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?”

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.

Investment Without Insurance = ZERO

Investment and Insurance go hand in hand. Many of us try to explore different options of investment but give very little importance to insurance. However investment planning without giving due consideration to insurance is a zero sum game. Let’s take a look at this real life example.

Amol and Vikas are two friends earning a salary of around Rs. 60,000 per month. Both are investment savvy and invest regularly in Mutual Funds through SIP (Systematic Investment Planning). They have decided to keep aside Rs. 30,000 per month to make their future secure. They selected an excellent mutual fund and decided to invest regularly.

Vikas started investing the entire amount in the mutual fund where as Amol decided to invest a part of the amount in the same mutual fund and the remaining amount in a term insurance and a medical insurance plan. After 10 years Vikas’s investment grew to 70 lacs with an annualised return of 12%. Amol also earned a decent return but it was little bit lesser than Vikas since a small portion of his money went into insurance plans.

One day uncertainty struck Vikas. He suffered a massive heart attack and was hospitalized. His family had to spend 10 lacs on his critical illness. But all these efforts were futile…… Vikas was no more!

Apart from the shocking personal loss, Vikas’s family now had to face his liabilities too (home loan, car loan, etc..) They had to liquidate all his investments in order to repay the loan amount. Even though he had made a proper investment, it turned out to be worthless! Most of his savings were spent on his hospital bills and towards repayment of the loans.

If only he would have opted for the medical insurance, all medical expenses would have been taken care off by the medical insurance company. Also his family would have received the insurance amount, had he opted for a term insurance. In the end, his entire investment of 10 years just vanished.

 

Life is very uncertain. When you plan for a better future, be ready to tackle uncertainties too. Insurance is one option which helps you to take care of such uncertainties.

So next time, when you plan for any investment, make sure to prioritize your insurance need before investment.

Dare to talk about Life Insurance?

Life Insurance is one of those topics which many of us do not want to discuss. We simply do not want to face the darkest side of life. Some people buy insurance as an investment option or just for saving tax without actually understanding the primary purpose of it. Let’s try to answer some of the most common questions about a Life Insurance.

Why do I need a Life Insurance?

In an unfortunate event if you are no more in this world, imagine the life of your near and dear ones without you or your support. So if you are the only earning member and your family completely depends on you, insurance is a must. However, there are a few scenarios when one may not need an insurance like for e.g.

1. If you are single and don’t have any dependants
2. If both husband and wife are earning enough and are financially independent of each other
3. If you and your family is super rich and accumulated enough wealth for maintaining a steady lifestyle, then you may consider not buying a life insurance. If you’re reading this article, most likely you don’t fall under this category 🙂

Do I have enough insurance?

Insurance amount varies for different individuals. It depends on the standard of living, financial liabilities etc. Experts say that on a broader basis person should have at least 10 years in hand salary or cover all the liabilities including home loan, personal loan, car loan, child education etc. for calculating the insurance amount. You may work out the exact amount with your financial planner.

Which type of insurance do I need?

For buying the life insurance, one can choose Unit Linked Insurance Plan (ULIP), Endowment Plan or Term Plan.

Unit Linked Insurance Plan (ULIP):

Unit Linked Insurance Plan is a combination of insurance and investment. Depending on the plan, payment made is invested towards equity or debt products or a combination of both. One is entitled to receive some maturity amount plus bonus when the policy matures, however it is not guaranteed. On the down side, charges associated with ULIP are generally very high. If you are planning to buy any ULIP, please pay attention to various charges like allocation charges, fund management charges, administration charges, fund switching charges, surrender charges, mortality charges etc.

Endowment Plan:

Similar to ULIP, saving component is associated with this type of insurance too but charges are not disclosed in these products. All these policies have surrender value or individual will get the maturity amount when the policy ends. The investment return on these policies are low as most of the funds are allocated to debt products. As an investment option, endowment plan returns may not even beat the inflation.

Term Plan:

These plans are the pure life insurance product. The premium you pay for a term plan goes towards mortality charges. This is cheapest of all but least marketed or advertised product compared to ULIP or endowment plans for a simple reason – agents do not earn fancy commission by selling term insurance. You may earn some handsome discount if you buy term insurance online. Term insurance does not have any surrender value, these are useful to your family only in case of an unfortunate event.

Think before you invest in a second home

Investment in property is one of the high risk, high return avenues of wealth generation. As disposable income is increasing, many people started investing in the second home. Are you thinking on the same lines? How about streamlining your thoughts to make a better decision? Yes? read on…

1. Your appetite and eligibility for a second home-loan

The most important thing is the availability of funds for the initial down payment. Initial down payment is generally 20% of agreement value and charges towards stamp duty and registration. For this amount it not advisable to go for any loan. Also check your EMI for the new loan before booking property. Generally Cumulative EMI of all your loans (Home loan for 1st, 2nd home, car loan, personal loan etc.) should not exceed more than 40-50% of your in-hand salary. Banks would definitely verify this before approving your loan.

2. The appreciation in property cost

Any city area can be categorized into 3 types, a developed area, a developing area and an under-developed area. As an investor it is good to focus on projects in developing area. There is very little room for appreciation in Property prizes in developed areas. Properties in an under-developed area might be cheaper in terms of valuation but the risk associated with it is very high. Also capital appreciation in this area might take more years than once can predict.

3. Do your financial math

If you are planning to buy under construction property calculate the value of your property when completed or at the time of possession.  Let’s look at following case study. Investor A booked flat in a project for 40 lacs with lead time of 2 years. Disbursement of payment will happen in a staggered manner based on the progress of the project.

* For simplified calculation, consider all charges included in 40 Lac (Sales tax, VAT, Stamp duty, Registration, infrastructure charges etc.) 

 

Home Loan Calculation
Disbursement Month Payable Amount Disbursement Amount Actual payment including interest (@ 10%) as on Jan’2014
Month 24 Jan’2012 25% 1000000 1220391
Month 22 Mar’2012 10% 400000 480121
Month 19 Jun’2012 10% 400000 468315
Month 16 Sep’2012 10% 400000 456800
Month 13 Dec’2012 10% 400000 445568
Month 10 Mar’2013 10% 400000 434612
Month 7 Jun’2012 10% 400000 423925
Month 4 Sep’2013 10% 400000 413501
Month 1 Dec’2013 5% 200000 201667
Total Payable 4000000 4544899

 

In the above case, even if property cost is 40 lacs only, investor A actually ended up paying around 45.5 lacs, assuming he received the possession of flat in 2 years. More delay in construction will increase the cost of property and will reduce the return on investment.

4. Long-term horizon

If you want a higher return on investment, hold the property for longer duration. Generally holding flat/house for 5-10 years will give better returns with few exceptions. After 10 years, maintenance of the building will increase; also finding a buyer for the older property is relatively difficult.