Demat Account

Demat refers to a Dematerialized account. If you want to buy or sell stocks you need to open a Demat account. It is just as opening an account with a bank. To open your Demat account you have to approach the DPs (Depository Participant). Demat account will help you to buy and sell shares without endless paperwork and delay. Practically all the trades have to be settled in Dematerialized form. So a Demat account is a must for trading and investing. Demat Account is just Like a bank account where actual money is replaced by shares,

For Example: Your portfolio of shares are 200 of Wipro, 100 of Infosys, 50 of HCL, All these will show in your Demat  account, you don’t want to show any physical certificates that you hold that shares. If you buy or sell the shares all are held electronically in your account. They are all held electronically in your account. As you buy and sell the shares, they will be automatically adjusted in your account. It is just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.

For opening a Demat Account, You should approach a DP and fill the Demat account opening form. NSDL and CDSL Web sites will list the approved DPs. Then you will receive an account number and a DP ID number for your account. Quote both the numbers in all future correspondence with your DPs.

Benefits of Demat account

• A safe and convenient way to hold securities
• Immediate transfer of securities
• No stamp duty on transfer of securities
• Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.
• Reduction in paperwork involved in transfer of securities
• Reduction in transaction cost
• No odd lot problem, even one share can be sold;
• Nomination facility
• Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately
• Transmission of securities is done by DP eliminating correspondence with companies
• Automatic credit into Demat account of shares, arising out of bonus/ split/ consolidation/ merger etc.
• Holding investments in equity and debt instruments in a single account.

Disadvantage of Demat account

• Securities may become uncontrolled in case of Dematerialized securities.
• Incumbent upon the capital market regulator to keep a close watch on the trading
• Stock-brokers, needs to be supervised as they have the capability of manipulating the market
• Various regulatory frameworks have to be complete to, including the Depositories Act, Regulations and the various By-Laws of various depositories.
• Additionally, agreements are entered at various levels in the process of Dematerialization. 

Fees Structure

There are four major charges usually levied on a Demat account: 

• Account opening fee
• Annual maintenance fee
• Custodian fee and
• Transaction fee.(All the charges vary from DP to DP)  

Account opening Fee

Private Banks, such as ICICI Bank, HDFC bank does not have any account opening charge. Depending on the DP, there may or may not be an opening account fee.

Annual maintenance fee

This is also called as folio maintenance charges, and is generally levied in advance

Custodian Fee

This will be charged monthly depends on the number of securities (international securities identification numbers – ISIN) held in the account. Generally it is between Rs. 0.5 to Rs. 1 per ISIN per month.

Transaction fee

The transaction fee is charged for crediting/debiting stocks to and from the account on a monthly basis. While some DPs, charge a flat fee per transaction, and some DPs peg the fee to transaction value, subject to a minimum amount. The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting the securities while others charge for both. DPs will charge if your instruction to buy/sell fails or is rejected. Service tax is also charged by the DPs. DP also charges a fee for converting the shares from the physical to the electronic form or vice-versa

Infrastructure Bonds

Section 80CCF of Income Tax Act ,1961 as inserted by Finance Act,2010 w.e.f 1-4-2011 says:

Deduction in respect of subscription to long-term infrastructure bonds.

In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, the whole of the amount, to the extent such amount does not exceed twenty thousand rupees, paid or deposited, during the previous year relevant to the assessment year beginning on the 1st day of April, 2011, as subscription to long-term infrastructure bonds as may, for the purposes of this section, be notified by the Central Government.

Description:

The investment market in India is flooded with a range of products like Life insurance policies, NSE and PPF, it really becomes very difficult for the individual to decide on the product that yields the maximum benefits. But most of the people already have tax saving investments to their credit and they want to further invest in products that will exempt them from paying heavy amounts as tax and also yield returns in the form of interest. And in this Scenario, Infrastructure bonds are the latest introduction in the field of investment. An important thing to be kept in mind is that no two people have the same needs and requirements. Hence people should invest according to their requirements.

There are a number of companies that offer infrastructure bonds like IFCI, LIC SBI, IDFC and L&T Infra. However the concept of investing in bonds is still at a nascent stage in the country. People still are not very well aware of the product and think twice before making such an investment.

Here is a brief analysis on this product-

There are four parameters on which we will analyze investment option:

1. Actual tax saving

2. Return on Investment

3. Opportunity Cost

4. Effect of Inflation

Assumptions:

1. Lock In period of 3 yrs

2.  Rate of return is 5.5% per annum

3. Inflation rate 8%

Tax Groups:

Tax group 1: Taxable income Rs. 1.6-5 lakhs

Tax group 2: Taxable income Rs. 5-8 lakhs

Tax group 3: Taxable income above Rs. 8 lakhs

Parameter 1: Actual tax saving

Actual tax saved on the investment; so for an individual having 10% tax slab the tax saved by him is Rs.2,000 (10% of Rs 20,000 = Rs 2,000)

Parameter 2: Return on Investment

At the end of Lock in period of 3 years, on an investment of Rs 20,000 the interest earned would be Rs. 3,484. Total return on 3 year lock in period is Rs 25,485 (Rs 20,000+3,484+2,000).

Parameter 3: Opportunity Cost

If Rs 20,000 had been invested in other tax saving instruments like ELSS Mutual Funds which also comes under 3 yrs lock in period which gives a return of 15% (which is very reasonable considering that the benchmark Sensex and many mutual funds have given comparatively higher returns on a long period) the effective return will be Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15% per annum for 3 yrs).

Parameter 4: Effect of Inflation

The minimum amount required to counter the inflation at the end of 3 yrs is Rs 25,194 at 8%

                Thus, it is clear that for a person in tax group 1, the benefit is of Rs 291 (25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2,182.

So it is clear from the above analysis that if you are looking for getting tax benefit for an investment locked in for 3 yrs in Infrastructure Bonds then people who fall in tax group1 should not invest in Infrastructure Bonds. If you are in the tax group2 then think of only upto 3 yrs period investing in Infrastructure Bonds to remain neutral and people in the tax group3 are highly benefited from Infrastructure Bonds and can invest for long term.

Points to remember:

• Infrastructure Bonds do not offer any protection against high inflation since the rate of interest they offer is pre-determined.
• Against the pledging of the infrastructure Bonds with a bank, one can borrow money from banks. The amount depends on the market value of the bond and the credit quality of the instrument. 
• Moreover, it should be noted that although Infrastructure Bonds are considered to be safe, there is no assurance of getting the full investment back.

Interest Income is Taxable:

The interest income from infrastructure bond is taxable. The interest will be added to investors taxable income. This means even though the investment in these bonds is exempt from tax (maximum Rs 20,000). interest income is not. Thus investment under section 80CCF is advisable only after the investor has completely exhausted Rs One Lakh investment under section 80C.

The proposed DTC has left infrastructure bonds out of the ambit of tax-saving investment avenues.