How to overcome common budgeting errors

Many of you manage to come up with a decent budget, but may end up looking to be just that - budgets! The reality turns out to be far from what you chalked out initially. This typically happens due to an oversight that renders your work useless. Here are a few tips on how to build a realistic budget:

Anything that can go wrong will go wrong

Murphy's Law fits into many aspects of life, it somehow fits the budgeting aspect to the 'T'. Many people don't set aside money for items like medical emergencies, car damages and home maintenance. These may be irregular costs, but they are not necessarily unexpected. Almost all cars and homes eventually need overhauling. The amount of repairs depends upon age, quality of construction and maintenance; it may do us good if we set aside a certain nominal percentage out of the net earnings on a monthly basis to cater solely for such contingent expenses.

Drawing inferences from past

The only way to build a realistic budget is to draw regular and appropriate inferences from the past expenditures on an itemized basis. The amount spent on each of the items may not vary drastically on a month-to-month basis unless they are seasonal / based on occasions. In fact, there are trends that one needs to keep in mind whilst building the budget. One could provision for purchasing apparels, sweets, household items / durables a little higher during festive season. Similarly, the electricity bill could possibly run high during summer due to increased usage of AC / fan.

Save first, spend later

Most of us would have thought that this should have been written the other way round. However, a more effective way of ensuring that you buy only what you need and do not end up in a cash crunch, is to set aside a percentage of money as savings and use the rest for buying essentials and utilities. Moreover, by strictly adhering to this principle, you will put your money to work and build a decent corpus for your financial goals.

Emergency fund

Typically one should hold at least 3 months of household expenses in easily accessible avenues; this could be your savings bank or flexi-fixed deposits, or for the emergency fund. The emergency fund may not always necessarily cater to medical emergency; this fund could come in handy for other reasons like job loss / transition, and other unexpected and unavoidable expenses

Include the fun element

Although, going out for luncheons, inviting friends over could be an occasional thing, it becomes important to provisions for these aspects as well. However, if you do not keep a tab on these, it could burn a big hole in your budget and turn it topsy-turvy.

Remember your investment commitments

Your premium payment on the insurance may be due only during a particular month of the year; however, one has to realize that this has to be planned out of the net earnings. One usually plans for the typical ongoing expenses: groceries, utilities and fuel, but forgets yearly expenses such as insurance premiums, property taxes etc

Trying to keep up with peers

Peer pressure seems to be affecting every aspect of life, specially the lifestyle that we maintain. If your friend bought a new smart phone, you would want to buy one on par or even better than that to indulge in the experience of using one too. There are also many other ways in which one could end up spending more than one actually earns. This is the easiest and most common means of getting into a debt trap! Remember that buying only what you need actually makes you stand out in the crowd.

Not being motivated

Sticking to a budget would require more or less the same willpower as one would while dieting or doing regular exercise. One should self-motivate by awarding oneself if the budget is successfully implemented. The reward could be in the form of extra self-indulgence, however, remember the whole point of building an effective budget is to put your money to best use and not to indulge in frivolous expenses.

Hope this helps you to start-off on the path to build an effective budget sans loopholes. And come the end of the year, your adherence to the budget should make you proud!

Financial Planner - Our Need

Want to here your opinion. Feel free to text me at neeru.kumari1@gmail.com

We say 'Financial Planning' is not rocket science but plain and simple common sense. It is deciding what are the goals, how much is needed for each of them and then making choices from various options for the best way of achieving these goals with least possible risk. So you can ask if it's so simple, why have a financial planner - why not simply do this yourself. Well, the answer to this is yes, you can. In fact, you are your own best planner, after all who else will be as motivated to get the best out of your money and achieve your goals? But the constraints that come up are time and knowledge. You need time to monitor your portfolio frequently, track the markets, keep a close watch on the economy and political scenario, interpret changes in policies, follow world indices, understand and evaluate the new options coming in almost every day; AND do your regular job. More, you need to have the knowledge and training to understand markets, governments, economies and products; and deduce and react to its changes appropriately and timely. With markets and economies world over becoming more and more global and inter connected, something happening in a far away corner of the world can have major consequences on investments here. Further, besides threats there are equally a myriad of investments and options opening up for Indian investors across geographical boundaries that you need to be aware of and evaluate. While there is a mass of data and information out there courtesy real and purported experts, it is a quite a task to decipher this information correctly and use only what is relevant to you. So in these times of outsourcing doesn't it make sense to have a professional do this for you? You have a qualified and experienced person to looking out for your financial interests and time to do other stuff in your life. Finally, often a certain amount of emotional distance and detachment is required while taking some financial decisions specially like realizing it is time to get out of an investment which you often put off since having developed sentiments towards it. Or not getting swayed or pressurized by marketing hype or crowd mentality or mass panic. And there is always the stick that is sometimes required to be wielded to force you to buy adequate insurance cover, write a will, organize the bank accounts or set nomination details properly and stop procrastinating. So get a financial planner - to take your money worries away and leave you free to enjoy life with a sense of relief that your money is being well looked after.

People are trading more out of fear

There is too much fear. There is not any announcement and if you look at the rollover numbers, the fears about rollovers not happening are a little big exaggerated and Asset Advisers find that is okay. They may be short buy say 5-7% from what is the 3-month average, typically stock futures get rolled somewhere around 75-80%.

Yesterday it was about 60% and typically on the last day about 10-15% additionally gets rolled over. So instead of 80%, we may do 75% but that is not like the end of the world kind of portrayal which is being spoken about all over.

These fears of huge sell-offs at the close are vastly exaggerated. The market certainly is not showing any signs of that. We do not have any leader stocks really tanking there is no front running and there is no major fearful unloading.

There is not too much built up position from retail side which is typically the weak holding. So, all these fears are exaggerated, people are trading more out of fear and there seems to be a lack of volume which is really leading to little bit of volatility. You might have some bit of increased volatility but it is nowhere near what is being bruited about and what is being feared.

Rapid GDP growth- best antidote for poverty

Rapid GDP growth is the best antidote for poverty. That is the big message that comes blaring out of the poverty data for 2009-10. Record GDP growth of 8.5% per year between 2004-05 and 2009-10 has reduced poverty at a record rate of 1.5 percentage points per year, double the 0.7 percentage points per year in the preceding 11 years.

There can be no better refutation of the leftist myth that fast growth has benefited only a small rich coterie while bypassing the poor.

Unfortunately, the good news has been drowned out by quasi-illiterate screams from politicians and sections of the media that the data has been fudged. The allegation is false. The data has not been fudged, and should be cause for celebration.

The government has adopted the Tendulkar Committee's poverty line, which is close to the World Bank poverty line of $1.25 in purchasing power parity terms. Critics howl that the Indian poverty line is unrealistic, but the World Bank poverty line has been accepted in global comparisons for decades.

China's official poverty line after its 1978 reforms was two-third of the World Bank poverty line. Nobody called it fudge or said it was impossible to live on so little. China estimated that it reduced the number of poor people from 250 million in 1978 to 29 million in 2001, a reduction of 221 million over 21 years. This was widely lauded, and Indian leftists complained that India's poverty reduction was glacial in comparison.

Not any more. Based on the Tendulkar line, India has reduced the number of poor by 52 million within five years. At this pace, India will in 21 years reduce the number of poor by 218 million, virtually matching China's performance of 221 million.

Earlier, thanks to slower GDP growth, the absolute number of poor in India fell very little on a consistent basis. But once India's GDP growth accelerated to 8% per year, matching China's growth between 1978 and 2001, India reduced poverty as fast as China. Caveat: the poverty lines in India and China are not identical, so the comparison may not be exact. Still, the fact remains that fast growth in both countries has been poverty-reducing.

We can certainly criticize India (as Amartya Sen and Jean Dreze did recently) for achieving less in most social indicators than not just China but even south Asian neighbors like Bangladesh. Thanks to misdirected subsidies and a refusal to discipline corrupt, absentee staff, the Indian government has achieved less on the social side than Bangladesh, let alone China.

Record GDP growth has produced record revenues for the government to use in improving social sectors.

Indeed, economist Lant Pritchett calls India a flailing state. "In police, tax collection, education, health, power, water supply - in nearly every routine service - there is rampant absenteeism, indifference, incompetence and corruption. In many parts of India, in many sectors, the everyday actions of the field-level agents of the state - policemen, engineers, teachers, health workers - are increasingly beyond the control of the administration at the national or state level."

Nevertheless, this should not divert attention from the big picture: record GDP growth in India has produced record poverty reduction, just as it did in China. This message has got totally lost in the debate over statistical fudging, for two reasons.

First, the Planning Commission last year gave the Supreme Court a poverty line estimate of roughly 32 a day. But the poverty data released last week placed the poverty line at 28.62 a day. Many politicians and journalists - including those of prestigious foreign newspapers - jumped to the false conclusion that the government had revised the poverty line downward. Reading this torrent of criticism from my current perch in the US, I too was misled into thinking that the poverty line had been revised downward, and repeated that error in my last Swaminomics column ( Poverty has truly fallen: it's no statistical fudge, STOI, March 25, 2012).

But the Planning Commission has clarified that the estimate of 32 a day given to the Supreme Court referred to 2011, whereas the 29.62 a day referred to 2009-10. The difference relates entirely to inflation - there has been no downward revision of the poverty line.

However, the government has indeed made a separate downward revision - of the poverty headcount ratio. Last year, Abhijit Sen and Montek Singh Ahluwalia of the Planning Commission said the 2009-10 NSS survey showed 32% of the population falling below the poverty line. This led to widespread moans that poverty was not falling fast enough despite record growth.

Less than a year later, the Planning Commission now says that the poverty ratio was actually 29.8%, implying a poverty decline much sharper than provisionally estimated last year. The revision has converted a modest performance into a stellar one. If the Planning Commission had simply waited for the final data and not misled the public with its provisional estimate last year, the final data would have carried greater credibility, and the skeptical public would have been more willing to celebrate the performance as stellar.

This mood will pass. Let us wait for the next survey data, for 2011-12. That will surely show a substantial further decline in poverty. Then we can really celebrate, with full conviction and no barbs about fudging.

Budget Impact on Insurance Sector

In Budget 2012, initially there was no significant declaration for the insurance sector. But there are some alterations which may change the whole scenario of insurance policies.

Except for pension plans, all regular-premium life insurance policies issued after April 1 will have to offer a minimum protection cover of 10 times the annual premium, else it will not be eligible for tax benefits under Section 80C and 10 (10D). This mandated cover amount was 5 times the annual premium till now. According to norms of Section 80C, life insurance premium up to 1 lakh is eligible for tax deduction and Section 10 (10D) exempts maturity proceeds from tax.

Due to this change, Unit-Linked Insurance Plan (ULIPS) and Endowment Plans both will be affected. However, expert says that most term plans will fulfill the new requirement. “This is a welcome move as it will ensure minimum life cover to the policyholders. The new requirement will ensure that they have some protection over a longer period of time”, says an expert.

Change in Plans

It is clear that the government is pushing individuals to buy life insurance policies in its true term rather than the insurance-cum-investment plans such as ULIPS and endowment, which are more popular. Due to mandatory higher life cover, higher premiums will be diminished, as ULIPS and endowment insurers will be left with a relatively small amount for investment.

“A person not looking for a pure protection cover need not buy a life policy at all. Instead, if their objective is wealth-creation, they can direct their funds to instruments like public provident fund (PPF), tax-free infra bonds and highly-rated non-convertible debentures (NCDs). In terms of equity, depending on their risk appetite, they can invest either directly in stocks or through mutual funds. Based on their risk-taking ability they can choose from large-, mid- and small-cap funds,” advises a Certified Financial Planner.

Prevention Could be the Cure

There is again a small but significant change in the deduction for spending up to 5,000 on preventive medical checkups. CEO of ICICI Lombard says, “Providing this tax exemption to individuals is a step in the right direction… it will help in bringing a greater focus on preventive health care. Most progressive health insurance companies have already started focusing on this space.”

“You can undergo a preventive health check-up at a diagnostic centre and submit the bill along with your investment declaration to your employer,” says the Director of H&R Block India.

Senior Citizens

From now on Section 80D will allow a tax relief of up to 15,000 on health insurance premium paid for self, spouse and children. This small change will help the elderly to claim higher deductions on health insurance premium.

Under Section 80DDB, the tax benefit on medical treatment, for senior citizens with disabilities is 60,000. For others, the limit in up to 40,000

Bonus will Not Count as Cover

Pranab Mukherjee, Finance Minister, has also altered the definition of insurance cover. While computing the sum assured for claiming deductions, premiums will be returned to the insurer and bonus will not be taken into account.

The Budget states, “This amendment has been proposed to ensure that the life insurance products are not designed to circumvent the prescribed limits by varying the capital sum assured from year to year”.

This simply means “Focus on life cover, and not on the Investment Component.”

Budget 2012: Are you better or worse off now? Here’s the bottom line

* The hike in IT exemption limit from Rs 1.8 lakh to Rs 2 lakh saves men Rs 2,060 in annual taxes, but women gain only Rs 1,030 since they had a higher limit of Rs 1.9 lakh. Senior citizens gain nothing since they were even now not paying tax below Rs 2.5 lakh a year. The shift in slabs with 30% kicking in at Rs 10 lakh, not Rs 8 lakh, means those between these two limits save anything from Rs 2,060 to Rs 22,660 per annum (or Rs 1,030 to 21,630 for women), while those with annual incomes above Rs 10 lakh save Rs 22,660 (or Rs 21,630), irrespective of their income. For senior citizens, savings are at best Rs 20,600.

* While the maximum exemption limit remains at Rs 5 lakh (for those aged above 80), it is theoretically possible to have an income of Rs 7.85 lakh and not pay any tax. Here's how: A very senior citizen (defined as someone aged over 80) who takes a home loan with an interest of Rs 1.5 lakh per annum, invests Rs 1 lakh under section 80C, pays a premium of Rs 20,000 on medical insurance and claims deduction of Rs 15,000 for medical expenses can achieve this feat. For those aged between 60 and 80, the corresponding figure would be Rs 5.35 lakh and for those below 60 it would be Rs 4.85 lakh.

* Tax exemption on savings account interest income up to Rs 10,000 means if you are in the 30% tax bracket it makes more sense to keep amounts up to Rs 1.4 lakh in an SB a/c that gives 7% interest rather than putting it in a fixed deposit, where the income would be taxed. Since FD rates are at best about 9% now, that would be equivalent to a post-tax return of about 6.3% for those in the highest tax bracket. For those with salary incomes up to Rs 5 lakh and interest income below Rs 10,000, this change also means they need not file tax returns if they have no other income.

* If you're purchasing a property (other than agricultural land) worth Rs 50 lakh in urban areas or Rs 20 lakh in rural areas, be prepared to have 1% of the registered sale value deducted at source as tax.

* If you were planning to buy a large car, think again. Excise duties on them are up from 22% to 24% in some cases and from 24% to 27% in others. So, you'll end up paying an additional sum of Rs 12,000 or more. If your dream vehicle was an imported SUV worth in excess of $40,000, the extra bill is even steeper with import duties up from 60% to 75%. On an S-class Merc, it could mean an extra Rs 3 lakh or more.

* Luxury, in general, got even more expensive with customs and excise duties as well as service tax up on virtually everything from gold to air travel to eating out and hotels. Mobile bills too will rise due to increased service tax.

Waiting for budget or RBI policy? An investment plan in time saves nine

I am waiting for the Budget. I want to see what the government is going to do before renewing my Systematic Investment Plan (SIP). The gold prices are really frightening at the moment; I am waiting for it to come down a bit before starting investing in gold..."

Do these statements sound familiar? Probably, you have heard a friend or colleague saying those things. Or you might have used them as an excuse to dodge your financial advisor. Well, the fact is many people use such big events to delay, postpone or hold back their investment plans. According to financial planners, most of these arguments are nothing but an excuse to buy more time and one should try to go on with the financial plan unless there is a genuine financial difficulty in executing them.

The other genuine reason is an event that alters the investment landscape dramatically - be forewarned, such events are very rare. “People generally use such big events as an excuse to delay their decisions or hold back their investments. We always try to look at the reason closely and communicate to them that unless it is a negative news on the personal front such as illness or job loss or pay cuts, they should not change their plans," says Gaurav Mashruwala, a certified financial planner. "We strongly discourage people from making such decisions based on market conditions.

For example, there are regular arguments like the market is so high or gold prices have soared. Or some would say that let the RBI policy or the Budget is over. We try to convince them that these are not genuine reasons for them to stop or postpone their investments," he adds. "More than investments, people tend to postpone or advance their big-ticket purchases before an event like Budget. Somehow, there is a notion that Budget normally drives prices high," says another Financial Planner.

"When it comes to investments, often these big events are almost inconsequential in the long term." He says unless there is a really big event that alters the entire landscape of investment space, investors should not bother about them. That is an advice you would hear from all advisors. But how does it differentiate between these events? Or how does one know which one is a genuine issue or not? Mahruwala says, “There is no standard advice on such issues and it is always based on the merit of the case. He says he has noticed that these big events or excuses fall under four categories: market related government or regulatory driven, personal issues or career related.”

For example, when someone comes up with an argument that he wants to wait till December to see how foreign investors are going to invest before he puts money in the market, Mashruwala often whistles foul. He does the same when someone points to higher gold prices as an excuse to avoid starting an SIP in gold.

"These are instances where you are trying to time the market, and it is a big NO," he says. The only occasion when he relents is when someone is expecting bad news on either the personal or the career front. "When someone is going though major illness in the family or somebody is expecting a pay cut or job loss, I always examine the issue more sympathetically. These are instances where one can consider delaying or holding back investments," he says.

The big event has to be something like a landmark judgment or a policy decision. Or it also could be an unbelievably good deal. For example, there was this offer of allowing 50% depreciation in the value of car during 2008. That is a huge trigger for purchases. But such events are very few. As for budget and policy review by the central bank, it won't alter your long-term plans. "People who are waiting for policy announcements in the Budget tend to forget that most of these things are already factored in the price of stocks. So when the actual announcement comes, there may be only a small reaction to that.

Sure, there are totally unexpected announcements that will move the market, but it is not wise to wait for them to make investments," says a wealth manager, who doesn't want to be quoted. "I often tell my clients that don't use these issues as tactics, especially if you are worried about the market conditions. I always tell them you can always take corrective steps with little damage if things go wrong. You don't have to waste time to get things right, as it also comes at a price," he adds.

So, the next time you feel like waiting for a big event to pass before starting a SIP or renewing one, remind yourself that it is thinly-veiled effort to time the market. Also, remind yourself that it is almost impossible to time the market in the long term.

Union Budget 2012: Impact on common man's wallet & investments

The upcoming Union Budget 2012 is one of the most awaited events of the year. There are several things that are being discussed; fiscal deficit, revenue collections, macroeconomic outlook, but how does it impact common man, his wallet and investments?

Supreme Court advocate and tax expert, HP Ranina, executive vice president at Bajaj Capital, Surjeet Mishra and certified financial planner, Gaurav Mashruwala share their views on what one should expect from the Budget and how should one plan to make the most of it.

Below is the edited transcript of the interview.

Q: This Budget is the last year where the government can mobilize much needed funds because the next year will be the election Budget. Given this, what kind of sessions can you expect for the middle class and for the common man because they have already been impacted severely due to high inflation?

Ranina: I think what the finance minister will do is to give relief to the small taxpayer. To take care of inflation, he will increase initial exemption limit, which currently is Rs 180,000 for men and Rs 190,000 for women. He may increase it to Rs 225,000 or just Rs 200,000. I am not too sure, but he will certainly want to increase that limit at least he will try to show that he is sensitive to the problems which the common man has to face.

I also expect that he will try to increase the savings limit under section 80C, which gives you the benefit of investment in mutual funds or public provident fund or LIC policy premium and life insurance premium. He will try to increase that limit from the current figure of Rs 100,000 to possibly Rs 200,000 because under the Direct Tax Code proposed limit is Rs 300,000.

So, he will try to go midway in this year's Budget and bring it up to Rs 200,000. That will also encourage people to save more and take advantage of the fact that they will be able to lower their tax liabilities, if they make requisite savings. This is the last year when he can raise tax revenues, so I do not expect very substantial concessions, those will be kept for the next Budget which is just before 2014 elections.

Q: What are you major expectations or wish list from this Budget?

Mashruwala: Two things; one is housing exemption; the interest rate exemption that we have is Rs 150,000. The interest housing loan interest is 10-11%, even if you look at simplicity 10%. So, Rs 150,000 will get exhausted even if I am borrowing 15 lakh. If I am borrowing 15 lakh I don't get any house. The government is not able to provide housing and then there is not enough housing exemptions that are available.

Considering higher inflation the rate of interest gone up, the housing cost has gone up. So he should enhance this limit substantially because we are at Rs 150,000 for many-many years now. Similarly, Ranina already said that he will increase 80C or have a separate limit for repayment of principal of housing.

Another one is healthcare, the limit for paying medical premium under section 80D. The cost of medical premiums has gone up, if you have dependents suffering from critical illnesses or disability. In the section 80DD and 80DB, limit is in the range of Rs 40,000-60,000-75,000 depending on the category, but those aren't sufficient.

This is because when you have a critical illness or disability the amount of money that we spend is to much. So, apart from what Ranina said, section 241 where we have housing loan interest repayment and expenses incurred for critical illness and disability, I wish something is done there.

Q: What are you expecting to hear from the FM this time around because the insurance and mutual fund industries also have some specific concerns that they are hoping to be addressed?

Mishra: There are two basic points that one would be expecting. One is that we are seeing a greater inflationary condition where the savings have gone down in the common man's space. So, there should be some initiative from government's side to increase savings rate and release some funds in the hands of the middle class who pay tax. There can be enhancement on the tax limit, so there will be some amount released and that can be utilized for savings.

The second is this EEE threat which is still coming. Against EEE you will be having the EET. So, government should clarify that doubt which is hampering investments in insurance and mutual funds, particularly in the ELSS category. Some clarification should come will make sure that investors continue to invest in long term in the ELSS schemes of mutual fund and in the long term savings products on the insurance side.

Thirdly, there has been a great way of funding infrastructure through infrastructure bonds because the cost of borrowing is pegged at the ten year G-sec level. The infrastructure finance companies are finding it very apt to get that money at 8-8.5% or 9% and they can lend it at a relatively higher rate. So, this is just a good way of funding infrastructure. Enhancement of limit in 80CCF from Rs 20,000 to maybe Rs 40,000-50,000 will increase the collection for infrastructure funding, which will help the government in turn.

Q: Just taking forward that ELSS point, now ELSS is one segment that gives you equity exposure with a tax saving benefit and now that is likely to go away when the DTC comes into force. So the common question that usually arises for me as an investor, should I be investing in ELSS today? What would be my tax exemption or would there be any after three years after the lock in has completed?

Mishra: My sense is if there is EET which is coming in, it will not be effective retrospective. The current year investors would be getting the EEE benefit. But in future from 2012-2013 financial year onwards, if EET concept gets introduced then ELSS becomes a threatened category and may or may not exist then after.

This is because people will definitely go for equities and take that risk because the net take home at the end of the year is tax free because it completes three years, capital gain and dividend is tax free. So, with that dual benefit going away this product will lose its charm. This is one of the best ways of long term wealth creation. So, I feel this will be not in good interest of general investor if they take away that benefit.

Q: What would your advice to investors be? Should I as an investor put in my money in ELSS scheme today?

Mishra: I feel the investors who are putting in money currently should continue because the retrospective effect is not likely, it hasn't happened in the past.

Q: If the expectation on exemption limits comes through how much of a impact would it come on the middle class salaried individuals roughly because majority of the benefit would come of those earning between Rs 8-10 lakh who would have to pay 20% instead of the current 30% as tax?

Ranina: That depends on whether they extend the slabs or they widen the slabs in this years Budget or whether he will wait for the direct taxes code itself. But, if he simply increases the initial exemption limit it's a very poultry amount of benefit, which a common man will get.

Suppose he increases it from Rs 180,000 to Rs 225,000 that is on Rs 45,000 and 10% rate means he will get a relief of Rs 4,500. That's all that he will get. It is only of he widens the tax slabs at say from Rs 3 lakh he makes it Rs 4 lakh or from Rs 5 lakh he makes it Rs 8 lakh, then there would be a substantial benefit to the middle class tax payer. Otherwise, this is only going to be very cosmetic in its impact.

Q: Coming to the ATC part of it now given that those benefits go up to Rs 1.5 lakh from Rs 1 lakh currently and under 80 CCF goes up to Rs 50,000 from Rs 20,000 currently, how should an individual pace out his investments? What are the key things to keep in mind given that this entire thing, assuming this comes through that this thing is gone up significantly?

Mashruwala: Again I would go back to look at your financial goals because the moment this limit widens you would have all the possible options. You would be paying your children's school fee which is benefiting you, when it comes to investment you would have retirement products, so depending on what age bracket you are in and are you saving for retirement then go all out on retirement.

If you are looking for some long term goals, ELSS is still an option this year. There will be several permutation-combinations available, if you are looking at a near term goal. Depending on your goals, you would have much more amount, which you can invest and still get tax exemption, tax benefit that will come in. Choose and pick what you needed but we will have equity, debt, retirement and pension products, children's tuition fees, housing loan repayments, so couple of options will be there.

Q: The Rangarajan committee has recommended that there should be some incentive for investments in the financial assets to discourage investors from investing into physical gold. Heavy gold imports have contributed to the spike in the current account deficit and in fact gold has already become more expensive because of a hike in customs duty. What is your advice to investors and what do you feel in this regard?

Mishra: Being a student of finance, I understand that gold is not an investment; gold is just a hedge against inflation. By nature of the upbringing, we have got a habit of buying gold and creating a reserve. From the economic point of view, gold is a capital asset created which is not reproductive in nature and it doesn't help the economy.

If you look at last year's fiscal deficit and gold import, which is close to 70% of total current account deficit, is a worry for the government and the local market. This is because most of our foreign currency reserve will be utilized in buying gold; it will not be utilized for productive usage of economy.

I would suggest all investors to refrain from exposing themselves higher into gold. In case the Rangarajan committee recommendations are taken into and the fiscal incentive or some support is given to investment in mutual fund and insurance, it will be a significant boost.

This is because money that comes into mutual funds and insurance in turn gets into productive assets in the economy, which creates job opportunities and capital formation. It will be in best interest of the economy to incentivize both mutual fund and insurance instead of supporting gold buying.

Q: Currently there is a differentiation between deduction for interest on housing loans in case of a self occupied property that is capped at Rs 1.5 lakh and rented property which doesn't have a limit as of now. Do you think this difference will be bridged and if so how?

Ranina: In fact this difference should be removed. There is no reason to limit it to Rs 1.5 lakh. The government may increase it slightly to Rs 175,000 or Rs 200,000 but I don't see any reason for this type of differentiation. The reason is that you want to encourage people to buy their own houses, price of properties are going up and interest rates are going up. This cap of Rs 1.5 lakh is a totally artificial cap. It has no relevance to any type of parameter, whether it is value of the asset or loan or interest.

This arbitrary figure and as no bearing at all, is not relevant at all, I think it should be completely removed. Whatever interest you pay should be allowed as a deduction because that's the only way by which indirectly the government will be subsidizing or helping the common man to acquire his own property. Housing apart from giving a benefit to the person concerned himself; it is a great economic activity. The more housing there is there will be more demand for cement, steel, bricks. It is a labor intensive industry. So, you are giving a boost to the whole industry and that will accelerate industrial and economic growth in our country.

Q: The expectation is also that income tax exemption for interest on housing loans is expected to increase to Rs 3 lakh from the current Rs 1.5 lakh. We hope that this entire gap is bridged, but however right now expectation is that it will go up to Rs 3 lakh. Given this what kind of a saving can one expect from this increase?

Mashruwala: If it goes to Rs 3 lakh and then depending on what tax slab you are in, if you are 10% bracket and if you are paying Rs 3 lakh then additional Rs 1.5 lakh will save some Rs 15,000. If you in 20% bracket Rs 30,000, if you are in 30% bracket Rs 45,000. That's not a major saving because the cost of housing has gone up so much, plus the interest rates are high.

That is not a substantial saving for somebody who is specifically purchasing first house or even if it's like I am doing another investment, I am buying another property, which I will rent out, so I am creating housing opportunity. There is some incentive. It is better than the present situation. But it is still not sufficient. The cost is really, really high.

Q: What is your expectation with respect to a possible hike in excise duty and also service tax of course GST won't come in this time but negative list is expected to come in?

Ranina: I expect him to rollback the incentives which he gave in 2008. Therefore, I do expect that he will increase the excise duties and the service tax and bring it up to the same level of 2008. This is the only year when he can do this because thereafter its the pre-election Budget, so this is the only year when he can bring about fiscal consolidation.

Fiscal consolidation is very important and in my view many FIIs and many foreign investors will also be quite enthused if the government is able to limit its fiscal deficit as a percentage of GDP. So excise duty increase is on the cards, service tax increase is on the cards, there will be a complete rollback of the position as it was in 2008.

Q: Do you also expect that luxury goods and services are susceptible to higher taxes vis-à-vis the others?

Ranina: Possibly yes, possibly there maybe further increase in excise on diesel cars. There can be some further increase on certain luxury items. Yes, I think he will do that and he will justify on the ground that the situation demands it.

Q: Given this we have some expectations which will give relief to investors' wallet and on the other hand we have these indirect taxes which could increase cost. Given both these things for a middleclass salaried person how do you compare what one could gain by way of an increase in the exemption limits versus possible increase in cost for a person. In simple words how much cash would be left in hand?

Mashruwala: I don't know what will eventually come out, but net-net in all probability he will end up spending more. Very rarely we have a situation where Budget after Budget he is going to save more amount of money because whether it is direct tax or indirect tax it keeps going up.

Nani Palkhivala used to say that why don't you link all these exemptions to index number because we anyway have indexation and just put it on autopilot, but no finance minister have been doing it. We have inflation rate which is galloping it much faster rate than the kind of savings that comes in. Net-net the investor will end up spending more than saving.

Q: Do you agree with that?

Ranina: Yes, in a sense I do, but there is a practical difficulty in indexing it to the inflation because that is an odd figure, to simply index it to the inflation that has taken place may create problem from a practical point of view. As long as the government revises the limits maybe once in three years, it will meet the same objective.

Q: What according to you is the most important thing that you would like to hear from the FM which will help the common man given the current economic environment, the inflation and the suffering that the common man has seen?

Mishra: I think two things; I cannot limit to one. One is the increase in tax slabs and more in the lines Ranina has suggested broadening the tax gaps. Second is where they can get some money in the hands of the investor. Some stimulus for the investments in the productive investment options like mutual fund and insurance.

Mashruwala: Over above what he stated two things; housing and healthcare because in both the cases costs have gone up.

Ranina: I would certainly say bring down the increased initial exemption limit, bring down the tax liability on the taxpayer. Give them some relief at least at the lower levels and I am sure that lot of people will be very happy with that.

Give more opportunity for savings in financial instruments, so that they can invest in them instead of gold. This would be a step in the right direction because even though government may lose a little revenue today, ultimately the economy will stand to gain.