Friday, August 29, 2014

Some Common Misconceptions About Home Loans - Know The Truth!!!

Buying a house is a lifelong dream for many of us and since making a down-payment of many lakhs to buy our dream-home is not practically feasible for everybody, we almost always end up going for a "Home Loan" or "Housing Loan". Easily 2 out of 3 people reading this article would have either taken a home loan or at least would be thinking about going for a home loan. As with many things in our country, there are a lot of misconceptions about home loans which effectively scare us from moving forward. The purpose of this article is to help you understand the truth about those common misconceptions...

Why this Article?

Signing up for a home loan is a HUGE financial decision that will impact your life for the next 10/15/20 years. I have written a few articles in the past about "Buying a Home", and "How to handle a Home Loan Part Repayment". However, based on the queries received from blog readers it is pretty obvious that many of them have a lot of misconceptions and hence I thought, why not write something to clear them...

Misconception No. 1:Fixed interest rate is better than floating interest rate

Home Loans usually come in two forms - one with a fixed rate of interest and the other with a floating rate of interest. If you are someone who doesn't want to risk the fluctuation that is possible on home loan rates, you can choose the fixed rate option. However, there is a catch here - Even if in future loan rates go down, you will still continue to pay the high rate. If you had chosen the floating rate option, reduction in home loan rates would benefit you greatly. But, this floating rate option has its drawback. In case market rates go up, so will yours. So, you need to think and decide based on the market outlook. 

Anyways these days banks don't offer "Fully Fixed" home loans like they used to, before. Most fixed rate home loans these days are hybrid loans where the rate of interest is fixed only for the first few years and the bank reserves the right to review the rate of interest after this initial period. 

Fixed Rate loans usually charge the customer a slightly higher rate of interest than floating loans because the bank cannot hike your interest even if the market rates go up. I think going for a flexible rate of interest is OK given the current market outlook because the rate of interests will not go up by more than 0.5% or 1% and it does not make sense to pay the additional interest right away... 

Misconception No. 2: Rise in interest rates will Always result in increase of EMI

Yes, in case of a Floating rate home loan, the rate of interest is subject to change, if the market lending rates change. However, the biggest concern point for most loan customers is that, what if my EMI goes up? A home loan is a big financial commitment and if the monthly EMI goes up by even a few thousand rupees each month, it could significantly affect our day-to-day life. 

However, most banks will not increase your EMI without intimating you and getting your concurrence. When the market rate changes, the bank will give you a choice, whether you want to extend your loan tenure or increase your EMI. You can choose either option based on your preference. So, don't worry.

The tenure extension might not be available if you are very close to your retirement age. Most loans are offered with a tenure that leaves at least 5 more years until your actual retirement age. So, if your loan is ending by the time you will be 58 and this recent rate of interest change would result in increasing your loan tenure by 4 years, the bank will refuse because you will most likely retire when you hit 60. So, they wont give you this choice. You will be forced to take the higher EMI. However, as long as you have a few years between the loan end year and your retirement, you can always choose the extend tenure option. 

During the tenure change, the bank will restructure your loan repayment in such a way that your new EMI amount stays as close as possible to your current EMI amount. However, it is not always feasible to have a tenure extension with absolutely no change to your EMI. If your current EMI is lets say Rs. 24,500 per month and after the tenure extension it could become 24,572 or 24,445 or something that is very close to your earlier EMI. The Bank will clearly communicate the change and also give you the choice on how you want to proceed. 

Misconception No. 3: Smaller tenure with higher EMI is always better

The best choice would be to pay cash and buy a house without a loan. However, not many people can afford this luxury which is why we go for the loan. And, while going for this loan, the EMI depends on your loan tenure. 

Lets look at a simple calculation for a 50 lakh loan @ 10.5% rate of interest. See the table below: 

It wouldn't take a rocket scientist to figure out the fact that the 10 year loan is the best choice as against the 30 year one because you are repaying 81 lakhs for the 10 year loan while you are repaying 1.6 crores for the 30 year loan. 

However, do you think everyone who takes a 50 lakh loan can afford to repay 67,467 every month? For the ones that can afford it, yes the 10 year tenure would be the best choice. But, if lets say you cannot afford this, you choose the EMI/tenure combination that would be the most comfortable for you. Yes, we all want to finish our loan fast and pay the least amount of interest to the bank. But, do we want to do that, at the expense of financial struggles each month? Would you want to compromise on your families living just to finish the loan a few years soon? This is why I say, a smaller tenure is not always better. 

Select a EMI/tenure combination that you can comfortably repay and every couple of years when you get a good pay raise, talk to your bank and rework the EMI so that you can finish off the loan quicker.

Misconception No. 4: Refinancing a loan is not advisable

Ok, this is probably the biggest and most unbelievable misconception people have. You are FREE to refinance your Loan, any time you want, if another bank is offering you a great rate of interest. 

Let me give you a real-life example. My dad bought a small 1 bedroom apartment in 1997 and borrowed 1.25 lakhs as home loan for which he was repaying about 2400 rupees per month as EMI for a 20 year tenure. In the year 2003 a family friend suggested that we refinance the home loan with Indian Bank that was offering the loan at just 11% per annum. After refinancing our EMI was 1450 per month and the tenure was changed to 15 years. Guess what, the amount my dad refinanced was 1.2 lakhs because the old bank claimed that we had only repaid 10,000 rupees in principal and went ahead and charged us a fee for early closure. In spite of this, we went ahead with this because, over the period of the next 15 years, we would end up paying almost 2 lakhs lesser to Indian Bank and refinancing made perfect sense. 

You are not obliged to finish your loan with the same bank you started. . So, if you feel that some other bank is offering you a better home-loan deal, go ahead... It is your money and you have absolutely every right to save as much as you can. 

Misconception No. 5: Lower Interest Rate is always better 

Ok, before you declare me crazy read out the next couple of sentences before you decide... 

A Bank that offers the home loan at the lowest rate of interest might not necessarily - Offer you the full loan amount you want or Have real crappy service or Charge you exorbitant up-front fees or Force you to sign-up for some random ULIP scheme just to get the home loan or I could go on and on... 

If I were given a choice between a bank that is offering me good service, the loan for the full amount I asked for plus very low fees at 10.5% and a bank that is offering me only 90% of the amount I asked and offers lower quality service at 10% interest, I will definitely go with the earlier because I don't have to worry about service quality and nor do I have to worry about arranging for an additional 10% of the money that they aren't giving me.

Does this make sense? 

Of Course, if I can get the same loan amount and same quality of service at a lower interest rate, I will obviously choose those guys. The point here is, lower rate always doesn't mean better... 

Misconception No. 6: Banks charge you hefty prepayment/foreclosure charges 

Ok, this was true up until a couple of year ago. Effective June 2012, banks CANNOT charge any loan prepayment charges in India anymore. In fact, banks aren't even supposed to charge you for refinancing your loan (see misconception no. 4). So, if you got a sudden cash influx (A bonus or an inheritance) just go ahead and close the home loan... 

I really hope this article helped clear out many of the misconceptions you may have had about home loans. Feel free to sound off your comments if you still have any queries...

Tuesday, August 26, 2014

Great News - Universal Account Number for PF Accounts - A Reality!!!

If you are a salaried employee and have gone through (or seen a friend do so) the process of actually transferring your PF Account from one employer to another, then I am pretty confident that you understand how painful this process is and the high probability of delays and problems. This system has been in-force for many decades and it was high time the authorities did something about it. 

Thankfully, the EPF Organization has finally decided to help out the PF Account holders. The purpose of this article is to share with you this great news and help you understand more about it...

So, what is this Great News?

Very Soon, you will be able to switch jobs and get your PF money transferred - Without any Hassle. Isnt this Great News?

Yes, the Employees Provident Fund Organisation (EPFO) expects to operationlise permanent or universal account numbers (UAN) to its over 4 crore subscribers by October 15 this year.

What is this Universal Account Number?

You must be aware of what a PF Account Number is - isnt it? When we usually switch jobs, our old PF Account is closed and a new PF Account is opened in our name. Moving forward, what is proposed is that, you will get one PF account number and you can take it with you wherever you go (employment wise) and continue to use the same PF account until you retire. Hence the name - Universal Account Number. 

How would the UAN work?

The universal account numbers will be portable throughout the working career of employees, something similar to how core banking services work. After getting your UAN, all you need to do is, to provide the same on joining a new establishment to enable the employer to in turn link the new allotted member identification number to UAN. This will help in smoothening out the process of filing of PF transfer claims on changing jobs.

Yes, you read it right. All you need is your UAN and your new employer will be able to start crediting your PF contribution right away into your PF Account. 

Will I be able to track my PF Account online?

Yes. All Account holders (Employees) would be also be given a personalised log-in though which they can see carry out different tasks like: 
  • Download UAN card
  • View updated PF account balance
  • Download PF Account statement
  • File and view transfer/withdrawal claims and 
  • Update KYC information

When Will I Get my UAN?

According to a recent Government Circular, all PF Account holders will get their UAN before October 15th. (Even if this gets delayed somehow, you will definitely get your UAN in the next few months)

Is there Anything I Need to Do?

Actually No. As of now, the EPFO has asked Employers to share its employee details (KYC Info) and the deadline for that is September 15th of 2014. Once that info is shared by employers, EPFO will go ahead and issue UAN's to PF Account holders...

My Thoughts:

This is real great news in many levels. Firstly, the hassle of transferring our PF Account was the main reason why people withdrew their corpus while switching jobs. If this is eliminated, the real purpose of the PF Account (To help accumulate a retirement corpus) will be achieved. Secondly, a huge burden is lifted off the employers part. They no longer have to worry about submitting requests for transfer or withdrawal and other PF Account related activities. If you join them, they just get your UAN and start contributing PF. If you resign, they just stop PF contributions and you will take your UAN with you. Isnt this amazing?

Personally, I am extremely glad our EPFO finally did something beneficial for its account holders. As this is the first time we are doing something like this, there are bound to be unexpected delays and hiccups. However, I am pretty sure that over the course of the next year all things will be smoothed out and we will have a world class retirement benefit system...

Wednesday, August 13, 2014

SBI Life Smart Wealth Builder - A Quick Review

With the Bull Market in full swing, Insurance Agents and Bank Officials have started convincing investors that ULIPs are the best way to go. One of my friends pinged me a couple of days back asking me if he should Invest in the "SBI Life - Smart Wealth Builder" scheme. My friend was being pestered by his neighbors to invest in this ULIP because this was the next best investment choice in the country. He dint want to disappoint his neighbors because he obviously has to live in that house for many more years to come. But, at the same time, he dint want to invest in some scheme that isnt good... 

So, I started looking at the details of the ULIP and realized this was yet another ULIP which, if you decide to invest, you will most likely regret your decision.

Read on to find out more...

Basic Info about the Policy - SBI Life Smart Wealth Builder

Smart Wealth Buider is a traditional ULIP policy offered by SBI Life Insurance company. This scheme has two options - a single premium option and a regular premium option. Some of the basic details about this policy are:

Guaranteed Additions up to 125% of one annual regular premium on a regular premium policy, for a 30 year policy term, subject to the Policy being in force till the maturity date.

  • Guaranteed Additions starting as early as 10th policy year onwards
  • No Policy Administration fees for first 5 years for Regular and Limited Premium Paying Term (LPPT) plans, thereby boosting your fund value
  • No Premium Allocation Charge from 11th year onwards 
  • Enhanced investment opportunity through 7 varied Fund Options 
  • Life Insurance coverage, with minimum Sum Assured based on your age
  • Flexible product with an option to increase/decrease your Sum Assured from 6th policy year onwards
  • Minimum Premium Payment Term: 10 years (Max. up to 30 years)
  • The policy offers 7 different investment choices with a varying % allocation towards equities. The policy holder bears ALL the RISK arising out of the Investments. 

Policy Benefits

Policy Maturity Benefit: On completion of Policy Term, Fund Value will be paid out to the Investor.

Death Benefit: Higher of the Fund Value or Sum Assured is payable; with a minimum of 105% of total basic premiums paid till the date of intimation of death.

Tax Benefits: Tax deduction under Section 80 C is available. However in case the premium paid during the financial year, exceeds 10% of the sum assured, the benefit will be limited up to 10% of the sum assured. 

Policy Fees and Charges

If you read the previous two sections, you might actually think the policy may be a good choice. However, you might reconsider the decision after reading this section..

This ULIP has the following charges:

1. Premium Allocation Charges - The amount that will be deducted from your monthly/yearly premium payments so that the insurance company can allocate your premium towards your insurance policy.This number varies from year to year. 

2. Policy Administration Charges - This is the monthly administration charge payable by the policy-holder to the Insurance Company for them to maintain & manage his insurance policy

3. Fund Management Charges - This is the % of your investments you should pay the Insurance company so that they can invest your money into the fund investment choice of your selection. This amount varies based on your fund selection. 

These charges are as follows: 

4. Mortality Charges - This is the amount that gets deducted from your Investments each month to provide you with the life insurance coverage. This varies based on your age and life insurance coverage

5. Switching charges - This is the amount you have to pay to switch from one investment option to another if you exceed the 2 free switches per year. Rs. 100/- per switch

6. Partial withdrawal charges - This is the amount you have to pay if you try to make partial withdrawals from your investments. Every year one free withdrawal is allowed after the minimum lock-in period. Rs. 100/- per withdrawal

7. Other charges - If you want a duplicate copy of your statement, you have to pay this fee. Rs. 100/- per statement

So, how high are the charges?

Let us take a simple example. Lets assume my friend invested in this policy and selected a equity fund in which he paid Rs. 1 lakh each year. Lets see how much will actually get invested. See the table below:

As you can see, during the first year you are losing more than 10% of the amount invested and between years 2 to 5 you are losing more than 7% and between years 6 to 10 you are losing more than 5%. From the 11th year onwards you are losing 2% of your investment as fees & charges. 

And the best part here is that, this table does not cover mortality charges or switching charges. The mortality charges will be usually along the same lines of a pure term insurance policy of the same sum assured. 

Is it worth Investing in such a policy?

No, definitely not. 

You can expect an average of abut 10-12% returns from a well managed equity fund. If the policy takes off about 5-10% of your investments every year for the first 10 years, the amount you are actually investing is getting reduced correspondingly. So, your reduced investments have to add another 5-10% returns in order to equal an equivalent equity oriented scheme. 

In the long run, the stock market can easily help you achieve about 12% or even about 15% during bull markets but a consistent 20% every year is practically speaking - JUST NOT POSSIBLE. 

How to Handle the Person Selling such a Policy?

Ok, this is a tricky part. If you know the person, personally it is a lot harder - say if that person is a relative or a neighbor. So, we gotta be polite and explain them we are not interested. 

The first and foremost selling point from the agents side is that these policie swill give you tax benefits under Section 80C. Yes that is true but so will other investments like ELSS Mutual Funds that will help generate the same amount of returns at 1/10th the fees. Or, other safe investments like PPF or NSC that give you guaranteed returns along with tax benefits. Yes, if you are someone in the 30% tax slab, you save 30% of your taxes to offset the fees you are paying but why should you? Just because it is helping you save taxes doesnt mean you can just pay some random insurance company? 

Secondly, the agent will most likely have a work-up like one of those tables in the pictures above with an extrapolated rate of returns at around 15% or more. The best part is, in those calculations they will consider the full 1 lakh as if it were invested FULLY. Ask them if these returns are guaranteed. They will say NO. What is the point then? 

Tell the agent that you are not interested in paying such high fees. Honestly any ULIP that charges around 2-3% fees each year can be considered for investment but definitely not one that charges 8% or 10%. 

What are my options?

A ULIP is nothing but a life insurance policy and an equity mutual fund combined into one. There are dozens and dozens of excellent equity mutual funds that can easily give you about 10-15% returns every year and that too with less than 1% fees. Since you are anyways gonna pay for the life insurance option provided by the ULIP, why not keep insurance separate and just take a proper insurance policy. 

This is something I have been saying time and again - Please Do Not Combine Insurance and Investments. 

Some Last Words:

If you are someone who is not comfortable with taking risks in equity markets, the agent will most likely tell you to select the Bond fund or Money Market Fund with guaranteed returns. Choosing such a fund scheme in such a high-fee-charging ULIP, you may end up getting less money than what you invested. At least, if you selected an equity fund, if the markets are good, you can break-even and make modest returns of about 5-6%.

Anyways, if you dont want to take risks, there are numerous "Safe" Investment options available and my most recent book covered all of the best "Safe" Investments in India. You might want to check it out. Click here to read the article on Safe Investment Havens

Happy Investing!!!

Wednesday, August 6, 2014

Should I Pay Transaction Fee On My Credit/Debit Card Transactions?

A couple of days back, there was an article about the new "RuPay" card and payment system that is gaining popularity (slowly of course) in India. One of the blog readers had sent me an email yesterday saying that he doesnt really use his Debit or Credit card much because merchants charge him a small fee everytime he uses his card, and that he felt this RuPay is going to be yet another drop in the ocean. Are you someone who has faced this problem? If so, you might want to read this article...

Why a Merchant Charges us a Fee!!!

Before we go into the details and understand why the merchant is not supposed to charge us any fee, let us first understand why he charges us that fee. Let us say that you go a shop in a mall near your house and buy a new shoe for Rs. 1499. If you pay cash, you just pay the money and the shop-owner gets the full 1499. However, if you pay using your credit or debit card, the shop-keeper will get somewhere between Rs. 1450 and Rs. 1499 depending on which card (Visa, Master, Amex, RuPay etc) you use. In order to offset this loss, shop-keepers ask the customer to pay this amount as a fee. So, he would say, if cash it is Rs. 1499/- and if credit card your amount is Rs. 1538/- (added 2% or Rs. 30 as fee)

What this means is that, on the part of the merchant, it is an unfair practice to charge customers this fee. The merchat is supposed to bear this charge. 

How much does the Merchant Lose by means of this fee?

The fee is different for credit and debit cards. 

If you pay using a Debit card the fee is:
  • 0.75% for transactions up to Rs. 2000
  • 1% for transactions above Rs. 2000 

If you pay using a Credit card the fee is usually in the range of 2% to 4% depending on which brand card you are using. 

Is it Legal for Merchants to charge me for using a Credit or Debit card?

No, it is not. As per the latest regulations from RBI it is Illegal for the merchant to charge you any fee for transactions that you pay using your credit or debit card. 

In September 2013, the RBI Issued a circular to all banks and to the public that, Merchants charging customers for paying using their credit or debit card is unjustified and not permitted. In fact, it even instructed banks to cut ties with such merchants who actually charge fees on customers...

What are my Options if my Merchant is insisting that I pay the fee?

Firstly, you are absolutely right to demand that the merchant accept the transaction payment using your credit card or debit card without any additional fee. However, if they insist tell ask them to show you the ruling or regulation that allows them to charge you this fee. Tell them that as per your bank, these transactions should not be charged on you. If he still insists that you pay the fee, you can tell him that you are not interested and will find a different shop that doesnt charge you this fee. 

In all probabilities the merchant would agree to your demand and allow you to pay via credit/debit card without any fee. After all, losing 20 rupees as transaction fee is better than losing 2000 rupees worth of business. 

In the worst case scenario, the merchant refuses to do business with you, dont budge. Just leave the shop and file a formal complaint against the shop with your card issuing bank. They would most likely penalize the merchant. 

Some Last Words:

Remember the article a few days ago titled "How to be a Responsible Citizen"? One of the reasons why businessmen are able to hoard huge amounts of blackmoney is due to these cash transactions. Let us be responsible citizens and exercise our right to use our personal debit or credit card. If a shop owner doesnt want to do business with us just because we want to use our credit or debit card, its a loss for him not for us. We can always find a shop that doesnt penalize us for using our card. 

Happy Card Usage!!!

Remember - As a customer, this is our right and there is nothing wrong in not doing business with a shopkeeper who wants to charge you for just using a card. Most likely, cash transactions will go underground as black income and

Monday, August 4, 2014


Ever since the new "Payment and Clearing" system called RuPay was introduced, there have many articles in news papers & magazines about this system. Some of us know what this RuPay system is but most of us might not know. So, if you are one among the majority population who do not know anything about this RuPay system, then look no further. The purpose of this article is to help you understand the RuPay system as well as the benefits it would have on our Indian Economy...

So, What is RuPay System?

RuPay is an Indian domestic card scheme conceived and launched by the National Payments Corporation of India (NPCI). RuPay facilitates electronic payment at all Indian banks and financial institutions, and competes with systems like MasterCard and Visa in India. The main objective of the RuPay payment network project is to reduce the overall transaction cost and develop products appropriate for financial inclusion.

Why RuPay was Introduced?

Though Visa and MasterCard were able to facilitate credit & debit card transactions across banks without issues, India did not have a payments clearing system ingenious to our country. The RBI has been pushing the NPCI to introduce such a system and RuPay is the result of that.  

RuPay is 7th payment network in the world after Visa, MasterCard, American Express, Discover, Diners Club, and JCB. 

Is RuPay New?

Actually No. The RuPay system was launched on 26 March 2012 but for some strange reason, banks from India have been reluctant to endorse it. On 8 May 2014, RuPay has been dedicated to India by President of India, Mr. Pranab Mukherjee which resulted in a surge of news about RuPay in all papers and finance websites. 

Is RuPay Just a Domestic System?

Again, No.  NPCI has a strategic partnership with Discover Financial Services (DFS), enabling the acceptance of RuPay Global Cards on Discover’s global payment network outside of India. 

Is RuPay Widely Accepted?

Of Course, Yes. In fact, RuPay cards are accepted at all automated teller machines (ATMs) across India under the National Financial Switch. With NPCI's agreement with DFS, RuPay cards are accepted on the international Discover network. 

As of now there are approximately 1.5 lakh ATMs and about 9 lakh Point of Sale (PoS) machines in India that come under this RuPay payment system. In addition to these ATM's and PoS Terminals, RuPay cards are also accepted online on over 10,000 e-commerce websites. 

The card's ATM PIN is sufficient to authorize the RuPay transaction. 

The Biggest Benefit of the RuPay System - Lower Fees

RuPay is entering as a direct competition with plastic issued through Visa and MasterCard, and its charges are drastically lower compared with Visa or MasterCard. Banks have to pay less to the payment gateway provider. Since the transaction processing will happen domestically, it would lead to lower cost of clearing and settlement for each transaction. This will make the transaction cost affordable and will drive usage of cards in the industry.  

According to RBI, more than 500 crores was paid as transaction fee to Visa and MasterCard last year by Banks from India. On top of this, enrolling with RuPay is Free for our Banks. Enrolling with Visa or MasterCard is very costly. It usually comes with a huge sign-up fee as well as quarterly maintenance fee which drain "Banks" resources heavily. 

A switchover to RuPay Card, the Indian version of Visa or MasterCard, can help Indian banks save as much Rs 500 crore annually in transaction fees. For all the stakeholders this is excellent news because NPCI charges just 90 paise as the fee per transaction - Of which 60 paise goes from the merchant and 30 paise from the card issuing bank. Compare this to the Average of about Rs. 3-4 per transaction that Visa or MasterCard charge.

Why Isnt RuPay Popular?

Though the RuPay card system was introduced long back, the system effectively did not get kicked off. In fact, most people did not even know such a system existed. Anyways, there are a few reasons why RuPay isnt becoming as popular as it should be..

1. Reluctance from Banks - Federal Bank and Public Sector (Government) Banks are the only ones that are currently issuing RuPay cards. Even Govt. Banks have started issuing in full-swing only after a nudge by the new BJP Government. The primary reason for this reluctance seems to be the long-term partnerships our banks have already engaged with international payment systems like Visa or MasterCard. As mentioned in the previous paragraph, the fees to enrol with MasterCard or Visa is very high and banks usually save on this fee by entering into long-term commitments. Cancelling this commitment would mean heavy penalties and banks probably dont want this to happen. 

My Take on this: I feel this is not a valid excuse. Banks are being short-sighted at their near-term penalties. In the long run RuPay will help them save hundreds of crores each year on fees to Visa or MasterCard. If I were to pay a few thousand rupees as penalty this year which will help me save many thousands each year for many more years to come, I would do it. But, for some strange reason, our banks are reluctant...

2. Reluctance from Citizens - For some wierd reason, our people feel that an International Brand is better than the local one. Most countries across the globe are very proud of their local payment systems and endorse it. But, we Indias still need International Acceptance in our domestic market. 

My Take on this: Unless you are someone who travels abroad frequently, a RuPay card could help your bank and your country save a lot of money that gets paid out to foreign clearing houses. Even if you are one, get yourself a RuPay card for your local transactions and have another Visa/MasterCard for your abroad trips. 

Some Last Words: 

I Personally feel that this RuPay payment system is an excellent idea and will help our nation develop as a super power. If we switching to RuPay card will help save India 500 crores worth of money being paid out to foreign entities like Visa or MasterCard, I would do it. In fact, this will also help stabilize the Indian Rupee. 

Though all government banks are issuing RuPay cards now, private banks are still not endorsing this system. If the customer insists that he/she wants the RuPay card, do you think the bank has a choice? They would happily oblige your request and give you the RuPay card. When I come back to India, I am going to switch over to RuPay. What about you? 

Saturday, August 2, 2014

Have You Started Planning Your Taxes Yet??

August is here and one-third of this financial year is almost over. Most companies have started asking its employees to submit the supporting documents & proof’s for tax deductions and exemptions. Many of us are upset over how high the TDS amount is that gets deducted each month from our paycheck. The purpose of this article is to help you start planning for your taxes for this financial year…

Before we Begin – Why this Article:

   A good friend of mine from the college days happened to chat with me on facebook who had found my book on Indian Income Tax useful. He was very happy over the fact that, the book helped him understand the many unknown aspects of our Indian Tax Laws which can help citizens save tax Legally. In fact he even quoted that by utilizing the various sections explained in the book, he was able to save Rs. 18,000/- Income Tax last year. So, I thought, why not remind our blog readers that it is time to start planning your Taxes so that you too can reduce your tax liability…

Saving Tax the Legal Way

The Indian Tax Laws are very simple and easy to understand. Though India is one among the countries with a high taxation rate, as citizens we also get a lot of options to reduce your tax liability. Most people are unaware of all these options and end up concealing their income to avoid taxes. If they knew all the options to save tax legally, I am pretty sure a big portion of people wont need to resort to illegal ways to reduce their taxes.

There are two major aspects of reducing our tax liability:

Utilizing Deductions From Income

As per our tax laws, there are certain deductions that are allowed on the income earned by an individual. These amounts can be subtracted while arriving upon the net taxable salary of an individual. For ex: If your total salary is 5 lakhs and the deductions that we are going to cover in this section total up to 1.5 lakhs, your net taxable income will be only 3.5 lakhs. 

Those Deductions are: 

  1. House Rent Allowance or HRA
  2. Leave Travel Allowance or LTA
  3. Medical Allowance
  4. Transportation Allowance
  5. Interest Paid on Housing Loan

Utilizing Exemptions From Income: 

Just like the various deductions that we covered in the previous section, the Indian Tax Laws allow many exemptions that help the tax payer reduce his tax liability. These exemptions are categorized as sections with numbers followed by alphabets to help us identify them easily. 

Those Exemptions are: 

  1. Section 80C - Exemptions for Qualified Investments 
  2. Section 80D - Exemptions for Medical Insurance 
  3. Section 80DD - Medical Treatment of a Physically Disabled Dependent
  4. Section 80DDB - Medical Treatment of Self/Dependents for Major Diseases:
  5. Section 80E - Exemption for Education Loan Repayment 
  6. Section 80U - Exemption for Disabled Tax Payers:
  7. Section 80G - Exemptions for Charitable Donations 
  8. Section 80CCG - Exemption for Investing in Rajiv Gandhi Equity Savings Scheme "RGESS"
  9. Section 80TTA - Exemption for Interest Income Earned from Savings Accounts 
  10. Section 80GG - Exemption for Individuals Living in Rented Houses 
  11. Section 80GGC - Donations Made to Political Parties
  12. Section 80CCD - Contribution to National Pension Scheme (NPS)

Each of these sections, be it the deductions or exemptions have a certain limit up to which we can avail our tax benefits. They also have some preconditions that we must satisfy in order to be eligible to utilize them. However, if we utilize all these sections, we can easily bring down our tax liability by a considerable amount.

If you want to learn more about these deductions and exemptions, you can buy my book on indian income tax. For the latest offer details Click Here

Some Last Words:

Yes, as citizens it is our duty and responsibility to pay our taxes properly. At the same time, the government also gives us the options to save our tax liability and there is absolutely nothing wrong in utilizing those options. Keeping black money or concealing our income to avoid taxes is ILLEGAL. But, utilizing tax saving options to reduce our tax liability is PERFECTLY LEGAL.

So, what are you waiting for???

Friday, August 1, 2014

How To Be a Responsible Citizen

There is a lot of talk these days about Black Money. There is a lot of talk about how Black Money is plaguing our economy and affecting it. In fact, there was an article about Black Money a couple of weeks ago in this blog. The article covered the basics of what Black Money is and also about the hottest topic for news these days – India’s attempt at recovering its Black Money from overseas Tax Havens. Did you know that easily 50% or more of India’s black money is actually concealed within our borders where the Government can easily dig it up?

The purpose of this article is to make you understand how you “As a Responsible Citizen” can help eliminate this menace. In this article, we are going to cover a few – TO DO Actions on our part that can help move India forward towards an economy where Black Money isn’t as big a deal as it is now…

TO DO No. 1: Always Ask for a Bill or Receipt

Yes, the simple and most effective step from our side to eliminate black money is to “Ask for the Bill

Most Businesses in India do not offer a Bill or Receipt to its customers. They do this because, by issuing a bill, they are actually acknowledging the “Income” and would have to pay “Income Tax” on this income. In order to motivate “You and Me” the Customer to accept the goods or services without the bill, they usually offer us a small discount. Blinded by our urge to save a couple of quick bucks, we don’t insist on the bill and help the shopkeeper conceal his income and increase his stash of “Black Money”.

You may ask me – Will my asking for a bill make a difference?

Yes of course. Think of this scenario. Lets say you buy groceries for your house from a nearby shopkeeper and the bill is Rs. 1,430/- The shopkeeper smiles and asks you to give him Rs. 1,400 with a 30 rupees discount. You are happy with the discount and the shopkeeper gets “Cash” and does not show this 1400 rupees you gave him as an income.

Lets say you asked for a “Bill”, the shopkeeper most likely wont offer you that discount and will ask you for the full amount. But, he will be forced to show this 1400 rupees as income and will end up paying taxes on the profit he made. Yes, you paid an extra 30 rupees but you also made sure that as a citizen you were responsible and did your Part to help the nation digout all the black money.

TO DO No. 2: Try To Pay Using Your Credit/Debit Card

Are you thinking?

What if the shopkeeper gives me a fake receipt? In India it is so damn easy to get your hands on a bunch of make-a-do receipt booklets. So, just because I got a receipt doesn’t mean the shopkeeper is going to show the money as an income. In such a situation, am actually paying an extra 30 rupees (from the example above) and the black money continues to grow…
Yes, you got a point here. This is where the TO DO item No. 2 comes into the picture.

If you make your payment using a Credit or Debit Card, the money actually changes hands through an intermediary – The Bank. The Bank will credit the transaction amount into the shopkeepers bank account and at the end of the year, the shopkeeper would have no other option but to show these transactions as part of his income.

TO DO No. 3: Never Give a Bribe

Ok, am not taking any lines out of a Movie. A Bribe is an unauthorized income for the person receiving it and by giving a bribe you are actually fueling the black money menace. Even if you don’t want to do the above 2 TO DO Items, at least try this. This will help our country move towards a corruption free and a black money free economy.

TO DO No. 4: Ignore Nay Sayers

When you start behaving responsibly – as a citizen, there may be many people who might confuse you with the following points:
a.       Anyways the Politicians and Govt. Officials are going to eat our Tax money. Why pay taxes then?
b.      Just you being responsible isn’t going to change a thing
c.       Nobody can change India

Country's like Singapore that can boast very low rates of corruption were actually built on principles of “Self Discipline”. Responsible Citizens are the fundamental pillars to any strong nation and by being responsible we can have a chain reaction effect. By seeing us being responsible, more and more of our friends and family members will join the bandwagon and together we can help move towards a black money free economy…

The Direct Impact – Of our Actions:

As more and more customers ask for their bills, the income that is actually included for tax purposes by businessmen goes up and their stash of black money comes down gradually.

The Indirect Impact – Of our Actions:

Tax Authorities will all of a sudden see a huge spike in income records for such people which will make them curious to dig-out more. A Businessman who filed taxes for an income an income of say 15 lakhs this year after showing an income of just 4 or 5 lakhs over the past 3 or 4 years consistently will raise eyebrows. One authorities start digging, more and more black money will come out…

Some Last Words:

You and I are salaried employees. Every single penny we earn is taxed. But, in spite of this, our government doesn’t have enough money for public welfare programs. If everyone in our country pays their taxes properly – the government can actually reduce the tax slabs. Yes, a country like Singapore is able to afford lower tax rates because, almost everyone pays taxes properly. With everybody paying taxes, the government already has enough money and hence gives back the benefit to its citizen by means of better facilities and lower taxes.

Lets do our part towards the Nations Development and slow but surely, we can bring about the change that we all dream about…

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