Money Today experts answer your personal finance queries
Money Today experts answer your personal finance queries -
Money Today experts answer your personal finance queries -
INVESTING
Q. I'm 47 and had a bypass surgery two years back. Should I get an insurance plan, even if it is costlier? The purpose of the plan is to cover a home loan. Are there other options to ensure that my home loan liabilities don't affect my family's finances if I die? -Harinder Singh Bajwa, Chandigargh
A. It is a good idea to have a life cover considering the heart surgery. However, there is a chance the insurer will reject your application. If you do get accepted, it will cost more (higher premium). If you do not get a plan, your best option would be to close or pre-pay as much of your home loan as possible. Again, this too will impact your investments as a substantial sum will be needed to close the loan. If you are still employed, find out if your company offers a term cover as such plans do not have an exclusion for pre-existing diseases.
Q. I'm 62 and my wife is 58. I have savings of Rs 35 lakh and no pension, while my wife has received a sum of Rs 20 lakh on retirement and a pension of Rs 20,000 per month. I wish to invest in a plan that allows for a systematic withdrawal plan, or SWP. We're hoping to limit our expenses to about Rs 40,000 per month. Should we opt for a bank fixed deposit or include a couple of mutual funds as well? Which are the best debt funds currently? -Sanjay Chavan, Aurangabad
A. As you've retired, we recommend you invest only in debt funds and, maybe, MIP Funds. A significant portion of the money can be invested in bank deposits with a payout option. But, limit it to an amount such that you don't have to pay tax on the returns. The balance can be invested in liquid, short-term and MIP funds. Also consider buying tax-free bonds. Choose a term of 15-20 years so that your interest rates are protected for this period. Too much exposure is not recommended as these are not liquid.
Q. The wealth management division of my bank has been asking me to invest in fixed maturity plans (FMPs). They say this is a good time to invest. My own research suggests that these are mutual fund schemes and I have had a bad experience investing in funds. Should I consider investing in these now? How are these different from normal funds? -Biju Joseph, New Delhi
A. A fixed maturity plan (FMP) is a debt instrument and has no equity risks. Debt funds are great for those looking for a tax-efficient investment as an alternative to fixed deposits. FMPs are safe-it is the closest you get to a fixed deposit as the bonds are, typically, bought and held to maturity. Further, there is no interest rate risk for an investor who holds to maturity. Choose an FMP that is investing in higher rated bonds.
Q. My LIC agent has been as asking me to invest in LIC Jeevan Anand, which, according to him, offers life insurance cover even after I have redeemed my investment. Can you explain what exactly this policy offers and if it's worth considering? -Prabhat Bhaduri, Howrah
A. LIC Jeevan Anand is a combination of 'endowment assurance' and 'whole life plan'. If the insured survives the term, the sum assured, along with vested bonuses, will be paid as a lump sum. But, in addition to this, a sum will also be payable on death of the insured. So, while it does offer a life cover after redeeming your investment, pay close attention to the offer document for the specifics. Get a detailed illustration that shows all the payouts and benefits in chronological order.
You should subscribe to the plan only if your needs match the plans benefits. It might suit you if, say, you do not need the money (used to pay for the plan) now but might require funds about the same time as the plan matures and have a dependant spouse. Also ensure that you've looked at all the alternatives available to meet the same needs.
You can consider tax-free bonds or a PPF account along with a term cover. This combination offers similar benefits to the LIC plan, but gives you more flexibility.
Q. I have been offered employee stock options (Esops) by my company. It is a leading information technology (IT) firm. Are IT stocks good investments now? What should I look for before taking a decision? -Ajit Kushwaha, Bengaluru
A. IT stocks are a good investment option right now because of the rupee depreciation. The sector is likely to do well in the medium term as well. Even so, do check the performance of your company before choosing to opt for the Esops.
Q. Is the transfer of shares from my demat account to my married daughter's demat account allowed (as a gift)? If so, how will this transfer be considered for tax purposes and capital gains purposes? -Ranjan Kumar Jha, Gurgaon
A. You can transfer shares from your demat account to your daughter's account as a gift. This will be exempt from tax. However, tax on capital gains will be applicable at the time of sale by your daughter.
Q. I'm 27 and have a mediclaim plan from my employer. I have about Rs 5,000 to invest every month. How much should I invest in funds and which funds would be good for a novice investor? Also, should I buy a separate health insurance plan? -Suraj Kumar , Patna
A. It is advisable to have additional health insurance, especially if you do not know how long you will be with the current employer. As for investments, a SIP, or systematic investment plan, with a large-cap and a balanced fund in equal proportion will be best. This will help diversy and provide growth. As your portfolio grows, choose more liquid options. Start investing in midcaps as well (SIP). If you require tax saving investments, choose an equity-linked saving scheme fund.
INSURANCE
Q. What are the major reasons for rejection of a health insurance application of people above 50 years of age? -Bodhisatya Biswas, Kolkata
A. Each insurer is governed by underwriting principles and has the discretion to accept or reject risk. Generally, applications are declined when the insurer finds the applicant is in poor health. This should not motivate an applicant to lie about pre-existing conditions as it will lead to difficulties when making a claim.
Q. Can I include my retired parents in my family floater plan? How much would the premium go up if I do so? -Mrinal Mukherjee, New Delhi
A. Each insurer specifies a different age limit when issuing a fresh policy or adding a family member to a floater plan. Check with your insurer on the maximum age limit for such inclusions. In most existing plans, individuals older than 65 years cannot be included in a family floater plan. Further, even if your parents are younger than 65 years, it is not advisable to include them in an existing family floater plan as the premium is based on the oldest family member covered by the policy. This means the premium on your family floater will increase substantially.
A better option would be to take out a separate policy for your parents that would cover them as per their requirements.
TAXATION
Q. My father bought land many years ago for Rs 10,000, which is now valued at Rs 60 lakh. We, my brother and I, are planning to sell that land and construct a shopping complex (retail realty) and a house nearby. What would be taxation impact if we're investing the whole amount in real estate? -Anup Sahani, email
A. Unfortunately, the capital gain on sale of land is exempt from tax only if re-invested in residential property (and that too only if you do not own a house at the time of sale of the land). So, there will be no tax exemption on the amount invested in the shopping complex.
Q. Do child plans, be it insurance or mutual fund schemes, get taxation benefits? -Mihika Kakkar, Nagpur
A. Child plans from insurers are eligible for deduction under Section 80C, provided the cover is over 10 times the annual premium. Only equity-linked saving scheme funds have a tax benefit.
Q. I work with a multinational firm that allows me to offer consultancy services to individual clients. I started this year by setting up an office in my house. However, the consultancy did not do well this financial year, costing me more (renovation, computer and Internet cost, telephone, etc) than I earned from it. How can I show this loss in my income tax returns for this financial year? -Kajal Rao, Hyderabad
A. You need to prepare a profit and loss account showing all the expenses incurred for the consultancy. You've said that the income was less than the expenses incurred. You would then file this loss using the ITR 4 form. If the receipts for the consultancy is over Rs 25 lakh in a financial year, a tax audit by a chartered accountant is mandatory.
Q. I know that gifts are taxed if it is not between close relatives. So, if the gift value is taxed for the recipient, is it exempted from tax for the person who gives the gift? Are the rules same if it is a gift from close relative? -Jobin Russel, email
A. There is no tax exemption for the person who gave the gift under any circumstances. The rule is that gifts are taxable for the recipient if it was received from someone other than a relative and no tax is levied (from donor or recipient) if it was received from a blood relative.
Q. I inherited a house from my father in 1992. It is located in Kerala. The land was bought and the house built by my father in 1981, but I am not aware of the exact valuation. The current market value of the house is Rs 3 crore. What would be the tax on it if I were to sell it? -Gunjan Arora, Jalandhar
A. Long-term capital gain is sale price minus the indexed sum of cost of acquisition and cost of construction (or improvement). The cost of acquisition is the fair market value as on 1 April 1981 for all property bought before this date or indexed cost paid for property bought after April 1. The indexed cost is calculated using the Cost Inflation Index (CII) set by the government. Assuming fair market value of Rs 1 lakh, the indexed cost of acquisition would be Rs 9.39 lakh, meaning you will have to pay 20% tax on Rs 2,90,61,000, which is about Rs 58 lakh.
(Anil Rego, CEO, Right Horizons, has tackled financial planning; Antony Jacob, CEO, Apollo Munich Health Insurance, has answered insurance queries; and Sudhir Kaushik, Co-founder and CFO, Taxspanner.com, has provided tax solutions.)
INVESTING
Q. I'm 47 and had a bypass surgery two years back. Should I get an insurance plan, even if it is costlier? The purpose of the plan is to cover a home loan. Are there other options to ensure that my home loan liabilities don't affect my family's finances if I die? -Harinder Singh Bajwa, Chandigargh
A. It is a good idea to have a life cover considering the heart surgery. However, there is a chance the insurer will reject your application. If you do get accepted, it will cost more (higher premium). If you do not get a plan, your best option would be to close or pre-pay as much of your home loan as possible. Again, this too will impact your investments as a substantial sum will be needed to close the loan. If you are still employed, find out if your company offers a term cover as such plans do not have an exclusion for pre-existing diseases.
Q. I'm 62 and my wife is 58. I have savings of Rs 35 lakh and no pension, while my wife has received a sum of Rs 20 lakh on retirement and a pension of Rs 20,000 per month. I wish to invest in a plan that allows for a systematic withdrawal plan, or SWP. We're hoping to limit our expenses to about Rs 40,000 per month. Should we opt for a bank fixed deposit or include a couple of mutual funds as well? Which are the best debt funds currently? -Sanjay Chavan, Aurangabad
A. As you've retired, we recommend you invest only in debt funds and, maybe, MIP Funds. A significant portion of the money can be invested in bank deposits with a payout option. But, limit it to an amount such that you don't have to pay tax on the returns. The balance can be invested in liquid, short-term and MIP funds. Also consider buying tax-free bonds. Choose a term of 15-20 years so that your interest rates are protected for this period. Too much exposure is not recommended as these are not liquid.
Q. The wealth management division of my bank has been asking me to invest in fixed maturity plans (FMPs). They say this is a good time to invest. My own research suggests that these are mutual fund schemes and I have had a bad experience investing in funds. Should I consider investing in these now? How are these different from normal funds? -Biju Joseph, New Delhi
A. A fixed maturity plan (FMP) is a debt instrument and has no equity risks. Debt funds are great for those looking for a tax-efficient investment as an alternative to fixed deposits. FMPs are safe-it is the closest you get to a fixed deposit as the bonds are, typically, bought and held to maturity. Further, there is no interest rate risk for an investor who holds to maturity. Choose an FMP that is investing in higher rated bonds.
A. LIC Jeevan Anand is a combination of 'endowment assurance' and 'whole life plan'. If the insured survives the term, the sum assured, along with vested bonuses, will be paid as a lump sum. But, in addition to this, a sum will also be payable on death of the insured. So, while it does offer a life cover after redeeming your investment, pay close attention to the offer document for the specifics. Get a detailed illustration that shows all the payouts and benefits in chronological order.
You should subscribe to the plan only if your needs match the plans benefits. It might suit you if, say, you do not need the money (used to pay for the plan) now but might require funds about the same time as the plan matures and have a dependant spouse. Also ensure that you've looked at all the alternatives available to meet the same needs.
You can consider tax-free bonds or a PPF account along with a term cover. This combination offers similar benefits to the LIC plan, but gives you more flexibility.
Q. I have been offered employee stock options (Esops) by my company. It is a leading information technology (IT) firm. Are IT stocks good investments now? What should I look for before taking a decision? -Ajit Kushwaha, Bengaluru
A. IT stocks are a good investment option right now because of the rupee depreciation. The sector is likely to do well in the medium term as well. Even so, do check the performance of your company before choosing to opt for the Esops.
Q. Is the transfer of shares from my demat account to my married daughter's demat account allowed (as a gift)? If so, how will this transfer be considered for tax purposes and capital gains purposes? -Ranjan Kumar Jha, Gurgaon
A. You can transfer shares from your demat account to your daughter's account as a gift. This will be exempt from tax. However, tax on capital gains will be applicable at the time of sale by your daughter.
Q. I'm 27 and have a mediclaim plan from my employer. I have about Rs 5,000 to invest every month. How much should I invest in funds and which funds would be good for a novice investor? Also, should I buy a separate health insurance plan? -Suraj Kumar , Patna
A. It is advisable to have additional health insurance, especially if you do not know how long you will be with the current employer. As for investments, a SIP, or systematic investment plan, with a large-cap and a balanced fund in equal proportion will be best. This will help diversy and provide growth. As your portfolio grows, choose more liquid options. Start investing in midcaps as well (SIP). If you require tax saving investments, choose an equity-linked saving scheme fund.
INSURANCE
Q. What are the major reasons for rejection of a health insurance application of people above 50 years of age? -Bodhisatya Biswas, Kolkata
A. Each insurer is governed by underwriting principles and has the discretion to accept or reject risk. Generally, applications are declined when the insurer finds the applicant is in poor health. This should not motivate an applicant to lie about pre-existing conditions as it will lead to difficulties when making a claim.
A. Each insurer specifies a different age limit when issuing a fresh policy or adding a family member to a floater plan. Check with your insurer on the maximum age limit for such inclusions. In most existing plans, individuals older than 65 years cannot be included in a family floater plan. Further, even if your parents are younger than 65 years, it is not advisable to include them in an existing family floater plan as the premium is based on the oldest family member covered by the policy. This means the premium on your family floater will increase substantially.
A better option would be to take out a separate policy for your parents that would cover them as per their requirements.
TAXATION
Q. My father bought land many years ago for Rs 10,000, which is now valued at Rs 60 lakh. We, my brother and I, are planning to sell that land and construct a shopping complex (retail realty) and a house nearby. What would be taxation impact if we're investing the whole amount in real estate? -Anup Sahani, email
A. Unfortunately, the capital gain on sale of land is exempt from tax only if re-invested in residential property (and that too only if you do not own a house at the time of sale of the land). So, there will be no tax exemption on the amount invested in the shopping complex.
Q. Do child plans, be it insurance or mutual fund schemes, get taxation benefits? -Mihika Kakkar, Nagpur
A. Child plans from insurers are eligible for deduction under Section 80C, provided the cover is over 10 times the annual premium. Only equity-linked saving scheme funds have a tax benefit.
A. You need to prepare a profit and loss account showing all the expenses incurred for the consultancy. You've said that the income was less than the expenses incurred. You would then file this loss using the ITR 4 form. If the receipts for the consultancy is over Rs 25 lakh in a financial year, a tax audit by a chartered accountant is mandatory.
Q. I know that gifts are taxed if it is not between close relatives. So, if the gift value is taxed for the recipient, is it exempted from tax for the person who gives the gift? Are the rules same if it is a gift from close relative? -Jobin Russel, email
Q. I inherited a house from my father in 1992. It is located in Kerala. The land was bought and the house built by my father in 1981, but I am not aware of the exact valuation. The current market value of the house is Rs 3 crore. What would be the tax on it if I were to sell it? -Gunjan Arora, Jalandhar
A. Long-term capital gain is sale price minus the indexed sum of cost of acquisition and cost of construction (or improvement). The cost of acquisition is the fair market value as on 1 April 1981 for all property bought before this date or indexed cost paid for property bought after April 1. The indexed cost is calculated using the Cost Inflation Index (CII) set by the government. Assuming fair market value of Rs 1 lakh, the indexed cost of acquisition would be Rs 9.39 lakh, meaning you will have to pay 20% tax on Rs 2,90,61,000, which is about Rs 58 lakh.
(Anil Rego, CEO, Right Horizons, has tackled financial planning; Antony Jacob, CEO, Apollo Munich Health Insurance, has answered insurance queries; and Sudhir Kaushik, Co-founder and CFO, Taxspanner.com, has provided tax solutions.)
