Sunday, March 31, 2013

How Much Pension Will I Get Through the Employee Pension Scheme (EPS)?

In one of the recent articles we had taken a detailed look at Employee Provident Fund or EPF. One of the components of this EPF is the Employee Pension Scheme or EPS. We covered what the EPS is and what it is supposed to do. But, we never talked about how much pension we might get after we retire. The purpose of this short article is to give you a relistic idea of how much pension you may get post retirement through this EPS Scheme.

To Refresh our Memory - What is Employee Pension Scheme?

The EPS is a saving scheme wherein a small sum of money is accumulated on a monthly basis over the duration of employment so that, it can help the employee receive a pension after retirement.

When can one start Receiving Pension from EPS?

An employee can start receiving pension under EPS only after rendering a minimum service of 10 years and attaining the age of 58 or 50 years.

Points to Remember:

1. No pension is payable before the age of 50 years.
2. Early pension — that is an employee receiving after completing 50 years of age but before 58 years is subject to a reducing factor @ 4% for every year falling short of 58 years. In case of death / disablement, the above restriction is not applicable.
3. The pension amount is payable to the eligible subscriber till he survives. On the death of the employee, members of his family—whom he has nominated—are entitled for the pension.

What Happens if I Resign before completing 10 years of service?

If you resign before completing 9 years and 6 months of service, you get the “withdrawal benefit” which depends on your monthly salary and the no. of years of service. EPS always rounds up the no. of years. So, if you worked for 4 years and 7 months, you will be considered as 5 years. You can opt for the withdrawal option only if you are less than 50 years old.

No. of Years of ServiceMultiplication Factor
Note: The amount you will receive is not based on the balance in your EPS corpus. It is based on your basic salary and no. of years of service that can be considered after rounding up as per the table above.

For Ex: An employee exits from employment after 3 years and 8 months of service with a basic salary on exit Rs. 5,000 - They will get Rs. 19,250 (5000 * 3.99)

If you have crossed the 50 year mark or the 10 years of service then this withdrawal option is not available for you.

What can I do if I have crossed the 10 years of Service?

If total service of employee is more than 9.5 years and age of employee is less than 50 years of age, they can only claim a scheme certificate. They can add services at different companies to calculate total service and can get pension from the age of 50 years onwards. If they have the scheme certificate for all services, they may apply directly at EPF office which covers the area. They needs to fill up Form 10-D, get form attested by a Nationalized Bank manager with photo and other required documents which is mentioned in the Form-10D to avail the Pension benefit.

So, If you are switching jobs you can get this Scheme Certificate and avail the pension option when you retire.

What is the Maximum Pension One Can Get from EPS?

Under EPS, the monthly pension is decided on the basis of ‘pensionable service’ and ‘pensionable salary’.


Pensionable Salary = Last Drawn Basic Monthly Salary
Pensionable Service = No. of years of Service you put in as an employee of your company

The formula to calculate pension is:

Monthly pension = (Pensionable salary X Pensionable service) ÷ 70

Did you read the article on EPF carefully? Did you note that the upper limit on EPS contribution is based on a Monthly Basic Salary of Rs. 6,500/-?

So, if the amount contributed every month is on a salary of Rs. 6,500/- what do you think will be considered as Pensionable Salary for the above formula???

As Expected, the pension is calculated on a monthly salary of Rs. 6,500/-

So if you have worked for say 35 years, your monthly pension will come to Rs. 3250

(6500 * 35) / 70 = 3250

Note: Rs. 3,250 is the maximum pension one can get per month through the EPS Scheme.

Are you disappointed after seeing this number?

Unfortunately, So was I.

This amount is too less. This amount wouldnt be enough for an individual in todays cost of living. Imagine the cost of living after 25 or 30 years when we retire?

To Make Matters Worse - If you invest this same Rs. 541 in a recurring deposit with a reputed Bank that offers compound Interest (That is compounded on monthly basis) at 8% interest rate per annum for 35 years, you would get Rs. 12,40,990 as maturity value.

If you purchase an Annuity Plan (A Fancy Term for a product that will pay you monthly pension) that offers 7% returns per annum, the monthly pension you will get is approximately Rs. 7,200/-

As you can see - The amount you will get is almost double of what pension you may get through EPS.

Sadly, all these limits and schemes were formulated in the 1980's when this Rs. 6,500/- per month was considered an extravagant salary that people yearned for. It is high time the Government of India woke up to the current state of affairs and revised all these numbers that make no sense today. The purpose of all these schemes is to help the Salaried Class of India survive when they retire after 25-30 years of service. Unless, these numbers are revised, there is practically no use in contributing to these schemes whatsoever...

My Thoughts on this:

Though the idea based on which these schemes were formulated need to be commended, they need to be tweaked in order to be effective. I would strongly suggest you plan for your retirement meticulously and ensure that you have a happy retirement. There have been multiple articles in our blog that cover Retirement Planning. You can visit the Retirement Planning Home Page of our blog by Clicking Here

Happy Retirement!!!

Tuesday, March 26, 2013

Employee Provident Fund - Demystified

Employee Provident Fund or EPF is by far the most common Retirement Planning option for the salaried class of India and in some cases the only Retirement Option. Even though most of the Salaried employees of India or should I use the more popular term "The Middle Class" have an EPF account and contribute towards it monthly, not many of us know what it is and how it operates. This article is one among the many that are coming up in this blog that can help you learn about Employee Provident Fund or EPF.

Let’s get started, Shall We???

What is the Employee Provident Fund (EPF)?

The EPF is created by the Employees Provident Fund Organization (EPFO) of India, a statutory body of the Indian Government under the Labor and Employment Ministry. It states that an organization having 20 or more permanent employees on its payroll, should register with the EPFO.

A Provident Fund is a fund that is created, through contributions, to provide financial support to individuals in their future (Specifically for post-retirement). The Employee Provident Fund is just such a fund. Contributions are made on a monthly basis, by both employees and employers, thereby encouraging employees to save a portion of their salary each month. Investments made by millions of employees across India are pooled together and invested by a trust.

The EPF is a tax free investment instrument for the salaried class. Interest earned on it is tax free, and returns are also not taxed. You also get a deduction under Section 80C for contributions made towards your EPF.

Do You want to take a guess at the value of the total corpus of the funds accumulated by the EPFO???

It is more than Rs. 3 Trillion...

Where does your Monthly EPF Contribution Go?

Currently, the following three schemes are in operation under the EPF Act of 1952, and it is into these trusts that your monthly contributions go. These are as follows:

1. Employees Provident Fund Scheme (1952)
2. Employees Deposit Linked Insurance Scheme (1976)
3. Employees Pension Scheme (1995)

In a majority of the cases, EPF, EPS and EDLIS are calculated on the basis of your Basic + Dearness Allowance (DA). Others consider your Basic + Dearness Allowance + Cash value of food allowance and retaining allowances if any as well.

What is the Employees Pension Scheme (EPS)?

This part of your monthly contribution is targeted towards offering pension on disablement, widow’s pension and pension for nominees. It is financed by diverting 8.33% of your monthly contribution away from the EPF and towards the EPS instead. This is kept to a maximum of 8.33% of Rs. 6,500, or Rs. 541. The government also contributes the equivalent of 1.17% of your monthly contribution towards the EPS.

Most people don’t realize this upper limit and think that it is a fixed % of their Basic Salary whereas the government has set up an upper limit. So, if your Basic Salary is more than Rs. 6,500/- per month, only Rs. 541/- will go towards EPS.

The purpose of the EPS is to provide for the following:

1. Superannuation Pension: A member who retires after 20 years of service and at or after the age of 58 years
2. Retiring Pension: A member who has rendered eligible service of 20 years and then retires before attaining the age of 58 years
3. Short Service Pension: A member who has rendered more than 10 but less than 20 years of eligible service
4. Permanent Total Disablement Pension: A member who is permanently and totally disabled and is unable to work/earn

What is the Employees Deposit Linked Insurance Scheme (EDLIS)?

Under this scheme, employees receive Life Insurance cover. The cost of the scheme is borne by the employer, but the life insurance received under this scheme is limited to Rs. 1,30,000/- (Which I personally feel is very low)

Most employers opt out for the EDLI and choose to have a group life insurance cover for their employees. This works out better for the employees and does not increase any cost to the employer. Usually the coverage provided under this scheme is a simple multiple of the annual salary of the employee (based on his/her grade/designation) and hence will be much higher than the fixed Rs. 1.3 lakhs cover that EDLIS offers.

A Sample Calculation - Of How Your EPF is Split Up and Saved:

Every Month a portion of your Salary is deducted towards EPF - This will be referred to as "Employee Contribution". Your employer too contributes a certain amount every month towards EPF - This will be referred to as "Employer Contribution".

Employee Contribution: 12% of your Basic Salary + DA (Comes out of your Salary)

Employer Contribution: Another 12% of your Basic Salary + DA (Comes out of your Employers Pocket)

In most corporate companies these days, this Employer Contribution too is considered as part of your total CTC (Cost To Company) and hence can’t really be considered as coming out of your Employers Pocket

The Employee Contribution goes entirely towards the EPF Scheme.

The Employer Contribution gets split up as follows:

1. 3.67% into EPF
2. 8.33% into EPS
3. 1.1% EPF Administration Charges
4. 0.5% into EDLIS (If Applicable)
5. 0.01% EDLIS Administration Charges

If you remembered to add up the numbers the total comes up to 13.61% which is higher than the 12% Employer contribution that I just mentioned a few lines ago. That is because:

* The 1.1% EPF Admin Charges is borne by your Employer and is not part of your CTC
* The 0.5% contribution to EDLIS or 0.01% EDLIS Admin Charges too are borne by your Employer (If Applicable) and is not part of your CTC.

So, if you just sum up the 3.67% that goes into your EPF and the 8.33% that goes into your EPS - The Total comes up to 12% doesn’t it?

In cases where the Basic Salary of an employee is more than Rs. 6,500/- most employers limit the EPS contribution to Rs. 541/- and contribute the remaining towards EPF.

For ex: If your Basic Salary is Rs. 10,000/-
12% of your Basic Salary works out to Rs. 1,200/-
3.67% of your Basic Salary works out to Rs. 367/-
8.33% of your Basic Salary comes to Rs. 833/- which is higher than the limit of Rs. 541/-

So, your Employer will contribute Rs. 541/- towards EPS and contribute Rs. 659/- towards EPF (Rs. 367/- + Rs. 292/-)

In Essence, the employer will contribute 12% of your Basic just as mentioned above with the simple difference being the fact that the EPS component is constrained by an upper limit and the remaining usually goes towards your EPF.

What Happens to the Money that is accumulated in the EPF Corpus?

The EPFO usually lends loans (To Government Entities) or uses the money to finance Government Projects. As a Result, the Government offers a fixed Rate of Interest on the money accumulated in our EPF Corpus. So, not only does your corpus grow every month (with additional monthly contributions) but also earns a fixed and regular interest.

When is the Interest Calculated/Credited in our EPF Account?

The Interest is usually Calculated as well as Credited into your EPF Account at the end of each Financial Year. Compound interest is paid on the amount standing to the credit of an employee as on 1st April of each year.

One Last Word of Caution:

There is a clause in the PF guidelines that allows employees to choose Rs. 6,500/- as the upper salary limit (Just like EPS) to calculate the EPF contributions as well. So, companies that offer PF as a benefit over and above the salary package to the employee may opt to put this upper limit of Salary on PF calculations thereby reducing your PF contribution every month. Firms that offer EPF as a total benefit in the "cost-to-company or CTC" mode wont bother about this because even their share of PF is considered part of your salary and hence they wont mind paying the higher PF amount

Hope this article covered all the basics you needed to know about the Employee Provident Fund Scheme. Watch out for more articles on EPF!!!

Friday, March 22, 2013

Are you utilizing all your Tax Saving Options?

March is almost over and we are in the last few days of the Financial year where people are running around to save tax. Everyone knows about Section 80C which gives you tax relief if you invest in qualified instruments like ELSS Mutual Funds or NSC or PPF etc. Similarly people use their home loans, medical expenses etc as well to reduce their tax liability. A surprising fact that I learnt a few weeks ago while interacting with a few of my friends back in India was that, beyond Section 80C, people dont really know about the other tax saving options.

The idea behind this article is to throw some light on the various sections under which we can reduce our tax liability...

Section 80D - Medical Insurance for Self & Dependents

We all know about Medical Insurance but many of us dont really have such insurance policies. To motivate people to get insured, the government has provisions under section 80D to help you reduce your tax liability if you have such policies. The premium amount, which is paid for medical insurance policy for self and family members to protect them from sudden medical expenses, comes under this section. The maximum amount allowed for exemption annually for self, spouse and dependent parents/children is Rs. 15,000. In case of a senior citizen, the maximum amount extends up to Rs. 20,000. If you are paying the premium for your parents (whether dependent or not), you can claim an additional maximum deduction of Rs. 15,000.

Section 80DD - Medical Treatment of a Physically Disabled Dependent

Under Section 80Dd, Individuals who have physically disabled dependents and incur expenses in their maintenance can claim tax exemptions. The tax assessee must have incurred the expenses for the medical treatment, training & rehabilitation of a disabled dependent OR must have deposited the amount to LIC OR any other insurer for the maintenance of the disabled dependent.

Here, the dependent should be none other than your spouse, children, parents or sibling. If the person is suffering from 40 per cent of any disability, a fixed sum of Rs. 50,000 can be claimed in a year. Similarly, if the disability is 80 per cent, the fixed sum goes up to Rs. 1,00,000 per year. A certificated issued by the medical authority treating the disabled dependent has to be provided as proof in order to claim exemption under section 80DD.

The following disabilities are eligible under Section 80DD:
• Blindness
• Low Vision
• Leprosy-cured
• Hearing impairment
• Locomotors disability
• Mental retardation
• Mental illness.

Section 80DDB - Medical Treatment of Self/Dependents for Certain Diseases:

If an individual has incurred expenses for the medical treatment for self or for his/her dependents for certain diseases, he/she can claim tax deduction of up to Rs. 40,000 (or the actual amount paid, whichever is lower) under Section 80DDB. For Senior Citizens the amount is up to 60,000. Deduction is applicable for treatment of self, spouse, children, siblings, and parents, who are wholly dependent on you.

Diseases covered under Section 80DDB

a) Neurological Diseases (where the disability level has been certified as 40% or more).
b) Parkinson’s Disease
c) Malignant Cancers
d) Acquired Immune Deficiency Syndrome (AIDS)
e) Chronic Renal failure
f) Hemophilia
g) Thalassaemia

Most major diseases are covered under this section. To claim a deduction under this section, you need to submit a medical certificate from the doctor who is treating the disease.

Section 80E - Education Loan:

With the liberalization of the banking rules for education loans, students in India are able to pursue higher education easily by financing their own education. Though we are just repaying the money we got from the bank as part of the educational loan repayment, the government is providing tax benefits under Section 80E to individuals who are repaying their education loans. The loan could be on your own name or for your wife or your children or minors for whom you are the legal guardian.

This deduction is applicable for a period of eight years or till the interest is paid, whichever is earlier. Any full-time educational course can be used for exemption under this section. However, part-time courses do not qualify under this section.

There was an article titled "Pay for your Education through an Education Loan" which covered Education Loans and the finer details of the same. I would suggest you Click Here and learn more about it.

Section 80G - Donations to Charitable Institutions:

Many of us donate money to charitable institutions and NGO's regularly. Though helping out the needy is a good deed and we usually dont expect anything in return, the government is trying to motivate citizens to help out the needy and thereby is providing tax relief to contributions/donations we make to charitable institutions. The exemption can be up to 50% or 100% of the donation made. There was an article titled "Section 80G of the Indian Income Tax" in our blog that covered this section in detail. I would suggest that you visit that article by Clicking Here and learn more about it.

Section 80GG - Relief for House Rent:

If an individual residing in a rented house does not receive any kind of HRA as part of their salary, he/she can claim a deduction under Section 80GG. A point to note here is that, if the individual or his/her spouse or their children own any residential property (House) in India or Abroad, they cannot claim exemption under Section 80GG.

The Relief/Exemption for tax purposes is the lower of the following 3 numbers:

a. Rs. 2000 per month or
b. 25% of Annual Income or
c. Amount of Rent paid in excess of 10% of Annual Income

So, for example if your Rent is Rs. 3000 per month and your Annual Salary is Rs. 1,50,000/- the calculation will work as follows:

a. Rs. 2000 per month = Rs. 24,000/- for one year
b. 25% of 1.5 lakhs = Rs. 37,500/-
c. Amount in excess of 10% of annual income = Annual Rent - 10% of annual income = 36,000 - 15,000 = Rs. 21,000/-

In this case your exemption will be Rs. 21,000/- per year as per option c.

Section 80GGC - Donations Made to Political Parties:

Any contribution made by an individual to a political party (registered under section 29A of the Representation of the People Act, 1951) is fully deductible under Section 80GGC of the Income Tax Act.
There is actually no upper limit here and any amount you contribute can be fully claimed for tax exemption. However, the party must be a registered political party of India otherwise this section cannot be utilized. Also, donations made can be used for exemption only once and during the same financial year only. Donations made last year cannot be used this year even if you missed claiming them last time around.

Section 80U - Exemption for Disabled Individuals:

Income tax law gives a special deduction to the persons who suffer from some kind of disability. This comes under section 80U of income tax act in which the persons who are suffering from some kind of or total disability has the special relief in income tax act.

The Term disability as per Section 80U refers to any of the following illnesses:

1. Blindness
2. Low vision
3. Hearing impairment
4. Leprosy
5. Moving disability
6. Mental retardation
7. Mental illness
8. Autism
9. Cerebral palsy
10. Multiple disabilities (more than 1 disability)

The deduction provided is flat Rs. 50,000, irrespective of the expense incurred if the disability is at least 40%. If the disability is severe (80% or more), the deduction can be up to Rs. 1 lakh. One needs to provide a copy of all the certificates issued by a medical authority in order to avail this benefit. A point to remember that, if the disability is less than 40%, this section cannot be used for Tax Exemptions.

80CCG - Rajiv Gandhi Equity Savings Scheme – RGESS:

The Rajiv Gandhi Equity Savings Scheme – RGESS is a new scheme introduced this year by our finance minister which offers tax exemptions under Section 80CCG for investors who invest up to Rs. 50,000/- in qualified shares. This benefit is only available if your total income for the year is less than or equal to Rs. 10 lakhs. There was an article titled "Rajiv Gandhi Equity Savings Scheme – RGESS" in our blog last year which explains in detail about the same. I would suggest you revisit the article by Clicking Here and learn more about it.

As you can see, there are many other sections apart from Section 80C that can help you avail tax benefits. If you qualify to use any of the sections elaborated above, it would be a good idea to revisit your tax planning and utilize the benefits available to us.

I have also published a book on Indian Income Tax which you can buy for a small fee. Check it out here:

Happy Tax Planning!!!

Wednesday, March 20, 2013

Have You Thought About or Planned for Income After Retirement?

"Retirement" is a word that is selling millions of ULIPs every year Across India. Insurance Advisors, Financial Planners, Bank Managers and even Bank Staff are trying to sell ULIPs to people when customers visit their offices for some reason or the other. The reason they give is simple "You need to Save/Plan for life after Retirement".

Unfortunately - Most of the ULIP's and Retirement Products that are being sold in the Market today solve only half the problem. They help you accumulate a lump sum corpus that will be available to you when you retire. It does not solve the other half of the problem - "Regular Monthly Income"

The Idea behind this article is to give you an idea about the investment options that can help you generate a regular income even after Retirement.

Before We Begin: There is a whole series of articles in this blog that deal with Retirement Planning. You can find them by clicking on the Page titled Retirement Planning at the top or by Clicking Here Also, people in their 30's may feel that they is still a long way to go before they actually retire. But, they forget the fact that their "Dads" and "Uncles" would be retiring very soon and they can use this knowledge to help those family members plan for their life post Retirement. To top it all off, if you help a senior member of your family plan their Retirement, you will get a good idea of how much money you will need post Retirement and how you can plan your life after Retirement in a better manner.

Pre-Requisite: The Pre-Requisite for this article is that "You have already planned for your Retirement and will have a lump sum corpus by the time you retire so that you can invest in the below mentioned instruments to start generating Regular Income"

Planning For Regular Income - Post Retirement

Accumulating money for Retirement and then leaving it as such is like, walking till your car and then walking away without getting in because, if you have been working for at least 2-3 years, you will definitely know that, whenever we get some lump sum cash and are happy about it, in most cases we are left wondering where the money went just 3 months down the line.

There are Many Ways by which you can generate "Regular Income" after you retire. But, all of them would require you to make a "Lump sum" Investment at first in order to get the income. That is why I mentioned this as the Pre-Requisite for this planning...

The following are some of the ways of generating "Regular Income" after "Retirement". At the End of each instrument you will find points titled: "Risk" and "Possibilities of Return" which will tell you how risky the investment is and the type of returns you can expect from each of these instruments. We will also mention if the income earned from these instruments is taxable or not.

1. Bank Fixed Deposits

This is probably the most famous as well as most commonly used instrument by Senior Citizens across the country. You invest a lump sum today and then the bank will make regular interest payments (Monthly/Quarterly/Half-yearly/Annual) for as long as the money is kept deposited with them. At maturity, the principal amount invested will be returned to us.

A Simple Example: Let us say I invest Rs. 25 lakhs in a Bank FD that is paying an interest of 8% per annum, the Interest I will earn at the end of 1 year is Rs. 2 lakhs. The bank will give me this money any way I want. For ex: Rs. 16,667/- per month or Rs. 50,000/- every quarter or Rs. 1 lakh every 6 months or Rs. 2 lakhs at the end of each year.

Risk: Very Low
Possibilities of Return: Above Average
Income Taxable: Yes

There are banks that offer more than 9% rate of interest for Senior Citizens. If you choose such banks the possibilities of returns are much higher than other banks. But, remember to stay away from finance companies that offer double digit rate of returns. They are very risky!!

2. Post of Monthly Income Scheme (POMIS)

One can invest a lump sum amount in POMIS and get monthly income for next 6 yrs. The return one can get is around 8% and the income can be given in form of monthly interest for next 6 yrs. One will get back his principal amount along with a 5% bonus at the end. One can invest only up to 4.5 lakhs for an individual account and 9 lakhs in a joint account.

Risk: Very Very Low
Possibilities of Return: Average
Income Taxable: Yes

3. Long Term Government Bonds

One can buy long term government bonds with maturity of around 25-30 yrs. that pay a half-yearly or annual interest at around 8%. As these are government bonds, the risk is almost absent but the interest earned by these bonds is fixed by the government and it varies from time to time. At the end of the tenure you get back your principal amount. These bonds are government’s way of raising money for public and you can consider these bonds as one of the safest instruments. Some of these bonds are also tradable in secondary market, so you can also sell them if you want to get rid of them.

Risk: Very Very Low
Possibilities of Return: Average
Income Taxable: Yes (Unless the Bond is Explicitly offered as a "Tax Free" Bond)

4. Annuity from Insurance companies

Annuity Plans are very similar to the first 2 products in the list. You can buy annuity plans from private or government Insurance companies. The returns or should I say monthly income would depend on the pension tenure and other options that you are allowed to choose. Products that have to return/refund the Principal at maturity usually offer lower rate of returns than annuity products that need not return the principal at maturity.

Risk: Low
Possibilities of Return: Below Average
Income Taxable: Yes

Annuity Plans offer much lower rate of returns (Around 6% only) when compared to other products. Once you invest your money, you are stuck until maturity and premature closure usually involves hefty penalties. So, think more than once before you invest in them.

5. Senior Citizen Saving Scheme (SCSS)

One of the best options for senior citizens above 60 yrs of age is to put their money in senior citizens saving scheme and get an interest of 9% per year which is payable quarterly. SCSS has a maturity period of 5 years after which if the individual wants, it can be extended for 3 more years. Even Investors in the age group 55-60 can invest in SCSS if they are retired (Through Voluntary Retirement) and the funds are coming from their Retirement Benefit.

Risk: Very Very Low
Possibilities of Return: Average
Income Taxable: Yes

Amount invested in SCSS is eligible for Sec 80C Benefits making this the best investment option possible for Senior Citizens

6. Rental Income

Buying an additional house when we are employed and then renting it out is a great way to supplement our income even before Retirement. For many of the senior citizens across India, this is a very commonly used option to generate income post Retirement. People even construct an extra floor and then rent it out. However, the problem with this route is the high initial investment and low liquidity. Selling a house is not easy and usually takes at least a few weeks and may take much longer depending on the size of the house, its locality etc. The problem here is identifying the right tenant. If any rogue element of the society manages to enter into your house, then, not only will they be skipping out on Rental payments but also they may make your lives difficult. So, make sure you think before you go this route and choose the right tenant for your house.

Risk: Average
Possibilities of Return: Average to Above Average (Depends on the Locality and Size of the house)
Income Taxable: Yes

7. Monthly Income plans of Mutual funds

There are mutual funds which are of category Monthly income plans (MIP). These mutual funds have inbuilt structure of providing regular income to its investors. However, they can be a little bit riskier because they invest in Equities too. On the bright side, the returns offered by MIP's are usually higher than other traditional investments. So, you must assess your risk taking ability before investing in such schemes. You can learn more about Monthly Income Plans by Clicking Here

Risk: High
Possibilities of Return: High
Income Taxable: Dividend Income is Tax Free but any other Income is fully taxable

As you can see, we have multiple options to invest for income after Retirement. I personally would split my investments across two or more instruments and will definitely include the Senior Citizen Saving Scheme.

Happy Retirement!!!

Sunday, March 17, 2013

Indian Union Budget 2013 Aftermath - An Outlook for the Banking & Insurance Sectors

The Indian Union Budget was presented in the parliament by the Finance Minister of India Mr. P. Chidambaram last week. News channels in India have been bustling with news about the Budget and how good or bad the budget will be over the past few days. As days go by, more and more clarity is emerging on the details and plans announced by our finance minister. Last week, we had an article in this blog titled "Budget 2013 - Highlights & Things you need to know about Budget 2013" where we took a high level view of the Indian Union Budget - 2013.

The purpose of this article is to go a step further and cover how the budget is going to affect the Banking and Insurance Sectors of our country. The idea is to understand the key developments that may impact the sectors in the coming year.

Overall Outlook For The Banking & Insurance Sectors: Positive

The Banking Sector is the life blood of the nation and not a single day goes by without some news about Banks or Insurance companies in the country. As expected, the Finance Minister had loads of plans that could affect banks. The following are some of the highlights that would impact the Banking & Insurance Sectors in India.

1. Before the End of the Financial Year ending 2013, the Finance Ministry is expected to provide Rs. 125.2 billion as additional capital infusion for 13 Public Sector Banks in India. This is set to increase to Rs. 140 billion in Financial Year ending 2014.

My Views:

Public Sector Banks in India have one of the highest Non-Performing Assets (NPAs) across the world. This is because, every time they make losses the government usually steps in and funds them with fresh capital. Where does this money come from?

Tax Payer Money

Essentially, the hard earned money that we pay as taxes is being channeled to fund banks that are unable to maintain their asset quality. They grant bad loans and try to write them off by taking funds from the Government. All this is because they have an unlimited supply of capital from the Government. Capital availability for public banks must be made in-line with private sector in order for the officials from banks to start doing their jobs properly.

What is a Non-Performing Asset?

A Non-Performing Asset from Banking perspective is a loan that is currently in default and the chances of the borrower repaying the money are low to nil.

Kingfisher Airlines is a prime example. SBI Alone has loans worth many thousand crores which KFA owes them. What will happen if Kingfisher declares bankruptcy? SBI will ask the Government for more money and the government will eventually give them the money while private sector banks are left to think how best to handle the losses...

If you ask me, this is not correct. Unfortunately, there is not much we can do about this. Hopefully things will improve in the coming years and the top management in Public Sector Banks start realizing their importance and behave responsibly.

2. The Finance Minister has proposed that India's first Women's Bank be set up. It will be a public sector bank (Owned by the Government) and will most probably begin operations around October or November 2013 if all the requisite approvals are in place. The budget allocated is around Rs. 10 billion

My Views:

I am not a Chauvinist and don’t intend on sounding like one but a "Women’s Bank" looks more like a populist theme with the elections that are coming up next year in mind. How different is this bank going to be in comparison to the existing numerous banks in the country? Practically speaking - The difference may be a result of who will work in the bank and who can open an account in the bank, but we already have millions of women working in Banks across India. This is just going to add yet another bank into the already overcrowded banking sector in India.

3. Funds for both Urban and Rural Housing are being proposed/set up. Rs. 60 billion for the Rural Housing Fund and Rs. 20 billion for the Urban Housing Fund. The funds will be distributed through the National Housing Bank through its Rural Housing Fund and Urban Housing Fund. The money will be used to lend loans to deserving citizens. A point to note is that the Urban Housing Fund is currently being created and is pending RBI Approval.

My Views:

An Infusion of 80 billion rupees into the market to lend loans to people to finance their housing dreams will result in significant growth in both the finance as well as the real estate markets across the country. It is a good step as long as the money performs its intended purpose and reaches the public.

4. Banks will now be able to act as Insurance Intermediaries/Advisors and sell insurance products. Most banks today sell only ULIP or Stock Market Related products. This new ruling will enable banks to sell even traditional insurance plans to its customers across its entire branch network.

My Views:

This is great news for both banks as well as for Insurance companies. Insurance co.’s are going to get additional sales channels and Banks are going to rake in additional revenue through commissions.

5. Insurance Companies can open up offices in Tier II Cities without approval from IRDA.

My Views:

Insurance Companies currently have to get IRDA Approval before they can actually set up offices in Tier II Cities. As a result, their presence is very limited in smaller cities across the country. With this new ruling, they can set up more offices in smaller cities and reach a wider target audience across the country. This will result in a significant boost in Income for Insurance Companies and will result in the Insurance Coverage across India. A Study conducted last year suggested that almost 70% of the population in our country do not even know about what Insurance is or know how to benefit from it. This new ruling will improve the penetration of Insurance into the semi-urban and rural areas of the country.

Final Verdict:

Even though the budget hasn't really given a huge boost to the finance sector in the country, it hasn’t dampened our spirits either. So, given the need for banking and insurance services in the ever growing population of our great nation, the banking industry and the insurance industry are expected to thrive and sustain their growth momentum next year too..

Happy Banking folks!!!

Saturday, March 2, 2013

Budget 2013 - Highlights & Things you need to know about Budget 2013

After a long hyped up wait, the Finance Minister Mr. P. Chidambaram delivered his 2013 budget speech in the Parliament yesterday. Motivated by expectations of a positive budget, the Indian Stock Market surged over 100 points during the start of the trading session. But, as the Finance Minister continued his speech, more and more news came in that affected investors negatively. As a result, the stock market ended the day, deep in RED. The Markets closed down by around 2%. BSE Sensex closed down by 291 points (1.52%) and NSE Nifty closed down by 104 points (1.79%). 

Based on the Investor reaction, you would've guessed by now that the budget did not bring much good news to people. However, there are a lot of things that you need to know about this budget because most of them will have a direct or indirect bearing on you and your finances this year. So, make sure you read this article carefully... 

Highlights of the Union Finance Budget 2013 - That Will have little to No Impact on most of us: 

The following are some of the highlights of the Union Finance Budget 2013 that will have little to No Impact on most of us: 

1. Rs. 1000-crore Nirbhaya Fund announced for the empowerment of women
2. Rs. 14,000 crore capital infusion into public sector banks in 2013-14
3. PSU banks to have ATMs at all their branches by March 31, 2014
4. Defense allocation increased to Rs. 2.03 lakh crore
5. Securities and Exchange Board of India to simplify procedures for foreign portfolio investors
6. Tax-free infrastructure bonds of Rs.50,000 crore to be issued
7. No change in basic customs duty rate of 10% and service tax rate of 12%
8. Insurance companies can open branches in Tier II cities without prior approval from IRDA
9. KYC of banks will be sufficient to acquire insurance policies, banks to act as brokers
10. Securities Transaction Tax (STT) cut on equity futures to 1 bps from 1.7 bps
11. Duty free limit for Gold raised to Rs. 50,000 in case of a male passenger and Rs. 1 lakh for female passengers

Highlights of the Union Finance Budget 2013 - That Will have A Direct Impact on most of us: 

Did you think for a moment that the Stock Market tanked close to 300 points after this? Unfortunately, this is not the entire list. The following are some of the highlights of the Union Finance Budget 2013 of India that will have a Direct Impact on Most of us: 

1. No Change in Tax Slabs

There was no change in tax slabs. The Finance Minister Mr. P Chidambaram said that the changes to the Tax Slabs were made just last year and it was not possible for any increase this year. So, the Tax Slabs that were defined last year apply for this financial year 2013-14 as well. The following Two Articles were written in March Last Year after last year’s budget. As the Tax Slabs have been left untouched for most of us (Unless your taxable income is above 1 crore) they will be useful to you now as well. To refresh your memory you can read them by clicking the links below:

Budget 2012 - Income Tax Slabs Revised in India
India Budget 2012 - How the Change to Tax Slabs Affect Us

2. Changes to Individual Tax Policies

Though the Tax Slabs were not changed, a few slight modifications were made this year. They are as follows:

Additional 10% Surcharge imposed on people whose taxable income is above 1 crore. 
A tax credit of Rs. 2,000 to every person with an income of up to Rs. 5 lakh per annum. 

3. RGESS first time investors income limit increased to 12 lakhs.

Earlier, RGESS scheme was only available to those investors whose taxable income is below 10 lakhs, but now it’s increased to 12 lakhs. So, this can be considered sort of a good news. To know more about this RGESS scheme I suggest you read the article titled "Rajiv Gandhi Equity Savings Scheme – RGESS" in our blog by Clicking Here

4. Additional Incentive for First Time Home Buyers 

If you are planning to buy a home and take a home loan of less than Rs 25 lakhs, this is your lucky year. You can claim an extra deduction of Rs 1 lakh in interest, over and above the 1.5 lakhs, but only for the next financial year 2013-14. Another point to note is that this benefit is applicable only for Fresh Home Loans and not existing loans. Remember that this benefit is available only for one year and not every year. Nonetheless 1 lakh is not a small amount of money and is a sizeable good news for most people because, excepting Metro's you can still get a decent sized apartment/house with a loan of around 25 lakhs isn’t it? 

5. Excise Duty hiked to 6% on Mobile phones worth more than Rs. 2000/- 

Excepting those basic black and white display mobile phones, almost all mobile phones these days are above this Rs. 2000/- limit set by our finance minister. So, if you are planning on changing your mobile phone after March 2013, you will end up paying a few hundred rupees more for the same phone because of this hiked Excise Duty. 

6. Excise duty on SUV's hiked from 27% to 30% 

Are you a fan of SUVs and are planning to buy an SUV after March 2013? If so, this news will come as a shocker to you. The Excise duty on SUV's is hiked by 3% and so, plan on shelling out a few thousands more on the same SUV that you were planning. Mahindra and Mahindra, the Nation’s top SUV Maker went down by close to 30 rupees yesterday as a direct result of this news. 

7. Import duty on luxury cars hiked to 100 % from 75 %

Are you an aficionado of luxury cars like BMW or Ferrari? Although only a handful of people in India can actually afford such luxury cars, the fact is that the Finance Minister has increased the Import Duty by 25%. So, expect luxury cars to be costlier by a few more lakhs this year. 

I can hear you mumbling. What difference does it make for me if a Ferrari costs 1.5 crores now instead of 1.4 before? It doesn’t affect me anyways!!!

8. Import duty on luxury two-wheelers hiked to 75 % from 60 %

Well, if you dream of riding a luxury two wheeler like a Suzuki Hayabusa or a Ducati Desmosedici or a Harley Davidson, your dream is about to get costlier because the Finance Minister has increased the import duty on such luxury bikes by 15% 

9. Service Tax on Bungalows and Luxury Apartments Hiked 

Those buying homes of carpet area over 2000 sq. ft. or of value 1 crore or more will pay service tax on 30% of the value of the property. Others however, will continue to pay Service Tax at the existing 25% of the value rate. 

10. TDS of 1 % on Real Estate Transactions over Rs. 50 lakh

For any Real estate transaction (other than Agricultural land), the seller has to pay the TDS of 1% on the transaction amount if it’s more than 50 lakhs. So if you are selling your flat that is worth Rs. 75 lakhs, you will have to pay a TDS of 75,000/- 

11. Specific excise duty on cigarettes increased by 18 %

This news may not affect you unless you are a Smoker but nonetheless, as with every year, the Finance Ministry has hiked the excise duty on Cigarettes that would make Cigarettes costlier than what they are currently...

12. Import duty on set-top boxes hiked from 5 % to 10 %.

Of Late, the craze to install a Set Top Box at home and watch TV in HD has picked up heavily in India and to take advantage of the Same, the Government has hiked the Import Duty on Set Top Boxes. So, expect to pay a few hundred rupees more on them if you buy after April. 

13. Service tax to be levied on AC restaurants of all kinds

Earlier, service tax was applicable only on those AC restaurants which served liquor, but now service tax is applicable on all kind of AC restaurants. So, your next eating out is going to be more costly. 

14. Customs Duty levied on all Coal Imports 

The Finance Minister has imposed a 2% customs duty on all Coal Imports. Though India produces/mines a significant portion of its Coal Requirements, we still import a large amount of Coal. So, this duty may not affect us directly or should I say immediately but this might result in a slow/indirect hike in price of products that are produced using Coal as the Fuel. 

I can hear you mumbling... Already the price of Petrol and Diesel are skyrocketing and now this??

My Thoughts:

My Thoughts on the Budget reflect the Market Sentiment. I am highly disappointed. Some measures to help the common man combat the skyrocketing cost of living in India were expected but were nowhere to be found. If the Finance Minister feels that the Tax Slabs were revised only last year and do not warrant a revision this year, what about the constant revision of petroleum prices which is resulting in an almost monthly rise in price of essential commodities? Items like Rice, Wheat, Dhal etc. are getting costlier by the day simply because manufacturers and distributors are passing on the additional cost of transportation (which is a direct result of hike in petrol/diesel prices) to the customer. The cost of living in the country has gone up when compared to last year but most of our income hasn’t. So, it would've been good if the Finance Minister had taken that into consideration and given some sort of benefits to the Tax Payers. 

What am I supposed to do with Rs. 2000? It won’t be enough to fund my petrol expenses on my Two-Wheeler that I would take to office daily is the reaction that an ordinary Indian Citizen would give.

Though I welcome the measures to tax the super-rich, the number of people in India who actually declare their actual income and pay taxes to be considered as "Crorepatis" is much lower than what it should be. Many businessmen don’t declare all their income and hence the government may not be able to realize as much tax revenue as they would ideally through the 10% extra taxes. 

Similarly, hiking the duty on luxury cars or two wheelers or hiking the service tax on luxury homes does not affect the common man because they are far out of our reach anyways. 

All in All, I personally feel that this budget hasn’t done much to help the "Common Middle Class" Indian Citizen. Only time will tell how effective it would be in controlling the country's inflation and fiscal deficits... 

Please feel free to leave your comments about the budget 2013 in the comments section below.
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