There are two defining characteristics of any economic revolution, one is that they bring unprecedented prosperity to the regions that these revolutions start off and another is that these revolutions percolate to other regions albeit gradually. As an after-thought there is a third characteristic as well, they are taught in schools long after they are over.
However it might have been an interesting thing for someone to have gone and asked people of those times whether they knew they were part of a revolution. Chances are that most of them would not have realized that they were part of any revolution at all and a still greater part of the population would not even have known what a revolution is and would have thought that the prosperity that they were enjoying was temporal in nature and the cause of it was there own diligence and intellect.
The later half of the 20th century and the 21st century would be known in the history of mankind for another kind of revolution which is the IT revolution. While people who live through this revolution would also be unaware of the cause of the prosperity that they enjoy and would also see incomes rising in a way never known before there is one factor which will make the IT Revolution different from all other revolutions of the past.
The difference is this ? This revolution would in times to come not be known as belonging to one country but rather one class of people belonging to most of the countries in the world.
By its very nature IT and the internet are making the world smaller, at a personal level they are making it far easier for people of one culture and country to connect to another and making the world boundary less in a never before known manner. At the level of businesses and corporates, IT would strengthen the invisible hand of Adam Smith to hitherto unknown strength and business would truly reach where it ought to for economic reasons as the geographical boundaries that are put up by countries would be breached not by swords or cannons but by megabytes and fiber optic.
In this revolution not only would people from all across the world be able to participate but would also contribute to it by bringing to the table skills to the disposal of enterprising individuals at never before known prices and would make doing business much easier and much more profitable than it was for any individual during the history of mankind.
How does this work? Take an example of a violin manufacturer in Australia who wants to sell his violins in Australia and other parts of the world through his ?physical? shop and also his virtual shop which is the internet. The internet provides the Aussie a means to hire a web designer in Romania to design his website and a content writer in India to write the content, using the services of a website hosted and run by a company in the United States and ultimately using his website to sell violins to people of Australia, UK and New Zealand among other countries. The most striking point about this is that all continents but Africa and Antarctica have been involved in this business cycle.? Africa I am sure will pick up in years to come but we will have to wait till the Penguins learn English for Antarctica to really join in. All this is already happening today, I know because I have been part of this chain and anyone who looks around him would find many more examples for himself.
The future would see more of this because of which small businesses would thrive and there would be truly a monopolistic market without any geographical boundaries. Competition would be intense and in this competition the fittest will survive regardless of the country of there origin.
The reason why the IT revolution promises to be ?boundary-less? is that the people from all these countries would benefit from the enterprise of there people and increasingly more and more people from different countries would be participating in a single business cycle and these business cycles would in turn promote other business cycles locally like for instance our Romanian developer spending money on Ice cream in Romania which helps everyone right from the retailer to the ice factory.
The sum would be much greater than the parts and although at the end we may see that one country has benefited from IT more than others the world in general would be a richer place.
At the end of the IT revolution or rather when the IT revolution as we see it today has peaked out one would see that a lot of countries have thriving businesses started off by first generation entrepreneurs who employ lot of smart people around the world and the number of Multinationals that we have today would have grown multifold with businesses doing business across geographies and making money across continents hiring people from all of these places. These business would spread there wealth across the world creating sprightly economic conditions in not only there own country but in a lot of other countries.
For investors such as me and probably you what is important is to recognize that there will be a lot of interesting stocks which will be ?start ups? and which will either enable these business cycles or be part of it, and on a more macro level we are in a revolution so don?t get left out by sitting on the fences.
The IPO Excesses seems to be finally over
In the recent times in the Indian stock markets there have been many IPOs that have listed much below there offer price and would have therefore meant a loss to those investors who had subscribed for the same.
Traditionally IPOs were offered by the promoters with a certain discount to the inherent value of the stock to the public so that they public at large could benefit from what is knows as “listing gains”. However the trend lately has been one where the promoters have priced their IPOs very aggressively and most of the times there had been nothing left for the investors at the time of listing.
However old habits die hard and even though investors could see for themselves that there is no money to be made in the IPOs were still queuing up for IPOs of similar nature where the pricing was aggressive, pedigree of investors not too well known and the track record of business not proven.
One can only hope that after seeing a series of IPOs fail in a short while the investors will finally come to terms with the reality that today investing in IPOs do not mean easy money as it used to in not too far a past. And increasingly promoters are pricing their stocks very aggressively and do not leave anything for the retail investors at the time of listing.
The retail investors need to be wary about which IPOs to invest in as the numbers of profitable IPOs are really dwindling and the only one in the recent past has been MindTree which has provided some listing gains to the investors.
Investors should be really wary about borrowing money to invest in IPOs because of the same reason as when one borrows to invest in the markets because of being allotted lesser number of shares than the application and the rate of interest of the borrowing it becomes more and more difficult to make any money and one bad investment nullifies all the good ones that have been done in the past because often the price falls are more spectacular than gains.
With all this in mind investors need to come to terms with the reality that IPOs today are not as profitable as some time ago and therefore one would need to exercise a lot of discretion before investing in any one and the practice of blindly borrowing money, investing and then selling on listing would not work for most of the stocks any longer.
With the increase in globalization and ease with which investors can borrow money in one market and invest in another new forms of arbitrage are coming up every day.
The Yen Carry Trade is one such example of a form of arbitrage where investors are borrowing cheap yen and then investing it in US Treasury bills to generate a higher rate of return.
Following is an example of how this would work:
Suppose an investor borrows USD 900 worth of yen at 0.5% rate of interest from Tokyo and converts them into USD at an exchange rate of 120 yen per dollar. The investor adds his own 100 dollars and then buys US T-Bills which give a return of 4.5%. So on an investment of 1000 USD or 120,000 yen the investors get an interest of 45 dollars. On the amount that they have borrowed in yen they have to pay an interest of 4.5 dollars so effectively they stand to make $40.50 on $100 worth of their own money. This is a really cool 40% return on their initial investment.
However this is not completely risk free because of exchange rate fluctuations. This is because the interest on the loan and the actual repayment has to be made in yen and not dollars, so if the exchange rate changes from 1 USD = 120 yen to 1 USD = 100 yen, at the end of the year the investor would get back 1040 dollars, but in yen terms they would amount to just 104,000. So while the investor at the beginning of the transaction started off with 120,000 yen at the end of it despite the interest ends up with a smaller amount.
This is what is known as Yen Carry Trade and the reason why this has become noticeable in the recent times is that the price of they Yen has moved up thereby making a few such transactions unprofitable which in turn have triggered a cycle wherein more and more people are selling off their dollar assets and buying back yen which in turn in again causing the price of the yen to go up and cause more unwinding of positions.
EMI’s consist of 2 parts: The principal amount of loan & the second one being the interest on that.
A. Treatment of Principal Amount
According to the provisions of Income tax Act repayment of principal amount of loan can be claimed as exemption from total income of the assessee under section 80C. This means that total amount of EMI’s paid during the year will be bifurcated into these 2 parts i.e. principal amount & interest. The total of principal amount can be claimed as exemption. One thing to be noted here is that since the section 80C also covers other exemptions relating to LIC premiums, PPF, NSC’s etc & the maximum amount of exemption that one can claim is upto Rs.1,00,000/-. However there is no limit on amount of principal amount of loan, however the total of exemptions to be claimed under this section should not exceed Rs. 1 lakh. Assessee can claim any of the expenditure as exemption i.e. repayment of principal amount / LIC premium / PPF etc.
In other words, the assessee can claim either full amount of Rs.1 lakh from only investments in LIC / PPF etc or can claim full amount of Rs. 1 lakh from repayment of housing loan or can make any combination of investments & repayment of principal amount of loan but it is to be kept in mind that total should not exceed Rs. 1 lakh.
B. Treatment of Interest
As regards the interest part of EMI it is allowed as a deduction from a different head of income i.e. House property. Here again we will first calculate the total amount of interest paid in an year from the EMI’s paid. If the house property in respect of which loan is taken & EMI is paid is self occupied then maximum amount of deduction that one can claim (under section 24) is Rs.30,000/-. However if the assessee fulfills the following conditions then the maximum amount of deduction is Rs.1,50,000/-
- Loan is taken on or after 01/04/1999 for acquisition / construction of property.
- Property is completely acquired / constructed within 3 years of taking the loan.
It may be construed that
- Deduction in case of amount borrowed for reconstruction / repairs / renewals of house property will be Rs.30,000/-.
- Deduction in case of amount borrowed before 01/04/1999 for construction / reconstruction / repairs / renewals / purchase of house property will be Rs.30,000/-.
Note: It is to be kept in mind that above provisions will ONLY apply when the property in respect of which loan is taken or EMI is paid is SELF – OCCUPIED by the assessee & not let – out.
Note : EMI paid in respect of that house whose construction has not been commenced will still be taken for computing exemption of interest & principal amount. The amount of exemption in respect of interest will be limited to maximum of Rs.30,000/- only. In order to claim maximum deduction of Rs.1,50,000/- the house should be constructed within 3 years from the end of year in which loan was taken & such loan is taken after 01/04/1999.
Gurpreet Singh, CA
Taxability of HRA depends on following two of factors : – Â Â Â Â Â
- Rented house i.e. the assessee MUST be living in a rented house. Deduction of HRA cannot be claimed when one is residing in his own house or is not paying rent at all.
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- Place of residence i.e. in metro cities (Delhi, Bombay, Calcutta & Madras) or other cities.
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Â Â CALCULATE THE FOLLOWING Â Â Â Â Â
- 50% of Salary* (if assessee is living in metro cities) OR 40% of Salary (if assessee is living in other cities)
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- Deduct 10% of salary* from rent paid by the assessee.
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Â Â Now take the least of the above calculated amounts & compare it with the amount of HRA received by the assessee. Â Â CASE 1 Â Â if calculated amount > HRA received then whole of HRA is exempt from tax Â Â CASE 2 Â Â if calculated amount < HRA received then the amount chargeable to tax is (HRA Â Â Calculated Amount). Â Â Â Â Â Note - * means that salary includes the following Â
1. Â Â Â Â Â Â Basic Salary Â 2. Â Â Â Â Â Â Dearness Allowance 3. Â Â Â Â Â Â Commission based on a fixed percentage of turnover (Sales) achieved by the employee as per terms of contract of employment.
Gurpreet Singh, CA Â