17 tax-free incomes for you

The following are 17 important items of income, which are fully exempt from income tax and which a resident individual Indian assessee can use with profit for the purpose of tax planning.

1. Agricultural income

Under the provisions of Section 10(1) of the Income Tax Act, agricultural income is fully exempt from income tax.

However, for individuals or HUFs when agricultural income is in excess of Rs 5,000, it is aggregated with the total income for the purposes of computing tax on the total income in a manner which results into "no" tax on agricultural income but an increased income tax on the other income.

Agricultural income which fulfils the above conditions is completely exempt from tax. The manner of calculating tax on total income and agricultural income, is explained in the following illustration:

Illustration For FY 2008-09 (assessment year 2009-10), a male individual has a total income from trading in textiles amounting to Rs 1,52,000; besides, he has earned Rs 40,000 as income from agriculture. The income tax payable by him will be computed as under: On the first Rs 150,000 of the taxable non-agricultural income: Nil On the next Rs 40,000 of agricultural income (falling under 10% slab): Nil On the next Rs 2,000 of taxable non-agricultural income @ 10 per cent: Rs 200 Income tax on aggregated income of Rs 152,000 + Rs 40,000 = Rs 192,000: Rs 200

2. Receipts from Hindu Undivided Family (HUF)

Any sum received by an individual as a member of a Hindu Undivided Family, where the said sum has been paid out of the income of the family, or, in the case of an impartible estate, where such sum has been paid out of the income of the estate belonging to the family, is completely exempt from income tax in the hands of an individual member of the family under Section 10(2).

3. Share from a partnership firm

Under the provisions of Section 10(2A), in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm is completely exempt from income tax since AY 1993-94.

For this purpose, the share of a partner in the total income of a firm separately assessed as such would be an amount which bears to the total income of the firm the same share as the amount of the share in the profits of the firm in accordance with the partnership deed bears to such profits.

4. Allowance for foreign service

Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India, rendering service outside India, are completely exempt from tax under Section 10(7). This provision can be taken advantage of by the citizens of India who are in government service so that they can accumulate tax-free perquisites and allowances received outside India.

5. Gratuities

Under the provisions of Section 10(10) of the IT Act, any death-cum-retirement gratuity of a government servant is completely exempt from income tax. However, in respect of private sector employees gratuity received on retirement or on becoming incapacitated or on termination or any gratuity received by his widow, children or dependants on his death is exempt subject to certain conditions.

The maximum amount of exemption is Rs. 3,50,000;. Of course, this is further subject to certain other limits like the one half-month's salary for each year of completed service, calculated on the basis of average salary for the 10 months immediately preceding the year in which the gratuity is paid or 20 months' salary as calculated. Thus, the least of these items is exempt from income tax under Section 10(10).

6. Commutation of pension

The entire amount of any payment in commutation of pension by a government servant or any payment in commutation of pension from LIC [Get Quote] pension fund is exempt from income tax under Section 10(10A) of IT Act.

However, in respect of private sector employees, only the following amount of commuted pension is exempt, namely: (a) Where the employee received any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive; and (b) In any other case, the commuted value of half of such pension.

It may be noted here that the monthly pension receivable by a pensioner is liable to full income tax like any other item of salary or income and no standard deduction is now available in respect of pension received by a tax payer.

7. Leave salary of central government employees

Under Section 10(10AA) the maximum amount receivable by the employees of central government as cash equivalent to the leave salary in respect of earned leave at their credit upto 10 months' leave at the time of their retirement, whether on superannuation or otherwise, would be Rs. 3,00,000.

8. Voluntary retirement or separation payment

Under the provisions of Section 10(10C), any amount received by an employee of a public sector company or of any other company or of a local authority or a statutory authority or a cooperative society or university or IIT or IIM at the time of his voluntary retirement (VR) or voluntary separation in accordance with any scheme or schemes of VR as per Rule 2BA, is completely exempt from tax. The maximum amount of money received at such VR which is so exempt is Rs. 500,000.

9. Life insurance receipts

Under Section 10(10D), any sum received under a Life Insurance Policy (LIP), including the sum allocated by way of bonus on such policy, other than u/s 80DDA or under a Keyman Insurance Policy, or under an insurance policy issued on or after 1.4.2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20 per cent of the actual capital sum assured, is fully exempt from tax.

However, all moneys received on death of the insured are fully exempt from tax Thus, generally moneys received from life insurance policies whether from the Life Insurance Corporation or any other private insurance company would be exempt from income tax.

10. Payment received from provident funds

Under the provisions of Sections 10(11), (12) and (13) any payment from a government or recognised provident fund (PF) or approved superannuation fund, or PPF is exempt from income tax.

11. Certain types of interest payment

There are certain types of interest payments which are fully exempt from income tax u/s 10 (15). These are described below:

(i) Income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf.
(iia) In the case of an individual or a Hindu Undivided Family, interest on such capital investment bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e. 7 Capital Investment Bonds);
(iib) In the case of an individual or a Hindu Undivided Family, interest on such Relief Bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e., 9 per cent or 8.5 per cent or 8 per cent or 7 per cent Relief Bonds); (iid) Interest on NRI bonds;
(iiia) Interest on securities held by the issue department of the Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949;
(iiib) Interest payable to any bank incorporated in a country outside India and authorised to perform central banking functions in that country on any deposits made by it, with the approval of the Reserve Bank of India [Get Quote] or with any scheduled bank;
(iv) Certain interest payable by Government or a local authority on moneys borrowed by it, including hedging charges on currency fluctuation (from the AY 2000-2001), etc.;
(v) Interest on Gold Deposit Bonds;
(vi) Interest on certain deposits are: Bhopal Gas victims;
(vii) Interest on bonds of local authorities as notified,
(viii) Interest on 6.5 per cent Savings Bonds [Exempt] issued by the RBI, and
(ix) Stipulated new tax free bonds to be notified from time to time.

12. Scholarship and awards, etc

Any kind of scholarship granted to meet the cost of education is exempt from tax under Section 10(16). Similarly, certain awards and rewards, etc. are completely exempt from tax under Section 10(17A), for example, Lakhotia Puraskar of Rs 100,000 awarded to the best Rajasthani author, every year under Notification No. 199/28/95-IT (A-I) dated 22-4-1996.

Any daily allowance received by a Member of Parliament or by an MLA or any member of any Committee of Parliament or State legislature is also exempt from tax under Section 10(17).

13. Gallantry awards, etc. -- Section 10(18)

The Finance Act, 1999 has, with effect from AY 2000-2001, provided for complete exemption for the pension and family pension of Gallantry Award Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and also other Gallantry Award winners notified by the Central Government.

14. Dividends on shares and units -- Section 10(34) & (35)

With effect from the Assessment Year 2004-05, the dividend income and income of units of mutual funds received by the assessee completely exempt from income tax.

15. Long-term capital gains of transfer of securities -- Section 10(38)

With effect from FY 2004-05, any income arising to a taxpayer on account of sale of long-term capital asset being securities is completely outside the purview of tax liability especially when the transaction has been subjected to Securities Transaction Tax (STT).

Thus, if the shares of any company listed in the stock exchange are sold after holding it for a minimum period of one year then there will be no liability to payment of capital gains. This provision would even apply for the old shares which are held by an assessee and are sold after the Finance (No.2) Act, 2004 came into force.

16. Amount received by way of gift, etc -- Section 10(39)

As per the Finance (No. 2) Act, 2004, gift, etc. received after 1-9-2004 by an individual or an HUF whether in cash or by way of credit, etc. is being subjected to tax if the same is not received from a stipulated relative. Section 10(39) provides that the amount received to the extent of Rs 50,000 will, however, be exempt from the purview of tax payment.

Similarly, amount received on the occasion of marriage from non-relatives, etc. would also be exempted. It may be noted that the gift from relatives, as specified in the section can be received without any upper limit.

17. Tax exemption regarding reverse mortgage scheme -- sections 2(47) and 47(x)

Any transfer of a capital asset in a transaction of reverse mortgage for senior citizens under a scheme made and notified by the Central Government would not be regarded as a transfer and therefore would not attract capital gains tax. The loan amount would also be exempt from tax. These amendments by the Finance Bill, 2008 apply from FY 2007-08 onwards.

[Excerpt from How to Save Income Tax through Tax Planning (AY 2009-10) by R N Lakhotia and Subhash Lakhotia, two of India's top taxation experts.

How to save income tax through planning!!

Taxpayers can lower the incidence of income tax by means of legal transfer of their sources of income among family members, so that each unit of the family enjoys the basic personal income tax exemption limit, which the Finance Bill 2008 has revised for financial year 2008-09 to Rs 150,000 for male individuals and HUFs; Rs 180,000 for resident women tax payers and Rs 225,000 for resident senior citizens.

The first step in tax saving through family tax planning is to adopt the concept of divide and rule. The simple rule is that each family member must have his or her independent source of income so as to legally become an independent tax payer under the provisions of the income tax law.

In case the entire income of a family belongs to just one member, the tax liability is much higher than when the same income is spread among different members of the family.

Now, under the income tax law it is not possible to arbitrarily divide one's income amongst different members of the family - and then pay lower tax in the names of different family members. However, this goal can be achieved by intelligent use of the facility of gifts and settlements.

Thus, for example, even if a taxpayer's parents are not paying income tax today but if they receive some gift from friends or relatives or from anyone else in the world, the income so generated would belong to them.

In this manner, independent income tax files can be started for different family members by developing independent funds for each person through gifts thereby resulting in separate independent sources of income which would then be taxed separately to income tax.

Once the income is spread among more people, chances are some of them would attract lower rates of tax. Also, each one would then be entitled to independently claim exemptions, deductions, rebates, etc.

Generally, any gift you receive from various members of your family and specified relatives is not considered your income but a capital receipt. Thus, no income tax is payable on gifts received from relatives - and also gifts received from parties other than relatives upto a sum of Rs. 50,000 and at the time of marriage up to any amount.

Care should, however, be taken to ensure that any gift which is received should be a genuine one. The person making the gift, called the donor, should have proof of his or her having the source for making the gift.

The other important point to keep in mind in the case of gifts is that the provisions of Section 64 of Income Tax Act prohibit any direct or indirect transfer of funds between an assessee and his/her spouse.

Thus, a husband should not make any gift to his wife; likewise, the wife should not make a gift to her husband. If the gift is made between spouses, it would attract the provision of Section 64 and lead to clubbing of the incomes of the spouses.

To achieve the best results of gift, and to avoid clubbing of income, you may receive gift from any relative other than your spouse, and, in the case of a daughter-in-law from her father-in-law.

A trust for minor children eliminates clubbing of income

The gifts made to a minor child would similarly result in clubbing of income. Hence, from the point of view of tax planning a trust could be created for the welfare of the minor child with a specific condition that no part of income should be spent on the minor child during the period of minority.

If this simple technique is adopted then there will be no clubbing of income of the minor child with the income of the parents. The clubbing provisions do not apply when you make gifts to your major children.

Your major children are your great tax savers

All your major children can help you save your income tax. You can freely gift money to your major children without attracting the payment of gift tax. This amendment makes it a good idea to make liberal gifts to your major children so that the income, if any, arising from these investments in years to come can be taxed in the hands of your major children.

For example, if you have fixed deposits let us say of Rs 20 lakh (Rs 2 million) and you have a major son as well as a major daughter then it makes sense to gift away Rs 500,000 to each of them.

After receiving the gift amount the children also make investment in bank fixed deposit and each of them receives yearly interest of say, Rs. 45,000. On this amount the son as well as the daughter will not pay income tax because the amount is below the exemption limits of Rs 150,000 and Rs. 180,000, respectively.

Thus your major children can now be great source of tax saving and you can enjoy the benefit of lower income tax incidence in the family as a whole. If, however, due to some reasons you do not feel inclined to make huge gifts to your major children, then you may give interest-free loans to your major children so as to legally reduce your taxable income. It is lawful to grant interest-free loans to your major children from your own funds.

Your parents and in-laws can save you taxes

Might sound incredible to most readers but the fact is that your own parents as well as your own in-laws can become legal tools of tax planning for you and your family. If you want to achieve this dictum then all you are requested to do is just to give away a portion of your funds either as a gift or a loan to your parents as well as your in-laws so that in years to follow your income tax burden become light as the income on funds transferred by you to them which would bring in income would be taxed in their hands.

With the increase in the limit of exempted income for individuals, women tax payers and senior citizens, it is now a great time for having income tax files for all.

Separate income tax file for a daughter-in-law

Under Section 64 (1) (a) of the IT Act, if the father-in-law or mother-in-law makes any gift to his or her daughter-in-law, i.e., their son's wife, on or after 1 June 1973, the income arising to the daughter-in-law in respect of the gifts so made would be liable to be included in the total income of the father-in-law or the mother-in-law making the gift.

However, where such a daughter-in-law receives a gift not from her father-in-law or mother-in-law or her husband but from her father or mother or uncle or aunt or uncle-in-law, etc. then the income arising to such daughter-in-law in respect of such a gift would be liable to be assessed as the income of the daughter-in-law separately.

Such income would not be included in the total income of the father-in-law or the mother-in-law or the husband of such a lady.

Besides, if the daughter-in-law makes an investment of such gifted amount, the income arising to her out of such investment would also be liable to be assessed separately.

Similarly, if she were to join a partnership firm as a partner with the help of such gifted money, the interest arising to her would be assessable to tax in her separate assessment.

Such interest or salary as a working partner would not be liable to be included in the income of her husband or father-in-law or mother-in-law or any other relative. If she is a partner of any firm carrying on any business, her husband could also be a partner in the same firm.

Now, from assessment year 1993-94 her share income from the firm would not be clubbed with the income of the husband. This is illustrated in the following example.

Example

Mr. A has a major son named Mr. B, who gets married on 18.1.2008. Mrs. B receives a sum of Rs 4,00,000 as gifts from her father, mother and other relatives, on the occasion of her marriage. Mrs. B joins a partnership firm along with C, D and E who are outsiders. Her interest from the said firm in respect of the accounting year ended on 31.3.2008 relevant to the assessment year 2008-2009 is Rs 44,000. The income of Mr. A from his separate business is Rs 43,000 while the income of Mr. B from his own separate business is, Rs 72,000. In this case Mrs. B would be liable to be assessed separately on interest from the partnership firm amounting to Rs 44,000 and tax payable would be nil. This sum of Rs 44,000 arising to Mrs. B would not be liable to be included along with the sum of Rs 43,000 being the income of her father-in-law Mr. A or with Rs 72,000 the income of her husband, Mr. B.

Tax planning for a nuclear family

The concept of joint family is cracking down. Nuclear family concept is on a rise. Under the present scenario for a nuclear family there is imperative need of tax planning so as to cut down taxes.

The simple methodology of tax planning for a nuclear family is to have separate income tax file for self, spouse and all children as well as the Hindu Undivided Family.

For major children the tax planning is easy and simple, namely to resort to the concept of gifts and loans. As far as the minor child is concerned the best answer could be achieved by having a separate income tax file of the minor child through his 100 per cent specific beneficiary trust as mentioned in the preceding paragraph.

The Hindu Undivided Family file can also be opened. In case the nuclear family adopts tax planning by having income tax files for different family members and thereafter takes liberal advantage of the provisions relating to tax deduction, then it would be possible to achieve best tax planning for a nuclear family.

Tax planning by DINKs

Working couples who have no children are known as DINKs (Double Income No Kids). Substantial tax planning is needed for them even in the initial years of their married life. The best tax planning which DINKs should adopt is that each one of them should take full advantage of income tax exemptions and deductions.

The present exemption limit for the financial year 2008-09 is Rs 150,000 for every individual male tax payer. In addition, for a woman tax payer the exemption limit would be Rs 180,000. Thus, for the financial year 2008-09, DINKS would be able to enjoy a combined exemption limit of Rs. 330,000.

Never in the past the tax exemption slabs were so very attractive. They should also make investments in a residential house by taking a loan and thus save income tax up to the maximum extent (each of them). They should also plan a separate income tax file of HUF.

Excerpt from How to Save Income Tax through Tax Planning (AY 2009-10) by R. N. Lakhotia and Subhash Lakhotia, two of India's top taxation experts.

8 key ratios for picking good stocks..

The following 8 financial ratios offer terrific insights into the financial health of a company -- and the prospects for a rise in its share price.

1. Ploughback and reserves

After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback.

Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.

The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.

Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.

Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.

Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.

As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.

Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.

The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.

2. Book value per share

You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.

The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds.

If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.

Book Value per share = Shareholders' funds / Total number of equity shares issued

The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company.

Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.

Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth.

The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.

3. Earnings per share (EPS)

EPS is a well-known and widely used investment ratio. It is calculated as:

Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued

This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend.

The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.

This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.

Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback.

Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.

4. Price earnings ratio (P/E)

The price earnings ratio (P/E) expresses the relationship between the market price of a company's share and its earnings per share:

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.

P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.

For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.

On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.

Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.

To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.

All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?

The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects.

If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.

5. Dividend and yield

There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends -- capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.

It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- it doesn't really matter whether it comes from capital appreciation or from dividends.

A wise investor is primarily concerned with the total returns on his investment -- he doesn't really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.

Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.

On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.

On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.

Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company's shares. This relationship is best expressed by the ratio called yield or dividend yield:

Yield = (Dividend per share / market price per share) x 100

Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.

Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each.

If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.

The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.

Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.

6. Return on Capital Employed (ROCE), and

7. Return on Net Worth (RONW)

While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.

While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:

1. Return on Capital Employed (ROCE), and

2. Return on Net Worth (RONW).

Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company's efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.

Return on capital employed

Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).

The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.

The operating profit of a company is a better indicator of the profits earned by it than is the net profit.

ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.

Return on net worth

Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.

ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.

The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.

8. PEG ratio

PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.

For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.

The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.

As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.

The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.

[Excerpt from Profitable Investment in Shares: A Beginner's Guide by S S Grewal and Navjot Grewal.]

Budget why and how

Why budget

To function effectively and discharge all its duties and obligations, every government needs resources. Through the budgetary process, the Indian Parliament authorises the government of the day to collect funds by way of taxes, duties, cess, borrowings and so on. The funds so collected by the government are used, with the approval of Parliament, to meet its expenditure.

The President of India is obliged constitutionally to have the Annual Financial Statement for the ensuing financial year laid on the table of the House under Article 112. But, according to Article 77(3), the Finance Minister has been made responsible to prepare the Annual Financial Statement and pilot it through Parliament. This Annual Financial Statement is called the budget.

The Team

The Finance Minister prepares the Union Budget and budgets of those states under President's Rule. Though the ministry of finance has the overall responsibility of framing the budget, other organs of the state are also involved in budget-making. These include;

1) The Planning Commission

Planning Commission sets overall targets for the ministries

2) The Comptroller & Auditor General

C&AG keeps a check on accounts

3) Administrative Ministries

Finance Minister has to consult the administrative ministries for their requirements and to incorporate plan priorities.

The finance ministry

In common usage, the budget is referred to as being the Finance Minister's speech and the documents tabled on the day of the budget. The actual process, however, starts much earlier and continues even after the budget is presented to Parliament. Each department in the finance ministry is charged with a particular responsibility.

Expenditure
Department of Expenditure

Revenue
Non-Tax — Department of Economic Affairs

Tax— Department of Revenue

Deficit

Department of Economic affairs

The process

The budget exercise kicks off in September every year with the issue of a budget circular by the Budget Division of the Department of Economic Affairs (DoE) to all Union Ministries, all states and UTs, autonomous bodies and departments and the three arms of the defence forces for preparing revised estimates for the current financial year and the budget estimate for the next financial year .The circular for 2008-09 budget was issued on September 20, 2007. It contained guidance to ministries/departments for framing the Revised Estimates for 2007-2008 and Budget Estimates for 2008-2009.

Due dates

Due dates for rendition of estimates for 2008-09 budget by ministries/departments to Budget Division of Department of Economic Affairs are:

October 26 ,2007
Interest receipts/recoveries of loans

October 26,2007
Capital receipts (including public account transactions)

October 31,2007
Statement of ( proposed ) Budget Estimates (SBE)

November 30,2007
Revenue receipts

Immediately after ceilings are communicated

Statement of Budget Estimates (final)Within 3 days of receipt of plan allocation from Planning Commission

SBE with BE 2008-2009 (Plan)

Notes on Demands for Expenditure Budget Vol. 2

Material for statements to be appended to Demands for Grants/Expenditure Budget.


Administrative ministries: After the line ministries submit relevant documents, pre-budget meetings begin. These involve extensive consultations between line ministries and the Department of Expenditure.

Interest Groups :Meanwhile the Department of Economic Affairs and Department of Revenue engage with stakeholders such as farmers, labour unions, business, FIIs, economists and civil society groups.

.State Governments: Demands to the state governments are sent to the concerned finance ministry departments for evaluation.

The finance ministry also undertakes an intense internal assessment n Spending priority-Department of Economic Affairs n Revenue mobilisation-Department of Revenue n Aligning with policy goals-Department of Economic Affairs

Once the pre-budget meetings are over, the approved ceiling for expenditure, as finalised in these meetings, is communicated. It includes internal ceilings of revenue and capital expenditure. Based on these limits, each ministry/department will prepare a final statement of budget estimates (SBE) and send to the budget division

The revenue department goes through all the demands and works out their revenue implications. A final call on the tax proposals is taken by the Finance Minister. The proposals are discussed with the Prime Minister before a final
decision is taken

Budget division then gets on with the task of preparing the budget documents. There are 13+ core documents.

How the budget is passed

1. The Budget is presented to Parliament on a date fixed by the President. By convention, since1999, it is being presented at 11 A.M. on the last working day of February

2. The budget session of Parliament opens with the address by the President.

Presentation

.Finance minister presents the Budget in the Lok Sabha

The Budget speech of the FM has two parts. Part A deals with general economic survey of the country and policy statements while Part B contains

Taxation proposals

‘Annual Financial Statement’ is laid on the Table of Rajya Sabha after the FM’s speech

Discussion

1. No discussion follows immediately after the budget is presented.

2. Few days later the Lok Sabha discusses the Budget as a whole and not the details for 2 to 3 days.

3. The FM makes a reply at the end of the discussion.

4. A ‘Vote on Account’ for expenditure for the next two months of ensuing financial year is obtained from Parliament.

5. The House is adjourned for a fixed period.

6. During this period, the Demands for Grants of various ministries/departments including Railways are considered by relevant standing committees

Vote

Standing Committee reports are presented to the House. It discusses and votes on demands for grants, ministry-wise

.The Speaker puts all the outstanding Demands to the vote of the House. This device is known as the 'guillotine'. The Lok Sabha has the power to assent to or refuse any demand or even to reduce the amount of grant sought by the government

In the Rajya Sabha, there is only a general discussion on the Budget. It does not vote on the Demands for Grants

After the General Discussion on the Budget proposals and voting on Demands for Grants have been completed, government introduces the Appropriation Bill. The Appropriation Bill is intended to give authority to the government to incur expenditure from and out of the Consolidated Fund of India.

Tax Proposals

The Finance Bill seeking to give effect to the government’s taxation proposals, which is introduced in the Lok Sabha immediately after the presentation of the Budget, is taken up for consideration after the Appropriation Bill is passed. However, certain provisions in the Bill relating to levy and collection of fresh duties or variations in the existing duties come into effect immediately on the day the Bill is introduced by virtue of a declaration under the Provisional Collection of Taxes Act. Indirect tax proposals come into force as soon as they are announced; direct tax proposals await approval by Parliament. Parliament has to pass the Finance Bill within 75 days of its introduction.

Documents

Finance Minister tables the following documents in the Lok Sabha

Key to Budget n Budget

Highlights n Budget Speech

.Budget at a Glance

Finance Bill n Memorandum n Receipt Budget n Expenditure Budget n Customs & Central Excise n Implementation of Budget n Announcements 3. The Macro Economic Framework Statement

.The Medium Term Fiscal Policy Statement n The Fiscal Policy Strategy Statement
5. The Outcome Budget

If the budget proposals are defeated in the lok sabha, the government has to resign !

Railway budget

The Railway Budget is presented to Parliament by the union railway minister, two days prior to the General Budget. The Railway Budget figures relating to the receipt and expenditure of the railways are also shown in the General Budget, since they are a part and parcel of the total receipts and expenditure of the Government of India.

The secret world of the finance minister

The entire process of collating data and preparation of the text of the budget document is done by a few selected officials and stenographers working on computers which are de-linked from all networks, including NIC hot link.

Printing of the budget documents

Finance Ministry hands over the CD containing print-ready templates of all budget documents for printing aroundFebruary 24

The Union Budget is printed at the special printing press in the basement of the North Block of the Central Secretariat in New Delhi.

Quarantine

All officials, technicians and workers involved with the printing are quarantined - they have to sleep in North Block

The legal experts on taxation from the law ministry who check the text and wordings of the Tax Acts are also quarantined

The Press Information Bureau officials who prepare press notes in English, Hindi and Urdu on the budget too are quarantined

All quarantined officials walk out of the North Block only after the budget has been tabled by the FM in the Lok Sabha.

The Cabinet gets to see the budget summary only 10 minutes before Parliament assembles for the budget presentation.

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