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All you wanted to know about Housing loan tax benefits

Manikaran Singal — Sun, 12 May 2013 09:27:56 +0000

Today I will discuss about housing loan tax benefits. Buying own house is one of the most important goal in everyone’s life. Looking at the rising property prices some purchase it as investment and many wants to avoid the stay on rent and thus wants to have own accommodation. The increase in housing prices has in turn lead to increase in demand of housing loan as very few can afford to buy property on cash/lump sum. Along with the comfort of paying back loan in installments housing loan comes with lot many tax benefits. Many investors who even can afford to pay in lump sum prefer going through housing loan route as the tax benefits reduces the net outflow of interest.

Understanding housing loan tax benefits is very important as one can take multiple advantages from this if used rightly. Understanding tax benefits of interest payment under section 24, principal payment under Section 80C, benefits under joint housing loan, second housing loan etc. makes this concept more interesting.

Before going ahead with the details on housing loan tax benefits, lets first understand the basic terms related to the housing loan:

EMI: Equated Monthly instalment (EMI) is the term used for the monthly payments made for repaying home loan. EMI has 2 constituents – Principal and interest. Principal is the portion of loan capital amount and interest is what bank charges for that loan. In the early years of repayment, EMI consist of higher interest portion and lesser principal amount. But as time passes your principal payment increases and interest reduces.

Self-occupied house: As per Section 23(2) (a), a house property shall be termed as self-occupied property where such property or part thereof : (a) is in occupation of owner for the purpose of self-residence, (b) is not actually let out during the whole or any part of previous year; and (c) no other benefit is derived by the owner.

Deemed to be let out: If an assessee occupies more than one property, he is allowed to treat only one property as self-occupied at his option. The remaining self-occupied properties shall be treated as “deemed to be let out”.

Joint home loan: Joint home loan is the loan where there is more than one borrower i.e it is a loan taken jointly by more than one person. A joint home loan can only be availed by minimum of two and maximum of six applicants. A joint housing loan is given to married couples or close blood relatives like parent and child. Usually banks insist that all co owners of the home must be co borrowers.

Pre EMI interest: No EMI gets started, till the time loan gets fully disbursed .As happens in housing loan with a construction linked plan, no EMI starts till the offer of possession by the builder. Borrower just has to service the loan interest. So the interest amount which has been paid before the starting of EMI called as Pre EMI interest or Pre construction EMI (which is only the interest part).

The Idea of explaining the above terms is to help you understand the taxation under housing loan in a much better way.

Housing loan Tax benefit u/s 80C

As explained earlier that housing loan EMI consists of Principal and interest. The principal portion of housing loan EMI paid in a financial year is eligible for tax benefit u/s 80C upto a maximum limit of Rs 1 lakh per year. Other Section 80C components for tax saving are PPF, ELSS, Life insurance premiums, NSCs, 5 year bank fixed deposit etc. The total cap of section 80C investment is Rs 1 lakh which is inclusive of this principal payment in housing loan.

But here is one condition; you can claim this section 80C benefit on principal home loan payment only in the case of self-occupied house.

Only exception is if the house is not in the city you work in.

For example: if you live in Delhi due to your job and the house that you are paying EMI for is in Chandigarh, than in that case you are eligible for the section 80C benefit on principal portion of the EMIs. Or you should be staying in that particular house to claim for Section 80C tax benefit.

Housing loan tax benefit u/s 24

The interest portion of housing loan EMI paid in a financial year can be claimed as deduction u/s 24 up to a maximum limit of Rs 1.50 lakh per year. Interest payment is considered as expense under the head “income from house property”.

The best part in tax benefit under section 80C and section 24 with respect to housing loan EMI is that there’s no limit on “Self occupied houses”. Say for example you work in Delhi, but you have one house in Chandigarh and other in Mumbai, for which you are paying housing loan EMIs, You can claim benefit of Section 80C and Section 24 for both of houses under self-occupied category within the maximum limit u/s 80C which is Rs 1 lakh and u/s 24 which is Rs 1.5 lakh, combining the total principal and Interest payment of all the houses. Do note that both benefits can be claimed only after taking possession of house.

Some conditions to avail this benefit:

Maximum interest allowed in aggregate of Rs 1.50 lakh per year, if the following conditions are satisfied-

a) Loan is utilised for construction or acquisition of house on or before 1-4-99.

b) Construction or acquisition of house should be complete in maximum of 3 years starting from the end of financial year in which capital is borrowed.

One more interesting point here is that section 24 tax benefit can be claimed even if the loan is raised from friends, family or relatives. If you have good inflow of income and then by doing tax planning early in life you can create different tax files in the family and can use them for your own tax benefits. This way you can save on the interest payment to bank, and also be able to claim tax benefit on your own income. Do note that this benefit can only be claim against the certificate issued by the loaner and he has to pay tax on the interest received against this loan. (Read : tax planning Tips)

Special tax incentive announced for people taking first home loan up to Rs 25 lakh in FY 2013-14 (Section 80EEE). In this scheme additional interest deduction of Rs 1 lakh is offered only for one year. If one could not exhaust the full Rs 1 lakh in 2013-14, then he can carry forward the balance to next year. Please note this is over and above the deduction of Rs 1.5 lakh and of course with many additional conditions.

Pre EMI interest

Pre EMI interest can be claimed in 5 equal installments starting from the financial year in which possession has been taken. For example you have paid pre EMI interest as under

Starting 2010-11 till 2014-15, you can claim PRE EMI interest deduction of Rs 1,80,000(20%) which comes to Rs 36000/-, along with the interest you pay in those years. But do note that total interest payment benefit should not exceed Rs 1.50 lakh in any financial year.

No discussion on housing loan tax benefits gets complete without mentioning about Housing loan on second house and joint housing loan. But I think that these topics deserve a separate post. So let this post be to the basics only and we’ll discuss about second and joint housing loan tax benefits in the next post.

Is joint account holding better than appointing nominees?

Manikaran Singal — Tue, 07 May 2013 18:33:56 +0000

From estate planning perspective, What is more important to have in accounts and investments – Joint holder or nominee? This question was asked by Mr Saksham through mail referring to my article on nomination. He specifically singled out point no. 2 at the end of my article where I wrote,

“If you want to further reduce the hassles of the family members, than rather appointing nominee make them joint account holder and keep the mode of operation as “Anyone or survivor” or “ Former or survivor”. Don’t forget to mention the same in your WILL too.”

He questioned that if he appoints a joint holder in all his investments than does this mean that there’s no need to appoint a nominee. It was a small and direct question but requires a detailed answer so I thought of writing a post on this.

Let’s understand about joint account holder in brief.

1.) Joint holding makes funds accessible to all joint account holders (depending on mode of operation opted), which is not possible in single holding. This helps when primary holder is going through bad health or gets temporary disabled due to accident or in any such situation when primary account holder is not available to sign or operate the account.

2.) Joint holding can help in keeping check on the usage of funds and inculcate some discipline in the personal finance. For e.g. when your children becomes major, and from tax planning perspective you want to gift some amount to him or you want to transfer the funds saved for his/her education into his account, but you are not sure on the financial management ability of him. In such case you can make yourself a joint holder in that account and keep the mode of operation as Joint, so till the time you gain confidence in the financial management ability of your children you can operate the account jointly with them. Read : Tax planning Tips

(Read : How nominations makes distribution of wealth easy)

3.) Just like the above mentioned case, joint mode of operation between spouses as joint account holders in bank accounts as well as in investments maintains a check on keeping up with the family budget as well as unnecessary withdrawal/redemption of investment for impulsive buying.

4.) Joint holding in some cases helps you saving taxes too. Like in case of joint home loans, both the borrowers can claim tax benefit in the ratio of their ownership. Even if there is rental income on the property or capital gains earned by selling off the same than again both income gets divided among the all owners.

Some misconceptions regarding joint account holders

Joint holders become the co- owners and thus can claim part of the deposit or investment. This is not true. In every financial investment joint holder is added just from operational point of view. Complete ownership, earnings and tax liability would be of the primary holder only.(with only exception of real estate).

Do I have to close my existing account and open a new joint account – No, not required. You can make your existing bank account a joint account. But yes, this may not be possible in the investments that you have made.

Can I make my salary account joint – Yes, your salary account is a normal saving account and you can add joint account holder in it.

Disadvantage of joint account holders:

- The main disadvantage of having joint account holder is that couples may not feel comfortable with the loss of financial independence that comes with a joint bank account, especially early in the marriage.

- Other disadvantage or you can say restriction in joint account holding is that no single holder can make changes in the basic details or structure of account on his own. For change in address, phone numbers, closing of account etc. both account holder signatures are required.

What is advisable joint holder or nominee?

Now lets come to the main question, which one is advantageous to have – Joint account holder or nominee? Can one avoid appointing nominee if there’s a joint account holder or if someone has nominee, is there any requirement of joint account holder? Well it is very much clear from the above mentioned detail that if the purpose is easy operation of account in the lifetime or even after death of primary holder, having a joint account holder is always advisable. But nomination also has its own importance. It’s like having an alternate to the joint holder. Do keep in mind that neither joint holding nor nomination creates a legal ownership towards funds lying in bank account or joint investments. The legal ownership goes to the person mentioned in the WILL or to the legal heirs as per indian succession act. So the onus lies on you to write a proper WILL and keep joint account holder and nomination both as per your distribution goal. Idea behind all this is that the wealth should be managed and distributed comfortably and without any ambiguity or confusion. You can make the ultimate beneficiary or the one to whom you want to bequeath the particular investment as a joint account holder and alternate beneficiary as nominee who will get the inheritance in case something happens to joint holder or if joint holder predeceases you. Also please note that appointing nominee has been made compulsory in many investment products.

What do you say? Do you think joint account holder has an edge over nomination?

Hybrid funds – For a balanced Asset Allocation

Manikaran Singal — Wed, 24 Apr 2013 08:25:05 +0000

Hybrid funds as the name suggests are those mutual funds which invest in more than one asset class and thus provide a balance between risk and return. We all know that Asset allocation and diversification are the most important elements of any investment planning; these hybrid funds provide us with best of both worlds. Diversification is the inbuilt feature of mutual fund but Hybrid funds has additional feature of asset allocation as it exposes us to different asset classes like equity, debt and in many funds with gold. Different hybrid funds has different investment objective and thus different asset allocation ratio. Thus one should invest in such funds only after understanding the importance and usage of the same in one’s portfolio.

There are some equity oriented hybrid funds, which are popularly called as balanced funds. These balanced funds have minimum equity exposure as 65% and rest goes into debt. The allocation of at least 65% in equity brings balanced funds at par with other equity funds as far as taxation is concerned. Other than balanced funds, there is category of debt oriented hybrid funds. In these funds the major portion of allocation goes towards debt instruments and rest goes into equity. Investor can select any fund, having different allocation as per his risk appetite, goal and taxation he’s falling into. Let’s have a look at some of these funds and how and where these can be used properly.

Equity oriented Hybrid funds – Balanced funds

As explained above the asset allocation in balanced funds comes up as 65-100% in equity and 0-35% in debt. The major advantage of these funds is that these are less volatile as compared to pure equity funds but enjoys the same tax treatment as of equity funds. Long term capital gain tax in balanced fund is NIL and short term capital gain tax is 15% of the gain.

These funds are best suited for a single goal and when investor wants equity like returns but with less risk. But do keep in mind that in balanced funds fund manager has option to increase the equity allocation to maximum of 100% so in those cases you may see increase in volatility of returns.

Best balanced funds

as per last 5 years performance are as below:

As I always say that if you are comparing funds only on the returns parameters, do look at annualized and annual return both. Below are the annual returns of the balanced funds selected above:

Comparing the annual returns along with annualized returns will help you in understanding the volatility in returns year on year. But this is only one parameter of selecting fund. Do check out the qualitative factors also. (Read : how to select best mutual funds in india)

Debt Oriented hybrid funds:

This is another category of hybrid funds with Asset allocation tilted towards debt side. As the taxation of the all funds having equity allocation below 65% is same, so you will find different variants and combination of debt oriented hybrid funds. Some are categorised as aggressive as they are high on equity allocation compared to others and some are categorized as conservative as they are high on debt allocation. Among these segments some funds are targeted at a particular goal like Monthly income Plans (MIPs) (Read : How MIPs should be used). Lets see how the aggressive and conservative segments have performed in last few years.

Best Hybrid funds – Aggressive Asset Allocation

as per last 5 years performance are as below:

Best Hybrid Funds – Conservative Asset Allocation

as per last 5 years performance are as below

You can very well see from the above tables that some of the funds which are under conservative allocation have performed better than hybrid funds with aggressive allocation. And in fact if you compare annualised returns with the balanced funds also, you will not find much difference in last 5 years returns patch. But does that mean conservative funds are better than aggressive ones. No. It’s all about asset allocation. Sometime one asset class performs and sometimes other. And this is how your investments should be allocated.

Now days you will also find some fancy names of Hybrid funds like “Capital protection oriented schemes” or “Dual advantage schemes” etc. In reality all these are just close ended versions of normal hybrid schemes. (Read: Should you invest in Capital protection funds)

Should you invest in Hybrid funds?

Hybrid funds can be a good starting point for a new investor. One can select among the balanced funds or debt oriented hybrid funds as per the understanding and risk appetite. Returns should not be the only criteria, better to understand the structure of product and if that structure suits your requirement or not. When one is targeted towards a single goal with a time horizon of 2 or more years and does not want to indulge in designing own asset allocation and rebalance it time and again, these hybrid funds in the form of balanced funds or others can be a good option. Do understand that higher the equity exposure in a portfolio, higher would be the volatility.

What do you think? Do you use hybrid funds as balanced or others for your investment? Are you comfortable with the Asset allocation these funds come up with? Do share your views?

Gold Investments – Buy, Hold or Sell?

Manikaran Singal — Wed, 17 Apr 2013 04:43:22 +0000

Last few days of steep fall in gold prices remind me of equity market fall of 2008. As at that point in time everyone was so bullish on equity markets with the reason that India has a huge growth potential , it’s a booming emerging economy and what not. But that was actually true, so what went wrong? Happenings in international market, right? Same was the version of people who justified their heavy investment in gold by saying that this is the safest asset class, hedge against inflation and moreover when economies are in doldrums and stock markets don’t perform than gold is the only investment that pays you well, which is again true. So what went wrong here? Happenings in international market again. The problem with a normal investor is that they consider (if at all) only local factors which influences any investment asset and believe that they have done required research. Indian economy is in a very bad phase, our fiscal deficit and current account deficit has entered in unacceptable territory, inflation is giving no clear sign of improvement… than why the gold has fallen.

See in a country like India which is so closely connected to the world economy, you cannot escape from the impacts coming from outer world. Unlike equity markets which get directly affected by domestic factors as well international ones, gold is purely an international commodity and priced in Dollar terms. It has more linkage to international factors than the domestic ones. In India , the gold rates are no longer driven by demand. The international market is a bigger driving force for the gold prices.

Gold performance internationally in last few years.

Gold Prices in Dollar Terms (Last 3 years)

The above chart shows the gold prices movement in dollar terms. This clearly shows that gold has peaked out somewhere in Aug 2011 when it touched $1926 per ounce, since then we did not see the same price again.

Gold Price in Indian Rupee data by YCharts

On the other side if we look at the gold prices in India, it has peaked out somewhere in November 2012 at Rs 34000/- per 10 gram.

So when internationally gold was falling, what has led gold prices to rise in India? The answer is Dollar. Yes, Dollar prices lead Indian gold prices.

Indian Rupee Vs U S Dollars ( Last 3 years)

Source : http://data.cnbc.com

The above chart shows that in Aug 2011, when internationally Gold was at its peak, INR was at 45.74 vs Dollar and after that gold started sliding but INR vs Dollar starts rising and this is why we in India did not experience the fall earlier.

This shuns the old notion that Diwali, Marriage season or other festivals effect the demand of gold and thus gold prices increase. These factors may impact but the major effect comes from dollar movements. And dollar gets impacted by lot many factors which are out of anyone’s control and prediction.

Reasons behind recent fall in gold prices

When the reasons of rise are international, so will be the reasons of fall. Following are some of the reasons which have contributed in this fall in gold prices.

Cyprus is planning to sell its gold reserves to help finance its bailout. It is also expected that other indebted countries like Italy, Spain, Portugal may follow suit.
U S economy is showing some improvement which has made investors believe that the worst might have been over.
Interest rates are expected to go up in US. As many investor hold gold as an alternate to US dollars so when there’s expectation of rise in interest rates, traders might sell the gold and invest in US treasury bonds.
Economic conditions are slowly improving which is resulting in shifting of investors’ interest from gold to equity markets.

Besides the above, there are some domestic factors also which may lead to fall in gold demand which may impact gold prices further and the major one is moderating of inflation. Moderating domestic inflation will lead to softening of interest rates by RBI, which will result in improvement of corporate activity and thus boosts equity market.

Improvements in equity market will in turn result in shifting of investment interest from gold to equity. Moreover less demand of gold among investors will lead to reduction in import bills and improvement in current account deficit which in turn improves country’s economic condition and will give impetus to overall equity market investments.

Is there any Possibility for gold prices to rise?

I know the investor /speculator inside you is looking for some answer onto the probability of rise in gold prices. Yes, there are some situations which may lead gold prices to rise again. Like Possible inflationary scenario in US ,central bankers worldwide are adopting strategy to build optimal gold reserves to diversify their holdings in other forms other than currencies such as dollar, deteriorating economic conditions etc. Actually gold has no fundamentals of its own and hence it has to depend on global scenario to push prices up or pull it down.

What should you do with your Gold Investments?

Well, first of all people has to understand if they are collector, investor or just a spectator. We Indians are so much obsessed with Real assets like gold that we start as investors but end as collector. By collector I mean we just accumulate and never sell. Infact we treat gold as an auspicious metal. We also have some specific festivals like “Dhanteeras”, “akshay tritya” which are meant for gold buyers and provide some opportune reason to buy more gold. For many people gold is an option to park their black money in. For all such kind of people, fall or rise in gold just doesn’t matter.

It only affect those who acted as smart investors, who without following the basic rules and under the lure of making fast buck has started hoarding gold. Now, as happened in equity market in 2008 the current steep fall in gold prices pressed the panic button. On the other side this fall has also attracted those investors who have started feeling that they have missed the gold bus earlier, and now the time has again come to ride the tide. I have few advises for the new and existing investors in gold:

a) If you have been investing or want to invest in gold with a clear goal in mind i.e to accumulate for children marriage etc. you should start / continue with your gold investments.

b) If buying gold is a part of your well defined Asset allocation strategy for long term investment than don’t stop, rather time has come to do some rebalancing.

c) If you are of the view that gold is a good hedge against inflation than also you may continue with your investment.

But for those who are a tactical investor having no goal in mind and wanted to make fast buck out of gold investments, I have no advice to give as nobody knows how much is good enough for them and where the gold will head from here.

I am not an analyst thus could not forecast the future of gold. I also don’t believe that anyone can ever predict the future of any asset class. For investors it is always to be wise in following a structured approach and allocate resources in different asset classes to achieve their long/short term goals. Gold investment should be part of those investment allocation.Whether to come out or increases your gold investments totally depend on the purpose or goal.

What would be your strategy on Gold investments now? Do you think gold is a good investment now or you agree with me on following a structured approach? Do share your views.

4 factors affecting success of financial planning

Manikaran Singal — Wed, 10 Apr 2013 18:49:06 +0000

Financial Planning always fails. Financial planning never pays. Financial planning is a useless activity….and so many statements like this usually comes from some of the stressed lot whenever I address a group of persons. They have their own views like how can you plan for a future which is uncertain, all insurance companies are “chor”, Equity investment is gambling, Real estate and gold are the best and safe investments, all advisers are there to missell etc. When I go deeper and discuss their issues with them I always found that many of these were going through some sort of financial stress or have been through a bad financial experience which is because of their own financial mismanagement. In reality a proper personal financial planning addresses these issues only and devise a path to achieve financial goals. There are many factors that influence one’s personal financial planning but out of those I have figured out the 4 most important personal factors which can make or break any financial plan.

1. Spending Behavior

Your complete financial life is linked to your spending behavior This spending factor designs your financial future. Your goal targets and achievements all are linked to your spending pattern. High spending directly affects your lifestyle and thus to your retirement goal and insurance requirement but on the other side it also leads to less investible surplus to allocate towards the same goals. This in turn also affects the achievement of other goals too. There is very common saying that “An inability to control spending is the root cause of most personal finance disasters.” And this saying does not apply to personal finance only. If you look at our country’s financial condition closely, you will find that one of the reasons of our country’s slow economic growth is high fiscal deficit which is the result of high subsidies and expenses in unproductive areas. This behavior of not being watchful on expenses is so much into us that in every Union budget speech we are only concerned on the Tax Sops that government has offered, but don’t look at the governments expenditure pattern which we fund out of our tax payments.

When your spending goes out of control, you lose your credibility among lenders, you could not continue with your long term investments and exit much early, you always feel stressed at work and start finding your income to be very less, Increase using credit cards but could not repay in full so start rolling over the balance month on month. Then on advise of some “ me too financial planner” or watching a Finance show on TV you figure out that Credit cards are costly to roll over, let’s take personal loan and clear off all dues…..and slowly starts entering in a debt trap. But the ultimate cause of everything is your “Spending”

If you are serious towards your financial future, rather than blaming your income for everything which is not even in your control, watch out your spending. Follow a budget, define your needs and wants, control impulse buying, and stay focused on your goals. I am sure you will get answers to most of your personal finance problems here only. But if you can’t control your spending, any financial planning will fail.

ICICI Bank i wish – a flexible recurring deposit

Manikaran Singal — Thu, 04 Apr 2013 15:14:12 +0000

ICICI bank I wish is a very interesting recurring deposit product of ICICI bank available for its saving bank account customers who use internet banking. The interesting part of this product is you can create and manage your short and long term goals (in terms of money you want to accumulate) with these savings and also can share it with your friends and family on Facebook. By sharing it with others you can also ask for their contribution in this deposit to help you achieve your goal or fulfil your wish faster.

The uniqueness of this recurring deposit product is in the feature of flexibility. Unlike regular recurring deposits , in this flexible product there is no compulsion on the part of depositor to make a month on month contribution into it. You can also make multiple deposits in a particular month. This product can only be invested through internet banking. In this article I will be covering the basic details of “icici bank i wish” and try to figure out the pros and cons of this.

Basic Features of ICICI bank I Wish

This is a recurring deposit product with a feature of flexibility in deposit. To bring excitement in your savings, it has option of Creating and Naming a goal. For e.g. you may want to buy a camera costing Rs 30000/- after a year. You can name your goal as “Camera”, tenure as 12 months and after adjusting to the interest rates, portal will calculate how much you need to save per month towards that goal. The flexible feature of ICICI I wish recurring deposit allows you either to put a standing instruction for regular deposits or transfer the funds as and when you have towards this goal. You may also share your Goal/Wish on your Facebook account and ask for contribution into this to your friends and family. Other features are as below:

Should you invest in ICICI Bank I Wish?

Well, structure wise it’s definitely a unique product. It is a fact that when you map your savings towards a goal, you become very much disciplined in your approach. And nothing can match the excitement of achieving the goal. The flexible aspect of this recurring deposit is also very attractive. But the major drawback of ICICI I wish is that this is a recurring deposit product which by its basic nature is taxable. Whatever you earn out of this saving will be added in your income and taxed as per your slab. I mean if the intention is to save for a short term goal, why not to use alternate options like liquid/short term mutual funds. For short term goals these mutual funds may not be comparable on taxation aspect (due to changes announced in budet 2013) but these funds will definitely provide you with better returns than recurring deposits. (read: bank deposits vs debt funds)

Secondly, the penalty charges on pre closure of the account are also a negative factor. This issue can also be answered by investing in liquid/ultra short term mutual funds as there are no penal charges of withdrawing the amount.

ICICI bank I wish can be a perfect product to inculcate discipline of savings among your Kids especially major kids (Above 18 years of age). They can be encouraged to save part of the pocket money for their goals (of going on vacation or buying costly gadgets) from their own pocket money and once that benchmark is achieved you can supplement that savings with your contribution. This way you can teach them the advantage of savings by allocating it to a particular goal and also it will not burden you with more of tax payments. As whatever earnings made on the savings will be treated as your Child income only, also the gift made by you to him/her will not attract any gift tax. (Read : tax planning tips)

What are your views on icici bank I wish recurring deposit? Does the flexible feature attract you?

How much health insurance cover should you buy?

Manikaran Singal — Wed, 27 Mar 2013 15:42:13 +0000

How much health insurance cover should I buy? What is the adequate health insurance cover one should have? Should I go with individual policy or family floater? Do I need to top it up with personal accident policy and critical illness plan also or just buying higher sum assured in mediclaim would be enough. All this and many more questions naturally come up in mind of person who gets convinced to buy health insurance policy. I used the word convinced because there are many people who still believe that buying health insurance is waste of money or are dependent on their employer’s provided cover. I will try to answer all the above mentioned queries through different posts but today I will be covering the first one i.e. “How much health Insurance should anyone have”?

Actually there’s no thumb rule which says how much health insurance coverage is good enough but yes there are some considerations which will help you in selecting adequate coverage. The coverage that you buy should be enough to ensure that if you (or a covered family member) get sick or injured you are not footing the entire medical bill on your own. Consider the following parameters before selecting medical cover.

1. City you live in:

You will agree with me that the cost of treatment in metro cities is around 25-30% higher than same treatment cost in non-metro cities. So depending on the city you live in you may choose your health insurance cover. But do consider the situation when patients get referred to metro cities as small cities does not have quality medical facilities. Out of my personal experience, I feel that for a young (Under 30) healthy person Rs 3 lakh cover would be bare minimum in non-metro and Rs 5 lakh cover in metro. And here I am talking of Individual plans and not family floater.

2. Your age bracket:

If you see the rate card of health insurance policies, you will find that different age groups have different premium rates. This is because the probability of falling ill is less in young age and same increases with age. So should be your strategy. You should start with a base cover in the young age and keep on increasing the cover as and when your premium bracket increases. Though if you don’t make claim in the first 5 years, then automatically your cover will get increased by 50% through no claim bonuses, so you may discount this increases in your calculation and increase your health insurance coverage accordingly. It doesn’t make sense for a son (30) and father (55) to have a same health insurance cover.

3. Family and Personal health history:

If there’s a family history of any illness than you should also prepare yourself for the same by getting enough health insurance and increasing it time by time. This is because once you also get diagnose with the same illness than it would be difficult for you to increase your existing coverage or buy a separate cover. This is one of the reason we advise corporate employees to have separate cover along with the employer provided cover. Keep getting your annual health check done and also keep watch on your health insurance cover. (Read : Corporate employees- don’t ignore health insurance)

4. Lifestyle:

Your lifestyle also guides your quantum of health insurance coverage. The kind of lifestyle we live automatically make us prone to many diseases. Stress has become a part of life, working hours don’t let anyone to exercise or have healthy food. Some use innovative excuses for their sedentary lifestyle. Many are habitual to smoking and boozing. No point for guessing the state of health after few years. Even if there’s no family history, still we are prone to many lifestyle diseases like diabetes, hypertension, high cholesterol etc. Of course you can delay or avoid all these by improving your lifestyle, but also be ready for the worst…keep on increasing your health insurance cover.

5. Affordability:

Many people avoid high health insurance cover just by giving excuse that premium is high and not affordable. I don’t agree with that reason. I always believe that affordability is a subjective term. When you have control on your cash flows, than you can very well afford the health insurance premium amount. Having 2 pizza parties every month costs around Rs 1500/- which means Rs 18000/- a year, Going out for movie every week with family in multiplex easily cost Rs 700-Rs1000 per week which means Rs 35000 – Rs 48000 a year, those who smoke and booze can calculate how much they spend on all these …. These are only few examples…you can figure out many such areas if you track your cash flows closely. And then you cannot say that health insurance premium is unaffordable. I am not saying that you should stop enjoying, but have a considerate view on priorities. Take a holistic view of your finances and have maximum possible health insurance coverage.

There’s another school of thought which says that your health insurance cover should at least be equal to your annual income. The main purpose of buying health insurance is to lessen the burden of paying complete medical bill in case of any eventuality. I believe that the way medical and education costs are increasing, going forward life is going to be very difficult. Having health insurance is good but many times health insurance may not be enough, so one should also accumulate decent medical corpus too. Be ready for the emergencies. (Read : managing financial emergencies)

What do you think how much health insurance cover one should have? And do you agree with me on the points stated above? Do share your views.

Public provident fund (PPF) – Basics you must know

Manikaran Singal — Fri, 22 Mar 2013 09:34:49 +0000

This post carries some highlights on the basic features of PPF (Public provident fund). Though I have already covered details on PPF in my earlier article, but still looking from the comments section I found that many things are still not clear among the investors. (Read : All you wanted to know about PPF). So the idea of writing this post is to stress on the important points which you want to understand. But if you want to understand PPF in detail, you have to visit the previous article only.

PPF is among one of the best investment options in India. Where it offers tax free interest, it is also eligible for saving u/s 80C of Income tax act. It is a very important instrument to be used in an asset allocation for long term investment.

Some important basic features of Public provident fund (PPF):

1. The maximum limit on deposit amount in PPF is Rs 1 lakh per financial year. This limit is on total deposit which includes your personal account and your minor child’s account in which you are guardian.

2. You cannot open more than one PPF account in your name. But you may open different accounts in the name of your family members. Like in the name of your spouse and your children (Minor/Major).

3. You may also deposit Rs 1 lakh in each of your family members’ PPF account. But do remember the point no. 1 mentioned above. Tax saving u/s 80C can be claimed only on the deposit of Rs 1 lakh. If your spouse or major child has some taxable income than you may consider gifting them some money to deposit in their PPF accounts for tax saving or otherwise to earn tax free income. But be sure on the clubbing provisions. (Read : Tax planning Tips).

Also do note that if you open 2 accounts for self (one in bank and other in Post office) or you deposit Rs 1 lakh in all accounts (yours and your minor kid’s) and get caught than you will be refunded with the extra amount deposited without any interest.

4. Public provident fund account can be extended for any number of times after the expiry of its tenure of 15 years. The extensions will be for the block of 5 years.

5. Interest rate in PPF will be announced every year in April. Unlike earlier, now one cannot predict the future value of the deposits made in PPF every year. Though PPF should be the integral part of one’s debt portfolio due to its tax free interest feature, but still from investment planning and asset allocation perspective one should rebalance the allocation every year and understand the other debt investment options along with it. (Read : Debt Mutual funds)

6. Nomination facility is available in PPF and one should use this facility judiciously. Since if nomination is not mentioned in the PPF account, your heirs may have to face many hassles in claiming the amount above Rs 1 lakh lying in PPF account. (Read : Importance of Nomination).

7. PPF has 15 years lockin but you can get a loan and also opt for premature withdrawal after a certain period of time. (Read : All about PPF)

Public provident fund or PPF is a very important and must have instrument in one’s investment portfolio. But one has to have clarity on its provisions and basic rules so that one can make the optimum use of the instrument to achieve its future life and financial goals.

Hope now, you are clear on basic features of Public provident fund. If you have any query on PPF, feel free to ask in the comments section.

Monthly Income Plans (MIPs) Works best with Systematic Withdrawal

Manikaran Singal — Sun, 17 Mar 2013 14:00:28 +0000

Monthly Income Plans (MIPs) are meant to provide monthly income to the investor through regular dividends but you can also create a stream of income through Systematic withdrawal plan (SWPs). Dividends results in reduction of NAV and are subjected to Dividend distribution tax on the other side SWP leads to reduction of unit capital of investment as withdrawal happens from the existing units only. Now the question is which works better in Monthly Income Plans – Dividend payout or SWP. Some back testing results that Systematic withdrawals give better results than dividend payout.

Actually few days back one of the readers Ashish asked me that now when the dividend distribution tax in debt mutual funds is going to increase, so would it be wise to stay with the dividend payout option in Monthly Income plan or is there any other strategy to manage the situation better. So just to answer him, I did this calculation which I am sharing with you now.

Before going ahead, let me explain the product i.e Monthly Income Plan (MIP) and Facility/ option i.e Systematic withdrawal plan (SWP) in short.

What is a Monthly Income Plan?

Monthly Income Plan popularly known as MIP is a debt oriented hybrid mutual fund product. In MIP Equity is allocated in between 5% -25%, and the balance would be the debt allocation. The Investment objective of Monthly Income plans read as , “ To generate regular returns through investment primarily in Debt and Money Market Instruments , also to generate long-term capital appreciation by investing a portion of scheme’s assets in equity and equity related instruments”. Though the objective is to provide regular returns, but the regularity and quantum is not assured. Advisors/Planners do advise on MIP to supplement the goal of regular returns and also to provide some tax efficiency in client’s profile. MIPs also get advised in growth option if client portfolio and risk profile demands.

What is Systematic Withdrawal Plan?

Systematic withdrawal plan also known as SWP is a facility that allows an investor to withdraw money from existing mutual fund investments at specified intervals. SWP facility is used to create a regular flow of income from investments. You can do a Fixed SWP where you specify the amount you wish to withdraw or Appreciation SWP where you can withdraw the appreciated amount every month or quarter.

How Systematic withdrawal is beneficial in Monthly Income Plans?

Now you have understood that to generate regular income (not assured) from MIPs, you can either opt for Dividend payout option, which are irregular and also not certain or you may go with MIP growth option and opt for SWP. In the former case you have to bear with the dividend distribution tax and in latter you withdraw units out of your capital and appreciation (if any). Question is which would be better option.

I did some back testing on a Monthly income plan of one popular AMC to figure out the answer.

Below are the details.

Investment amount : Rs 975000/-

Date of Investment : 1 Jan 2008

Date of redemption: 1 Jan 2013

Product and Units alloted :

Reliance MIP (Monthly dividend payout): Units allotted 85901.57 (@ NAV – 11.3502)

Reliance MIP Growth : Units allotted 64732.01 (@ NAV – 15.0621)

SWP rate : @ 8% p.a payable monthly

Dividend dates/rates : As per actual

The above calculation clearly shows that in the last 5 years, Systematic withdrawal plan @8% p.a payable monthly would have been a better option than Monthly dividend pay out . The reason might be the dividend distribution tax, and if actually that was the reason than the returns will go down in future as the DDT has been increased from next financial year. Systematic withdrawal Plan in MIP has also shown better returns than the Post Office monthly income scheme where the returns are fixed but are 100% taxable. On the other side debt mutual funds has always been a tax efficient investment option. (Read – Bank deposits Vs debt funds)

How SWP was beneficial?

- SWP option has returned more as is visible through XIRR.

- SWP has reduced the taxation, as unlike Dividend option where DDT gets deducted, this leads to some Short/Long term capital gain/loss. Though it is not shown in the calculation above, but I am sure that it would surely be less than the DDT. Hope you agree with me.

- SWP has resulted in continuous and fixed cash flow stream and thus adequately supported the regular income criteria as required by Client.

Conclusion:

Well back testing clearly shows that Systematic withdrawal plan works better for Monthly Income plans to get regular income. But as per the standard disclaimer that “Mutual funds are subjected to market risk….”,future can’t be predicted. Moreover this calculation has been done on one of the top performing fund of the category, this may not result the same in other funds too. Overall, the bottom line is that looking at the increase in dividend distribution tax in debt schemes, systematic withdrawal plans should also be considered when the goal is to get monthly income in MIP funds.

What are your views? Do you agree with me in considering SWP in MIP?

Nominations make wealth distribution easy

Manikaran Singal — Tue, 05 Mar 2013 08:14:19 +0000

Nomination is not just another option you find in any financial product form, it carries huge importance. If used in the right way it may help in proper distribution of wealth among your legal heirs. Generally Financial Planning deals with 3 aspects – Wealth accumulation, Wealth Preservation and Wealth distribution. We Indians are more concerned on accumulation and preservation part and ignore the distribution aspect. But without making arrangements of wealth distribution no financial planning is complete. I mean, what’s the use of buying insurances, making investments etc. if we can’t ensure that right money will be transferred to right person and that too in comfortable manner . Nomination facility along with proper WILL plays major role on the wealth distribution front. Let’s see how

What is nomination? Or who’s a nominee?

Nomination is a facility where the account holder or investor appoints a person who can claim the proceeds of deposits, investments, sum assured etc. post demise of the account holder/investor/insured. Where it makes the claim process easy for the nominee, financial institution’s liability also gets duly discharged after making payment to the nominee.

Sounds simple? That’s why you don’t pay much heed on appointing a nominee with a proper thought. Now let me give you a shock here -

Nominee is not the legal owner of the proceeds. He’ll just act as a trustee and custodian of those assets/deposits and has to transfer all to the legal owner/heir. In other words, nominee just gets a right to receive and not right to own.

What if there’s no nomination?

Make your family members aware about the court procedures. As if there’s no nomination mentioned in the investments than they have to arrange for death certificate, probate, succession certificate, affidavits, no objection certificates …and so many such documents as demanded by the bank, mutual fund houses etc. So rather than pushing your family members or legal heirs in such sort of legal hassles, I think giving nomination is easy.

How WILL is related to nomination?

Nomination is just the right to receive the funds after the demise of investor or account holder, but it does not make the nominee the owner of the funds. Owner will be decided by the WILL written by investor or if WILL is not there than the amount /proceeds will be distributed as per the Succession laws applicable on the investor (Hindu Succession act’1956, Indian succession act’1954, Mohmmedans law) (Read : role of WILL). Thus even if you have appointed a nominee in your account, he’s not authorised to use it unless he’s one of the legal heir as per the WILL or succession laws. Lets understand this by example.

Mr H has bought one life insurance policy before his marriage for a Sum assured of Rs 1 crore. He’s appointed his mother as a nominee in the policy. After his demise, though the policy proceeds will be paid completely to his mother, but his mother will not be the complete owner of the insurance proceeds. The proceeds will be divided in the ratio as mentioned in the WILL or if there’s no WILL then as per succession laws.

Now, lets assume that mother predecease Mr H. Can you figure out the hardships that the family would have to face to claim the insurance proceeds?

Or if the nominee was the brother and after Mr H’s demise, he refuses to part with the insurance proceeds, which calls for long court cases.

I believe no one of us wants to put our family in such situation.

That doesn’t mean that appointing a nominee is useless activity. The solution is writing a proper WILL, along with nominating the right persons in your financial instruments.

How can I ensure proper wealth distribution through nomination and WILL?

By now you must have understood the importance of nominations and writing a WILL. Nomination facilitates the comfortable receipt of funds, and WILL makes the person legal owner of those funds .The pre requisite of an Estate planning is to ensure that assets should be distributed to the right person in a comfortable manner. So to make smooth the whole process and to ensure the proper wealth distribution, your nomination should support your WILL. Just imagine how comfortable it would be for your wife, if she’s a nominee in your life insurance policy and also has mention of the same in your WILL. If your WILL says that (Read : role of WILL)

“Financial Assets will be distributed as per the nominations mentioned in those specific investments and those nominees will own those assets”

than this leaves no scope of dispute in future. As it leads to comfortable distribution as well as to the right person intended.

Some other points to keep in mind while chosing nominees

If you’ve appointed any NRI as a nominee in your investments or bank accounts, than make sure that he has all necessary documents like Pan card, address proof etc. to fulfil the KYC requirements.
If you want to further reduce the hassles of the family members, than rather appointing nominee make them joint account holder and keep the mode of operation as “Anyone or survivor” or “ Former or survivor”. Don’t forget to mention the same in your WILL too.
If you want to secure the benefit of your spouse and kids in your life insurance policy then rather making them nominee, buy the policy under “Married women property’s act”.
You may appoint multiple nominees, but be sure to mention the same in your WILL, and distribute assets in the same ratio as per nomination.
If even after writing a proper WILL and appointing nominees you still have doubts on you wealth distribution after your demise than Private trust can be an effective tool for your wealth distribution goal. (Read : about Private trust)

Everything you do in your financial life should be directed towards a particular goal. Like wealth accumulation, wealth distribution is also an important goal. Your nominee should be appointed in such a way that it helps in easing out the process rather than complicating the achievement of goal of proper wealth distribution.