Prajna Capital

Posted: 04 May 2015 01:05 AM PDT

Churning one's stock portfolio does not guarantee better returns. It comes with added costs and can result in higher taxes

HIGH BROKERAGE COSTS

Influenced by brokers, television experts, friends and family, investors tend to trade their securities too frequently. This may not be necessarily good for them. Frequent buying and selling only helps a broker make money--not the stockholder. That is why brokers hound investors with stock calls. And these tips do not always go right. Each time you trade--buy or sell a stock--you pay a fee to your brokerage house, which is 0.5-0.75% of the transaction value. The more you churn your portfolio, the more money you burn. Also, each buy and sell attracts a transaction fee of around 0.003% levied by the stock exchange. Buying and selling frequently is for traders, not investors

DEPOSITORY EXPENSES

In addition to the brokerage that you need to pay each time you trade, every time a stock goes into or out of your demat account, there is a depository charge levied on you as well. The more often you transact, the higher is your depository expense. Depository charges include the fee levied by the National Securities Depository (NSDL) and the Central Depository Services, and the fee levied by your depository participant (DP)-the financial firm with which you hold your demat account. For instance, NSDL charges a depository fee of `4.50 per stock purchase. The DP charge varies across participants, but is typically a flat fee per sale transaction.

NO TAX BENEFITS

Stock trading is also not good from a tax planning perspective. If you buy and sell frequently, you stand to miss out on the tax benefits available to patient investors. If you sell your shares within one year from their purchase, the gains, if any, resulting from the sale of these shares, will be termed as short-term capital gains. They will be taxable in your hands at a flat rate of 15%. On the other hand, stocks held for at least one year, qualify as long-term capital assets. And as there is no long-term capital gains tax on stocks, those who stay invested for at least a year do not have to pay any capital gains tax.

TAX LIABILITY CAN INCREASE

Frequent buying and selling of shares can actually push up your tax liability. Those frequently buying and selling shares run the risk of being characterised as traders. So, the income from such `trade business' becomes business income, as opposed to income from investments (capital gains). And when investment income is considered business income, it is taxed at the highest slab rate of 30%. It depends on various factors such as volume of shares bought or sold, frequency of trade, intention behind it and so on. If someone has borrowed funds to trade then that may also be held against him. Even a solitary transaction is likely to be pulled up for being an adventure in the nature of trade. This is a subjective matter because the taxman is unlikely to act on small gains, but profits of more than `5 lakh could catch the taxman's attention, say experts.

NO SHORT-CUT TO MORE MONEY

You cannot always make money through trading in the short-term. There is extreme movement of stock prices on a daily basis and, in most cases, stockholders don't understand the volatility. It is also difficult to predict whether stock prices will go up or down as there is no established system or formula to define the movement of prices. Traders function on technical research--stock indices, trends, price movements--whereas investment should primarily be dictated by fundamentals around stocks' valuations. Also, technical research can be quite complicated, and so retail investors who turn traders, in the hope of making a quick buck, often end up burning their fingers.

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Extending Your PPF Account

Posted: 03 May 2015 10:45 PM PDT

Imagine a five-year investment option that gives you a fixed tax-free return of 8.7% with a partial withdrawal option that doesn't attract any penalty. Sounds too good to be true? This would not sound abnormal if you knew about the PPF account extension option. After the initial maturity of 15 years, one can extend their PPF account in blocks of 5 years for infinite times. Since all PPF withdrawals are covered under EEE tax regime, premature withdrawals are also exempt from tax, making it an extremely attractive scheme.

You can opt for two kinds of extension —

a) With contribution or

b) Without contribution

The default option is without contribution and automatically kicks in if your account lies dormant for more than a year post maturity . An extension without any further contribution means you continue to earn interest on your accumulated money and the account stays active without you having to make any the yearly investments. You can also willingly opt for this option. Once the account has been classified as "extended without any further contribution". you cannot make any fresh contribution for next five years. However, there is no limit to how much you can withdraw. But only one withdrawal per financial year is allowed.

This can be a good pension investment option post-retirement when you are looking for stable source of regular income. You can withdraw the interest part every year and keep earning a fixed return on the balance. So, the money keeps growing without corroding the principal

If you have income above the taxable limit post-retirement, consider opting for the extension with further contribution to maximize on the tax-benefits. The money ploughed back will not only help you exhaust the tax-saving options for the year but make provision for higher yearly incomes for the near future.

The other option is where you choose to keep contributing to the account on a regular basis during the extension period. However, if you opt for this, you are allowed a withdrawal a maximum up to 60% of the total during the 5-year extension. Meaning, if you have accumulated `25 lakh at the end of 15 years and opt for an "extension with contribution option" you can withdraw up to `15 lakh during the extension period. The amount can be withdrawn as a chunk or in a staggered manner. The one withdrawal per year rule will still apply.

At present PPF earns an investor 8.7% pa tax free interest. Though it does not provide cash flow, since the interest is cumulative, the returns are better than most other risk-free options. It is therefore strongly recommended that investors continue extending the scheme every 5 years after the initial 15 year period. The advice would remain the same for someone whose account has completed the first 15 year period at age 40 or age 50.

The with-contribution extension option is more suitable if you are still earning. Even though the scheme allows you to withdraw it is advised that you keep invested unless it is earmarked for a goal.

For someone who is 40 with already 15 years invested in PPF and does not require the funds for another 10 to 15 years, then both additions to the PPF as well as regular renewals is recommended. But for someone who is 45 or 50 may have life-stage related goals such as children's higher education. In that case you may withdraw the required amount but recommend to keep the account alive as such high guaranteed tax-free returns that too with liquidity benefit is not available anywhere else and it will be an opportunity loss