Prathiba Girish | Finwise

Why I will not be investing in NPS despite the removal of tax on withdrawals!

Prathiba Girish Financial Planning, Government Savings Schemes, Pension, Personal Finance, Retirement, Tax Savings December 20, 2018December 19, 2018financial planning, national pension scheme, national pension system, NPS, retirement, Retirement planning, saving for retirement, Tax benefits, tax saving 0 Comment

National Pension Scheme is not as popular as the government would like it to be. In order to make it on par with other investment options, changes have been made constantly and the latest was announced last week. The biggest and most talked about change is that now NPS enjoys fully EEE status where it was earlier partly EEE and partly EET.

EEE (exempt, exempt, exempt) essentially means there are tax exemptions (up to specified limits) available while you invest, the capital appreciation when you stay invested is exempt from tax and there is not tax exemption when you withdraw.

At this point, a quick recap on how withdrawals from NPS are treated currently will help. It is compulsory to invest 40% of your accumulated corpus in an annuity scheme which gives you pension. The remaining 60% can be withdrawn after you attain 60 years of age. Currently out of the 60%, 40% can be withdrawn tax-free while the remaining 20% is taxable.

Going forward, once the changes announced are implemented, the entire lumpsum withdrawal of 60% will be exempt from tax. The pertinent point to note is that it is still compulsory to buy an annuity with 40% of the corpus and the pension received will be taxable. Therefore, EEE is only for the lumpsum withdrawals. While this is a welcome improvement, it is too minor to change one’s decision on whether to use NPS as a significant investment vehicle.

Taxation is evolving in recent years, as is evident with the long-term capital gains measure introduced for equity investments. I strongly believe that while it is an important factor, it cannot be the only factor in deciding on the vehicle of investment.

If you recall in my previous article I had said that I would not invest in NPS for several reasons, many of which are still applicable, hence my stand in principle remains the same. Let me recap the reasons why I would not invest in NPS, even in its improved avatar.

The corpus is locked in until one turns 60. I have come across numerous clients who want to retire as early as their late 40s. With NPS, your funds will not be at your disposal if you choose to retire early, the only option being to withdraw 20% of your corpus and investing 80% in annuity.

The annuity from NPS currently does not give good returns. It is possible to have an annuity with better returns through investments in mutual funds and if lack of knowledge is a constraint, one can engage a financial planner to help with the same. Compulsorily locking funds with the pension provider alongwith poor returns is a stiff price to pay for investing in NPS.

However, there is a possibility that one could still consider investing to the extent required for extra tax savings of upto Rs 50000 per year, given this change.

Lastly, if you are a central government employee, you can cheer some of the other changes like increased contribution by employer (Govt.), etc. While you stay invested, choose your asset allocation wisely and keep track of it regularly to make the best of the situation.

Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. Please reach us at prathiba.girish@finwise.in or +91 9870702277.

Hype and hysteria surround Indian weddings – what about your investments?

Prathiba Girish Financial Planning, Personal Finance, Retirement December 5, 2018December 5, 2018financial planning, investing, marriage, wedding 0 Comment

Weddings are big in India, it is an event for which people plan and save for years, sometimes decades. The recent celebrity weddings have the attention of the entire nation. There is so much interest in what did the bride and the groom wear, the jewellery, the locations, the food, the guests… Everything is scrutinised and fed for public consumption which we lap up hungrily. What’s wrong with that? Who doesn’t want to look at beautiful people and extravagant weddings? True, it’s all quite harmless to be an animated spectator to a celebrity wedding.

But look closer home and chances are that you will see the same thing being repeated. The focus is always on the event. Somewhere, one forgets that the wedding itself signifies a happy beginning rather than a happy ending.

Curiously, in my many meetings with customers, I have noticed that we often behave the same way when we invest. We speak to a lot of people, make a conscious choice of the product and pat ourselves on our backs when we actually execute our decision to buy. But what after that? Are these reasons for the investment not important to remember later, when one decides to take a sudden decision to liquidate that investment prematurely due to a sudden (hitherto) unplanned need?

All the initial research and focus signify a happy beginning in your investment’s journey and its extremely important to stay focussed even later during the lifetime of the investment. One needs to invest with a purpose and a clearly articulated expectation from the investment. Expectation is again a two-way street where you need to put down what is it that you will commit to do eg. quantum of money you are willing to invest, the time for which you will stay invested and therefore the kind of returns you expect to make.

With many of my clients, I have noticed simply naming the investment with the purpose brings in a lot more focus and avoids knee jerk reactions which could greatly harm the portfolio. For eg. if you are saving for your child’s education you could name it “Anu education fund”. The other thing which keeps you on track is understanding the volatility and having realistic expectations from your funds.

Remember, while the act of investing itself is the wedding, the financial plan required to support it is the marriage, and just like in a marriage, it takes a lot of effort and time to keep investments on track. You must review your investments with your planner at regular intervals and evaluate if you would invest for the same purpose in the same scheme if you had to do it now. If the answer is yes then you are sorted, else it’s time to rethink and learn from your earlier decision. Wishing you the very best in your wealth building journey.

We would like to thank our unnamed friends whose wedding image has been used in this blog, with permission.

Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at prathiba.girish@finwise.in or +91 9870702277.

There are some things money can’t buy, for everything else there can be a financial plan!

Prathiba Girish Financial Planning, Personal Finance November 5, 2018November 5, 2018Diwali, financial planning, money and diwali, prosperity 3 Comments

It’s the time of the year when there is so much hope, joy and festivity in the air. I have beautiful memories of Diwali. This was a festival we looked forward to as children and we would count the days to Diwali and await it with great excitement. I keep asking myself what is it about Diwali, that makes it so special.

Diwali caters to all our senses. It suggests bright colours and lights, the lovely fragrance of flowers, the sound of music and crackers, and of course the aroma and taste of great food. We used to stay in an independent house. The road which lead to our house was a dead end and I remember practising rangoli so that I did justice to my half of the road. My neighbour was really artistic and would effortlessly make neat, large rangolis in front of ours. The camaraderie we shared planning these rangolis brings a smile even today after twenty years.

We had marigold torans on the doors and the rose petals soaked in rose water in a mud “urli” lent a beautiful touch. And we would deck our hair with fragrant jasmine, without which no festival is complete down south. Diyas were simple and made of mud, not painted and nothing fancy, but the string of diyas on the compound wall made the whole house come alive.

The food is altogether another story, preparations would start days earlier with one sweet or savoury item being made in decent quantities every day. I remember the days when Amma would scream her lungs out and expect us to come and help. Both my brothers and me would help her for all of 15 minutes and the moment the first batch was ready we would scoot with our spoils. The coconut burfi, thenkuzhal, murukku, ribbon pakoda and karanji were made only on Diwali and we would attack the food with complete enthusiasm.

The crackers would be purchased at least a fortnight in advance and split equally amongst us under our watchful eyes, we would not budge during this exercise lest the sibling gets a better deal. Once this was done our trading would start can you trade your rockets from some flowerpots? The list would go on. New dress was non-negotiable. The rustle of silk and women in their beautiful kanjivarams is so intrinsic to Diwali.

Forward to today, I struggle to create similar memories for my children. They do enthusiastically help in making the rangoli, and help me string lights on the windows. But they are kind of taken aback by my excitement to make all the traditional sweets at home. Dutifully they do their bit and help me in preparing the same. My son asks “why are you making so much? Who is going to eat them?’’ They are not really interested in the traditional sweets or savouries unless I think of a way to incorporate some cheese, chocolate or some such thing into it. My defence that Diwali is not the same with store-brought sweets falls on deaf ears. The kandils and flowers are in place and so are the rangolis and diyas. What is needed to bring a smile to our faces and warm our hearts is the getting together of family and friends in the old-fashioned way.

This is a time when realization dawns that happiness and memories are formed from small inconsequential things and with meeting and greeting loved ones. It is truly like the ad “there are somethings money can’t buy”. So true! Think back and you will agree that your happiest memories are not about your material acquisitions but about experiences that have brightened someone else’s day along with yours. May the spirit of Diwali live in us all year through and help us value the simple things which bring so much joy.

We at Finwise wish you and your family a very happy, prosperous and safe Diwali!. Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at prathiba.girish@finwise.in or +91 9870702277.

Title inspiration : MasterCard. The intent of this blog is to share a similar thought as what MasterCard intended – that life’s simple pleasures cannot be bought with money.

You can be young and without money, but can you be old and without it?

Prathiba Girish Financial Planning, Retirement October 24, 2018October 24, 2018 1 Comment

While young people who are just venturing off and finding their feet may find themselves without money, this brings to mind an image of positivity. It brings to mind carefree days, huge potential, unlimited possibilities and is indeed a happy picture.

When you flip the coin and look at a senior citizen who has no money, what is the image your mind conjures up? Is it of loss of dignity, dependence, despondence and tension caused by uncertainty about the future?

We all know the importance of being self-dependent in the twilight years. Yet somehow you find many a senior citizen cash strapped and living a very cautious, uncertain life, and depriving themselves of small luxuries which are so rightfully theirs, earnt over a life time of prioritizing everyone’s needs above theirs and being thrifty.

When I look around I find so many senior citizens who are asset rich but are having a tough time making ends meet. These are seniors who have real estate worth lakhs, but think very hard before booking a ticket to the music program that they have been really looking forward to.

In most cases while savings of their lifetime lies locked up in the form of a house, the children contribute towards their day to day needs. This automatically gives the children the upper hand and the parents think and rethink basic wants and needs since they have to dip into the pockets of their children.

On rare occasions where I have approached these senior citizens to monetize their house, seek professional help to invest the proceeds and live a life of a much better standard in a rented house, I am met with shock and disbelief. In all these cases the children are well settled and the estate is not going to make much of difference when its time. However the same has a potential of giving a wonderful, carefree life filled with much cherished experiences to the seniors. ‘

The common objections to this are

This is our hard-earned asset. How can we sell it?
At this age, you want us to shift houses every year or so? We are too old to manage house hunting, shifting etc.
What will we leave behind to our children when we are gone?

Each of us have our own belief systems. I feel shifting to a better house even if you are doing it repeatedly is worthwhile, especially given the fact that your second innings is with financial independence.

Of course, you are not expected to do the actual hunting and shifting, you will be surprised at the level of service available when you can afford the cost. All it takes is a proper real estate agent and a good mover and packer to get you settled.

Why worry about leaving behind something for your children? The greater worry should be of being at their mercy and expecting support in your life time. As for estate, I am sure your children will not have a problem when you leave behind wise financial instruments as compared to a tax-unfriendly, illiquid difficult-to-split piece of real estate.

I am sure there would be other views and would love to hear them. Do drop a comment on what path you would like your parents to choose if they are caught in a similar situation.

Finwise has significant experience working with retired customers and helping them live their second innings with financial security. We are a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at prathiba.girish@finwise.in or +91 9870702277.

Should you invest in PPF or ELSS to save tax?

Prathiba Girish Tax Savings October 3, 2018 0 Comment

As some of you would have picked up in the recent financial news, the interest rate on PPF has been increased to 8% from 7.6% from this month. This will again lead to many people wondering if PPF is better than ELSS going forward.

While there are many options available to you for saving tax under section 80C, today we will compare PPF and ELSS. You my know that PPF is a debt investment and ELSS is an equity investment. Normally comparing the two would be like comparing apples to oranges. Since these are the most popular investment options for people who have not exhausted their 80C limits with EPF contributions, the comparison is justified.

Before we go about comparing the two, let’s understand the basic features of both.

You can invest in PPF by opening a PPF account at your bank or post office. The interest rate on PPF is announced on a quarterly basis. The current rate w.e.f 1^st Oct 2018 is 8%.

The maturity is 15 years, and it can be renewed for a block of 5 years after the maturity. It’s an illiquid instrument and forces you to park your money for 15 years. This can also work to your advantage if you lack the discipline to hold on to your investment for a long time.

Equity linked Saving Scheme (ELSS) is an equity mutual fund with a 3 year lock in. Please note that not all equity MFs provide tax benefits under 80C, there are certain funds specifically denoted as ELSS that only do so. Since it is equity there is not fixed return like PPF and the returns are based on the market performance.

Having said that they have beaten the PPF returns by a huge margin over the last 10 years. The below table shows returns for Rs 1 Lac invested in various ELSS schemes at the date of inception vs the same amount invested in PPF on the same date. As you can see, over an approx. 20-year period the money has multiplied 55 times in ELSS vs about 5.3 times in PPF. Even over a 5 year period, ELSS has multiplied 2.6 times vs 1.5 times for PPF.

Scheme Name	Launch/ Investment Date	Amount Invested	Current Value as on 25-09-2018	ELSS Scheme Returns (%)	PPF Current Value	PPF Returns (%)
Franklin India Taxshield-Growth	10-04-1999	1,00,000	55,36,304	22.89	5,32,755	8.97
HDFC TaxSaver-Growth Plan	31-03-1996	1,00,000	51,10,910	19.1	7,65,027	9.46
ICICI Prudential Long Term Equity Fund (Tax Saving) – Growth	19-08-1999	1,00,000	36,74,500	20.75	5,11,967	8.92
IDBI Equity Advantage Fund – Growth Regular	10-09-2013	1,00,000	2,64,000	21.14	1,52,544	8.7

Source: Advisorkhoj.com

Bear in mind the following while making a choice

Invest with a long-term horizon of 15 years and stick to it, do not link your investment time horizon to the exit clause of the scheme
The returns from equity will be volatile and may even be negative over the short term. Be prepared to hold on to your investment despite double digit negative returns in the interim. If you can digest volatility, see that performance is negative in short runs and still not panic, ELSS may be a good option
Importantly your portfolio will have an asset allocation towards both debt and equity. You should choose PPF if you are looking to augment your debt portfolio, though ideally debt investments are made for shorter time frames and equity for longer time frame
Last but not the least, important to remember the choice of ELSS fund is also important, and the choice must be made with adequate diligence. In case you are not equipped to do that, you should reach out to your financial planner.

Now that you have seen the pros and the cons of both, what should you do? If your investment is for the long term (i.e. at least > 7 years), I would recommend you invest in ELSS. Expect volatility along the way, don’t panic, don’t withdraw in 3 or 5 years, tighten your seat belts and watch the magic of wealth creation unfold. If the volatility is something you cannot handle, PPF would be your option, but remember that it will only preserve your wealth.

Should you invest in National Pension Scheme?

Prathiba Girish Retirement March 17, 2017 0 Comment

Should you invest in National Pension scheme?

I have been asked this question repeatedly over the last couple of months. Hence, I decided to pen down the pros and cons that you need to consider while deciding if the product is meant for you. Before we get started on the same, let’s summarize all that is known about NPS. These are facts that are available aplenty all over the web but for ease of understanding have summarized below.

What is NPS?

National Pension System (NPS) is a scheme initiated by Government of India to provide old age security and pension for all citizens of India. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Why was NPS introduced?

This scheme was introduced by the government to shift from defined benefit to defined contribution scheme. It was initially introduced to all government employees and was mandatory for all employees joining service after 1st Jan 2004, it was opened to all citizen in 2009.

Who can Invest in NPS?

Any Indian Citizen (both resident and non- resident) between the age of 18 and 60 on the date of submission of application can join NPS.

How to apply for an NPS Account?

You can procure your PRAN application form from any of the Point of Presence – Service Providers (POP-SP) you wish to register with. One can also apply online.

Who manages the money?

You get to choose from the seven provident fund managers mentioned below andyou can change the fund manager once a year without any exit load.

HDFC Pension Management Company Limited
ICICI Prudential Pension Funds Management Company Limited
Kotak Mahindra Pension Fund Limited
Reliance Capital Pension Fund Limited
SBI Pension Funds Private Limited
UTI Retirement Solutions Limited
LIC Pension Fund Ltd.

How does this work?

The scheme is based on unique Permanent Retirement Account Number (PRAN) which is allotted to each Subscriber upon joining. Subscriber can contribute directly or through the Employer. With PRAN, the disadvantage of shifting the NPS account due to change of employment is done away with, since PRAN is portable across geography and employer. An investor can open only one account during his/her life span.

There are two schemes available for subscription

Tier I NPS account

This is known as retirement account, withdrawals from this account is restricted. Tax benefit under section 80CCD is available only for investment in tier I account. On retirement or closure of the account, part of the corpus accumulated has to be compulsorily assigned towards annuity. Currently 60% of the corpus can be withdrawn and the rest will be retained to provide annuity. Minimum annual contribution for this account is INR 6000, however minimum contribution while opening this account is INR 1000.

Tier II NPS account

This is an investment account, withdrawal from this account can be done at any time as per need. No tax benefits are available for this account. In order to open Tier II account one must compulsorily open a Tier I account. Minimum annual contributions for this account is RS 250 subject to year-end holding of a minimum of INR 2000, however minimum contribution while opening this account is INR 1000.

What are the different fund options?

NPS offers 3 fund options

Equity – investments in equity funds capped at a maximum of 50%
Corporate bonds (C) – no maximum cap, it can be upto 100%
Government securities (G) – no maximum cap, can be upto 100%

You have two options for deciding the percentage allocation towards the 3 funds. Under Active choice you get to choose your own asset allocation subject to a maximum of 50% in equity. The allocation can be changed once every financial year.

Under Auto choice the allocation is done automatically as per your age. You can shift from Auto to Active once in a Financial Year.

What about maturity and premature withdrawal?

On exit at retirement age, 60% of accumulated corpus can be withdrawn as lumpsum, of which only 40% tax free and 20% taxable. The remaining corpus (40%) will be utilized to purchase an annuity to provide monthly pension. However, the subscriber can choose to not withdraw as lumpsum and utilize the entire corpus for purpose of annuity.

On exit from NPS before retirement age, which is possible after 10 years of starting the scheme, only 20% of the corpus can be withdrawn and the remaining 80% needs to be compulsorily used for purchase of annuity

On death, the entire corpus can be withdrawn as lumpsum by the nominee/legal heir.

What are the most compelling reasons in favour of NPS?

Tax concessions

For NPS, tax deduction for contribution can be done under three sections

Employee contribution

Contribution upto Rs.1,50,000 under section 80CC (this includes mandatory deduction for NPS)
Additional Deduction for voluntary contribution upto Rs. 50,000 under section 80CCD

Employer Contribution

Upto 10% of basic salary put into the NPS by the employer on behalf of the employee is deductible without any limit.

Cost structure

The expense ratio is very low and ranges from 0.1% to 0.21% when compared to 2.00% and higher in equity Mutual funds and insurances. This can boost returns over the long term substantially

Liquidity

Unlike many other products this is truly a long-term product meant to secure your retirement. It can be an advantage given that it forces the subscriber to stay invested over long periods of time.

Ability to tweak Asset Allocation

Allocation to equity and debt can be changed once a year under active choice.

What could be the disadvantages of NPS?

Compulsory Annuity

NPS investments mature when the subscriber attains age 60. If the corpus is in excess of Rs 2,00,000 at maturity then 40% of accumulated corpus has to be compulsorily used to buy annuity. Simply put, in this case you would pay a lumpsum (minimum 40% of accumulated corpus) to receive a series of payments which could last for a specific period or your life time.

The returns on annuity in India has been extremely poor. Assuming you get great returns during your accumulation phase, the investment can still be undone with very poor returns during your annuity phase. Further pension received from annuity is taxable.

Taxation at maturity

NPS maturity proceeds are taxable, as mentioned earlier only 60% can be withdrawn at maturity out of which 40% is tax free whereas tax is payable on the remaining 20%. Further pension received from annuity is taxable.

Liquidity

While the lock in period is huge, this apparent lack of liquidity can work to the advantage of investors who discontinue investments started with a long term horizon at the smallest of pretexts and do not stick to their retirement plans. For disciplined investors who earmark funds for retirement and persist with the plan, this can be a huge drawback..

Tax deductions

I am assuming that the 80C limit is taken care of by EPF contributions which is the case with most salaried investors in the 30% tax slab. For others where investments need to be made to avail of 80C exemptions, ELSS is a better bet (more on that in my next article).

Contributions to NPS are exempt from tax under section 80CCD to the extent of INR 50000 per annum. For a person in the 30% tax bracket this could lead to tax savings of approx. INR 15000 per year but for those in lower tax brackets, this amount is reduced to INR 10000 and INR 5000 respectively and does not provide a compelling argument in favour of investing in NPS.

Cap on Equity Exposure

The expense ratio being low is a huge plus and a very compelling reason to invest, but one needs to bear in mind that maximum asset allocation to equity under active choice is pegged at 50%. Given the long-term nature of NPS, this maximum cap of 50% limits the upside which aggressive investors could get by increasing their allocation to equity.

Given the overall arguments, I will not be investing my money in NPS in its current avatar and would rely on my discipline and knowhow to build a sizeable corpus. As an investor, the knowhow part can be outsourced to your financial planner. If you plan to give this a miss do ensure that you have discipline to set aside finances for your retirement and have the will power not to dip into your nest egg till you retire. If this seems unlikely you should consider investing despite knowing the pitfalls!

What is critical illness insurance? Do you need it?

Prathiba Girish Insurance July 23, 2015February 20, 2019

While life insurance & health insurance are topics covered extensively by media, one rarely reads or hears about critical illness insurance. Every time I have tried telling people about the need for this product, I get a strange look followed by “didn’t we just discuss my health cover”, as not many can distinguish between the two.

Critical illness insurance pays you the sum insured on being diagnosed with a critical illness which is covered under the policy, provided you survive for the minimum survival period as per the terms of the policy.

Health insurance policy will reimburse the cost incurred by you including hospitalization, diagnostic tests and medicine for a specified number of days pre and post the illness.The critical illness policy will pay you the sum insured on being diagnosed with an illness covered under the policy “no questions asked”. Critical illness is not a reimbursement plan.

Most of us underestimate the chances of being diagnosed with a critical illness. As per a newspaper article published a couple of years back “It is estimated that by 2020 cardiovascular disease will be the cause of over 40 per cent deaths in India. India is set to be the ‘heart disease capital of the world’ in few years” The treatment for the same can set you back by 3 to 7 lakhs.

As per another article in Business Today a couple of years back “millions are grappling with the prohibitive cost of cancer treatment in India, where the disease has wiped out entire life savings and even forced some people to sell their homes” It further gives indicative cost of treatment. I have reproduced that paragraph in italics below.

“Breast cancer patients, need targeted treatment drugs, such as Herceptin or Herclon, made by global major Roche, which cost around Rs 75,000 for a course; a patient could need up to 17 courses. Similarly, a drug called Avastin – used to treat colon, kidney, lung and gall bladder cancer – can add around Rs 8 lakh to a patient’s bill at around Rs 1 lakh a cycle”.

It is worth noting that the above estimates take only treatment costs and do not factor in other costs related to inability to work and lifestyle changes associated with the illness.

So how is a critical illness different from a health insurance?

A health insurance reimburses expenses incurred due to hospitalization and medical expenses related to the hospitalization. Critical illness insurance pays the entire sum insured on being diagnosed with a critical illness covered under the policy. It is not a reimbursement and hence has nothing to do with hospitalization.

What should you look for in a critical illness policy apart from the premium?

One should primarily look at illness covered & survival period apart from the premium while deciding on the policy. It may be worthwhile to note, that your application for a policy may be rejected by the insurance company and hence it may make sense to apply to a company who is likely to accept your application. This information can be obtained from somebody who deals with these companies regularly.

What are Illnesses covered under a critical illness policy?

The number of critical illness covered differs from company to company. You also get policies which cover one single illness example Cancer Care. Some of the more common critical illnesses include

Heart attack
Cancer
Paralysis
Coronary artery bypass surgery
Major organ transplant (e.g. heart, lung, liver, pancreas)
Stroke
Kidney Failure

What is Survival period?

Most critical illness policies come with a survival period which could range from a few days to a few months. This essentially means you need to survive the pre-specified period after being diagnosed with the illness to be eligible for a claim.

Who should opt for this policy?

This policy ensures that the financial burden of illness is circumvented and hence everybody should opt for it. People with family history and primary bread winners should definitely ensure that they are adequately insured.

What does it cost?

The premium is based on age, the premium for a healthy 30 year old for 20 lakhs policy should be approximately INR 7,500. Like in the case of health insurance the premium will increase with increase in age and is not fixed.

Are there any tax benefits?

Premium paid towards critical illness insurance can be claimed as deduction under section 80 D, the limit of this section have been increased in the recent budget. Under Section 80D, the premiums paid towards health insurance/critical illness policies for self, spouse, children & parents are allowed as a deduction. For this FY the limit has been raised to INR 25000,for senior citizens the limit is INR 30,000. I have written on this subject earlier and am giving you a link to the article. https://finwise.in/blog/?ph=412

Should we take a stand alone policy or opt for a rider with an existing life insurance policy?

When you opt for a critical illness rider with your life insurance policy the premium remains constant throughout your tenure. Whereas with a stand-alone policy it increases every time you cross the age slab. The issues with opting for a rider are two. Firstly these riders are taken when you buy the policy and you may not be able to opt for it at a later stage. So if you already have a life insurance policy you may not be able to add-on a rider now. Secondly the sum insured in a critical illness rider may be limited and may not suffice. My Suggestion would be to go in for a combination of both with the purpose of having adequate insurance.

While it is good to hope for the best, it is equally important to plan for the worst. Let us endeavor to keep illness at bay and double our time invested in fitness. At the same time take adequate measures to mitigate the financial risk arising out of the illness. God forbid if you were to be diagnosed with a critical illness, there should be nothing which stands between you and the best healthcare possible.

Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Have you adequately secured your retired life?

Prathiba Girish Retirement June 23, 2015 1 Comment

A dear uncle of mine, who retired a couple of years back, recently checked with me if there were any specific steps to be taken post retirement towards financial wellness. That got me thinking, is there anything which we do differently because we are retired, except of course, not earning an active income? The answer is not a simple yes or no. Some things listed below can be done irrespective of whether you are already a retiree or not, while others are specific to retirees. Following are my thoughts on what your approach should be towards financial planning post retirement.

Start with your current position: To start planning for your future you need to know where you stand currently. Start by listing all your assets and liabilities. Take time to accurately list down your monthly and annual expenses. Factor in one-time expense like the wedding of a child or recurring expenses like vacations. List down your goals and the implications they have on your finances. Start with living a comfortable retired life and work your way down to the long cherished dreams of vacations, etc. Once this is done, you will have a clear road map on finances required at various stages in life and will be able to plan your investments accordingly.

Don’t shy away from equity just because you are retired: Retirement is not a short phase, it could encompass almost one-third of your life. It could last even 20 years and sometimes, even more. Equity has a history of giving stable and superior returns over long periods of 8 to 10 years. I am not asking you to experiment at this juncture in your life. There are relatively safe products to invest in equity. Even assigning a portion of your corpus can do wonders to your returns. Considering we are talking about investing money which you have really sweated out to earn during you entire working life, hire a good professional and understand their reasons for recommending products. If they demand a fee for their advice, believe me, it may be well worth it.

Ensure you have sufficient health insurance cover: This is the phase where expenditure on health related issues is often at its highest. It is extremely important to have an adequate health cover, hence, if you have a health insurance cover of your own, do continue it even if your premium has gone up considerably owing to increase in age. If you don’t have a health cover, you may find it difficult to get one now, especially if you have been diagnosed with one of the abundantly common lifestyle diseases like hypertension and diabetes.

If you are able to get a cover, but the high cost of the same is a deterrent, consider a top up cover where you are covered over and above a deductible. I have written extensively on this and you can find links pertaining to the same at the end of this article. If you have children who have group cover with their employers where they have the option of adding you, please ensure that they do, even if it means you bear the premium for the same. The group covers come with huge benefits where pre-existing diseases are covered from day one.

Put away sufficient emergency corpus in investments which are liquid: Even if you have adequate health insurance, you will need to have a sizeable emergency corpus. Various situations may arise requiring you to pay upfront. The hospital were you decide to go in for the procedure may not be covered for cashless facility with your insurer in which case you will need to pay and claim later. In an emergency, the hospital may ask you for a refundable deposit before they start providing medical attention. Worse, your particular ailment or line of treatment may not be covered under insurance at all.

While you will have some part of your investments in long term products without an easy exit route, it is important to have some funds which are earmarked for emergency.

Make a will: Contrary to popular belief, making a will has nothing to do with retirement. We read about accidents almost on a daily basis in newspapers but refuse to believe that the same could happen to us. It is important to list your assets and how you would like them distributed after you pass away. After all, your intention is not leave a feuding family. Also ensure you change your nomination as per your will, don’t leave your assets to one child while you have nominated the other.

Don’t worry! The process of making a will is very simple. You have a lot of assistance available even online today. Registering a will is desirable. You can also change your will any number of times during the course of your life time without much trouble.

Some aspects not directly related to your finances

Spend on experiences: Like most people, you may not have been able to indulge in experiences which you would have always intended to, due to constraints of time or finances. Make a list of all the things you always wanted to do and plan for them. The time you spend in planning and executing them will keep you occupied and joyous for a long time. Don’t forget to photograph these moments so you can refresh your memory and relive them every now and then.

Invest time and effort in keeping body and mind healthy: While sounding very clichéd, prevention is better than cure. Ensure you spend at least half an hour each day on keeping your body and mind fit. Join the yoga classes nearby, go for a walk, do whatever you enjoy, but be consistent and half your troubles will take the next route out of you!

Join clubs where you meet people at the same stage of life: Join the laughter club near your place or the temple committee, any place where you meet people who are in the same stage of life. Actively participate in organizing social outings. This can cheer you up, especially when you realize that you are not alone and others around you face the same issues as you. It is strangely heartening to know that others face them too.

Try to keep abreast with technology: Your grandchild will be only too happy to demonstrate his/her knowledge to you. Kids can be very patient. If you don’t have a grandchild yet, look for some kid in the family or neighborhood. Technology can be liberating. I have personally witnessed how simple stuff like checking your whatsapp, bonding with your extended family & checking the latest news flash on your phone can keep a person involved and connected.

Links to article mentioned above

https://finwise.in/blog/?p=412

The impact of increased Section 80D limits on your health insurance

Prathiba Girish Insurance April 7, 2015February 20, 2019 0 Comment

A month back I had written on the impact of budget on your personal finances, I had followed it up with an article on Sukanya Samruddhi Account, let’s now see what increase in 80D limits can mean for your health insurance.

What is section 80 D?

Under Section 80D the premium paid towards health insurance policy for self, spouse, children & parents are allowed as a deduction. Cost of preventive checkup for self and family as defined above,up to a limit of 5000 subject to overall limit of 25000 is also allowed as a deduction under this section. With effect from this year the limit has been raised to 25000 there is a further increase of 5000 for senior citizens

Are you asking us to buy an insurance just to save tax?

No! of course not! We strongly believe that your financial decisions need to be totally based on needs and goals, only after you have ascertained the need for a product or an investment should you look for tax optimization. Well, having said that all of us are aware of the ever increasing cost of health care. Just last week my daughter had a minor fall in her school needing a small procedure at the hospital which lasted all of 15 minutes. The bill for the same was a whopping 26,000! I am sharing this incident just to bring home the steep increase cost of good health care.

This being a reality, having adequate health insurance for your family is absolutely imperative.

Yes, but all this was always the case! What has the budget got to do with it?

What the budget has done can be compared to a discount sale on your favorite garment brand. Come sale season many of the well-known brand shops are swarmed with people trying to take full advantage of the offer. Why then should you not treat this opportunity differently? Isn’t it a discount offered in disguise? Assume you don’t have health insurance even though you recognize the need for it and you pay tax at the highest bracket. If you do buy the insurance and claim deduction under section 80 D your premium would be deducted from your taxable amount subject to maximum limits discussed above. You therefore have a choice of looking at it as discount at your tax rate on your health insurance premium.

Fine, we get it but what about the insurance we already have?

If you already have a health insurance, great! What you need to evaluate is if the sum insured is adequate. Having a very low sum insured defeats the very purpose of insurance. Ball park if you have a floater than a minimum of 10 lakh cover would be required. For an individual the minimum would be 5 lakhs. If you find that your current insurance is small. You have the option of going in for a top up or add on cover.

These covers come with a deductible and cost very little. A deductible means that the insurance covers any amount incurred above the deductible limit. For example if you have a deductible of 2 lakhs, for every hospitalization the first 2 lakhs will have to be borne by you and any amount incurred over and above 2 lakhs will be reimbursed by the insurance company. You can opt for a deductible equal to your current insurance & use the top up to increase your cover.

My company covers me, why would I duplicate insurance?

Many companies offer health insurance as part of package and opting for it is normally a good deal. This is because a lot of conditions are waived off for group insurance which is not true for individual insurance. Pre-existing diseases for example will not be covered under your individual policy but will be taken care of in most cases in a group policy

. Despite the apparent advantages being dependent solely on company provided cover can be a little dicey cause you may fall sick or worse have an accident when you are in between jobs. The bigger risk however is the fact that when you retire and desperately need insurance you may be diagnosed with lifestyle diseases like diabetes or hyper tension and may be uninsurable. A top up insurance would come in handy in your case, because you would be limiting your losses to the deductible amount even at a later stage. And the premium for a top up insurance would cost you as much as a meal in a fancy restaurant.

Another problem which I encountered in my own case was, while we were covered for medical expenses by my husband’s company to the extent of 80% of the bills the company had not insured with anybody. This essentially means that when the reimbursements were made they became taxable. So if I incur an expense of 1 lakh the company would reimburse 80% or eighty thousand and we would end up paying tax of twenty four thousand. Which means my reimbursement post tax would be fifty six thousand. If I were to have a personal medical insurance (which I do) I would have been reimbursed the entire sum spent and no tax is applicable on the same.

Given below is the premiums applicable for top up insurance from Apollo Munich (company chosen randomly), this is to give you an idea of how cheap these insurances really are.

For a 40 year old in the highest tax bracket the family can be covered from 3lakhs to 13 lakhs at Rs.9,112+ service tax. If you factor in the tax deduction under 80D you could consider the cost of insurance at 70% of the premium which is Rs.6378+ Rs.898 service tax. Should you decide not to go ahead you would end up paying 3000 tax anyway.

You also need to keep in mind that while your parents may not be dependent on you financially, you would chip in, in case of a medical emergency. The premium as you get older is pretty steep. Instead of forgoing the option of insuring them you could consider the top up option and limit your losses. Again insurance paid by you towards parents’ health insurance is available as deduction under 80D. If your parents are senior citizen you would get a maximum deduction of 30000 over and above the limit of 25000 available for self, spouse and children.

Go ahead evaluate your health insurance and buy your peace of mind. May the beginning of the financial year bring you peace happiness and health. Do leave your queries and experiences as comments.

Everything you need to know about Sukanya Samriddhi Yojana – a scheme meant for girl children below 10 years of age

Prathiba Girish Government Savings Schemes March 15, 2015October 15, 2018 3 Comments

If you have a daughter under age 10 you would have probably promised yourself to read up on the Sukanya Samriddhi scheme launched for the girl child in January this year, launched as part of “Beti Bachao Beti Padhao” initiative of the government. We have attempted to summarize the scheme and give you our views on if you should take advantage ome.

Eligiblity

Account can be opened by the parent or legal guardian in the name of the girl child who is less than 10 years of age.
Currently a one year grace period has been given and girls born between 2.12.2003 and 1.12.2004 are also eligible. They can also be beneficiaries of the account provided the account is opened before 1.12.2015.
Maximum of 2 accounts, one per girl child, can be opened by the parent, unless the second is a twin or the first is a triplet, in which case, 3 accounts are allowed.
Multiple accounts cannot be opened in the name of one girl child.

Where can one open the account?

The account can be opened in a post office or scheduled commercial banks which are authorized to open this account

The account may be transferred anywhere in India, if the A/c holder shifts
The banks where the account can be opened are
- State Bank of India
- Punjab National Bank
- Canara Bank
- Bank of Baroda
- UCO Bank
- Bank of India
- Indian Bank
- Allahabad Bank
- Coproration Bank
- IDBI Bank
- Dena Bank
- United Bank of India
- Andhra Bank
- Central Bank of India

What are the documents required for opening an account?

Birth Certificate of the girl child
Address proof of the guardian
Identity proof of the guardian

Maximum and Minimum Deposits

The minimum deposit to be made per year is INR 1000 and maximum deposit is INR 150000 per year, per account.
While the account can be opened with a minimum deposit of INR 1000, subsequent to opening the account, one can deposit in multiples of hundred, subject to the above mentioned limits per year.
Deposits can be made in lump-sum or periodically. There is no limit on the number of deposits either in a month or in a financial year.
If the minimum amount of INR 1000 has not been deposited, then such an account can be regularized by paying penalty of INR 50 per year along with a minimum deposit INR 1000 per year of default any time till the account completes fourteen years.

Time period of the Account

The deposits are to be made for 14 years from the date of opening the account.
The account will mature on completion 21 years from the date of opening the account or on marriage of the girl after she attains 18 years of age.
If the girl were to get married after attaining 18 years of age the account will be closed and the maturity proceeds will be paid. The account will not be allowed to be operational post marriage.
If the account is not closed on maturity (in case of completion of 21 years after opening the account and the girl remaining unmarried), the account will continue to earn interest at the prevalent specified rate applicable to the scheme.

Rate of Interest

Rate of Interest for this scheme is not fixed. The interest is subject to revision every financial year. For this year (FY15) the interest payable will be 9.1%.
Interest will be compounded on a yearly basis.
You can also opt for monthly compounding on request. Interest will be paid on the balance (to the nearest thousand, downwards) in the account. Eg. If the balance is INR 50,784, Interest will be paid on INR 50,000.

Tax treatment

The deposits are eligible for deduction under section 80C.
The taxation status has been changed to EEE in the latest fiscal budget. This means that the deposits are exempt from tax, the interest earned is exempt and the maturity amount is exempt as well.

This recent change, making the interest tax-exempt is a huge positive for the scheme and makes it a very good option for accumulating wealth, on par with PPF.

Premature withdrawal

Partial withdrawal up to 50% of the balance at the end of the preceding financial year shall be allowed after the girl reaches 18 years of age.

Premature closure

On death of the account holder, the account will be closed immediately on production of death certificate. Interest will be payable till the last completed month prior to the premature closure. The balance in the account shall be paid to the guardian of the account holder.

In cases of extreme compassionate grounds such as medical support in life threatening diseases, death etc. the account can be closed prematurely.

How much will you be able to accumulate with this scheme?

The table below gives corpus one would accumulate at age 24 of the girl and at age 18 for various contributions. These figures are rounded down to the nearest lakh and would be indicative and not exact, since the interest paid is subject to revision. For calculation purposes, we have assumed the same rate of interest (9.1% p.a.) throughout the tenure and that investments are made in lump sums for 14 years. Even though the scheme offers redemption on completion of 21 years from opening the account we have assumed that the redemption is only made at age 24

Should you open this account?

When you have a long term goal like child’s education or marriage, equity is something which we advocate very strongly, subject to your risk appetite. This is because volatility can wreak havoc in the short term but loses significance over long time periods, provided of course that you have chosen the right stock or fund to invest in. Having said that “one cannot put all eggs in one basket” and you would want to diversify.

This scheme is a good option to build assets for time-bound long term goals and is an option you can look at, apart from equity, to help with diversifying your asset portfolio.

The argument in favor of the scheme is its tax status of EEE i.e. you can claim deduction under section 80 C when you invest and earn interest free income. (While 80 C may not be such a big draw for a lot of you who exhaust it with EPF contributions, interest being tax free is a huge positive).

The interest currently being paid is 9.1% which would be above inflation by a few percentages and it is compounded monthly/yearly as per choice. These returns are relatively high compared to other debt instruments.

Above all, this scheme is close-ended and that as per us is good because this forces discipline on you, and gives time to allow compounding to weave its magic on your money and help build a sizeable corpus!

This is therefore a good scheme and it can be one of the instruments to accumulate wealth for education and marriage of your little girl.

Given below is the link of government circular along with forms for opening the account

http://www.indiapost.gov.in/dop/Pdf%5CCirculars%5Csukanya_samriddhi_SB_Order_2.pdf