[Investors Please Listen] Understanding your Home Loan Offer - Flat loan rate VS Reducing balance loan

For the twins, Gayathri and Sanjana, fate intended that everything in their lives should happen in unison. Be it their first visit from the tooth fairy or their first job, the precision in timing was astounding.

It so happened that they decided to buy their dream homes too around the same time.

The destiny that bound them together did not apparently bind their natures as Gayathri was very laid back and did not care too much for numbers, so she approached the first friendly bank that treated her like a queen, when she applied for a loan and took their best offer.

Sanjana on the other hand did her research and had offers from several banks.

Back at home Sanjana compared notes with Gayathri, who almost jumped for joy. She felt that she had landed an excellent loan bargain with minimum fuss, unlike her sister.

After all, for the same loan amount of Rs 20 lakh (Rs 2 million) with a 20-year loan tenure, Gayathri had an annualised interest rate of 12.75 per cent, while the two loans that Sanjana had shortlisted from a bunch of loan offers, were both quoted at an annualised interest rate of 13 per cent!

However, Gayathri's joy was short-lived when Sanjana explained how appearances can prove to be deceptive!

The loan offer Gayathri obtained was a flat rate loan. Banks can calculate their interest rates either at a flat rate or a reducing balance rate. Sanjana on the other hand, had shortlisted two reducing balance loan offers with different rest periods.

As her calculations revealed, the loan offer with a monthly rest turned out to be a better loan bargain than the one with an annual rest. Let us examine these two aspects stated above in detail.

At a flat rate, the interest rates are calculated keeping the outstanding amount (i.e. the amount on which interest is calculated) constant throughout the loan tenure, while in a reducing balance loan the interest rate is recalculated on a periodic basis based on the reducing outstanding loan amount.

Sanjana explained to Gayathri that at any given point in time, an X per cent flat rate is always more expensive than an X per cent annual reducing balance rate. Even in the case of a reducing balance loan a significant factor that impacts the loan cost is the time interval at which the reducing balance is recalculated, which could be monthly, daily, yearly, quarterly or half yearly.

These time periods are known as rests, which denote 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 loans.

The table below has the results of Sanjana's calculations that helped Gayathri calculate the real cost of her loan.

Loan type	A	B
	Gayathri's Flat Rate Loan	Sanjana's Reducing Balance Loan
Annualised interest rate for a Rs 20 lakh loan with a loan tenure of 20 years	12.75%	13.00%
Type of Rest	Does not apply	Annual Rest	Monthly Rest
EMI	Rs 29,583	Rs 23,726	Rs 23,432
Total interest paid	51 lakh	36.94 lakh	36.23 lakh

Flat rate loan versus reducing balance loan

In the above table, a comparison between Column A and B reveals the difference in the impact between a flat rate loan and a reducing balance loan.

It is clear that the effective interest that Gayathri will need to pay up with her current loan offer is much higher amounting to Rs 51 lakh (Rs 5.1 million), while the loan offers Sanjana had zeroed in on for the same loan amount and tenure was much lower showing a difference of nearly Rs 20 lakh in the interest paid out!

Choosing the offer with the ideal 'rest'

To make the most of your reducing balance loan you need to ensure the periodicity of repayment closely matches the frequency of your rest.

Sanjana was quick to realize this and her calculations revealed that 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 till that particular year (compounding period, when the outstanding loan amount is recalculated) ends, 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 Sanjana to take up a loan offer with the rest that more closely matches the frequency of her loan repayment.

So if you are repaying your loan amount on a monthly basis, take up the loan offer that gives you the best rate on a monthly rest.

Banks generally quote an 'annualized' interest rate, but remember that interest rates can be deceptive unless you figure out how they are defined. You can easily calculate the total amount of interest that you will pay for each offer by multiplying your EMI into the number of monthly installments and subtracting the loan amount from this figure.

You can then easily identify which loan is the most cost effective for you. Remember to account for any upfront fees (e.g. processing fee) while comparing two loans.

In summary, the key to understanding your loan offers from multiple banks is to calculate the total amount of interest and fees you would pay for each offer and zero in on the offer that gives you the least total interest outflow.

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Safe Harbor:
The information contained and provided on this Website provides Investment advice for the education of investors. The posts are an information service only. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. We do not assume any responsibility or liability resulting from the use of such information, judgment and opinions for Trading or Investment purposes.

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Housing gains through Tax incentives

16 Mar 2009, 0511 hrs IST, Bakul Chugan, ET Bureau

Investment begins at home. Though the real estate sector has seen a deep correction, a house is probably one of the best investment avenues one can

seek today. Despite the global economic slump, which has hit the property prices too, real estate still remains a prized possession.
If falling interest rates and cooling off property prices are prompting some to take a leap and grab their dream houses, there is also no dearth of those who want to sell their house to overcome the recession blues. And, given the importance attached to this most prized asset class, taxman has provided tax incentives for both the buyer as well as the seller of the house.

Buying A House
If your dream house has now come within your reach, check out the following before taking the plunge. (a) It is always advisable to go in for a home loan. Interest paid on home loans can be deducted from your taxable income up to a maximum of Rs 1.5 lakh.
As this deduction is applicable to each individual owner of the house, this can be a double bonanza in the case of joint ownership. Thus, if the joint owners equally bear the interest burden, then each owner shall be eligible for a deduction up to Rs 1.5 lakh
However, it is important to note here that where more than one owner claims deduction, the total deduction cannot exceed the actual interest paid by the joint owners.
For example, if the annual interest liability on the house property is Rs 2 lakh and the property is jointly owned by husband and wife, then each gets a deduction of Rs 1 lakh only.
Similarly, where the annual interest liability is Rs 4 lakh, then each owner gets a deduction of Rs 1.5 lakh only, taking the total deduction to Rs 3 lakh (b) It is not only the interest repayment but even the principal re-paid can be claimed as a deduction under section 80C. The limit here is restricted to Rs 1 lakh provided the loan is borrowed from a recognised financial institution 

Owning More Than One House
It is not unusual to see people own more than one house these days, especially by those who like to invest in real estate. It has in fact become a common practice to buy and let out houses, which also adds substantially to one’s income, given a high demand for rental premises.
If the subsequent houses are also purchased through borrowed finance, the entire amount paid as interest can be claimed as deduction from taxable income. Ceiling limit of Rs 1.5 lakh is not applicable in case of subsequent properties as these are deemed to be let out.
Thus even if the same are vacant, the owner shall be required to disclose a notional rental income that the property would have derived had it been actually let out.

Selling A House
Selling a house is rewarding - from tax perspective - provided the same is held for at least for three years before transferring the title. Holding a property for three years and more makes it a long-term capital asset and eligible for various tax incentives under the Income Tax Act.

Gains arising from the sale of a house are treated as income and are thus taxable in the hands of the seller of the property. However, if the sale proceeds are utilised for either buying or constructing another property, the same shall be exempt from taxes.
However, one needs to keep in mind the following to avail of these tax incentives. (a) If the new house is intended to be bought, the same should be purchased one year before or within two years of selling the existing property
(b) However, if the new house is to be constructed, ensure that it is done within three years of sale of the earlier property. It is not necessary to begun construction only after selling the earlier property. However, the construction must be complete within three years of sale
(c) For the interval between the sale of the existing property and buying or constructing another property, the sale proceeds need to be deposited in the ‘capital gains deposit account scheme’ with any nationalised bank. The proof of this deposit should be submitted along with the return of income to claim an exemption from capital gains tax
For those who do not wish to acquire another house from the sale proceeds of the existing property, capital gains tax can be avoided by investing the sale proceeds in the capital gains bonds issued by NHAI or REC within six months of sale of the property. The maximum investment permitted in such bonds is Rs 50 lakh, and these bonds can be redeemed only after three years from the date of investment.

Rental Accomodation
Tax incentives are available not only for the owners but also for those who have rented accommodations. In case of salaried employees who receive a house rent allowance (HRA) from their employers, the least of the following three options can be claimed as an exemption under section 10(13A): (a) HRA actually received from the employer (b) Rent paid in excess of 10% of the salary (c) 50% of the salary (metros) or 40% of the salary (non-metros).
In case of self employed individuals or those employees who do not receive an HRA, the least of the following three options can be claimed as an exemption under section 80GG: (a) Rs 2000/- per month (b) 25% of the total income (c) Rent paid in excess of 10% of total income.

HOUSEWISE
Sell a property only after holding it for at least three years
New house property should be purchased one year before or two years after sale
Construction of new house ought to be completed within three years of sale
Deposit sale proceeds in capital gains deposit account scheme till the time of new purchase
Capital gains can also be used to purchase bonds from NHAI or REC
Buyers would do well to take a loan to finance a house
Joint ownership is always advisable if you are borrowing money for house property

Take Healthcare Insurance and Enjoy Tax Benefits Under Section 80D

 

1. Take healthcare Insurance, and protect yourself and your family. Check for Tax benefits under the scheme, especially section 80D.

2. Avail Income tax deduction for the healthcare Insurance premium paid.

3. The healthcare Insurance shall be taken for (you, your spouse and your dependent children) and for your parents.

4. Make sure the premium is paid by any non-cash mode.

Insurance companies offer Health insurance policies. Take both Life Insurance and Healthcare Insurance to save income tax.

Amount eligible for Deduction:

Deduction allowed for Healthcare Insurance : Rs. 15, 000/-

Deduction allowed for Healthcare Insurance (Senior Citizen) : Rs. 20, 000/-

Deduction is allowed for the Healthcare Insurance premium (Non-cash),

1.  Paid for, Self, Spouse and Dependent children;

2. And also for your parents ( Dependent or Not).

Example :
Mr.Sunil is working in a MNC. He has taken health insurance policy for his family ( Himself, Wife and two dependent children).The annual premium is 17,000.

In addition Sunil has taken health insurance for his Parents. The annual premium is 38,000, in which 20,000 is paid by Mr.Sunil and remaining 18,000 is paid by Sunil’s father.

Note: Sunil’s father is a Senior citizen and he is not dependent on Mr. Sunil.

Deduction available for Mr.Sunil:

Health Insurance premium paid for his family : Rs. 15,000 (out of Rs. 17,000)

Health Insurance premium paid for his Parents : Rs. 20,000

Total deduction available for Mr. Sunil : Rs. 35,000/- (Rs 15,000 + Rs.20,000)

Deduction available for Mr. Sunil’s father : Rs. 18,000/-

Source: http://www.saveincometax.co.in/2009/01/15/take-healthcare-insurance-and-enjoy-tax-benefits-under-section-80d/78665/index.html

[Investors Please Listen] 5 tax-planning tips for salaried people

Personalfn.com | February 04, 2009 | 17:42 IST

With the tax-planning season about to end, most individuals are rushing around to make investments to minimise their tax liability. It has been observed that individuals (often salaried ones) end up paying more taxes than they are obligated to.

While lack of sufficient time to conduct the tax-planning exercise is a reason, largely, this can be attributed to lack of awareness about different incentives, allowances and rebates under the Income Tax Act. Apart from the Section 80C deductions which are quite popular, there are various other sections which can help salaried individuals save taxes.

We believe there is a need for salaried individuals to devote adequate time and effort to the tax planning exercise and be aware of the various benefits that they can avail of. In this article, we present 5 tax-planning tips that can aid salaried individuals minimise their tax liability.

1. Utilise the entire Section 80C deduction

Under Section 80C, the maximum deduction available is Rs 100,000 pa. Ideally, salaried individuals whose gross total income is equal to or more than Rs 250,000 should utilise the entire Rs 100,000 limit.

Consider the case of an individual whose taxable income is Rs 600,000 and who only utilises half of the available Rs 100,000 limit. He would end up paying an additional tax of Rs 15,450 as opposed to an individual with the same taxable income, but has utilised the entire limit.

Also, at times, individuals make investments of over Rs 100,000 in Section 80C designated avenues, since they fail to understand that the benefits are capped. For example, despite making investments of Rs 70,000 in Public Provident Fund and Rs 40,000 in ELSS, the amount eligible is only Rs 100,000.

Following investments/contributions qualify for Section 80C deductions,

• Public Provident Fund
• National Saving Certificate
• Accrued interest on National Saving Certificate
• Life Insurance Premium
• Tuition fees paid for children's education (maximum 2 children)
• Principal component of home loan repayment
• Equity Linked Savings Schemes (ELSS)
• 5-Year fixed deposits with banks and Post Office

(The above list of investment/contributions is not exhaustive. For a complete list, please consult a tax- advisor)

2. Think beyond Section 80C

For salaried individuals whose gross total income exceeds Rs 250,000 pa, deductions under Section 80C may not be sufficient to reduce the overall tax liability. In such cases they can consider the following:

Home loan: Individuals intending to buy a house should consider opting for a home loan. Interest payments of upto Rs 150,000 pa are eligible for deduction under Section 24.

Medical insurance: An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of upto Rs 15,000 pa under section 80D.

An additional deduction of up to Rs 15,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 per year.

Donations: Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G.

Salaried individuals who plan to pursue higher education should avail of an education loan as the entire interest is eligible for deduction under Section 80E. The loan can be for self, spouse or child from an approved charitable institution or a notified financial institution.

3. Restructure the salary

Restructuring the salary and including certain components can go a long way in reducing the tax liability. Unlike eligible investments which lead to an additional cash outflow, restructuring the salary is a more 'efficient' means of claiming tax benefits. The following can form a part of one's salary structure:

Food coupons like Sodexo and Ticket Restaurant; they are exempt from tax up to Rs 60,000 per year.

Medical expenses which are reimbursed by the employer are exempt up to Rs 15,000 per year.

Individuals living in a rented accommodation should have House Rent Allowance (HRA) as part of their salary.

Transport allowance is exempt upto Rs 800 per month.

Leave Travel Allowance (LTA) can be claimed twice in a block of four years for domestic travel.

4. Claim tax benefits on house rent paid

Salaried individuals can claim rent paid by them for residential accommodation, if HRA doesn't form part of their salary. This deduction is available under Section 80GG and is least of the following:

25% of the total income or,

Rs 2,000 per month or,

Excess of rent paid over 10% of total income

Please note that the above deduction will be denied if the taxpayer or his spouse or minor child owns a residential accommodation in the location where the taxpayer resides or performs his office duties.

5. Opt for a joint home loan

As discussed earlier, the principal repayment on a home loan is eligible for a deduction of up to Rs 100,000 pa and the interest paid is eligible for a deduction of up to Rs 150,000 per year.

In cases where the home loan is for a substantial sum, it is not uncommon for the interest and principal repayment to exceed the stated limit. To ensure that the tax benefit is optimally utilised, an individual can consider opting for a joint loan with his spouse or parent or sibling.

This will ensure that both the co-owners can claim tax deductions in the proportion of their holding in the loan. The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximised.

Benefits of tax-planning

Income (Rs)	Tax Rate (%)	Maximum tax savings after 80C deductions (Rs)	Savings invested @ 8% pa for 20 years (Rs)	Savings invested @ 15% pa for 20 years (Rs)
Upto 150,000	Nil	-	-	-
150,001-300,000	10	10,300	48,008	168,575
300,001-500,000	20	20,600	96,016	337,151
500,001 and above	30	30,900	144,024	505,726

As can be seen in the table above, making use of the available tax deductions can go a long way in helping individuals accumulate wealth. Consider the case of an individual in the highest tax bracket with a gross total income of Rs 600,000.

If he chooses to ignore the tax sops available under Section 80C, his tax liability will amount to Rs 87,550. Conversely, if he chooses to makes eligible investments/contributions of Rs 100,000 under Section 80C, his tax liability will be Rs 56,650 i.e. a saving of Rs 30,900.

The amount saved in turn can be invested in various avenues like fixed deposits, mutual funds and equities, depending on his risk appetite.

Given that the tax-planning exercise can aid salaried individuals to both save on tax and accumulate wealth, they would do well to offer the exercise the importance that it deserves.

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Safe Harbor:
The information contained and provided on this Website provides Investment advice for the education of investors. The posts are an information service only. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. We do not assume any responsibility or liability resulting from the use of such information, judgment and opinions for Trading or Investment purposes.

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[Investors Please Listen] Personal Tax: 10 things to do before March 31 Indian financial

Year runs from 1 April to 31 March. Accordingly, the Income-Tax Return is to be prepared and filed for the relevant financial year.

            31st March is an important date as it marks the end of a financial year. The last few weeks are when we rush for the documents/investment proofs, based on which we compute our tax liability.

The income-tax department has done away with the requirement of filing any supporting documents like investment proofs, etc, along with the return of income. It is, however, prudent to collect the same before the end of the financial year and keep them in records for future reference. These would also be required, in case your return is picked up for assessment.

 

Here are ten things to do before March 31, 2009 i.e. before the current financial year ends:

1. Submit to your employer the proof of investments/expenses that you have incurred to claim deduction under Section 80C. These includes receipt for insurance premium paid, deposits made in your public provident fund account, investment made in equity-linked savings schemes, National Savings Certificates purchased, children's tuition fees paid, etc. Your employer would require the details and the documentary proof to provide you the deduction under Section 80C.

2. If you are claiming deduction for house rent allowance, then ensure that you have submitted the necessary details and proofs like rent receipt, etc, to your employer for claiming the benefit.

3. Collect all your bank statements and Tax Deducted at Source (TDS) certificates, if any, from your bank. This will help you to compute interest income on bank deposits and pay balance tax, if any.

4. If you have a running home loan, you must collect the certificate of repayment of principal amount and the interest paid during the financial year from the bank/financial institution from which you have taken the housing loan. You are required to provide a computation to your employer specifying the income under the head 'House Property' along with the proof of interest and principal repayment, to claim deduction.

5. In case you have changed employment during the financial year and not collected your Form 16, then you should collect the same now.

6. If you have made a donation to any charitable organization during the year, then ensure that you collect a valid receipt to claim deduction u/s 80G.

7. If you are claiming deduction under Section 80D for payment of health insurance premium for self and family, then ensure that you have obtained receipt for the premium paid.

8. If you are claiming deduction for interest on educational loan then ensure that you have the necessary records to substantiate the same.

9. If you have sold/transferred any asset like house property, shares, mutual funds etc. then compute the capital gains and check the exemptions available to you. A distinction is to be made between long term and short term capital gains.

10. Compute your tax for the year and assess whether you are required to pay any balance tax.

These are few of the important steps that one should take care of while preparing one's tax computation. It would be a good idea to take the necessary action now to avoid the last minute rush of collecting the details and ensuring that all the available exemptions/deductions are claimed.

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Safe Harbor:
The information contained and provided on this Website provides Investment advice for the education of investors. The posts are an information service only. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. We do not assume any responsibility or liability resulting from the use of such information, judgment and opinions for Trading or Investment purposes.

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[Investors Please Listen] Income Tax refunds faster now

The refund banker makes it easier and faster to get the IT refunds due to you



Securing a refund of income tax was a long-drawn process. The completion of assessment takes considerable time. And in case there is any amount of refund due to the assessee, it used to take even longer. In order to reduce the time taken to issue refund orders, the government has initiated the scheme of refund banker. The bank will pay the assessees directly, based on an advice from the Income Tax Department. So the assessee will not have to follow up with the IT Department to check the status of his refund.



According to the Income Tax Act, if any person convinces the assessing officer that the amount of tax paid by him for any assessment year exceeds the amount he should have paid, he will be entitled to a refund of the excess amount. The assessee needs to file an income tax return before the due date of filing returns.



The scheme for sending IT refunds through a bank was inaugurated by the Finance Minister last year. In this scheme, the income tax refunds due to taxpayers will be sent by the State Bank of India directly from their CMP Branch in Mumbai.



The scheme of refund banker is based on the concept of refund bankers for IPOs. In this scheme the assessing officer will process the income tax returns on his computer. If a refund is due to the taxpayer, the data will be picked up automatically and transmitted to the bank. The bank will then send the refund as indicated by the assessing officer either through ECS or by a banker's cheque to the taxpayers address as indicated in the returns of income. An advice will also be sent to all tax-payers regarding the funds deposited in their account by ECS. The bank will despatch refund cheques within three working days of receipt of data.



Where through death, incapacity, insolvency, liquidation or other cause, a person is unable to claim any refund due to him, his legal representative, trustee, guardian or receiver, will be entitled to receive the refund for the benefit of the person or his estate.



Every claim for refund should be made in the prescribed form and verified in the prescribed manner. The claim should be made within one year from the last day of the assessment year. Where, as a result of any order passed in appeal or other proceedings, refund of any amount becomes due to the assessee, the assessing officer will refund the amount to the assessee without his having to make any claim.



With the simplifying of process and expediting refunds, compliance with the tax laws and timely payment of tax liabilities to the IT Department is expected to increase.
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Safe Harbor:
The information contained and provided on this Website provides Investment advice for the education of investors. The posts are an information service only. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. We do not assume any responsibility or liability resulting from the use of such information, judgment and opinions for Trading or Investment purposes.

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Tax Saving Investment Declaration

Tax Saving Investment Declaration

Tax Saver (ELSS) Fund

“The twin advantage of Tax Savings and Growth Potential”

Key Benefits
A. Growth Potential & Long-term Perspective
• Maximize the growth potential of your investment by investing in a scheme with an active investment strategy, which makes the most of the opportunities available in the equity markets.
• The experienced fund management team follows a disciplined approach to investment, focusing on minimizing risk by creating a well - diversified portfolio.
• Optimal asset allocation, Bottom up & Top down stock selection and systematic use of derivatives are some of the tools the team uses to effectively maximize the growth potential of your investments.
• ELSS allows you to take a minimum three years perspective for its investments enabling the Fund Manager to take a long-term call on the markets.

B. Save Tax
• Investment in this scheme would enable you to avail the benefits under clause (xiii) of Sub-section (2) of Section 80C of the Income-tax Act, 1961.
• Investment made up to Rs. 1 lakh by the eligible investor being an Individual or a Hindu Undivided Family in the scheme will qualify for income tax deduction under above mentioned Section of the Act.
• Since it will be an income deduction, an investment of Rs. 1 lakh in this fund can shave off Rs. 33,900/- from your tax payable liability (assuming you are in the highest tax bracket).
• Dividends received will be absolutely TAX FREE in the hands of investors.
• The dividend distribution tax (payable by the AMC) for equity schemes is also NIL.
• Long Term Capital Gains tax is also Nil as redemption is allowed after 3 yrs lock in period.

Tax Saver (ELSS) Fund

“The twin advantage of Tax Savings and Growth Potential”

Key Benefits
A. Growth Potential & Long-term Perspective
• Maximize the growth potential of your investment by investing in a scheme with an active investment strategy, which makes the most of the opportunities available in the equity markets.
• The experienced fund management team follows a disciplined approach to investment, focusing on minimizing risk by creating a well - diversified portfolio.
• Optimal asset allocation, Bottom up & Top down stock selection and systematic use of derivatives are some of the tools the team uses to effectively maximize the growth potential of your investments.
• ELSS allows you to take a minimum three years perspective for its investments enabling the Fund Manager to take a long-term call on the markets.

B. Save Tax
• Investment in this scheme would enable you to avail the benefits under clause (xiii) of Sub-section (2) of Section 80C of the Income-tax Act, 1961.
• Investment made up to Rs. 1 lakh by the eligible investor being an Individual or a Hindu Undivided Family in the scheme will qualify for income tax deduction under above mentioned Section of the Act.
• Since it will be an income deduction, an investment of Rs. 1 lakh in this fund can shave off Rs. 33,900/- from your tax payable liability (assuming you are in the highest tax bracket).
• Dividends received will be absolutely TAX FREE in the hands of investors.
• The dividend distribution tax (payable by the AMC) for equity schemes is also NIL.
• Long Term Capital Gains tax is also Nil as redemption is allowed after 3 yrs lock in period.