Wills

A Will is a legal declaration by a person stating how and to whom his belongings have to be given after his death. A will is normally a written document, though there are oral Wills which are allowed (privileged) to be made by members of Armed Forces under certain circumstances.

Who can make a Will - Any person who is an adult and who owns any movable or immovable property, is required to make a Will. However, many people have a notion that to make a Will one requires to have huge properties or huge bank balances and other assets. They do not think of what would happen to the whatever little property or assets they have, if they die without making a Will. Many people also have a notion that having nomination in an asset is sufficient. Nomination is only a right to receive. But it is a Will that decides who will ultimately own the asset. It has been held by the courts that a nominee is a trustee who receives the asset on death of the original holder and is to hold it on trust till the rightful owner is identified.

Most people tend to avoid or postpone making a will, probably because they do not want to think about their death.

What if will is not prepared – If a person dies without making a will (referred to as “intestate” in legal language) his assets gets distributed to the legal heirs as per his personal laws or as per the Indian Succession Act. If a person wants his assets to be distributed to any other person or organisation, maybe a neighbour or a servant, who has taken care of him in his old age, and this person dies without making a will, this neighbour or servant will not be a beneficiary as per the personal law or Indian Succession Act and would therefore not get anything even though it was the intention of the person to bequeath something to this neighbour or servant.

 

When Personal Law applies and when Indian Succession Act applies – In the earlier para we have seen the terms personal law and Indian Succession Act being used. In case of Hindus, Sikhs, Jains and Buddhists dying without making a Will, the Hindu Succession Act applies. In case of Muslims dying without making a Will, the personal succession law applies. In case of any persons other than above dying without making a Will, the Indian Succession Act applies.

The personal laws and Indian Succession Act lay down a specific formula as per which the assets are to be distributed if the person dies intestate.

Parties to a Will - A person making the Will is called a Testator, persons who get the property (as per the Will) after the demise of the Testator are called Beneficiaries and a person who is given the responsibility of administering the Will is called an Executor. There is another party who forms a very important part of the Will, and he is the Witness.

How to make a Will – Though not mandatory, it is preferable to consult a qualified Estate Planner or a lawyer to make a Will, as they can guide you properly. There are certain points to be kept in mind when making a Will.

Important components of a Will - A Will should be preferably made by a single person, the Testator. Preferably his or her pet name or alias should be mentioned. It is advisable to include his religion. The age and the present and permanent address will be the next item in the Will. Normally a statement is included stating that this is his last Will and that he has revoked any earlier Wills made by him.

The second para gives the details of Executor or Executors who are to administer the Will.

The third para can give the details of family members. If any family member is to be specifically excluded, it is preferable to mention that, as this may be helpful to the beneficiaries to point out the intention of the testator in case of any litigation at a later date.

The next para would be the operating part of the Will. Here the Testator lists down the properties and assets he owns and indicates to which beneficiary which asset or proportion thereof has to go. This is normally followed by a residuary clause, where the Testator states that any asset that is not covered in the earlier paragraph has to be distributed to such and such persons in such and such proportion.

The final para would be where the Testator dates and signs the Will. This is normally done immediately after the date without leaving any space in between.

Most importantly, the Will has to be signed by two witnesses who are legally competent to contract. These two witnesses have to see the Testator signing the Will and have to sign in his presence. The Witnesses need not know the contents of the Will, it is sufficient that they see the Testator signing it and sign it themselves as having witnessed the Testator sign it.

If a person wishes to make any minor change to his will, he can execute an addendum to the Will, which is called a Codicil.

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Bonus Issue of Shares

 

A bonus can be defined as something given as a present or gift for good performance. Something given that is over and above the normal. From an investment or share market perspective, a Bonus issue of shares is when a company issues shares for free. The company does not get any money from the shareholder for the issue of such bonus shares. A company which has performed very well for several years and which has got huge reserves can issue bonus shares. Companies normally announce issue of bonus shares when reaching or attaining certain milestone. This could be the company completing a certain number of years in operations (10 years, 25 years, 50 years, etc), performance or profitability reaching certain levels (Turnover or Net Profit reaching a milestone level), so on, so forth.

When a bonus issue is made the shareholders get certain additional free shares of the company in the same ratio of their holding in the company before the issue.

Bonus issue is normally in terms of number of shares declared as bonus to the number of shares held by the share holder in the company. For instance, a bonus declaration of 1:1 means that for each share held in the company the share holder is entitled to one additional free share, or in case of a 1:2 bonus declaration, the share holder would get 1 additional free share for every 2 shares held in the company.

What happens when a company declares bonus shares? When a company declares bonus shares, the company’s issued capital increases. The number of shares available in the hands of the share holders increases proportionately to the number of shares already held by them. If the company is listed on a stock exchange the supply of share of the company in the exchange increases. The price of the company’s share after issue of bonus share normally falls proportionately in respect of the price before the bonus. For instance if the price is Rs 5,000/- before the declaration of the bonus and the company declares bonus in the ratio of one share for every two shares held, the price of the share after the bonus would fall to roughly Rs 3,334/- (i.e. Rs 5,000 * 2/3) Investors who could not buy the shares earlier because these shares are costly, can now buy the share as the share price would have reduced and also because more supply of shares would have come into the market. The share price normally does not fall exactly in proportion to the bonus issue. The proportionate price would slightly be more after the bonus issue, as the euphoria of bonus plus the additional demand for the share tends to push up the price.

Why do companies declare bonus shares? There could be several reasons why a company’s management would decide to declare a bonus issue of shares. Some of the common reasons are : (1) Increasing free float (number of shares available for trading or increasing the liquidity of shares in the exchange), (2) spreading the hold or encouraging more retail participation (making the expensive shares more affordable to investors who want to invest but could not as the shares are priced very high), (3) increasing the equity base (number of equity shareholders in the company), (4) to display confidence to the investing community that the company can service a larger shareholder base, (5) Privately held company declaring huge bonus and making the share price attractive before going public and listing their shares in the exchanges. (6) When companies are unable to declare dividend to its shareholders.

When declaring a bonus issue the company’s management take into consideration several factors. (1) Availability of sufficient reserves. Since bonus shares have to be issued out of the free reserves of the company, it has to ensure that there are sufficient reserves available when calculating the bonus ratio. (2) The company must have sufficient authorised capital to accommodate the bonus issue. (Authorised Capital is the figure beyond which the company cannot raise its capital.) Otherwise the company has to increase its authorised capital before going ahead with the bonus issue. (3) The company declaring a bonus issue has to be reasonably sure that it would be in a position to declare dividends (service equity) on the enhanced capital after issue of the bonus shares. (4) A company registered under the (Indian) Companies Act has to ensure that, the company should not have defaulted in payment of interest or principal of any debt security issued by it and in payment of statutory dues of its employees like Provident Fund, gratuity, etc. (5) A company registered under the (Indian) Companies Act has to follow the guidelines issued by the Securities and Exchange Board of India (SEBI)

Who is eligible for Bonus shares? An investor who holds share of the company (declaring the bonus issue) as on the “record date” is eligible to receive the bonus shares.

Record date is the cut-off date set by the company. A record date is set for the company to draw a list of eligible shareholders to whom the bonus shares are to be allotted.

When can the bonus shares be sold in the stock exchange? The company issuing the bonus shares has to apply for and get the bonus shares listed in the stock exchange. Once these are listed and they are available in the shareholder’s account they can be sold like any other shares.

If the shareholder decides to hold the bonus shares, he becomes entitled to dividends and other rights that are available to the owner of the original shares. 

 

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Financial Goals

The word goal immediately brings to our mind’s eye a goal post as in a football or hockey game. 

Right from our childhood we are used to working with some type of a “goal” in most aspects of life. Starting any work with a realistic, specific goal is the first step to ensure that it gets completed successfully. For instance, in the case of a student it can be completing the school home work by a specific date, the nature and volume of home work is set realistically by the teachers depending on the average student’s capacity. For a home maker it could be completing a particular house hold work like cooking, within a specific time, the nature and volume of work depending on the number of members in the household. For a corporate accountant it could be completing the organisation’s financial accounts for the year within a target date. For the players in a game of football or hockey, the goal is to win the game by scoring more points than the opposition within the allotted time period.

Most of us are aware of SMART goals. SMART is the acronym for: Specific, Measurable, Achievable, Realistic and Time bound. In all the examples given above one can identify the SMART components.

 

Having a goal makes us conscious of completing the job within a time frame. The “goal theory” can be applied in almost all the aspects of life. And this includes Financial Goals as well. In simple words a Financial Goal can be defined as any target that is set in monetary terms.

It is always much easier if we are able to identify the goal in advance. Some very common financial goals can be to have an emergency corpus, to come out of credit card loans (or for that matter any debt), buying own house, making a foreign trip, etc.  

Financial Goals can be classified into short-term, medium-term and long-term goals. Short term financial goal can be having an emergency corpus, medium term can be coming out of debt trap or making a foreign trip and long term can be buying a house or retirement planning.

Needless to mention the SMART components have to be made applicable to Financial Goals too. “Lots of money for retirement”, or “a foreign vacation in future”, or “a big house before I retire” are not SMART financial goals.

Instead “Rs 5 crores at the time of retirement at the age of 60” or “20-day Europe Tour with family in the summer of 2023” or “3 BHK apartment measuring 1200 Sq feet in Bangalore in a budget of Rs 1.5 Crores within 5 years” are proper goals.

 

As in the case of any other goal a financial goal has to Specific, Measurable, Achievable, Realistic and Timebound. Let us take one of the examples given above and analyse how an achievable goal can be framed.

In the retirement example given above the Rs 5 Crores goal can be easily achieved by a 30-year-old person who has another 30 years to go for retirement (see explanation in footnote $ below), but difficult or impossible for a 55-year-old executive / self employed person with negligible present net worth and not much income or receipts in the near foreseeable future. Similarly, for a family with not much resources at hand and with not much monthly surplus in hand (remaining after the routine monthly expenses); a 20-day Europe trip may not be possible in the next year, but they can certainly plan a 10-day vacation at Goa.

When it comes to Financial Goals it is important to be clear and sure about the facts and figures. When planning for a financial goal in a future point of time, near or distant, one has to factor inflation. This is true for all financial goals - higher education, house purchase, corpus for retirement, foreign vacation, etc. A college course which costs Rs 1 lakh per year today will cost Rs 2.14 lakhs per year, after 8 years at 10 % inflation rate. A house costing Rs 2 Crores will cost Rs 2.67 Crores after 5 years at 6% inflation rate. 

 

People normally overestimate their earning capacity in the short term and underestimate the power of compounding in the long term. For instance, there is always a tendency to take loan in the immediate future as a solution for buying a house, without factoring the cash flow issues one is likely to face immediately. However, when it comes to long term, they feel that accumulating a corpus of Rs 5 Crores or Rs 10 Crores is impossible or very difficult.

 

Footnote:

$ - A SIP of 6,500 per month with an annual step up of 10% at 12% return per annum would give a corpus of Rs 5.19 Crores in 30 years!

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Deductions & Exemptions under the Indian Income Tax Act

Deductions and Exemptions under the Indian Income Tax Act

In the context of the Indian Income Tax Act, Deductions and Exemptions reduce one’s taxable income and more importantly one’s income tax liability. Though these terminologies are sometimes used interchangeably there is a basic difference.

The purpose of this article is to explain the basic difference between these two and provide some common examples. 

 

Deductions:

As the name suggests, deduction means an amount that is deducted or reduced from the Gross Income to arrive at the taxable income.

Availability of deductions to a tax payer can be on the basis of nature of income offered to taxation.

Income from Salaries is eligible for deductions under section 16. This includes standard deduction, Entertainment Allowance & Profession Tax paid.

Income from House Property is eligible for deductions under section 24. This includes 30% of annual value and interest paid on any specified loans taken in respect of the house property, mostly loan taken from a financial institution or bank for buying a house.

 

Income from Business is eligible for deductions under sections 35AD, 35E, 36, etc. These are mostly expenses incurred for earning the particular business income.

Income from Other Sources is eligible for deductions under section 57. Again, these are on account of expenses incurred for earning the income from other sources.

The deductions mentioned above come into play when calculating the income earned by the tax payer under each of these heads namely Salary, House Property, Business & Other Sources.

The income from all the above heads are totalled together to form Gross Total Income. Chapter VI A lists out a plethora of deductions which come into play after the stage of Gross Total Income. Deductions under Chapter VI A include the popular ones under sections 80C to 80 U.

Deductions can also be categorised depending on the status of a tax payer i.e Individuals, HUFs, Companies, Societies, etc. For instance, deduction under section 80 P is available only to Societies, deduction under section 80 M is available only to domestic companies, deduction under section 80 U is available only to individuals.

A Deduction can be on account of expenditure incurred (donation made to a registered NGO), investment made (Investment in National Savings Certificate) or based on some peculiarity of the tax payer (Blind or physically disabled individual).

Most deductions are subject to an upper limit.

 

Exemptions:

As the name suggests, exemptions are those that “do not form part of total income”. In other words, unlike deductions which are “reduced” from the Gross Income, exempt incomes do not form part of the Gross Income.

The Income Tax Act states that in computing the Total Income of any person any income falling under the specified sections and classified as exempt income, shall not be included as income.

Section 10 of Chapter III of the Income Tax Act lists some of the exempt incomes. Some of these exempt incomes are agricultural income, House Rent Allowance received by an employee (subject to certain calculations), amount received by a member of HUF which has been paid to him out of the income of the HUF, any income paid to an individual being interest on amount lying to his credit in a Non-Resident External account in any bank in India, etc.

Like deductions, exemptions can also be categorised depending on the status of a tax payer i.e Individuals, HUFs, Companies, Societies, etc. For instance, exemption under section 10 (13A) is available only to Individuals, exemption under section 11 is available only to Trusts, exemption under section 13A is available only to political parties.

Again, like a deduction, an exemption can also be on account of expenditure incurred (rent paid by employee to claim HRA exemption), investment made (Investment in electoral bonds by political parties) or based on some peculiarity of the tax payer (trust has to spend a specific percentage of its receipts to be eligible to claim exemption).

Needless to mention, taxation is a complex subject and requires a deep and detailed study to understand the finer points. As mentioned earlier the purpose of this article was to only explain the basic difference between these two & provide some easy to understand examples.

 

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