How to tackle unfair selling practices of banks?

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A plethora of financial products are available today suiting our various financial goals and risk appetite. More the choices, more the confusion. Banks have become a one stop shop for offering all kinds of financial products and services besides accepting deposits and lending money. While the objective of the RBI is to enhance the wider reach of financial products by appointing banks as intermediaries, it has given rise to a menace – rampant misselling. With bank employees being offered performance linked incentives, the question of potential conflict of interest is always existent. It has become a common practice, rather malpractice of banks to pitch financial products to customers which they don’t really need. Misselling is widespread in the bundled products space, especially in the case of home loans, bank lockers, debit card and credit card.

Take the case of bank lockers. Opening a fixed deposit is usually shown as a precondition for the allotment of a bank locker. Similarly, to open a PPF account, opening a savings account with the bank is represented to be mandatory.

Another common example is that of home loans. Rather than the core lending product, banks promote the home loan package which is bundled with life insurance. The customer is required to pay a lump sum premium and is added to the home loan amount to be paid along with the monthly EMI. The buyer does not know how much exactly he has paid for insurance. Further, the cover reduces with the payment of the principal amount. If you switch the loan to another bank or foreclose the loan, the cover will expire. Such home loan protection plans are costlier compared to pure term insurance cover. These are pitched tactfully so as to give an impression that life insurance is mandatory to buy along with the home loan product. Customers are not aware that they have an option to refuse bank for insurance and there is no compulsion to buy it as per RBI rules. Some even fear that if they do not buy the bundled product, it might create a problem in their home loan application.  In some rare cases, customers are not even aware that they have been assigned a life insurance policy along with home loan as they blindly sign a pile of loan documents.

Many customers take the word of bank officials at face value or feel they have no other choice but to go for bundled products. So what can you as a customer do to tackle the unfair practices of banks? Let us examine the options:

  • Firstly, be very clear of your requirement and do a thorough research of the product you want to buy. Then, if you find yourself in a situation where a bank official is trying to forcibly sell you a product, convey a clear message to him that you are aware of the RBI rules as an informed customer. If he tries to sell you a bundled product, refuse and tell him you can buy later individually as per your need. Most of the times when you show resilience, bank officials back out.
  • If you still find that the bank official is reluctant and gives you no choice other than the bundled product, ask him to show the official notification which mandates the bundling of financial products. Alternatively, you can ask him to give the same in writing. If he refuses, let him know about your plan to approach another bank. If the bank is desperate for business, it would sell you the product you require without any conditions.
  • In the case of home loan, some bank officials deliberately bring up the issue of life insurance during the final stage of loan agreement. After going through a long drawn out process and desperate for the deal to get over, you may end up buying whatever comes with the core loan product. So it is prudent to seek clarification with the bank in the initial stage of the agreement. Read the papers carefully before signing.
  • In case you find out the wrongdoing after buying a product, escalate the matter to the branch manager of the bank. Write a complaint letter to the higher authority and mail a copy to the concerned bank official also whom you were dealing with. Ensure that you maintain records of all communication, both electronic and physical.
  • If your complaint is not acted upon by the bank, you can approach the banking ombudsman, the grievance redressal system of the government. It takes care of banking related complaints that include unfair selling practices. You can fill up a form online or courier the physical form to their postal address. It is a hassle free process and very effective.

To conclude, a wrong financial product in your portfolio can prove to be very costly. It is thus prudent to remain cautious at the time of buying a product and read the fine print. In case you find yourself in a weak spot after a product is being sold to you fraudulently, do not let matters slip away. Confront bank officials and file a complaint. Be persistent in follow-ups and fight for a refund. After all, it is your hard earned money!

Having multiple bank accounts? How many do you really need?

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The definition of convenience has evolved in the 21st century thanks to the internet. Ironically, the more convenient our life gets, the busier we have become. It is because we humans have a tendency to complicate the simplest of things. We focus on so much unnecessary clutter that we forget to view simplicity as it is. Take the case of online banking. One need not visit the bank nowadays for financial transactions or information. Everything is available at the click of a mouse. But still, managing multiple bank accounts could be a cumbersome task. Ask anyone how many bank accounts do they have and the common answer would be at least 2-3. Besides the salary account, the other accounts which people may usually have are a home loan account, any dormant salary account from previous employer, account attached to home loan, demat., etc. And how many would these be actively used? Barely one or two. Let us examine the pitfalls of having multiple bank accounts:

  • Managing multiple accounts mean going through the maze of statements or passbook entries of all banks to track transactions. The more infrequent you look at them, the less you remember where your debit and credit of a transaction has come from. Not just that, remembering atm pins, internet log-ins, passwords of multiple bank accounts could be tough. Further, collating all TDS and interest income information at the time of filing tax returns would be a daunting task.
  • The more accounts you have, higher is the probability of blocking huge funds unnecessarily in savings account. This could otherwise be channelized into productive investing.
  • Many users continue with dormant accounts from previous employers and forget or ignore to change their personal details. There is a higher risk of internet frauds taking place in such accounts.
  • Bank officials intentionally or otherwise levy charges which are not applicable to your account. It becomes increasingly difficult to coordinate with them to get the charges reversed later.

Having multiple accounts can thus be a big drain on time, energy and money. So how many bank accounts should you really have? While there is no thumb rule, limiting the number to around 2-3 accounts would be financially prudent. The practical approach most people adopt is paying their living expenses, monthly bills, EMI payments, insurance premium, etc. from the salary account. However, in the event of change of job, it can cause inconvenience with the change of salary account and may lead to cheques getting bounced.

It is thus prudent to have just one dedicated bank account in addition to the salary account. The latter will be your temporary account in which you can maintain minimum balance. You can use the dedicated account for payment of your household expenses, utility bills, EMI payments, insurance premium and investments. You can transfer a fixed sum every month into this dedicated account to maintain sufficient balance for all payments.

To conclude, it is best to have two, at the most three bank accounts. It would be far easy to regularly track them and channelize funds efficiently for various purposes. So consolidate your bank accounts and simplify your financial life!

Common traps a real estate buyer should avoid!

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The real estate industry in India is pre-dominantly a seller’s market. It is largely an unregulated industry with lack of transparency and property agreements heavily favoring the builders. People do not read the fine print as there is a general lack of awareness and become vulnerable, falling prey to unscrupulous builders. Here are some common traps that you as a prospective property buyer need to be wary of:

  • The illusion called ‘Sample Flat’: Sample flat is one of the most potent marketing tool used by any builder. To start with, there are usually no doors in the sample flat and the ceiling height is high. The walls are thin and in some cases instead of brick walls, plywood partitions or gypsum boards are used. Further, the furniture design is carefully thought out so as to look small in dimensions. All these give a very spacious feel to the entire flat. Further, the flooring and the painting is of high end quality. The expensive modular kitchen and the superior tiling offer a luxurious feel. But the popular saying “What you see is what you get” doesn’t really hold true when it comes to sample flats. The reality is quite different and there is usually a gap between the specifications of the sample flat and the actual flat sold. Do not hesitate to ask the builder questions about facilities offered in the sample flat vis-a-vis the actual flat. For example, seek clarification whether the flooring, tiling and electrical fitting used in the sample flat will be a part of the actual flat. Also, be on the same page with the builder on the layout of the flat. Further, ensure that that the carpet area is clearly mentioned in the agreement between you and the builder.
  • Do not get tempted by pre-launch advertisements: Pre-launch offers of builders come with a good 20-30 per cent discount to the market rate and can be very tempting for prospective buyers. At times, the discounts are also accompanied by offer of a free car or foreign vacation in a lucky draw for the first few bookings. However, there are various risks associated with such offers. Many builders launch such projects and accumulate money from investors even before securing the requisite clearances. Without the approvals, it is illegal for a developer to publicise the property, allot flats and collect money from buyers. Such pre-launch offers thus face the risk of total cancellation due to lack of clearances. They may also face inordinate delays in construction due to approvals not coming on time. This in turn could push up the total cost of the project which the builder may pass on to buyers even if it is not mentioned in the agreement. Further, if the buyer is not financially strong, he would be unable to pump in timely capital to continue the project in case of delay in getting clearances. It is thus prudent to enquire about all clearances beforehand and also about buyer solvency.
  • Beware of dummy investors: Usually in newly constructed ready-to-move in properties, you will observe that majority of the flats are vacant. But your broker will tell you that barring few, all the flats are sold out, i.e., they are investor flats. While every property investor is a buyer first, it may so happen that you may be dealing with a dummy investor. And these are mostly brokers. It is also possible that many middlemen are involved and you never know who the real owner is till you close the deal. The main objective of these dummy investors is to artificially keep prices high in the property market. These properties are quoted at 10-15 per cent discounted price than what is offered by the builder. This is a smart marketing strategy to entice buyers and make them perceive that they are buying at a cheaper rate. But in reality they are buying higher than the market price. It is thus better to remain cautious when buying ready-to-move in properties. Such properties if not rented out or not sold for a very long time should ring a warning bell in your mind. While it is difficult to identify whether the investor is genuine or not in the beginning of the transaction, insist on having a meeting with the builder and investor together. Also, check the difference between the prices quoted by the builder and the investor. If there is a huge discount offered by the investor, then do not be in a hurry to close the deal but introspect further. You can also enquire about prices from recent dealings done by newly moved-in residents with the builder.
  •  Do not give in to the pressure tactics of builders, agents: The typical marketing gimmick of selling any product or service is to create an urgency, a rush in the minds of customers for buying. Any sales team of the builder or the broker would show you how majority flats of a project are being sold out and only few are left in the pipeline. Further, they almost make you believe on the potential development of infrastructure in the vicinity of the property and hence the probable rise in prices in the near future. Such sales tricks try to put psychological pressure on buyers of monetary loss or fear of being left out or missing out on a valuable buy. Avoid being trapped into such pressure tactics and making buying decisions in a rush. Contemplate and then make big the property buying decision in your life.

To conclude, you may come across these usual traps while buying property from a builder. Exercise caution and do not rush into taking the big property decision. We have already talked in our previous article about preparing a basic checklist on builder goodwill and past history, property location, flat specifications, amenities offered, documentation, etc. So do some due-diligence before buying a property to avoid such traps.

Top 6 things to check before buying your dream home!

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Buying one’s own space to live is one of the most important lifelong decision for any individual. The experience is associated with not just excitement but also at times anxiety and stress. It is the biggest and most expensive financial transaction for any individual. It thus becomes imperative to do the necessary due-diligence before finalising any property deal. Here is a basic checklist before signing on the dotted line:

  • Reputation of the builder: It is important to check the history of the builder and his company. Checking the company website would not give you a complete picture. Check out his past projects and visit the people residing in them. Talking to residents who have done property dealing with the builder would provide you reliable inputs. You can ask them about time frame for completion of project and delays, if any. You can also take inputs on quality of construction, materials used by the builder and if they are facing any issues on the amenities provided.
  • Location: While connectivity to work place, main roads and highways is generally checked on first, there are a lot of other things that need to be borne in mind when it comes to location. Connectivity to banks, schools, hospitals, markets, etc., also need to be reviewed. Safety is another important issue. If you or any of your family member return home late at night, how safe is the location? Further, quality of roads, frequency of public transport like autos and buses in and around the location need to be examined.
  • Flat Specifications: Be clear right from the beginning on carpet area and built-up area of the flat. Carpet area is the actual usable area of a flat. Built-up area is carpet area plus the walls and door and is the base on which the cost of the flat is calculated. Ask for a detailed layout of flat with dimensions and you would be able to roughly estimate the space. Do not get deluded by sample flats. The highly customized interiors and the premium furniture offer a mesmerizing look of the flat but in reality may not be very spacious as it would appear to be.
  • Essential and luxurious amenities offered: Check on essential amenities offered by the builder like water supply, electricity, water tank, lift, parking, etc. Lack of parking space has been a problematic issue with many buyers. Check whether the property premises have enough space to offer parking to potential residents. Also, enquire about upfront payment for exclusive parking spaces. Sometimes, these could act as a spoiler and affect the budget. Further, check on the luxurious amenities offered like swimming pool, gym, power generator, clubhouse, etc. Remember, more the amenities, higher would be the monthly maintenance cost.
  • Resale, rental potential: This could not be the deciding factor in buying a property but it is better to have some foresight on it. While you would be obviously buying a house to stay in it lifelong, personal circumstances in the future might warrant a change in location or renting out the flat for a temporary period. So, think about the resale and rental potential of the property.
  • Documentation. Ensure that the builder has got all the project approvals during the various phases of construction starting from commencement certificate in the beginning to occupancy certificate till the end. Check whether the builder has obtained all the environmental and municipal clearances and whether the property is built on residential or non-residential land. You can procure all this information from local bodies. Even the builder cannot refuse any buyer if the former is being asked to disclose all the important approvals. Intimation of Disapproval (IOD), also known as the ‘Building Permit’ is one of the most critical document which should be available with the builder. It lays out conditions which the builder has to comply with during various phases of the project. For e.g., the builder may have the permission for development rights of 10 floors of a building and he may illegally construct 15 storeys. Remember the famous Campa Cola Residents case. Although the residents had paid all the legal dues to the builder and were staying for 25 years, they faced eviction from municipal authorities and drawn into a legal battle with them.  It is thus imperative to ensure that the builder is adhering to all the conditions as per the approvals obtained during various phases of the construction.

To conclude, the above basic checklist would guide you in evaluating all the essential aspects of a property. These parameters could also help in shortlisting two or more properties on your watch list. So, do a comprehensive assessment of any property before you make a down payment or finalise your home loan.

Your most valuable asset? That is undoubtedly ‘YOU’!

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If I were to ask you what your most valuable asset is, you would probably list down any of your prized possessions. It may be the dream vacation house that you built or the limited edition classic watch you bought. But the truth is whatever assets you own – your house, car, investments, jewellery, etc., they would not be a reality unless you made them. So your biggest asset is ‘YOU’, your intellectual ability to create real and income earning assets, your ability to grow your wealth each year. Unlike your assets like house, car, etc, which depreciate over time, you would want to maximise your earnings potential with your skills and experience to create long term value for the future. That is not possible unless you invest in yourself. Let us examine how you can strive to maintain maximum value out of self:

  • Review your career goal: The most important area where you can make a big difference to your wealth is your career. This is from where you get your largest flow of income. Your rare skill sets or better ways of performing existing tasks make you a valuable asset to your organization. But it is important to not get complacent and keep up with the changing trends of your profession/industry or else you will eventually lose value. Hence, periodically review your career path and the role in your organisation. Ask yourself the following questions:
  1. Are there any additional skill sets you need to acquire to maintain your performance or to move up the corporate ladder in your organization?
  2. Are there further growth prospects to explore in your company? Do you want to switch to another organization?
  3. Are you satisfied with the way your career has shaped up? Do you want to change your field?

Addressing these questions will help you to develop a long term vision for your career. Just like a financial planner helps you define and achieve financial goals, set career goals for yourself. It would provide a clear path as to where you want to land up in the long run.

  • Work Hard: One of the essential principles of achieving success and boost wealth is working hard. It is a virtue, a quality anybody can develop. Always do more than what you are paid to do, always go the extra mile and it would reap rewards in the long run. Eventually, you will be paid more when beating expectations in your organization becomes a habit.
  • Acquire additional skills: The dynamics of any business change over a period of time and change fast. Also, information technology has fast become an integral part of every business and has changed the way organizations are run. It is thus important to read and stay updated of the latest developments in your field of work. Education can be a great investment which can further enhance your income earning ability. Acquire additional skills for your professional development. It could be taking an online course, learning a new application, a new language, etc. It may help you to give a new dimension to your work and further enable you to make a valuable contribution to your organization.
  • Improve your people skills: Interpersonal skills are very essential for professional success. Having all the intellectual ability in the world is no good if you lack the people skills in your professional life. If necessary, attend seminars on effective communication of corporate trainers. Your productive interactions, the power of persuasion, providing motivation to subordinates, moderating your responses, building trust, eventually contribute to your personal reputation. The success of professional engagement with your clients, senior managers, subordinates, hinges on how people perceive you. Your character, your goodwill is your asset which would help you to scale great heights of success and boost your wealth.
  • Respect your body: If you are not feeling good in your body, you will not be able to enjoy the fruits of your success. Further, if you are unwell, you will not be able to do justice to your work. Your health can become a liability, costing you time, work opportunity and money. Given that your work life consumes a big chunk of each week, it is imperative to stay healthy, not just in body but in mind too. Eating healthy, regular exercise, good sleep is a must to keep your mind and body fit. Engage in activities that you enjoy like pursuing a hobby, finding a creative corner in your house to boost your imaginative/artistic drive. It can rejuvenate your mind. Invest in your health to reap rich rewards for the future in your personal and professional life.
  • Manage your finances well: Earning more money is just not enough, managing it well is equally important to become wealthy. Stick to a few basic principles of handling your finances. Given your ability to earn, you need to buy adequate life and health insurance for self to financially prepare your dependants for sudden emergencies. Be aware of your spending pattern. Grow your wealth by investing on a regular basis. Define your financial goals and align your investments with them. Your retirement would be a stage where your ability to earn would be replaced with financial savings for your survival. So do not ignore your retirement goal. If you fall short of your retirement nest egg, you may consider partly relying on your income earning capacity by working part-time in retirement.

 Conclusion:  Focus on growing your professional skills and increase your value in the long run. The more you invest in yourself today, the more you get to maximise your opportunities. Be a valuable asset to your organization and expand your role and responsibilities. Investing in yourself will catapult your career to higher levels and maximise your wealth.

 

The Joy of being Debt Free!

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Unlike our ancestors, borrowing money is not a taboo in present times. As a matter of fact, majority of the people have no option but to take loans when it comes to at least funding big-ticket purchases like a house. Due to skyrocketing real estate prices in India, buying a house, office space, a parcel of land is just not possible without borrowing from the bank. Easy processes and quick disbursals make it convenient to take loans nowadays. Then of course, there are certain tax benefits on home loans, education loans, etc which people can avail of.

Being in debt is absolutely normal but getting out of it faster is one the best financial decisions you can ever make. Imagine the things that you can do if you turn debt-free. Imagine all the stressful money things you would not have to deal with once you are debt free. Let us examine them:

  • Your cash flow gets freed up: Paying EMIs is not so much fun. And, paying them for 15-20 years is definitely not. It consumes an average 25-30 per cent of an individual’s income. When you turn debt-free, imagine the kind of cash flow you have on hand and what you can do with it. You have a healthy bank balance and you can put it to productive use.
  • You don’t have to think too much about budget: You do not have to walk a tight rope between balancing EMIs and other essential financial expenses when you are debt free. Which bills to pay first? Should the bonus be used for renovation or use it towards debt? Once you are out of debt, taking other financial decisions become easier.
  • Your money is yours now, not for creditors: You do not need to pay creditors each month. Whatever is left after meeting the regular household expenses is all yours. You actually get to build wealth for yourself rather than paying interest to banks. You get to invest your savings every month and grow your hard-earned money. You can take more risk and increase the equity allocation in your investment portfolio. Further, you can spend freely. You can buy things which you can pay for because of your healthy savings balance. You can use your credit card to enjoy the float. It is however important to maintain balance between spending wisely and investing your savings in a disciplined manner.
  •  You can do anything you want to: Once you are out of debt, you can fully focus on your essential financial goals. Not just that, you are kind of financially free to do anything you want to pursue. You can prepare a bucket list and turn those dreams into reality. Or maybe, quit your job and pursue something you love. Or start your own business. You could plan frequent vacation trips. The possibilities are endless.

Chalk out a disciplined loan repayment plan:

Generally, people do not make a conscious decision to have a loan repayment plan in place.  Sadly, borrowers start repaying towards the end of the loan tenure and end up servicing EMIs through a major part of their working life. Heavy interest is charged in the initial years of loan tenure by banks. So it is essential to repay loan as much as possible in the first few years.

Take an inventory of all your loans. Start with the most expensive ones like credit card debt. Create a deadline to repay your loans. Compulsorily set aside a small portion of your income to repay towards debt. Consider it as a regular expense just like your household expenses, EMIs, SIPs and insurance premiums. Make small sacrifices if need be in the form of budget cuts. Annual bonuses, if any or sudden windfall income inherited from family should be utilized to repay as much debt as possible. Regular repayments, however small they may be, will lead to faster clearing of the loan and greater savings for the future. Small baby steps will eventually set the momentum and give you confidence to clear your debts faster.

For example, consider a home loan of Rs.60 lakhs for a tenure of 20 years borrowed at a fixed rate of 9.5 per cent per annum. The EMI for the home loan comes to Rs.55,928. If you continue the loan for 20 years, you would end up paying, 74.22 lakhs in interest, i.e., 120 per cent of the principal amount originally borrowed! If you prepay Rs.2,00,000 at the end of every year besides servicing the regular EMIs, you will be able to close the loan in 11.5 years and pay interest of 39.5 lakhs. Prepaying the loan regularly in small chunks will thus reduce the tenure and save you a lot of interest.

Conclusion Debt affects your life not just financially but also psychologically. Turning debt free gives you a liberating feeling and inner peace. You feel more confident to take financial decisions and in more control of your money. You are better prepared to face any kind of financial emergency.

No matter how much money you earn, ultimately your willingness to sincerely eliminate debt will determine your success or failure. It is a not just a financial decision, it is a significant life choice you make. Also, it is important to maintain the drive, the motivation to remain debt free. Resist the temptation to get into debt again.

What would you like to do when you turn debt free? Draw up your bucket list and share your views with us.

Planning your dream vacation? Here is how to do it

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Dreaming of travel to historical places in India? Or maybe to picturesque locales in Switzerland, or explore Europe on a Mediterranean cruise. Vacations mean relaxation, peace of mind, rejuvenation, fun time with family, etc. However, holiday planning isn’t just about booking flights, hotels and scheduling itinerary. It also means a lot of money. With some financial planning in advance, you can effectively save for your dream vacation. Let us examine how you can pay for your trip without stretching your finances:

  • Plan in advance: Most people align their holiday plans with their children’s vacation. Last minute bookings in the peak season can be an expensive affair. Start planning early on and decide on your destination and the time period for travel. With so many travel portals available online besides the regular tour agencies; one is spoilt for choices today. Exploring them carefully and scouting for the best deals can save you a lot of money. Register on travel portals and stay updated about their best offers. Booking flights and hotels in advance can give you huge discounts. Visiting the website before visiting the place, feedback from experienced friends and relatives can give you a lot of valuable tips to cut costs. You can also plan your holidays in the off-season where you can get attractive packages at big discounts.
  • Determine travel corpus: After deciding on the destination and time period for travel, determine how much money you would require for the entire trip. There could be some unexpected expenses besides air tickets, accommodation, local transport and food. So, do not forget to factor them in your budget. If your travel goal is at least a year away, then expect some uptick in expenses due to inflation and consider in your budget.
  • Determine monthly saving: Start saving early after finalizing your travel budget. Considering the estimated time period, target corpus and a fixed rate of return, calculate how much you need to keep aside every month. For instance, if your target corpus is Rs.10 lakh, which you want to achieve in 3 years by investing at 8% p.a., you would be required to save approximately Rs.20,000 per month. Note that savings allocated to other important goals should not be compromised. If you cannot afford to save in the determined time period for your dream vacation, postpone your trip and save longer till you are ready with the corpus.
  • Invest savings for a separate vacation fund: Invest in suitable options and map it to a separate travel goal. Call it the vacation fund. The investment avenues would depend upon the time period of your goal. For domestic holidays, usually, planning 3-4 months in advance is sufficient. For foreign trips which are hugely expensive, planning 6 months to over a year may be required. It is prudent to invest in debt options for such shorter time frames. You can open a recurring deposit account or a bank fixed deposit. You can also invest in a liquid fund. The idea is to stash aside regular amounts for investment in a disciplined manner dedicatedly for the vacation fund.
  • Avoid debt to fund travel plans: Funding your vacation through personal loans can cost you a bomb. Banks can charge anywhere between 15 to 25 per cent per annum for a personal loan. Heavy EMIs can affect your cash flows and disrupt your other financial goals. It is better to plan in advance and pay for vacation trips from your own pocket. Also, resist the temptation to use credit cards to pay for additional holiday expenses like shopping. If you use them abroad, ensure to repay on time instead of rolling over the bill every month. Enquire from the issuer about additional credit card charges like foreign currency conversion cost if used abroad. Consider Forex cards for this purpose.
  • Take advantage of LTA: Many people are not aware to wisely make use of leave travel allowance (LTA) when planning their vacation. An employer offers LTA as part of the salary package. The LTA is tax exempt and there is no limit on the amount you can claim for deduction. The concession however is available only for travel within India. Note that LTA can be claimed for 2 journeys in a block of four calendar years.

Conclusion:

Planning early on and working out the financials for a holiday can save a lot of money. If planned effectively, your dream vacation could be well within your reach in the future (Refer to the table below). So turn your aspiration of a dream vacation into specific goal and enjoy holiday of a lifetime.

travel budget

Financial checklist for NRIs returning to India

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Many returning NRIs are not completely aware of the rules in India with regards to change in residential status, banking, taxation, forex and investments. Here is a financial checklist you as a returning NRI should bear in mind to ensure a smooth transition in finances.

  1. Re-designate existing bank accounts: On return to India for permanent settlement, you need to inform the Indian banks about your status change. As per FEMA regulations, you need to compulsorily convert your existing NRO/NRE accounts to resident savings account. The Foreign Currency Non-Resident (FCNR) and Non-Rupee bank deposits can however be held till maturity. You can also open a Resident Foreign Currency (RFC) account if you want to repatriate your forex earnings to India. Further, to avoid the risk of foreign currency fluctuations, it is prudent to transfer your outstanding balances, if any, in existing NRE and FCNR accounts to RFC account. Prefer international banks which have online facilities for smooth transfer of funds.
  2. Maintain sufficient cash flow: It would be difficult to predict what expenses will be like once you are back in India. Initially, there could be huge cash outflow in the form of house relocation, renovation expenses, school fees for children’s education, etc. You can get an idea about the big chunk of expenses by discussing with your relatives/friends in India. You can budget about 6 months of household expenses and the big-ticket costs and transfer the funds in advance to your account in India.
  3. Review your Indian and foreign investments afresh: If you have been staying abroad for a long time and prefer to make India your base location, decide about your properties and investments abroad. You can choose to hold your foreign property as FEMA regulations allow it provided you were a non-resident or received a gift/inheritance from a person resident outside India. The only hitch is that there are strict rules to comply with upkeep of property abroad. It can become inconvenient to manage it sitting thousands of miles away.

If you decide to sell the house, it may take time depending upon location and market conditions. So keep some buffer time to sell the house & complete all formalities before you return to India.

Review how convenient it would be to manage your overseas investments from India. It is prudent to keep it simple and pare it down accordingly. Have a small exposure to foreign investments in your globally diversified portfolio.

In the case of Indian investments, if you have any existing shares, you would be required to close your Portfolio Investment Scheme (PIS) account and open a fresh trading account in India. You will have to inform your stock broker and depository participant about your status change in India.

  1. Beware of the tax angle: The tax liability as per Indian tax laws is determined with reference to the residential status, i.e., physical stay in India. You will not immediately become resident on the day of landing in India. Your status will change from Non-Resident Indian (NRI) to Resident but Not Ordinarily Resident (RNoR). You will qualify as RNoR for 2 successive years if you return to India after staying abroad for a period of nine years or more. As a RNoR, you would not be taxed on your global income, if any, for 2 consecutive years. Also, any asset that you choose to bring along to India will be exempt from tax. You will be liable to pay tax only on the income earned in India. You will however continue to earn tax free interest from FCNR deposits. Ensure that you update your KYC for mutual fund investments and inform about the change in residential status. There will be no tax implications if you sell your equity fund holdings held for over a year.

It is prudent to consult a tax advisor for filing returns in the first year after moving to India. Also, ensure that you carry income tax statements of the returns filed in the foreign country of at least previous 3 years. You may require it for future reference in case of dispute.

  1. Assess health insurance requirement: Update your KYC details for existing insurance policies, if any, in India. Updating the address and contact number will ensure you start getting regular reminders or other notices. If you do not have a health insurance policy after returning to India, ensure you buy adequate cover for self and family. Also, check if your health insurance policy bought abroad is valid in India.

 Other points to remember:

  • As per FEMA regulations, an individual is permitted to retain with him foreign currency and traveler cheques up to a maximum limit of USD 2,000 on return to India. The unspent amount beyond this limit needs to be surrendered to an authorized person within 180 days from the date of return to India. It is a violation of law to hold foreign currency beyond the specified limit and may attract penalties.
  • If you are receiving or are eligible for pension abroad, you can either choose to maintain it there or check with your employer if it can be transferred to India.

To conclude, taking care of all the financial tasks after coming to India could be a lot to handle. If you do not have the time and expertise, it is better to hire an investment advisor who would guide you on the financial transition in a tax efficient way. You can also hire an expert advisor who specializes in serving returning NRI/PIO families for a fee.

Financial checklist of top 9 tasks before moving abroad

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Are you planning to migrate abroad in the near future? It is time you start preparations early on. No, we are not talking about completing paperwork for migration, packing, etc. While people usually focus on the regulatory and travel issues, they forget to organise their financial affairs. What happens to your life and health insurance policies in India? How would you operate your bank accounts if required?  Would share trading and other investment rules change if you become NRI? These and many such questions need to be addressed and acted upon before you become NRI.

Here is a financial checklist of the important financial tasks that need to be taken care of till you are physically present in India.

  1. Convert your primary savings account into NRO account: As per RBI guidelines, it is mandatory for an individual to re-designate his existing savings account as Non-Resident Ordinary (NRO) account when he/she plans to leave the country. An NRO account can be operated just like your regular savings bank account. You can deposit the income earned in India in the form of rent, interest, dividend, capital gains, etc, into this account. The account can also be used for all local payments including EMIs, investments, insurance premiums, etc. Further, an NRI can remit up to a maximum of USD 1 million per financial year from this account under foreign remittance scheme.
  2. Open NRE account: If you want to invest your forex earnings into India and later get it back in the foreign country (repatriation) without any limit, then you would need a Non-Resident External (NRE) account. Unlike NRO account, you are not required to submit any tax certificate on the repatriable funds. Also, interest earned in NRE account is tax free compared to NRO account where it is taxable as per the applicable slab rate.
  3. Make arrangements for clearing loans & other payables: You may have ongoing loans which need to be serviced as you move abroad. Instead of your local savings account, you will have to reroute your EMI payments through your new NRO account. Also, register for receiving e-alerts and e-statements so that you can keep a tab on your regular EMI payments while you stay abroad. As your potential earning capacity increases in a foreign country, you may want to prepay your loans back home and become debt free. Check with your bank if it is possible to prepay the loan through NEFT (National Electronic Fund Transfer) and be aware of the formalities to close the loan.
  4. Have adequate term insurance: Life insurance is covered globally. So it is prudent to continue with your term cover in India even as you plan to migrate abroad. But if you have a traditional insurance policy like an endowment, money back or unit linked plan, you need to look at the costs involved. It may not be worth the time and money to pay huge premiums and monitor them. It is mandatory to update your KYC details with your insurer. Ensure that your residential status after becoming NRI is communicated to the insurer for continuity in servicing and claims. Further, review whether your term cover is adequate to cover your family’s expenses, liabilities and financial goals during any unfortunate event. If not, it is better to buy additional term insurance abroad.
  5. Have adequate health insurance: In case of health insurance, mediclaim is payable only if the treatment is taken in India. If you are moving abroad for a short stint and intend to return to India, then it makes sense to continue your health insurance policy in the resident country. But if you intend to permanently stay abroad, it is better to discontinue the existing policy and buy a new one in the foreign country.
  6. Continue/Open PPF account: Many investors have the wrong notion that NRIs cannot invest in PPF account. A resident turned NRI can continue to invest in his/her existing PPF account till the maturity period of 15 years. However, an NRI cannot extend indefinitely thereafter for a block of 5 years as in the case of resident Indian. If you do not have a PPF account, open one before leaving the country. It is one of the best tax free investment options which will not be available in foreign countries. The PPF contributions can be made by an NRI from his/her NRO account.
  7. Open PIS account: If you already have a resident trading account for shares, you cannot transact from that account once your status changes to NRI. So if you want to continue trading after settling abroad, you will have to mandatorily open a portfolio investment scheme (PIS) account. You also need to open a new demat account and trading account. You need to transfer all your holdings into the new account and then close your resident trading account. In the case of mutual fund transactions, you will have to update your KYC details mentioning the change in residency status and bank account to ensure smooth debits of SIPs and other transactions through NRO account.
  8. Create a power of attorney: In your absence, someone might be required to perform your financial tasks related to banking, insurance, investments, etc. You can give a family member or some other trusted person power of attorney (PoA) to act on your behalf. A PoA holder can operate bank accounts, do stock/mutual fund transactions, even sell your property, etc.
  9. Give your house on rent: If your flat is probably going to remain idle and no other family member is going to stay in it, it is better to rent it out. Finalise all paperwork with your tenant before you go abroad. You can create a specific power of attorney and nominate a trusted person to operate the bank account to manage rental income on your behalf.

There are hundred things to take care of while migrating abroad. Being prepared in advance will spare the pain of co-ordinating with your family members and financial service providers while sitting thousands of miles away. So do not forget to perform the necessary financial errands before leaving the country.

How to prepare yourself mentally for retirement?

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When we talk about retirement planning, it is usually perceived in terms of how much funds to save, where to invest in twilight years, etc. The focus is essentially on getting finances in order and accumulation of adequate savings. But retirement planning is more than this math. It is also about starting a second innings in your life, akin to rebirth. Many people dream about the day they will be able to retire, be relieved of all major responsibilities and have time to relax with family.

While the thought of not being tied to your job can be very relieving, the transition from working to retirement life may not be so easy. It is a period of social adjustment during which many older individuals struggle. They suffer from the typical retirement syndrome – boredom, lack of purpose and motivation. A pleasurable retirement requires some vision and planning. Start answering these questions as you approach retirement:

(1) How will you fill up your time during retirement?

You are initially very excited once your retirement life starts. No Monday blues. You get into a set routine of going about your daily tasks. You prepare a bucket list and want to try out activities which you have never done before. Probably, travel is there on your list to visit places you have never visited earlier. What next? What are you going to do with 2,000 hours a year you used to spend working? If you are probably going to live for say 20-25 years after retirement, that would be a lot of time to kill! One of the biggest reasons of dissatisfaction in retirement life is boredom! And it is very common for new retirees. Many people mistakenly envision retirement as a winding down period, but it is not easy to do so for 20-25 years.

So how do you remain active & productive in your retirement life? What hobbies do you want to pursue? Do you want to be involved in voluntary social work? Do you want to start a second innings in your career, your own business? Do you want to blog? Do you want to learn about new things, say a foreign language, etc? Brainstorm and articulate your vision about the activities which you longed to pursue during your working career and would like to undertake post-retirement. You can also lay the background few years before you retire. For instance, if you intend to volunteer for some social work, you can prepare a list of NGOs and start gathering information on them, even visit them for enquiries.

Further, staying lonely and disengaged could affect your physical as well as mental well-being. Besides proper diet and exercise, maintaining social connections is a critical part of healthy ageing. Having a wider social circle helps reduce the risk of certain age-related illnesses.

An active retirement definitely is thus much more fun than just sitting on the porch in a rocking chair. You may discover a new side of yourself in retirement. You may find all sorts of opportunities and interests to pursue and your creativity may soar.

(2) Where would you live after retirement?

You might want to stay away from the hustle & bustle of the city. You may want to live in your ancestral home or buy a new vacation home. Or maybe you do not want to change your base location at all. Your location post retirement would depend upon your desires and your family situation. Personal factors like wanting to stay close to relatives, reduce living expenses, change in health status, etc, may affect your decision. Selling your old home and shifting to a new place may not necessarily be a good call. There would be costs involved in moving and might not be worth it.

(3) Where does your spouse figure in the retirement picture?

You and your spouse may not necessarily have similar goals for retirement. You both can work towards it by addressing certain questions like:

  • Where do you want to stay after retirement?
  • How will you spend your majority time?
  • Do you want to stay close to immediate family members?
  • Do you want to stay separate or with children?
  • How much time are you willing to give to your grandkids?
  • Do you want to work part-time?

You and your partner may find some surprising differences. An open one-to-one communication and compromise would be required to get on the same page with your spouse on retirement goals. Also, if you share a common passion/hobby, you can pursue it together. Ensure you give each other enough space and respect each other’s schedules.

Conclusion: While everyone conjures a happy retirement picture, it may have certain periods of uncertainty. Your personal family and financial situation will not be the same when you retire. Leading an active social life, reconciling your retirement goals & expectations with your spouse can help you to embrace change easily. Introspecting and planning on these non-financial aspects can help you to adjust to retirement life better.