Money Plants

Monday, January 30, 2006

What is eligible for LTA?

Conditions for LTA
1) You can take your spouse, kids, dependent parents, dependent
brothers and sisters

2) Limited to the amount actually spent on travelling
3) Travel to any place in India
4) Exemption will not be admissible to more than 2 children born
after 1st Oct 1998

5) Upper ceiling for exemptions:
Travel by rail
First class AC fare

Travel by road
Public transport - First class or deluxe class
If there is no recognized transport - Equivalent of first class AC
train fare

Just posted:
Travel by air

Economy fare of the national carrier by the shortest route to the destination. Now this does not mean that you need to necessarily travel by Indian Airlines. Its just that IA will be a benchmark for maximum ceiling.

PS: If you guys can tell me what issues in finance you want to know on a priority basis, please post your comments. I will, in any case, keep making posts that I feel are relevant.

Sunday, January 29, 2006

All you needed to know about LTA but didn't know whom to ask

LTA is an allowance that your employer may pay you as reimbursement towards any travel expenses within India that you may incur while on leave. That means, you must satisfy 2 basic conditions: you must take leave and you must travel within India. You can claim expenses incurred if you travel with your family but cannot claim expenses incurred if your family travels without you. When I say 'claim' expenses, it means show bills as proof. If you don't show bills, you will still get your LTA amount but minus the tax.

While this allowance is paid to the employee every year, it is treated as tax-free only for two journeys in a block of four years. The 'block of four years' is defined by the income tax laws. They are 1998-2001, 2002-2005, 2006-2009 and so on. These are calendar years.

It is very clear that only 2 journeys are tax free. Whether you undertake those 2 journeys in one year or spread it across 4 years is up to you.

Let's take an example. Suppose you get an LTA of Rs 10,000 per annum and let us also assume that you are in the block of 4 years between 2006 to 2009. Here are some circumstances.
1) You make 2 journeys in 2007 and spend Rs 7,000 and Rs 5,000 on each respectively
In 2006, you pay tax on Rs 10,000.
In 2007, you will get reimbursed up to Rs 10,000 (although your total expenses of both journeys are Rs 12,000, your salary package has a limit of Rs 10,000). This Rs 10,000 will be tax free.
Since you have exhausted both your journeys in 2007 itself, you will be taxed on LTA every year thereafter, untill 2009.

2) You make 2 journeys in 2006 and spend Rs 3,000 and Rs 6,000 on each respectively
In 2006, you will get reimbursed up to Rs 9,000. This Rs 9,000 will be tax free.You will be taxed on the balance Rs 1,000.
Since you have exhausted both your journeys in 2006 itself, you will be taxed on LTA every year thereafter, untill 2009.

3) You make one journey in 2007 and spend Rs 7,000 on it. You don't make any more journeys till 2009
In 2006, you will get taxed on Rs 10,000.
In 2007, you will get reimbursed up to Rs 7,000. This Rs 7,000 will be tax free.You will be taxed on Rs 3,000.
Since you do not make anymore journeys till 2009, you will be taxed on LTA every year thereafter, untill 2009.

4) You make one journey in 2006 of Rs 8,000, one in 2007 of Rs 10,000 and one in 2009 of Rs 15,000.
In 2006, you will get reimbursed up to Rs 8,000. This Rs 8,000 will be tax free.You will be taxed on Rs 2,000.
In 2007, you will get reimbursed up to Rs 10,000. This Rs 10,000 will be tax free.
In 2008, you will be taxed on Rs 10,000 since you have not made any journeys.
In 2009, you will be taxed on Rs 10,000 since you have already exhausted your 2 journeys in 2006 and 2007.

5) You don't make any journeys between 2006 to 2009
You will pay tax on Rs 10,000 every year for the 4 years.
But there is one benefit that is given to you. You can carry forward the benefit of one journey to the next block of 4 years, which is 2007-2010. However, you must make that journey in 2007.
That means, suppose you make one journey each of Rs 10,000 in 2007,2008,2009 and 2010, your taxation will be as follows:In 2007, you will be reimbursed Rs 10,000 which will be tax freeIn 2008, you will be reimbursed Rs 10,000 which will be tax freeIn 2009, you will be reimbursed Rs 10,000 which will be tax freeIn 2010, you will be taxed on Rs 10,000

If you make 3 journeys in 2007 and spend Rs 20,000 in total, you will get tax free reimbursement of only Rs 10,000 and at the same time, you will have to pay tax in the next 3 years.

Some tips:
  • Even if you make 2 journeys in one year, make a claim only if it is beneficial otherwise spread the benefit over 2 years.
  • If your spouse and you both get LTA, use it efficiently so that you both together can claim 4 journeys in a block of 4 years.
  • Since the interpretation of LTA rules is a bit complicated, some companies device their own policy regarding LTA. Please check rules with your company.

Coming up...
What is eligible for LTA?

Wednesday, January 25, 2006

E-E-T? What's that?

You've probably read dozens of news reports that the budget may see a migration from E-E-E to E-E-T. What in the world is that?
Well, its a very simple rule.
1) The first E stand for tax exemption at the time of investment
2) The second E stand for tax exemption in interest accrual
3) The third E stands for tax exemption at the time of withdrawal.

If E-E-E will be replaced by E-E-T, it means, the third rule will be replaced by a tax. That means, no exemption will be available on withdrawal. Of course, the E-E-E/E-E-T rule applies only for those investments that give you a tax deduction at the time of investment.

First, look at the table that shows the various investments that we have today and their tax implications at every stage, that is, at the time of investments, at the time of dividend/interest accrual and at the time of capital appreciation/ withdrawal.

You will notice that some of the investments have a tax deduction at the time of investment. It is these instruments that will come under the scanner for E-E-T. The logic is simple - you cannot get tax sops both, at the time of investment and at the time of withdrawal. Therefore, if you are getting a tax break at the time of investment, then be ready to forego a tax exemption on withdrawal.

Whether PC will steam ahead with this change or succumb to leftist pressure, we will find out on Feb 28th. For all the tech gurus out there, PC in this part of the world means P Chidambaram ;-)

P.S. I hope you can read the contents of the table. This is the best I could do with my little tech knowledge.

Monday, January 23, 2006

Which policy gives you maximum cover at least cost?

There are at least 100 policies available in the market today. But all these policies can be classified under 2 broad heads:
1) Pure protection
2) Protection plus savings

Pure Protection:
What is it?
In a pure protection policy, you will pay premiums every year for a fixed term, say 10,20 or 30 years. There will be a fixed sum assured. Sum assured is the amount which is payable to the nominees in case of death of policyholder.
If the policyholder dies during the term, his nominees will get the sum assured. If he survives the entire term, he does not get anything at the end of the term. So the entire premium is his cost.

Which are the policies under this?
Term insurance policy

How much does it cost?
Illustration: For a 30 year old healthy person, the annual premium will be around Rs 2,000 for a sum assured of Rs 5 lakh.

Why is this useful?
This is the cheapest type of policy and is useful if you want to take a large insurance cover.

Protection plus savings:
What is it?
In India, people don't like the idea of paying a premium every year to get nothing at the end of the term. It just doesnt sell. That is why insurance companies have devised this category of products. Here, out of the total premium you pay, part of it will be allocated towards your sum assured and the rest will be invested in a fund. In a traditional policy, this is a debt fund and the investor has no option to choose his fund. Also, the company will share profits
generated by the fund with its policyholders. Policyholder will never know what was the actual return and what was given as bonuses.

But in a recent variation called Unit linked insurance policy, the rules are slightly different. (Explained under 'variants' below)

Which are the policies under this?
Endowment policies, Whole Life policies

How much is the cost?
Illustration: For a 30 year old healthy person, the annual premium will be around Rs 20,000 for a sum assured of Rs 5 lakh. Out of this, around Rs 2,000 will be allocated toward the sum assured and the balance Rs 18,000 will be invested in a fund that will generate profits.

What are the variants?
Moneyback policy/children's policy - In this case, you will get eriodic returns during the term of the policy

Unit linked policies - Here, the 'fund' in which your premiums will be invested will offer an option similar to mutual funds - such as debt, balanced or equity. You will have an option to choose the fund and the company will give you all the returns your fund generates after deducting administration and management charges.

Why is this useful?
If you don't require a very large cover and don't like the idea of getting nothing back at the end of the term, this could be an option for you. If you want to make investments for your child alongwith a life insurance cover, this option maybe considered.

Sunday, January 22, 2006

How much insurance do you need?

Make a rough calculation:
Step 1: Income replacement
1) Calculate yearly expenses of your family. Say it is Rs 1,00,000
2) Multiply this by around 3 times to take care of inflation. That works out to Rs 3,00,000
3) How much of investment would you need to make to generate an annual income of Rs 3,00,000 for your family? To find out, divide this number by 8% (I am assuming you will get 8% return on your investment). That works out to around Rs 37 lakh
4) To this add lumpsum expenses that your family may need to incur - like daughter's marriage, child's higher education, medical needs. Let's say you add another Rs 10 lakh and take the total to Rs 47 lakh.

Step 2: Loans cover
Calculate all outstanding loans. Say that works out to another Rs 20 lakh

Step 3:
Add Step 1 and Step 2, which works out to Rs 67 lakh

Step 4:
Deduct from Rs 67 lakh, all investments you have made till date (including company PF). Let's say you have investments worth Rs 7 lakh.

Finally, your total insurance cover requirement is Rs 60 lakh. Seems like a huge number right? But that's scientifically worked out. You've seen the numbers pan out yourself. No element of subjectivity involved.

I am not trying to scare you. And it's not like you have to go out today and buy all that lacking insurance. It's really not possible. If I do all these calculations on my own self, I am probably underinsured myself.

But the point is to at least be aware of what you need to do and gradually build your insurance requirements. With families getting more and more nuclear these days, it is important to have enough insurance to protect your family. Review your needs and insure for the sake of insurance and not to save tax.

Next blog: Which policy gives you maximum cover at least cost?

Do you need life insurance?

You hear the words 'insurance agents' and squirm. He'll haunt you till you buy a policy. And while earlier it was only LIC agents, you now have agents from 13 private insurance companies - all the more aggressive, all the more pesky.

Well I am not saying you fall prey to their marketing, but give it some thought. Do you need life insurance? How do you know if you do? How much do you need? Which policy do you need?

Let's take those questions step by step. One blog for each step.

How do you know if you need life insurance?
Here are some reasons:
1) You have a family that depends on your income. So if you are not around, they need an income substitute.
2) You have a home loan or car loan or a large outstanding loan. If something were to happen to you, the liability will devolve on your family. You don't want that to happen and hence need to take an insurance.
3) Even if you don't have a family that depends on your income, if you are young, it makes sense to take some insurance cover, because the younger you are, the cheaper the insurance cost. You can always hike the cover later on when you have dependents.

Next blog: How much insurance do you need?

Friday, January 20, 2006

Did you file your tax returns this year?

"How does it matter if I don't file my returns? I am not evading tax. My employer is deducting my tax in any case. And who's going to find out anyway?"

Well, as honest as it may seem, not filing tax returns, while attracting a penalty (that is if you are caught) can also be a bottleneck for more important things. Like getting a loan for instance. It can be any kind of loan, a home loan or a car loan, banks will ask you for your tax returns of the last 3 years. Even if you're thinking about migrating or travelling abroad, you need to have your tax returns in place. It's a requirement to get your Visa.

The last date for filing your returns for 2004-2005 was July 31st 2005. If you didn't file your tax returns, you still have time till March 31st 2006. And the best part is you will not have to pay any interest or penalty for the delay. That is of course if you have a salary income. If you have any other kind of income, you will have to pay a penalty of 1% per month for every month of delay. But you can still rectify your wrong and get in synch with the law.

Ya so if you are wondering, "if I could file my return by March, what was the fuss about the July 31st deadline?" Well that's an anomaly in the law.

Wednesday, January 18, 2006

71 days to go...

71 days to year end and I am sure your employers are sending out e-mails by the dozens to give in those tax declarations and investment proofs. So what is considered as tax saving investments and how much? My employer has given me a deadline of 15th feb, but I don't have the money to invest till my feb salary comes in. Then what can I do?

Well, here's help. To answer the first question: what is considered as tax saving investment and how much, here's a list;
1) You can invest/save up to Rs 1 lakh and all these will be included in your total to 1 lakh.
a) Your contribution to company PF
b) Principal portion of your home loan
c) Tuition fee for 2 of your kids' school
d) Contribution to Public Provident Fund
e) Investment in life insurance policy
f) Investment in ELSS scheme of mutual funds
g) Investment in National Saving Certificate (NSC)
h) Premium paid towards pension plan of insurance company up to Rs 10,000

2) Apart from the 1 lakh out of the above, you can also get extra deduction of the following:
a) Interest portion of education loan
b) Mediclaim insurance premium paid for yourself and your dependents up to Rs 10,000
c) 50% of amount of donations, if you have made any to tsunami relief of any kind of flood relief funds

3) If you have taken a housing loan, you can claim another Rs 1.5 lakh deduction on the interest portion

Coming to the second and more important question: My employer has given me a deadline of 15th feb, but I don't have the money to invest till my feb salary comes in. Then what can I do?

It's an easy solution. Inform your employer about all investments you have made till the deadline date. Let him deduct your tax accordingly. Once you get your salary, make balance investments. At the time of filing returns in July 1006, you can disclose the additional investments made and claim a refund from the income tax department. Don't worry....the IT department is pulling up its socks. Refunds don't take longer than 6-8 months these days.

Tuesday, January 17, 2006

Get, set, goal...

Times are tough. There are more investment avenues now than ever before - mutual funds, unit linked insurance, bonds, deposits etc etc. And each one is vying for the same investor - YOU. So it's up to you to find method in the madness. And the only way to do that is to set your own financial goals.

This one is like a typical HR interview question. Where do you see yourself 5,10,15,20 years down the line. Only this time, its financially. Now the future cannot be all that unpredictable. Over your lifetime, there are some goals that you will set only once or maybe twice at the most. They are:
1) I want to buy a house
2) I want to buy a car
3) I want to save for my child's education
4) I want to save for my child's marriage
5) I want to save for my own retirement
6) I want to save up to look after my dependent parents

These goals are mostly once or twice in a lifetime goals. And then there are your yearly goals or requirements.
1) I want to make a trip abroad
2) I need to save for my/my wife's pregnancy
3) I want to remodel/paint/renovate my house

Once you can successfully identify your goals, investing is that much simpler. You can then make your investments knowing how much risk you can take, how long you can lock-in your money and so on. For example, let us re-look at our lifetime goals:
1) House - If you plan to buy one within the next 5 years, then you may not want to invest in equities as markets can be volatile in the short run. You may want to put away money in safer instruments
2) Car - ditto as house
3,4) Child's education/marriage - If your child is still young, you will have time of at least 10-15 years before you need huge amounts for his/her higher education or marriage. You can afford to take the risk and invest in equities.You could also review life insurance.
5) Retirement - If you have a long way to go before you retire, you can take risks and invest in equities
6) Dependent parents - Again, the time frame will help you decide.

And once you've saved for all these, you will automatically know how much you have to spend on some indulgences, that too without feeling too guilty :-)

Monday, January 16, 2006

Are mutual funds risky?

Yes and No. Yes in the short run, no in the long run.

Mutual Funds are risky, but you might want to know that bank fixed deposits are even riskier. How's that?

Well for starters, there is a devil called inflation. Today, the economy is healthy and inflation is at 4.5%. The average return your bank fixed deposit can give you is 5.5%. So your effective return is just 1%. If inflation goes up to 6% (which it has in the past), your effective return is negative.

How does inflation matter you ask? If you have 10 bucks today, you get a loaf of bread. Now suppose you want to buy a loaf of bread when you retire and you want to save up for that from now on. So you invest 10 bucks in a bank fixed deposit that gives you a return of 5.5%. Say you retire after 20 years. Your 10 bucks would then be worth 29 bucks. But then, at an inflation of 6%, your bread will cost you 32 bucks after 20 years. SO you cannot buy a loaf of bread with the 10 bucks you invested in a fixed deposit.

Now coming to mutual funds - specifically equity mutual funds. These funds invest in the stock market. We all know stock markets are extremely volatile. They move up and higher and come crashing down. But that's only in the short term. In the long run, by which I mean at least 10 years, equity markets give the best results, beating inflation hands down. Equity stocks can beat inflation because their underlying companies generate profits which are inflation adjusted. Profits are inflation adjusted because if inflation goes up and costs increases, companies will increase their prices too in order to generate profits.

The trick is to get around short-term volatility. And the best way to do that is to invest systematically, some amount every month. That way you buy at high points and also buy at low points so your cost is averaged out. Also, hold your investments for at least 10 years to see returns. And of course, choose a mutual fund wisely and not because an agent/friend told you.

The sensex was devised in 1979 at 100 and is at 9000 levels today. Thats 90 times in 25 years. While 9000 is on the higher side, chances of the sensex falling below 5000 are very less. So 50 times in 25 years is still not bad eh?


So you say you don't have enough to save? Can you spare 2000 bucks a month? Ok...1000? If you can, you're on your way to financial freedom. If you can't, you are doomed in any case.

Don't tell me 1000 bucks a month will get you nowhere in investing. Believe me, that's all you need to build your retirement corpus. What can you do with 1000 bucks?
1) Listen to your dad - open a bank recurring deposit. Link it with your savings account and transfer the money there.You can expect to earn 4.5% every year.
2) Get savvy - invest in mutual funds. Expect around 15% over a long term
3) If you know the stock markets - invest in equity stocks. Expect around 15% over a long term
4) Play it safe - invest in a PPF account. Gets you 8% every year.

And what do you do next? Fill it-shut it-forget it. Don't touch that money for at least 10 years. Do I hear you say 'whoa - 10 years is too much, what if I need the money?'. If you weren't investing, you would have been spending. So locking it in for 10 years won't matter, would it?

And if you want the's what you get if you stay invested for 10 years (based on historical performance of course, which is most likely to continue into the next 10 years, unless politics or nature or both screw up)
1) Bank RD - 1.52 lakh
2) Mutual funds - 2.78 lakh
3) Equities - 2.78 lakh if you've done a good job of fund management
4) PPF - 1.84 lakh

And if you have 30 years to retire, here is what you will have when you retire
1) Bank RD - 7.65 lakh
2) Mutual funds - 60 lakh
3) Equities - 60 lakh if you've done a good job of fund management
4) PPF - 14.68 lakh

If you're convinced, get going. If you aren't, I will have to do some more convincing. Of course, later.

Let's start from the very beginning...

"...A very good place to start.
When you read you begin with A-B-C
When you sing you begin with Do-Re-Mi

....When you save you begin with S-I-P
The first three words just happen to be Systematic-Investment-Planning"

My first attempt at blogging and I've picked the most exciting, yet ironically, the driest of all subjects - Money. We work hard to make it, yet work least to keep it. Let's explore ways of making money management exciting.

And like I said - The first three words just happen to be Systematic-Investment-Planning. More in the next blog.