax bracket. I'm sure we can come up with all sorts of interesting incentives to make this work.

Obviously, the monetary cost of all these "benefits" will be trivial compared to the tax being paid to get them. But, if these are structured well, the "prestige" value of these will make them work. At some level, it may sound like reservations for the rich, but I feel that a little bit of creativity can help design something that is a win-win for all.

If such incentives are in place, society will play its natural role is helping this process as well. Imagine if I am a successful businessman, but don't pay any tax. The fact that I don't have access to any of these special privileges, even though I clearly make a lot of money, will expose me to my near and dear ones and I might decide to pay some taxes to avoid the ridicule (open or behind-the-back) that this will invite.

Crazy thought, but I wonder if someone has thought this through.

Financial planning cheat sheet

Here's a quick summary of all that I have assimilated about personal financial planning over the years

Insurance: Don't go for ULIPS or complex insurance plans, stick to simple term insurance, it is the cheapest method. Insurance cover should be about 10 times your annual expenses (not income). Online only insurance policies will give you the best deal since they cut out the agent's commissions, consider icici pru's iprotect or aegon religare's iterm. Btw, you need insurance only if you have dependents, so no child insurance policies please. also, never lie on the insurance application, it's a sure shot way of claim rejection

Investment: Consider asset allocation to all the following asset classes - liquid, gold, equity, debt, fixed income, real estate

Liquid: Keep aside some amount as liquid investment for contingency requirements - either in a savings bank account or some good liquid fund, expect returns of 4-6% p.a. on this. 6 months expenses is a good thumb rule for how much to set aside here

Gold: Consider keeping about 5-10% of your total portfolio as gold. Gold ETF is a good way to invest in gold, you need a demat account for that. If you don't have that yet, consider opening a demat account and start purchasing gold ETF on monthly basis. GOLDBEES is a good one. Buying physical gold is not a great idea - banks charge a huge premium for certified gold coins, jewellary incurs huge making charges

Equity: Unless you have lots of spare time and interest in following the stock market, stay away from individual stocks. Instead, invest in established mutual funds. Don't invest in a lump sum. Rather go in for STP or SIP. Look for market dips to invest a little extra. diversified equity funds are the best choice (HDFC equity, HDFC top 200, Fidelity equity, Reliance RSF). Index funds are good too, you can also invest in index ETFs through a demat account (QNIFTY), the management charges are usually lower. Invest for a long time frame, at least 10 years, and don't be perturbed by market changes. If you don't have money to spare for 10 years, don't invest in equity, invest in debt. http://www.fundsindia.com/ is a good online provider for mutual fund investments without any charges

Debt, fixed income and Real estate in a later post.

Kasauli trip

We figured monsoons would be over by sep-end, so planned a trip to kasali in the last weekend of september. Kasauli is a small, quiet hill station about 350 kms from Delhi. Shimla is another 60-70 kms further on the same route. We figured shimla is too commercialized and Kasauli would be more relaxing, and the shorter drive is preferred with kids.

It took us about 7 hours to get there, with a couple of stops in between. For food stops, Haveli is highly recommended (there's one is murthal, and another in karnal - the one in karnal is quite happening with shops and all).

In kasauli, we stayed at the Kasauli Resort, and had a good overall experience there. The view from the rooms was great, which is very important in such a stay. Also, they had a nice campus with swings for kids. Pretty decent restaurant, but we didn't like the food too much. There are three floors, but no lift which can be a problem for some. Also, it would be nice to have heating in rooms, which was not there. It does get pretty cold at night.

There's not much to do in kasauli, just a visit to Manki Point and the local mall road shopping area. Go there to enjoy the nature and the views, which there is plenty of.

Trip to Taj Mahal and Agra

After trying to plan a trip to Agra for a long time, we finally managed to make the trip last weekend (july-end). We had apprehensions about the weather, with monsoon right here, but we decided to go for it anyway. It was a pretty satisfactory trip overall, I'll try to share some of my experiences which might help others planning the same trip.

The distance from NOIDA is about 200 kms. We planned to leave early morning, but it was 9 am by the time we left. We took a short break for tea near the UP border, in a place called "Apni Haveli". It looked decent from outside, but was pretty shabby inside, would definitely not suggest to anyone. In fact, there is a cafe coffee day right around there, which would have been a much better choice.

We were in agra by about 2 PM, we got a lot of traffic inside Agra. Our hotel was Clarke Shiraz, which is supposed to be a five star. It is nice, but the rooms look old, I would have expected more from a five star. But at INR 5K per night, it was a decent deal. The ITDC Mughal seemed to be a much better hotel for a slighty higher price.

After lunch and some rest, we set about to visit the Taj Mahal. Only battery operated vehicles are allowed within 2 kms of Taj Mahal. So, our taxi parked at the designated parking lot (INR 50 for parking) and we were immediately accosted by Tangawallas (horse-drawn carriage) and a shabby battery van. They told us they would charge INR 200 for the round trip to Taj Mahal. It was a bit high, but we thought Tanga would be a new experience for the kids, so hired one. We later found that govt run battery operated van provides round trip for INR 20 per person, and it much more comfortable.

Meanwhile, a chap started giving us all kinds of free advice citing that he is a government employee. He took me to the ticket booth and facilitated the purchase. After all that, he finally told me that he is a guide and we would have to pay him INR 350, which is the govt approved rate. I told him I was not interested, but since he seemed helpful (and out of job), I told him that he could "guide" us for INR 100. He finally agreed at INR 200. Later, we found out that he was slightly retarded, and mainly used him as a photographer, which he did a decent job of :). Personally, I don't think you really need a guide for Taj Mahal, just seeing and experiencing it is quite satisfying.

It was getting dark by the time we were done, and we decided to spend some time in the local market and dine at a nice restaurant since the food at Clarke's was not so great (it was okay). We bought some decoration items, and after asking around, learnt about a restaurant called "Pinch of Spice". We found the food excellent and the decor was nice and seating comfortable. I would definitely recommend it to anyone traveling to Agra.

Next day, we decided to visit the Dayal Bagh in Agra followed by Fatehpur Sikri. Dayal Bagh was a major disappointment, nothing to really see there and it is poorly maintained. I don't recommend it unless you have extra time to kill. Interestingly the adhoc roadside parking charge here too was INR 50, which is a scam.

On our way out of Agra, we made a quick stop at "Panchhi petha outlet" right on the main road. Panchhi is a very old, well known brand of agra, so we bought some angoori petha and namkeens from them. They don't offer any samples for tasting, but later when we tasted some in the car, it was really good. I'll definitely get more if I ever go there again. Watch out for fakes though, and make sure you find the authentic outlet. Most indian towns have some such legacy, reminds me of chitale bandhu in Pune ...

The drive to Fatehpur Sikri took about an hour and a half, it is about 50 kms from Agra. We were again accosted by a "guide" fella as soon as we got out of the car, but this time I refused right away. But, these guys are very persistent and on my wife's request we retained his services, again for a re-negotiated rate of INR 250. I felt the guide was more relevant here, since Fatehpur Sikri is not that spectacular, so the additional context provided by the guide makes it interesting. There is a mosque (chishti's dargah) right next to it, which we quickly visited also.

Finally, had a late lunch (forgettable) at a resort restaurant nearby and headed home.

Btw, a word about the weather. We didn't run into heavy rains, and the cloudy weather kept the heat out for most part. But, the humidity was very high which made it quite uncomfortable at times, I was sweating profusely most of the time. So, not the best time to make this trip.

Home loan in India

Floating rate home loan (at least in india, since that's where my experience lies) is a grossly misused concept. I have taken 4 different home loans in the last 5 years, and have learnt a few useful lessons.

All banks have a benchmark lending rate (BLR), this has slightly different names in different banks, but the concept is the same. When you apply for a floating rate home loan, they give you a discount over the BLR, and will try to woo you by giving the lowest possible effective rate (BLR - discount) in the market. But, this is just a ploy to lock you in and exploit you for the rest of the loan tenure.

The BLR is a complete sham and the banks have complete independence in how to manipulate it. You will realize this when the interest rates in the market start to fall below the level that you got your initial loan at. The reasonable expectation is that your effective rate should fall as well (after all that's what you thought "floating" meant). But, lo and behold, nothing like that happens. When you ask the bank, you'll find out that the BLR of the bank has not nudged at all. You then wonder how the bank is staying competitive in the market!! Well, it's quite simple, they have simply increased the "discount" for the new customers, so that they can rope in new customers by giving "floating rate" loans at competitive terms without passing on the benefit to existing customers.

You would then think that things will probably even out when the interest rate in the market rises. But, no such luck. The banks are very prompt in hiking the BLR as soon as the interest rates rise, making sure they don't miss a rupee in revenues.

To quote a couple of specific examples. I saw this with a home loan I took from ICICI bank. The initial rate of interest was 11%. This gradually rose to 13.5% and stayed there even when the prevailing market rate of interest was more like 10%. I asked ICICI bank to adjust my floating rate to reasonable levels, but they didn't do it, and eventually I moved my loan to a different bank at an interest rate of 9.5%, after paying a 2% pre-payment penalty to ICICI.

I saw it again with Deutsche Postbank (formerly BHW). I got a loan in 2008 at an extremely competitive rate of 9.99%. Today, 2 years later, my loan rate stands at 10.49%, when the bank is openly offering new loans at 9%. Even after raising this with them, and even escalating it to senior levels, there has been no remedy. And if i want to move my loan to another bank, I need to pay up 2% pre-payment penalty, which makes the whole exercise worthless.

That brings us to the pre-payment penalty clause. This clause is specifically in place to ensure that the banks can hold you ransom even when they are not giving you a fair deal. You can't even transfer your loan without paying this penalty.

Another sham that the banks have come up with to cover their ass in this scenario is a scheme to reduce your loan rate by paying an upfront fees. They typically charge you 1-2% of your loan amount to reduce the loan rate by 0.5-1%. This means it will take you more than 2 years to just recover the upfront fees that you paid them to lower the rate. And I'm pretty sure, 2 years later you will find yourself in the same position again. Not really a solution to the problem.

Btw, RBI has proposed some guidelines whereby the BLR would be regulated and such exploitation can be prevented. I'm not sure when that comes into effect, but it's really required to stop the banks from continuing to exploit gullible customers.

Moral of the story: When you take a floating rate loan, try to ensure that there is no pre-payment penalty clause, because that's the only way you can avoid being exploited (by moving your loan to a different bank) if the bank keep hiking your effective loan rate.

I should also put in a word here for a couple of banks with which i had good experience. HDFC bank was very fair, and even allowed me to close my loan early without any penalties. Axis bank offered me a loan without the pre-payment penalty clause, and have been pretty prompt in reducing my loan rate in response to a reduction in market rate.

Disclaimer: I have no personal bias towards any of the banks mentioned in this article. I have just recounted actual facts.

White collar crooks (aka Wealth managers)

Watch out for the so called wealth management services offered by the banks. Your relationship manager from the bank will offer to do this for you. I often wonder how qualified these guys really are, they do seem to be smart guys and girls with MBA degrees, so I would assume they do understand what wealth management means.

I have obliged plenty of these wealth managers during my last 3 years of experience in dealing with banks and researching information about investments in general. But, not one of them has come close to helping me "manage" my "wealth". All that they are interested in is peddling schemes and offers that result in big fat commissions for them. And they don't hesitate in brazenly lying about the "features" of the scheme that they are selling. These are your white-collar crooks. I am amazed at how they twist facts with a straight face.

Here's one example that I have overheard plenty of times. A new fund offer (NFO) from a mutual fund company is a good buy because the NAV at lauch is only Rs 10. Anyone with a little understanding of mutual funds would know that NAV of a mutual fund means nothing. The only purpose of NAV is to determine the number of units that you own and track the relative performance of the fund over time. Whether the NAV of a NFO is Rs 10, or Rs 100, or Rs 3.1416 is hardly relevant. In fact, common sense tells me that it is generally not a good idea to invest in a mutual fund of an NFO becuase they will probably be incurring much more initial costs (advertising, initial setup etc), which will come from the money that you are going to invest in it. Moreover, unlike an existing fund, there is no past data to judge how well the fund could perform. So, for all you know it may turn out to be a dud. Compare that with a mutual fund that has been around for 5 years, and has consistently delivered superior returns year-on-year. Why on earth would you prefer the NFO over the existing established fund (unless of course, the NFO has completely different goals which you believe in, and there is no existing fund doing that)?

But, the wealth managers will still pitch you every NFO that comes out for the simple reason that they have incentives to sell that which they don't have with the existing mutual funds. With the entry loads abolished, selling existing mutual funds is not lucrative at all.

Another common misleading pitch is about the ULIPs. They will tell you that the policies come with a lock-in period of only 3 years, and you can get your money after that. They very conveniently fail to mention the penalties incurred if you do that instead of continuing the policy for the full term of 10 or 15 years. Also, they very conveniently gloss over the fact that the fees charged in the first 3 years are much higher and the average fees charged comes even close to reasonable only if you at the entire policy period of 10-15 years. Moreover, they will tell you that you can easily get returns of 15% because these are linked to equities, without sharing with you the inherent risks of investing in equities over short periods of time. ULIPs may be reasonable investment avenues for at least a 10 year horizon (even though the fees are high, and should be rationalized further), but to pitch them as 3 year instruments is a crime.

One such rogue convinced my father to convert a fixed deposit (prematurely) into a ULIP policy. How can a ULIP be a replacement for a 1 year FD as an investment goal? I think such guys should be hanged to set an example. While-collar crooks!!!