Hi Sir, I am employed with a 11LPA job. I do not have a history of saving but have started a 7000 rupees SIP recently (almost 60% in index and 30% in midcap and rest in hybrid). I inherit my father's Chennai property worth over 8cr by today's market value. As the property is too old, demolishing it and reconstructing requires a huge loan and a 20 year EMI commitment which i am not interested. I just wanted to know if i can sell the property (have to lose 20% as capital gain) and create an income generating scheme

Ans: Capital gain on sale consideration will be reduced by Indexed cost of acquisition and allowable expenses incurred on transfer. You have to calculate indexed cost of acquisition by applying Cost Inflation Index as per prescribed formula on cost of acquisition.

For cost of acquisition, you may take actual cost or fair market value of the asset, as on 01.04.2001.

In case of land and building, fair market value on 01.04.2001 cannot exceed stamp duty value as on 01.04.2001.

Exemption is available if amount of capital gain is invested by purchasing a new residential house within one year before or within 2 years after the date of transfer of the residential house.

As you have already got possession of new property in November 2020, you will not be eligible for exemption.

Decision of investment in specified bonds or acquiring tax mutual funds can be taken after considering several factors like risk appetite, amount of tax liability on capital gain, availability of surplus fund etc.

Ans: Firstly, congratulations on building a substantial asset base. Your prudent investments and property holdings reflect a keen eye for financial planning. At 50, planning for a relaxed retirement in a small town is a great choice. Given your current investments and lifestyle, let’s delve into a comprehensive strategy to maximize your returns and simplify your financial life.

Understanding Your Current Financial Position

You have Rs 9 crore in equity investments and two properties worth Rs 7 crore. One of the properties has not appreciated in value for the past decade. Your equity portfolio is well-diversified with 90% in mutual funds (high and medium risk) and 10% in stocks. You aim for a monthly income of Rs 1 lakh and want to set aside Rs 20 lakh annually, leaving the rest invested.

Creating a Monthly Income Stream

To generate a monthly income of Rs 1 lakh, you need investments that offer stability and regular returns. Let’s explore how you can achieve this through a mix of investment avenues.

Systematic Withdrawal Plan (SWP) in Mutual Funds

An SWP allows you to withdraw a fixed amount regularly from your mutual fund investments. This provides a steady income while keeping the remaining corpus invested for growth. Given your substantial mutual fund holdings, an SWP can be an effective strategy. You can set up an SWP to withdraw Rs 1 lakh per month, ensuring a reliable income stream.

Debt Mutual Funds and Fixed Deposits

Consider allocating a portion of your corpus to debt mutual funds and fixed deposits. These instruments offer stability and predictable returns. Debt mutual funds can provide better post-tax returns compared to fixed deposits, making them a suitable choice for regular income.

Public Provident Fund (PPF) and Senior Citizens’ Savings Scheme (SCSS)

Although you are not a senior citizen yet, once you reach 60, SCSS can be an excellent investment for regular income. Meanwhile, you can continue contributing to your PPF account. Both these schemes offer tax benefits and secure returns, adding stability to your portfolio.

Selling the Underperforming Property

You mentioned the property valued at Rs 3.5 crore has been stagnant for a decade. Selling this property can free you from maintenance hassles and provide liquidity for better investments.

Considerations Before Selling

Before deciding to sell, weigh the potential black money issue. If 60% of the sale proceeds are in black money, it limits your reinvestment options. Ensure you understand the legal and tax implications. Consulting a legal advisor can help navigate this aspect.

Investing Sale Proceeds in Stocks

While equities offer high growth potential, investing a large lump sum at once can be risky. Market timing and volatility are significant concerns. Instead, consider a phased approach through Systematic Transfer Plans (STP) or gradually increasing your equity exposure.

Balanced Portfolio Approach

A balanced portfolio with a mix of equity, debt, and other instruments reduces risk and ensures steady returns. Given your substantial corpus, preserving capital while ensuring growth is essential. Let’s explore the components of a balanced portfolio.

Equity Investments

Continue investing in mutual funds and stocks, but with a balanced approach. Allocate a portion to large-cap and multi-cap funds for stability, and the rest to mid-cap and small-cap funds for growth. Regularly review and rebalance your equity portfolio to align with market conditions and your risk tolerance.

Debt Investments

Debt mutual funds, fixed deposits, and government schemes should form a significant part of your portfolio. These instruments provide predictable returns and safeguard against market volatility. Ensure your debt investments are diversified across different types and maturities.

Gold Investments

Gold is a good hedge against inflation and market risks. Consider allocating 5-10% of your portfolio to gold through gold ETFs or sovereign gold bonds. This adds a layer of security and diversification.

Health and Life Insurance

Ensure you have adequate health and life insurance coverage. Medical emergencies can deplete your savings, and having a robust insurance plan protects your financial stability. Life insurance ensures your loved ones are secure in case of unforeseen events.

Tax Planning

Efficient tax planning enhances your returns. Utilize tax-saving instruments and strategies to minimize your tax liability. This ensures more funds are available for investment and income generation.

Setting Up a Contingency Fund

A contingency fund covering at least six months of expenses is crucial. This fund acts as a buffer during emergencies and prevents disruptions in your financial plan. Keep this fund in liquid instruments like savings accounts or liquid mutual funds.

Phased Withdrawal Strategy

Instead of withdrawing a large amount at once, adopt a phased withdrawal strategy. This ensures your investments continue to grow while providing the required income. Review your withdrawal strategy annually to align with your financial needs and market conditions.

Final Insights

Your financial foundation is strong, and with prudent planning, you can enjoy a comfortable retirement. Selling the underperforming property can provide liquidity for better investments, but consider the black money implications carefully. A balanced portfolio approach, combining equity, debt, and gold, ensures growth and stability. Setting up a systematic withdrawal plan and having adequate insurance coverage further secures your financial future. Regularly review and adjust your financial plan to stay aligned with your goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: You've got a great opportunity on your hands with the Chennai property inheritance. Let's explore how you can turn this inheritance into a long-term income-generating scheme without getting bogged down by a huge loan or long-term EMI commitment.

Understanding Your Current Situation
First, it's commendable that you have started saving with a SIP of Rs. 7,000. Your job with an annual package of Rs. 11 lakhs provides a stable income. However, the challenge is that you haven't had a history of saving. That's about to change, and I'll guide you on how to make the most of your current and future financial resources.

The Property Dilemma
You’ve inherited a property worth Rs. 8 crores. The property is old and needs reconstruction, which you are not interested in pursuing due to the huge loan and long-term EMI commitment required. Let's explore the option of selling the property.

Selling the Property
Selling the property could be a wise decision. Here's why:

Avoiding Reconstruction Hassles: Reconstruction involves not just financial strain but also time and effort. Selling saves you from these hassles.

Immediate Capital: Selling the property provides you with immediate capital. You can then invest this capital to generate a steady income.

Capital Gains Tax: Yes, you'll lose 20% as capital gains tax, but the remaining amount is still substantial. With proper investment, this can create a significant income stream.

Creating an Income-Generating Scheme
Let's explore how you can reinvest the proceeds from the property sale to generate income for the years to come. Here’s a step-by-step approach:

Diversification is Key
Diversifying your investments is essential to manage risk and optimize returns. Here are some investment options to consider:

Mutual Funds: Mutual funds offer various options like equity, debt, and hybrid funds. They are professionally managed and can provide good returns.

Fixed Deposits and Bonds: These provide safety and steady returns. They are less volatile compared to equity investments.

Systematic Withdrawal Plan (SWP): An SWP from mutual funds can provide regular income. This way, you can withdraw a fixed amount every month.

Mutual Funds: A Strong Contender
Mutual funds can be an excellent option for creating an income-generating scheme. Here’s why:

Variety of Options: You can choose from equity, debt, and hybrid funds based on your risk appetite and investment horizon.

Professional Management: Fund managers handle the investment decisions, ensuring your money is well-managed.

Potential for Higher Returns: Equity mutual funds have the potential to offer higher returns over the long term.

Systematic Withdrawal Plan (SWP): You can set up an SWP to receive a regular income from your mutual fund investments.

Balancing Between Safety and Growth
Considering your moderate risk appetite, a balanced approach is ideal:

Equity Funds: Invest a portion in diversified equity funds for growth. These funds invest in a mix of large-cap, mid-cap, and small-cap stocks.

Debt Funds: Allocate some amount to debt funds for stability. These funds invest in government and corporate bonds, providing regular interest income.

Hybrid Funds: These funds invest in a mix of equity and debt. They offer a balance of growth and stability.

Power of Compounding
The power of compounding can significantly grow your investment over time. By reinvesting your returns, your investment can grow exponentially. This is particularly effective in equity mutual funds.

Systematic Withdrawal Plan (SWP)
An SWP allows you to withdraw a fixed amount from your mutual fund investment regularly. This can provide a steady income stream. You can set up an SWP to match your monthly expenses.

Benefits of Actively Managed Funds
Actively managed funds can be more beneficial compared to index funds. Here’s why:

Potential for Outperformance: Fund managers aim to outperform the market index by selecting high-performing stocks.

Flexibility: Fund managers can adjust the portfolio based on market conditions, providing flexibility.

Research and Expertise: Active funds involve extensive research and analysis, ensuring informed investment decisions.

Risks and Mitigation
Investments come with risks. Here’s how to mitigate them:

Market Risk: Equity investments are subject to market risk. Staying invested for the long term can mitigate this risk.

Credit Risk: Debt funds carry credit risk. Choosing high-quality debt funds can reduce this risk.

Interest Rate Risk: Changes in interest rates can affect debt funds. Understanding the interest rate environment can help in selecting the right debt funds.

Long-Term Financial Planning
Long-term financial planning is crucial to ensure your financial security. Here’s how:

Emergency Fund: Keep a portion of your investment in liquid funds for emergencies. This ensures you’re not forced to liquidate long-term investments at an unfavorable time.

Retirement Planning: Plan for your retirement by investing in a mix of equity and debt funds. The power of compounding can help build a substantial retirement corpus.

Child’s Education: Invest in equity mutual funds for your child’s education. The long investment horizon can help accumulate a significant corpus.

Final Insights
Selling the property and reinvesting the proceeds can be a smart move. Diversify your investments across mutual funds, fixed deposits, and bonds. This approach provides a balance of growth, stability, and liquidity.

Remember, consulting with a Certified Financial Planner can help tailor a strategy that suits your unique situation. They can help you create a balanced portfolio that aligns with your financial goals, risk tolerance, and investment horizon.

Making informed decisions today can ensure a secure and prosperous future for you and your family.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

Ans: You've got a great opportunity on your hands with the Chennai property inheritance. Let's explore how you can turn this inheritance into a long-term income-generating scheme without getting bogged down by a huge loan or long-term EMI commitment.

Understanding Your Current Situation
First, it's commendable that you have started saving with a SIP of Rs. 7,000. Your job with an annual package of Rs. 11 lakhs provides a stable income. However, the challenge is that you haven't had a history of saving. That's about to change, and I'll guide you on how to make the most of your current and future financial resources.

The Property Dilemma
You’ve inherited a property worth Rs. 8 crores. The property is old and needs reconstruction, which you are not interested in pursuing due to the huge loan and long-term EMI commitment required. Let's explore the option of selling the property.

Selling the Property
Selling the property could be a wise decision. Here's why:

Avoiding Reconstruction Hassles: Reconstruction involves not just financial strain but also time and effort. Selling saves you from these hassles.

Immediate Capital: Selling the property provides you with immediate capital. You can then invest this capital to generate a steady income.

Capital Gains Tax: Yes, you'll lose 20% as capital gains tax, but the remaining amount is still substantial. With proper investment, this can create a significant income stream.

Creating an Income-Generating Scheme
Let's explore how you can reinvest the proceeds from the property sale to generate income for the years to come. Here’s a step-by-step approach:

Diversification is Key
Diversifying your investments is essential to manage risk and optimize returns. Here are some investment options to consider:

Mutual Funds: Mutual funds offer various options like equity, debt, and hybrid funds. They are professionally managed and can provide good returns.

Fixed Deposits and Bonds: These provide safety and steady returns. They are less volatile compared to equity investments.

Systematic Withdrawal Plan (SWP): An SWP from mutual funds can provide regular income. This way, you can withdraw a fixed amount every month.

Mutual Funds: A Strong Contender
Mutual funds can be an excellent option for creating an income-generating scheme. Here’s why:

Variety of Options: You can choose from equity, debt, and hybrid funds based on your risk appetite and investment horizon.

Professional Management: Fund managers handle the investment decisions, ensuring your money is well-managed.

Potential for Higher Returns: Equity mutual funds have the potential to offer higher returns over the long term.

Systematic Withdrawal Plan (SWP): You can set up an SWP to receive a regular income from your mutual fund investments.

Balancing Between Safety and Growth
Considering your moderate risk appetite, a balanced approach is ideal:

Equity Funds: Invest a portion in diversified equity funds for growth. These funds invest in a mix of large-cap, mid-cap, and small-cap stocks.

Debt Funds: Allocate some amount to debt funds for stability. These funds invest in government and corporate bonds, providing regular interest income.

Hybrid Funds: These funds invest in a mix of equity and debt. They offer a balance of growth and stability.

Power of Compounding
The power of compounding can significantly grow your investment over time. By reinvesting your returns, your investment can grow exponentially. This is particularly effective in equity mutual funds.

Systematic Withdrawal Plan (SWP)
An SWP allows you to withdraw a fixed amount from your mutual fund investment regularly. This can provide a steady income stream. You can set up an SWP to match your monthly expenses.

Benefits of Actively Managed Funds
Actively managed funds can be more beneficial compared to index funds. Here’s why:

Potential for Outperformance: Fund managers aim to outperform the market index by selecting high-performing stocks.

Flexibility: Fund managers can adjust the portfolio based on market conditions, providing flexibility.

Research and Expertise: Active funds involve extensive research and analysis, ensuring informed investment decisions.

Risks and Mitigation
Investments come with risks. Here’s how to mitigate them:

Market Risk: Equity investments are subject to market risk. Staying invested for the long term can mitigate this risk.

Credit Risk: Debt funds carry credit risk. Choosing high-quality debt funds can reduce this risk.

Interest Rate Risk: Changes in interest rates can affect debt funds. Understanding the interest rate environment can help in selecting the right debt funds.

Long-Term Financial Planning
Long-term financial planning is crucial to ensure your financial security. Here’s how:

Emergency Fund: Keep a portion of your investment in liquid funds for emergencies. This ensures you’re not forced to liquidate long-term investments at an unfavorable time.

Retirement Planning: Plan for your retirement by investing in a mix of equity and debt funds. The power of compounding can help build a substantial retirement corpus.

Child’s Education: Invest in equity mutual funds for your child’s education. The long investment horizon can help accumulate a significant corpus.

Final Insights
Selling the property and reinvesting the proceeds can be a smart move. Diversify your investments across mutual funds, fixed deposits, and bonds. This approach provides a balance of growth, stability, and liquidity.

Remember, consulting with a Certified Financial Planner can help tailor a strategy that suits your unique situation. They can help you create a balanced portfolio that aligns with your financial goals, risk tolerance, and investment horizon.

Making informed decisions today can ensure a secure and prosperous future for you and your family.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

Ans: Capital Gains Tax Analysis
Property Purchase Details

You bought a plot in 1996 for Rs. 1.6 Lakhs.
Its current market value is about Rs. 80 Lakhs.
This shows a significant increase in property value.

Capital Gains Calculation

Your capital gain would be around Rs. 78.4 Lakhs.
This is the difference between purchase and sale price.

Capital Gains Tax Analysis
Property Purchase Details

You bought a plot in 1996 for Rs. 1.6 Lakhs.
Its current market value is about Rs. 80 Lakhs.
This shows a significant increase in property value.

Capital Gains Calculation

Your capital gain would be around Rs. 78.4 Lakhs.
This is the difference between purchase and sale price.
It's a long-term capital gain as held for over 24 months.

Tax Saving Option

Yes, you can save tax by investing in a new house.
This is allowed under Section 54F of Income Tax Act.
You need to buy one residential house in India.

Time Limit for Purchasing New Property

You have two options for the time limit.
Buy within 1 year before the sale of your plot.
Or buy within 2 years after the sale of your plot.

Construction Option

If you plan to construct a house, you get 3 years.
This 3-year period starts from the date of sale.
Construction must be completed within this time.

Important Conditions

The entire sale proceeds must be invested in new house.
If partial amount invested, tax exemption will be proportional.
You shouldn't own more than one house on sale date.

Capital Gains Account Scheme

If you can't buy immediately, there's a safe option.
Deposit the money in Capital Gains Account Scheme.
This gives you time to find a suitable property.

Tax Implications

If conditions are met, you save tax on entire gain.
Any amount not invested will be taxable.
Tax rate on long-term capital gains is 20% with indexation.

Professional Advice

Consider talking to a Certified Financial Planner.
They can guide you on best tax-saving strategies.
This ensures you make the most of your property sale.

Finally

You have a good opportunity to save tax.
Plan your property purchase within the given time limits.
Proper planning can help you save a significant amount.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in