Investment / Exemption Options To Save Tax Under Section 80C

As the financial year ending is approaching fast, let’s take a look at the different investment / exemption options to save tax under section 80C. One can use options like Fixed Deposit, PPF, National Savings certificates (NSC), Tuition Fees, Home Loan Principle Component, Life insurance/ULIP, ELSS to save tax under section 80C.

Common Man: Is he better off than the poor?

Money doesn’t grow on trees. True, money doesn’t grow on trees. That’s what we were taught in our childhood. And that’s what even our Honorable PM reiterated in his address to the nation after the Government’s decision to allow FDI in Indian retail. And who better than the common man can understand this. In 65 years of independence, if there is someone who has undergone a massive transformation, it is undoubtedly the “Aam Aadmi”, the “Mango Man”. Much more literate yet powerless, larger in number yet politically insignificant, a thousand times richer yet vulnerable to price rise and inflation.

Since policy level debates still keep raging about an absolute definition of poor, it sometimes becomes difficult to really separate them from the middle class. However, is the middle class common man really better off than the perceived poor? Every month his earnings get wiped out in a wave of EMIs, credit card bills, groceries, utility bills, fuel expenses and house rent. It’s hardly a matter of 7 days when he could see his salary getting vanished in the monthly Tsunami of expenses – painfully reading through the SMSs after any ECS from his bank account. And then spend the rest of the month wondering what actually a salary denotes. Just like the poor, even the common man lives in a more or less hand-to-mouth situation. Except that poor live in mud houses, we stay in brick-and-mortar apartments; poor doesn’t have an LCD, AC, refrigerator, microwave, home theater – we may have them all. But are we still better off ?Poor does not have any saving. So does most of the middle class. They do not have any constructive old age planning. So does a common man.

But before moving further, let’s hold on – if we feel that poor need financial literacy; if we feel that they need to be taught how to save money; if we feel that they need to be taught how to manage their finances then it’s a complete misconception. The poor are much smarter than the rich or even the middle class. For a villager living in abject poverty, every paisa is like a father – mother. The calculation is rather a way of his life. If he doesn’t do so, he cannot survive. Although the middle class has reasonable access to all kinds of financial instruments, we still keep wondering about what and how about savings whereas a poor villager may not even have a simple Bank account.

Common Man

So where does the common man stand. He is neither poor nor rich. He earns more than a poor, but still struggles to meet his ends. He may understand his environment much better but still remains in a bigger dilemma than the poor.

A simple example – I am sure not many of us would have actually considered knowing how much insurance coverage we have and how much is needed. In most likelihood, we assume insurance to be an investment. Whereas it’s essentially a risk cover against any eventuality of death. But unfortunately we take death for granted and only think in terms of investment rather than incurring a cost of securing our families in case of our death. An eventuality we are sure to occur but still keep ignoring.

Similarly, not many of us would actually bother to check our credit history as available with credit bureaus. In fact, we may not even be aware of the existence of credit bureaus although the first credit bureau was established in India 12 years back. Even I bothered to check my credit report only after applying for a home loan and learnt about a credit card default on my name for a fictitious amount of just Rs. 100 on which the credit card company kept on charging penal interest for 12 long months while I was assuming that I have cleared all my dues.

When it comes to savings and investment, no discussion is complete without any indication about real estate which is perhaps perceived to be a safe, guaranteed and lucrative medium of savings and money appreciation. But the satanic habitation of black money and builder-mafia nexus makes it a highly diabolical investment avenue. And with the corruption ridden system in our country, playing around with the relevant laws is almost on the fingertips of politicians, authorities, bureaucrats and of course the builders. In the absence of a real estate regulator, this becomes a pure arm twisting game. The recent real estate crisis in Noida Extension (UP) stands testimony to this. Triggered by a revolt by the farmers in the area against the authorities for rationalization of land acquisition compensation, the Allahabad High Court scrapped few land acquisition deals putting at stake all real estate projects in the region as also crores of money invested by more than 1 lakh buyers. In the midst of a fierce battle between farmers, authorities and builders, it is the innocent buyers who are paying the actual price – delay in property possession, unwarranted price escalations, the abrupt cancellation of bookings, unjustified penal charges, interest on bank loans even when construction is on hold and above all – harassment in the hands of the builders – the buyers are having enough on their platter to have a series of sleepless nights. Added to this, housing finance also remains to be loosely regulated business in India. And everyone seems to be taking undue advantage of all these loopholes duly aided by the helplessness of the buyers – the common man again.

So, somewhere the “Aam Aadmi” remains negligent, somewhere ignorant and somewhere helpless. Therefore, the million dollar question that keeps raging in my mind – “Is the common man really better off than the poor?”

Why SBI home loan is still the cheapest option?

As promised in our last article, we will take a look at some more attractive options offered by the banks for home loan borrowers. Today’s article will take a qualitative and quantitative look at the current offers from SBI (State Bank of India), ICICI bank & Axis bank.

State Bank of India’s home loan offering is a plain vanilla scheme with slightly lower interest rate than other banks whereas ICICI bank came up with an innovative plan of 1% cash back on every EMI you pay. Cash back will be deposited in the borrower’s ICICI bank account or can be adjusted against the outstanding loan amount. Axis bank started a new scheme called as ‘Happy Ending Home Loan’. In this offer a home loan borrower will get 12 EMIs waived off if his loan account is active for minimum 15 years.

Let’s take a look at the following illustration which proves that borrowing from SBI is still the cheapest option.

Home Loan Comparison – SBI, ICICI, AXIS
State Bank of India ICICI Bank Axis Bank
Loan Amount 40,00,000 40,00,000 40,00,000
Interest Rate (%) * 10.15 10.5 11
Tenure (months) 240 240 240
EMI 38,999 39,935 41,288
Interest Payment 5,359,816 5,584,447 5,909,009
Total Payment (Principal + Interest) 9,359,816 9,584,447 9,909,009
Discount 0 95,844 4,95,450
Actual repayment 9,359,816 9,488,602 9,413,558
Difference in actual repayment compared to SBI 0 128,787 53,742

* Please note that Interest Rate mentioned in the above table are as per latest values known from our sources for the illustrated loan amount. You should call individual banks to know the interest rate offering for your loan case.

ICICI Bank’s Cash Back Offer

Cash back will be credited to your account only after completing 3 years, thereafter every 1 year till the closing of home loan. This offer also does not include the pre-EMI you’ve paid. Cash back will be credited only to ICICI bank account. This offer does not apply for the prepayment made towards the loan.

Axis Bank’s EMI Waiver Offer

One can get benefit of EMI waiver only if minimum tenure at the time of disbursement is 20 years. Also if you are making part payments in-between, tenure should not fall below 15 years otherwise you will not be eligible for this benefit. Most of the people close their home loan in 8-10 years. So one need to make a decision whether you really want to keep your home loan for such a long time to get this benefit.

Disclaimer: I do not intend to recommend any particular product based on this review. The above analysis is  to enable the readers take into account all the aspects of individual products and make a more informed decision.

Home Loan – Processing Fee vs Interest Rate

During this festival season, many of the banks are coming up with lucrative home loan offers to attract home loan borrowers. Offerings include options like a lower interest rate, processing fee waiver, cash back or EMI waiver options. Remember that a home loan is a long term commitment. So before finalizing any home loan scheme, pay attentions to some basic facts. In this article we will take a look at the use case to help you choose between zero processing fees and lower interest rate. In the next article we will take a look at other options like cash back and EMI waiver.

The processing fee is a one time expenditure. It is used by bank to complete loan processing formalities and it is non refundable. Generally it is in the range of 0.25% to 0.50% of the loan amount. Few banks are even offering zero processing fee to lure customers. Given the option between lower interest rate and zero processing fee, it is advisable to go for lower interest rate in most cases. Let’s take a look at following illustration.

Bank A offering a 10.5% interest rate with 0% processing fee and Bank B is offering a 10.4% interest rate with 0.5% processing fee.

 

Home Loan – Processing Fee vs Interest Rate
Bank A Bank B
Loan Amount
40,00,000 40,00,000
Interest Rate (%)
10.5
10.4
Processing Fees (%)
0
0.5
Tenure (months)
240 240
EMI
39,935
39,667
Interest Payment
55,84,446
55,20,047
Total Payment
95,84,446
95,40,047
Saving in total Payment
44,399

 

Even though Bank A is offering 0% processing fee, in long term taking a loan from Bank B is beneficial due to slightly lower interest rate.

So if you are in a dilemma about choosing between lower processing fee and lower interest rate, reuse our Loan Transfer Calculator as shown below. The illustration below shows how to get the savings amount for the values shown in the above table. Know your savings by entering values on the same lines.

Loan Transfer Calculator
Loan Transfer Calculator

Debt Fund- Dividend vs Growth

In my last article, we saw how debt fund can be used as an alternative to bank fixed deposit. Now lets take a look at what options are available while investing in debt funds. For investment in debt funds, one can choose between dividend payout and growth option.

In dividend payout option, any profit made by the fund is given back to the investor in the form of dividend e.g. If the face value of the fund is 10, NAV is 50 and it declares the dividend of 40%, then the investor will get a dividend of Rs 4. However NAV of the fund will drop down accordingly. Generally dividends are declared periodically but these are not guaranteed.

In growth option, fund house does not declare any dividend instead they reinvest any profit made.

With dividend payout option, liquidity (getting cash) is possible in two forms, selling units and periodic dividend. In this option you do not have to pay additional income tax on the dividend as DDT (Dividend Distribution Tax) is already deducted by the fund house at the time of declaring dividend.

However in growth option, one can get cash only after selling units of the fund. In this option, one need to pay income tax on the profit earned although for long term investment in growth option, one can get the benefit of indexation.

So if you need money periodically, you can choose the dividend payout option else go for growth option as it is a better way of wealth creation.