What budget 2011 means for you? – I

February 28th 2011 was the day when finance minister Pranab Mukherjee announced his budget for the financial year 2011-12. Here are some of the propositions announced and their impact on your personal finances.

  • Increase in tax exemption limits by mere Rs 20,000 and : This means you will be saving just Rs 2060 across all the income categories and a mere Rs 1030 for senior citizens.
  • Senior citizen age set at 60 years: This is good for you if your age is between 60-65, as previously the age limit for senior citizen was 65 years.
  • No tax for senior citizens whose income limit is Rs 5 lakhs above 80 years: Excellent news for senior citizens with annual income of Rs 5 lakhs and whose age is more than 80 years, as they don’t have to pay any tax on their income.
  • Insurance products become expensive: FM has increased tax on insurance products that are primarily meant for investment. While originally you paid 1% as tax on insurance premium, now it has gone up to 1.5%. This means you will get lower returns from your insurance products. Also if you have invested in ULIPs, be ready to shell out more. Till date, you paid tax only on the fund management and mortality charges. But now you will also end up paying tax on allocation charges as well as administration charges.
  • Tax benefits on infra bonds to continue: Till now, you could save extra Rs 20,000 in addition to Rs 1 lakh by investing infra bonds. You can continue to enjoy this benefit even further.
  • No need to file tax returns if your salary is up to Rs 5 lakhs: This will bring cheer to plenty of salaried people, whose income lies between Rs 1 lakh to Rs 5 lakh. But if you have income from other sources like dividends, rent, interest etc., you’ll have to inform about the same to your employer. He will then issue you with a Form 16, which the government will regard as IT return.
  • Introduction of Sugam: Sugam is the new form the government plans to introduce in order to simplify the procedure of filing your tax returns. It is being done to promote electronic filing of tax returns along with payment.  

 

This is all about the effect of budget on the direct taxes. Next time we’ll see its effect on indirect taxes.

Tips to lower your car insurance

Can you imagine a life without a car in modern times? Today having a car is a must for everybody. But owning a car also comes with its share of expenses. One of the major expenses associated with a car ownership is the car insurance. As it is an expense, it makes sense to reduce your premium amount. Here are few tips to lower your car insurance.

• Avoid certain cars like Qualis, Sumo and Tavera as they are used mostly for commercial purpose. Hence they attract higher premium for car insurance, even if you are buying them for your personal use.
• Always go for petrol engine, instead of diesel, LPG or CNG engine, as they attract 10-15% more premium. Similarly engines whose body is made from fibre have higher premium than those made by the metal.
• Include safety devices like seat belts, air bags etc. These devices will not only save you in case of accident, but will also lower your insurance premium.
• Reduce the number of accessories like audio, systems, air conditioning fitted to your car. These accessories do increase your insurance premium.
• Your profile also pays a vital role in determining your insurance premium. If you have ever been in an accident, your premium amount will go up.
• Shop around for good bargains, as different insurers offer different rates for the cover.
• Imported cars attract higher premium than the indigenous cars. This is because spares for imported cars are very expensive.

These tips will go a long way in saving you money on your insurance premium.

Impact of regulatory changes on your investments

The last couple of years have seen a flurry of regulatory changes affecting the various Indian investment products. These changes are sure to impact all of us. So it is essential for you to understand what these regulatory changes mean for you. Here are some of the major changes impacting various investment products.

Regularization of ULIPs

  • Reduction of charges: Before the ULIP charges were capped, the insurers charged exorbitant charges on these products. Hence it took a long time for the  recovery of these charges. But now IRDA has put a limit on these charges. This means you can recover your charges more quickly.
  • Spreading out of charges over the policy term: Previously these charges were deducted during the initial 3-5 years of the product. As a result, your corpus decreased significantly. But now, the final amount goes up significantly, as more amount is invested initially.
  • Hike in lock-in period: The the lock-in period for these products has gone up to 5 years from the earlier 3 years. This is a very important change as equities tend to give better returns over a long period, and most ULIPs are equity-based products. So you tend to get higher returns.
  • Guaranteed return on pension scheme: The pension schemes from insurance companies are now set to offer you a guaranteed return of 4.5%.
  • Limitation on surrender charges: With this move, you will get higher amount, if you decide to surrender your policy prematurely.

 

Revised guidelines for PMS

  • Minimum investment for PMS to be fixed at 5 lakhs: Previously, PMS managers would accept clients even though they couldn’t invest Rs 5 lakhs. But with this new SEBI circular, the minimum amount for PMS account has been fixed at Rs 5 lakhs.
  • PMS Managers to charge fee only on the excess profit generated: SEBI has said that the PMS Manager can charge their fee only on the excess profit generated over the previous year. E.g. if you invest Rs 5 lakhs, which after a year becomes Rs 8 lakhs, then you pay fee only on Rs 3 lakhs and not on the entire corpus. This saves you money in the long run. Moreover this fee will be levied at interval exceeding a quarter. This will safeguard your returns.

 

Abolishment of entry loads in mutual funds

  • This means lesser churning, fewer NFOs and no mis-selling. It means investors gain.

How to decide whether to purchase insurance from an insurance agent or your bank?

Today banks have ventured into other financial products, besides the traditional banking. This includes insurance as well. So you are now in a dilemma whether to buy insurance from your bank or an insurance agent. Well, here are the pros and cons of both the methods.

Pros:

  • Convenience: Your bank offers you lot of convenience like minimal paperwork and direct debit as they have all your personal data, and access to your bank account. This is not possible with an insurance agent.
  • Consolidated portfolio: You can get a consolidated overview of your portfolio, including your savings account, loans, insurance and investments. This helps you get a clearer picture of your finances, which is not possible with an insurance agent.
  • Customized products: Nowadays, insurance companies are offering insurance products specifically designed for the bank’s customers. This will help you get a good deal. You will not get any such deal with an insurance agent.

Cons:

  • No personalized service: The bank will not come over to your door to fill the forms and collect payment. It will just set up a direct debit on your account and it is your responsibility to ensure that there are sufficient funds in your account.
  • Lack of trust: There is a good rapport between you and your insurance agent. This is not possible in case of the bank.
  • Poor range of options: Many banks offer limited range of insurance products. But an insurance agent can offer you a wide array of products.

So weigh the pos and cons of both the alternatives before buying your insurance.

Best instruments to save for your child’s future

Every parent wants to give the best for his child. So they start saving for their child’s education. However there are many instruments available in the market that claim to offer best returns for your child’s future. These products are designed exclusively for children. Here are the products meant to give your child the bright future.

  • Children’s plans from insurance companies: Many insurance companies offer children’s plans. These are the combination of insurance and investment. While they resemble normal ULIPs, the charges are higher here as these products are specialized products offering guaranteed returns. The insurance cover is more, and even if you are not around your child will remain protected. You can also withdraw money from the policy periodically to meet your child’s educational needs..
  • Children’s plans from mutual funds: Similar to insurance companies, mutual funds also offer children’s plans. These are more of debt funds with higher charges than traditional mutual funds.

 

Now when you choose a typical child’s plan, you will get lower returns than a conventional investment instruments. So what should you do?

Start investing in couple of good equity mutual funds as soon as your child is born. Take a term policy that will offer you high insurance at low premiums. This will ensure you can build a healthy corpus for your child by the time he turns 18.

ULIP war – Who loses?

Recently ULIPs were in the news when SEBI had directed 14 insurance companies not to issue any new ULIPs. SEBI contended that despite being an insurance product, ULIP had a high proportion of investment and thus should be regulated by SEBI. However in reality IRDA regulates the insurance products including ULIPs.

The case went to the court and the government had to step in and hand over the jurisdiction of ULIPs to IRDA. But in this war, it is ultimately you the customer has lost. Wondering why? Here is why.

This is because mutual funds and ULIPs do not have level playing field. While mutual funds are not allowed o pay upfront commission to its agents, ULIP agents can pay commission as high as 40% to its agents. As a result, many financial advisors tend to push ULIPs on their unsuspecting clients. Now remember, this commission comes from your investment.

The drawback of ULIP is that you need to keep your investment for at least 10 years to recover this upfront commission. This despite what many insurance agents tell you that you can keep on investing only for 3 years. Also the insurance cover is very low than what you would get for half the investment had you opted for term plan.

Moreover returns from ULIPs are not guaranteed as it is a market-linked product. Thus looking at drawbacks of ULIPs it is advisable to stay away from ULIPs. But with IRDA winning the battle against SEBI, it is the customer who has lost.

What is Term Insurance?

Visit any insurance broker, and you will be bombarded with various different types of insurance products. But one type of insurance that most of them don’t talk about is term insurance. Why do they do that? Simply because they don’t make any hefty commission from selling this insurance. However if you want insurance that offers you highest life cover at the lowest possible premium, then you cannot afford to overlook this insurance.

In simple terms, term insurance provides you only with life cover. You can compare it with car insurance. Just as car insurance insures your car against any damages, term insurance insures you against any calamities. If your car meets with an accident, you can claim compensation from the insurance company. But if nothing happens to your car, then you don’t get anything. Term insurance works the same way.

The main advantage of this insurance is that you can get higher life cover than any other insurance product. But the best part is that this cover is available at the lowest price. As a result, your premium payable is also very low, since there is no investment component involved in this insurance. So your whole premium goes towards buying your life cover.

The disadvantage of this insurance is that it is not available to people over a certain age limit. Also you can just keep on renewing it till you reach the age limit, after which you will not have any life cover.

Today with the stiff competition amongst the insurers, you can get the highest possible cover by paying the lowest possible premium. There are many insurance portals that compare the features of different term insurance products. It will let you get the best deal possible, that is right for your needs.

Tips to select right medical insurance

The adage “Health is Wealth” is true. A couple of days in hospital will set you back by few lakhs of rupees and long-term illness can end up messing around with your finances Hence it is important for you to take care of your health by eating healthy, exercising and insuring it by buying a medical insurance. Here we discuss more about this type of insurance.

What is medical insurance?
Medical insurance is the insurance that compensates you for expenses incurred during hospitalization to treat the ailments suffered or accidental injuries experienced when the policy is in force. It means the insurance company bears the hospitalization expenses that you have to bear during the term of the policy.

Premium
To enjoy this benefit, you have to pay a certain sum as premium. Premium is computed using factors such as your age and health. As you grow older, the premium you pay goes up. However if you have not claimed any compensation and your policy is old, you can enjoy the benefit of either higher insurance cover without paying anything extra or by reducing the premium for later years.

Extra benefits
If you take medical insurance for your whole family, instead of only for yourself, you can get good discounts. Also since many insurance companies are offering the provision of cashless hospitalization by joining hands with third party administrators (TPAs), you don’t have to make any payment to avail of the medical treatment. Alternately, you can avail of the treatment, pay for it and then claim this amount from the insurance company.

Tax benefits
The premium paid is qualified for a subtraction from gross total income, and is Rs 20,000 for senior citizens and Rs. 15,000 for others.

Why be an early bird?
Earlier you take the insurance cover, the better as you can benefit from lower premium, since you are healthy and don’t suffer from any diseases. Most medical insurance products do not cover the existing ailments and so you can easily get a cover if you start early. Also medical check up becomes unnecessary at this time.

Points to consider when taking medical insurance:

  • Find out which illnesses are exempted.
  • Find out if the insurance cover pays for injuries caused by war, riots and terrorism.
  • Find out the diseases that are excluded during the initial policy period.
  • Find out if the policy offers cashless hospitalization and the hospitals that provide you with this facility.
  • What is the compensation offered for disability (partial and complete)
  • For dependents, find out the highest age for availing the cover.
  • Be aware of the benefits you are eligible for, if you don’t file a claim.

The Best Tax-Saving Investment Options

We all wait till March before starting with our tax-planning. As a result, we rush through our investments before the financial year is over. In the process, we end up making poor investment choices that do save tax but do not offer attractive returns. Hence it is advisable to start our tax-planning way in advance.

Once you have decided to begin with your tax-planning, you must know where to invest to get the best possible returns. Here are some best investments.

ELSS: Nothing beats the returns from equity-linked savings schemes (ELSS), if you can handle the risk. There are many ELSS funds that have managed to give superlative returns. Choose funds with a track record of at least 5 years. The main advantage of ELSS is that it has only 3 years lock-in period, which is the least.

Insurance: Besides protecting you against unforeseen events, insurance also helps you save tax. But don’t buy insurance simply to save tax. Instead calculate how much insurance you actually need and find out if you have a shortfall. Only then, buy the insurance. If possible, opt for term plan, as it is the cheapest policy offering you highest possible life cover.

PPF: One of the oldest and the best debt products, PPF is totally exempted from tax. The sum invested, the interest earned and the maturity amount are all tax-free. However the maximum amount you can invest is only Rs. 70,000 in one financial year.

Home loan: The principal portion of your EMI for the home loan can help you in reducing your tax liability.

Premium towards medical insurance: Now you can get a deduction of up to Rs 15,000 towards the medical premium paid. This insurance could be for you or your dependants (spouse and children). If you are paying premiums for your parents, you can get further deduction of up to Rs. 15,000 ( up to Rs. 20,000 in case of senior citizens).

The way to do the tax planning smartly, is to contribute the maximum amount towards your PPF. Then invest the rest as per your financial needs. E.g. if you don’t have adequate insurance cover, first buy insurance before considering other investment options.

Why insurance is not a good investment option?

“Invest Rs. 2000 a month and get Rs 5 lakhs after 5 years.” “Give a better future to your child by investing in our insurance plans.” These and other similar advertisements bombard us everyday. The basic aim of these ads is to market insurance plans as investment vehicles. But is it true? Do insurance plans really make good investment options?

To answer this question, first let us understand the main objective of insurance. The primary aim of insurance is to protect you and your near and dear ones against any unforeseen calamities. Let’s say, you have met with an accident, due to which you are unable to work. It will affect your income and you and your family will suffer financial hardships. But if you have an insurance cover, you can claim compensation, that will help you ride through the tough time.

Now when you look at insurance as an investment option, a portion of the premium you pay towards your life cover is invested. Depending on your risk profile, you can choose to invest in equities or debt. As a result, the life cover you get is significantly reduced. Also to manage your investments, the insurance company has to hire expert fund managers, which cost money. The fees for their charges are deducted from the value of your investment. Consequently, the value of your investment decreases.

Moreover the charges and the portfolios of these plans differ vastly amongst different insurance companies. This makes it difficult to compare the returns of these plans. Hence insurance + investment combo doesn’t make smart investment decision. Instead, it is better to take both of them separately. Remember the key to successful investment is disciplined and consistent approach.

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