Union Budget 2011 - A hit or flop show ?

Everyone spent hell lot of time speculating about budget before Feb 28, 2011. Media gets an easy topic to discuss 24 hours and experts gets the chance to show their speculation skills to the public.

Well, when I talk about whether this year's budget is hit or flop is my perspective and lot of people may agree or disagree to it. Couple of days before the Union Budget I wrote a post with title "If I were Finance Minister - Union Budget 2011" (Click link to see the post http://allaboutmoneyandprofit.blogspot.com/2011/02/if-i-were-finance-minister-union-budget.html), now that was like a dream to me and I thought of writing a revolutionary budget. But reality is different so I will not compare but I said there with what has been announced by Finance Minister on Feb 28.

Disinvestment of PSU - Good for Economy

An aggressive promise from Government. They are going to raise Rs 40,000 Crores in 2011-12 from disinvestment. Keep in mind that this is just a promise, lets see what comes in reality. Looking at the past trend of UPA they have been conservative about such promises so I hope that the number of Rs 40,000 Crores is conservative and actual realization would be way ahead of it. However its a matter of timely execution. A good step to bridge the gap towards Fiscal Deficit.

Foreign Investment in Mutual Funds

Another aggressive step wherein foreign investment has been allowed in mutual funds in India. Of-course this will bring more investment to India but I am skeptical about it. Mutual Funds till date have been relatively considered as stable investments than equity but the way FII plays with equity markets if the same practice is replicated in mutual funds, small investors will loose big time.

Aadhar (UID) Cards

It has been promised that 10 lakhs UID cards shall be issued everyday w.e.f 1st Oct 2011. This system will bring transparency and eliminate the corruption at various levels and bottom of pyramid will get the most benefit out of it.

Well, keeping in mind that Nandan Nilekani is leading this project I have no doubts in mind that it will not happen on time.

Economic Growth

• The GDP growth is expected to grow at 9% in 2011-12
• No major steps to control Inflation and seems that it will continue to bite the poor of India

Direct Transfer of Cash Subsidy

Prima facie it looks really a step towards inclusive growth wherein we are talking about transferring benefits to beneficiary directly for Kerosene, LPG & fertilizers and remove all mediators, which on paper will help control corruption as well. But reality is going to be completely different. All hopes on the Task Force which will set up the process for it. I am very very skeptical about it, my only hope is UID if in case task force is able to use that efficiently.

Foreign Direct Investment

Till now the statement is just on paper that discussions are underway to liberlise FDI policy. Pure lolly pop.

Agriculture

My favorite topic and thankfully this was covered  in length. Few key initiatives which I liked :

• Rashtriya Krishi Vikas Yojana budget increased from Rs 6,755 to Rs 7,860/-
• Rs 400 crores allocated to Eastern  Region to promote Rice based crops
• Rs 300 crores allocated to bring 60,000 hectares under Palm Oil plantation
• Rs 300 crores allocated to promote animal based protein production through live stock development.
• Credit Flow increased from Rs 3,75,000 crores to Rs 4,75,000 crores in 2011-12
• 15 more mega food parks approved for 2011-12
• Private players to be allowed for Storage capacity and warehousing. 

Black Money

Five fold strategy, membership of various international fora of money laundering, DTAA etc were announced but let me tell you that all these are just excuses. It just need WILL to attack this dragon which no one in our politics has. If it happens, the names involved in it will change the history of India and no one who is in power wish to do so.

Bharat Nirmaan

I just copied a statement of our Prime Minister about the scheme to give you an idea of what Bharat Nirmaan is. “Bharat Nirman will be a time-bound business plan for action in rural infrastructure for the next four years. Under Bharat Nirman, action is proposed in the areas of irrigation, road, rural housing, rural water supply, rural electrification and rural telecommunication connectivity. We have set specific targets to be achieved under each of these goals so that there is accountability in the progress of this initiative.”

A significant allocation of funds has been done to this initiative. The budget has been increased to Rs 58,000 Crores for 2011-12 from mere Rs 10,000 Crores for 2010-11.

Government is targeting to provide broadband connectivity to all 250,000 villages in next three years. Thats called inclusive growth.

Please do read more on Bharat Nirmaan at http://bharatnirman.gov.in. This is the real work which would enable every Indian to be self dependent.

MGNREGA

The original name NREGA has been changed to MGNREGA. As expected the salary under MGNREGA has been linked with Consumer Price Index. So more dent to the budget.

Anganwaadi salaries have been doubled for workers and helpers both.

IT Initiatives

• Some more initiatives will be seen in efficient tax administration although no clear plans unveiled.
• Rs 300 crores allocated to modernize state stamp and registration in next three years. This will change the history if it happens with real WILL POWER to reform this area.

Taxation

• Government seems to have fed up with GST by now. Consensus among states is a major headache to UPA. Many changes, many drafts, many deadlines and it seems that it is still not in a position of actual implementation even in phases. The scope of GST has been narrowed, really dont know what has been excluded or compromised till now.
• Direct Tax Code (DTC) would be effective from 1st April 2012, a good news. Lot of hassle and complication of taxation would hopefully go away.
• Income Tax exemption of Individual tax payer increased from Rs 160,000 to Rs 180,000, benefit of Rs 2,000 annually
• Minimum Alternate Tax (MAT) increased from 18% to 18.5% for companies. Good one, get from the companies who are earning more and pass on the benefits to deserving ones and i.e. Poor India.
• Additional deduction of Rs 20,000 for investment in long term Infrastructure bonds for Individual tax payers

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As a tax payer there is nothing exciting which I got from this budget however looking at the challenge of controlling Fiscal Deficit and a step toward double digit growth, I would rate this budget at 6 out of 10 and purely this is because there are few initiatives on Agriculture front which I liked, some promise about FDI liberlisation and commitment towards bottom of pyramid by increasing budget for Bharat Nirmaan scheme and by linking wages with CPI under MGNREGA.

Sure Success Venture - Online Media Business

We all have experienced multiple eras wherein we have seen immense changes in the way we operate or work. When it comes to revolution, it reminds me of 1991 reforms when entire economy took a U turn and exposed itself to external world. Since then we saw many industries transforming their way to operate. Be it Banking, Insurance, Telecom or IT, we have all seen the change, and change for good.

21st century's first decade witnessed historical change or boom in Online business. Today we are in a situation that we can spend hours and hours on Internet busy with our favorite activities. This decade made people addict to Social Media sites, Blogging, Online Shopping, Chat and even things like online banking.

So who is benefiting from it, of course apart from end user,the one who creates such platforms. Be it Facebook, Yahoo or some other blogger.

One fine day I was amused to read an article in Forbes, that three Indonesian created a Social Media site (something like Facebook), the only difference was that it was made for that country only. Does not make difference, it must be only language or something other known tags on that was specific to the country. Yes and the other small difference was that this site did not focus more on profile views. This work did so well that Yahoo took it over recently and can you imagine what Yahoo paid ? It was somewhere in the range of USD 2.5 million to USD 4 million. I am sure thats a way big money the creators of site ever imagined.

Dependency of common man on Internet has increased drastically and going forward it will continue to show the growth. So whatever we make with dedication and passion will sure shot be a success.

Blogging has grown many fold since it started. People have made this also as a source of income. Apart from this there are n number of sites on online shopping and auctions, one can not imagine how much money thise sites are pocketing.

Google story is the real inspiration for the people who wish to do well in Internet world. Can someone imagine to build an empire out of a search engine, at least till now no one else could do. If you read through the Google story book, only two things comes out clearly is that both the founders of Google has Sheer Passion to excel and they were determined to create something new. In today's world people are obsessed with Facebook and Twitter but believe me, anything new to this kind of social media network is most welcome, it just need to be better and different.

Someone must have given a thought (in Indian context only) to create Matrimonial site originally, so later on other people copied it. Our Grand parents can not imagine that marriages are fixed online but thats the revolution and who brings idea first gets the prize.

I remember very clearly the queue in banks for withdrawal or deposit of cash, today all of us have almost forgotten such things and story does not end here, more than half of banking activities are done online now. And when did you last time withdraw money from bank standing in queue and listen to the old Aunty cashier who never use to talk properly ? I need to remove the dust from ten year old memory.

Yes, I forgot the big change, our Stock markets. Everything is online now. I have heard the stories of old times when there was no Demat account and online transactions. Even I could never imagine how stock markets use to work in old times. Now real time updation helps you take instant decision to act.

I have seen many people working as Travel / Adventure Agent online. And they earn good money out of it. The reach of Internet is so vast that it has become the common platform for receiver and provider of service. So everyone comes here.

The only weakness of this business is that there are no entry barriers, once you make a concept people just copy it. So competition keep growing around you but keep in mind that if you are original idea owner, you will always have an edge over competition. Just see Google, there are search engines but no one is at par with Google.

All just this business need is a new and unique idea and build the empire with passion and zeal.

If I were Finance Minister - Union Budget 2011

If I were Finance Minister this is what I would have evaluated to bring reforms in Indian Economy. Some of the "Ideal" budget initiatives.

Discard NREGA

In 2009-10 budget, Rs 39,000 crores were allocated under this scheme. The objective of this scheme is to assure minimum wages to everyone for 100 days in a year. It is really good initiative that government has given employment to bottom of pyramid people however the work happening under this scheme does not result in any return to society/government.

Moreover it is not focussed on developing basic infrastructure, Yes in some states basic roads are constructed under this scheme but of no use.

I believe that the funds allocated to NREGA can be diverted towards departments like PWD, Forest Department, IPH, Agriculture etc. It will not only create solid infrastructure but also equivalent opportunities of employment.  However we need to ensure that this money is utilized for its original objective for which we need to bring more transparency and efficiencies in these departments.

Infrastructure Sector Reforms

We all know how bad is Indian Infrastructure. We are in 21st Century and there are plenty of villages which are not connected with Roads, do not have hospitals, Schools and telephones etc. I am among one of those citizens of India who have witnessed such life and the situation today is the same. Nothing has changed for people of those villages, at least since my childhood. We talk about India among top nations in GDP growth but where is Inclusive Growth which UPA  keep chanting ?

If we read Indian economy articles in India, we have a myth that we are compared with China, but fact of the matter is that we are no where as compare to China, be it Infrastructure, be it GDP, be it FDI, you compare anything and we are way behind.

This Sector need reforms in a way that more expenditure allocation is needed and of-course a commitment of Government to ensure that every Citizen has an access to basic needs.

Let FDI come to India without any apprehension

This is big dream. Our Political instability or risk of instability make lot of FDIs hesitant about Indian Economy. Over and above that our systems and compliance add more spice to it. Let this source of Investment be free and keep least possible restrictions on it. Open more sectors to FDI, we have already seen reform of many sectors after we allowed FDI. It not only creates more employment opportunities for young talent but also upgrade their skills to international level. Needless to say that it brings more efficiencies because of increased competition.

Implement GST

GST implementation will remove lot of complexity and inefficiency from current system. Moreover will help marginalizing taxes on goods and services. Transparency in any proposal create lot of confidence in people and I am sure that GST is one of those initiative which will bring more transparency over a period of time.

No matter what it takes to Finance Minister to implement this, talk to States, bring them to a consensus, GST implementation is need for rapidly growing India.

Public Private Partnership (PPP) - A way forward

We have witnessed the result of allowing private sector in past. 1991-92 was the time economic reforms in our country started. Then Finance Minister Mr Manmohan Singh presented the historic budget wherein one could call our Economy as Open Economy unlike pre 1991 era.

Private Investment in Banking Sector forced Public Sector banks like SBI and PNB to change their strategies to survive in new world wherein private sector was big rival. Telecom sector privatization enable even bottom of pyramid Citizen to afford mobile phone. Also private telecom companies provided mobiles in interior villages where BSNL till date is not able to provide land line connections.

Privatization not only made Consumer "The King" but also created immense employment opportunities. Even another benefit of Private Sector is "No Corruption".

Tax Holidays, SEZ, Export Incentives

There are so many sectors which need right taxation policies. To encourage more investment in specific geography/Industry government need to be more encouraging. Lets extend them the help they need in the beginning, benefits will flow to our Country in long run in the form of GDP growth contribution, Tax income to government (After tax holidays), Employment opportunities etc.

Export is very important part for us. It helps us create presence in the world for various products and services. Apart from this, as Exports bring foreign currency to India, it helps improve our Forex reserves.

Infrastructure sector need more focus here because of its log gestation period. Also since this sector always need huge funds to investment, government need to create more institutions/banks to lend such huge funds in shortest possible time.

Agriculture Sector Reforms

The most ignored and more integral part of our economy is Agriculture. Over decade the Agriculture sector share in GDP has shrinked. We really need to encourage this sector if India wish to right history on economic reforms. Strategically also this sector is very important to be self dependent.

The whole system and regulations need reforms. Thank God at least income from agriculture is not taxed. Also there is good amount of subsidy spent in this sector. However the big flaw in system is MSP (Minimum Support Price). The irony is that this minimum support price is too minimum, as a result farmer gets peanuts and middle men involved in trading take huge advantage of it.

Check out MSP of pulses and see the market price, I bet you, it will be an eye opener for you. So where is the money? We need to change the parameters the way we define MSPs. To be honest I have not gone through the current parameters but gap in MSP and market price clearly indicate that this need attention from experts.

When any sector is strategically so important for us, how can we allow hedging etc in such sectors. The reason for significant gap between MSP and market price is not only because of MSP parameters but also factors like hedging and speculations manipulate this in large form.

Education - The backbone of "Bharat Nirmaan"

To erase poverty from its root and channelize the young blood, Education reforms are must. If  youth of India is well educated the chances are more to channelize their energies towards good else unemployment will continue to increase crime and poverty.

Millions of kids do not have access to primary education and many who get it do not get the quality education. Good teachers do not opt for Government Schools because they do not get good salaries there. I have seen many cases wherein Government School teacher gives education to his/her kids in private schools. We cant close our eyes from such burning issues. Education sector needs immediate reforms not only at primary education level but also for higher education because that is the stage which enable students to contribute to Economic growth.

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There are so many other areas which need immediate attention from government to address them in a way that concept of Inclusive Growth become the reality.

Our economy is growing so rapidly that Government need to be proactive in addressing potential issues rather than reactive once the damage is done.

Union Budget 2011 - What to expect on Income Tax on Salary

The countdown has begun for Central Government to unveil Union Budget for 2011-12 on 28th February 2011 Monday. Finance Minister Mr Pranab Mukherjee is busy from few months meeting almost all critical stakeholders on their expectations and ideas on budget.

Its such a critical event for Central Government that only figures and facts are not considered while drafting budget but political implications plays a critical role in it.

The facts and figures which would play a major role in deciding Income Tax on Salaries :-

Telecom 3G spectrum auction 

Unlike 2010 budget situation, this year situation for our country from Fiscal deficit point of view is way better, thanks to the execution of Telecom 3G spectrum auction and unexpected revenue of Rs 67,719 Crores  government received. This was much more than what government anticipated in the beginning of the auction. Clearly it has helped government to cut down on Fiscal deficit in big way.

Forex Reserves

Foreign Exchange Reserves has increased by ~5% in Calendar year 2010 (source http://www.rbi.org.in) which add up towards reduction in Fiscal Deficit.

Foreign Direct Investment

India received USD 19,002 million as Foreign Direct Investment (FDI) from April 10 to Nov 10 (source http://www.rbi.org.in). Although this is less than last fiscal year FDI but fairly decent figure to bank upon.

Foreign Institutional Investment (FII)

FII's were the one taking out all money from stock market in 2008-09 recession. They withdrew USD 15,000 million (net of Inflow and outflow) from Indian economy during 2008-09. I personally believe that this was one of the key reason that our stock markets crashed badly.

Now FIIs are back in India and have invested USD 29,048 million in 2009-10 and USD 31,007 million in fiscal year 2010-11 which is still going on. It surely eases up the pressure on Forex reserves and help improve   fiscal deficits significantly.

National Rural Employment Guarantee Act (NREGA)

This scheme has earned lot of points for UPA and they have seen its result in many elections. This scheme was started in year 2006.

Seeing its magnificent success and results, government increased the budget to Rs 27,000 Crores in 2009 and Rs 39,000 Crores in year 2010 (144% increase) and there is high probability that this number will increase further. 

A major change this year in this scheme was that minimum wages have been linked to inflation, hence indexing of minimum wages with inflation will result in more outflow of funds which means increase in budget.

This can be one of the reason that Income Tax on salaries can be secondary over NREGA budget allocation.

Other Factors

Factors like Inflation, GDP growth, PSU Disinvestment, Unique Identity Card (UID), Export/Imports, GST, Indirect Tax collection, Infrastructure development etc will play a key role in deciding which source of Income (for government ) to increase/decrease and which portion of expenditure need leverage.

The Strategic/political situation which would play a major role in deciding Income Tax on Salaries :-

Its Vote Bank Game

No matter what the facts and figures are, upcoming elections always influence the decision to some extent. 2011 will have 5 state assembly election i.e.West Bengal, Kerala, Assam, Tamilnadu and Puducherry. Now the government which is in power in centre would never love to loose in these elections hence will try to spread the benefits in such a manner that every voter is benefited.

So expect some concession in Income Tax on Salaries because of this.

Moreover, UPA will start its preparation for next term in centre right now hence again some benefit to tax payers on this account as well.

I am not going to speculate on how much tax benefits will flow into the pocket of tax payer but clearly some concessions on Income Tax on salaries seems logical.

However we should not forget that few days before Union Budget we will witness Railway Budget. A loss making department will surely eat up big chunk of our Union Budget and Railway Minister Mamta Banerjee will try to introduce as much trains to West Bengal as possible keeping in mind upcoming Assembly elections  in West Bengal.

It would be unfair with Union Budget to say that these are the only factors which enables Finance Minister to make a proposal.

Let's wait and watch what is there inside dark brown Brief Case of Mr Pranab Mukherjee for Income Tax payers.

Create Investment Portfolio Staggered and Diverse

One go Investment can be fatal whereas staggered investment will grow the portfolio :-

Jumping from 100 Meters hight in one go will surely result in fatality however Jumping 10 steps of 10 meters each will take you to the same destination safe and live. Same is the case when in comes to building investment portfolio.

We never know what is the right time to make an investment in stock market, mutual funds or real estate. Now in such situation, the approach of making investment in one go for entire available funds is not advisable at all. Let the money take time to get into Investment portfolio and invest money over a period of time.

The key benefit from this strategy is that if one entry was at higher rates the other one can be at much lower rates and compensate the loss of earlier decision. It is nothing but adopting the method of SIPs introduced by Mutual Fund AMCs.

Narrowness of Investment Portfolio is dangerous :-

Narrow the boat, more the probability of its sinking in Storm. On the other hand, Broader it is, lesser the probability of its sinking.

Sometime investors get emotionally attached to particular share, mutual fund or some other investment product and divert major share of portfolio towards that product. I call such action as "Suicide". You would agree with me that profit does not come from emotions and Business is too far from emotions. So why a silly decision because of some stupid reasons like "I got good profit from this share", "This mutual fund is lucky for me" etc

Well, I would say that keep emotions away and diversify the portfolio as much as possible. Even within one category, you can further divide into sub categories.

Example of Diversification at first level :-

1. Equity Share
2. Mutual Fund
3. Gold
4. Real Estate
5. Fixed Deposit
6. Bonds

Now these key categories further can be diversified. Share of Equity can further be allocated in to different companies and sectors.

This strategy works well in almost all situations. How much it does well is subject to how fairly the diversification has been done. For instance Auto sector is not doing well and we have some allocation into Equity shares of XYZ auto company. In this case our small portion of equity will under perform but not the entire portfolio. Moreover better performance from other sectors can set-off/minimise the loss from XYZ equity shares.

Even further, for long run, investments like Real Estate and Gold are bound to increase, so even if there is under-performance from one segment of diversified portfolio, the others will help set-off/minimize the losses.

National Pension System (NPS) - Good way to build net-worth for retirement

Central Government started this scheme in the middle of 2009 under the umbrella of Pension Fund Regulatory and Development Authority (www.pfrda.org.in). PFRDA is the regulator of this scheme and issue guidelines for efficient governance and management of funds.

Salient features of NPS are :-

• Lucrative investment options
• Flexibility to withdraw money under Tier II scheme
• Funds are managed by professional fund managers
• Various investment options like mutual funds and ULIPs. Options ranges from Equity to debt to Fixed income to government securities.
• Low threshold limit of Rs 500 per installment
• Option to invest on monthly basis
• No brokerage charged by fund managers like mutual funds or shares
• NPS account can be opened with almost every bank and post offices.
• Bank issues an unique account number (PPAN) which remains same throughout the life of investor
• Transparent record keeping with professional and independent agency.
• Available for everyone between the age of 18 years to 60 years.
• Easily transferable account from one branch/location to other branch/location.

The most attractive characterstick of NPS is its multiple investment options. It allows investor to divert funds towards Equity, Debts, Government securities or investment which yields fixed income. This flexibility covers risk appetite of masses and becomes the favorite option for investor who really think long term future security.

This scheme has been designed so carefully that a lay man can understand the structure and feel confident before opting for it. The effort has been made by government to keep charges on lowest possible side and in simple manner.

It has some major shift for Central/State Government employees. Employees who has joined services on or after 1st Jan 2004, will no longer have option of GPF as a result they will have to opt for NPS only. Such employees will have an option to opt of Tier I (Mandatory non withdrawal account) or Tier II (Voluntray withdrawal account).

The story does not end here. It seems that government has taken a oath to make it successful, hence It has been allowed as Tax rebate under Section 80C. Also it has been included under EEE products which means the income earned out of investment made in NPS is exempt from tax.

Apart from regular NPS, the recent addition to this scheme is "NPS lite" which is meant for low income investors and works on group contribution basis. Barring some small technical processes and formalities, scheme in principle remains same with its motto to make people secure their retired age.

Shine your Portfolio with Yellow Metal - Buy Gold

As I read back the history of Gold it has always rewarded people with thick returns in Longer horizon. Yes there were macroeconomic situations when shine of Yellow Metal faded but no one could keep the shine away from it for long. Its Consistent performance has build immense faith in investor’s mind and that is the reason that Demand of Gold will continue to grow and so as the prices.

The recent example of robust performance by Gold is ,2008 Financial Meltdown worldwide. Gold was the only Investment which continued to rise (barring Crude Oil) against all graphs going down south. Gold was INR 4,000 per 10G in 2001 and 10 years later it has reached INR 20,000 per 10G in Jan 2011, the absolute return of 400%, isn’t a thick return ? Don’t forget that there was Global Financial meltdown in 2008, 2009 and early 2010 in many parts of world as a result Sensex was down from 21,200 points (Jan 2008) to 8,000 Points (March 2009), which is 63% reduction and mind it, the same was the story of investors who had nothing in their portfolio other than equity.

Like other commodities, Gold’s prices are primarily determined by Demand and Supply but not to forget that no commodity is away from Speculation. Gold Demand and Supply really gives interesting insights on how India has large share in Gold Demand.

As per World Gold Council, 5 Year Average (Q4 2005 to Q3 2010) of Demand is 3,766 tonne out of which 57% (2,151 tonne) is of Jewellery and 31% (1,182 tonne) is for Investment purpose. Interestingly India and Middle East account for 70% of world Demand. Further, Above the Ground stock of Gold as on 2009 end was 165,600 tonnes with more than 50% share of Jewellery and merely 18% as Investment.

How to Invest in Gold ?

There are numerous ways to get an exposure into Yellow Metal Investment.

1. Coins and Bars – An easy way to make investment in Gold is buy physical Gold in the form of Coins or bars. Normally Coins are available in Grams in India and wide range is offered by the industry.
2. Exchange Traded Funds – The best way to make investment in Gold. No need to take physical delivery and keep Gold in safe. There are many ETFs in India in the form of Mutual Funds which are linked with Gold price performance in market. In some of the cases there are requirements for AMCs to keep physical Gold with them.
3. Futures and Options – Since Gold is a commodity, it is traded at Commodity Exchanges. As a result Future and Options can be a best way for investment in Gold.

Apart from these three ways there are lot of other options but in India practically these three practices which are popular among investors. ETF investment in Gold is similar to other Mutual Fund products hence is the best way to add shine of Yellow Metal to your portfolio.

Almost every broker or so called expert of Stock market comment on Gold performance and some of them have gone to the extent of predicting Gold prices by 2020 equivalent to USD 3,000 per Ounce (28.3G). Now what really happens is a matter of time, folks watch it once you add shining metal to your portfolio and enjoy the Giant Swing which is surely going to be upward.

Do not mix Taxation when it comes to Gold. There are some tax implications but do not let them dominate your investment decisions in this case because there is no other investment script which would give you returns like Gold and also save tax to you.

Real Estate Investment - Best way to multiply Net worth many fold

When it comes to multiplying Net worth at large level the only option I see in today’s Indian Economy is Investment in Real Estate. UPA talks about “Inclusive Growth” and I see that happening in Net worth of people who venture into Real Estate Investment. The prices of land are growing in almost every corner of India the only difference is that in some cases increase in prices is extremely high and in others relatively less.

Many people hesitate to invest money in Real Estate only because of the reason that it requires lot of initial work, efforts, time, research and good relations with people (brokers) dealing in it. This Industry works completely different from others and accordingly one need to be very vigilant and alert while taking decision to invest in Real Estate.

I have seen many people earning average salary (say INR 25,000 pm to INR 100,000 pm) and owns big properties and plots. Fact of the matter is that fixed monthly salary for them is like peanuts and major chunk of return for them is always Real Estate. Now how is it possible? The answer is not simple, because if answer was simple everyone would have ventured into it.

The Answer is that accumulate few lakhs from your savings and balance opt for Bank Loans. The phenomena is such that Bank Loans are available at 10%-13% per annum and Real Estate Investment provides you returns way higher than this, many a times 100% per annum. And this is the way you make more out of less. Now imagine if such phenomena continues for you for couple of years, needless to say that it will become difficult for you to count how many folds your Net worth has increased.

As this Industry works differently as a result there are so many things which are grey such as Black Money involvement. Imagine a situation that you have 20% of total investment which you are contributing from your own pocket and balance 80% is coming from Bank. But if Seller want you to pay 50% of total value “Off the record” ? Such questions will always remain unanswered.

Why Investment in Real Estate sure shot success

1. It’s an immovable property and appreciation in Land value is bound to happen
2. India as an Economy has very bright future hence demand for Industrial/commercial Land will continue to grow for decades
3. Cut throat competition among Real Estate Brokers, Builders, Financers will ensure to get you the best deal
4. Longer repayment period of Bank Loans (normally 15 years to 20 years) eases up the pressure on monthly fixed income
5. Our Banks provides loans at very reasonable rate of 10%-13% per annum
6. Increasing Per Capita Income of Average Youth will continue to raise Residential land demand
7. The land or property can be used for any other Business purpose such as Leasing, Own Business etc

Must watch things

1. Ensure that property is dispute free
2. Ensure that the “Real Owner” is selling you the property
3. Agree on mode of payments for every single penny
4. Go through renowned and well known broker. Please do not evaluate brokers basis their Commission.
5. Study the surroundings of the property and basic facilities around it. These things plays the most important role in determining the price.
6. Make plan for payments and possession etc in line with Bank Loan disbursement. Sometime many deals go off because of misunderstanding and there are places in India where prices change every day and broker to broker.
7. Do some research on future of the property and its surroundings, this will give you confidence in taking a call whether to invest or not.
8. Do keep in mind that Sale and Purchase of Real Estate attracts Income Tax (Capital Gains) and there are exemption ways given by Central Government to reduce Tax. You may consult the expert to avoid any kind of inquiries from Income Tax Office.
9. Make sure all original documents of property are in your name else you will lose money big time.

Here is the small example (with approximate figures) from one of my known who has big unrealized money in hand just after 2 years of investment :-

Monthly Fixed Salary                           INR 120,000/

Net worth at the time of Investment    INR  2.5 million

Cost of Plot                                          INR 9 million

Bank Loan (for 20 Years)                   INR 6.8 million (75% of Cost of Plot)

Own Contribution                                 INR 2.2 million (25% of Cost of Plot)

Monthly Installment                               INR 74,323/-

After two years he has paid INR 1.8 million (including Interest). The latest value of the plot is INR 19 million. The unrealized profit is INR 10 million which is approximately four times higher than his two year old Net worth. Also if the plot is put into use for any commercial or non commercial purpose it will add few more thousands to increase net worth. Of course there are other things involved in it such as Income Tax etc but the purpose of the example was that he utilized own net worth and Fixed monthly salary in such a manner that investment yields maximum possible return.

Your investment in Real Estate can start with few lakhs and go up to billions. However this investment need highest alertness and vigilance to protect your net worth.

Invest in Infrastructure Bonds to Increase Exemption Limit of Rs 100,000 to Rs 120,000

Salaried people can avail extra Income Tax exemption of maximum Rs 6,000 (30% of Rs 20,000) by investing Rs 20,000 in Infrastructure Bonds. This exemption is available on Income earned after 1st April 2010. Also this exemption is over and above the investment limit of Rs 100,000 per annum.

Government has given this incentive to increase investment in Infrastructure  sector. Make sure you buy the bonds which are notified by Central Government for Income Tax Exemption purposes.

The Bonds to be issued by :-

1. Industrial Finance Corporation of India (IFCI)
2. Life Insurance Corporation of India (LIC)
3. Infrastructure Development Finance Company Limited
4. Non Banking Finance Company (NBFC) CLASSIFIED AS INFRASTRUCTURE FINANCE COMPANY by Reserve Bank of India

The Lock in period for the investment would be five years however investor has an option to stay invested till ten years.

Interest rates ranges normally between 7 to 8 percent per annum which is also tax free.

Central Government has given this specific incentive to reduce your tax burden marginally in the year of investment by giving you Tax Exemption from your regular income and Tax Free Interest at the time of redemption of bonds after five years.

This option is undoubtedly better than keeping money in Fixed Deposit, so go ahead and buy these bonds before 31st March 2011 to avail tax exemption from your Income for 2010-11 Financial Year.