FOREIGN EXCHANGE

With the most busy month of March getting finally over, its time to relax and spend time with your family and go out on a vacation. And if at all you are planning a trip to abroad you might want to do shopping there. What will be the basics you will be doing before going ?

Foreign Currency, yes that’s the most important component of your trip to abroad.

It all started with the failure of Barter system in encouraging trade that currencies came into existence and every country having its own currency to trade. And it is because of this difference in currencies of different nations that the concept of foreign exchange came into existence.

In commodity market you value the items that you purchase in money terms. But in foreign exchange you value money in terms of money but both are of different countries having different currencies. What is foreign exchange? It is the amount of home currency you give to exchange it for foreign exchange.

Foreign Exchange market in short is also called FOREX. It is the most traded financial market in the world. Every trading day over $4 trillion worth of currencies are traded across the world buy Banks, financial institutions and individual investors. The trading week begins from Monday morning in Sydney, Australia and finally closes on Friday evening in New York. There is no central market for currency trading which thus provides the investors with an opportunity to invest 24 hrs a day for a period of 5 days in a week

 In India the forex market is divided into two layers.

Layer 1

This layer consists of the main controllers of forex in India. RBI is the chief regulator of forex in India, along with that FEDAI (foreign exchange dealer’s associations of India) also plays a vital part in making of the rules for the same.

Layer 2

This layer consists of Bank-to-Bank (interbank) and Bank-to-customer(merchant transaction) transactions.

Why do people buy foreign currency?

1. To purchase the items abroad (  e.g. Tourists )
2. For FDI (Foreign Direct Investments )
3. For Gaining  ( By the fluctuations in foreign currency rate )
4. For paying for imports.

How to interpret Forex quotes?

In Foreign exchange market currencies are always traded in pairs that’s because we exchange one country’s currency for another therefore whenever we buy a foreign currency we are simultaneously selling our home currency.

Forex quotes consists of two prices

1. The price at which we can buy the foreign currency (also called as “ASK PRICE” )
2. The price at which we can sell the foreign currency (also called as “BID PRICE” )

ASK PRICE is the price at which the bank is ready to sell us the foreign currency and the BID PRICE is the one at which the bank is ready to buy the foreign currency from us .

Ask price is always greater than Bid price as we are the customers and bank/dealer is the provider therefore we will always buy at the highest of the quote that is the ASK PRICE and sell at the lowest of the quote that is the BID PRICE or put it the other way bank always sells at the highest of the quotes and buys at the lowest of the quotes.

You might have read the foreign currency rates that appear in the daily newspaper in the format as follows

USD/INR

The currency that is placed first is called as the base currency and the other one is called as the     price currency.

So as per the above quote dollar is the base currency and rupee is the price currency

e.g. suppose that the rate quoted by the bank to you is given is in the following form

       USD/ INR = 45.20/45.22

The above given quote is referred to as a two way quote.

This implies that US dollar is the base currency and rupee is the price currency and that the bank is ready to buy dollar from you at the BID PRICE (45.20) and is ready to sell you dollar at the ASK PRICE (45.22)

NOTE: Bid Price is always smaller than Ask price.

Sometimes rate is also given as

Rs / $

In this case the currency at the first position is called as the price currency and the other one is called as the base currency. Hence, Rs is the price currency and $ is the base currency respectively.

e.g. suppose the rate given is

        Rs 45.20 / $

This though is an outdated form of a quotation but implies that for 1 dollar we will have to pay Rs 45.20.

The party that gives the quote is called as the MARKET MAKER

And, the party which takes the quote is called as the MARKET USER

What is the difference between BID RATE and ASK RATE called as?

This difference between bid rate and ask rate is called as ‘SPREAD’

What is Exchange Margin?

Exchange Margin also called EM is the margin that the Market maker earns when we do a transaction with him or her. 

How is the quote decided in case of Bank-to-Customer transaction?

When a customer approaches a bank to buy foreign currency then the bank has to provide him with a quote. For this the bank first checks the quote which is available in the interbank market for its purpose and then adjusts exchange margin in it before giving a quote to the customer. The main activity carried out here is that when a bank buys foreign currency from a customer, it will sell it in the Interbank (IB) market (this is called as squaring off of merchant transaction).

In this way merchant rate is calculated and user bank profit is confirmed in the form of ‘EM’( Exchange Margin) 

e.g. Suppose IB quote is         1 $ =  45.30/45.33 Rs

And you approach your bank to sell 1 $

What should be the quote given buy the bank if it wants to earn 5 paisa profit on the transaction

ANS

Since the bank will buy dollar from you therefore the relevant rate is the lowest of the quote that is 45.30.

Now the bank will adjust its EM in this quote. Now since 45.30 is the price that bank will pay you and will receive the same when it will square off therefore to earn a margin the bank will have to pay you less so it will deduct the margin of 5 paisa from the quote i.e.

For you the quote will be  =  45.30 - .05 = Rs 45.25

   

Hence, the bank will buy from you at Rs 45.25

Similarly in case you want to buy dollar from the bank the calculation will be as foolows

Relevant rate = highest of the quote =  45.33

ADD : EM                                         = 00.05

Total that will be quoted to you         = 45.38

Hence, the bank will sell you at Rs 45.38.

And this is how my friends you get the desired currency

I hope that now you all must have known how the entire things are carried out in foreign exchange.

So next time when you plan a trip to abroad you will be knowing everything that actually takes place when you get your currency converted.


This article has been Authored by RISHABH AHUJA. He can be contacted at: simply_rishabh@yahoo.com

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Solutions -CA IPCC Tax May 2012 Paper

Q. No.		Answer
1(a)		Total income = 9,83,820, Tax = 1,50,530
1(b)		Tax payable  = 88,065
1(c)		Net VAT payable = 80,000
2(a)	(i)	Yes he is reuired to file ROI
	(ii)	15,000
2(b)		Value of taxable services = 8,45,330, Tax = 87,069
3(a)		24,531
3(b)		False, False, False, False, False, True, False, False
3(c)		False, False, False, True, False, False, False, True
4(a)		Total income = 10,64,000
4(b)		Service tax = 91,052
4(c)		Tax payable = 5,15,350
5(a)		Mr. A = 2,60,500, Mrs. A = 2,40,000, Minor child = 20,000
6(a)		20 lacs
6(b)		6,25,567
6(c)		10,488
7(a)		2,65,300

Source: CAclubindia

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Solution to CA IPCC law May 2012 Paper

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Download CA IPCC Cost and Financial Management may 2012 Paper

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Download CA Final Corporate and Allied law May 2012 Paper

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CA Final Advance Auditing May 2102 paper

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CA IPCC Law, Ethics and Communication May 2012 Paper

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Important Announcement - CA Examination May-2012

Enquires are being received as to whether the examination for the Paper - 4 of Professional Competence Examination (PCE) and Paper - 3 of Integrated Professional Competence Examination (IPCE) Cost Accounting and Financial Management which is scheduled to be held on 8th May, 2012 has been postponed or not. 

In this connection, it is clarified that there is no change in the schedule of examinations including the above referred papers and as such the said papers will be held on Tuesday, the 8th May, 2012 as already notified through examination application form and admit cards etc. 

Additional Secretary (Exams)

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CA IPCC Account Paper May 2012

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Ca Final SFM May 2012 Paper

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Download Revised Schedule VI

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CA Final financial Reporting May 2012 Paper

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Feedback of Candidates on Question Paper-Chartered Accountants Examinations, May 2012

Examination Department Feedback of Candidates on Question Paper-Chartered Accountants Examinations, May 2012.

The Institute has developed an online Feedback form on the Question Papers of Chartered Accountants Examinations to be held from 2nd May 2012 to 17th May 2012 at the link http://www.icai.org/app_forms/student_feedback.html.

Students and other stakeholders may make use of the facility.

Examination Department

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Job Openings at Hari Bhakti for CA

Guys from our Sources we come to know that there are job openings in Hari Bhakti(BDO). Job Location is Mumbai and CTC will be 4.5 to 5.5 Lacs. Intrested Candidate can send there CV at hr@bdoindia.co.in


To See other job openings for CA Click Here

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Little known schemes u/s. 80C of Income Tax Act

Little known schemes u/s. 80C of Income Tax Act

If an individual falls in the 30% tax bracket and has exhausted the maximum limit of Sec 80C, one can save Rs 30,900 in taxes.  We run you through the provisions of Section 80C. However, we highlight those schemes that are little known and which many investors avail of sparingly.

Stamp duty and registration charges

The first and foremost provision that many taxpayers are not aware of is stamp duty and registration charges. According to the law, ‘the amount paid towards stamp duty, registration fees and other expenses for the purpose of transfer of house property to the owner also qualifies for tax exemption’. This is over and above the principal payment that qualifies under Section 80C. But deduction u/s. 80C for total amount including Principal Loan Repayment and stamp duty and registration charges cannot exceed Rs. One Lakh.

Exemption for interest payment towards home loan is permissible under another section hence the above limit of Rs 1 lakh does not apply to it.

Let us take an example, Mr A purchases a house property of Rs 32 lakh and takes a home loan of Rs 25 lakh at 10%. His stamp duty and registration charges on this work out to approximately Rs 1.75 lakh. The interest for the first year comes to Rs 2.48 lakh and principal payment comes to Rs 41,376.

Thus, Mr A can claim maximum tax exemption of Rs 1.5 lakh on his interest payment under Sec 24. The entire principal payment (not more than Rs 1 lakh) of Rs 41,376 can be claimed under Sec 80C.

Nonetheless, it still leaves Rs 58,624 to be invested in other tax-saving instruments to reduce overall tax liability. In reality, buying a house is quite often an expensive affair, leaving little cash with the homebuyer. On top of it, if one has to make additional investment to save on tax, it becomes difficult.

But with the inclusion of registration and stamp duty fees under Section 80C, it not only reduces tax liability but also saves the property buyer from further cash outgo.

Fixed-deposit with HUDCO or any housing board
Another provision that would be eligible for exemption under Section 80C is ‘any sum paid towards fixed-deposit schemes of HUDCO or to any housing board, which is constituted in India for the purpose of planning, development or improvement of cities or towns’.

Typically, these schemes are promoted by state housing boards to promote long-term social sector objectives, or for infrastructure development of city.  In fact, principal payment towards home loans taken from Housing and Urban Development Corporation (HUDCO) also qualifies for exemption under Sec 80C.

Even subscription to a home loan account scheme of the National Housing Bank (NHB) or contribution to any notified pension fund set up by the NHB also meet the requirements. Hence, if these two offer home loans at competitive rates, one can avail loan from them as well.

Contribution to a non-commutable deferred annuity plan

Further, contribution to a non-commutable deferred annuity plan is also an option to avail tax exemption. In normal parlance, this is nothing but a standard pension plan eligible for tax exemption under Section 80C.

This includes schemes such as Jeevan Suraksha by LIC or Pension Plus plan by HDFC Standard Life. Contribution to an approved superannuation fund is also a way to claim tax benefit.

Typically, large organizations maintain superannuation funds and contribute to them. In case employees want to make a higher contribution; they can do so to the extent of 15% of basic plus dearness allowance. Besides these lesser-known options, the other commonly used options are contribution to employee provident fund, life insurance premium, or payment of tuition fees. Five-year tax saving fixed deposits issued by banks can also be bought.

With a 6-7 .75% quarterly compounding interest rate, these FD’s have an edge over NSC with a one-year lesser lock-in period. However, the NSC has an edge because of the fact that interest accrued is also eligible for 80 C limit for the first five years that is not the case with FDs.

Equity-linked savings scheme MF or Ulips
besides, these low risk options, one can go for high-risk return schemes such as equity-linked savings scheme MF or even Ulips. ELSS usually provides a higher return in the long run than small savings schemes and carries a lower lock-in period of three years.

Small savings schemes offer a lower return of around 8 to 8.5%. Further, there is a relatively long lock-in period -15 years for the PPF and six years for NSC. The advantage with these schemes is that they offer a guaranteed return unlike equity-based products where there is no guaranteed return and one can lose money like when the markets tumbled in 2008.

Risk profile and investment strategy are the key determinants for allocating funds to any scheme. Also, one must consider inflation-adjusted returns before taking a decision.

This article has been Authored by Mukul Gulati. He can be reached at avsm.pegasus@gmail.com

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