Salary restructuring and income segregation should be deployed, says Shantanu Awasthi of Karvy Private Wealth

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Updated: July 30, 2018 12:23 PM

Markets and industry seem to have overcome two major developments in recent times, demonetization and GST. The rising crude prices were an area of concern and threatened to disturb the low inflationary balance which India found in recent times.

Private Investment Trusts are ubiquitous outside India.

The mid-cap stocks and small-cap stocks have seen a sharp correction and the large-cap space barring a few stocks have also witnessed correction. Mostly IT sector and somewhat Pharma sector benefitted from the rising dollar and FMCG sector which is favourite in times of uncertainty coupled with rising consumption also performed well, says Mr Shantanu Awasthi, Head – Family Office, at Karvy Private Wealth. Talking about AIFs to breaking the wealth epiphany, Mr Awasthi shared his insights of the industry with Nishita Nathani of Financial Express Online.

Here are the excerpts of the conversation:

What is an Alternative Investment Fund? How can retail investors invest in an AIF?

SEBI has multiple platforms to invest money. First is the mutual funds. Second is the portfolio management schemes, which involve diversification in equity and debt instruments. The minimum amount of investment required is Rs 25 lakh from investors. The third is through venture capital, private equities and pure private equities, formulated in 2013. These platforms were formulated to channelise the investment options for investors with minimum Rs 1 crore. Venture capital spans to Rs 5-10 crore band. Category two fund investment in private equity spans above Rs 5 crore in the form of debt and equity. Non-convertible debentures and convertible debentures can be issued to the investor. The third category of the AIF is an open structure in which the entire gamut of the investment is in the equity. In the category three investment, the capital gain tax and the dividend is taxed to the fund and not to the investors. The category 1 and category 2 gains and dividend gains are taxed in the hands of individuals.

Talking about taxes, what is the biggest wealth epiphany? What realizations to be kept in mind for tax filing this year?

Individuals with a very high taxation slab can look forward to forming separate entities like a HUF and like I mentioned, Private investment trusts. The income sources can be segregated by the family members and the segregated income shall be taxed under the return of the low-income earning member of the family. One can go for salary restructuring to plan the tax.

The government has introduced the National Pension Scheme to avail tax deduction of Rs 1.5 lakh for self-contribution and also for the employer contribution. 80CCD(1) covers the self-contribution, which is a part of section 80C. The maximum deduction one can claim under 80CCD(1) is 10% of salary, but no more than the said limit. For the self-employed taxpayer, this limit is 20% of gross income. Any additional self contribution (up to Rs. 50,000) can be claimed under section 80CCD(1B). Therefore, the scheme allows a tax deduction of up to Rs 2 lakh in total.

What are Private Investment Trusts?

Private trusts are ubiquitous outside India. The wealth tax and taxes on the transfer of wealth are on the higher side. In India, the tax structure is simpler. However, people do go for private trusts for a smooth intergenerational transfer of wealth. Family members become the beneficiaries and taxability shifts to the legal entity instead of the individuals. Also, the individual unlimited liability seizes against the liability of the entity. In the 1980s, the tax rates used to be much higher, and the private trusts used to serve as a tax planning vehicle. Similar trends continue even now.  The customisation of one’s portfolio outlook in terms of investment and taxes also vary according to the present stage of the economy, a person’s aspirations and goals.

Yes, the economy. What do you think the performance of private wealth segment has been in the last half year and your anticipation in the next half year?

2018 started on a euphoric note with all-time high flows into equity markets and built up an expectation of sustained Bull Run and expected earnings growth. The wealth industry was again witnessing a golden run somewhat similar to the 2004 era. The entire industry witnessed record flows into financial instruments and debt markets. This led to renewed interest in the wealth management industry. The first half of the year witnessed renewed interest amongst private equity players with deals being struck and many new players foraying into wealth management business. Markets and industry seem to have overcome two major developments in recent times — demonetization and GST. It looked like a promising year with everyone being bullish about the long-term story of India, earnings growth looked promising and the wealth management industry was buzzing once again. However, the economic scenario was fast changing and some global events were looming large and the threat to ruin the party was ever increasing. The rising crude prices were an area of concern and threatened to disturb the low inflationary balance which India found in recent times. Our current account deficit and fiscal deficit continued to grow this along with the Fed policy of increasing interest rates. This, in turn, led to a flight of FII monies and run on the Indian currency. All in all the industry had a good first half on account of record flow of funds from domestic investors and institutions and most of the wealth firms hit record AUM & profitability, due to the momentum and euphoria built in the previous quarters. However, the reality of low returns in both equity (especially the mid-cap space which had become very popular) and debt funds has left the investor community in a fix and most people are circumspect of future performance on the backdrop of the election year and adverse international developments like trade wars. The investors are still not worried but are waiting on the sidelines for the opportunity.

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