May 04, 2022

What is India VIX - the volatility indicator?

If you have spend sometime in Stock market, you would have come across India VIX indicator whenever panic strikes. So what does it mean and what it represents?

The Indian Volatility Index in short is referred to as India VIX. As name suggests, this index measures the volatility of the market. Index helps in understanding if the market participants are feeling fearful or complacent about the market in the near term.

It indicates the degree of volatility or fluctuation traders expect over the next 30 days in the Nifty50 Index. India VIX was introduced by the NSE in 2008, but the concept was originally introduced by Chicago Board Options Exchange in 1993.

Expert note - If you are interested in learning the mechanism of calculation, refer to NSE for technical information.

How to interpret India VIX?

Say the India VIX value is 21.88. This means that the traders expect 21.88 per cent volatility for the next 30 days. In other words, traders expect the value of the Nifty to be in a range between +21.88 per cent and -21.88 per cent from the current Nifty value for the next year over the next 30 days.

India VIX Index

You can easily understand the importance of India VIX as indicator, when you see the Index over COVID panic start - going up to almost 70.

India VIX during COVID

Use this indicator as one additional guidance tool when trading in India market.

April 11, 2022

Inverted Yield Curve

One of the finance term which has suddenly gained lot of attention is 'Inverted Yield Curve'. So let's understand what does the Inverted Yield curve mean and what it indicates.

Yield curve is basically graphical representation drawn on expected interest (called yield) to be received on government bond (called as G-Security, Treasury bill, GILT etc) over different maturity period. Under normal situation, you get higher interest on Government bonds carrying longer maturity - which when plotted on graph give you positive slope for the yield curve. It looks something like below: 

Representation of Normal Yield Curve

Historically, this yield curve has shown inverted or negative slope in the lead up to the recessionary environment or economic slowdown. This generally looks something like below:

Representation of Inverted Yield Curve

What to look out for? : Investors watch parts of the yield curve as recession indicators, primarily the spread between the yield on 2-year to 10-year (2/10) curve Treasury bills. Following graph by Reuters shows the historical recession and inverted yield curve happening very clearly.

2/10 year Treasury Curve from 1980 to 2022



December 27, 2021

CAGR meaning and calculation

CAGR or Compounded Annual Growth Rate refers to the mean annual growth over given period of time. To simply put, it shows the average annual return generated over a period of time thereby smoothing out any spikes or drops from the return over a period.

Let's take an example - you invested in a stock "A" at the beginning of year 2019 at Rs 1,000 and at end of year 2020 it's trading at Rs 500 and now at the end of 2021 its trading at Rs 3,000. How do you compute your average annual return? This is wherein CAGR comes to play, helping you smooth out the fluctuation to show your average return over 2019 to 2021.

How to calculate CAGR?

CAGR Formula
CAGR can be computed using above formula where in N refers to the number of years. Going back to our previous example, number of year would mean 2 years (2019 starting to 2021 end), Starting Value will be Rs 1,000 and Final Value will be Rs 3,000. Once calculated, you will get return of ~73.2%.

Calculating CAGR using EXCEL - 

You can use Excel's inbuilt formula of RRI. It has three arguments (number of years NPER, present value PV and final value FV).

So to calculate our example, your formula would be =RRI(2,1000,3000)

Always remember, while comparing CAGR between two stocks / investment / any item; numbers of years are equal. Else, you will be comparing apple to oranges.

October 13, 2021

Debentures explained

Definition: A debenture is defined as an instrument of debt executed by the company representing its obligation to repay the money at a specified rate and with an interest. It is one of the methods of raising the debt capital by company.

A debenture is like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.

Types: Debentures are primarily issued in two types - Convertible Debenture or Non-Convertible Debenture. Convertible debentures are a type of debentures that can be converted into equity shares of the company. Non-convertible debentures are defined as the type of debentures that cannot be converted into equity shares of the company

Important:
  • Convertible debenture carries lower interest rate, as they carry advantage of converting to equity at later stage
  • Maturity value of Convertible debenture is dependent on the share price

September 23, 2021

Dividend dates you must know

Here's quick guide for different dates you would read during Dividend announcement made by the Company and what does it signify -

Dividend Dates

Dividend Declaration Date : Date on which the dividend is announced by the company

This is the first trigger event, when company announces the dividend. This announcement includes details like dividend amount, total amount of dividend distribution and the record date (will explain this next).

Record Date (Cut-off date) : This is the date by when your name must be on the company's record books as a shareholder to be eligible to receive the dividend

On the dividend declaration day, together with quantum of dividend, the company also announces the Record Date. The record date is the date to simply put date on which final list of shareholder eligible for dividend would freeze. So if you want to be eligible for dividend, your name should be present on the company’s list of shareholders i.e. record book, by this date.

Shareholders whose name are not registered until this date on the company’s record book will not receive the dividend. 

Ex-Dividend Date : The date before which you must own the stock

The Ex-dividend date is usually two days before the record date. Reason for 2 days is due to the stock settlement time of 2 days followed in India. When you buy a stock, it takes two days (settlement time) before it gets reflected in your demat account. If you buy the stock on or after the Ex-dividend date, stock will not be reflected in your account within Record date and hence you won't get the dividend, instead, the previous owner of stock will get the dividend.

Dividend Payment Date : This is the date when dividend is disbursed to the shareholders

This is the date set by the company on which the dividends are disbursed to the shareholders.

Only those shareholders who bought the stock before the Ex-dividend date and got their name in record book of the company would be entitled to get this dividend. 

So if you are planning to get benefit of Dividend, Ex-dividend date is crucial and you need to make sure, that you buy the stock before stock starts trading as Ex-Dividend in secondary market.

Want to learn about how Dividend yield is calculated? Read here.

July 01, 2021

Free Cash Flow explained

In simple terms, Free Cash Flow (FCF) refers to the amount of cash generated by the entity after accounting for reinvestment in non-current assets. 

FCF = Cash from Operations [-] Capital Expenditure

Wherein, Cash from Operations = Net Income [+] Non-Cash expense [+] Changes in Net Working Capital. This number can readily be referenced from Cash Flow statement presented by the entity.

Non-Cash expense includes P&L expenses which have not been actually spent in Cash, like - Depreciation, Amortization, Stock based compensation, impairment charges etc.

Working Capital is calculated primarily difference between current asset and current liabilities, like -  Accounts Receivable, Inventory, Accounts Payable, etc.. Change in Net Working capital may be positive or negative number and will need to be added or deducted accordingly

Lot of Equity research report also calculates Levered and Unlevered Free Cash flow. So it's very important to understand the difference between them

Unlevered Free Cash Flow, also called Free Cash Flow to Firm (FCFF)

Levered Free Cash Flow, also called Free Cash Flow to Equity (FCFE)

Main difference between FCF, FCFF and FCFE is with respect to how the interest and debt is treated. Here's quick formula to give an idea on interest / debt treatment.

Free Cash Flow: Includes interest expense, but NOT debt issuances or repayments

Unlevered Free Cash Flow: Excludes interest expense and ALL debt issuances and repayments

Levered Free Cash Flow: Includes interest expense, and mandatory debt repayments

Formula to calculate each:

FCF: Cash Flow from Operations [–] Capital Expenditure

Unlevered Free Cash Flow (or FCFF): Earnings before Interest & Taxes (EBIT) [-] Taxes [+] Non-Cash Adjustments (like Depreciation, amortiztion, stock compensation) [+] Changes in Net Working Capital [–] Capital Expenditure

Levered Free Cash Flow (or FCFE): Net Income [+] Non-Cash Adjustments [+] Changes in Net Working Capital [–] Capital Expenditure [–] Debt Repayments

Note - as we started FCFE from Net Income, tax impact on debt repayment should be adjusted to arrive at more accurate number.

Unlevered free cash flow or FCFF is mostly used while doing discounted cash flow analysis


January 01, 2021

Exempt Income - Understanding & reporting in ITR

Income tax terminology can get very confusing at times and one of the most confused term is distinction of 'Tax deduction' and 'Exemption'. The lack of understanding leads to lot of people failing to report in the Exempt income in the Income Tax Return (ITR) filing. 

Understanding difference between 'Tax deduction' and 'Exempt income'

Tax deduction refers to the amount of money that is allowed as deduction from your total taxable income. The final amount after 'tax deduction' from total income is referred as ‘taxable income’. Concept of 'Tax deductions' is to motivate individuals to save and invest, also allowing some necessary expenses. Examples of 'Tax deduction' are amount deposited in PPF, NPS, donation made to charities (section 80G), Medical insurance, etc.

'Exempt income' on other hand means income that are excluded for arriving at taxable income. Exempt income are of two types - fully exempt (like Agricultural income, PPF interest, etc) and partially exempt (income subject to certain limit, like House Rent Allowance, Leave Travel Allowance, etc). Remember Exemptions are always from the specific income head and not from the gross total income. For e.g., Exemptions allowed under salary head cannot be claimed from any other income head.

To summarize, Exempt income is tax free from the point it is earned, while tax deduction are the part of income which is excluded basis certain tax provision and excluded from computing taxable income.

Tax Deduction vs Exempt Income


Why disclosure of Exempt Income is important?

Disclosure of Exempt Income is often ignored by individuals while filing income tax return, thinking it does not get taxed anyway - what assesse forgets is, this non-reporting can put them in risky situation when the future enquiry about the source of income is raised by Income Tax officer. In absence of disclosure under Exempt Income, you cannot pin-point source and open the assessment for further enquiry.

Section 10 of Income tax Act deals with all the incomes which are exempt from computing income taxes. Some examples of Exempt Income:
  • Interest credited to Provident Fund - Fully exempt (Statutory PF, PPF). In case of Recognized PF, only to the extent interest does not exceed 9.5% (Learn more about PPF here)
  • Dividend income from domestic company (amount not exceeding Rs. 10 lakh)
  • Gift or Voucher or Coupon on ceremonial occasions or otherwise provided to the employee - (a) Gifts in cash or convertible into money (like gift cheque) are fully taxable (b) Gift in kind up to Rs.5,000 in aggregate per annum would be exempt, beyond which it would be taxable.
  • Any income generated from agriculture and related activities including rent from land/farmhouse used for agricultural purpose, further processing of the agricultural product, income from seeds or saplings, etc. [Section 10(1)]
  • Share of income received from the family income, being a part of a Hindu Undivided Family [Section 10(2)]
  • Any amount received as a part of a life insurance plan including policy bonus [Section 10(10D)]
  • Any withdrawals from the provident fund (for salaried employees) [Section 10(11)(12)]
  • Amount received as compensation from the government, in case of disasters [Section 10(10BC)]
  • Income generated from tax-free securities [Section 10(15)]
  • National Pension System -  Any payment from the National Pension System Trust to an assesse on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed 60% of the total amount payable to him at the time of such closure or his opting out of the scheme.
Disclosure Of Exempted Income For Salary Allowances in ITR

Disclosure of this type of exempted income is required to be made under "Schedule S - Details of Income from Salary" when filing tax returns
  • House Rent Allowance (HRA)
  • Leave Travel Allowance (LTA)
  • Encashment of Leave
  • Pension
  • Gratuity
  • Voluntary Retirement Scheme
  • Perquisites
Disclosure Of Exempted Income For Non-Salary Allowances in ITR

The Income Tax Act also specifies specific types of non-salary income that are also exempt from tax. These incomes include dividends, agricultural income, interest on funds, capital gains etc. Disclosure of these types of income is required to be made by the taxpayer under "Schedule EI - Details of Exempt Income" when filing tax returns

Screenshot of Exempt Income input required in ITR2:

ITR 2 - Exempt Income

Long-term Capital Gain tax exemption

It's important to note, Budget 2018 proposed to remove Section 10 (38) of the Income Tax Act, 1961. As per this section, the long-term capital gains (LTCG) arising on sale of equity shares or units of an equity-oriented mutual fund on which Securities Transaction Tax (STT) is paid was exempt from taxation. This section was initially introduced through the Finance Act, 2004, with effect from AY 2005-06, based on the Kelkar Committee report to attract investments from Foreign Institutional Investors (FII).

The Budget 2018 introduced Section 112A by withdrawing Section 10(38). It proposed to impose tax on the LTCG of the following: Shares, Equity-oriented funds or Business trusts. 

The LTCG tax is applicable at a rate of 10% on gains over and above Rs 1 lakh a year, and there is no benefit of indexation. The provisions of this section will apply from the financial year (FY) 2018-19, i.e. AY 2019-20.

Note: Article is meant for basic understanding and general guidance. Check with your tax consultant before filing taxes. Article is written on 1st Jan 2021 basis the then prevailing tax rules.