Planning your dream vacation? Here is how to do it

Click to enlarge

Click to enlarge

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

Fianancial Year Resolutions
Click to enlarge

Click to enlarge

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

fin-yr-reso
Click to enlarge

Click to enlarge

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?

fin-yr-reso
Click to enlarge

Click to enlarge

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.

How to overcome financial challenges as a single parent?

fin-yr-reso

financial planning fpr single parent

Being a single parent is not easy. Coping through widowhood or divorce along with children is painful. Besides the emotional grief to deal with, a challenging financial journey lays ahead. As household responsibilities are divided between spouses, financial matters are handled and executed by one partner in the family while the other is passive. When the decision making partner is no more, it is a huge task for the other partner to get familiar with money matters. Securing the financial future of the child and getting an immediate grip on existing finances become a priority. Here is a checklist on how you can streamline financial issues after the spouse is gone or separated.

  1. Review Budget: Total income usually takes a hit when the spouse is no more or in case of divorce. Savings are affected as household expenses which were shared earlier will now have to be paid singly. More funds need to be provided for contingencies. Certain critical questions need to be addressed to get an understanding of where you stand financially:
  • Would you be able to take up a job if not working earlier?
  • Would you be able to sustain at least your household expenses with your potential income?
  • Do you have a strong support system to take care of your kids? Can you afford day care?
  • Do you have an alternate income stream to support expenses?
  • Can you afford to meet your child’s lifestyle expenses or compromise on them?

These questions will help you to assess your cash flow and revise your budget to reflect the changed situation.

  1. Settle Liabilities: Outstanding liabilities after the death of spouse can be a big drain on cash flows. It is thus imperative to repay debt first. Proceeds from life insurance cover of the deceased spouse can be used to repay debt.

In the case of divorce, it is prudent to mutually decide in advance about sharing debts with least possible conflict. You and your spouse can both decide to continue sharing the loan burden or sell off the property to close it.

  1. Have adequate insurance: You need to ascertain whether your existing income and the proceeds from your spouse’s life insurance policy are adequate to cover household expenses, outstanding debts and future goals like child education. If not, then buying additional life cover should be a top priority as you would be the sole breadwinner now. You also need to have adequate health cover to take care of huge medical expenses.

In the case of separation, nominations in life insurance policies in favor of the spouse need to be changed quickly. If you are the sole custodian of the child, then you need to reassess your life insurance requirement to secure your child’s financial future. While re-computing cover, it is prudent to make a conservative assumption about not receiving any money from your spouse for the maintenance of child. Employer health policies and independent family policies having spouse’s name need to be removed to reflect the new circumstances.

  1. Complete banking & other formalities: After spouse’s death, the priority should be closing all bank accounts, making insurance claims, application to the employer to get provident fund and other benefits.

In divorce, it is not just joint liabilities and assets that need to be settled. Bank account, demat account, bank locker, etc., everything that is joint needs to be closed. With the consent of both parties, the joint bank account can be converted into a single account of the spouse who is operating it as the primary account. Any holdings in the joint demat account can either be liquidated or transferred to respective new individual accounts of both parties with mutual consent. In the case of joint bank lockers, both parties need to be present at the branch to complete the closure formalities and divide the belongings by mutual decision.

  1. Estate Planning: As a single parent, it is imperative to create a Will for the financial security of your child. You can also create a trust for your minor kids and appoint a trusted individual as their guardian.

If your Will already exists at the time of separation, it needs to be amended quickly to change the beneficiaries. Further, nominations across life insurance policies, investments, bank accounts, etc., in favor of the spouse need to be changed.

  1. Re-plan investments: With a sudden shift from double income to single salary, you will have to review your financial goals. Essential goals like children’s education will have to be given priority. But do not compromise on your retirement goal. While the financial security of your children would take precedence over everything else, you need to think of your finances too in twilight years.

You also need to review your asset allocation. Locking up money in safe debt products will not help to meet your financial goals. To build wealth over time, you need to invest smartly in equities. While your risk taking ability will be low, you can invest in equity mutual funds instead of directly investing in shares. You can also invest in hybrid fund for starters which invest in a mix of both stocks and debt instruments.

Any lump sum received after spouse’s death or through alimony need to be invested with a lot of thought. Avoid hasty decisions and put the the money received in fixed deposit till you come up with a concrete investment plan.

Conclusion: A single parent can appear vulnerable to many. There will be relatives who will dispense advice as per their whims & wishes but not understand your financial situation completely. You will have constant fears and doubts about taking financial decisions. It would be better to put off decision making till the time you think rationally about money and your financial goals. You can seek help of a competent financial advisor who would give you unbiased advice bearing your complete benefit in mind.

How your family can help you reduce tax liability?

fin-yr-reso
Click to enlarge

Click to enlarge

Everyone knows about the usual options of annual tax saving – taking benefit of section 80C, claiming medical expenses, house rent allowance, etc. But there are some unconventional ways to reduce your tax outgo. You can save tax through your family! As per Indian Tax laws, gift given (in cash or kind) to relatives is not taxable in their hands. While there are some tax implications of investing the gifted money in the name of family members, let us understand how you can still legally do it and reduce your tax liability:

  • Invest through your spouse: You can gift any amount of money to your spouse without attracting tax. However, income generated from the gift given to spouse is subject to taxation. The provision of clubbing income will apply here. For instance, if you gift your spouse Rs.5 lakhs, it will not be taxable. But if your spouse invests this amount, say in a fixed deposit at 10 % p.a., the interest of Rs.50,000 will be clubbed to your income and taxed as per your slab. However, in this case you can still take advantage of the gifting provision legally if your spouse is not working or in a lower tax bracket compared to you. Taking the above example, if your spouse reinvests Rs.50,000 and earns interest on it, it will be treated as her income. Thus, the income reinvested on the earned income is not taxable in your spouse’s hands. Another smart way is to invest money in tax free options like PPF in your spouse’s name. The tax free income can be reinvested later by your spouse in fixed deposits, debt funds and will be treated her as income without attracting tax.
  • Invest through parents: Gifting money to parents as well as the income generated on investing it is tax exempt. Clubbing of income provisions do not apply here. Senior citizens enjoy a basic exemption limit of Rs.3 lakh p.a. and for super senior citizens (over 80 years) it is Rs.5 lakh p.a. If your parents are retired & do not have any high income, and you fall under the highest tax bracket, you can invest your surplus savings in their name and earn tax free income. For instance, you can invest up to Rs.30 lakh (Rs.15 lakh each) in the name of your parents in a fixed deposit yielding an interest rate of 10% p.a. This will fetch you a tax free income of Rs.3 lakh. If your parents are above 80, you can invest up to Rs.50 lakh (Rs.25 lakh each) and earn a non-taxable income of Rs.5 lakh annually.If any or both of your parents have continued their PPF accounts after retirement and your own annual limit of Rs.1.5 lakh is exhausted, you can invest in their name. You can invest a maximum of Rs.3 lakh (Rs.1.5 lakh in the name of each parent) and earn tax free income. Similarly, you can invest in senior citizen scheme in your parent’s name annually up to Rs.30 lakh (Rs.15 lakh each). If you are an active investor in the stock markets, you can open a demat account in your parents name and trade shares. If you book short term capital gains, it will not attract 15% tax if your parents fall below the basic exemption limit.You can also claim an additional tax benefit on health insurance premium paid for your parents, besides claiming for self. Under S/80D, you can claim a tax deduction of Rs.25,000  from your taxable income for mediclaim premium of your parents. If they are senior citizens, the tax benefit is higher at Rs.30,000. For the medical treatment of any parent or both having disability, you can claim tax deduction up to Rs.75,000 under S/80DD. In the case of severe disability, you can claim tax benefit up to Rs.1 lakh.
  • Invest through major children: The clubbing provisions do not apply once a child turns 18 and he/she will be treated as a separate individual for all tax purposes. So, like in the case of parents, you can also invest in the name of major children without attracting tax. You can show the money as interest free loan granted to your children and invest in their name. You can invest up to a maximum Rs.2.5 lakh p.a. if they are not working and can earn tax free income. You may not be comfortable gifting a lot of money to your major children. Ensure that they do not take advantage of it. Further, if you have a handicapped child, you can claim tax benefit under section 80DD for medical expenses similarly as in the case of parents.

Due to lack of general awareness, many people do not know these simple rules and end up paying high tax. This is particularly true in the case of fixed income options like FDs and corporate bonds which are not lucrative for individuals falling under the 30 per cent tax bracket. Channelising investments and broad basing your income in the names of your family members will greatly help you to reduce your tax liability in a legal way.

Should you avoid or invest in NPS?

fin-yr-reso

The National Pension Scheme (NPS) is a government backed defined contribution retirement product. The objective of NPS is to provide a pension plan to the ageing population of the country. The returns are not guaranteed and linked to markets unlike the traditional pension products. Presently, what is luring investors to consider investment in NPS is the additional tax incentive of Rs.50,000 available under section 80 CCD (1B). This is over and above the Rs.1.5 lakh deduction available under S/80 C. The basic features of NPS are explained in the mind map below.

National Pension Scheme - Basics

 

The problems with NPS:

While the additional tax incentive is a big plus point, NPS has its share of issues. The taxability on a huge 60 per cent of the withdrawable corpus at retirement is a big put-off for investors. Also, there is some ambiguity related to few tax issues. Further, withdrawal rules are not flexible enough and low liquidity is a concern. Let us examine these issues:

NPS Withdrawal & Exit Rules
At the age of 60 For all amounts above Rs.2 lakh, at least 40% of the corpus to be used for purchase of annuity 
Remaining amount to be paid as lumpsum
Option to delay purchase of compulsory annuity by up to 3 years
Option to delay withdrawal of lumpsum amount till the age of 70
Option to make fresh contributions till the age of 70 (Not for govt employees)
Voluntary retirement  NPS subscription for minimium 10 years to be eligible for early exit
For all amounts above Rs.1 lakh, at least 80% of the corpus to be used for purchase of annuity 
Remaining amount to be paid as lumpsum
Premature Death For Government employee
For all amounts above Rs.2 lakh, at least 40% of the corpus to be used for purchase of annuity 
Remaining amount to be paid as lumpsum to nominee/legal heir
For Private employee
Option to withdraw entire accumulated corpus by nominee/legal heir
Purchase of annuity optional
Partial interim Withdrawal  NPS subscription for minimium 10 years to be eligible for partial interim withdrawal
 25% of employee contribution to NPS is the maximum withdrawal limit
Allowed up to a maximum of 3 times during the entire subscription period
Minimum 5 years gap between 2 withdrawals (except for treatment of illnesses)
Can withdraw for children education & marriage, purchase of house or treatment of specified diseases for self & dependants
  • Rigid exit and withdrawal rules:
    (1) At the age of 60: With people marrying late and starting a family in their 30s nowadays, their financial responsibilities may well not be over at 60. In such a case, the withdrawal rules of NPS are not flexible enough to provide a retiree control over his own money. He has to lock a minimum 40% of the corpus in compulsory annuity. There are numerous annuity products available in the market and a retiree can buy those of any amount in the future if he wishes to rather than locking his money through NPS.With people marrying late and starting a family in their 30s nowadays, their financial responsibilities may well not be over at 60. In such a case, the withdrawal rules of NPS are not flexible enough to provide a retiree control over his own money. He has to lock a minimum 40% of the corpus in compulsory annuity. There are numerous annuity products available in the market and a retiree can buy those of any amount in the future if he wishes to rather than locking his money through NPS.

(2) Voluntary retirement: Imagine an employee who takes voluntary retirement before 60 and desires to start his business. He is banking on his NPS savings to invest in the venture. But he cannot withdraw, as a very substantial 80 per cent of the NPS corpus gets locked into annuity if he retires before 60.

(3) Death before maturity of NPS: In the event of premature death, for a government employee, 40% of the money gets locked into compulsory annuity while in the case of a private employee, it is optional. There is no logic here in keeping the exit rules different between government and private employees. The nominee/legal heirs of a government employee may require money as much as those of a private employee may do after their demise.

  • Taxation: The tax treatment of the NPS corpus is a big spoiler when compared to other retirement products like EPF, PPF, etc. The recent amendment in the Union Budget (2016-17) has proposed some tax relief but is not enough. Earlier, the entire 100 per cent amount to be withdrawn at 60 was declared taxable. Now, of the maximum 60 per cent accumulated corpus withdrawable at the time of maturity, about 60 per cent will be taxed as per individual’s slab rate. The balance 40 per cent will be tax free. It is unfair that such a substantial lump sum is treated as income unlike debt mutual funds where capital gains are computed and indexation benefit is available on them.

           Further, while the amount converted to annuity will not be taxed, the annuity income received in the future years is taxable in the hands of the investor as per the slab rate. The tax treatment is the same on pre-mature exit from NPS, i.e., before retirement.

These taxation rules apply to private sector employees who open an NPS account with their employer. They also apply to the self employed who individually open their NPS accounts. For government employees, the lump sum withdrawal at the time of retirement is tax free. The tax treatment is thus unfair and does not offer uniform treatment to all participants.

Ambiguity on tax issues: There is no clarity on the tax treatment of partial withdrawals from NPS which are allowed up to a maximum of 25% of an investor’s contribution thrice during the entire subscription period.

Also, there is no clarity on whether section 10(10A) will be applicable to NPS or not. This section covers commuted pension which is received lump sum at the time of retirement. Under this section, if a private sector employee gets gratuity at the time of retirement, 1/3rd of the commuted pension will be tax free. If the employee does not receive gratuity, one-half of the commuted pension will be tax free. This section if applicable can bring substantial tax relief to investors.

  • Limited equity exposure: NPS invests your money in 3 instruments – equity, government securities and other fixed income options. As per the recent revised guidelines, fund managers under NPS can actively manage money not just by investing in stocks but also mutual funds, exchange traded funds and IPOs. NPS however allows limited exposure to equity. Pure mutual funds are likely to provide better returns than NPS in the long run.

For private sector employees investing in NPS, equity exposure is capped at 50 per cent and for government employees, it is 15 per cent. The difference in equity cap for both sectors is ridiculous. Government employees have been thrust upon a product (Yes! Compulsory for employees joining after 1.1.2004) which does not allow them the freedom to choose their own asset allocation and they have to make do with a lower equity exposure and compromise on returns.

Conclusion: If you are a beginner who wants to take exposure to equities but have no clue how to go about it, you can consider investing in NPS. For salaried employees, it would instill discipline to save compulsorily just like the EPF contributions get deducted every month. NPS is a true retirement product, with strict restrictions on withdrawals during the accumulation period.

If you already have exposure to equities and are a disciplined investor who allocates a portion of his savings every month into equities, you are better off not investing in NPS. NPS is basically a tax deferral product. You would be availing the additional Rs.50,000 tax benefit now only to pay tax  later at retirement. And, not just on the gains. You would be paying 60 per cent tax on a substantial 60 per cent of your hard earned savings eligible for withdrawal at retirement. It is prudent to pay tax now and invest the rest in equity funds. You would earn better returns and have complete control on the management of your retirement corpus.

Find the will to write a Will! – Simple steps to make one

Click to enlarge

Click to enlarge

You spend more than half of your lifetime in creating wealth through assets like property, investments, gold, vehicle, etc. But what happens to it when you are gone? You may have nominated your loved ones across various assets but they are not the true owners, only trustees. Amongst your children, you may want to give more to the financially weaker one. Not just the money, specific things which hold sentimental value, you may want to bequeath to certain members. In the absence of a Will, the law of succession will apply, i.e., your property will be distributed equally amongst your spouse, children and other family members (natural heirs).

Succession laws vary depending upon not just religion but gender also. So for e.g., if a Hindu married woman dies without preparing a Will, her entire property would be inherited by her husband and children. Neither her own parents nor her siblings stand to inherit anything even if she had wished to. In the case of no children and husband pre-deceased, a Hindu woman’s property after her death will be inherited by her mother-in-law but her own mother does not get anything.

As morbid as it may seem, preparing a Will is one of the wisest things you can do for your loved ones. Through a Will, you can transfer your wealth to your dear ones as per your desire and ensure that it is done without family disputes in the future. Lack of a proper Will is likely to create legal hassles amongst them after you are gone. Also, your immediate family members may face financial hardships ahead if they are mere nominees or custodians of your financial assets and cannot utilize your wealth if some relative drags them to court.

How to write a Will?

  1. Personal Details & Declaration: Your Will should start with providing your personal details like name, address, age, etc, along with date & declaration. It should state that you are of sound mind at the time of making the Will and not under any pressure/influence by any person. In case you have made any prior Will, then you must specifically mention that the old Will stands revoked.
  1. Creating a list: List down all your assets – investments, bank accounts, bank locker and contents, jewellery, demat accounts, property, cash, vehicle, etc. Mention all of these with clear addresses and location (with online &offline documents, if any). This list will provide you greater clarity on your inventory of assets. The good thing about preparing a Will is that even if you have missed out on something, it will be covered under Residual Assets and will be transferred to your loved ones.
  1. Naming the beneficiaries: After making the list of assets, prepare a list of beneficiaries and map each asset towards beneficiary/beneficiaries. Also, review your nominations and joint holdings across all your assets. Check whether the nominees you had named earlier are consistent with the list of beneficiaries you have mentioned for each asset. If not, then change the nominee name wherever applicable, to avoid conflicts in the future. Further, it is possible that a beneficiary may die before you and the Will would be required to change accordingly. So it is prudent to name alternate beneficiaries in the Will. Barring cash, the value of other financial assets like property, mutual funds, shares, etc, keep on fluctuating. It is thus better to mention the ownership in percentage terms. This would also help if there is going to be more than 1 person in sharing the ownership of a particular asset. It is also important to be clear on the property that you solely own and the property that you share with some one – maybe your spouse, sibling, business partner, etc. You can only give away the portion of what you own. If beneficiary is a minor, ensure that you appoint a trusted guardian to look after the asset till the minor reaches adult age.
  2. Signing the Will: Your Will will be valid only if it has your thumb impression or signature on it. Ensure that your signatures are present on all pages of the Will. Not just that, you will be required to sign the Will in front of at least 2 witnesses. They are required to sign after you, thereby certifying that it is your Will. The witnesses are also required to furnish their full address details. It is prudent to get some trusted person who is not a direct beneficiary to sign the Will.
  3. Executor details: Name a trusted person as an Executor who will have the huge responsibility of getting your property transferred as per your wishes. Ensure you appoint a person who has the time, energy and willingness to execute the entire process. You will have to intimate and seek his consent in advance. Otherwise, there might be no Executor for your Will if the person refuses to accept the responsibility after your demise. You can also appoint an alternate Executor.

  Important points to remember:

  • Ensure that there is no ambiguity in the contents of the Will. Your intentions need to be recorded very clearly so that no one takes advantage and interprets any twisted meanings out of the Will.
  • Once you have prepared the Will, ensure to store it in a safe place and let your Executor know about it. You can make a copy of the Will for safety reasons. Bank locker could be one of the safest places to store your Will.
  • If you fear someone might challenge your Will on fitness grounds, get a medical certificate attached to the Will to prove that you were mentally sound at the time of writing the Will. Best still; get a doctor to sign as witness which would erase all doubts of you being of an unsound mind.
  • With changing circumstances and relationships with your family members, you may want to review your Will periodically and change it. You may want to update your Will in case there is a new addition in the family or you may have acquired a new high value asset.
  • If you have any doubts while preparing the Will, it is better to consult a lawyer. If you feel your personal family situation is complicated with many members and feuds, it is better to get the Will prepared from a lawyer. You can also take the help of many online paid services available nowadays for preparation of Wills.

Conclusion: Start writing your legacy on a piece of paper. Preparing a Will is a prudent way to facilitate smooth transition of your property to loved ones after your demise. Having a succession plan in place thus completes your financial planning exercise.

Planning for a family? Plan your finances first!

Click to enlarge!

Click to enlarge!

Birth of a child is one of the most important life changing events for a couple. Having a healthy child, doing up the baby room and buying all the kiddy stuff are topmost on the minds of wannabe parents. But amidst this excitement, they forget about future finances. It costs a bomb to raise a baby in present times. It is not just the maternity costs, doctor visits and regular baby expenses like clothes, toys, baby foods, stroller, cradle, pram, medicines, etc. Check out this list of additional expenses:

  • One time cost incurred on social functions in the range of Rs.30,000 – 70,000 like baby shower, naming ceremony of the new born, etc.
  • Vaccination costs at periodic intervals till the child completes 10 years, starting from minimum of Rs.700-Rs.3.500.
  • Massage costs of the baby (usually done for six months at least) about Rs.8,000-10,000 every month.
  • Cord blood banking to secure the health of the baby from future problems, costs around Rs.20,000-70,000. (click on the link to know more about it)
  • In the absence of support system, if a full time maid is required to look after baby, then it costs around Rs.8,000-10,000 per month. Alternately, if parents arrange to put the baby in day care, it costs roughly around Rs.6,000-10,000 per month.

Parenthood thus brings along big financial changes after the birth of a child. Following are the main check points to prepare in advance:

  • Review income changes: Before your bundle of joy arrives, ascertaining income changes would help to stay prepared if you have a working spouse. She would have to check the maternity policy with her company. Also, she needs to find out if she can extend her leave beyond maternity and can afford to take leave without pay for few months. In the absence of a strong support system, your spouse may also decide to take a break from work and become a stay-home mom for a while. These factors are likely to impact the total family income, especially if your spouse is a significant contributor to it. Doing the math in advance will help you & your partner anticipate the likely monetary situation and will enable to rework on your budget, if required.
  • Review your expenses: With expenses bound to rise in the post natal phase, it is important to manage cash flows diligently. Usually, new parents go overboard in shopping rather than spending on only the essential items for the child. Once you have reviewed your income changes, prepare a list of all your living expenses including potential baby costs and then adjust your budget accordingly. Cutting down on spending and getting into the savings mode will help to tide over additional expenses before the newborn arrives.
  • Review your insurance requirement: With the addition of a new member in the family, your financial responsibility as the bread earner increases. It is thus important to enhance your life insurance cover as your child will be financially dependant on you at least till the time he/she finishes college. Avoid child plans as they do not serve any purpose. Also, add your child’s name in your health insurance policy.
  • Create a contingency fund: Kids have a greater risk of hurting themselves and the probability of an emergency is thus more. Unexpected medical expenses related to child may crop up anytime. It is thus prudent to have a contingency fund which would help you financially during a medical emergency.
  • Review goals: As expenses shoot up after the baby is born, the propensity to save reduces. Channelising the limited savings towards various goals appears difficult. And with the new financial responsibility of raising a child, it is easy to forget about personal goals. Creating a corpus for the baby becomes a priority as not just higher education but schooling has become very expensive. However, this does not mean you compromise on your essential goals like retirement. Continue your investments in the retirement kitty. If need be, postpone some of your aspirational goals for a while like buying a bigger car, house renovation, etc. As for education fund of the child, start investing small sums and you can bridge the gap later gradually over the years with an increase in income & savings.

Preparing for parenthood isn’t just about buying tiny clothes and other baby items. A lot of financial preparation is required too. Laying a strong financial foundation early on will help to make your parental journey smoother in the future.

The perils of last minute tax saving exercise

Click to enlarge

Click to enlarge

Around this time every year, you will see frequent advertisements of tax saving financial products in the print and electronic media. There would be countless posts on financial blogs about how to save tax under S/80C and innovative ways to save tax beyond this section. It becomes a priority as the year draws to a close and investments are then done in a haphazard manner with the sole objective of saving tax.

This is the typical tendency of majority of investors as they do tax planning at the near end of a financial year. Tax saving takes precedence over investment planning. Let us examine the problems associated with such hurried approach of tax planning.

  • Tax saving decisions not aligned with financial goals : 

    Usually during the March quarter of a year, investors get obsessed with the word 80C. With limited time on hand to submit tax proofs to the HR department in their organisation, investors become vulnerable and usually fall prey to crooked agents.

    Endowment policies and unit linked insurance plans (ULIPs) are the typical products pitched to investors to take benefit of section 80C. Just to save tax in a particular year, investors buy life insurance policies committing to pay premiums for 20-25 years. These policies are very expensive as they yield abysmal returns in the long run with high premiums and a small cover. Worse still, majority investors discontinue the policies once they realize they cannot afford the premiums and suffer losses. Not only do they stay grossly underinsured but also miss out on better investment opportunities which could have yielded higher returns than the traditional policies. Such haphazard tax planning affects both their insurance and investment goals.

  • Investing huge funds in one shot to save paltry tax amounts : 

    Many a times, people do not understand the basic calculation of arriving at taxable income after taking into account all exemptions and deductions of the Income Tax Act. As a result, they invest a huge sum just to save tax in products that do not suit their requirement & risk appetite.

    The Rajiv Gandhi Equity Savings Scheme launched in 2012 is a real case to cite. The scheme solicits funds into direct equity, mainly for first time investors. Only investors having a gross annual income of less than Rs.10 lakh (in the 10-20 per cent tax bracket) are eligible to invest in the scheme. It has a lock-in period of 3 years with redemption rules (cannot sell in the first year at all!) too complicated for a beginner to understand. The maximum investment limit is Rs.50,000 and the tax benefit available is 50 per cent of this limit, i.e., only Rs.25,000 is eligible for deduction. This means if you fall under the 10-20 per cent tax bracket, you would be able to save a measly Rs.2,500-5,000 on a huge investment of Rs.50,000.

    The RGESS is thus not a good deal for investors looking to save paltry tax amounts given the associated volatility and complex redemption rules of the scheme.

The Right Approach

Rather than making new investments with the objective of saving tax, you should chart out your financial plan first. Once your current situation and financial goals, both short term and long term are articulated, an investment planning exercise can be done. Suiting your requirement and risk profile, an asset allocation can be decided which would give you the choice of multiple investment products. Depending upon your goal horizon, you can invest in them and in due process also save tax to the maximum limit. For instance, you have chosen PPF to invest for retirement. You know a fixed amount needs to be saved and invested every year, and importantly, at the beginning of the financial year as you would not lose out on the entire year’s interest. In this manner, your investments stay aligned with you financial goal of retirement and you also avail tax benefit.

Remember, tax planning is secondary to investment planning and not the other way round.