Section 24 Income Tax Benefit of a Housing Loan

A house loan repayment has two components – principal and interest – and both of these components are treated differently for tax benefit calculation purposes.

The principal amount is covered under Section 80C and has a Rs. 1 lakh limit. In order to claim the tax benefit under 80C the house should already be constructed, and should be a residential property.

Tax Benefit of Home Loan Repayment
Tax Benefit of Home Loan Repayment

Section 24: Tax Benefit on the Interest On Home Loan

The interest on the home loan is treated differently, and Section 24 deals with the tax aspect of the interest on house loan repayment.

The maximum limit under this section is Rs. 1,50,000 and you don’t have to actually live in the house to claim this benefit.

The interest payment is deducted from your taxable income and thus reduces your tax liability. There is no limit on the number of houses you can claim this as well as the location of the houses. The only limit is Rs. 1,50,000 on the whole amount.

There are special conditions like when you get the loan disbursed before the construction of the house and pre – EMI interest and Raag has covered these aspects in a lot of detail in his post about tax benefits of a home loan which you can read if you were interested in those details.

Correction: An earlier version of the article stated that the 80C deduction is only available if you are living in the house. CA Karan Batra notified me that you don’t have to live in the house to claim deduction. Apologies for the mistake. 

FDI in Multi Brand Retail is Great

Cabinet has cleared the FDI policy that allows multi brand retail in India, and companies like Walmart and Carrefour can now partner with an Indian company and sell to consumers .

The persistently high inflation and the current Euro mess must have a lot to do with the timing of this decision but the decision itself was a long time pending.

Everyone knows stories of the food grain that rots in India’s warehouses and though India is the second largest producer of fruits and vegetables in the world with a production of 180 million tons – it has only 5,386 stand alone cold storage units with a capacity of 23.6 million tons – 80% of which are used just for potatoes!

Back to the policy, it stipulates the following key things:

  • The foreign equity player will own up to 51% of the stake through the government approval route.
  • The policy will be rolled out to only cities with a population of more than 1 million people and there are currently only 53 such cities in India – out of a total of 7935 cities.
  • A minimum investment of a $100 million is required and half of that should be in backend infrastructure like cold chains, transportation etc.
  • They have to source a minimum of 30% from Indian micro and small industry having capital investment of less than a million dollars.

India is not the first one to do this, and what it has done is not unique either. Many developing countries have much more liberal policies than India. These countries include China, Brazil, Mexico, Thailand, Russia, Singapore, Argentina and Indonesia among others.

In fact China started out in much the same way as India allowing 51% foreign equity and confining them to large cities. They only removed these restrictions in 2005 after having them in place for more than 10 years. They gave the domestic players enough to time to get up to speed with the western model and then allowed free competition.

It has turned out quite well for them as most of the top 10 retail companies in China are local and not foreign. These were the top 10 Chinese retailers in 2010.

  1. Suning Appliance Group
  2. Gome Electrical Appliances Co., Ltd.
  3. Bailian Group Co., Ltd.
  4. Dashang Group Co., Ltd.
  5. Vanguard Co., Ltd.
  6. RT-MART International Co., Ltd.
  7. Carrefour S.A. (China)
  8. Anhui Huishang Group Co., Ltd.
  9. Wal-Mart Stores, Inc.  (China)
  10. Chongqing General Trading (Group) Co., Ltd

This clearly shows that Chinese companies didn’t let much bigger foreign players compete them out of the market, and the Indian experience shows the same thing in areas like telecom where foreign and local players co-exist.

What’s even more fascinating is that the number of Chinese equivalent of kirana stores rose from 1.9 million to 2.5 million after the liberalization of its retail sector!

This is because of economic growth of course and also because big players don’t have a magic wand that they can use to ouster other smaller players as soon as they enter any market. Many of their strengths in their home countries are based on factors that are totally absent in other countries. Wal-Mart is able to drive costs down because of its incredible logistics and supply chains which are absent in India as they were absent in China.

Then there is the question of physical infrastructure like roads and ports that are not to the same level as they are in the US and they simply won’t have the kind of scale that they have in the US to negotiate and bargain with the suppliers and drive down the cost.

Local knowledge is also an important thing and I found an interesting example of that in this Harvard article written in 2005.

Here is the example:

In the grocery section of its stores, Wal-Mart originally offered meat and seafood American-style, in plastic-wrapped, freshness-dated containers. To Chinese consumers, however, “fresh” means that you can pick it out yourself and watch it wriggle – so they took a pass.

Big companies can’t set up shop and drive out smaller players overnight – they have advantages in some areas but that doesn’t mean the smaller players are completely at their mercy.

Don’t underestimate the innovation and resolve of Indian entrepreneurs and companies that compete with much larger companies globally. IBM earns more in a quarter than the top 3 Indian IT companies earn in a year, and yet they give IBM a run for its money in many contracts

Even now, organized domestic retail players are present in the market, but mom and pop stores are not going out of business because of them. I think this will hold true in the future as well, and allowing FDI will be a big net positive for everyone.

Wal-Mart is going to invest $756 million in Brazil and hire 7,000 people this year, and India can expect similar type of investments from these big players. And this is not hot money that goes out of the stock market and leaves it reeling every time someone in Europe sneezes. FDI flows are a lot more stable than FII flows and that’s a good thing.

Getting efficient supply chains and eliminating middle men is good for both consumers and farmers as this will give both parties a better price.

Getting more of the retail sector under the organized sector is also good because it leads to more employment and also of a better quality.

Anyone who remembers the time it used to take to get a phone connection or the big hassle it was to chase after the telephone guy to fix the phone knows how great competition is and I don’t think anyone is really questioning whether this policy is good for customers or not.

My view is that this will be good not only for the customers but for everyone involved, and that the current policy allows us to test that view without a lot of risk.

The potential upside is immense, and the downside is limited – I think FDI in multi brand retail is great for everyone, and I hope this great first step doesn’t get derailed.

Which is the best place to invest?

This is a very common question here, and I feel rather exasperated when I encounter this question but I’ve never actually written a detailed post on why that is.

Since, the new year will come soon, and a common variation of this question: Which is the best place to invest in 2012 will be asked a lot – I thought this is a good time to do a post on this subject.

First, you need to define what you mean by the best place to invest. Obviously, you’re not thinking of the safest place to invest because almost all of us treat our bank deposits as ultra safe and backed by the government implicitly so I assume that you wouldn’t bother to ask this question if safety of money was your primary concern.

Returns are what most people have in mind when they ask about the best place to invest, and the real question is what will give me the highest return without any risk of losing money?

Let’s take a look at the returns of gold (GoldBeeS ETF), equities (Nifty) and fixed deposit for the last 5 calendar years. I’ve taken year to date returns for 2011, and I’ve taken data from April onwards for 2007 since that’s when GoldBeeS listed.

Nifty and gold returns for the past 5 years
Nifty and gold returns for the past 5 years

Now, one look at the above chart tells you what the best investment for 2011 would have been – gold of course.

And 2010 – that’s gold too. But look at 2009 – whoa! Look at the Nifty skyscraper shoot through to the sky – if you missed being in equities in 2009 – you missed that skyscraper and certainly a lot of people missed that because of what happened in 2008.

And 2008? Well, your first instinct is to say that gold did the best in 2008, but I would say someone who sold Nifty Futures did far better than people who held gold in 2008.

So, the best investment in 2008 was short Nifty.

And look at 2007 – there you go – Nifty makes massive gains again and outperforms everyone.

Now, these are just three investment classes, but there are plenty more options like real estate and silver, and then within equities you have sectoral mutual funds, and the way you slice and dice the investment options are just endless.

In my mind, the big idea that emerges from this chart is that every year something else is the best, and that’s also true for a slightly longer periods of 3 – 5 years as well.

There is simply no way to tell what’s the best investment for the next year or the next 3 – 5 years.

If you keep getting in and out from one asset class to another in the hopes of chasing the best returns – you will easily miss out rallies and burn your fingers because the time you enter a new asset is usually the time when a lot of euphoria surrounds that asset and it actually falls in value. That hasn’t happened to gold yet, but I won’t be surprised if that happens in the near future, as near as next year.

I would never put all my eggs in one basket, and risk the chance of seeing a 50% crash in the value of my money or get out of the market completely and see it rocket its way to the top.

There is no such thing as “best investment” just like there is no such thing as return without risk.

A few blog related things

Every once in a while I like to take a break from money related topics and discuss something else, and today I’m going to discuss about some blog related things that have been on my mind lately.


I’ll start with the topic of email – a lot of you reply to the daily emails, and that’s not a very good way to ask questions or engage in a discussion because of the heavy volume of email and difficulty in handling them.

I try to respond to most emails but if I didn’t respond to your email the moment I read it – chances are it will get buried in more email and you will never get a response.

I read all the emails so if you don’t expect a response then sending one is fine, but it’s a lot better to post comments if you expect a response because I can look at all comments consolidated in one place from the blog dashboard and reply to them one by one quite easily. So, please leave comments instead of emails as far as possible.

Suggest a topic posts

It normally takes me about two weeks or longer to get to a topic suggested in the suggest a topic page, and I know this is too long a wait in this world of instant gratification.

As things stand today, there’s not much I can do about this – I like to do one post every weekday and write one post in a sitting. Some posts take a lot longer than others, and when I know something will take more than a couple of hours, that usually gets pushed to later.

To be clear, no one till date has complained about this, and I really appreciate that but at the same time I want you to know that it’s on my mind that these posts shouldn’t take so long, and although I don’t have a solution now – something might come up in the future.

Bloggers and advisers interested in getting featured here

There is a very simple way to get featured here, and that’s to leave helpful comments and answer reader’s questions. That’s all you have to do. Please don’t write in to me to get featured here – it will not happen. The only way to get a profile page is if you have left helpful comments on the site. And the reason behind that is there is no other way for me or others to judge the quality of your work. Leaving a few comments on the site easily gives a window on what you’re interested in and whether it will be a good fit with the audience here. If it will be, then I’ll reach out to you and if it doesn’t, then well, it just doesn’t.

Guest Posts

I’m very very reluctant in accepting guest posts because of more or less the same reason. If you just offer to write a post out of the blue – I don’t have any idea of what the post is going to look like and it’s quite difficult to say no if I’ve already invited you to write it. Even if you do send me a link to your blog it’s hard for me to go through it and arrive at a conclusion at what the future post will look like. If we don’t know each other already, it’s unlikely that your guest post will be featured here.

Anonymous Commenters

There are occasional emails from people who want to know if it’s okay to use their blog / company name instead of their real name or comment anonymously, and that’s totally fine. You are free to use whatever you want.

These are a few behind the scenes things that I have to deal with on a daily basis and I wanted to share them with everyone because in my early days of blogging I have felt some of these frustrations myself.

I used to wonder why bloggers reject free guest posts or never bother to respond, but having worked on this for some time gives me a better perspective on some of those decisions, and I hope it gives you a new perspective on some of these things also.

L&T Infrastructure 80CCF Bonds

The latest infrastructure bonds to come out are from L&T and like the bonds from IDFC they too carry a 9% interest rate.

The term of maturity is 10 years with a buyback after 5 years, and you can either take the option of the monthly interest or cumulative sum at the time of maturity.

The issue opens at November 25, 2011 and will close at December 24 2011, so there is quite a bit of overlap between this and the IDFC issue.

The issue has been rated ICRA AA+ and CARE AA+ and here are some other details.




Interest Rate


Cumulative but effectively 9%

Maturity Period

10 years

10 years

Buyback Option

5 years

5 years

Buyback Amount



Maturity Amount



The face value of these bonds is Rs. 1,000 and they will list on the BSE after the lock in period.

Let me look at a few new questions that have come up about these infrastructure bonds since the last post.

The first question was about the tax on the cumulative option and Shiv clarified that the tax on the cumulative option will also be treated the same way as interest is treated and will not be treated as capital gains.

The second question was about volatility in the bond prices when they list in the stock exchange, and you don’t have to worry about that volatility if you choose to exercise the buyback option and sell it back to the company. When you sell it back to the company using the buyback option you will get the principal back and the volatility in the market won’t affect you.

Then, a few of you asked if it’s better to wait for other issues, and if you are waiting just for the extra interest rate then that’s not likely to be much – maybe 0.25% or so higher on 20,000 and that doesn’t amount to much really. In my opinion it is better to choose one of the options that are available before this year ends, and get this over with.

You can look at the 80CCF infrastructure bond FAQ if you have any more questions, and here is a post with the 2011 infrastructure bond calendar that shows the bonds that are presently open for issue. And of course, you’re always welcome to post a comment.

Also, much thanks to Shiv who informed me about this bond issue (like the other ones).

LIC Jeevan Saral Review

Ranjan wrote about LIC’s Jeevan Saral last Sunday, and I thought this was an interesting product to look at and review here. The unique thing about LIC’s Jeevan Saral is that they allow you to set your own monthly premium and then they cover you for 250 times that amount.

This is a money back plan so that means you get the sum assured at maturity, and when you think of these two things together (250 times sum assured and money back) – it piques your interest.

250 times monthly premium sounds impressive so I went to the sample term insurance quotes page to see what the term plan numbers are like.

LIC’s term plan costs you Rs. 15,540 per year to insure Rs. 50 lacs, and Met Life’s cost only Rs. 5,800 for Rs. 50 lacs. So, that works out to about 3,861 times for LIC and 10,352 times for Met Life!

You can go to LIC’s premium calculator page and look for premiums on term plans yourself and I think you will see that they are over 3,000 times your monthly premiums.

Comparing LIC Jeevan Saral’s cover to pure term life insurance covers is not a fair comparison because you do get money back in this policy, but the 250 times number raised my curiosity and the first thing that occurred to me is to look at how many times term life policies insure you for monthly premiums. Now, that I have the 3,000 times number anchored in my mind, I won’t get this excited next time.

So, let’s compare this with some of the other plans we have looked at here - LIC Whole Life Limited Payment gets you a cover of Rs. 10 lacs for Rs. 26,000 per year, so that’s about 500 times premium. LIC Bima Bachat was a one time premium payment policy so I don’t think you can compare these two, but clearly 250 times monthly premium is not that big of a deal.

Now, let’s move to the returns of the Jeevan Saral policy, and this follows the theme of the other plans discussed here with some returns guaranteed  and some variable based on how much LIC themselves make. Based on their benefits I see the return to be in the 6% range considering the conservative and more reasonable assumptions given in the LIC benefits page.

This was an interesting policy to look at because of the unique 250 times aspect, but nothing  I discovered here changed my mind that you are better off with a term plan and with keeping investment and insurance separate.

What do you make of it?

Update: Rajesh Kwatra emailed with the following information that I wasn’t aware of. 

Somebody forget to mention one more interesting feature about this is that, during the untimely death of the policy holder he will get sum assured + loyalty additon and all the premium will be return to his/her nominee except first year ( Loyalty addition he will be given only if policy completed 10 years. This is the special feature available in this policy only.
I just forget to add one more important point that in this policy if anybody want to exit after 10 years he/she will be allowed to do that and in that case LIC will treat the policy that for the last completed year and policy  holder will get the premium of the all the year along with the Loyalty addition too,while on other policy LIC is treating it as a surrender.Because of this features this policy was awarded with Golden Peacok Awards for innovative Produst/Service Award-2009.

Don’t average down and compound your problems

One thing that confounds me about the current market sentiment is that the market fall itself is only 20% or so, which is a lot less than the one we witnessed in the last crash but the panic seems to be at least as much as the last time.

One reason for that is the people who “play” the market generally invest in mid – caps, smaller caps, penny stocks and other momentum stocks, which have obviously fallen a lot more than the broader indices.

The two common reactions to such falls are either booking losses, and shunning the market completely, or to average down your purchase by buying more of the same stock.

Both of them are bad ideas, but averaging down on penny stocks or companies with bad fundamentals is worse than shunning the market altogether because you are throwing good money after bad.

I’ve always been wary of averaging because most of the times it becomes a good excuse to hide losses, and I think this is especially true if you hold a penny stock, or some other lesser known small cap that has fallen quite dramatically.

Ultimately, you want to invest in whatever you feel will grow the most from this point onwards and not what has fallen the most already!

This is another one of those easy to say – hard to do things, and I’m fully aware of how difficult it is to actually execute because I’ve faced it myself.

I think a big part of getting over this feeling is to acknowledge that you will make mistakes in picking your stocks like everyone else, and get on with it.

Some people take these losses personally, and their ego hurts, but they overlook the fact that everyone makes mistakes and gets it wrong some of the times. You won’t find examples of mistakes among your friends and relatives because they don’t like to talk about it, but if you look at the portfolio of any active mutual fund – you will find stocks that haven’t performed well, and that clearly shows that even professionals make mistakes.

If you start from a position where you say to yourself – you are going to be wrong in some of these calls – it’s a lot easier to deal with it after such an event occurs.

If you find yourself in the situation I described above, this is also a good time to assess whether in fact it makes more sense for you to invest in diversified mutual funds rather than taking stock positions directly.

When should you book profits?

This post is drawn from a topic posted in the Suggest a Topic page, but the original comment wanted a convincing answer to this question, and I don’t think I have one, but I’ll still attempt to address the question with some thoughts I do have.

First, here is the comment.

I like your articles very much – they are very informative. Keep up the good work!
I have a query – please try to give a convincing answer if possible.
I invest in mutual funds by SIP only and in stocks directly. My SIP in mutual funds are for long periods – ten to fifteen years. I have read a lot on rupee cost averaging and the power of compounding but I am not convinced whether I should let a SIP in a particular MF run for so many years or book profits in between. I review my portfolio every six months. What if the SIP
ran for so many years and finally the MF performance plummets as it happened to
SBI MSFU Contra and Reliance Growth funds? I had been investing in these MFs for the past five years but feel that I should have booked profits earlier.

I touched upon this topic nearly 3 years ago in a post titled Buy and Hold. And Sell?.

If I were to write that post today I would get rid of the question mark. I wrote the following thing in that post:

Don’t forget to sell

Calling a market top is almost impossible, but it is fairly easy to see when markets over-heat. Instead of holding on to stocks perennially, you should sell, when the market is over-heated. There is no reason tonot do this.

When stock prices reach levels that do not justify the earnings of the companies they represent, there is no reason to hold on to the stocks. You should convert your stocks into cash in such times.

From 3 years to now – that conviction has only become stronger – the only thing that surprised me was the speed with which the market turned after the crash. While buying stocks during the ultra depressing time of late 2008 and early 2009 – I used to think that it might take a few years for the situation to get stabilized and earnings will grow then and as a result the stock prices will grow as well.

The turn came much sooner, and then the markets fell this year as well although the fall is not even 20% YTD – all the gloom and doom stories make it sound much worse.

I think when you are sitting on fat profits you should book some of it especially when your postman starts giving you stock advice.

You can take that money to meet major expenses or put some of it in debt instruments to take advantage of high interest rates like you see today, or keep stashing the cash so that you can take advantage of getting in the market when it crashes the next time.

All of these things are much easier said than done, and a lot of it depends on your own conviction and confidence about what you are doing. There is a reason why everyone sells in a panic and buys during euphoria.

You can see this around you now when the Sensex is down almost 20% YTD – how many people are really buying aggressively?

But ultimately, I think you want to be at the place where you are confident in making decisions to book profits, and also increasing your equity holdings during time of distress, and of course knowing the rationale behind it. You don’t want to just buy because there is distress.

I bought equities aggressively in late 2008, early 2009, and that’s what I’m doing right now. Not everyone will think it’s the right thing to do because of their confidence in the market, need for cash in the near future, or even opportunities and I can certainly understand that.

Those are my thoughts, I don’t for a minute think they are “convincing” because I think it’s one of those things that is a lot harder to do than to talk about – if it weren’t – everyone would be doing it.

Buffett Interview, Free MoneySights and BRIC Internet penetration

Warren Buffett’s interview is easily the highlight of this week. There were several wow moments there, but let me just talk about a couple of them here.

First is when Buffett talks about owning 5.5% of IBM and says that he has never spoken to the leadership at IBM – and that IBM will come to know of his ownership through this interview!

That’s pretty amazing and is consistent with his investments in the past. It emphasizes that you don’t need access to the management or have any knowledge of a company’s affairs outside of what’s available in the public domain to make successful investments.

Secondly, he said something very insightful when asked about how he processes all the uncertainty that exists today. Here is what he said.

BUFFETT: The world’s always uncertain. The world was uncertain on December 6th, 1941, we just didn’t know it. The world was uncertain on October 18th, 1987, you know, we just didn’t know it. The world was uncertain on September 10th, 2001, we just didn’t know it. The world—there’s always uncertainty. Now the question is, what do you do with your money? And if you—the one thing is if you leave it in your pocket, it’ll become worth less—not worthless—worth less over time. That’s certain—that’s almost certain. You can put it in bonds and then you can get a certain 2 percent for 10 years and that’s almost certain to be less than the decline and the purchasing power. You can put it in farms and the farms will probably keep growing corn and soybeans and they’ll grow it whether, you know, whether Italy has trouble tomorrow or not. It’s very interesting to me, if you own a farm and somebody said, you know, Italy’s got problems. Do you sell your farm tomorrow?

The way most people talk about the economic situation is exactly opposite of this but when you think about things in this light – that makes it a lot easier for you to process information without getting into panics and hold on to your stocks a lot longer than you otherwise would have.

On to other things – MoneySights declared that they were removing all charges and becoming free for the users. I know there were a couple of questions about this in the Suggest a Topic section so there has certainly been interest in their platform among readers here.

The finance ministry has given the nod to FDI in multi brand retail. Allowing big foreign players like Walmart in the Indian retail space will be a great thing. It will lower costs for the consumers, farmers should get better prices because big retailers will be able to cut middle men and better infrastructure should lead to significantly reduced wastage of food. I think this is great news and a step in the positive direction.

Not all news is good though – Macquarie has cut its India growth forecast to under 7% for the next fiscal.

Beyondbrics has a chart that shows the ratio of internet users and total population in the BRIC nations. India has the lowest penetration.

There has been a lot of noise about the heated Chinese real estate market and according to government statistics house prices fell 0.15% month on month in the 70 cities that they monitor.

Finally, the whole story of Ramayana in this incredible infographic.

Enjoy your weekend!

FMP Indexation Calculation and Benefit

I had written a post on how FMPs (Fixed Maturity Plans) compare with fixed deposits some time ago, but in that post I didn’t go into the details of indexation calculation or how the benefit accrues.

In this post I will take an example of the FMP indexation calculation and that should clarify how this works. Indexation only comes into picture when you incur capital gains, and that’s because indexation helps to take into account the effect that inflation has on an asset purchase.

If you buy a house in 1985 and sell it today, there will be a huge difference in price, and it’s not fair to tax you the whole difference because a large part of the difference is simply due to inflation.

Indexation makes sure that inflation is taken into account while calculating capital gains, and you are only taxed on that part of your capital gains which are over and above the price rise caused by inflation.

The table that is used for this is called the Cost Inflation Index and that’s calculated by the RBI based on the inflation numbers.

Here is a link that shows you the Cost Inflation Index (CII) numbers from 1981 – 82 to 2011 – 12. The CII for the financial year 2010 – 11 is 632 and for 2011 – 12 is 711.

The CII is used to calculate what’s called the indexed cost of acquisition and this number bumps up the original price to match inflation.

The way you calculate the indexed cost of acquisition is by using the following formula:

Original purchase price x ( Index value in the current year / Index value in the original year)

In the case of FMPs, the original purchase price is nothing but the money you invested.

Let’s say you bought a FMP of a maturity of  370 days with Rs. 1 lakh in FY 2010 – 11 and sold it in FY 2011 – 12. To calculate the indexed cost of acquisition you will input the numbers in the above formula and get the new indexed value.

1,00,000 x (711 / 632) = 1,12,500

Let’s say after 370 days – the FMP rose to Rs. 1,12,500 which means it gained 12.5% in just over a year. To calculate the capital gains – you will need to subtract the indexed cost of acquisition with the selling price.

In this example both are the same so you won’t end up paying any tax.

There are a couple of things to keep in mind about this  – indexation only works for long term capital gains which accrue after you have held the FMP for a year, so that’s why you see a lot of FMPs that have a maturity period of slightly over 365 days.

Secondly, what Direct Tax Code eliminates is the double indexation benefit of FMPs which meant that you could buy something in March 2010 and sell it in April 2012 and make it span across two financial years. The DTC won’t allow this, but as far as I know FMPs will still be tax efficient when compared with fixed deposits because of the way indexation works.

Hemant has already done this comparison so you can see how the FMP returns compare with fixed deposit returns there.

Finally, Vijay brought up the point that if the maturity of the FMP is less than a year then it’s better to opt for the dividend plan, and if it’s greater than a year then it’s better to go for the growth plan and that’s because dividend distribution tax is lower than short term capital gains which become applicable if you own the FMP for less than a year.

This post was from the Suggest a Topic page.