Doctor’s financial queries…

One very important query in all doc conferences is “Our practice is good, but it may go down..so buying a property and creating a second source of ‘rental’ income makes sense no? 

The answer is very simple.

When you want to create a second source of income you need to create a secondary asset. The secondary asset has to give you either a current income (like bank fixed deposit), or income and capital appreciation (equities and rental property), or pure appreciation no current income (like precious metals and unutilised land).

Now Income is taxed – as current income (rent, interest) or as capital gains (equity, land). The current income is one of the worst – it gets taxed as regular income and at regular rates. So it makes more sense to reduce CURRENT INCOME and instead increase deferred income (or unrealized tax free / tax deferred income).

So it actually means you should invest in equities (tax free dividend and tax free appreciation income) or in mutual funds Income options (debt schemes growth option) instead of Real estate. This is because RE income cannot be deferred and will be taxed at normal rates.

I hope I have made myself clear. Please check and keep checking www.subramoney.com for such sensible answers to a very very typical doctor query.

http://www.subramoney.com/2008/01/real-estate-to-create-wealth/

 

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5 Responses to “Doctor’s financial queries…”

  1. Avail a loan. Post tax cost is 70% of the interest rate, assuming doc in the 30% bracket and doc will end up with a tax loss

    Invest your own funds in a debt fund (ultra short is the best to avoid interest risk). After 3 years and indexation, swp to pay the emi. The doc will actually end up making money off the loan ?

    This is a variation of the question.. Should i prepay my loan or invest ?

    Obviously you need to pay attention to the cash flows for first three years or use a not so high yielding arbitrage fund.

  2. http://www.subramoney.com/2008/01/real-estate-to-create-wealth/

  3. The comment was in response to the post about inability to defer RE income.

    RE vs Equity , or only equity in your pf is a different case altogether.

  4. is it correct that dividends are not really tax free – the DDT is paid by the company, so indirectly paid by all investors irrespective of their tax bracket?

  5. yes param, but there are work arounds – you will soon see them at work. Cos. will resort to more buybacks instead of paying dividends – and you could use that money to buy more shares 🙂

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