Let’s say you have received a job opportunity in a big city, far away from your home town. It’s the job of your dreams in the city of dreams, Mumbai!
While discussing with your friend about moving to Mumbai for this amazing job, he tells you about how exciting but challenging it is to live in Mumbai; the crowded local trains, the need for you to constantly be on your toes, and the most important thing, the rent expenses being sky-high.
After giving it a thought, you realize, you are quite excited about the fast life and travelling in local trains, but, oh no!! What about the high rent expenditure? How will you manage that? Will your employer give you any extra money in addition to your salary for the rent expense?

Let’s find out...

Why HRA?

Salaried individuals often need to move out of their respective home towns to big cities for work. Most of them opt for living in an apartment on rent, rather than purchasing property, as it is economically beneficial for them.Keeping the high rental expenses in mind, many employers choose to give an allowance for the rent paid by their employees. This allowance forms part of their salary.

What is HRA?

HRA (House Rent Allowance) is a benefit given by the employer to the employee for his house rent expenses. Okay then! You check your offer letter and YASS! Your problem is solved! Your gross salary includes HRA! But wait, what about the increased tax liability on the increased income? Well, that problem will also be solved in a few minutes!

Tax benefits of HRA
Although the allowance leads to an increase in gross salary, it is not fully taxable under the Income Tax Act, 1961. As per section 10(13A) of the Income Tax Act,1961, read with Rule 2A of the Income Tax Rules, the least of the following will be exempted, and will not form part of the taxable income:

1. Actual HRA received
2. 40%/50%* of salary**
3. Actual Rent paid in excess of 10% of salary**

Salary for this purpose = Basic salary + Dearness allowance (In terms i.e. forming part of retirement benefits)
** 50% for metro cities (which includes Chennai, Kolkata, Delhi, Mumbai) and 40% for other cities
I know, this complex calculation is beyond the understanding capacity of a layman. But don’t worry, let’s see some examples to understand this calculation better.

Example 1:
Let’s say, Mr P, residing in Mumbai has the following receipts from his employer:
Basic Salary (pa) Rs.8,50,000
DA (In terms) Rs.20,000
HRA received Rs.4,20,000
Actual rent paid Rs.5,30,000
Therefore, the exemption shall be the least of the following.
1. Actual HRA received – 4,20,000 
2. 50% of salary - 4,35,000
3. Actual rent paid (–) 10% of salary – 4,43,000 (5,30,000 – 87,000)

Exemption = Rs.4,20,000

 

Example 2:
Mr. X, residing in Pune has the following receipts from his employer:
Basic Salary (pa) Rs.6,50,000
DA (In terms) Rs.15,000
HRA received Rs.2,40,000
Actual rent paid Rs.3,00,000
Therefore, the exemption shall be the least of the following:

1.  Actual HRA received - Rs.2,40,000
2 .40% of salary – Rs.2,66,000
3. Actual rent paid (–) 10% of salary – Rs.2,33,500 (3,00,000-66,500)
Exemption = Rs.2,33,500

 

 

Some important points to keep in mind:

1.From FY 2020-21 (AY 21-22), taxpayers have an option to choose from two tax regimes, old or new. So, individuals opting for the new tax regime will not get the benefit of any exemptions, which includes HRA. However, if an individual chooses to opt for the old tax regime, he/she will get the benefit of the exemption.
2.HRA is fully taxable for employees who do not pay any rent or the accommodation occupied is owned by him/her.
3.To avail of the HRA exemption, the employee has to provide rent receipts to the employer as proof of rent payment.
So, I hope you now know what HRA (House Rent Allowance) is and how it is taxed. Until next time!

 

Valentine’s day is around the corner and I am sure you have already planned a surprise gift for your loved ones. One more thing I am sure of is that CARR students will plan a financial gift for their loved ones. And when it comes to financial gifts, the first choice will obviously be shares. But before you gift shares to your loved ones, you must consider the costs associated with it in the form of charges and taxation.

1. Charges for gifting shares:

Let us say that I have decided to gift a few shares of different companies that I think are good to my husband. It will cost me 0.03% (of gift value) or Rs.25/-, whichever is higher. Additionally, GST @ 18% will be levied on the charges. The Gift charge is charged per company or ISIN. The following example will clear the doubts –

I have decided to gift shares of Jubilant Food Works, Bharti Airtel, and D Mart, before we go ahead let me be very clear that this is not a recommendation. So, the gift charges will be:

There are a few things to keep in mind while calculating the charges
i. The highest closing price of the stock between NSE and BSE is considered for computation
ii. The charges are computed by considering the highest closing price on the day the gift transaction is processed
iii. Charges are rounded off to two decimal places
So that is it about the charges. Now there is another cost involved in gifting shares and that is taxation. Let us see what do we have there.

2. Taxation on gifting shares:

As per the Income Tax Act, 1961 a “gift” can be in the form of money and movable/immovable property that an individual receives from another individual or organization without making a payment. In legal terms, the person or organization providing the gift is termed the transferor while the gift receiver is known as the transferee.
Simplifying the definition further, examples of gifts that are taxable in India include:-
i. Money received by cash, draft, cheque, bank transfer, etc.
ii. Immovable property such as land, building, residential/commercial property.
iii. Movable property such as jewelry, shares, ETFs, bonds, paintings, sculptures, etc.

Now that we know what can be said as a gift let us understand the taxes levied on the transferor as well as the transferee

I. Tax in the hands of transferor:

II. Tax in the hands of transferee :

    A. On receipt of the gift

Section 56(2)(x) of the Income Tax Act, 1961 states that the Gift of movable property such as shares, ETFs, mutual funds, etc. received without consideration and exceeding Fair Market Value of more than Rs. 50,000 is taxable in the hands of the transferee as ' Income from Other Sources ' and tax should be paid at slab rates. This means if the gift amount is Rs. 50,001 then tax is to be paid on the entire Rs. 50,001 and not just Re. 1. Hope this point is clear. There are certain exemptions to it –
          a) Gifts received from any relative. Relative here means:
              a. in case of an individual—
                 i. spouse of the individual;
                 ii. brother or sister of the individual;
                 iii. brother or sister of the spouse of the individual;
                 iv. brother or sister of either of the parents of the individual;
                 v. any lineal ascendant or descendant of the individual;
                 vi. any lineal ascendant or descendant of the spouse of the individual;
                 vii. spouse of the person referred to in items (ii) to (vi); and
             b. in the case of a Hindu undivided family, any member of the HUF; or
          b) Gifts received on the occasion of the marriage of the individual; or
          c) Gifts received by way of inheritance.
In the above three exemptions, there shall be no tax irrespective of the fair market value of the gift received.

    B. On the sale of the gift

The subsequent sale of the gift by the receiver would be taxable under the head Income from Capital Gains. To determine the nature of capital gains whether STCG or LTCG, the holding period would be determined from the date of purchase by the previous owner i.e. the transferor till the date of sale by the transferee. To compute the capital gain, the cost of purchase by the transferor would be considered as the cost of acquisition.

I hope now you have got some clarity on the taxation of gifts. It can be confusing at times, so many people tend to simply ignore it. But, having an idea about taxation helps you take an informed decision. So, if you are planning to get a gift for your special ones this valentine’s day don’t forget to watch my valentine's day special video releasing on Saturday 12^th February 2022 at 9:00 PM on my YouTube channel. Until next time!

Just like Jay has Veeru, Munna Bhai has Circuit, and Bunny has Avi, even our chart patterns come in duos. Head & shoulder has Inverted head and shoulders, Double top has Double bottom similarly, Ascending Triangle has Descending triangle. We have already discussed the Ascending triangle in our previous blog. If you haven’t read it yet, click here. Now, let’s begin with understanding the Descending triangle pattern.

For this pattern, one may take a short position (F&O) at the breakdown candle. The price target is calculated by taking the distance of the vertical line of the triangle and then adding it to the breakdown candle. Stop-loss can be placed at the recent high.

Bottom line

As is the case of Ascending triangle, even Descending triangle may give false breakouts and/or longer consolidation duration. Hence, it is the best practice to get multiple confirmations from other indicators like MACD, RSI, etc. before entering into a position. If technical analysis intrigues you, make sure you click on the link to check out my course where I have explained more such patterns, indicators, and strategies in the most simplified way. Until next time!

It’s a bright sunny day. You are traveling from Bangalore to Pune by road. You have reached midway somewhere near Hubli when you stop for some rest and refreshment. What is the first thing that comes to your mind? Chai… That cup of tea freshens you up and you are ready to move north. Similar is the case in technical analysis. A cup and handle pattern is a chart pattern that takes the shape of a cup with a handle. It is a trend continuation chart pattern. The stock price is moving north. In between it takes a break, it forms a pattern that resembles a cup with a handle. After that break, the stock again starts heading towards north. The Cup with Handle formation was popularized by William J. O’Neil in his book “How to make money in stocks?”.

What is a Cup with Handle chart pattern?
As the name suggests a cup with a handle chart pattern is a pattern of price movement on the trading chart that looks similar to a cup with a handle. A “U” shaped price movement forms the cup section and a short price pullback from the edge of the cup forms the handle. The pattern shows the movement of the stock in the past and helps us predict the stock's movement in the future. However, this pattern takes time to form. The formation may be as short as seven weeks or as long as 65 weeks or more. A cup and handle pattern provides a logical entry point, a stop-loss level, and a profit target.

How to identify a cup and handle pattern?
The pattern can be formed in any timeframe. However, it is advisable to focus on the daily timeframe. Being a continuation pattern, there has to be a prior trend and the same needs to be understood first.
Identifying the bullish cup and handle pattern: - There must be an established uptrend for the bullish cup and handle pattern to form. However, the trend should not be a mature one as it would reduce its chances to continue. The cup is formed by a normal fall in prices that gradually reverses forming a “U” shape. It should have a bowl or rounding bottom and not a sharp “V” shaped bottom. A rounding bottom ensures that there is a consolidation with valid support at the bottom of the “U”. The pattern could have equal highs on both sides of the cup, but this is not a necessity. The depth of the cup is another lookout point. The cup should not be too deep.
The fall in security price that forms on the right side after the formation of the cup is the “handle”. It is a short pullback that slopes downward. This can be taken as a small consolidation before the big breakout. While the cup can extend from 7 to 65 weeks, the handle may take about 1 to 4 weeks to form. Let us try to understand this with the help of the following example -

A visible cup and handle pattern followed by a breakout can be seen in the above example of Kolte Patil Developers stock. The black line shows a small uptrend in the stock. The stock has reached Rs.277 from Rs.206. A normal fall in prices to Rs.132 and gradual reversal to Rs.277.3 breaking the previous high leads to the formation of the cup. There is a steady decline till the bottom and steady incline back to the previous high leading to a “U” shape cup and not a “V” shape cup. The security has created two highs near Rs.277 at the start and end of the cup, which is a typical characteristic of the cup. We can see that at the end of the cup, the security has faced a minor correction before giving a breakout at Rs.280. This minor correction is called “The Handle”. The breakout at Rs.280 is also giving a buy signal.
An important point needs to be noted. Volume data can be very helpful in both patterns. Volume should decrease during the formation of the pattern and there should be an increase when breakout/breakdown happens after the formation of the handle.

What can be an ideal entry, price target, and stop-loss?
The price which breaks out of the upper trend line is an ideal entry price (Rs.466 in our example). Security can be purchased at the close of the breakout candlestick. There are two target prices for this pattern. The first target is an estimated distance equivalent to the depth of the handle. The second target is equivalent to the depth of the cup, starting from the point of breakout. If after buying at the breakout, the price drops, instead of rising, a stop-loss order is needed. The stop-loss should be at a level that is below the lowest point of the handle.

Limitations of the Cup and Handle Pattern.
Every coin has two sides. Similarly, the cup with handle pattern also has certain limitations. The main disadvantage is the time taken to form a clear pattern. A fully developed pattern may take one to six months to form or even more. This might delay the investment decisions. The depth of the cup is another issue. In some cases, a shallower cup can give a strong bull run and, in some cases, a deep cup can be a false signal. In certain exceptional circumstances, Cups forming without handles also limit the utility of this theory. Like other technical patterns, the cup and handle pattern can be unreliable in illiquid markets.

Bottomline
The cup and handle pattern when formed in a nicely rising bull market, tests an old high and encounters selling pressure because of profit booking. The price gradually declines and consolidates over time because the selling pressure is not high. New buyers and old buyers see the reduction as an opportunity to take a long position in the market, leading to a gradual increase and retesting the high from where the pullback initially started. The more the consolidation, the bigger the breakout. It is advisable to use the cup and handle chart pattern with other technical indicators for the best decisions.
If you would love to understand the calculations that go behind Cup and Handle and how to use other significant indicators, make sure to check out my course on Technical Analysis. Until next time!

Rakesh Jhunjhunwala the veteran Indian investor also known as the Big Bull of India recently lost his life on the 14^th of August 2022.

Rakesh Jhunjhunwala was the crown jewel of the Indian Stock market who believed in the Indian growth story and was so optimistic about the Indian Capital markets and was always bullish on the Indian stock markets.

As we all know Rakesh Jhunjhunwala started his investing career way back in 1985 with a mere amount of Rs.5,000 with his own investment philosophy which backed every investment he made in the markets but what separated him from the crowd was the size of his bets whenever his conviction was high which led him to invest a large chunk of money in his best stocks which are Titan, Lupin and Crisil back in 2002-03. In an interview, Ramesh Damani pointed out that Jhunjhunwala’s investments logged a whooping CAGR of 54% over the last 35 years.

In an interview, Rakesh Jhunjhunwala said “If a girl is pretty then the suitor will come” which means if the company is good the investors are going to come and invest. He further mentioned that he likes to invest in stocks that are not popular because you get a good company at a cheaper price.

Let us understand what are the top 5 lessons which we can learn from his investing career

1. Be ready to grab an opportunity - He firmly believed that the volatile nature of markets is what creates opportunities

2. Invest in a business that is Hard to replace – Investing in such businesses will give you a competitive advantage.

3. Success requires obsession – He used to say that people become shy of investing in stocks after booking losses. His advice for investors was to prepare themselves for the market and continue investing with a thumb rule of 'buy, hold and forget.' He used to advise investors to hold a stock as long as they can.

4. Never time the market - Stock markets are always right and no one can time the market. He was of the opinion that one should enter or exit on the basis of market timing instead of timing the market on its own.

5. Be Bold - He believed that “whatever you can do or dream you can, begin it. Boldness has genius, power, and magic in it." So, one should take stock market shopping like any other shopping. As you try to buy goods at the cheapest possible rates, you should do the same while buying stocks as well.

When he was asked in an interview about his worst investment, Mr. Jhunjhunwala said that his worst investment was in his own health. Shankar Sharma one of his close friends said that “with Rakesh, you need to have a strong liver to match up to his capabilities both in terms of thinking and drinking as well” So irrespective of the net worth that Mr.Jhunjhunwala had health is something where he got a pullback in life because of his habits.

Finally, India will remember him as the biggest bull, and his investment rules or philosophies cannot be written down in a book as the man himself along with his ideas were unique.

The FIFA World Cup is starting tomorrow. Similar to Cricket, football is a ride of emotions for millions of fans across the country. Remember the 2011 Cricket World Cup? It was Sachin’s last World Cup and everyone wanted him to retire with one in his bag of achievements. Similar is the case with Lionel Messi this year. He has already confirmed that it will be his last try to get the Golden Cup, and we all want to see him hold one. Football has given us some very emotional moments. Remember how Russian Prez’s umbrella attracted more lenses than the trophy in the 2018 Finals, for once no one was annoyed that a non-deserving team won when Germany lifted the cup in 2014, and of course, you either need to be dead or not born to not know Shakira’s Waka Waka that took over the universe in 2010, it still does.

Today, we will understand three investment lessons that this phenomenal game can teach us. Let us begin 

1) Choosing a team:

You may have observed that the team the manager chooses prior to every game attracts a lot of interest. Before revealing his starting lineup, the manager assesses the strengths and weaknesses of both his own squad and the opposition. Similar circumstances apply to stock picking. Research is necessary before selecting the best stocks.

The type of players chosen by a football manager is another analogy. If the manager decides to pitch a squad made up entirely of defenders or strikers, he would get himself into trouble. What would a game look like with eleven strikers? The team's composition would be incredibly unbalanced. They may score a hat trick, but they will also give up a lot of goals. Likewise with choosing stocks, choosing only stocks in the same industry or that are similar is not a good strategy. To reduce risk, you must diversify your holdings.

2) Profile of the players:

Players vary from one another, just like stocks do. The energy of the fresh blood, the serenity of the seasoned, and the undisclosed magic of the great players must all be in perfect proportions in order for the team to succeed. Different needs are served by each player. Take Lionel Messi or Cristiano Ronaldo as an example, whichever team they play for they are the ones chosen first by the manager. That's a result of the legends' extraordinary consistency throughout the years. For an investor, they resemble the stocks of reputable businesses that have historically produced significant returns.

Managers love the next-generation players. We are talking about the Mbappes, Kluiverts, and Scholes of the world. The rookies have something to prove, are simple to manage, and have skill reserves that can only be discovered if they are selected for the squad. However, not all young people make a splash. Playing a young gun definitely has its drawbacks. Here, managers take a calculated risk, something like investing in stocks of an unproven small-cap firm. Either these stocks turn out to be multi-baggers or they disappear without a trace. Therefore, a wise bet can be made by researching the company's business plan.

If you gave it any thought, you'd see that stable large-caps have a lot in common with defenders, unstable mid-caps have a lot in common with midfielders, and promising small-caps have a lot in common with forwards.

3) Game plan:

The strategies used on a football pitch also apply to the stock market. The manager chooses a starting lineup for his team based on the team's capabilities and the opposition's strengths. The most common football lineups have been 4-4-2, 4-3-3, and 3-5-2.

Balanced Strategy: 4-4-2 lineup is used when a manager wants to ensure that his side plays creatively while still avoiding taking any unnecessary risks. This is accomplished by keeping the ratio of defenders, midfielders, and strikers in check. The following strategy can be used by an investor to balance his portfolio for the best outcomes: He can invest 20% in small-cap stocks, 40% in mid-cap stocks, and 40% in large-cap stocks.

Aggressive strategy: When the manager decides it is time to put all of his efforts into scoring goals, he deploys a 4-3-3 aggressive lineup that consists of three strikers, three midfielders, and four defenders. The manager needs to choose players with excellent offensive talent in order for this method to succeed.

Defensive strategy: The manager occasionally wants to be conservative and avoid giving up goals. This is where he uses the 3-5-2 formation. To support the three midfielders and two tenacious strikers up front, he deploys three central defenders and two fullbacks. This is comparable to a person who prefers to take small risks and is content with steady profits. Such investors choose portfolios that are heavily weighted in defensive large-cap stocks, with the balance held in mid-cap stocks that are performing well.

Hah! I somehow see finance in everything that I see around me. But, enough learning for today, now let us drench ourselves in the wild energy and emotions that this World Cup has in its purse for us. Until then Tsamina mina, eh, eh Waka waka, eh, eh…