If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

We discuss here what you need to know about computing taxes on the rental income for a house and the capital gains from the possible sale of a house is taken up for discussion in this article.

A. Tax on Rental Income from a property

When you own two houses and let out one of them for rent, you receive an income for which you need to pay tax. In such a scenario, the taxable income from the total rent income received by you for that particular financial year will be computed in your tax returns.

How your rental income is computed

For rented out properties the gross rent needs to be the greater of the three values below:

a. Municipal valuation of the property – The rental value fixed by the corporation based on your locality and property value.

b. Actual rent received during the financial year – The rent received by you from your tenant for that particular financial year.

c. Fair rent – The rent of a similar property in the same or similar locality.

From this gross rent, the property tax is deducted to arrive at the net annual value of the rental income.

Deductions possible from the net annual value of the rental income:

1. 30% of the net annual value for repair, maintenance and rent collection expenses for the property

2. Interest paid towards any type of home loan on this particular property.

3. Any property insurance premium you have paid for the financial year.

Here is a simple example:

Actual rent received from property - Rs. 15,000 x 12 = 1.8 L

Less: Municipal Tax/Property Tax paid by you – Rs. 5,000

Balance: i.e. Net Annual Value -Rs. 1.75 L

Less:
(1) 30% of the net annual value – Rs. 52,500
(2) Interest paid on a renovation loan for the house – Rs. 30,000

= Taxable rent income = Rs. 92,500

The taxable rent income will be included by your auditor under income from other sources, along with other such incomes as well as your salary income and deductions you are eligible for, to calculate your final tax outgo.

B. Capital gains tax on selling a property

Let us also quickly consider what happens if you decide to sell your property.

Any profit that you receive by selling any asset at a price higher than at which it was acquired by you is classified as capital gain and clubbed under income from other sources.

Short term and long term capital gains

If you sell your house within 3 years from the date of purchase you will incur a short term capital gain or loss which is included under other sources of income.

In case you sell your house beyond three years then it is considered as a long term capital gain/loss.

Exemptions from capital gains tax

If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

In case you do not choose to make any investments and opt to pay tax, the income is calculated using the indexation method which is nothing but accounting for the effects of inflation.

For example, if you had purchased a house for Rs 5 L and then sold it for 9 L, the capital gain would be Rs 4 L. However, for the sake of income tax calculation a number called indexation number is used which is a percentage of the gain that is assumed as value addition due to inflation.

Thus if indexation is 20% then only Rs. 3 L (Rs  9L – 20% of 5 L + 5 L = Rs 3L) would be taken as capital gain. A capital gain is usually charged @20% in most cases where the calculation is based on indexation.

A better understanding of the tax rules can make your life easier and help you file your tax returns with clarity.

Photo credits: familymwr

In case of housing loans, banks have a provision for restructuring the loan e.g. terms of extending the tenure of the loan. For the same, the bank must perceive the reason of default to be genuine. The Reserve Bank of India (RBI) has issued guidelines on the same. For. e.g. the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collaterals with the borrower’s co-operation is also advised as the next step.

Owning a house or a car is a dream come true for many because of the availability of loans. In the last few years with an increase in standard of living particularly in the metros, the once conservative and loan averse investor is now willing take on loan commitments to satisfy even leisure requirements.

Taking a loan has an impact on your cash flows by way of EMI payments. What happens to all your loan commitments, if you have lost your job or are entangled in a debt trap because of too many commitments?  Default becomes imminent. A default occurs when a customer repeatedly fails to make payments to the lender as per the schedule outlined by the lender at the time of giving the loan.

Does a default mean that you need to give up ownership of the asset for which the loan was taken?

When you find that you are in a situation where you will not be able to meet your loan obligations, running away from the lender is the last thing you should do. Banks/lending institutions understand that there could be genuine reasons for which the borrower is unable to make timely payments such as loss of job, or an accident that may have confined the borrower to the bed. This is especially true if you have always paid your EMIs on time, every time before events took an unfortunate turn.

You need to engage in a dialogue with the bank/financial institution. Based on how genuine your intent and case is, the bank may look for various feasible solutions that is mutually acceptable. The borrower will benefit because he will be able to retain his asset and the bank will also benefit because this agreement will prevent an addition to its NPA portfolio.

The various options that can be worked out include:

• Reschedule your debt: After having analyzed your financial position, if the bank feels that the quantum of EMI is what is troubling you, they may be willing to reschedule your debt by extending the loan tenure. That will bring down the monthly EMI commitment, though it will mean more interest outgo in the long term. However, you should consider the immediate relief it can bring to your current situation. When the tide turns and you are facing better times you can try negotiating with your bank and revert to your old or higher EMI or even prepay your loan, closing it early and saving excessive interest outgo if it makes sense post the pre-payment penalty.

• Deferring the payment: If your financial situation is such that there is likely to be a jump in cash flow going forward because of change in job or any other reason, you may seek temporary relief from the bank for a few months. The bank may permit the same but may charge penalty for not paying within the time frames agreed upon earlier.

• Restructuring the loan: In case of housing loans, banks have a provision for restructuring the loan e.g. terms of extending the tenure of the loan. For the same, the bank must perceive the reason of default to be genuine. The Reserve Bank of India (RBI) has issued guidelines on the same. For. e.g. the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collaterals with the borrower’s co-operation is also advised as the next step.

• One time settlement: If you express your desire to pay back, and make known to the bank your current financial condition, banks may be willing to enter into a one time settlement on a case to case basis. This is a good way to get rid of your loan if you have some money as usually the settlement will be done at a lesser value i.e. the bank may waive off some amount/charges. If your financial situation is really bad, then you may need to file for bankruptcy to free yourself from the loan commitment.

• Conversion of loan in case of unsecured loans: Banks tend to be stricter as far as unsecured loans are concerned. The borrower could opt for converting the unsecured loan to a secured one by offering a security. That should bring down the rate of interest and thus the EMI burden.

Running away from the problem is not the solution. Not only will you undergo emotional stress, you will also end up losing your asset. What is important is that your intent to pay off the loan should be evident to the lender. It is in the banks interest too, to ensure that the loan doesn’t turn bad. So be wise and engage in a dialogue with the bank the moment you figure out that you will not be able to meet obligations and don’t wait till the last moment. That should help you tide over the temporary crisis you could find yourself in.

What happens if none of the above options work out?

If none of the above options work, the bank after giving you time for repayment will go in for repossession of the asset for the purpose of recovery of dues.

Movable asset (Car/Auto)

• Borrower will be given a notice of 7-15 days to pay the dues before the repossession of the Vehicle. In case of non payment within this notice period, the Bank will repossess the pledged vehicle..
• After repossession of the vehicle, a Pre-Sale Notice would be issued to the borrower giving him a time line of 7 days to make payment of the outstanding dues. The Pre Sale Notice would clearly mention the details of the concerned office and the corresponding contact person for payment and release of vehicle.
• In case the borrower makes the payment in accordance with the agreed terms of settlement, the vehicle will be released back to the borrower within 7 days from the realization of the payment.
• The vehicle will be sold by way of auction through dealers empaneled with the bank within 90 days from the date of repossession.

Immovable Asset (House/property/land)

A notice will be sent to the borrower u/s 13(2) of the SARFAESI Act. This can be done only after the loan is classified as NPA as per the guidelines set by RBI

• The customer will be allowed 60 days post issuance of the notice to regularize the account or come forward to settle the account. .
• If the borrower refuses to pay, then the authorized officer will ask for the physical possession of the mortgaged property by handing over the demand possession notice to the borrower
• The Bank shall proceed with the auction of the attached property post 30 days of taking possession of the property, in the event, that the customer does not come forward and settle the loan. The Bank shall send the customer a letter intimating him, of the venue of the sale indicating date and time of the same.
• The bank will consider handing over possession of property to the borrower any time after repossession and before concluding sale transaction of the property, provided the bank dues are cleared in full.

Any excess amount obtained after adjusting the dues on the loan will be refunded to the borrower.

Borrower’s rights

The SARFAESI act gives the customer the right to appeal against the action of repossession taken by the bank in the Debt Recovery Tribunal u/s 17 within 45 days from the date when the action was taken. If the DRT passes an order against the borrower, then an appeal can be filed before the Appellate Tribunal within 30 days of receiving it. If it is held in appeal that the possession of the asset taken by the secured creditor was wrongful, the Tribunal or the Appellate Tribunal may direct its return to the borrower, along with appropriate compensation and cost.

Loan default can have serious consequences. Not only could it result in seizure and auction of your assets, but your credit score too will take a beating. Even rescheduling debt tarnishes your credit history to an extent and will reflect in your credit score. Obtaining a loan in the future will become an issue which is a huge financial setback. Make sure you take a loan only if you’re sure of timely repayment. A good way to do this is to ascertain your personal net worth in terms of assets you own and the money you have at your disposal after taking stock of your existing debts and other financial commitments.

Owning a home gives you a sense of pride and liberty, but also many responsibilities. For a first timer, it would be a rather complicated process, especially ‘saving’ for down payments. The savings for a home purchase can be started at any time, much before you seriously start shopping for a home.  With the RBI increasing the down payment limit to 20% of the actual price of the property for loans above Rs.20L, an early start in saving for your downpayment is the best option.

Planning is the most important step for buying your first home as in with any other purchase. And here, the key for planning is an honest financial self-appraisal with a budget planner. The idea of budgeting may be distasteful to those who have not tried it. However, budgeting is a fabulous diagnostic instrument to analyse your income-expenditure patterns and thereby your true financial position. It helps you to identify and eliminate discretionary expenses.

House ownership typically involves multiple costs like down payments, loan repayments, property taxes, insurance, maintenance, interior designing, stamp duty, etc.  So, if you don’t fix your overspending before you buy a home, you will not be able to protect yourself from the cash flow problems which may affect you.

Also, tracking your income and expense patterns will give a realistic picture of what you can afford to repay each month, considering your other living expenses. Once you understand exactly what you can borrow, start looking out for a home like a shrewd shopper.

Aim for a home you can really afford to pay. Loans can be good friends in the hour of need but an inconvienient burden, if not properly managed. It is wise to restrict your monthly loan repayments to 40-45% of your monthly income. Real estate values are always on increasing trend, except for a few mid term hiccups. So, even if you buy a small house now, in a year or two the prices will double, especially if you live in the city giving you the option of liquidating it and opting for a better residence.

Banks will finance upto 80% of the property value. So, the remaining 20% are expected to be shelled out of your pockets. If your savings allows, it is always better to make the maximum down payment possible, to reduce your monthly financial burden in the form of an EMI.

Familiarize yourself with available options

It is crucial to find the right lender and the right loan in the process of buying a home. It is always good to know the basics of loan terms and clauses from your friends or through online sources, before you speak to the lender.

Compare the EMI payable for different tenures with your monthly income. Higher the loan tenure, lesser the EMI, but at the same time you will be shelling out more interest. There are also schemes like step up loans, where EMIs accelerate every year in proportion to the increase in your income, however it comes with a certain amount of risk. Banks even allow the customers to switch the current EMI options to longer loan tenures, if they are unable to take it forward.

Banks sanction in-principle loan based on the customer’s eligibility for those who have not yet decided on the property. This helps home buyers guage the loan amount that a bank would be able to give them and the the money they will have to manage. This will help set a budget limit before looking out.

Few saving tips

• Those who started planning early can slowly save and invest in good investment schemes. But you need to make sure that your savings are working for you. Money that is put in a savings account earns less and will not help you much to reach your goal faster. Look forward for a high-yield savings or low risk investment in debt funds. Investing in share markets is a good option, but not a guaranteed one. However if you stay invested for a long term and make your exit at the right moment, it will immensely help you in meeting your money requirements.

• Those who save late also have many options like gathering additional sources like tax refunds, bonuses, dividends etc. Immediate money requirements can be arranged from sources like- gold loan, personal loan, borrowing from relatives, collateral security etc.

• If you are selling your current home for a new one, do it right when the real estate market is up. Or if you have already done it, invest the money in low risk investments which have a flexible liquidity option.

• If you are servicing multiple loans, if possible clear the costlier loans or try to pay off most of them. Personal loans, credit card debts and business loans are costlier, while home loan is the cheapest among them and the tax advantages on home loans is an additional benefit. You can also make part prepayments for all loans whenever you have excess money which will directly bring down your outstanding prinicipal amount.

• Individuals often take personal loans to bridge the immediate finance requirements. The average interest rate of a personal loan is 16-30%. Ideally you should go for other loans such as loans against property, collateral security loans, top up loans, loans against fixed deposits, gold loan, with lower interest rates for immediate requirement of funds.

• Always say a strong ‘no’ to borrowing on credit cards. Always pay off all your credit card dues on or before the due dates, as it is the most difficult one to break off if debts mount.

• While planning, consider not only your current position but also the future changes that could impact your situation like changes to your income, expected costs etc.

Once you begin to understand all the parts of the home buying journey, you’ll feel confident. No matter how a home buyer accumulates funds to purchase a home, careful planning will always make the road to home ownership smooth.

To understand how a home loan works one needs to understand what a rest means. A rest is the interval at which the remainder of the loan amount is recalculated as you repay the loan. This is relevant only in the case of a reducing balance loan as opposed to a flat rate interest loan. These regular intervals or Rests can be yearly, monthly or even daily.

Financial institutions have various parameters surrounding the loan amount detailing the manner in which the loan is repaid. A “Rest” is nothing but the regular interval at which the loan amount balance is recalculated and also refers to the periodicity of compounding. This can be possible only in the case of reducing balance loan amounts.
These regular intervals or Rests can be yearly, monthly or even daily.

A yearly rest or an annual rest would mean that even when you pay EMIs on a monthly basis on your loan, the loan amount based on which you pay the interest, will be recalculated only at the end of the year(12 months). This means you would continue to pay interest on the entire loan amount , even when the outstanding loan amount reduces each month.

In the case of a monthly rest, the balance loan amount is recalculated and decreases every month. Hence it is to the advantage of the loan consumer to take up rest that more closely matches the frequency of his loan repayment. So if you are repaying your loan amount on a monthly basis, take up the option of a monthly rest. Banks generally charge an “annualized” interest rate, which is converted accordingly to a monthly rest or daily rest.

Here is a simple illustration that shows you that the interest rate on a monthly rest is lesser than that of an annual rest. Take two instances, where you borrow Rs. 20 lakh at a 10% annualized interest rate (which is obtained by multiplying the rate per rest period into the number of rests per year), where in one case the rate has annual rests and in the other case it has monthly rests.

To compare loan offers from multiple banks, you need to calculate the total amount of interest you would pay for each offer. Knowing the annualized rate quoted by each bank will help you calculate the interest rate you pay at different rest periods and enable you to compare offers even if their interest rates are quoted differently.

The only reason investors head for the stock market is to earn better returns compared to other investment avenues. The objective is the same but approaches can be different. For example, some may like the growth theme, some may like the value theme; few are excited about banking sector while some find consumption theme intoxicating.

At a broad level, there are two major ways to find profitable companies and hence stocks. These two approaches are entirely different. They are top-down approach and bottom-up approach. While they are different in approach, the goal is same, to find the right stocks to invest in. Let’s discuss these two approaches.

Top-down Approach

Top-down approach looks at the “big picture” and overall growth theme. It starts with global sentiments on economy and looks at the growth data. Thereafter, it goes to national data such as growth, inflation, employment, wages & other factors. Then it studies the overall market sentiments, the sector and finally the company. Sectors are impacted by policies and changes in business realities. In the case of the market, investors study the market valuation and general sentiments. For example, a high interest rate regime almost kills the real estate industry. Hence if the interest rate is high like how it is in India currently, investors will be wary of investing in real estate.

Hence if you look at today’s scenario, the global growth of the economy doesn’t look very attractive. With crisis in Europe and slowdown in America, the world economy presents a gloomy picture. China is doing well in this environment but its growth rate has come down to a single digit. Once we have realized that the growth has subdued and there is no trigger in near term, we understand that stock investing may not give the desired returns.

Then we look at the country’s growth. In our case, India’s projected growth has come down from 9%+ to 7%+. Moreover, rising inflation and interest rates are making sure this goes further down. This is a drastic contraction. This again shows the market may not improve much in the coming days. The market sentiment is not favourable either. Most of the sectors are performing badly. In such a scenario, it seems likely that the market or sector will not improve soon. This seems to hold good for any sector, be it real estate, manufacturing, IT/ITES, they all have negative to flat outlook for future growth.

Finally, the company data is studied and investment is planned based on all the factors.

Pros and Cons of  the Top-down approach

Top-down investing is a good measure of  the overall stock market. Top-down investors believe that if the macroeconomic condition or the big picture is not favourable, stocks will not do well, irrespective of the merit of the company behind it. This is right to a large extent. We have seen how the 2008 crash of the Indian stock market brought down every company irrespective of their businesses.

The disadvantage of top-down approach is getting it right. It is extremely difficult to follow macro-economic data and rely on it. Numbers like GDP, unemployment; inflation can give a fair idea about the current state but cannot say much for the future. Look at the sensex regaining its 2008 crash in 2009-2010. It would have been impossible for someone to predict such a great turnaround in a year.

Bottom-up Approach

Bottom-up approach starts with the micro level; i.e. it studies the company first. The investors look at the numbers, ratios, and other qualitative information to arrive at a conclusion. Bottom-up approach requires investors to do the due diligence on company financials, management discussion & analysis, future projection of income, and past financials. Once the data is collected and studied, investors look at the valuation and the growth projection of the company. Valuation takes care of past data while future projection looks at the future. Bottom-up investors do not like to look at the big picture because there is huge uncertainty in predicting events in future based on the current state of economy. Instead, it is much easier to predict a stock’s trend based on valuation and past data.

Pros and Cons of bottom-up approach

Bottom-up approach has limited variables to track. Hence, it is much easier than the top-down approach. The study of ratios gives a fair idea about the strength of the company and the future can be predicted reasonably well.

The disadvantage of bottom-up approach is that it ignores the macro-economic variables which impact nations and markets. This is also known as systematic risk. In case of market slowdown or crash, investors with bottom-up approach will be the losers as market crash will take everything down with it.

What should investors do?

It is not easy to suggest one approach over the other. There have been investors who have opted to go with each approach and have done tremendously well. It entirely depends on individual investors. However, for common investors who do not have much idea about the macro-economic condition, bottom-up approach looks a better option as the data for bottom-up approach is readily available and fairly reliable. For the investors who can study the macroeconomic data and interpret it correctly, top-down approach makes much sense.

Once the checks are in place and the bank pre-approves the loan, it will hand over a letter stating that an in principle approval of a particular home loan amount has been granted and will be valid up to a particular period. Some banks will also state the rate of interest at which the loan will be provided, the rationale being the interest rate at the time of pre-approving the loan should be applicable. Please note that the pre-approved loan is valid only for a particular period- in most cases it is six months, post which the individual will have to go through the process again.

Looking for a house? Do you have a budget in place, which will ensure that you look for a house that is well within your means?  If not, start the process now, as buying a house is a big investment, having financial repercussions for years to come.

How do you prepare a budget? Analyse your current financial situation to determine available resources. You need to answer questions such as, how much cash will you have at hand for a down payment? Also, you would want to know the quantum of housing loan you would be eligible for? After all, how many of us can buy a house today without a housing loan? The housing loan amount will be the critical factor determining your budget. Want to guage the actual quantum of loan the bank will provide you with? Look for ‘pre-approved’ housing loans.

What is a pre-approved housing loan?

It is essentially an in principle sanction given by a bank for a particular loan amount. A fairly robust process is followed by the banks to determine the loan amount. They will require you to submit a lot of information such as income tax returns, bank account statements, income proof, salary slips, identity proof, and Pan details among various other things. Banks will also obtain data from CIBIL to check the credit history of the individual.

Once the checks are in place and the bank pre-approves the loan, it will hand over a letter stating that an in principle approval of a particular home loan amount has been granted and will be valid up to a particular period. Some banks will also state the rate of interest at which the loan will be provided, the rationale being the interest rate at the time of pre-approving the loan should be applicable. Please note that the pre-approved loan is valid only for a particular period- in most cases it is six months, post which the individual will have to go through the process again.

Once a loan has been pre-approved, does it mean the bank is obligated to provide the loan?

The bank is not obligated to provide the loan as banks clearly state that the in principle approval is subject to verification of property documents and the property itself.

Does it come free of cost?

Several banks do charge a pre-approval loan processing fee which is refunded if the loan is taken, on the other hand some banks do not charge any fee.

What advantages does it offer?

• Ensures that you narrow down your home search

Getting a loan pre-approved will help you to target a house that is within your budget. This will prevent you from straying- houses bigger than your budget will automatically be eliminated.

• Greater negotiation power

A pre-approved loan will make it clear to the seller that you are a serious buyer and also assert the fact that you have the financial means to close the transaction. Thus he will be willing to offer you a discount or some additional benefits so that the deal is sealed.

• Credibility with real estate agents

Given that the agent will earn commission on the transaction, he will put in extra efforts as he knows you are a genuine buyer.

• Quicker loan disbursal

Processing of the loan application will take place at a much quicker pace if the loan is pre-approved. This ensures that you save time. Many a time, individuals have lost out on good houses, because they were not able to garner resources in time. If you want to make sure that you do not want to lose out on a dream home due to external factors like running short of time, awaiting the loan sanction etc., you could opt for a pre-approved home loan, to ensure a smooth home purchase process.

Do evaluate your exact need before you opt for a pre-approved loan, it should not be a scenario where you are unable to locate the house of your choice for purchase within the stipulated period of six months. If the bank charges a processing fee, then that would be an incurred loss for you.

Also, interest rates might change depending on market conditions during the time of the actual loan disbursal, which will not happen until you zero in on the property and the property documents are verified by the bank. Opting for a pre-approved property with a pre-approved loan might enable a quick home purchase process, the pre-approved status for your loan asserts your credibility and repayment capacity while the same for the property indicates the credibility of the builder.

One of the most popular and important riders added to an insurance policy is the ‘Waiver of Premium’  rider. If this rider is a part of one’s insurance policy, it ensures that the premiums to be paid by the insured are waived in the event that the insured becomes ‘completely disabled’ or loses his source of revenue because of unemployment owing to an injury or sickness. In such a situation, even though the premiums are not paid by the insured, the policy does not lapse.

With the growing uncertainty of life, getting an insurance policy has become a must for almost every individual. When you take an insurance policy, you also tend to add ‘riders’  to the policy. Riders are the additional benefits that you may buy and add to your policy. They are options that allow you to enhance your insurance cover, qualitatively and quantitatively. Riders can be mixed and matched based on one’s preferences for a small additional cost.

One size does not fit all

A one size fits all approach does not apply to insurance policies. Therefore, the kind and number of riders added to an individual’s insurance policy depends on the many factors such as the individual’s health, future plans, purpose of the insurance etc.

One of the most popular and important riders added to an insurance policy is the ‘Waiver of Premium’  rider. If this rider is a part of one’s insurance policy, it ensures that the premiums to be paid by the insured are waived in the event that the insured becomes ‘completely disabled’ or loses his source of revenue because of unemployment owing to an injury or sickness. In such a situation, even though the premiums are not paid by the insured, the policy does not lapse.

What is a waiver of premium?

A waiver of premium is an extra option life insurance companies provide you with on top of your purchased life insurance policy at an additional cost. This offers protection and cover for your premiums if you should fall seriously ill or incur injuries that leave you impaired – in a situation where you cannot earn. In such an unfortunate event, the life insurance company will become responsible to pay the premiums which you were expected to pay.

The best part about this rider is that anyone who takes up the insurance policy can effectively add this rider to the policy. The amount of premium to be paid depends on the premium you pay on the base policy and on other riders. The higher the premium on the base policy, and the more the riders you add, the higher will be the premium you pay on this rider.

Is it worth it?

Many ask whether this rider is worth being latched on to the base policy. With the increasingly stressful lifestyle, hazardous traffic situations and a horde of other factors, addition of this rider to an insurance policy would be very helpful. This rider also ensures that in the event of death of the insured during the term of the policy, the policy does not lapse and remains in force even during the Auto Cover period. The Auto Cover Period is a term of two years during which full death cover continues even if the insured has not paid premiums – subject to at least two full years’ premiums having been paid.

One other feature of this rider that bears attention is the fact that the premium paid for this rider qualifies for tax deduction under section 80D of the Income Tax Act.

How is it useful?

This rider is especially useful in a child insurance policy as this primarily has been set up in place to provide money for your child in the hour of his or her need.

In the case of a child insurance policy, where you are ensuring your child receives a sum of money at a certain pre-defined age, this will ensure that the process is uninterrupted and premium payment is continued, so that your child receives the money at the pre-determined date.

Imagine the scenario if do not opt for this and end up in an unfortunate situation, where you are unable to pay your premium and the policy lapses. Then it would be no good to anybody, so to have this drawback plugged, its better to pay up the additional cost to ensure continuity in the premium payment.

The terms and conditions regarding what constitutes serious illenss or injury and conditions regarding the time frame when the premium payment starts by the insurer etc.  are defined by the insurance company and may vary from one company to another. Be sure to research on this thoroughly and understand the clauses and conditions of the insurance company until you choose an option offered by a company with which you are most comfortable with.

Usually, the premium paying term for the rider is throughout the benefit period but a few companies restrict the time frame to the policy owner attaining a particular age or for a maximum duration of 25 to 30 years.

Therefore, choose riders according to your need and budget. Sometimes its is the choice that we make that will help us through tough times.

As the features offered by each credit card varies, it is essential for you to understand which features will benefit you a lot. If you are shopping regularly at a particular store, go for a credit card that offers your reward points or cash back or discount when you shop at that store. Don’t select a card that offers you free air miles on usage, if you are not a regular flier.

Today it is difficult to come across a person who doesn’t own a credit card. With the rise in standard of living, banks are coming out with increasing number of cards offering a number of innovative features. While it increases the number of options open to the customers, this innovation can also confuse the person looking to own his first credit card. As a result, it is very important for you to choose the right credit card so that you can get the best out of credit card. We answer some of your questions on how to select the right credit card for your needs.

What card is ideal for me?

As the features offered by each credit card varies, it is essential for you to understand which features will benefit you a lot. If you are shopping regularly at a particular store, go for a credit card that offers your reward points or cash back or discount when you shop at that store. Don’t select a card that offers you free air miles on usage, if you are not a regular flier. Do you use the credit card to pay your utility bills? Then choose a card that provides you benefits for paying your bills. Besides rewards, also take a look at the interest charged. If you intend to carry outstanding balances each month, then it is advisable to choose a card offering a low interest rate. But if you can manage to pay off the balance in full at the end of each month, it is advisable for you to go for a card with high interest rate but with low or nil joining and annual fees. If you are traveler, check out if the card has widespread acceptance.

What are the important features my card should have?

Though cards contain many important features, some are the more important than others. While we all like to be rewarded for using the card, it should not be the sole criterion affecting your decision. Instead here are some essential features to look at when choosing a card.

• Annual/joining fee: While most banks offer entry level credit cards for free, these fees are still levied on the high end credit cards meant for businessmen. If you happen to pay your card balance each month, then these fees will make it expensive for you to use the card. In this case, it makes more sense to opt for the card that doesn’t charge any such fees.
• Credit limit: If you are a heavy shopper, always select the card offering you the highest credit limit. It will prevent your card from being rejected due to insufficient credit limit.
• Cash limit: Do you always swipe your card to withdraw cash in case of emergencies? If yes, then you must always take a look at the cash withdrawal limit available on the card and also bear in mind the exorbitant interest rates, the card is levy for cash withdrawals. It’s best you do not withdraw cash on your credit card.
• Interest rate: Do you always like to carry unpaid balance each month? If yes, then always select a card charging lowest interest rate, as high interest can very easily land you in debt.
• Acceptability: Is your card accepted across wide range of establishments? Is it accepted internationally? While Visa and Mastercard are universally accepted, Diners and American Express have limited acceptability.
• Other charges and penalties: Besides fees and interest, remember the bank also charges you various other fees like late payment fees, cheque bouncing fees, over limit fees etc. Watch out for these fees, as they are very high.
• Quality of service: Not all banks provide the same level of customer service. Check out if the bank offers 24×7 customer service for its credit card customers. This is helpful if you have to report stolen card, check your credit limit or want to discuss any billing problem with the customer service.

How do I compare these features?

You can visit the websites of various banks, and go through the details of their various card products or get someone from the bank to give you a call to explain what features each product has.

Photo credits : Matsukawa

In this era of recession, deflation, and job cuts, it is especially important for you to consider where your hard-earned money is going; financial security is the key in today’s unpredictable world. And the first step towards gaining that security is to have a saving plan.

Do you have money put away for a rainy day? How will you manage if there’s a family emergency? What about a down payment for a home, or a fund for higher education, or retirement? Do you have loans to repay?

In this era of recession, deflation, and job cuts, it is especially important for you to consider where your hard-earned money is going; financial security is the key in today’s unpredictable world. And the first step towards gaining that security is to have a Saving Plan.

Still not convinced? Then ask yourself why you need to save. The answer’s really very simple: so that your money can start earning money, and work towards reducing the effort you put in everyday.

START SAVING NOW: HERE’S HOW!

You might wonder how to begin saving if your income is already over-committed. Efficiency and discipline are the answers.

• You need to first find out where your income is going. Maintain a diary for the month, noting down everything you spend on, to the last paisa. You will be surprised at the amount of random purchases you make – from coffee breaks to grocery bills. These are the best places to start trimming.

• Then, make a budget. This isn’t as difficult as you think. All a budget does is create a plan for spending, by stating expenses and goals. Make sure to cover fixed and regular expenses such as mortgage or rent, utility payments, and car or loan/credit card payments. Then set limits on necessities like groceries and clothing, as well as nice-to-haves like entertainment and travel. It’s also important at this stage to factor in a savings amount.

• Now, your first priority is an emergency fund, if you don’t already have one in place. And the easiest way to do this is to have the amount deducted from your salary every month and put into a Fixed or Recurring Deposit. Give yourself a pat on the back if you find yourself adding that little extra to your fund because you managed to save a little more this month. You might find it easier to stay within budget if you use cash or debit cards for the necessities and frills.

• As your emergency fund accumulates, your next task is to find more money for savings and even investment. Begin by paying off your credit cards. If you spend a little time examining your monthly statements, you will be amazed to see how much money you’re losing just by way of interest!

SAVING Vs. INVESTING

At this point, we need to address the differences between saving and investing.

Savings provide for emergencies and fund specific purchases in the near future (within two years). The primary goal is to store funds and keep them safe. However, you invest to increase net worth and work toward long-term goals. Also realise that investing involves risk, where you could lose some of your original investment. Only consider an investment plan when you have in place an emergency fund, insurance, control over credit use, and a retirement plan.

IN THE LONG RUN

Now, consider making a long-range savings and investment plan. When beginning to plan for investments, consider your goals, the amount of time you will be able to spend on nurturing these investments, how much you know about the funds, how much money you have to invest, whether you can tolerate risk, and handle loss. Remember that your ultimate goal is a financially secure future for you and your family.

If you look back over all that we’ve discussed so far, you will realise that we’ve told you how to begin saving money, in small, manageable chunks. The final objective might be to set aside enough for you to retire so that you don’t have to work another day, but your immediate goal is to start the process and become habituated, so that saving becomes a way of life, and a chance to improve how you live.

The Iyers had a simple formula -  If they earned Rs. 100/- whether Raghu’s salary or Radha’s freelance income Rs.30.00 went towards investments. Of this – Rs.10 went to long term saving, Rs.10 went to short term (1-2 years) needs and Rs.10 went to build an emergency corpus. After a couple of years they had created an emergency corpus which enabled them to start investing that Rs.10 for their children.

Mrs. Iyer watched from the bench her husband swing and perfect a put on the golf course. Her thoughts went back 32 years when they had just come back from an exciting honeymoon. Her father-in-law sat them down and had a chat that changed their life… or should we say, put their life on track.

Both Raghu Iyer and Radha had been class mates at IIM Calcutta and had married couple of years after they had passed out. They had high flying corporate jobs and were earning handsome salaries. Their background and the position required them to maintain a certain standard of living and they did. Young, enthusiastic and full of energy they were the work hard, party hard type of people and loved it that way.

Raghu had an inkling as to what his father was about to say that evening. Appa was a disciplined man and had a certain way with everything. Now, he would ask them to take stock and live a more sober life which meant cutting down on their wardrobe spending, lesser partying, they will have to travel economy and avoid going on a shopping sprees on impulse. This whole planning for the rainy day thing was boring and budgeting was something they hated to do. Actually Raghu dint know of a single person who loved budgeting. So they dreaded the meeting.

But that evening, Raghu’s father told them just one thing that let them live life king size then and now.  Initially for the first few months it was a bit tough, but things started falling in place quickly. Then came the children – twins and Radha was forced to quit full time working. This was a conscious decision; however, it did impact their cash flows. But they still went ahead and bought the house they had identified and upgraded their Maruti 800 too. Their annual vacations were sacrosanct and it provided both the Iyers and the children exposure to different parts of the world.

Relatives and friends envied them but took solace in the thought that with this kind of lifestyle, the Iyers would have to compromise on their long term and retirement savings and would be reduced to be dependents on their children when they grow old.

The children did well and went abroad. Raghu retired early at 55, took up the cause of rural education and nurtures his passion for golf. The Iyers are well settled and would comfortably see through their twilight years in each other’s company. Relatives and friends are still envious of them.

The Iyers had taken their father’s advice seriously and saw to it that their and the children’s future was well taken care of. Radha smiled at the thought of her father-in-laws words that defining moment. It sounded ridiculously simple then but now it seems profound.

“Religiously put aside 30% of your earnings into carefully chosen investments. Spend the rest of the money, the way you want and please”.

It was so simply said, so straight forward yet the Iyers decided to carefully implement it.

The Iyers had a simple formula -  If they earned Rs. 100/- whether Raghu’s salary or Radha’s freelance income Rs.30.00 went towards investments. Of this – Rs.10 went to long term saving, Rs.10 went to short term (1-2 years) needs and Rs.10 went to build an emergency corpus.

After a couple of years they had created an emergency corpus which enabled them to start investing that Rs.10 for their children. They adjusted their life around living with Rs.70.00. The short term investments provided for their holidays and indulgences and the children had a reasonable sum of money in their accounts when they went to college.

Of course a student loan was inevitable but that was still fine. And needless to say the Rs.10.00 invested every month for the past 30 years in equities and fixed deposits were a decent corpus when Raghu turned 55.

However in this the magical secret was three things:

- Passivity – they mindlessly took away Rs.30.00 from every hundred and never meddled with their investments.

- All incremental income, annual bonuses or performance incentives followed the same pattern of 30% being invested – 70% being spent.

- And there arose no particular need to withdraw from their long term savings because they had emergency cash, were comfortably insured and planned their fantasy spending plans.

The Iyers are happy people but are a bit shy to share this learning with youngsters. Question them about it and they simply say – “The lesson is just – Spend less than you earn and pay yourself first”.