All you need to know about inflation-indexed bonds

Many of you may be aware, "Inflation Indexed Bonds (IIBs)" will be launched on June 4, 2013 with first tranche of Rs 1,000 - 2,000 crore with a maturity of 10 years. The intention behind the launch of IIB is help provide real returns to investors and reduce physical gold buying spree. Whether it can indeed reduce gold imports would be discussed a little later, but first let's get to know IIBs a little better.

Meaning of IIBs:
IIBs are debt instruments which endeavour to offer return higher than the inflation rate (or to simply put, the rising cost of living which eats into our hard earned savings) if held till maturity. These bonds adjust the principal amount which one invests to the inflation, so that investors earn higher interest. 

So, how would they be structured...
The IIB will be linked to the Wholesale Price Index (WPI) inflation with four months of lag, wherein the index ratio would be calculated thereby adjusting the principal amount invested with WPI inflation. 

Index ratio =
	WPI inflation on adjustment date
	WPI inflation on issue date

Further, the aforesaid index ratio would be multiplied to the principal amount along with the coupon payment, to obtain the inflation-adjusted interest. 

Inflation-adjusted interest = (index ratio x principal amt.) x coupon rate

So at maturity, you as an investor would get back the inflation-adjusted principal or face value, whichever is higher. 

When can IIBs work for you?
You see in an inflationary scenario, where prices are on a rise and have an effect of eroding the value of hard earned savings, IIBs can work well for you. But during deflationary phase, they may not yield you much luring returns since them being linked to WPI inflation. 

In the current scenario can they provide luring returns?
Well the launch of IIBs has come in at a time where WPI inflation has depicted a descending trend and moderation in the last few months. Thus one may not get attractive annual yields immediately. However if WPI inflation continues to haunt once again as the economic growth starts picking up, IIBs could yield better annual yields. 

But PersonalFN is of the view that, instead of using WPI inflation for indexing, the Consumer Price Index (CPI) inflation should have been used as it is more relevant to citizens who are saddled with rising cost of living. You see, there's yet a huge gap between WPI inflation and CPI Inflation which reflects what consumers are paying. April 2013 CPI inflation at 9.39% is higher than 4.89% WPI inflation for the same month. 

Having said that, it appears Reserve Bank of India (RBI) has plans to move to CPI inflation once it stabilizes, as per the statement of Mr R. Gandhi, Executive Director of RBI. "Once the CPI stabilizes, we may move over to that index," he said. 

As far as the tax status is concerned, thus far special tax status hasn't been provided to IIBs. So, there doesn't appear an incentive for retail investors to invest; but having said that, investors can claim capital indexation benefit. 

So, would IIBs divert attention of investors from gold and fixed deposits?
PersonalFN is of the view that while the Government intends to restrain India's insatiable appetite to own precious yellow metal which has put pressure on Current Account Deficit (CAD); it appears unlikely that investors' attention would be diverted from gold, at least until economic uncertainty persists. In fact drop in price of gold would attract many to buy more for both emotional and financial reasons which may keep exerting pressure on country's CAD. So while the objective of IIBs as per the central bank is to protect savings of poor and middle classes from inflation and incentivize household sector to save in financial instruments rather than buying gold, it may not appeal many investors. Likewise,risk averse investors may continue to invest in one of their most popular investment avenue i.e. Fixed Deposits (FDs), although they may not very tax-efficient and / or provide inflation-adjusted returns. Thus the complex structure of these bonds may desist many and may also find it difficult to compete with other debt instruments.

 PersonalFN

Online EPF Transfer and Withdrawal from July 1, 2013 – Great News !

Starting July 1, 2013 , EPF account holders will be able to withdraw or transfer their EPF accounts from one employer to another employer online. EPFO has said that they are working on setting up a central clearance house which will be operational from July 1, 2013 . One of the major problems faced by employees is to transfer their EPF accounts from one company to another when they change their jobs or to withdraw their EPF accounts after leaving their job, which takes years and months, without them having any transparency in the system and process. They are frustrated, lost and have no idea where to ask for their EPF status and to whom . Because of this delay, a lot of people just let things go and the matter drags for years and years

You can also Track the Status Online

The best part is that you will be able to track your request online and will be able to see which stage your EPF withdrawal or transfer is ! .

Permanent EPF account number for each person

EPFO has earlier said that they are working on the permanent EPF account number where a employee once allotted a EPF account number will be able to use the same Employee provident fund number when he/she moves to another employer. The new employer will deposit the provident fund money in the same permanent account number. This will solve a lot of issues, but this would be possible only after 1-2 yrs , the first focus is on introducing a online withdrawal or transfer service.

Verification of Details after the request is put ?

Once you apply for withdrawal or transfer, the verification of all the details from employer will be done by EPFO . All you would have to do is just initiate the transfer or withdrawal request online (Its not clear how it will happen or what you need to exactly do). After that EPFO department will take charge and do their part of work by contacting the employer. Here is how the transfer would work

The member makes his transfer application at his new or old office or directly to the EPFO through an online application. The process is then taken over by the EPFO, which gets data verification from both offices and gets the transfer done immediately. Now, EPFO would do the work of getting details from both old and new offices where transfer is involved, says EPFO Commissioner Anil Swarup. – SOURCE

This will help 50 million Employee provident fund account holders , lot of paper work will be saved and surely the harassment will reduce . (Read how you can withdraw/transfer your EPF , if your employer is not supporting or helping you) . at this moment , a lot of withdrawal’s happen because employees know that its more easier and do not want to take chance for future issues due to the complex process. Hence this move will help a lot to EPFO department in retaining employees with their EPF’s .

What should you do right now ?

While the EPFO has said that this will be operational from July 1, 2013 , still there might be delays from their end (you know how deadlines work in real life , remember what happened withDTC (Direct Tax Code) ?) . If you can really afford to wait and want to try out this online system, then wait for 2-3 months and then give this a shot, else follow the usual process at this moment.

Conclusion

While its a welcome move and we should trust the EPFO department, still you know what happened with the EPF Online Passbook system by EPF , which is not up-to the mark and there are tons of issues with it. It might happen that this online EPF transfer and withdrawal system is built , but there can be huge disappointment with the way it would work . We can only wait and watch at this moment.

Can You Withdraw from Your EPF Account before Maturity?

Every month your Salary Slip may be showing deduction towards Employee Provident Fund (EPF) account, it includes both you and your employer’s contribution towards EPF account. You might be rightly thinking that your contribution towards EPF is meant for your retirement and you can withdraw the accumulated money in EPF only at the time ofretirement. At time you may have urgency for money and you may be looking for various sources to get money. But why search for other source, when your own money can come to your rescue. Yes, there are certain circumstances when you can actually withdraw your money from EPF account before maturity. 

Let’s take a look at such circumstances, and the criteria that apply for withdrawal from your EPF account: 

1. Construction / Purchase of a House including acquisition of site or plot for such purpose
   
   
   • You should have completed minimum 5 years of service.
   • Purchase of a House can be for Self, Spouse or joint ownership with spouse.
   • In case of purchase of a site or plot for construction of a house, withdrawal amount should be least of the following:
     
     
     1. 24 months of your Salary (Basic + Dearness Allowance) OR
     2. You and your employers share of contribution with interest OR
     3. Actual cost of acquisition of site or plot.
        
   • In case of purchase of a built in house OR construction of a house, withdrawal amount should be least of the following: 
     
     
     1. 36 months of your Salary (Basic + Dearness Allowance) OR
     2. You and your employers share of contribution with interest OR
     3. Actual cost of acquisition of House.
        
   • In case you are withdrawing the amount for construction of the house, then construction should begin within 6 months of the 1st installment and should get completed within 12 months of the last installment.
   • In case you are withdrawing the amount for purchase of the house or the site or plot, then purchase shall be completed within 6 months of the withdrawal of the amount.
     
2. Addition / Repair to the existing house
   
   
   • House should be owned by for Self, Spouse or joint ownership with spouse.
     
   • Withdrawal amount should be least of the following: 
     
     
     1. 12 months of your Salary (Basic + Dearness Allowance) OR
     2. Your share of contribution with interest.
        
3. Repayment of loans 
   
   
   • You should have completed minimum 10 years of service.
   • Loan should be in the name of Self, Spouse or joint ownership with spouse.
   • Withdrawal amount should be least of the following:
     
     
     1. 36 months of your Salary (Basic + Dearness Allowance) OR
     2. You and your employers share of contribution with interest OR
     3. Outstanding amount of loan (Principal + Interest).
        
4. Medical Treatment in case of certain major Illness
   
   
   • Medical treatment can be for self or a member of your family.
   • Your employer should have granted leave for treatment of the illness.
   • Certificate from a doctor of the hospital is required as a proof.
   • Withdrawal is possible in case hospitalization lasts for one month or more.
   • Withdrawal is possible in case of any major surgical operation in a hospital.
   • Withdrawal is possible in case of suffering from T.B., leprosy, paralysis, cancer, mental derangement or heart ailment. Withdrawal amount should be least of the following: 
     
     
     1. 6 months of your Salary (Basic + Dearness Allowance) OR
     2. Your share of contribution with interest in the fund.
        
5. Marriage or Education
   
   
   • You should have completed minimum 7 years of service.
   • You can withdraw the amount for marriage or education of self, children or siblings.
   • Maximum amount of withdrawal can be 50% of your share of contribution with interest in the fund.
     
6. Withdrawal within one year before the retirement
   
   
   • Maximum amount of withdrawal can be 90% of the fund value.
   • Withdrawal is possible at any time after attainment of the age of 54 years or within one year before retirement, whichever is later.
     

If any of the above mentioned circumstances fits your requirement then you can consider EPF account as a source of fund for funding your financial goals. The criteria’s for above mentioned circumstances may be difficult for you to remember, but you can just keep in mind the circumstances under which withdrawal is possible and refer these criteria’s when you are actually in need of funds under those circumstances.

PersonalFN

Interest rate on small savings, PPF lowered

The government today reduced the interest rate on Public the Provident Fund (PPF) from 8.8 per cent to 8.7 per cent. The new rate will come into effect from April 1.

It also lowered the rate on other small savings schemes, with maturity of two years or more, by 10 basis points. This includes fixed deposits (FD) and recurring deposits (RD), as well as National Savings Certificates (NSC).

A one-year time deposit will now fetch the investors an interest at the rate of 8.2 per cent, against 8.3 per cent earlier. Five-year NSC and 10-year NSC will give a rate of return of 8.5 per cent and 8.9 per cent, respectively. The senior citizens savings scheme will offer the highest rate of interest at 9.2 per cent.

Monthly Income Schemes of five-year maturity will earn an interest of 8.4 per cent. Interest on savings deposit and one-year term deposit remains unchanged at 4 per cent and 8.2 per cent, respectively.

Based on the decisions taken by the government on the recommendations of the Shyamala Gopinath Committee for Comprehensive Review of National Small Savings Fund, the interest rates for small saving schemes are to be notified every financial year, before April 1 of that year. The committee had recommended benchmarking small savings returns with the market rate.

Planning Commission Deputy Chairman Montek Singh Ahluwalia justified the move saying the returns remain favourable to depositors in real terms, as inflation is lower than it was two years ago.      

“I don't believe that interest rate for savers through the post office system can be delinked completely from the interest rate system in the country. If you want low rate environment, you cannot say, ‘I want higher interest rate for savers and low interest rate for borrowers’. They have probably moderated a little bit in line with the softening of interest rates,” Ahluwalia said on the sidelines of the Skoch summit.      

The Reserve Bank of India cut the repo rate by 25 basis points in its last monetary policy review.

                                  

Core banking must for co-op banks by Dec 31: RBI

The Reserve Bank of India (RBI) on Wednesday mandated a deadline for Urban Co-operative Banks (UCBs) to implement the core banking solutions (CBS) by December 31, 2013. In case of any non-compliance, UCBs may be stripped of some facilities in terms of regulatory approvals.

"Very few UCBs have adopted CBS," RBI said in a notification.

"Hence, all UCBs are advised to implement CBS, in all their branches before December 31, 2013.  The concerned Regional Office of the Reserve Bank may be kept informed of the progress made in implementing CBS. It may be noted that failure to implement CBS within the timeframe, could result in denial of various facilities (expansion of branches or area of operation etc.) to UCBs."

What is CBS?

In simple term, this means, you need not to visit your own branch to do banking. You can do it from anywhere wherever, your bank has presence. Execution of CBS will help banks to offer all new-age products to their customers. Core Banking Solutions (CBS) essentially helps in integration of the range of services that can be offered by all the bank's branches from centralized data centers.

UCBs in India

There are around 1,621 UCBs in India. While every state-owned commercial bank has already implemented CBS system, UCBs lag far behind. Lack of funds, according to those district level banks, is the basic reason to do business without CBS. Many-a-times SIDBI - a nodal government agency, dillydallies in sanctioning funds to them, they argue.

However, RBI observes, the usage of Information Technology (IT) is critical for the survival and growth of banking institutions as IT usage not only helps banks to reduce their cost of operations, but also enables them to offer products and services at competitive rates to their customers.

"Small UCBs cannot afford the cost of implementing CBS," Duttaram Chalke, chairman Apna Sahakari Bank, an UCB operating in Maharashtra with nearly Rs 3,000 crore business (loans + deposits) told moneycontrol.com. His bank had implemented CBS in 2008.

Some of the big cooperative banks include Saraswath Bank, Shyamrao Vittal Bank and NKGSB Bank.

"CBS is always better for the future business prospect. Alternatively, small banks can hire the computer data centre (required for CBS) from relatively larger ones like us. We can accommodate them. We all are serving for the purpose of financial inclusion," he said.

IT has become not just an enabler but a differentiator for banks in a competitive environment. Further, for effective regulatory and supervisory compliance the banks need to use IT in their operations. Considering the importance of the matter, the Reserve Bank had included 'Review of Mechanisation and Computerisation' as one of the reviews to be placed annually before the Board of Directors of UCBs.

Government stance

"The Government of India has also observed that UCBs without CBS do not integrate well with the banking system and hence there is the need to quickly adopt this model. CBS is a necessity in today's banking scenario. UCBs are, therefore, advised in their own interest, as also in the interest of their customers, to adopt CBS as soon as possible," RBI said.

Moneycontrol Bureau

Rail Budget Highlights

Facts about Rajiv Gandhi Equity Savings Scheme

The Rajiv Gandhi Equity Savings Scheme (RGESS) has been officially notified and will be launched byFinance Minister P Chidambaram this week. ET Wealth explains what you should consider before opting for this tax-saving option available under Section 80CCG.

Who is eligible? 

RGESS is available to all resident individuals whose gross total income is less than Rs 10 lakh and who are investing in equity for the first time. A first-timer has been defined as the one who has not opened a demat account as a 'first holder' before the notification date of 23 November 2012, even if his name appears in a joint demat account opened before this date. The investor who has opened a demat account as first holder before the notification date but has not bought any shares or traded in the futures and options segment will also be considered as a first-time investor.

How can you get tax benefit? 

To avail of tax deduction, an investor has to open a new RGESS designated demat account or designate for this purpose his existing demat account, where no trading has taken place before 23 November. He needs to submit a declaration in Form A, certifying that he has not traded before 23 November 2012, to the depository participant, who in turn forwards it to the depository for verifying the status and designate him a new retail investor. He can then start buying the eligible securities, which include stocks from the BSE-100 or CNX 100 index. The listed shares of navratna, maharatna and miniratna public-sector undertakings, and initial public offers (IPO) of PSUs, whose turnover is more than Rs 4,000 crore, are also eligible for investment. One can avail of tax benefit by investing in the eligible mutual fund schemes too.

What's the lock-in period? 

Unlike other tax-saving schemes, the lockin period here is split in two. The first year is a fixed lock-in and the investor cannot sell, pledge or hypothecate the shares. The next two years are flexible and he can sell, but has to buy other eligible securities with the proceeds. All eligible securities in an RGESS designated account are automatically subject to the lock-in periods. If an investor wants to buy more designated shares and keep these outside the lock-in clause, he has to give a declaration in Form B within a month of the transaction date. One can also keep other securities in this account without the lock-in clause. The tax benefit under Section 80CCG is withdrawn if these conditions are violated, but if the changes are due to involuntary corporate actions it's not affected.

What are your savings? 

While there is no restriction on investment, only Rs 50,000 is considered for tax purposes. Of this, only 50%, or Rs 25,000, is allowed as deduction. Since RGESS is for people with income less than Rs 10 lakh, they will fall in the 10% or 20% tax bracket. The maximum savings under this will be Rs 5,000 for people in the 20% tax bracket and Rs 2,500 for those under 10% (beyond the Section 80C benefits). Besides, the savings are only for the first year, not subsequent years. So, those who don't have enough money or time to invest Rs 50,000 in 2012-13 should consider postponing it to 2013-14.

Stocks or mutual funds? 

Since direct investment in equity needs expertise and first-time investors are unlikely to have it, they should refrain from investing directly in the market. The risk is also high because Rs 50,000 is not enough to create a well-diversified portfolio. A better option is to go through the mutual fund route. As of now, several exchange traded funds (ETFs) have been declared as eligible securities and investors can invest in these. Various mutual fund houses have also started filing offer documents for eligible schemes with Sebi, while their new fund offerings (NFO) too are expected soon.


ET