Wednesday, 31 December 2008

How to go for Pension Plans or retirement Planning

How to plan for retirement. I am investing in PPF regularly but very actively looking for retirement from ICICI, HDFC or Metlife. Still not clear on what`s best, looking at following parameters to start with:
a. Minimal Premium Accumulation Charge ( Even if it`s there, then only for regular premium for first few years ).
b. No or very little premium on Top-ups
c. Clear guidelines on Annuity plan ( ICICI explains most clearly but doesn`t give all answers ).
d. Death Benefits ( I don`t want life insurance cover )
e. Any other charges if any should be clearly started in terms on figures on monthly/annual basis, also whether expenses are on NAV or premium paid.

Answer - Dear Friend, Plz. do a simple exercise. Call at least 5-6 Ins. agents from different Ins. cos. & give following details to agents. 

1. Age of Person, 60 years (the age u `ll start receiving ur pension)
2. Amount to be invested 1Crore
3. Plan selected - Immediate Annuity Plan.
4. Ask to give benefit Illustration of mly. pension till life of policy holder after that same pension to spouse till life & after that return of purchase price to the legal heirs of policy holder.

Plz. do this exercise with at least 5-6 Ins. cos. inform me for ur findings after completing ur exercise.

Why I`m asking to do so, bcoz when u `ll go thru this exercise, u `ll come to know what the meaning of large corpus creation is? Plz. do note as per my prev. reply of retirement corpus, calculate ur own requirement as per inflation no.


Ashal ...

Monday, 29 December 2008

Charges in ULIPs & Mutual Funds

My insurance agent told me that There are many internal charges in MF which are charged by MF companies but these charges are not visible to Normal investor.

He suggested : In case of ULIP, there are 2 things :

- charges are completely transparent then MFs
- And in long Term (10-15 yrs), ULIPs are cheaper than MFs in terms of charges.

Please suggest and draw some clear picture about charges.


Dear vivek, there is totally opposite picture what ur Insurance agent had advised u. Let me explain.
In case of MFs there r only 3 types of charges applicable -
1. Entry Load - It can be avoided if u invest directly to ur MF bypassing ur MF agent.
2. Exit Load - It can also be avoided by remaining invested for certain time period in that particular plan.
3. Fund Management Charge - It`s charged as a %age of total assets under the plan. Normally it varies from 0.25% to 2.5% depending upon type of funds (Debt to Eq.) as well as expertise of fund co. for a same set of MF plans, lower FMC Plan is always advisable for investment.

In case of ULIP following 4 types of charges r applicable.
1. Prem. allocation Charge - It may vary from as low as 1% to as high as 65-70% of ur first year prem. & reduced year after year or may remain same at a constant level say 4% or 5%.
2. Mortality Charges = It`s the basic cost of insurance & again it varies among Ins. cos.
3. Policy admin charges - Some ULIPs charge as low as 20 Rs. per month where as some charge as high as 200-300 Rs. per month. Again not constant among Ins. cos.
4. Fund Management charges - From 0.5% to 2.5% depending upon the type of Fund (debt to Equity).

From the above list u can judge urself that in case of MFs there is only 1 charge FMC, which u `ll have to pay but in case of ULIPs there r several charges & no common benchmark is there to see the impact of these charges. I do hope the message is clear to u.



Wednesday, 10 December 2008


Dear friendS, This new plan of LIC although provides gtd. returns but plz. note the NET Yield is variable for different age person due to difference in prem. paid for the same amount of cover.

Some info for this policy is given below.
Minimum Sum assured = 150000 & can be purchsed in multiples of 30000
Max. Sum assured = No limit
Prem. type = single prem. only
Type of policy = Traditional endowment policy with gtd. return
Minimum entry age = 13 years (nearest birth day)
Max. entry age = 60 years (nearest birth day)
Policy term = 5 years or 10 years
in First policy year the SA = 6 times of Single prem. paid (appx.)
From 2nd year onwards SA = 2 times of single prem. paid (appx.)
Maturity SA = 1/6th of original SA
GTD. addition per year = 100 Rs. for per 000 maturity SA for 10Y plan & 90 Rs. for 5 year plan
Loan & surrender value = after completion of 1st policy year

Sample benefit illustration for a 35year normal healthy male stamdard life.
Age of life assured = 35 years
SA = 300000
Maturity SA = 1/6 of Initial SA = 50000
Single prem. = 48975
Term of policy = 10 years
In case of death during 1st policy year claim amount = Initial SA + GTD addition = 300000 + 5000 (@ 100 Rs. per 000 maturity SA for 50,000 maturity SA)
In case of death during 2nd to 10th year claim amount = 100000 (reduced SA) + GTD. addition of 5000 Rs. per year
Maturity amount after 10 years = 50000 (maturity SA) + 50000 (gtd. addition) + 10000 (lyality addition if any, not gtd.) = 110000 Rs.

From investment point of view (it `ll be the main sales pitch to be adopted by LIC agents al over india), the CAGR for above person = 8.43% with Loyality addition & 7.5% with out Loyality addition of 10000 Rs. which is non gtd.

My Take on jeevan Aastha plan -
It`s a carefully designed Fixed Maturity Plan (FMP). Yes u read it right, it`s indded a FMP as the term as well as returns r known to u before taking the policy & are almost gtd. in nature (just leaving loyality addition as a non gtd. one).
Being an ins. plan offered by the largest Ins. co. of india, it`s also Tax efficient too. In the first year the SA is almost 6 times of single prem. hence 20% prem. to SA rule is taken care off at the time of investment. being investment oriented policy, from 2nd year the SA is reduced immediately to have lesser expenses for mortality charges.

The biggest catch lies in the GTD. bonus calculation.

As the maturity amount is fixed for the policy term, the Net yield (CAGR) `ll be higher for persons in the age bracket of 13-35 years & `ll be very low for the persons in 45-60 age bracket. Anywhere from 6% to 7%. This is due to higher mortality charges for this age bracket.

My Judgement - 
This Policy is not suitable for any age class. for Y`ger people (20-35 age), the 10 year term can provide better returns from market linked instruments like Eq. & Debt. MFs. For older age people the return is not that much attractive. In fact for the persons who r in their 50s, the 10.5% bank FDs & PPF & Bhavishya Nirmaan Bonds (BNB) of Nabard r better option. as By that time the Ins. needs r over & even if one purchase it for ther partial ins. benefit, the real ins. is very poor.



Thursday, 13 November 2008

To Gift or To Loan

Q. A & B are Brothers married and staying in joint family.Each of them are separately assessed for Income tax. B sales shares worth 1 cr paying STT which he had baught before more than 3 years. B invests this amount equally in 4 names i.e A Plus A`s wife, B & B`s Wife 25 Lakhs each in Mutual Funds.Can you please advise the tax Implecation and also we should make a Gift Deed for this or show as a loan to others.Please advise in detail.

Best Regards.

Answer :- Dear friend, From ur query, it seems u had directly invested the amount of 25L for each person as mentioned by U, from ur own bank account. This `ll be treated as cash gift.If u had first invested all the 75L Rs. (for other 3 members), under ur name & later gifted the alloted units to ur family members, then it w`d be a gift in kind.

U`ll ask, what`s the difference in this?

In case of gift - For ur Brother A & his wife, the income from such MF investments, `ll be taxable in their own hands, but in ur wife`s case, if the income from these MFs is taxable (if the gains r STCG from Eq. MFs or the MFs r debt oriented), it `ll be clubbed with ur income under the clubbing provisions of Section 64. For ur own 25L Rs. the income generated by MFs `ll be taxable in ur hands if it is taxable at all.In case u want to show the 25L rs. to all other 3 persons as loan, in this case, the interest received (if any) from these 3 `ll be taxable in ur hands & the income from these MFs `ll be taxable in the hands of the respective owners. In this case, even ur wife`s investment `ll be taxable in her hands & clubbing provisions of section 64, `ll not be applicable as it was not a cash gift. Instead it was a loan & u r paying Tax on ut interest income.

I hope the above info is useful for u. Plz. feel free to ask, if u need more help.


Thursday, 6 November 2008

Taxfree income for a retiree

Some days ago, Mr. Sharma, an elderly person came to me for advice on how to plan his investments after retirement. He was retired at the end of last FY & after so much noises in the financial market regarding Share market crash, high inflation, recession etc., he was not sure what to do, where & how much to park his hard earned retirement kitty. Here is the initial data –
Present family size – Husband aged 60 & wife aged 57 only. (children, 1 son & 1 daughter, both are married & settled in their life respectively),
Annual expenses for living, Medical Ins. Prem. & visit to children once in a year = 150000 Rs.
Retirement funds received net of taxes = 35L Rs.
Currently both Mr. & Mrs. Sharma owns individual PPF accounts having 10L Rs. in each.
House they r living in currently, is their own & market value is around 40L Rs. as of now.
Apart from this, some shares in demat accounts of both with combined valuation of around 5L Rs. after prediwali crash & most of the shares r bluechips. But there was no Eq. MF investment as on date.
Mrs. Sharma is a housewife, all through her life.
Although they have direct Eq. investments but are reluctant to invest in direct Eq. or in Eq. MFs at present.

As his age is 60 only, he can’t anjoy the higher tax exemption limit of Sr. citizen at present, so it is necessary to keep his Tax incidence in mind while advising on investments.

The advice – Out of his retirement kitty of 35L Rs. (which was lying in saving bank account at present), I advised to loan an amount of 18.5L Rs. to his wife (Mrs. Sharma) as an interest free loan. After giving the 18.5L Rs., He w'h have 16.5L Rs.

Here r investments of Mr. Sharma –
1. 4.5L Rs. in POMIS - annual income 36K Rs.
2. 7L Rs. in SCSS - annual income 63K Rs.
3. 4.5L Rs. in various banks’ FDs of higher rates 10.5% avg. – annual income 49K Rs.
4. 0.5L Rs. in saving bank account for emergencies – annual income 1.7K Rs.
Total annual income = 1.49L Rs. which is just a tad below his taxable income limit of 1.5L Rs. Hence no tax at all.
Here r investments of Mrs. Sharma –
1. 4.5L Rs. in POMIS - annual income 36K Rs.
2. 11L Rs. in various banks’ FDs of higher rates 10.5% avg. – annual income 120K Rs.
3. 2.5L Rs. in bank FDs of smaller duration ranging 6-12 months earning 8% avg. (this was for medical & other major expensive emergencies) – annual income 20K Rs.
4. 0.5L Rs. in saving bank account for emergencies – annual income 1.7K Rs.
Total annual income = 1.78L Rs. which is just a tad below her taxable income limit of 1.8L Rs. Hence no tax at all.

So after all this, the annual income for the family is 3.27L Rs. & no tax at all. All the investments were made in the highest possible safe instruments (POMIS, SCSS & Bank FDs). After deducting the annual expenses of 1.5L Rs., there was a surplus cashflow of 1.77L Rs. As their expenses were taken care off, Income Tax liability was zero, I advised to invest this surplus cash in a mix of MIP & balanced funds in 80:20 ratio. Even incase of MIP, 75% allocation was made for < or = 20% Eq. exposure MIPs & rest 25% was in 20-40% max. Eq. exposure MIPs. Thru MIPs & balanced funds, the total Eq. exposure was 33% or 58K Rs. out of total investment of 1.77L Rs. of surplus cash.
The investment in MIPs & balanced funds is to be used as buffer & to give kick in returns to fight inflation.

The basic retirement kitty of 35L rs. was fully safe, zero income tax, & at the same time surplus cash is providing a cushion for future increase in expenses due to inflation. After his age of 70-72, in future, if the interest income generated by his total investments falls short of his the than mly. expenses, the option of reverse mortgage is there to supplement the income requirement.

After all the No. crunching, now Mr. Sharma is fully satisfied with this portfolio & he is investing based on this advise.

Monday, 13 October 2008

Interest Rate direction

Dear Friends, My take on Interest Rate -
Almost every indian Investor/saver have deposits in Banks. Over the last 18-24 months, the banks r offering higher rates on deposits (test case , now mojority of investors are thinking to join the SBI @ 11% FD). Add 2.25-2.5% administrative cost & profit margin for banks on these deposit rates. The effective lending rate works out to around 12-13% but wait there is another twist in the tale named as CRR (Cash reserve ratio). For every 100 Rs. accepted by bank as deposit, it `ll have to keep 7.5 Rs. (after recent reduction of 1.5%) mandatorilly with RBI & it `ll be non income earning.So from the 100 Rs. deposited by u, the bank `ll be able to lend only 92.5 Rs. & before the CRR cur the same figure was 91 Rs. only. So the effective lending rate comes around 14-15%. Now add at least 1-2% NPAs (non performing assets), the same lending rate `ll move on to on more higher level around 15.5-16%.
Now change ur shoes from depositor to borrower, R u ready to borrow at such higher rates to purchase -
1. That Plasma Panel
2. That High speed Mobike for ur son
3. That Grand new sedan costing 10+L
4. That sweet little (lavish) home costing anywhere from 20L to some crores depending upon in which place of india u r.
5. That drean swiss vacation.
The list goes on & on, but one thing is certain u `ll certainly cutback some of the above mentioned purchases or delay the same.

Now imagine u r not a domestic borrower but a corporate borrower. To increase ur capacities or starting a new factory or any other business requirement, after taking loans at such higher rates, how `ll u earn profits when the sale of ur products (CAR, Bike, Consumer goods, Homes....) is going down.

Sooner or later, the interest rate `ll go down, how much I DON`T KNOW, by when, again I DON`T KNOW.

I know only one thing, for a healthy growth, low interest rates r essential.



Wednesday, 17 September 2008

Timeline: Global credit crunch

A year ago, few people had heard of the term credit crunch, but the phrase has now entered dictionaries.
Defined as "a severe shortage of money or credit", the start of the phenomenon has been pinpointed as 9 August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit, and made the financial world realise how serious the situation was.
The problems, however, started much earlier.

After a two year period between 2004 and 2006 when US interest rates rose from 1% to 5.35%, the US housing market begins to suffer, with prices falling and a rise in homeowners defaulting on their mortgages.
Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rise to record levels.

The credit losses associated with sub-prime have come to light and they are fairly significant...Some estimates are in the order of between $50bn and $100bn of losses
Ben Bernanke, Chairman US Federal Reserve, speaking on 20 July 2007
New Century Financial, which specialises in sub-prime mortgages, files for Chapter 11 bankruptcy protection and cuts half of its workforce.
As it sold on many of its debts to other banks, the collapse in the sub-prime market begins to have an impact at banks around the world.
Investment bank Bear Stearns tells investors they will get little, if any, of the money invested in two of its hedge funds after rival banks refuse to help it bail them out.
Federal Reserve chairman Ben Bernanke follows the news with a warning that the US sub-prime crisis could cost up to $100bn (£50bn).
9 August 2007

BNP's statement is scary, to put it mildly
BBC Business Editor, Robert Peston
Read Robert's 9 August blog
BNP Paribas' statement
Investment bank BNP Paribas tells investors they will not be able to take money out of two of its funds because it cannot value the assets in them, owing to a "complete evaporation of liquidity" in the market.
It is the clearest sign yet that banks are refusing to do business with each other.
The European Central Bank pumps 95bn euros (£63bn) into the banking market to try to improve liquidity. It adds a further 108.7bn euros over the next few days.
The US Federal Reserve, the Bank of Canada and the Bank of Japan also begin to intervene.
17 August
The Fed cuts the rate at which it lends to banks by half of a percentage point to 5.75%, warning the credit crunch could be a risk to economic growth.
21 August
UK sub-prime lenders begin to withdraw mortgages or put up the cost of borrowing for UK homeowners with poor credit histories.
28 August
German regional bank Sachsen Landesbank faces collapse after investing in the sub-prime market; it is sold to larger rival Landesbank Baden-Wuerttemberg.
3 September

German corporate lender IKB announces a $1bn loss on investments linked to the US sub-prime market.
4 September
The rate at which banks lend to each other rises to its highest level since December 1998.
The so-called Libor rate is 6.7975%, way above the Bank of England's 5.75% base rate; banks either worry whether other banks will survive, or urgently need the money themselves.
13 September

The fact that it has had to go cap in hand to the Bank is the most tangible sign that the crisis in financial markets is spilling over into businesses that touch most of our lives
Robert Peston, BBC business editor
Read Robert's 13 September blog
The BBC reveals Northern Rock has asked for and been granted emergency financial support from the Bank of England, in the latter's role as lender of last resort.
Northern Rock relied heavily on the markets, rather than savers' deposits, to fund its mortgage lending. The onset of the credit crunch has dried up its funding.
A day later depositors withdraw £1bn in what is the biggest run on a British bank for more than a century. They continue to take out their money until the government steps in to guarantee their savings.
18 September
The US Federal Reserve cuts its main interest rate by half a percentage point to 4.75%.
19 September
After previously refusing to inject any funding into the markets, the Bank of England announces that it will auction £10bn.
1 October
Swiss bank UBS is the world's first top-flight bank to announce losses - $3.4bn - from sub-prime related investments.
The chairman and chief executive of the bank step down. Later, banking giant Citigroup unveils a sub-prime related loss of $3.1bn. A fortnight on Citigroup is forced to write down a further $5.9bn. Within six months, its stated losses amount to $40bn.
30 October
Merrill Lynch's chief resigns after the investment bank unveils a $7.9bn exposure to bad debt.
29 November
The Bank of England reveals the number of mortgage approvals has fallen to a near three-year low.
30 November
The Council for Mortgage Lenders (CML) issues the starkest warning yet of the impact of the credit crunch on the mortgage market, saying that without more funding available on financial markets, mortgage lenders will not be able to offer as many mortgages.
6 December
US President George W Bush outlines plans to help more than a million homeowners facing foreclosure.
The Bank of England cuts interest rates by a quarter of one percentage point to 5.5%.
13 December
The US Federal Reserve co-ordinates an unprecedented action by five leading central banks around the world to offer billions of dollars in loans to banks.
The Bank of England calls it an attempt to "forestall any prospective sharp tightening of credit conditions". The move succeeds in temporarily lowering the rate at which banks lend to each other.
17 December
The central banks continue to make more funding available.
There is a $20bn auction from the US Federal Reserve and, the following day, $500bn from the European Central Bank to help commercial banks over the Christmas period.
19 December

Ratings agency Standard and Poor's downgrades its investment rating of a number of so-called monoline insurers, which specialise in insuring bonds. They guarantee to repay the loans if the issuer goes bust.
There is concern that insurers will not be able to pay out, forcing banks to announce another big round of losses.
9 January 2008
The World Bank predicts that global economic growth with slow in 2008, as the credit crunch hits the richest nations.
18 January
A rush to withdraw money from its commercial property funds forces Scottish Equitable to introduce delays of up to 12 months for investors wanting to take their money out.
It blames the rush of withdrawals on concerns about the US sub-prime mortgage collapse, recession worries and interest rates.
21 January
Global stock markets, including London's FTSE 100 index, suffer their biggest falls since 11 September 2001.
22 January
The US Fed cuts rates by three quarters of a percentage point to 3.5% - its biggest cut in 25 years - to try and prevent the economy from slumping into recession.
It is the first emergency cut in rates since 2001. Stock markets around the world recover the previous day's heavy losses.
31 January
A major bond insurer MBIA, announces a loss of $2.3bn - its biggest to date for a three-month period -blaming its exposure to the US sub-prime mortgage crisis.
7 February
US Federal Reserve boss Ben Bernanke adds his voice to concerns about monoline insurers, saying he is closely monitoring developments "given the adverse effects that problems of financial guarantors can have on financial markets and the economy".
The Bank of England cuts interest rates by a quarter of one percent to 5.25%.
8 February

Some investors forgot the golden rule of financing: 'Don't buy things that you don't understand'
FSA chief executive Hector Sants, speaking on 27 February
In the UK, the latest CML figures show the number of homes repossessed in the UK rose to 27,100 in 2007, its highest level since 1999.
10 February
Leaders from the G7 group of industrialised nations say worldwide losses stemming from the collapse of the US sub-prime mortgage market could reach $400bn.
17 February
After considering a number of private sector rescue proposals, including from Richard Branson's Virgin Group, the government announces that struggling Northern Rock is to be nationalised for a temporary period.
7 March
In its biggest intervention yet, the Federal Reserve makes $200bn of funds available to banks and other institutions to try to improve liquidity in the markets.
17 March
Wall Street's fifth-largest bank, Bear Stearns, is acquired by larger rival JP Morgan Chase for $240m in a deal backed by $30bn of central bank loans.
A year earlier, Bear Stearns had been worth £18bn.
28 March
Nationwide predicts UK house prices will fall by the end of the year, revising its previous forecast of no change in prices.
2 April
Moneyfacts, which monitors financial products, says 20% of mortgage products have been withdrawn from the UK market in the previous seven days.

I have a deep sense of shock at how deeply our successful industry has already been hit by these unprecedented funding market conditions
Steven Crawshaw, chairman of the Council for Mortgage Lenders, speaking on 11 April 2008
Five days later the 100% mortgage disappears when Abbey withdraws the last home loan available without a deposit.
8 April
The International Monetary Fund (IMF), which oversees the global economy, warns that potential losses from the credit crunch could reach $1 trillion and may be even higher.
It says the effects are spreading from sub-prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.
10 April
The Bank of England cuts interest rates by a quarter of one percent to 5%.
11 April
A warning is issued by the CML that the amount of funding available for mortgages in the UK could be cut in half this year.
It calls on the Bank of England to kick-start the money markets and ease the effects of the credit crunch.

The effects of the credit crunch are likely to be broader, deeper and more protracted than previously expected
IMF global stability report, 8 April 2008
15 April
Confidence in the UK housing market falls to its lowest point in 30 years in March, according to the Royal Institution of Chartered Surveyors, because of the "unique liquidity blight".
But it does add that the situation is good news for buyers with large deposits who can buy property that was previously out of reach.
21 April
The Bank of England announces details of an ambitious £50bn plan designed to help credit-squeezed banks by allowing them to swap potentially risky mortgage debts for secure government bonds.
22 April
Royal Bank of Scotland announces a plan to raise money from its shareholders with a £12bn rights issue - the biggest in UK corporate history.
The firm also announces a write-down of £5.9bn on the value of its investments between April and June - the largest write-off yet for a British bank.
25 April
Persimmon becomes the first UK house builder to announce major cutbacks, citing the lack of affordable mortgages and a fall in consumer confidence.
It adds sales have fallen by a quarter since the beginning of the year.

Because of the uncertainties in the global economy and the UK lending environment, it is difficult to predict when the [housing] market will improve
House builder Persimmon
Read the full story from 25 April
29 April
The CML says number of new mortgages approved in March slipped 44% to 64, the lowest monthly number since records began in 1999.
30 April
The first annual fall in house prices for 12 years is recorded by Nationwide.
Prices were 1% lower in April compared to a year earlier after a "steep decline" in home buying over the previous six months.
Later in the week, figures from the UK's biggest lender Halifax, show a 0.9% annual fall for April.
2 May
More than 850 companies went into administration between January and March, government figures show, a rise of 54% on the previous year. Retail and construction firms are hardest hit.
22 May
Swiss bank UBS, one of the worst affected by the credit crunch, launches a $15.5bn rights issue to cover some of the $37bn it lost on assets linked to US mortgage debt.
19 June
There are significant developments in two major credit crunch-related investigations in the US, which it is hoped will restore confidence in the credit markets.
The FBI arrests 406 people, including brokers and housing developers, as part of a crackdown on alleged mortgage frauds worth $1bn.
Separately, two former Bear Stearns workers face criminal charges related to the collapse of two hedge funds linked to sub-prime mortgages.
It is alleged they knew of the funds' problems but did not disclose them to investors, who lost a total of $1.4bn.
25 June
Barclays announces plans to raise £4.5bn in a share issue to bolster its balance sheet.
The Qatar Investment Authority, the state-owned investment arm of the Gulf state, will invest £1.7bn in the British bank, giving it a 7.7% share in the business. A number of other foreign investors increase their existing holdings.
8 July
The gloomy findings of a survey of its members prompt the British Chambers of Commerce (BCC) to suggest that the UK is facing a serious risk of recession within months.
Meanwhile, the FTSE 100 stock index briefly dips into a "bear market", in which the market suffers a 20% fall from its recent highs.
The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected
British Chambers of Commerce, 18 July 2008
Read the full story
13 July
US mortgage lender IndyMac collapses - the second-biggest bank in US history to fail.
14 July
Financial authorities step in to assist America's two largest lenders, Fannie Mae and Freddie Mac. As owners or guarantors of $5 trillion worth of home loans, they are crucial to the US housing market and authorities agree they could not be allowed to fail.
The previous week, there had been a panic amongst investors that they might collapse, causing their share prices to plummet.
21 July
Just 8% of HBOS investors agree to take up the new shares offered in its £4bn rights issue, because they are priced higher than existing shares are trading on the stock market.
But HBOS still gets the £4bn it wanted, as the unsold new shares are bought by the issue's underwriters.
31 July
UK house prices show their biggest annual fall since the Nationwide began its housing survey in 1991, a decline of 8.1%.
The average home now costs £169,316. That is nearly £15,000 cheaper than in the same month last year.
Meanwhile, HBOS reveals that profits for the first half of the year sank 72% to £848m, while bad debts rose 36% to £1.31bn as customers failed to repay loans.
4 August

Global banking giant HSBC warned that conditions in financial markets are at their toughest "for several decades" after suffering a 28% fall in half-year profits.
Of Europe's top banks, HSBC has among the heaviest exposure to the troubled US housing and credit markets.
22 August
The bad news continues with revised figures from the ONS revealing that the UK economy is a standstill.
28 August
Nationwide reveals that UK house prices have fallen by 10.5% in a year.
A day later Bradford and Bingley posts losses of £26.7m for the first half of 2008, blaming surging mortgage arrears for a rise in impairment.
Looking ahead, it warned it expected arrears to remain at high levels for the rest of the year.
30 August
Chancellor Alistair Darling warns that the economy is facing its worst crisis for 60 years in an interview with the Guardian newspaper, saying the current downturn would be more "profound and long-lasting" than most had feared.
1 September
Official figures from the Bank of England show a slump in approved mortgages for July.
Meanwhile, while the pound falls to record lows of 81.21 pence against the euro and two-year lows of $1.80.
2 September
In an effort to kick-start the UK housing market the Treasury announces a one year rise in stamp duty exemption, from £125,000 to £175,000.
But there is more bad news, as the Organisation for Economic Cooperation and Development forecasts that the UK will be in a full blown recession by the end of the next two quarters. A day later the European central bank cuts growth forecast 2009 to 1.2% from 1.5%.
4 September
The Bank of England leaves rates on hold at 5% while the latest figures from the Halifax show that house prices in England and Wales continue to fall.
5 September
A raft of negative news from around the world sees the FTSE notch up its steepest weekly decline since July 2002.
The US labour market figures - which showed the unemployment rate rising to 6.1% - were a further jolt to investors who have had to swallow a slew of poor economic data in recent days.
6 September
The Halifax warns that the impact of the credit crunch will be felt well into 2010. Chief executive Andy Hornby explains that British banks will continue to suffer major problems in offering loans until they can raise significant sums on wholesale markets, something that will not be possible until US house prices recover.
7 September
Mortgage lenders Fannie Mae and Freddie Mac - which account for nearly half of the outstanding mortgages in the US - are rescued by the US government in one of the largest bailouts in US history.
Treasury Secretary Henry Paulson says the two firms' debt levels posed a "systemic risk" to financial stability and that, without action, the situation would get worse.
At the same time, in the UK, the Nationwide announces it will merge with two smaller rivals, the Derbyshire and Cheshire Building Societies.
9 September
More bad news emerges for the UK economy as the ONS reveals manufacturing output fell by 0.2% between June and July, raising a real fear of recession.
Meanwhile, the British Retail Consortium reports UK retail sales values fell by 1.0% on a like-for-like basis from August 2007.
On the housing front, there were more negative headlines with the Royal Institute of Chartered Surveyors published figures showing house sales were at their lowest level for 30 years, while the CML reported that the number of first-time buyers has hit its lowest level since its survey began in January 2002.
10 September
Wall Street bank Lehman Brothers posts a loss of $3.9bn (£2.2bn) for the three months to August.
The announcement comes against a background of further dire economic warnings from the European Commission, which warned that the UK, Germany and Spain will go into recession by the end of the year.
15 September
After days of searching frantically for a buyer, Lehman Brothers files for Chapter 11 bankruptcy protection, becoming the first major bank to collapse since the start of the credit crisis.
Former Federal Reserve chief Alan Greenspan dubs failure as "probably a once in a century type of event" and warns that other major firms will also go bust.
Meanwhile fellow US bank Merrill Lynch, also stung by the credit crunch, agreed to be taken over by Bank of America for $50bn, the latest twist in a dramatic turn of events on Wall Street.

Sourced from -

Sunday, 7 September 2008

Tax on withdrawals from ULIP for NRI

Dear Ashal,Thanks for the reply.Some hope.Details are as follows.Would like to know best path forward.Policy: ICICI LIFETIME. Started on 24th Aug-2004,premium 20000 per month. Sum assured to begin with was 1 lakh. 100% in maximiser fund.Within a year, of the policy the insuranse coverage was increased to 11 Lakh. In Nov 2007, I shifted the whole amount to PROTECTOR fund, (Approx. 13.20 Lakhs). However monthly premiums were continued to go into maximiser fund.As on date,Maximiser fund: Units= 3431.26 @ NAV of 51.11 & Protector fund: Units= 83015.91@ NAV of 16.46.I'm NRI, premiums paid thr NRE A/C. Request tax and insurance experts to suggest best path forward. I want to withdraw the amount and have written to stop further premiums.Best regards,Prahlad.

Dear Pralhad, For ur monthly prem. of 20K (annual prem. of 2.4L) the minimum sum assured should be 12L Rs. as i mentioned earlier. Now as u have stopped ur future prem. it `ll be nice on ur part if u increase ur cover from 11L to 12L. If it is not possible, don`t worry. Here is ur calculation,
A. Sum assured = 11L (as u increased it in the 1st year itself)
B. annual prem. @ 20% of A = 2.2L
C. Excess prem. paid = 20K
D. Total annual prem. paid = 2.4L
E. %age excess prem. of annual prem. = 20/240*100 = 8.33%F. Total fund value as on date (arrived from the data posted by u) = 15.42L appx.
G. Taxable surrender value = 8.33% of F = 128450 appx.
H. Hence Tax free surrender value = F-G = 1413550 appx.In the current year, if ur resident indian income from all other sources is almost nil, u may even sat off ur taxable surrender value against basic exemption limit of 1.5L for under 65 age male tax payee. I hope above info `ll be useful to u. Feel free to ask if u need more help.



Home Loan Principal Repayment & Section 80C

Does the Principal prepayment of home loan can considered for deduction in Income Tax 80C section along with normal Principal payments paid as part of the EMI?

Dear, any partprepayment of principal 'll also be eligible for 80C benefit within the over all limit of 1L Rs.



STCG & Income Tax liability

I am a salaried employee with annual salary of 6 lac/annum. I was involved in the following trading in the NSE stock market. I want to know the STCG and the income tax liability. Please help in determining the exact STCG and tax on it.

Trade-1 - Bought 10 shares of Reliance Industries on 20-05-2008:
Rate per share: 2100
Brokerage: 157.50
Service Tax: 19.50
STT: 26.25

Trade-2 - Sold 10 shares of Reliance Industries on 25-06-2008:
Rate per share: 2200
Brokerage: 165
Service Tax: 20.40
STT: 27.50

Dear, Here is the calculation u asked for. (Plz. note STT \\`ll not be considered for purchase or sell price)
A. Purchase price = 2100*10 = 21000
B. Brok. + service tax = 177
C. Net purchase cost = A+B = 21177
D. Sell price = 2200*10 = 22000
E. Brok. + service Tax = 185.40
F. Net sell cost = D-/e = 21814.60
G. net STCG = F - C = 637.6 Rs.
H. Tax on STCG @ 15.45% (as shares were sold thru recognized stock exchange & STT was paid at the time of sell)= 98.51 = 99 Rs. only


Tuesday, 2 September 2008

Income Tax calculation for a Retired Person

I am a retired and requires advice on tax payment.My income is ....
Monthly pension.... Rs.11000/-per month
Interest on FD... Rs. 6000/-per month
Rent on property... Rs 2000/-per month

My monthly expenditure on house loan Emi and insurance
House laon EMI... Rs. 5500/- per month
PLI... Rs. 1100/- per month

MY yearly premium of ULIP
Yearly... Rs 55000/- per anum

Whether I have to pay any tax..?

Dear, had u posted 2 more data - ur current age & break up of ur Home loan EMI in Interest & Principal. it 'll be a lot easier to me to calculate ur exact Tax liability. Anyway i'm trying to untangle ur tax query by assuming that ur age is below 65 (i.e. u r not a Sr. citizen) & out of ur EMI pmt. of 66000 Rs. P.A., ur Interest component is 20K & Principal component is 46K. Here goes ur tax calculation.

A. Annual pension income = 132000
B. Annual Interest income = 72000
C. Rent income calculation -
a. annual rent received = 24000
b. property tax paid to municipality (u forget to mention, i'm assumeing it) = 1000
c. Gross rent income = a-b = 23000
d. 30% deduction for maintenance of property = 30% of c = 6900
e. net rental income = c-d = 16100
D. Gross annual Taxable income = A+C+e = 220100 Rs.
E. Interest paid on home loan = 20000
F. Net annual income = D-E = 200100
G. Investment in 80C instruments = ULIP+PLI+HOME Loan Principal = 55000+13200+46000 = 114200 (as effective investment in 80C allowed upto max. limit of 1L) hence amount available for deduction = 100000
H. Net taxable income = F-G = 100100

As net taxable income is below the zero tax limit of 1.5L, the good news is u 'll not have to pay any income tax on it as per the above calculation.

Note - plz. put actual figures of ur home loan in the above calculation as i have assumed it.



Medical benefit on Spouse's Scheme

I work in a private company and my spouse works in a central govt. organization. She gets free (with a nominal monthly deduction) medical benefits for her and her dependents. I get Rs. 15,000 p.a. as medical allowance. My questions are:
- Can I get included in the free medical benefit scheme from her employer?
- The spouse`s organization wants a letter that I do not get any medical benefits from my employer.I can get that letter but it will mention the medical allowance. Can I opt out of medical allowance from my employer and make it fully taxable?


Dear, as u r working, in strict sense u r not dependent of ur spouse. At the same time as u r getting med. allowance, u can't claim med. benefit under ur spouse's med. scheme.

The only option u have is to forget ur med. allowance from ur employer & then receive a letter that u r not receiving any benefit from ur emp. & submit the same to ur Spouse's emp. to enrolled urself for the scheme.



Liquid Funds

Please pardon my ignorance, but I have a very basic question regarding "Liquid" funds.
I am planning to park my lumpsum money in liquid funds and initiate STP to diversified equity funds of the same fund house.
This was actually discussed in this messageboard about one month back. My question is: do I need to park my money in only those funds which have the word "Liquid" in the name? I know this sounds silly, but just wanted to confirm if the term "Liquid" (when used in a fund name) has some special meaning? e.g. consider the following 2 options where I want to STP to Birla Sunlife Frontline Equity.

1. Birla SL Dynamic Bond -RP (G) - STP to - Frontline Equity
2. Birla SL Liquid Plus - RP (G) - STP to - Frontline Equity

Now, the first option seems to be a better option to me as it has given 11% return in last 1 year. So can I go ahead with this?
Or do I have to choose the 2nd option only because the name suggests it's a "Liquid" fund?

FYI, exit loads are as below:
Birla SL Dynamic Bond (0.20% if the investment is redeemed within 30 days months from the date of allotment.)
Birla SL Liquid Plus (0.25% for redemption /switch out of units within 1 month from the date of allotment)

Again, that means I cannot start STP from Birla SL Liquid Plus before 1 month, correct me if I am wrong.

Dear, Plz. note -

Birla Dynamic bond fund is a bond fund, that's why its performance in terms of returns is better than liq. + fund. As it is a bond fund, exit load is there.
Birla SL Liq. + fund don't have any exit load. I personally check from birla web site for the same. In fact no liq. + fund has exit load.

If u opt Dynamic bond fund for higher returns, even in this case Exit load don't seems much as u 'll transfer 1K per week only. So u 'll pay exit load for 4 weeks only. So for a weekly STP of 1K, ur total exit load for 4K Rs. 'll be 8 Rs. (0.2% of redeemed amount) only.

One plain advise, to avoid entry load on Target Eq. fund (Birla Frontline in this case), invest under direct mode only.

Regarding the use of word, liquid + , is not at all necessary, some AMCs use other words like Cash plus, Cash management, Money Plus etc. Please check the individual schemes' details that it fits in the Liq. + category or not.

Ashal ...

Monday, 1 September 2008

Loss in F & O

I am a salarised person. I have lost three lakhs in f&o in the year jannuary 2008.I want to how can i file my income tax return showing loss and want to know wheather set off of loss will given in this current year or not.In other words I want to know if I earn a profit three lakhs in the current year then three lakhs will adjusted because of accomulated loss of last financial year.thanks.

Dear, if u had filed ur IT Return for the Prev. FY (2007-2008) on or before 31st of July 2008, u may claim sat off ur losses of ur F&O transactions booked in Jan. 2008.

From ur query, it seems, u have missed the deadline of return filing. I'm afraid, my dear friend, ur Assessing officer may deny to carry over ur prev. years' losses.

Anyway file ur returns right now & hope ur assessing officer accepts ur reason of delayed filing (if it's a valid one).



Lump Sum Investment during Retirement

My uncle is around 65 yrs. Recently he has got a lump sum of Rs.2 lacs as arrears. Please suggest whether investing in land/FD/MF would be better.

If anyone would suggest a good financial planner it would be of great help.

Dear, As his age is already 65 or may be 65 in current FY. The zero Tax limit for him 'll be 2.25L Rs. Although not much data regarding his current income & investments is available, still for his age investment in Land is strict no-no.

Invest in bank FDs & MFs as per his liquidity requirement. Even under MFs, invest in FMPs, Bond funds & MIPs. Avoid Eq. funds for his age.



Thursday, 28 August 2008

Large Cap funds

Hello,I’m a long term investor with a perspective of at least 10 years. How many Large Cap funds should one have? Sundaram Select Focus, DSP Top100, HDFC Top 200 & Birla Frontline Equity - should one have all these 4 Large Cap Funds or any 1, 2 or3? My Portfolio comprises 2 Large Cap Funds - Sundaram Select Focus & DSP Top100 (out of total no. of 6 funds). If I add HDFC Top 200 & Birla Frontline Equity to my Large Cap funds, wouldn’t it be like buying the same shares; bcoz the FMs of these Funds might have bought almost similar shares. Kindly advise.
Long Term Investor

Dear friend, Normally an investor should have following break up in terms of total no. of MF plans.
3 Large cap
1 Mid cap
2 Multicap, diversified, opportunity
1 sectoral
1 balanced
1 speciality fund (here i mean gold funds or global funds to reduce over all risk).
total 8-9 funds r sufficient in any portfolio for a long term growth. the large cap funds should form the core of ur portfolio, hence the over all exposure to this category should be around 50-60%
Mid cap 10%
Multicap - 15-20%
Sectoral - 5-10% but zero before 3-4 years of retirement.
Balanced - initially zero if investors age is in 20s & should increase with age & by the time the person retires, it should be around 40%.
Speciality - 10% of ur initial portfolio.
Plz. note i have not used the word Ideal, as nothing can be ideal for everybody. U may take ur own break up & invest accordingly to reach ur goal post.



Wednesday, 27 August 2008

Tax treatment of Debt MFs & FMPs for NRI

Dear AshalPls help me with this.You seem to be a GURU in taxation.I am a NRI want to invest in DEBT/FMPs.Pls advise the Tax on STCG ( 30%) & LTCG (20%) whether will be deducted at source.Since I am a NRI, I dont have resident income, so in that case can i File IT return and claim refund for the STCG & LTCG amount if interest income is less than the taxable income. Pls advise.

Dear friend, I'm not a guru on Tax matters. The TAX guru is respected Subhash Lakhotiaji. For ur query - As u r NRI, in case of ur investment in DEBT/FMPs, the MFs 'll applied the TDS & 'll issue the Form 16A for the same. As u don't have any other resident indian income (salary, rent, interest etc.), first u can claim the zero tax exemption limit of 1.5L even if there is any more income from STCGs of debt/FMPs, u can still sat off ur 80C investment against such income. To claim ur refund, yes u 'll have to file ur returns.



Income Tax On Fixed Deposite

Dear Sir,I am salaried person of a PSU and Tax payer in the bracket of 30%.I want to invest Rs 50000/- in fixed deposite in view of increased interest rates.However, to save the tax on the interest earned on proposed Fixed deposite, i want to buy it in the name of my spouse who is a house wife and have PAN Card.So i am planning to buy the FD in her name for a period of one year and submit her IT return as individual.I request you to kindly advise me whether it is allowed as per Income Tax Act.Regards Sanjeev

Dear friend, As u told, u r in 30% Tax slab, I assume to avoid Tax on FD interest, u r planning to invest in ur wife's name. My dear friend Tax evasion is not legal. My dear friend, u can't avoid it, as the income generated from any cash amount gifted to spouse, 'll be clubbed with income of original person whose money was it, Under clubbing of income provisions of Section 64. If u do want to take benefit of high interest rates with low tax on it, plz. invest in FMPs (Fixed maturity plans) of MFs of duration 1Y & more.Due to indexation benefit, ur net tax liability on gains from such FMPs 'll be far less than what u 'll pay as tax on bank FD interest.
Ashal ...

Date for calculating Capital Gains

Dear Ashal, Kindly inform that from which date is the purchase of my flat considered valid. From the time of booking, from the time of registration or from the date of possession letter received. As this shall help me calculate whether it will be a short term or long term capital gain as the time from when I booked the flat to the time I will receive possession is spread on 3 yrs gap.Thanks....Jas

Dear jasper, Although i don`t have right now with me the exact details of some recent judgements of Honourable Supreme Court & various High courts (In terms of Case Nos., year of J`ment, respondents etc.), the moot point of all such j`ments was, The rights of ownership `ll be calculated from the date of making considerable & adequate payment to purchase the property (normally it relates with the date of registration of property). In such j`ments, the h`ble courts observed that, during prolonged delay of possession (for any reason), The rights over the property were with the purchaser & delay of actual possession was simply the delay in actual use of property not delay in its ownership.So u may consider ur date of registration for capital gains purpose.


HUF formation

Question - I have a small family with my wife and a daughter. I wish to know whether i can form a HUF or not? Also how can i create capital in the HUF - if by gift proceeds from near and dear ones, what will be the tax implications for the same?

Answer - Dear Friend, No matter ur child is a daughter or a son, Ur HUF was already formed by the day u married. What u r asking for, "I wish to know whether i can form a HUF or not?" is simply to form capital in ur HUF.

As HUF is a virtual Tax identity, there can't be any blood relatives of an HUF. Hence zero Tax on Gifts received from Blood relatives can't be claimed. For first year, as no capital is there, no income 'll accrue to HUF, hence in first year, u may receive a maximum of 2.5L Rs. as gift from ur near & dear ones. out of this 2.5L Rs. invest in 80C instruments, mainly ELSS to get money early as lowest lock in period is there of 3 years. After investing in ELSS, ur HUF's net taxable income 'll be 1.5L Rs. only in the current FY. It 'll be fully tax-free.For every following year, receive Cash gifts only upto the limit that HUF's total income from other taxable sources & gift remains under 2.5L Rs.

One interesting part is, ur HUF may receive gifts in kinds of any valuation from ur near & dear ones. For example u open a demat acct. in ur HUF's name. Now ur relatives & friends gift ur HUF, Eq. shares worth of 20L Rs. under gift. Ur HUF may sell these shares immediately to have liquid cash. The most interesting part of this, "Gift in Kind" strategy is ur HUF can claim tax free LTCGs for these Eq. shares, if the total holding period of these shares including original holder's (the doner) holding period is more than 1 year & shares r sold thru Stock exchanges & STT is paid on sell.I hope the above info may be of ur help.



Tuesday, 19 August 2008

How to get a TAX FREE Pension

Now a days a lot of young males & females are investing in Pension Plans offerd by almost all Insurance Cos. in India with a target to save enough for their sunset years. Once they are retired from their jobs, the accumulated corpus 'll provide the handsome pension, as the TV commercials of these Insurance cos. showcase.

If life is so simple, then there should not be any problem on earth. The basic problem with all such pension plans & investors who are investing in these plans, neither the plan providers (read Ins. cos.) are giving full details nor the customers (investors) are aware regarding their future - 1. What 'll be the accumulated corpus?

2. what 'll be the appx. returns (read pension)?

3. What is tax treatment of pension?

4. till how much time, the pension 'll be given?.........

Not many people give serious thought on these aspects. The most cruicial part of retirement planning thru these pension plans is - people are not aware, How the income tax liability/applicability 'll impact their over all pension.

1. Premature Withdraw - If due to any reason, the person, wants to premature withdraw of this pension plan, the surrender amount 'll be added to the taxable income from all other sources in the Financial Year of Receipt of such surrender value.

2. Start of Pension - At the time of start of pension (also known as vesting age in Insurance Cos.), The investor may withdraw a max. 1/3rd amount of her/his accumulated corpus till date as Tax free Cash commutation. Balance 'll be used for pension generation. As per IRDA guidelines, the investor has option to put remaining amount with any Ins. co. which is offering max. pension on this corpus.

Normally people prefer to start pension @ age of 60 years. Now comes the most interesting part of taxation on pension plans. Whatever amount received as pension 'll be added to the income from all other sources in the relevent financial year & taxed accordingly. At the same time, the cash commuted part (if opted for) 'll also be invested in safe avenues like SCSS, Bank FDs, PO schemes, Etc. The interest earned from such investment as already taxable. Hence the total pension generated from accumulated corpus as well as interest income from CASH COMMUTED part is taxable.

Now comes the question - How we can manage to avoid such income tax on our pension?

If an Investor, wants to invest in UNIT Linked Pension Plans (ULPP) to receive pension, it is better to invest in whole life ULIP or at least age 75 ULIPs. The investor should note here that money received from Life Insurance policies are tax free under section 10 (10) (D) as per current indian tax law. So once the investor reaches the age of 60 (the noraml retirement age) s/he may start withdrwaing tax free pension from ULIP in the form of partial withdraw.

As already mentioned these withdrawls 'll be tax free. the added advantage in case of ULIPs as replacement of ULPP is, one can plan her/his withdraw according to need whereas in case of ULPP, a fixed sum 'll be given no matter, ur actual requirement is less or more than it.

While selecting ULIP as pension plan, always try to invest in the ULIPs which offers lowest cover multiple say 5X or 10X of ur annual prem. & the same time plz. don't overlook the other aspects of ULIPs. Fund management charges, policy admin charges, Prem. allocation charges etc.
Hence make a wise call & if u r really interested to invest for ur pension, invest in a whole life or age 75 ULIP to get a "TAX FREE PENSION."

Thursday, 14 August 2008

Equity Investments: Tax Impact

``Equity and efficiency are complimentary, not contradictory…`` – Dr. Manmohan Singh

Equity investments can be in the form of direct investments through equity shares or indirectly through mutual funds. Balanced funds with equity exposure above 65% in Indian companies traded on a stock exchange are treated as equity from a taxation standpoint.

Dividend Distributed

Apart from capital appreciation, one can also earn returns by means of dividend declared by the company/fund. These dividends are tax-free in the hands of the investor, and there is no dividend distribution tax either on ``Equity`` mutual funds as per the definition above. This is so because when companies declare dividends, there is a dividend distribution tax that is paid by the company. This has no impact on the investor.

Securities Transaction Tax (STT)

The point which is often ignored is STT that is applicable on purchase/sale of equity shares, units of equity oriented mutual fund (delivery based) at 0.125%. For non-delivery based sale, 0.025% is applicable on transactions, sale of derivatives/options would attract 0.017% STT. Hence, they do not escape from the ambit of taxes irrespective of the holding period.

Computing Date of Holding – Special Scenarios

Shares acquired as a gift

Where one has been gifted equity, the period for which the shares were held by the previous owner (the person who gave the gift) is to be included in the holding period. The cost of the shares incurred by the donor of the gift is considered to be cost of benefactor of gift.

Shares acquired as inheritance

Where one has inherited equity, then the period for such shares will be from the date of transfer (to the one who has inherited the equity). The purchase cost will be the Fair Market Value (FMV) as on the Date of Transfer.

Rights shares

For right shares, the period of holding will be computed from the date of allotment of the shares. The amount actually paid for purchase of the rights shares is taken as cost of the shares.

Bonus shares

When one receives bonus shares, the period of holding is computed from the date of allotment of the bonus shares. Cost of bonus shares is taken as nil.

Shares listed Overseas

Shares listed overseas and mutual funds investing in overseas stock (with Indian traded equity shares composition <>65%

Capital Losses

Since long-term capital gains earned on equity investments are tax-free, long-term capital losses incurred on equity investment cannot be set off to reduce taxable capital gains.

Short-term capital losses incurred on equity investment can be set off against any capital gain (long-term or short-term). If in the current year there is no taxable capital gain to set off the loss against, one can carry forward this loss for 8 years and set it off against future taxable capital gains.

Plan well- you can now reduce the taxes on your capital gains from equities.

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Sunday, 20 January 2008

Term Insurance Plans

As the name suggest Term Insurance Plans offer insurance cover for a specified term & that too with minimum premium payment. It is the cheapest form of Insurance & also the basic version of Insurance which everybody should purchase for sake of financial security of family members in case something unwanted or mishappens to the earning member of the family.Today almost all the 18 Life insurers are offering these term plans in India.

How to select term Plans:- A lot of factors are involved for selecting term plans. The most commonly used factors are the Human life value, age of person, the riders availability with the cover, & last but not the least the premium payable for cover. Many people 'll ask how one should calculate the HUMAN Life Value? The answer for this question is dependent of several factors. Primarily 2 main factors are the remaining life earning potential of the person & the same time the current & future liabilities of the person like Car/Home Loans etc. & Children's education & career related expenses.

One may ask how can we give a final figure to an expense (education of children) in today's trying times when cost of each & every item, service is skyrocketing. The answer is not that much difficult. Let's understand with an example. Say a person aged 30 years have a new born baby boy for whose career as a MBA proffessional, he wants to take cover. the simplest method for deciding the cover 'll be present cost of education from preschool to MBA level, inflate the figure with average inflation no. of 6-7% per annum. the resultant figure 'll be a guiding sign to decide the cover amount.

How to select plans from different Insurance Companies:- After deciding the cover amount, next question comes, how one should select policy from diffrent ins. cos. As there is no matyrity amount is returned after completing the term of policy, The only deciding factor remains the cost (prem. paid for the cover) & the claim settlement record of Ins. cos.

What are riders & how these benefit:- With Term Plans, different Ins. cos. offers a variety of riders. Some common riders are - Accidental Death & Disability Benefit Rider (ADDBR), Critical Illness Rider (CIR), Waiver of premium rider (WoPR). As the name suggests, ADDBR comes handy when the insured person mets with an accident, in case of death, the amount as opted under accidental death beenfit is paid with the normal death amount. In case of only disability in accident & not death, the person is entitled to get disability sum assured as opted under ADDBR. WoPR comes handy when the insured person met with an accident & finally unable to work due to permanent disability, in this case the ins. co. waive off the future premium of the basic cover of term ins. policy & the policy remains in force till the term of the policy or death of policy holder which ever is earlier.

Static cover or Split cover:- Many people 'll shocked to read what the static cover or split covers are? Well we all know, life is not fix for ever. Our life styles, conditions, income, liabilties change over the period of time. then why should be there a fix cover of X amount from day 1 to 20-25-30 or 35 years. Let's understand it with an example - If the same person of 30 years age. with a new born baby, requires a total term cover of say 50,00,000 Rs., It should be be split in to 3 different covers of 20L, 15L & 15L of 30 years, 25 years & 20 years duration respectively.

Why this split cover, in initial part of life from age 30 to 45, there are maximum liabilities on a person, Home Loan, Car Loan, Kids Education etc. But after that these liabilties tapers down with every passing day & finally when the person reches his/her late fifties, almost all liab. are over by then. In the above example if the person is alive till age 40, a prt of liabilities from age 30 to 40 is over. Also during this period, there 'll be some savings from income earned during all these years, which again 'll help to bring down the over all liability level so after 12-15 years, there may be a situation that a part od ins. cover is not at all required. in case of static cover of 50L, the person 'll have to pay prem. for full cover but here comes the benefit of split cover. the person in question may discontinue the lowest term policy now & may deploy its prem. for better earning investment.

So the final word is understand the product & jump to grab it by both hands which is necessary to every indian family's financial security.