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Sunday, January 9, 2011

You can also become Crorepati by investing wisely

We would be lying if we say that we have never dreamt of becoming rich, owning a big house, a big car, a lavish lifestyle. In short, living life, king size, like a Crorepati.

Why not turn this dream into a reality?

Just as little droplets of water make an ocean, similarly regular savings invested prudently can help you accumulate a large corpus, equivalent to crores over time. Accumulating crores may not be easy but with the fast growing Indian Economy and with the per capita incomes on a rise, this dream is not far fetched.

The simplest and the most convenient mode of investing to be a Crorepati, is to start by investing the monthly savings across the available investment avenues. This is termed as the Systematic Investment Planning Route.

As you save and invest a particular amount, month after month, you tend to benefit from the Power of Compounding and the savings grow at a magnificent rate as the time elapses. For example, Rs.5000 saved monthly can grow up to Rs.4 lacs in 5 years, Rs.10 lacs in 10 years, Rs.20 lacs in 13 years and Rs.1cr in around 23 years, assuming a return of 15%.

While this may seem apparently simple, but if you think deep, a lot of questions may crop up in your mind. Questions like how much amount should one save, for how much time, in what avenues, the actual return may or may not align with the expectations etc. Even though this approach is simple, following it religiously and reaping its benefits will be doubtful in the absence of a sound and research-backed advice.

When it comes to your finances, Financial Planning is imperative, so as to not leave any aspect of our Financial Life untouched.

Plan Now, before it is too late!

Open Trading and DMAT account with us and become Crorepati by wise investment methods.

Retirement Planning

Every one dreams about a comfortable retired life but how many actually Plan.

Why not turn this dream into reality?

There was a time when people gave little thought to planning for their retirement. They were somehow able to manage with their PF Receipts and other savings or they had their children to look after them.

Now, the scenario has changed radically. We do not want to compromise on our lifestyles even post retirement, competition is immense and joint family has become a rare phenomenon. Many people postpone their wishes to retirement. For e.g., going for a foreign tour or for a pilgrimage, buying a vacation home and so on.

In the light of these factors, Retirement Planning has emerged as one of the most important goals for one and all. Irrespective of the age bracket or work area we may belong to, Retirement Planning is certainly relevant for each one of us. While some of us may be self employed professionals aiming to work till we live, but it is important that we understand that as we age, our stamina goes down and so does our work capacity and there is no exception to this law of nature.

 I have missed the bus, or There are many years before I retire, both these schools of thought are inadmissible and just another way to procrastinate. By thinking this way, you will never be able to make your retirement years, the golden years of your life, where you do not retire from work but also from worries, tensions and any form of anxiety. 

So, what are you waiting for?

To start with, you can earmark a part of your monthly income towards funding your retirement. If there are over 10-15 years to your retirement, invest this amount in a growth portfolio with equity as the dominant asset class.

If there are less than 10 years for you to retire, increase the monthly savings amount and invest it in a moderate portfolio so that you do not bear high risk on your investments.

The retirement plan would differ case by case depending upon client specific situation in terms of portfolio size, intermediate goals, risk appetite, years to retirement, retirement contributions, etc.

So go ahead and start now. It will surely be worthwhile.

Set Realistic Goals: Decide how much money you will require to live the retirement lifestyle you want. With good health and increasing life expectancy, you could even live for more than 30 years after retirement.

Earmark a Part of the Monthly Inflow to Retirement: Make sure that a part of your monthly income is earmarked to retirement. For the exact amount that you should be saving towards your retirement, you just have to log on the Just Plan Section on this website. 

Informed Investing: Following a well devised investment strategy can work wonders towards timely and efficient realization of your goals. Make sure that your investments are not concentrated in one asset class and are indeed diversified towards optimizing the overall return. 

So, if you are all geared up to invest towards your retirement, go to the Just Plan Section and Plan Now. 

Open Trading and DMAT account with us and turn yor dreams  into reality.

Wealth cannot be accumulated through addition but is created through multiplication

Wealth Creation

The amount of wealth a person owns becomes the subject of envy or discussion amongst his peer group, friends and relatives.  

There are only a lucky few who have become millionaires overnight or are actually born with a silver spoon in their mouth. Rest of the affluent lot that we see around us have actually made it big for themselves by working hard and smart. They had their plans clear and saving / investing gained priority for them over consumption and this is how over the years, they were able to amass wealth and become, what we in common parlance call, ‘Rich and Wealthy’.

It is a truth universally acknowledged that wealth cannot be accumulated through addition but is created through multiplication. This means that you can create wealth by judiciously investing your savings across different asset classes and not by adding cash to your Savings Bank A/c.

As you embark on this goal to create wealth, first decide how much amount you want to accumulate and in how many years. Based on these details, calculate the amount that you should be saving / investing periodically and carry out the feasibility analysis of the result so attained. Thereafter, invest the amount in a suitable asset allocation towards the achievement of your goal of wealth creation.

As you decide on the avenues to invest in, make sure that you consider the following factors towards making an informed decision:

·         Time Horizon: It means the tenure for which you will invest your savings. The time horizon of your investments should match the time horizon of your goal.

·         Asset Allocation: Choosing the right mix of asset classes, while keeping in mind your risk appetite is very important.

·         Power of Compounding: As you invest systematically and regularly towards the achievement of your goals, you tend to benefit from the Power of Compounding, thereby improving the overall return on your investment. This is how it works:

By investing Rs.5000 per month for 5 years at an expected return of 15%, you can accumulate a corpus of Rs.4.05 lac and this same amount invested per month at same return expectation will grow to Rs.12.20 lac over a term of 10 years. Also, the rate of return that you earn has a great bearing on the overall portfolio growth.

Simply stated, if your goal is to create a significant amount of wealth, you should start investing for long period of time, in a variety of investment avenues, suiting your risk profile
Prudent Asset Allocation is very significant to reach the desired goal. It involves dividing an investment portfolio across different asset categories, such as stocks, bonds, cash and real estate, gold, etc.

The process of determining the correct asset mix is completely dependent on how much risk you are able to take as well as the time horizon that you have in view.

By including asset classes that are have low correlation or negative correlation; the investor can stabilize his overall portfolio return, thereby reducing the overall risk. Historically, the returns of the major asset categories have not moved in the same direction at the same time. So when equities are not faring well, you can find opportunity in debt instruments and if you have proportionately invested in both these asset classes, you are able to shield yourself against extreme movements in your portfolio.

Finally, it is important to assess the performance of the investments at least once a year and if you see one investment option that is consistently under-performing, transfer your money to another one that performs consistently better. But you must also remember that even the best investment options can sometimes undergo a period of underperformance.

So even if you are advised to weed out the under-performers, don’t be too rash in your decisions. At the least, re-evaluate your portfolio every year or two to give a better picture of their long-term performance and wealth creation.

Plan now, before it is too late!

Open an Trading and DMAT account now with us and lead a worry-free financial life.

New Pension Scheme

1.    What is NPS?
It is a pension scheme introduced by Govt. of India where,
– You can regularly invest in this scheme and
– Get a part in lump-sum at your retirement and it gives fixed monthly income for the lifetime.
– Common man’s gateway to getting pension benefits post retirement.
2.    How does it work?
- The NPS is based on a unique individual Permanent Retirement Account Number (PRAN) created for individual subscribers.
- The PRAN Number will remain the same for your lifetime irrespective of where you operate your NPS A/c from across the nation.
In this system,
- A subscriber shall periodically contribute savings into his/her Permanent Retirement Account (PRA) while he/she is working and
i. Use the accumulations at retirement to procure a pension for the rest of his/her life.
3.    Investment Options in NPS
- Investor can decide on proportion of investment to be made across different Debt, Equity & Government Securities. The maximum exposure that can be taken in equity is up to 50%. The investment classes are as given below:

i. G Class: Investment would be in Government securities like GOI bonds and State Govt. bonds
ii. C Class: Investment would be in fixed income securities other than Government Securities
iii. E Class: Investment would primarily in Equity market instruments. It would invest in Index funds that replicate the portfolio of either BSE Sensitive index or NSE Nifty 50 index.
4.    Do I have choice to select my fund manager for investing my proceeds?
- You can select from the following seven pension fund managers for managing your proceeds:

i. SBI Pension Funds Pvt. Ltd
ii. UTI Retirement Solutions Ltd
iii. LIC Pension Fund Ltd
iv. IDFC Pension Fund Management Co Ltd
v. Kotak Mahindra Pension Fund Ltd
vi. Reliance Capital Pension Fund Ltd
vii. ICICI Prudential Pension Funds Management Company Ltd
5.    What are the exclusive NPS Benefits?
- Cost effective mode of planning for one’s retirement, the cost structure is far more efficient when compared with charges levied by mutual funds or other investment options.
- Investment in NPS is highly safe and it contains very less amount of risk – these schemes were launched in May’09 and have yielded about 12% annualized return.
- New Pension Scheme provides high returns compare to other investment options.
- It provides tax benefits under section 80C of income tax.
6.    USPs of NPS
- Government provided pension plan directly regulated by PFRDA – Safety wise
- Great End to End Retirement Planning Tool as it will offer investment benefit during the work life and annuity benefit post retirement
- Option to seamlessly switch across savings b/w investment schemes
- Portable Plan
- Nationwide access to NPS over a period of time
- A Must in every individual's portfolio

Take the easier path to wealth creation

By Suresh Parthasarathy 

Here are four tenets to guide you in your pursuit of wealth and help you avoid some typical mistakes in strategy.

Most salary-earners believe that wealth-building is only for the ultra high-net-worth individuals. After all, doesn't money beget money? However, wealth creation is really not just for an exclusive club of ultra-rich individuals. Anyone can build wealth through planned investments over a long period of time.
However, unless you have strategies in place you are leaving wealth creation to chance. The fact that ultra HNIs achieve higher returns than middle-income individuals owes a lot to their asset allocation pattern. There may be several strategies to build wealth. However, we draw on real-life examples to arrive at four basic tenets that will guide you in your pursuit of wealth, even as you avoid the cardinal mistakes some people commit.
Invest based on life cycle
Most people tailor their investment and savings habits to the experiences of others. Take Rajesh Mariappan, an IT professional in his late twenties, who reveals that since his father lost quite a lot of money during the stock market correction in 2000, he himself never invested in equities!
The fear factor made Rajesh opt for an ultra safe portfolio, with all his savings in debt investments earning an average interest rate of about seven per cent per annum. Inflation and taxes have since whittled down these returns to nothing, with the result that Rajesh has been saving diligently, but has built no wealth in the past six years.
Individuals should base their investment preferences on their own life stage. Investors in the age group of 20 plus can take higher exposures to risky asset classes such as equity compared to those in their late 50s, because they have the ability to wait out any market corrections. Those having a long working life ahead of them with financial goals 10-15 years ahead should include equity in their portfolio. Due to the compounding effect and lower taxes compared to pure debt investments, equity can help one build wealth at a faster pace.
So this is Rule 1: Investment strategies should be tailored to one's needs.
Know thy risk
Risk-profiling is the first step towards asset allocation. Each asset has a different risk profile and the investor needs to understand and choose from among options based on his own risk appetite. Having chosen a particular option after understanding the risks, one should avoid changing the allocation unduly because those risks actually materialised!
Many individual investors, for instance, booked profits in stocks after the initial run up in this bull market and have not been able to re-enter market at prevailing prices due to a dilemma about whether the market is too risky to enter. Now, investors with a 10-year horizon and keen on building wealth should not drastically reduce their equity exposure on small market blips.
Take the case of Bangarappa, who holds a business administration degree. On the advice of his broker he promised his father that he could double his retirement money in the short term by investing in derivative instruments. He invested the entire Rs 16 lakh of his father's retirement proceeds in late 2007 in stock futures. When the market crashed, his portfolio was worth just Rs 3 lakh, effectively decimating his father's savings and jeopardising his sister's marriage. While equity investments or derivative exposures may be suitable for people with a high-risk appetite and a big surplus to spare, they certainly aren't a parking ground for retirement savings.
Being over-cautious can have its pitfalls too. Mutual funds are meant mainly as long-term investment options. But in 2010 retail investors have continuously withdrawn money from such funds on every rally. Having withdrawn Rs 17,000 crore from MF equity schemes while market was rising, they may have lost out on an opportunity to make the best of the rally. Ultra HNIs and foreign institutional investors, on the other hand, continued to pump in fresh money and made big gains in the rally. This explicitly shows that if investors don't understand the risk implied in their investments, they may move in the opposite direction of the trend and fail to build wealth.
Rule 2, therefore, is: Be comfortable with the risks before investing in an asset class
Know where to use leverage
In an easing inflation scenario, leverage can help build wealth quickly. However, investors should be cautious in knowing where to use debt and how much leverage to take. Salary earners often fail to make a distinction between using leverage to buy “lifestyle” assets and appreciating assets.
Lifestyle assets such as an owned home, car, a plasma television or other electronics gizmos may improve your quality of life, but they do not help build your long term wealth. Wealthy people may create lifestyle assets by liquidating other investments, but salaried individuals borrowing to fund these buys may be saddled with large EMI repayments for several years at a time. That precludes investment in other appreciating investments such as shares, debt or even rental property. A decade ago the average age of the individual taking a home loan was 40-plus, whereas this has dropped to 30-plus today. That suggests that investors commit a large part of their earnings to a home loan repayment very early in their career. Investors paying 50- 60 per cent of their gross salary as EMI may, due to limited surplus failed to invest sufficiently in stocks, mutual funds or other appreciating assets.
Take the case of Chennai-based young couple Sathish and Priya, in their mid-thirties, who bought who their first house five years back and then added on a Rs 20-lakh plot of land five years later. While the home is self-occupied and the land may yield appreciation over the long term, their investment plan suffers from a key defect. Both their investments are leveraged and take away a good portion of their monthly earnings. More important, both their investments are in a single asset class — property. If property prices were to grow very slowly over the next 10 years that would certainly impact their wealth. Over-exposure to one asset class can be a hindrance to their wealth building exercise if equities or debt outperform over the next 20 years.
Thus, Rule 3: Unplanned debt will eat away growth
No asset class is guaranteed to deliver uniform returns from year to year. The key benefits of diversification are that even if one asset class underperforms in a specific year, the others will make up for it. So, the secret to building wealth with reducing risk is diversification. For instance, in the last five years, equity, debt, real estate and even crude oil all witnessed a bumpy ride; gold is the only asset class that has delivered a consistent return from year to year.
A bit of gold in your portfolio may have helped even out the bumps while the stock market crashed or interest rates fell. However, what percentage of the portfolio should be allocated to each of these assets is based on the individual's risk appetite. One common mistake individuals make is, however, in diversifying too much within the same asset class.
Raghavendar, a businessman, has an equity portfolio of Rs 15 lakh. With mid-cap stocks rising last year, he took a further Rs 5 lakh loan by pledging his shares and invested this sum in mid-caps too. In November, his mid-cap portfolio had lost 30 per cent. He now faces a double whammy where he needs to pay interest on his loan and also suffer portfolio losses. Many investors own more than a dozen equity funds in their portfolio. Now that leads to duplication of stocks and may not materially lower the risk, even as it increases your hassles in tracking your portfolio.
Rule 4 says: Don't put all your savings in one asset class. Always keep room for a surplus to diversify
Zeroing in on an advisor
Do you ever wonder why individuals and corporate investors are duped time and again when they set out to mint money? Two major reasons for financial scams are: lack of prudence and financial literacy. The Organisation of Economic Co-operation and Development (OECD) discovered, in a research exercise, that financial literacy is very poor, even in developed nations. For instance, only 18 per cent of investors surveyed in the US were able to calculate a compounded return on their investment!
This makes it imperative for individuals to acquire a basic level of financial literacy before setting out to build wealth. Assuming that a good number of investors will need the help of advisors to build wealth, how should they go about selecting one? An individual needs to evaluate the advisor with some hard-hitting questions.
1. Gauge his intentions: Try and gauge the advisor's intentions in your first meeting. Is he paying attention to your needs and goals? Or is he simply keen to sell products that may suit his purse?
2. Check the credentials of the advisor: He should have financial qualification such as Certified Financial Planner, MBA with statutory certifications such as AMFI and IRDA. Do check whether your advisor is able to respond to your clarifications on the spot or takes a long time to get back. If he seeks time repeatedly, he is a generalist and may find very difficult to construct right portfolio. Whereas a specialist will be in a position to suggest modifications to your plan based on your risk appetite. If your advisor asks you to sign on blank application forms or asks for signature on white papers, be careful and do spend time to evaluate him.
3. Know how the advisor is paid for the service: In a scenario where most financial products are broker-driven, most of the advisors are paid by the financial product vendors. Ask for disclosures on how the agent is getting his commission and whether it is from the product manufacturer. Check whether he is ready to put everything in black and white.
4. Risk management: Ask your advisor what risk management systems are in place in the event of a crisis. When a plan is given, ask for more options and check whether these are suited to your risk appetite.
5. Decide between institutional and independent financial advisors: Institutions score on technology platforms, upgrading their skills with help of internal training and some of the products that are exclusively available to the institutions from the financial product manufacturers.
But the drawbacks of such institutions are target-based selling of products without too much customisation. Frequent churning of advisors too can be a problem; when new advisors take charge of your portfolio, it may undergo unnecessary modification or the new advisor may not understand on what parameters the portfolio is constructed.
Independent advisors too are motivated by their own revenues but have fewer “targets” to meet. If you are smart and insist on an engagement letter, mis-selling could come down to greater extent with independent advisors. Unless the advisor discontinues his business, continuity too will not be a problem. However the disadvantage with individual advisors is that they may not upgrade to the latest technology and may not have access to the kind of specialised products sold by institutional advisors.

Why using a credit card makes sense

By Madhu T,ET Bureau

No credit cards, please — we are young and credit-averse. It seems, a small bunch of youngsters will do anything to resist a credit card being pushed into their wallet. Nita, a young mediaperson, for example, cringes every time someone in her group flashes his or her card to take care of the bill at a restaurant. She just can’t understand why anyone would opt for a credit card — an easy way to fall into a credit trap, according to her — to pay bills. Why not opt for a debit card to settle the bill instead, she would often confront her friends, much to their amusement. Not in a mood to get into longdrawn boring conversations about the merits of using credit cards, her friends would mutter key phrases like convenience, free credit period and so on. To cut the story short, Nita is yet to figure out why people keep collecting credit cards as if they are life-saving masks.

Increasingly, a small number of youngsters are consciously resisting the desire to own a credit card. Of course, they are far outnumbered by the flashy crowd of youngsters working for BPOs and KPOs, who live by credit cards and swear by easy credit.

“I don’t have any figures to support the claim, but it is true that more and more people are aware of using credit cards in a reckless manner. Many people are content with their debit cards and they are not comfortable with the idea of using credit cards to pay up their bills,” says a financial advisor. According to him, the older people in the group may have had a bad experience dealing with credit cards and they consciously stay away from further trouble. Kids, who have grown up hearing stories about the perils of easy credit, seem to have learnt early lessons in life and keep away from free credit cards for the rest of their life.

Nita, however, hasn’t heard any horror stories about credit card traps. But she knows that it is an expensive form of credit available and many people tend to accumulate huge debt, thanks to easy availability of credit. “When someone is using a credit card, Istart thinking how much money that person would have to pay at the end the month. The way people use their credit card, I am sure they have a huge outstanding at the end of the month,” she says. “I somehow also start thinking about the interest rate they would be paying to clear off the debt. That is why I have decided that I will not get into the habit of accumulating debt,” she says. However, Rita stays away from the credit card because of the lessons learnt the hard way early in life. She used her credit card (an add-on card her father gave her) as if there was no tomorrow and in no time she was in trouble. “I maxed up my credit card and my father had to bail me out. That is why I have decided that I am not going to use credit cards all my life,” says Rita.

However, according to financial experts, every tool – including the much abused credit card – has its plus and minus sides. They don’t think people should develop an irrational fear about this piece of plastic unless they think that they are incapable of responsible behaviour. “Credit cards are a useful payment mechanism and people don’t have to avoid them unless they feel they would be irresponsible when it comes to using them,” says Gaurav Mahruwala.

Sajag Sangvi, a certified financial planner (CFP), says the best thing a person can do is to stay away from using the credit card if s/he cannot resist the temptation to shop and go on revolving credit. “If you don’t clear your outstanding amount on the due date, you are in for trouble. Credit card companies charge around 36% interest on the outstanding amount, which is the highest form of credit,” he says.

For the financially-savvy, the convenience and free credit periods are literally the rewards for using credit cards. For example, a credit card gives you around 50 days of free credit period. Some cards offer even more time. This is the feature that tempts the financial geek. Imagine, you earn interest rates on savings deposit on a daily basis and some other entity is giving you free credit for that period.

“Free credit is a very good feature. It allows you to shop without bothering about the money in your account. The only thing you have to be particular about is to make sure that you clear off your dues on the specified date on which you are supposed to make the payment,” says Mashruwala. He also underscores the convenient factor: you don’t have to carry a lot of cash around to shop. Sure, you can use your debit cards at most places now, but some people don’t like the idea of using debit cards for shopping as it may expose their entire savings account. Also, some travel sites insist on a credit card to make reservations.

In short, you don’t have to avoid credit cards like a plague. All you have to do is to clear off the outstanding on the due date. However, if you fall for the revolving credit facility (that is, pay up a small part of the outstanding immediately and pay the rest later), rest assured you will hurtle towards a debt trap. Because the standing joke is that you can go on paying the credit till you are alive if you are only paying the minimum amount due every month.

Get Credit-Savvy

Credit cards are a useful payment mechanism as you don’t have to carry around much cash for your purchases They are especially useful for people who travel frequently within the country and abroad Credit card bills give you an insight into your spending behaviour at the end of the month or quarter They provide you a free credit period of around 50 days, which is extremely attractive If you think you can go overboard with your shopping and may fail to make full payment on the due date, avoid using credit cards If you are using credit cards as a financing tool, do remember that it is one of the most expensive forms of credit.

Personal loan trap: Flat rate no better than reducing one

Placed at the entrance of the office, the big banner proclaimed the USP of the non-banking finance company (NBFC)—“No disclosure of the purpose of the loan.” I was grateful. Despite racking my brains for hours, I hadn’t come up with an urgent reason for a Rs 3-lakh personal loan.

All the options seemed clichéd—illness in family, debtors threatening to sue or capitation fee for a sibling’s education. Weekend doses of potboiler movies were taking their toll. The relationship manger (RM) lived up to the NBFC—not once did he ask why I wanted Rs 3 lakh. The questions were basic.


“Do you own a credit card or have you taken any other loan?” he began. “No,” I replied. My credit record was clean. In fact, I had no record at all. Most investors think this is a good thing. Would the RM let on the truth? He did: “We need to examine your credit record with Credit Information Bureau India Limited for the past one year. If you have no loan or credit card, there is no record. We can’t give you a loan.” I was stumped.

My application had been turned down within five minutes. Where were the false promises to ensure I took a loan? They were coming. The first one was a lame attempt. “Take a credit card. Don't use it if you are uncomfortable. After one year, we will give the loan,” said the RM. What about the emergency for which I needed the money? Would it wait for one year? Of course, I had forgotten.

The NBFC didn’t ask for the purpose of the loan, so they couldn’t be bothered. I murmured something about an emergency and started to get up. “Wait,” ordered the RM. I sat down again. “Does anyone in your family have a credit card? Or has anyone taken a loan?” he asked His second attempt hit pay dirt. I told him that my husband had a credit card and was servicing a home loan. Would that do? “Of course. Take the loan in his name.

What is his annual income?” he asked. I gave a random figure. He tinkered with a calculator and said my husband was eligible for a personal loan up to Rs 6 lakh. It wasn’t his business that my husband’s cash flow could not accommodate another EMI. It was time to ask the most important question: “What is the interest rate on my loan?” The RM excused himself to discuss it with his senior. 
Within five minutes he had the answer: "Your EMI will be Rs 10,696." Alarm bells ought to have started clanging. Instead of revealing the loan rate, the RM was talking about the EMI. Why? I pushed him to tell me the loan rate. He hemmed and hawed but seeing no way out, gave me the figure: 9.45% It wasn't shocking. As expected, the NBFC was charging 7-15% lower interest than banks. This is why people go to them: lesser paperwork and cheaper rates. Also, most don't know the difference between a flat rate and a reducing balance rate.

I wasn't supposed to know either. Continuing to play a naïve investor, I asked: "What will be the rate in the way banks calculate interest?" The RM was not ready for the poser. He stared at me, his computer screen and again at me. Finally, he said reluctantly: 17%. The cat was out of the bag. Banks advertise loan rates calculated on reducing balance, while NBFC's rate was applicable on the entire loan.


In absolute terms, the EMIs would not be very different. I asked the RM to explain why the second figure was higher. "It has been calculated on a reducing balance whereas ours is a flat loan rate. Double the flat rate and you get the reducing rate," he said. In that case, twice 9.45 should be 17, right? Even ordinary investors would have seen through his sham. The RM knew he had messed up. Quickly, he moved to plan B. If you can't convince, confuse. "In a flat rate loan, you have to pay the entire amount if you pre-pay within six months.

In a reducing balance loan rate, you don't have to pay anything except the principle." Did the RM realise he was favouring banks and not the NBFC? Trying to rush, the RM explained the sanctioning of loan. I had to give photocopies of some documents. EMIs would start from 3 February. "So I won't pay anything for the month of January, right?" I asked. The RM's smile slipped a notch. "You will be charged a pre-EMI interest of Rs 10,000 up to 3 February 2011.

I can't set up the direct debit from 3 January as it is only two working days from sanction date (30 December). But don't worry. The amount will be deducted from the loan cheque," he said. What about the processing fee? It was 2% of the loan and would be deducted from the loan cheque as well. I insisted on paying pre-EMI interest and processing fee—totaling Rs 25,000 in cash. But the RM didn't budge.

"We are doing this for you. How does it matter whether you pay now or through the loan?" he asked. It didn't matter to him. I would be the one paying 17% interest on Rs 3.25 lakh instead of Rs 3 lakh.

When I confronted him with this, the RM offered another deal: "If you take this loan from me, I will reduce the interest to 16% and the processing fee to 1.5%." I had to give him credit: He was a lousy RM but a relentless salesman. It is a pity that most people can't make out the difference.

Eight tax saving secrets you should know

This article is from ET Wealth

The Income Tax Act 1961 is a voluminous piece of legislation. Taxmann Publications’ latest edition of the Act runs into 1,125 pages. It’s enough to intimidate even the most diligent law student and tax expert, leave alone ordinary taxpayers. But hidden away in the 300-odd sections and 14 schedules are clauses that can benefit ordinary taxpayers-provided they know how to claim those benefit.

ET Wealth spoke to a range of tax experts to glean information on little-known tax benefits you may be entitled to. Here are eight deductions that can help you save tax over and above the tax saving investments you make during the year.

1. Use losses in stocks to cut tax

Can you gain from the short-term losses you made on stocks? Yes, says the Income Tax Act. If you have made any long-term capital gains from sale of property, gold or debt funds, you can set them off against short-term capital losses made on stocks and bring down your tax liability. “Short term capital losses can be set off against both shortterm capital gains as well as taxable long-term capital gains,” says Sandeep Shanbhag, director of Wonderland Consultants, a Mumbai-based tax planning and financial consultancy. This can be especially useful for someone who has booked profits on gold ETFs and physical gold this year. Suppose you have sold a property and made a long-term capital gain of Rs 30 lakh after indexation.

At 20%, the tax payable on this long-term capital gain is Rs 6 lakh. However, if you have also sold some junk stocks during the year and made a short-term loss of Rs 3 lakh, you can set this off against the gains from the property. Then the gain from the property will get reduced to only Rs 27 lakh and the tax payable will be Rs 5.4 lakh. However, the law makes a distinction here. One cannot set off short-term gains from stocks against long-term capital losses from the other assets. “Long term capital losses can only be set off against taxable long-term capital gains,” says Shanbhag.

How much tax can you save: Setting off a short-term loss of Rs 3 lakh against longterm gains can help you save Rs 60,000.

Proof required: Keep record of your equity trading account statement with details of the transactions that resulted in losses.

2. Get deduction for rent even without HRA

House rent can account for as much as 40-50% of the total household expense. That’s why the house rent allowance is exempt from tax to a certain limit. But what if your salary does not include an HRA component or you are a self-employed professional or businessman? Under Section 80GG, you can claim deduction of the rent paid even if you don’t get HRA. “Not many people are aware of this deduction,” says chartered accountant Mehul Sheth. But there are stiff conditions to be met. The least of the following three can be claimed as deduction: rent paid less 10% of total income; or Rs 2,000 a month; or 25% of total income. Also, the taxpayer should not be drawing any HRA or any housing benefit.

Besides, he or his spouse or minor child should not own a house in the city where he stays and he should not be claiming tax benefits for some other self-occupied house. Whew. Incidentally, if you are living in your parents’ house, you can pay rent to them. If your parent has no other income or pays a lower tax, this can bring down your tax liability significantly. However, the rent will be taxable as the income of the parent after a 30% standard deduction. This means, you can pay a senior citizen parent up to Rs 3.43 lakh a year.

How much tax can you save: Given the stiff conditions, one can’t claim more than Rs 2,000 as deduction per month under Sec 80GG. But this can bring down your tax by Rs 7,400 a year in the highest tax bracket.

Proof required: Taxpayer has to submit a declaration on form 10-BA that he is paying rent and not receiving HRA.
3. Pay lower tax if someone is ill

The treatment of a chronic illness can be a drain on the finances of a taxpayer. That’s why the Income tax Act allows a taxpayer to claim a deduction of Rs 40,000 if he has a dependent who suffers from any of the ailments specified under Section 80DDB. “The deduction is higher at Rs 60,000 if the patient is a senior citizen,” says chartered accountant Paras Savla. The diseases include, neurological diseases (including dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia and Parkinson’s disease), malignant cancers, full-blown AIDS, chronic kidney failure and haematological disorders (haemophilia and thalassaemia). Dependents can include spouse, children, parents and siblings. However, there are a few conditions.

The patient should be wholly or mainly dependent on the taxpayer and should not have separately claimed deduction for the disability. If the amount spent is reimbursed by the employer or an insurance company, there is no deduction. If the taxpayer gets a partial reimbursement of the expenses, the balance can be claimed as deduction.

How much tax can you save: If a dependent is a patient, the taxpayer’s liability comes down by 12,360 in the highest income bracket. If the patient is a senior citizen, the tax is lower by Rs 18,540.

Proof required: One needs a certificate of the illness from a specialist in a government hospital.

4. Claim benefits for your political affiliations

Can you lower your tax if you have political connections? Apparently you can. Any amount contributed to a recognized political party can be claimed as a deduction under Section 80GGC (80GGB for corporates). “This is a new deduction and was introduced in April 2010. The donation can also be made to the electoral trust which works for the purpose of conducting elections,” says Sheth. Interestingly, unlike other deductions, there is no ceiling on the amount that can be claimed as a deduction. Of course, the deduction is available only if the donation went into the party coffers.

Cash given to individuals doesn’t count. Other donations also get you tax benefits. Under Section 80G, donations to charitable organizations get deduction ranging from 50% to 100%. It’s a good idea to know how much deduction would be available before you write a cheque. However, There is a ceiling to the deduction a taxpayer can claim in a year. “The quantum of deduction is limited to 10% of the gross total income of the donor,” says Tapati Ghose, partner at Deloitte Haskins & Sells. Also, only cash donations are taken into account. Food, clothes and medicines do not qualify.

How much tax can you save: In the highest tax bracket, a donation of Rs 1 lakh to a political party can bring down your tax by Rs 30,900.

Proof required: You must have a stamped receipt of the payment from the political party. 

5. Use education loan to lower tax

The rising cost of higher education is forcing people to borrow money to pay the fee of their children’s professional courses. The taxman is sympathetic and offers a deduction that can lower the cost of the loan. The interest paid on an education loan is fully deductible from taxable income under Section 80E. Till a few years back, this deduction was available only to the borrower. Now, even a parent or a spouse can avail of it. What’s more, this now includes loans taken for vocational courses. “If a parent or legal guardian takes the loan, he can claim deduction for the interest paid for up to eight successive years, starting from the year in which the interest is first paid,” says Shanbhag.

However, loans taken for siblings and other relatives do not qualify. Also, the lender must be a recognised financial institution; loans from employers or individuals do not count.

How much tax can you save: If you take a Rs 10 lakh education loan at 10% interest for 8 years, you can save Rs 1.41 lakh in tax in the highest tax bracket. This will bring down the effective cost of the loan to 7% per annum.

Proof required: Loan statement from lender.

6. Disabilities can be tax savers

There are other signs to suggest that the taxman is not the heartless Scrooge he is often made out to be. If a taxpayer suffers from a disability, he can claim deduction of Rs 75,000 under Sec 80U. If he has a disabled dependent, he can claim the deduction under Sec 80DD. Disability includes blindness, low vision, leprosy, hearing impairment, loco-motor disability, mental retardation and mental illness and deduction is available only if the impairment is at least 40%. If the disability is severe (80% or above), the deduction is Rs 1 lakh a year. The dependant could include the taxpayer’s spouse, children, parents and even siblings.

Incidentally, the deduction is offered as a lump sum and does not depend on the actual amount that the taxpayer may spend on himself or on the disabled dependent. However, the disabled person should be wholly or mainly dependent on the taxpayer for maintenance, and should not have claimed deduction for the disability under Section 80U separately.

How much tax can you save: A deduction of Rs 75,000 can cut tax by Rs 23,175 in the highest tax bracket. In case of severe disability, the tax is lower by Rs 30,900.

Proof required: A certificate of disability from a civil surgeon or the chief medical officer of a government hospital.

7. Take unlimited deduction for your second home loan

When it comes to buying a second house, the taxman can be very encouraging. Under Section 24b, one can claim deduction of up to Rs 1.5 lakh a lakh for interest paid on a home loan. But if the taxpayer buys a second house through another home loan and gives it on rent, the entire interest paid on the home loan during a given year can be claimed as a deduction. As Savla says, “If you have more than one house, any one is deemed to be rented out. So the interest income on the home loan for that house can be claimed entirely for deduction, provided the rental income or a deemed income is charged to tax.”

How much tax can you save: If you have taken a home loan of Rs 50 lakh at 9.5% for 20 years, your interest payment in the first year will be Rs 4.7 lakh and you can save tax up to Rs 1.09 lakh.

Proof required: Loan account statement from your lender

8. Claim HRA as well as home loan benefits

But you can claim both house rent allowance (HRA) exemption as well as the tax benefits on the interest paid on a home loan. Many organizations do not allow employees to claim both benefits. Their logic is that HRA is exempt if you are paying rent and home loan benefits apply only for a self-occupied house. You can’t be doing both at the same time. But this is a gray area in the Income Tax Act. “In legal terms, silence signifies approval.

In other words, the Act need not expressly allow something. The lack of express disallowance also signifies intention of approval,” says Shanbhag. So given this, HRA and interest on home loan are two separate provisions and claiming one of them as a deduction does not influence the other. As Shanbhag puts it, “The taxpayer may own any number of flats, either in the same city that he works in or anywhere else in the whole of India or for that matter abroad, but that in no way influences the HRA deduction that he is entitled to.”

There are many such examples in the tax laws. Let’s take for instance, Section 80C (PPF, NSC, ELSS etc.) and Section 80D (medical insurance premium). “Everyone will agree that both Section 80C and Section 80D can be separately claimed. But does it expressly say so anywhere?” asks Shanbhag.

How much tax can you save: In the highest tax bracket, a deduction for Rs 1.5 lakh will bring down your tax by Rs 46,350.

Proof required: Loan account statement from your lender