Financial stability is not something which can be achieved in a few months or a few years even.
It takes nearly 8-10 years to achieve financial stability, that too, if you do everything correctly for all these 8-10 years.
Hence, being in your 20s is the best time to beat the crowd and start planning for your future. The early you start, the better it is!
It doesn’t matter even if you start in your 30s; because the early you start the better it is! Same stands true for a 40-year-old as well.
But if you start in your 20s, there is a high likelihood that you can achieve financial independence in your 40s.
So let us see how to achieve 1 crore at the age of 40, and become financially independent.
1 Crore At The Age Of 40
To believe what you are just about to read, you need two things. First being a calculator; and second, the compound interest formula, which we all learnt in class 7th during school days.
So here we go.
With a monthly investment of Rs.10,000 from the age of 23 in an instrument giving 16% compound interest; you will make one crore.
Also, with a monthly investment of Rs.15,000 from the age of 23 in an instrument giving 12% compound interest; you will make one crore.
“12%, 16%- I Won’t Fall In The Trap Again”
One can argue, which are these instruments which are giving 16% and 12% per annum consistently?
“It looks good on paper, but these returns are a hoax which the so-called investment pundits bank on for personal benefits”, can be a valid argument if you haven’t witnessed such returns before.
Here is the clarification:
Sensex, an indicator of the top 30 Indian stocks, has grown by 16% compounded annually since its inception in 1979. This can be calculated using the calculator, given that Sensex’s price at inception was 100. Its current price while writing this article is 48,832.
Yes, no short-cuts to achieve financial independence!
Naive investors usually are skeptical about long-term stock market returns as they fear some events about to happen in the short term- election results, war situations, inadequate monsoon, financial scams, etc.
But here we have a data set of 42 years from 1979 to 2021, which has seen all- assassination of two Prime Ministers, wars with neighbouring nations, 4 big economic slowdowns, governments changing, financial scams, communal riots, natural disasters; and ?
And you also saw a worldwide pandemic, during which the entire world came to a standstill.
Is this data of 42 years not enough to generalize a return of 16% from the stock markets over a long period of time?
This is just the benchmark. If invested with proper knowledge, one should surpass this benchmark as well to gain more than 16%.
Rs. 10,000, 15000 per month for a 23-year-old?
An individual is expected to complete graduation at the age of 22. Getting a job at 23 is not a realistic assumption for all, one can argue.
One can even argue that it is difficult to invest such a heavy amount at the age of 23, even if he gets a job.
Noted! Still, one crore can be reached if Rs.6848 is invested per month with a 10% rise in this monthly investment every year, as the salary of the investor increases every year.
One can start investing at an age of 26, if not 23. If an individual starts investing Rs.15000 per month at a compounded growth of 16%, they will attain 1 crore till he reaches the age of 40.
A few other options
If Rs. 5000 is invested monthly at 16% per annum from the age of 22; then the figure of 1 crore can be reached at the age of 43, which is not bad either.
Similarly, if Rs. 5000 is invested monthly at 12% per annum from the age of 22,then 1 crore can be attained at the age of 47.
This should work too; because you will rarely find someone saying- “Oh, 47 is too late to be a crorepati.”
Don’t Buy in 20s- Just hire it
A person in the early 20s is not financially mature. Even though one considers himself a financial geek, and claims to know all about personal finance, he is likely to be mistaken.
Because maturity doesn’t come with knowledge, it comes only with experience.
Hence, taking important financial decisions like buying a house or an expensive car should be avoided in the 20s. All energy should go in saving and generating a corpus which will help you to buy an even bigger house and a more luxurious car in the 30s.
Peer pressure can take the toll on you. But you need to weather the storm. Nothing is achieved without sacrifice! And it’s just a notional sacrifice in this case.
Social media is here to stay. It will be there when you get to your 30s as well. You will be proud of yourself when you finally make a social media post with your dream car.
But what till you reach there? You will still need a car and a house to stay in.
You can live on rent and use auto rickshaw or cab services.
Living on rent versus buying a house is yet another interesting contest. Living on rent comes out a clear winner, in most cases (deciding factors differ from instance to instance).
Well, living on rent versus buying a house on loans is not that an interesting contest; as living on rent comes out as a clear winner in all cases. This is because, buying a house turns out to be more ‘interest’-ing in that case.
Using rented cab services turns out to be more cost effective in most of the use-cases as well. Keep following TBM. More on this in some other article.
Also, buying in 20s is not suggested for a few more reasons:
- No clarity over the city to be staying in
- No clarity over career options
- No clarity over your partner’s city preferences (Not great clarity about your partner too)
- No clarity over further education
It should be noted that ambitions cannot be mixed with investments. Life is short and every individual should live for his/her ambition. It is just the investment perspective of things that is the point of discussion here.
Also read: Top 5 FinTech Growth Ideas in 2021
Unveil the Power of Compounding
Power of compounding can do wonders with your wealth if given only one ingredient- Time
“Power of compounding is the eighth wonder of the world. One who understands it, earns it; one who doesn’t, pays it”- Albert Einstein
The crux of the matter is that the early you start; the early you become financially independent.
Becoming financially independent does not mean having huge lumps of money.
It only means that you do not have to work to earn the same monthly salary that you were earning earlier. This is a form of passive income; and monthly earnings from your investments in the form of dividends is one way to earn passive income.
Maintaining an Expense Diary
It is important to develop the habit of logging in your expenses and savings in a diary, or in an expense logging app.
This habit will help to keep an account of all the money matters. And, all that gets accounted, gets improved.
Keeping The Credit Card At Bay
“Credit cards offer debt, not money”, a wise man said.
“The 20s is the age to build assets, not liabilities”, another wise man said.
Hence, be a wise man and say goodbye to all the credit giving instruments.
The one who gives credit becomes wealthy, not the one who takes it.
Where is Financial Literacy In The College Curriculum?
One is sent to school for 14 years, and then to college for 6 years, just because he can get a good job and earn some money.
But, if he was taught for 20 years to earn money, why was he not taught ‘how to manage that money’ for even a day?
Why does the school and college curriculum not incorporate some financial literacy lessons?
Anyway, it is never too late.
One must start planning and executing personal financial plans at the earliest.
Consult a good financial advisor, who will make the job cut out for you.
Peace of mind is the real wealth. Financial independence will give you that peace of mind.
Yes, it is a vicious circle. Just like the earth; and “Our brain”- it’s all in there.
Rbi Bans American Express and Diners Club From May 1, 2021
RBI swipes away Amex from India
Everybody loves to flaunt the upgraded status of their credit cards at airport lounges and restaurants.
But, what if you think of doing so the next time and have to cut a sorry figure, as you come to know that your country’s central bank has banned these cards.
Yep! If you own an American Express or a Diners Club card, you need to know that RBI has passed a notice on banning American Express and Diners Club from May 1, 2021.
But, why has RBI been so severe on these multinational financial services providers? What is next in store for you if you use these cards? Can you use it hereafter?
What happens to all the privileges you gained on your Amex and Diners Club card all these years? Is your privacy at stake?
Let us find out all these answers, one by one.
RBI has banned Amex and Diners Club from acquiring new customers from May 1, 2021.
This ban has been imposed by an order issued by the RBI on April 23, 2021.
Reason For The Ban
According to RBI, Amex and Diners Club have violated data storage norms.
“These entities have been found non-compliant with the directions on Storage of Payment System Data,” the RBI said.
Both these card service providers are authorized payment network operators as per the Payment and Settlement Systems Act, 2007 (PSS Act).
RBI has taken this decision as per the powers vested in RBI by the PSS Act.
But this is not a sudden outburst by RBI. Both the card service providers were warned about the same in April 2018 itself.
In April 2018, RBI directed all the payments service providers in India to store all the data (full end-to-end transaction details, information collected, carried, and processed as part of the payment instruction) in Indian online data storage facilities. RBI allotted 6 months to put this order into effect.
It also required the payment card companies to report compliance to RBI and submit a board-approved System Audit Report (SAR).
But American Express and Diners Club failed to submit the compliance report, and hence the ban.
It is shocking to know that American Express, a leading payments card company, paid less heed to the central bank’s instructions!
This was very unlikely to happen. What was American Express doing all these 2 years since April, 2018?
When Will The Ban Be Lifted?
The ban has been imposed will full certainty by the RBI.
But, Amex and Diners Club can make some early moves to convince RBI about their future intentions. If they act responsibly and take the path as guided by the RBI over secure storage of data locally, they present themselves a better opportunity.
The employees of Amex and Diners Club will feel stranded at the moment. The marketing teams working for onboarding new customers to their companies will be left with no work from May 1 onwards. This will be an add-on worry for the employees during the ongoing pandemic.
Hence, RBI can reconsider the ban in the future, if Amex and Diners Club adhere to its norms.
The Existing Customers
The ban does not speak anything about the existing customers of American Express and Diners Club.
Hence, all the card owners will be able to transact normally- they can use, upgrade and enjoy privileges as before.
To redeem its brand value, and more importantly, to redeem its customers, Amex can offer a few giveaways in the form of offers and discounts. The ongoing pandemic in India will restrict the users from availing these benefits, though.
But now that both these card companies are on the radar of RBI, the cardholders better hope their card issuers remain in the ‘good books’ of the regulators.
Other Similar Bans
This is not the first time that a card company or a financial services provider is banned by the RBI.
HDFC Bank faced such a ban in December, 2020.
Yes, the so-called leading bank of India faced a similar ban. It was barred from launching any new digital services and issuing new credit cards.
This ban came as a result of the frequent outages on the mobile banking and net banking systems of HDFC Bank for a period of 2 years.
Even after 6 months of imposing the ban, there are no signs of the ban being lifted.
HDFC Bank is partners with Diners Club for the sale of credit cards and specialized payments systems.
Diners Club did not learn the lesson from HDFC Bank it seems.
Both HDFC Bank and Diners Club under the radar of RBI at almost the same time- this shows the ‘taken for granted’ attitude of the financial services sector towards RBI.
Do you know, Diners Club International, founded in 1950, is the first independent card company in the world to issue credit cards to its customers. But , RBI has put swords on the oldest credit card company in the world.
Options For Customers
After this ban, the customers are left with options like- SBI Card, Axis Bank Cards, Icici Bank Cards, to name a few.
SBI Card will be the biggest beneficiary of this move. The ‘sarkari’ tag associated with SBI has done wonders to its retail banking business. The same is expected with SBI Card as its penetration strengthens in the tier-2 cities of India.
Foreign Companies – Go Away
Citibank has shut down its retail banking business in India. It will leave India soon.
Many other international leading brands from the financial sector- like Standard Chartered and Deutsche Bank have fled India, too.
And now that American Express and Diners Club are feeling the heat, it is to be understood where things are heading.
Non-compliance of the norms set by RBI within the stipulated time cannot be just a brain-fade from Amex and Diners Club. There can be more to it.
Is it that these companies did not want to store their data locally in India and were waiting for RBI to call the shots?
Whatever it is; well-done RBI!
We shouldn’t let anyone misuse our country’s data, should we?
If we can swipe, we can swipe them away too!
Tax Benefits of Investing in Real Estate
If you feel equity is overvalued currently, real estate can be a better option.
Real estate and gold are the favorite asset classes of Indians for investments. Equity comes last on the list.
Investing in real estate comes with a few tax benefits.
But, the benefits have got so many ifs and buts that it is confusing for a regular taxpayer to comprehend for his use case.
Do you know that selling a house before and after 24 months of purchase attracts a different tax rate?
Do you know that a house constructed, and a house purchased, both come under different purviews of the income tax? Or does it not come under income tax at all?
Then where does it find its place in the tax regime?
Well, like all the topics here on TBM, let’s disintegrate this topic as well for better and easy understanding.
Let’s take it one by one.
So, here we go!
Real Estate- A Capital Asset
Real estate is a capital asset. But not all real estate is a capital asset.
Rural agricultural land is not considered a capital asset. This is because the income generated from the sale of rural agricultural land is exempt from taxation.
Section 10(1) of the income tax rules says that any income which is earned by agricultural sources is exempt from income tax.
But, all other forms of real estate like- residential property, commercial property, plots come under the taxation regime.
In fact, urban agricultural land also comes under the purview of taxation.
The gain on every asset considered as a capital asset is called capital gain.
So, if you buy a house for Rs. 25 lakhs and sell it for Rs. 50 lakhs, your capital gain is 50-25= Rs. 25 lakhs.
So the capital gain is nothing more than ‘apna fayda’ in any transaction of buy and sell. It is just that these terms are packaged heavily.
Now, capital gains are classified into two categories:
- Short-term capital gain (STCG)
- Long-term capital gain (LTCG)
The difference between the two can be gauged by their literal understanding.
Here is the detailed difference between the two:
STCG is applicable when the difference between buying and selling of the residential property is less than 24 months. LTCG is applicable when the same is more than 24 months.
STCG is taxed as per the income tax slab of the individual. The income tax slabs are as under for the current financial year:
LTCG is taxed at a flat rate of 20%. There are many exemptions in LTCG taxation and are discussed below.
Indexation benefit takes into account inflation.
So it’s like- why should you pay more tax if you sold your house at a higher selling price, just because there was a boom in the real estate prices due to heavy inflation? Is it your fault?
Hence, the indexation benefit has been introduced to remove this drawback.
Indexation is considered in LTCG, but is not considered while processing the taxes for STCG. This is fair enough as inflation has a minimum effect in 24 months.
There are no exemptions in STCG. A few exemptions can be availed in LTCG.
Let us talk about these exceptions in LTCG, which make real estate investments beneficial.
Benefits Under Section 54
This section has provisions for reducing your LTCG tax on the sale of residential house property only. The residential house can be a purchased one or a self-constructed one.
But, plots and commercial properties don’t come under its purview.
Who can claim this benefit?
Only individuals and HUF can claim this benefit under Section 54.
To claim the benefits under this section, the residential property should be held for a minimum of 24 months.
So, you cannot buy a house every month, and keep on claiming benefits by selling them every single month.
Because if you do that, you will come under the purview of STCG, which anyhow has got no exemption benefit.
But what is the benefit?
The benefit is that you don’t have to pay the LTCG tax at a flat rate of 20% (as mentioned above) on the profits earned by selling a house.
You have to buy another house with the amount you earned from the earlier property sale. You can also construct a new house, if not buy an already constructed one. But, you cannot buy a plot to claim this benefit.
Also, it is mandatory to buy a new property within 2 years of the sale of the original property. A property bought 1 year before the sale of the original property will also serve the purpose. If the taxpayer prefers constructing a house over buying one, the time limit is extended to 3 years.
Let’s take an example.
If you sell a house for Rs. 50 lakhs, which you had bought earlier at Rs. 25 lakhs; then your capital gain is Rs. 25 lakhs. You will have to buy another property or a maximum of two properties worth Rs. 25 lakhs; so that you don’t pay the LTCG tax of 20% on this Rs. 25 lakhs.
This is a saving of Rs. 5 lakhs.
Now, it is not necessary to buy another property worth Rs. 25 lakhs only. You can buy another property worth Rs. 50 lakhs as well; but only Rs. 25 lakhs can be claimed for tax exemption.
Maximum LTCG Capping
This benefit is not for the real estate tycoons; as it should be.
The maximum LTCG which can be exempted using Section 54 is Rs. 2 crores.
Also, it is not for real estate brokers and traders.
This is because you can avail of this benefit just once in your lifetime.
“Why not buy a new house and enjoy this taxation benefit, and then sell the new house immediately after and relax with cash in hand”? – A naive taxpayer can question their Chartered Accountant.
This, too, is not possible, as if the new property used for claiming the benefit is sold within 3 years of purchase, the exemption will be reversed. The individual will then be liable to pay the LTCG tax in the next assessment year.
The taxation guys are smart, it seems. No room for mischief!
To add to the strict norms, it is mandatory to park the LTCG in dedicated capital gain account schemes of banks. It cannot be kept in savings accounts.
Also read: Private Company vs Public Company
This was an elaborate explanation of Section 54, which provides tax benefits to real estate investors.
But there are various other sections that are targeted towards the taxation benefits of the real estate investors.
Here is a brief explanation of the other sections, as the nature of the benefits remains more or less the same, as in section 54.
All capital assets- including house property, plots, and commercial property, come under the purview of Section 54EC.
All taxpayers can take benefit under this section, unlike Section 54.
To claim an LTCG benefit under Section 54EC, the real estate property should be held for a minimum of 3 years.
After the sale of this property, the LTCG should be invested in specified bonds with a lock-in period of 5 years. This investment should be done within 6 months of the sale of the property.
The investment can be done in National Highways Authority Of India (NHAI) bonds or Rural Electrification Corporation (REC) bonds.
So, as per the example mentioned above, Rs. 25 lakhs need to be invested in these bonds to exempt them from LTCG taxation.
A maximum of Rs. 50 lakhs of LTCG can be claimed under this section.
Unlike Section 54, no dedicated bank account is needed here.
The returns on these bonds are very low, which are around 5-6%. These returns are taxable as per the income tax slabs. Hence, Section 54 stands out in front of Section 54EC.
Commercial properties, plots, and all other capital assets except house property come under the purview of Section 54F.
The major difference between Section 54F and Section 54 is- The ‘entire sale value’ of the original real estate property should be invested for the purchase of a new ‘residential property only’.
Hence, as per our example, the entire Rs. 50 lakhs have to be invested to buy a new property.
If only Rs. 25 lakhs is invested, you get 50% benefit, i.e. benefit on 50% of the LTCG (Rs. 12.5 lakhs).
Real Estate And Unrealistic Expectations
Investments in real estate are not always fruitful. It depends on the bull and bear cycles of real estate, each of which lasts for 10 years, historically.
Grabbing all the available loans to buy real estate disturbs the equations even further.
Real estate investors need to make informed decisions, which is rarely seen amongst a generalized pool of investors.
Not many know the exact tax benefits as well for their use-cases.
Tax Benefit Is Not A Discount
A tax benefit is sometimes seen as a discount.
A tax benefit is not a discount number on the price tag of a piece of land or a flat.
You can see it as a cashback offer- the closest you can relate to in this domain.
A middle-class person has to spend the savings of his lifetime, along with additional loans to buy real estate.
The tax benefit shouldn’t be the only decisive factor behind buying it.
You shouldn’t forget to claim your tax benefit too.
There is much more you can do to save tax on real estate apart from the above-discussed points.
Keep following TBM for more on this in the future. You can always reach out to your CA, if in a hurry.
That is the best way, as you don’t have to tax your mind.
It’s April. If you have paid the tax, just relax!
CIF Number – The Only ‘Aadhar’ Of Your Bank Account
The ‘know how’ and ‘DIYs’ of the CIF number
If you have a bank account, you might have come across the term CIF number; at least once in your lifetime, surely.
If you don’t know what the CIF number is, then you are at the right place.
We’ve got you covered.
Let us dive deep into what a CIF number is and how it is important for the prompt working of the banking system.
What Is The CIF Number?
CIF stands for ‘Customer Information File’. As the name suggests, the file has a number which is known as the CIF number.
The format of the number varies with the banks i.e. different banks follow different formats for this number.
- SBI: 11-digit
- Central Bank of India:10-digit
- AXIS Bank: 4-digit
- HDFC: 8-digit
This number is highly essential for mobile banking or internet banking as this number works as the user ID. The user ID can be changed later on, but the CIF number is the digital virtual identity to every username changed in the future as well.
This customer information file carries all the banking information of the account holder in a digital form. So yes, your banker has all your banking information, that too, in detail.
So, does it imply- “Do not share your CIF number with anybody”?
Well not at all. It is not like a secret ATM pin. It is mentioned in every document related to your banking identity.
It contains information about the owner of the account, ongoing as well as previous loans, demat services, account type, account balance, and transaction information.
All the accounts you have with the bank can be linked to one single CIF number. This is useful in growing your Total Relationship Value (TRV) or Customer Relationship Value (CRV).
It is used by banks to determine how much minimum balance you can maintain, or how much credit can be given to you.
Just like the Aadhar card number gives you a unique identity, a CIF number gives you a unique banking code for all your banking needs.
This code cannot be changed as it is specially coded with all your information.
Also read: Private Company vs Public Company
Where Can You Find Your CIF Number?
There are various ways of finding your CIF number. Both offline and online.
It doesn’t matter in which bank you have your account, the process is the same for every bank.
Let’s get to it.
This is the easiest way to find your CIF number.
The CIF number is printed on the first page of your passbook, just above the account number.
Just like the passbook, the CIF number is printed on the first page of your checkbook. You won’t find it on the cheques.
You can always go old school and contact the customer care number to know your CIF number.
- Log in to your internet banking.
- Select the ‘e-statement’ option.
- Choose the period for e-statement.
- The account summary page will show your CIF number.
Nowadays, every major bank has their app for the comfort of its customers.
You can easily find the CIF number in the app of your respective bank.
Every bank provides an e-statement at your will, it is usually through SMS, but you can opt for email.
Just send a request to customer care. The automated operator will guide you through the process.
Do You Need The CIF Number Often?
You won’t require the CIF number often, as it is mainly for bank administrative purposes.
You will need it if you wish to change your bank branch or if you wish to access mobile banking and internet banking.
Every bank you change will pass on the CIF number to the next bank. The new bank will fetch the data from this CIF number.
A loan, mutual fund, fixed deposit is managed through the existing account number usually; hence producing your CIF number all the time is not required.
CIF Number- The Aadhar For The FinTechs
The FinTech companies are evolving.
The services of personalized bank accounts, personal and health insurance solutions, loans, and peer-to-peer transfer of assets are being made easy and fast for the customers.
Hence, the information of the CIF number is like gold dust for the FinTech companies.
The CIF number with self-learning algorithms can do wonders to transform the financial services sector.
In today’s world, where online frauds are the order of the day, financial data security is the need of the hour. It is time to segregate data and work more upon data privacy. CIF number is the key here.