Author: Team Jagoinvestor

Family Trusts : How it helps in your Estate Planning

Posted on by Team Jagoinvestor

Who doesn’t want to ensure the financial safety and security of loved ones?

You work so hard for your entire life to build the required corpus, assets or to grow your family business (if any) to inherit the legacy to your family.

But, what if there are many heirs to your property?  In the case of having children from a previous marriage?  In other words, you have a very complex family structure.

Have you given a thought that how will a smooth inheritance process take place after your demise?  Who doesn’t want to avoid family disputes on property-related issues? This is where one needs estate planning.

In this article, we will introduce you to the concept of family trusts and the basics of estate planning.

Having an estate plan in place is to achieve seamless intergenerational legacy distribution, continuity of business, and safeguarding the benefit of all the heirs, are the best thing you can do for yourself and your loved ones.

What is Estate Planning?

Estate planning is nothing but writing it down, how you want to distribute your wealth among your family members after your demise. It can also be a plan that defines, how will your family legacy be carried on or who will head family business, in case you are ill or in a critical health condition.

Estate includes immovable like home (real estate), agricultural land, etc, as well as immovable assets like gold jewelry (commodity), our bank balance & fixed deposits (cash). Items such as our collections like coins and paintings are also a part of the estate.

When should one do estate planning?

People have a myth that estate planning is for rich, not for poor or it is a thing to be done after retirement. At the same time, it is suggested to do estate planning as soon as you are having any liability on you (Debt/Loans) and you have any asset whether physical or financial (whatever amount it can be).

You need to write it down, how will your debt be met, what asset should be used to pay off and who is answerable to things. It is to ensure that your loved ones are not troubled for loan related issues after your demise.

Most of us defer estate planning for a later date or time due to various reasons such as—to avoid discussion on demise, avoid difference of opinion with a better half on the distribution of asset, lack of knowledge, etc. But, the time is now and we must put this on our priority list and not postpone it, thinking it to be irrelevant.

As I said estate planning should be done by every person. However, a more important question is how to do it and what are the ways to do estate planning.

What are the ways to do Estate Planning?

In India, it includes making a nomination (for financial assets – it is suggested to always nominate a person whom you want to actually transfer the asset), joint ownership, will or setting up a trust.

If there is no such thing or there are any disputes like nominee is different from the legal heir, then wealth distribution will happen as per the succession law depending on the religion you belong from.

As per succession law, the Property of a Hindu resident will be distributed as per Hindu succession law i.e. equally among class – 1 legal heir (spouse, mother, and kids).

For eg. You have a house worth Rs. 3 Cr. and there are 4 kids. You have not made any will or trust. So, it is not necessary that 4 of them will agree to the not single point of selling the house and distributing the proceed equally. One or two may disagree and keep the property with them.

If you want to know more about succession law, you can watch the video given below –

Estate Planning – using Trust

If there is a complex family structure like kids from first marriage, many kids, stepmother, special child or a minor, or you have a business empire and due to a lot of drawbacks/disadvantages of another source of estate planning like nomination, succession law or will (whether registered or not) it is suggested to have a living trust (private trust) to enable smooth inheritance of wealth.

Trust is an agreement between the settlor (maker of trust) and the trustees to transfer legal ownership of assets/property to the trustee with an obligation that the same should be held and used for the benefit of all the beneficiaries as specified in the trust deed.

For forming a trust, you (the giver of wealth) need to write a trust deed that specifies all the instructions for the distribution of wealth. The settlor then appoints a trustee to execute the trust deed and he/she also needs to fund the trust by transferring the assets (movable as well as immovable). Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

Trust deed – The trust deed should specify the purpose of the trust, it’s objective and how will it function. You need to identify the trustee or trustees which can be a friend or relative or it can also be a corporate entity. You also need to give instructions in the trust deed about execution in case of any incapability happens to you (critical health conditions) and about its dissolution.

Trustee – Corporate trustees are professional firms or companies that provide or arrange different services as required by the trust. In a trust deed, you need to specify the successor trustees (if first trustees are not alive or are retired).

Myth about Trustee

People think that if they form a trust, their wealth will be owned by the trustee and they will lose control over it. So, yes the trustee becomes the owner but in a virtual world. In reality, the trustor has an obligation to fulfill the purpose of the trust deed.

A trustee has no right to use the property for himself/herself. He/she can use property just for the benefit of beneficiaries. However, while the settlor is alive, he has full control over the activities as well as an asset transferred.

In fact, nowadays there are various professional trust agencies that provide trustee arrangements. They don’t have any biased or personal sake in your wealth and they will stand as whole-time executor of your trust deed.

Drawbacks of Will

We know that a will is one of the traditional method used to do estate planning. But, will whether registered or unregistered can be challenged in the court of law. Let’s see in detail, what all are the drawbacks of will?

1. Will can not take care of unforeseen eventualities – As the will is a final declaration of your intention with respect to your property, which the courts endorse only after your demise. Thus a Will can not take care of unforeseen eventualities like any disability or illness as it is towards the disposition of property of the deceased rather than management.

2. Probate of will takes long period – A Probate which is necessary for establishing the rights of the executor or the beneficiaries under the Will in certain cases may take 6 months to 1 year and until such time, the beneficiaries would not be able to use the assets.

3. Can be challenged in court – Authenticity of a will can be questioned in the court on the grounds of fraud, forgery, undue influence (made in the pressure of something), mental illness of maker, lack of will-maker’s capacity, lack of knowledge and approval, and revocation. Even a registered will can also be questioned as registering a will does not lend it any legal sanctity or remove suspicion about its validity it’s just that it reduces the grounds on which it can be contested in court.

In India, a traditional way of estate planning has been setting up Hindu Undivided Family (HUF) which is a distinct unit for tax policy as per the provisions of section 2 (31) of the Indian Income Tax Act. However, it may be noted that after a property gets apportioned to a HUF, every coparcener has an equal rights to it and partition of HUF land has often led to clashes and court cases.

Therefore while the HUF with its archaic tax treatment and confused entity fails to cater to the requirements of present-day wealthy the Will is posed with un-certainties and the nonsense of a Probate. In such an atmosphere, one approaches the Family Trusts with a lot of hope and expectations that Family Trusts have managed to standby.

Why private trust should be used for a special child or minor child?

As an investor, we focus more on wealth creation. However, how will this created corpus devolve on the child and who will provide for & take care of the children when the parents are no more are important questions as well.

Hence, estate planning for parents with a special child (mentally or physically challenged) or minor children is even more crucial. Those parents need to plan in advance that who will take care and provide the needful to their special child.

A parent can grant responsibility of guardianship to a close relative but, it is a whole-time job and no one is sure that the things will work out as per the plan. In today’s world, everyone has their own priority and problem, there is no surety that he/she will be able to spend enough time on this responsibility.

So, to deal with it, a parent is suggested to form a trust and appoint two trustees – one from relative/friend and second should be a corporate trustee. In this way, the corporate trustee is a professional has all the arrangements mentioned in the trust deed of a parent with a minor child or a special child. It will also help parents to pass on the day-to-day operation and execution responsibilities to corporate trustee

Following are the services with a professional trustee can provide or arrange for a special child

  • Full-time helper
  • A cook
  • Health care attendants
  • Specialist doctor
  • Basic household groceries
  • A channel for making payments of all bills/expenses

Conclusion

For a special child or minor child, as they are not able to claim there right, you need to appoint an executor along with a will. And due to various drawbacks of a will like long probate period or execution-only after the demise of the maker, it is suggested to have a trust formed.

EPS 95 – Should you opt for higher pension?

Posted on by Team Jagoinvestor

Some of the employees recently got a notification from their employers that they have to give a “joint declaration” if they want to opt for higher pension in EPS or not?

Let us try to clear the confusion on this.

Background 

So when a person gets a salary, there is a component called basic salary in their salary. 12% of that is contributed by employee end and 12% of that is matched by the employer.

However the 12% part which employer provides is further divided into 8.33% and 3.67%. The 8.33% part actually goes into something called EPS (Employee pension scheme) and rest goes into EPF. However the EPS part is limited to maximum of 8.33% of 15,000 which is considered as the ceiling for basic salary, due to which what happened is that a very small portion of money went into EPS and big part went to EPF.

Over the years, people were dissatisfied that pension portion is not matching their high salary which results to a very tiny pension amount does not makes sense.

Hence recently supreme court has given the order that all the eligible members (who were part of EPFO scheme before 2014) shall get a chance to correct this and some part of their EPF can be transferred to EPS which will result in higher pension.

We have created a small video presentation to make you understand this topic in detail , so please watch the video below.

5 reasons why you shall NOT opt for higher pension in EPS-95

  • If you want to get a higher lumpsum payout at the time of your retirement
  • if you don’t like EPFO as an organization and want to not engage with them post retirement
  • If you are someone who wants to retire early in life
  • If your salary can reduce in later years of your career
  • If you have already shifted many jobs and not transferred your earliar EPF accounts into current one’s

Conclusion

In the last I just want to include that if you want flexibility and want a bigger corpus then don’t opt for higher pension scheme. But if you are someone looking for fixed and guaranteed and you are comfortable with lower corpus at the time of retirement then you can think of moving into higher pension scheme.

How NRI’s can claim tax benefit under DTAA?

Posted on by Team Jagoinvestor

The taxation becomes more complicated when you moved out of one country to another for earning. A lot of times, an NRI will be earning in India as well as abroad, and pay the income tax in India and abroad both at the same time, because of many country levy tax on global income. This leads to double taxation for NRI’s.

We will talk about Double Taxation Avoidance Agreement (DTAA) today and understand how NRI’s can take benefit from it while they are planning their investments

Many NRIs earn various types of income from India eg. rental income, interest on FD or NRE/NRO savings account or even capital gain on sale of asset, etc. However, due to DTAA (Double taxation avoidance act), An NRI can save himself from getting taxed twice.

What is DTAA?

DTAA is a tax treaty signed between India and various other countries because of which investors does not have to pay taxes twice in both the countries. Hence DTAA mainly have following benefits

  • Helps NRI’s in lowering their taxes
  • Helps NRI’s in avoiding paying dual taxation
  • Makes a country attractive for NRI’s because of such a treaty
  • Helps in curbing the tax evasion by NRI’s

The benefit of DTAA is extended every year to NRI. Which means that NRI’s who want to keep availing the DTAA benefits have to furnish the required documents at the start of every financial year to the tax authorities.

Here is an example

An NRI can avail tax benefits with the help of DTAA, as his earnings in India are taxed as per the rates decided in agreement. This prevents the NRI from paying 30.9% as TDS (Tax Deduction at Source), instead, he could pay tax at 10-25% rate depending upon the country he currently resides in.

Example of DTAA with USA

There is a DTAA between India and USA also, and the TDS rate is only 10%, which means that an NRI who has income in India and who falls in 30% tax bracket will only be paying a TDS of 10%, and not 30% if he does all the documentation. Note that there are different tax rates for various kinds of income like interest, dividends, royalty etc.

Following are the types of income’s which fall under DTAA

  • Salary that is received in India
  • Income from services that are provided in India
  • Fixed deposits & saving bank account held in India
  • House property situated in India
  • Capital gains arising out of transfer of assets in India

I think it will also be applicable on NRI’s investments in Mutual funds investments in India

DTAA with 89 countries

Right now, India has double tax avoidance treaties (DTAA) with more than 89 countries around the world, whose details can be accessed here and a simple tabular list can be found here

Below is a TDS rate list with all 89 countries (out of which some 85 are in force)

[su_table responsive=”yes”]

Sr. No Country with whom India has TDAA treaty TDS Rate
1 Albania 15.0%
2 Armenia 10.0%
3 Australia 10.0%
4 Austria 10.0%
5 Bangladesh 15.0%
6 Belarus 10.0%
7 Belgium 10.0%
8 Bhutan 15.0%
9 Botswana 15.0%
10 Brazil 15.0%
11 Bulgaria 10.0%
12 Canada 10.0%
13 China 10.0%
14 Columbia 10.0%
15 Croatia 10.0%
16 Cyprus 15.0%
17 Czech Republic 10.0%
18 Denmark 10.0%
19 Estonia 10.0%
20 Ethiopia 10.0%
21 Finland 10.0%
22 Fiji 10.0%
23 France 10.0%
24 Georgia 10.0%
25 Germany 10.0%
26 Hongkong 10.0%
27 Hungary 10.0%
28 Indonesia 10.0%
29 Iceland 10.0%
30 Ireland 15.0%
31 Israel 10.0%
32 Italy 10.0%
33 Japan 10.0%
34 Jordan 10.0%
35 Kazakhstan 10.0%
36 Kenya 10.0%
37 Korea 10.0%
38 Kuwait 10.0%
39 Kyrgyz Republic 10.0%
40 Latvia 10.0%
41 Lithuania 10.0%
42 Luxembourg 10.0%
43 Malaysia 15.0%
44 Malta 7.5%
45 Mongolia 10.0%
46 Mauritius 10.0%
47 Montenegro 10.0%
48 Myanmar 10.0%
49 Morocco 10.0%
50 Mozambique 10.0%
51 Macedonia 10.0%
52 Namibia 10.0%
53 Nepal 10.0%
54 Netherlands 10.0%
55 New Zealand 10.0%
56 Norway 15.0%
57 Oman 10.0%
58 Philippines 10.0%
59 Poland 10.0%
60 Portuguese Republic 10.0%
61 Qatar 10.0%
62 Romania 10.0%
63 Russian Federation 10.0%
64 Saudi Arabia 15.0%
65 Serbia 10.0%
66 Singapore 10.0%
67 Slovenia 15.0%
68 South Africa 10.0%
69 Spain 10.0%
70 Sri Lanka 10.0%
71 Sudan 10.0%
72 Sweden 10.0%
73 Swiss 10.0%
74 Syrian Arab Republic 10.0%
75 Tajikistan 10.0%
76 Tanzania 10.0%
77 Thailand 15.0%
78 Trinidad and Tobago 10.0%
79 Turkey 10.0%
80 Turkmenistan 12.5%
81 Uganda 10.0%
82 Ukraine 15.0%
83 United Mexican States 15.0%
84 United Kingdom 10.0%
85 United States (USA) 10.0%
86 Uruguay 10.0%
87 Uzbekistan 10.0%
88 Vietnam 10.0%
89 Zambia 10.0%

[/su_table]

What sections under IT Act provide relief from paying double tax?

Section 90, Section 90A and Section 91 of the Income Tax Act, 1961, provides for DTAA relief.

Section 90 – Reads as “Agreement with foreign countries or specified territories”. It applies to the cases where India has a bilateral agreement with another nation like Canada, UK, Singapore, etc.

Section 90A – When a specified association in India enters into an agreement with a specified association abroad, the Central Government, may by notification adopt such agreement and provide relief under section 90A of the Income Tax Act, 1961.

Section 91 – Applies to cases where India does not have any bilateral agreement, rather it has unilateral agreement. It states how tax relief can be availed in case of “Countries with which no agreement exists.”

How to claim DTAA benefits?

To benefits from the provisions laid under DTAA, an NRI individual will have to provide the following documents in a timely fashion to the concerned deductor eg. bank in case of tax on interest income earned.

  • Self-declaration cum indemnity format
  • Self-attested PAN card copy
  • Self-attested visa and passport copy
  • PIO proof copy (if applicable)
  • Tax Residency Certificate (TRC)

According to the Finance Act 2013, an individual will not be entitled to claim any benefit of relief under the Double Taxation Avoidance Agreement unless he or she provides a Tax Residency Certificate to the deductor.

To receive a Tax Residency Certificate, an application has to be made in Form 10FA (Application for Certificate of residence for the purposes of an agreement under section 90 and 90A of the Income-tax Act, 1961) to the income tax authorities of country of residence. Once the application is successfully processed, the certificate will be issued in Form 10FB.

DTAA methods

There are two ways NRI’s can claim the DTAA benefits, and let’s discuss it here

Tax Credit Method

This is the most popular method of taking DTAA benefits. Under tax credit method, the person first has to take into consideration all his income into consideration (foreign country + home country income) and calculate the taxes applicable. Then they will calculate the taxes as per home country and take that much credit while paying for taxes.

For example, if someone has a bank interest in India for 20 lacs and the tax rates applicable to them is 30%, and if in the foreign country they live right now taxes is at 40%, then the person will be able to take back the credit of 30% and only pay additional 10% taxes. This method makes sure that there are almost no way a person pays dual taxes.

Exemption Method

This is another way, in which you don’t have to consider your home country income at all and just have to pay the taxes on the income which you have earned in the foreign country. So it does not matter what are the tax rates in different countries. As per the DTAA treaty, you just skip the home country income altogether, so you just end up paying taxes in home country only.

Take Professional Help with it comes to DTAA

Once you have become an NRI, and you have multiple income sources in different countries and when you also have spent different times in India and abroad, it becomes quite complicated to take benefit of DTAA rules. You also have a chance of making a mistake and pay less tax (or to pay more) if you try to do it yourself.

Hence I strongly suggest that you hire a professional CA who has expertise in DTAA matters and pay the fees to them to do the calculations and tax filing.

I hope this article was able to help you understand various rules related to DTAA.

If you are an NRI, we also invite you to explore our NRI financial planning services

What is Cost Inflation Index (CII)

Posted on by Team Jagoinvestor

Can you guess, what these numbers are for 200, 220, 240 or 264?

Don’t worry it is not some math thing. These numbers are used as measures to save you from paying higher taxes on the sale of any capital asset like real estate or gold. It’s the value of the “Cost Inflation Index” (CII) from the financial year 2012 – 13 to 2016 – 17.

Let’s understand what is this and how CII can be used to save tax?

What is the Cost Inflation Index?

Imagine you have bought a house in 2015 worth Rs. 2 Cr. and you are selling it for Rs. 3 Cr. in 2018. So, what will be the capital gain here? It is Rs. 1 Cr., can you imagine how much tax you might have to pay for it? That will be really a big chunk of the profit to be paid as tax.

To save you from heavy tax payments, the government has come up with CII. It is used for calculating the estimated increase in the prices of goods and assets year-by-year due to inflation.

With the help of CII, the cost of purchase of an asset will be indexed, in other words, it will be revalued or increased from its original price, considering the effect of inflation and will result in lowering capital gain tax payable on the sale of the asset.

How?? we will see later, but lets first understand…

Why CII is used in income tax?

CII is used for capital assets like real estate, gold, debt mutual funds or debentures. Asset class whose price will increase by a period of time as the value of money gets eroded due to the country’s inflation.

However, we record capital assets at cost price, despite increasing inflation, they exist at the cost price and cannot be revalued. Therefore, when these assets are sold, the profit amount remains high due to the higher sale price as compared to purchase price. This leads to a higher tax to be paid on capital gain arisen on their sale.

In the above-mentioned example, we all know that the value of 2 Cr. at the time of 2015 can not be equal to the value in the year 2018, it will be increased. The house purchased in 2 Cr. will cost much higher today, and the reason is “Inflation”.

And therefore, the Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over a period of time will lead to an increase in the prices of capital assets and eventually result in lesser capital gain and tax.

In simple words, CII helps in calculating Real gain =

Selling Price of the Asset – Inflation Adjusted Purchase Price of Asset

How the cost inflation index is calculated?

How will you calculate the Inflation Adjusted Purchase Price? If let on investor, each person will have his own view in inflation, hence the CBDT (Central Board of Direct Taxes) notifies a unique number based on their calculation on consumer price index every year in the official gazette, which is used for calculating the indexed cost.

Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.

Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the price of the same basket of goods and services in the previous year to calculate the increase in prices. How CII is calculated is not much of our use, but let us see, what are the rates notified?

What is the concept of the base year in the Cost Inflation Index?

For this purpose, the government has defined a base year i.e 2001 – 02. For all purchases before 2001, the factor used is the base factor which is 100.

Any capital asset purchased before the base year of the Cost Inflation Index, taxpayers can take the purchase price as higher of the “actual cost or Fair Market Value (FMV) as on 1st day of the base year. Indexation benefit is applied to the purchase price so calculated. FMV is based on the valuation report of a registered valuer.

Suppose a land was purchased in the year 1995. So, for calculating the indexed cost of acquisition, the fair market value of land in the year 2001 – 2000 will be considered for calculation of the indexed cost of acquisition.

Change of base year from 1981 – 82 to 2001 – 02?

Initially, 1981-82 was considered as the base year. But, taxpayers were facing hardships in getting the properties valued which were purchased before 1st April 1981. Tax authorities were also finding it difficult to rely on the valuation reports.

Hence, the government decided to shift the base year to 2001 so that valuations can be done quickly and accurately.

Chart of Cost Inflation Index

[su_table responsive=”yes” alternate=”no”]

Financial Year Cost Inflation Index (CII)
2001 – 02 (Base Year) 100
2002 – 03 105
2003 – 04 109
2004 – 05 113
2005 – 06 117
2006 – 07 122
2007 – 08 129
2008 – 09 137
2009 – 10 148
2010 – 11 167
2011 – 12 184
2012 – 13 200
2013 – 14 220
2014 – 15 240
2015 – 16 254
2016 – 17 264
2017 – 18 272
2018 – 19 280
2019 – 20 289

[/su_table]

Applicability of CII in capital gain tax calculation

The cost inflation index can be used for calculating long term capital gains (LTCG) for investments in securities and real estate.

Since LTCG is flat 10 % (above the gain of Rs. 1 Lac) for investments in Equities, hence it has no relevance for calculating LTCG for investments in shares and equity mutual funds. But, it is useful to calculate LTCG in debt-oriented mutual funds (especially Bond funds and Fixed Maturity Plans).

Debt Mutual Funds – LTCG can be claimed only if the holding period is more than 3 years.

Properties / Real Estate – In the case of property, LTCG can only be claimed if the holding period is more than 2 years.

How CII is applied?

When the indexation benefit is applied to the “Cost of Acquisition” (purchase price) of the capital asset, it becomes “Indexed Cost of Acquisition”.

[su_box title=”Calculation of Indexed Cost of Acquisition”]Indexed Cost of acquisition = Cost of acquisition * CII for the year of transfer / CII for the year of purchase or base year (in case of the asset purchased before 2001)[/su_box]

Let’s understand this with the help of the same example given at the start. You bought a house for Rs. 2 Cr in the financial year 2015 – 16 and sold it in F.Y. 2018-19 for Rs. 3 Cr. So, what will be the capital gain after considering CII?

CII for 2015 – 16 = 254

CII for 2018 – 19 = 280

Indexed Cost of acquisition = 2,00,00,000 * 280/254 = 2,20,47,244

Therefore, Capital gain = Cost of sale – Indexed cost of aquisition = 79.52 Lakh (3 Cr. – 2.20 Cr.) which would have been Rs. 1 Cr.withour CII.

Hence, taxed at 20% (rate for LTCG) saved on Rs. 20.48 Lakh i.e Rs. 4 Lakh approx.

I hope, this article helped you in understanding the concept of CII and its importance. Let us know what you think about CII and revision made by CBDT in the base year in the comment section.

How PMS (portfolio management services) works?

Posted on by Team Jagoinvestor

If you are a high net-worth individual, looking for investing in a professionally customized portfolio of stocks, then PMS (Portfolio management services) can be a good choice for you.

In this article, we will discuss everything about PMS – Portfolio Management Services.

What is Portfolio Management Services (PMS)?

PMS is a service targetted at HNI investors who have a high-risk appetite, and the minimum ticket size of the investment required in PMS is Rs. 50 Lakhs – as increased by SEBI recently.

A lot of investors want to have a direct equity portfolio and may want high returns by taking a huge risk. A lot of investors manage their portfolio, but not everyone might have all the expertise needed to manage the stock portfolio. For this kind of investor, PMS can be a good option to look for beyond equity mutual funds.

There are 3 types of PMS

Discretionary: Discretionary Portfolio provides the service provider a right to make decisions on behalf of the client, whether he wants to sell or buy the shares. He is not bounded to consult with the client.

Non-discretionary: The portfolio manager suggests investment ideas suitable to risk appetite investor, while the decision is taken by the client. The client at his discretion can select stocks or other investment products. However, the execution of trade is done by the portfolio manager.

Advisory: Under these services, the portfolio manager only suggests investment ideas. The choice, as well as the execution of the investment decisions, rest solely with the Investor.

Note: In India, the majority of Portfolio Managers offer Discretionary Services. Most of the portfolio management companies provide model-based services. A standard model is followed and a bit alteration is done for individual client preference.

PMS is an individualized pool of funds

When you opt for a PMS scheme, a bank account, Demat account, and trading account are separately opened in your name and all investments are made in your name only. Accordingly, any income or dividend coming out of the investment made will also be credited in your bank account and the shares will be held in the Demat account in your name.

It means you hold all stocks individually, unlike mutual funds, where there is a pool of funds managed by a fund manager and performance is evaluated based on per day NAV. Each fund performance is influenced by all the investors jointly based on their sentiments, whereas in PMS the behavior of individual investors is isolated from one another.

PMS agreement

When you opt for a PMS service, you need to sign an agreement, which specifies all the details of services to be provided along with strategies and models of portfolio to be followed by the portfolio manager. When you sign it, you give a power of attorney for operating your trading and bank account to the portfolio manager.

If you are having a Demat account, trading account and bank account, you have to open all of these again to avail PMS. So that a portfolio manager can clear power of attorney. Therefore, whenever dividend or interest income or any other amount is credited to the bank account linked to PMS, the portfolio manager will redirect that amount in your portfolio.

As per market regulator Sebi’s instructions, a portfolio manager is required to furnish performance reports to their clients every 6 months. Most portfolio managers give a username and password which can be used to login to their website and see the portfolio statements.

The fee structure in PMS

PMS has a high cost of maintenance as compared to any other investment option. It has entry load, yearly management cost as well as profit sharing. However, they vary from provider to provider.

1. Entry Load – When you opt for portfolio management service, you are charged an entry fee which is generally termed as the Entry Load or Set up cost. It is 1 to 3% or it may vary. It gets deducted from the amount of your investment.

So, as we said, to avail, this service minimum amount is Rs. 50 lakh. So, you have to keep aside Rs. 50 Lakh + 2 or 3% of set up costs to start investing in PMS.

2. Management Charges – This is a service charge for managing your portfolio. It may vary from 1-3%, depending upon the service provider.

3. Profit-Sharing Fees – If a PMS has profit-sharing agreements between the client and provider, in addition to other fixed fees, then this charge is based on such terms of an agreement. Some charge this fee-based in the hurdle rate.

The hurdle rate is a promised rate of return. If a portfolio has given more than that percentage, then 10% or any percentage will belong to PMS company. It means you have to share profit if your portfolio has managed to give returns above what was promised.

Apart from the charges mentioned above, the PMS also charges the investors on the following counts as all the investments are done in the name of the investor:

  • Custodian Fee
  • Demat Account opening charges
  • Audit charges
  • Transaction brokerage

However, the fees of the service providers are negotiable, so you can exploit it as much as you can. There is no standard norm defined for the PMS fee.

Advantages of PMS

  • A portfolio of stocks and debts monitored and professionally managed by an expert.
  • PMS promises to outperform benchmark i.e Higher returns than the benchmark in the long run.
  • You get to invest across asset classes – debt, equity, gold, and mutual funds.
  • No limit to the extent to which you can invest in a certain stock.
  • No herd behavior is followed by an expert, they keep your requirements in their mind and accordingly invests in the segment preferred.
  • Diversified as well as focused portfolio depending on investor’s profile.

Disadvantages of PMS

  • As per SEBI guideline Minimum investment required is Rs. 25 lakhs (From 1st Jan 2020 it will be increased to Rs. 50 Lakh) because of which a small investor won’t be able to enjoy services offered under PMS.
  • PMS providers share profits but not losses.
  • Long documentation procedure, you need to open a new Demat Account, trading, as well as bank, account for PMS.
  • High set up cost – you have to pay 1 or 2 % of your AUM i.e. the amount you want to invest, at the time of investment. Along with this you also have to pay yearly management cost.

How PMS are taxed in India?

PMS taxation has always been quite debatable in the past whether it should be treated as Business Income or Capital Gains, but from the last few years after a recent court ruling, it’s now clear that profits from PMS will be treated as normal Capital gains and equity taxation rules will apply.

This means that any short term capital gains (before 1 yr) will be taxed at 15% and any long term capital gains will be taxed at 10% (after 1 lac limit per financial year) without indexation benefits.

Difference between mutual fund and PMS

A lot of investors might wonder how much PMS is different than an equity mutual fund. Here is a video which talks about the difference between PMS and Mutual funds.

Also, here is the tabular comparison between PMS and mutual funds

[su_table responsive=”yes” alternate=”no”]

Basis of difference Portfolio management services Mutual Fund
Impact of sentiments Individual portfolios are isolated from other investors behavior The sum total of all the investors’ in fund impacts the overall performance of a fund
Limitation No caping on the purchase of listed stock. However, PMS can not invest more than 25% of AUM in unlisted equity shares. Caping of 10% of AUM of a fund in a single stock, it means a limitation on investment
Public Data on past performance No standardized terms of working & publication of data Standardized method of representation of data on the website of every fund house
Cost structure Variable or fixed fee structure (usually very high but negotiable) Fixed fee structure
Entry Load High set up cost i.e 1 or 2% of AUM of an investor is chargeable as set up fee No setup cost or entry load
Initial requirements Accounts required Demat + Trading + New bank account (new accounts are to be open if required by the PMS company) Existing Bank account
Required Minimum investment The Minimum ticket cost Rs. 50,00,000 SIP Rs. 1000

Lump-sum Rs. 5000

[/su_table]

We hope this article helped you to understand PMS in brief. Please comment on how you liked it and if you have any queries regarding PMS. In case you want to invest in PMS, we can also help you in that regard. Just email us at [email protected] and we will get back to you.

How to add your new born baby to your health insurance policy?

Posted on by Team Jagoinvestor

Newborn baby comes with a bundle of joys. However, after his/her, your life changes a lot like adjusting your schedules, balancing your work life and most importantly managing your finances. One important thing which parents forget after the newborn arrives is to add him/her in the health insurance policy.

In this article, we are going to share what is the process of adding your newborn baby to your existing health insurance policy. Note that it does not matter if the child is biological or adopted, the process is exactly the same for all.

As medical emergencies are uncertain and unforeseen expenses may affect your finances badly. And also, getting health insurance for a newborn or a child below 5 years may not be possible, all health insurance policies have a certain entry age limit.

How to add a newborn baby in your health insurance?

There are two ways of adding a newborn to health insurance. First at the time of renewal and other is, adding during the year.

1. At the time of Renewal

There are two modes of doing it at the time of renewal, online and offline.

  • Offline mode – In offline mode, you need to inform your agent or insurance company, fill a prescribed form and attach a birth certificate of newborn baby, discharge card and other required documents along with cheque/DD of the increased premium amount.
  • Online mode – In online mode, you just need to visit the website of the insurer and go to the renewal page and you will see an option to add a newborn somewhere on the page. On selecting add newborn, the premium for your health insurance policy will be increased and you need to pay the revised quote. However, some companies may ask to attach a soft copy of the birth certificate of a newborn baby.

2. Before Renewal Date

Adding a child during the year can be done only through offline mode. You need to inform your agent or insurance company, fill a prescribed form and attach the birth certificate of newborn baby, along with NEFT/cheque/DD of the increased premium amount.

Important points

  • Waiting Period – Newborn baby is not covered until 90 days, due to the high amount of risk involved in medical emergencies.
  • Revised Premium – When you add a new member to your policy, the insurance company will recalculate the premium amount. So, you need to pay an increased premium amount.
  • Cashless card – You need to submit a photo of new born at the time of adding, to avail cashless card facility.

In the case of a newborn health insurance cover, it is very important to know, what is covered, what all are exclusions and whether vaccination is covered or not. So, Make sure you read your policy document.

Sovereign Gold Bonds – 9 things you should know

Posted on by Team Jagoinvestor

Most of the investors feel that gold is a good option to invest. One, because it gives quite reasonable returns and second but most important, we have an attachment with gold as per our traditions.

However, if you want to buy gold physically, you need to bear storage cost i.e. locker rents and along with this, it is not easy to buy and sell physical gold. And hence, Gold ETFs came into existence, which enables investors to trade gold on stock exchange and earn returns like they would be doing in case of physical gold.

But, now there is another option which is just like you are investing in physical gold available in Demat form, which can be traded on stock exchange, and also get a small amount of interest on the investment.

We are talking about Sovereign Gold Bonds. These bonds are issued by RBI in consultation with Govt. of India.

What is Sovereign Gold Bond?

Sovereign gold bonds were introduced by the Government of India in 2015 under the Gold Monetization Scheme, to enable investors to invest in an asset class which is a substitute for physical gold.

RBI announces public issues under these schemes in tranches i.e. specifying series along with dates of subscription of series of bonds and date of allocation.

You can refer below table for the SGB scheme 2019-2020 issue –

[su_table responsive=”yes” alternate=”no”]

S. no. Tranches Date of subscription Date of Issuance
1 2019-20 Series V October 07-11, 2019 October 15, 2019
2 2019-20 Series VI October 21-25, 2019 October 30, 2019
3 2019-20 Series VII December 02-06, 2019 December 10, 2019
4 2019-20 Series VIII January 13-17, 2020 January 21, 2020
5 2019-20 Series IX February 03-07, 2020 February 11, 2020
6 2019-20 Series X March 02-06, 2020 March 11, 2020

[/su_table]

As these bonds are issued by the Reserve Bank of India on behalf of the Government of India, they carry sovereign guarantee. These bonds are issued at the discretion of government from time to time with a specified close date, and they are open for the public to subscribe.

The bonds are denominated in units of one gram of gold or multiples thereof. Minimum investment in these bonds is one gram.

9 features of Sovereign Gold Bond?

Let us understand the Sovereign gold bond in detail by referring to all its features.

1. Who are eligible to buy sovereign gold bonds?

Any resident individual including HUFs, trusts, universities and charitable trusts can buy sovereign gold bonds. This bond can also be purchased by a guardian or parent on behalf of a minor. But, a non-resident or ordinarily non-resident of India cannot buy a sovereign gold bond.

However, if a resident individual who bought SGBs, who has now become NRI can hold them till the maturity of the bond but cannot repatriate the maturity amount. He/she cannot even trade SGB’s on stock exchange.

2. Denomination of gold bond

Each investment will be denominated in multiples of gram or grams with a basic unit of 1 gram at least to be purchased in a single purchase i.e. minimum investment. It means if you want to invest Rs. 10,000 and the rate of gold on purchase date is Rs. 4000 per gram. So your investment will be denominated in 2.5 grams.

3. Maximum Amount

There is a limitation on the amount of gold that you can be held in sovereign bond. How much gold one can have in a financial year i.e. April to March (whatever can be the price of gold) is given for each category of eligible investors –

[su_table responsive=”yes” alternate=”no”]

Category Maximum Subscription
Individuals 4 kg
HUFs 4 kg
Trusts and similar entities 20 kg

[/su_table]

This ceiling will include bonds purchased under different tranches during initial issuance by government i.e. subscribed in the primary market as well as via the secondary market.

4.Issue Price

The price of the bond will be fixed in Indian rupees on the basis of the average closing rate of the last 3 working days of the week preceding the subscription period of gold having 999 purity (24 caret) published by India Bullion and Jewelers Association.

The issue price of the gold bonds will be less by Rs. 50 per gram for those who subscribe for it online and pay through digital mode.

5. Interest rate

The investors will be paid Interest on the amount of initial investment at the rate notified by RBI for a particular tranche at the time of its launch and is payable semi-annually. Till date interest is near to 2.5% p.a.

6. Redemption

Redemption price shall be fixed in Indian Rupees and the redemption price shall be based on a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.

7. Listed on the stock exchange

These bonds can be held in Demat form and the government has enabled trading of gold bonds on the stock exchanges i.e. NSE and BSE. This feature is given to enable easy trading of bonds and one can buy bonds even after the subscription period is closed.

8. Maturity

The tenure of the bond will be for a period of 8 years with exit option in 5th, 6th and 7th year, to be exercised on interest payment dates. It means one cannot redeem bonds before the end of 5th year. However, if one wants, he can transfer bonds via the stock exchange platform. So, we can say that there is no lock-in for SGBs.

9. SGBs can be used as collateral

Bonds can be used as collateral for loans. The loan-to-value ratio (LTV) is to be set equal to ordinary gold loan mandated by RBI. Therefore, it is a very good option that you can use gold bonds as security against loans like stocks.

9. Payment Options

The payment of SGBs can be made in cash (up to Rs. 20,000) or Demand Draft or Cheque or electronic mode. It’s good that you have an option to use cash for it. However, on redemption or transfer, the amount will be credited to your bank account.

How to buy Sovereign Gold Bonds?

Whenever the government of India announces a series of bonds, they specify the dates of subscription, date of issuance of bonds and the amount of purchase per gram. A subscriber can go via physical mode or online mode for subscription of SGBs.

1. Physical Mode – To invest in gold bonds, you can fill in the application form which is provided by issuing banks or from designated post offices. You can also download the application form from the website of the Reserve Bank of India.

Scheduled Commercial Banks (excluding RRBs, Small Finance Banks and Payment Banks), designated Post Offices (as may be notified), Stock Holding Corporation of India Ltd (SHCIL) and recognized stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange Ltd. are authorized to receive applications for the Bonds either directly or through agents.

2. Online Mode – To invest in bonds using online mode, one can use their intermediaries/broker’s platform or bank platform. There will be a discount of Rs. 50 per gram if you purchase via online mode and paying through digital mode.

Every applicant must provide their PAN number issued by the Income Tax Department. Without a PAN, one cannot apply for investing in gold bonds.

Tax treatment of Sovereign gold bonds

The capital gains tax arising on redemption of SGB to an individual has been exempted. This is an exclusive income tax benefit offered on gold bonds to encourage investors to shift to non-physical gold.

However, the transfer of gold bonds before maturity will attract Capital gain tax. The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond using secondary market after 3 years from the date of purchase.

The interest received on SGB per financial year is taxable as per the slab rate of subscriber.

Comparison of Physical gold, Gold ETF and Sovereign Gold Bond

[su_table responsive=”yes” alternate=”no”]

Points Physical Gold Gold ETF Sovereign Gold Bond
Returns Lower than actual return on gold (due to making charges) Lower than actual return on gold (due to brokerage) Higher than actual return on gold (due to interest payments)
Safety Risk of handling physical gold High High
Purity of Gold Purity of gold always remains a question High as it is in electronic form High as it is in electronic form
Capital Gain LTCG applicable after 3 years LTCG applicable after 3 years LTCG applicable after 3 years (No capital gain tax if held till maturity)
Loan collateral Yes No Yes
Tradability Conditional – depending upon availability of buyer Tradable on exchange Tradable on exchange and redeemable 5th year onwards
Storage cost High No No

[/su_table]

Are sovereign gold bonds safe?

As we already mentioned, these bonds are issued by RBI in consultation with GOI, it ensures that there will not be any question about default risk i.e. no risk of repayment. However, the price or the redemption value of the bond will depend upon actual market price, so a drop in the market price of gold can put the capital at risk, which is a fact in case of holding physical gold or gold ETFs as well.

Why should you invest in Sovereign gold bonds?

See, buying SGB’s are suggested just as a substitute for buying physical gold. The flaws of buying physical gold are many like, they are not easily tradable and involve heavy storage cost, you don’t earn any interest on holding physical gold, you bear making charges and if you earn any gain on sale of gold you have to pay capital gain tax.

In SGBs you need not to face all these flaws instead they are very safe in terms of default risk, We cannot say that there is no risk, considering capital loss risk that may happen due to market price change.

Conclusion
If you are looking for long term investment in gold then instead of physical gold, SGBs are suggested. You don’t need to pay any tax i.e. capital gain tax on redemption of SGB on maturity or after 5th year. But, keep it in mind that there is STCG tax or LTCG tax on the transfer of SGBs on stock exchange before maturity and there is a limit on the quantity of gold that one can hold per financial year in the form of bond.

PIS account for NRI’s – Invest in Direct Equities in India

Posted on by Team Jagoinvestor

Are you an NRI who is planning to invest in direct stocks or other equity options? Indian economy is one of the fastest-growing economy and many NRIs and PIOs are planning to invest in Indian equities, but they are not sure, whether they can invest in India or not? And what is the procedure for investment?

As per rules, an NRI can also invest in direct equities, equity mutual funds or future & options (F&O) in India just like a resident but NRI’s have to open a separate account called as PIS account (portfolio investment scheme account) for investing in direct equities and we will look at that today.

PIS Account (Portfolio investment scheme)

PIS or portfolio investment scheme account is an account to be opened by NRI’s if they want to invest in stocks directly. This PIS account allows NRIs to buy and sell shares and convertible debentures of Indian companies on BSE & NSE by routing such transactions through their NRE/NRO bank account.

How to get PIS Account activated?

  • Step 1 – Open an NRE account/NRO account or you may already have it
  • Step 2 – You need to ask your bank for PIS form, fill a form ‘Application for designating bank account for PIS’ and submit it to the bank. Bank will send the form to RBI for approval.
  • Step 3 – Once approved by the RBI, the requested bank account (NRE or NRO) is designated as PIS Account.
  • Step 4 – Your Demat account and the trading account will be linked with the PIS account to enable the buy and sell off stocks at NSE/BSE.

Once your PIS account is linked with a Demat and trading account, you can invest in stocks online.

Non-PIS Account

By default, every NRE/NRO account is a non-PIS account (PIS is not activated). The following are the investments which can happen with the non-PIS account.

  • Mutual Funds and IPOs.
  • Sale of shares acquired through Right Issues/ ESOP
  • Sale of shares received in inheritance
  • Sale of shares received in bonus
  • Sale of shares bought when NRI was resident Indian.

Many banks make it mandatory to open a separate Non-PIS account along with a PIS Account. They offer 4-in-1 Account which includes:

  • NRI Saving Bank Account (Non-PIS)
  • NRI Saving Bank Account (PIS)
  • NRI Demat Account
  • NRI Trading Account

Important points

  • Transactions from a Non-PIS account are not reported to the RBI.
  • The PIS account cannot be a joint account
  • NRIs cannot do intraday trading with the PIS account. NRI’s can’t sell stocks without taking delivery of the shares/convertible debentures purchased.
  • Short selling is not permitted under PIS.
  • One can have only 1 PIS linked account. If you would like to open a PIS account with another bank, you will have to close the existing PIS account first.
  • In the case of POI, the POI card is also required in documentation
  • In case your overseas address is not in English, you need to get it translated by a translator in your city and get their stamp
  • In case you do not want to travel to India just for making investments, you can always give POA (Power of attorney) to someone trusted who can do the process for you.

3 account to be opened along with PIS account

Note that PIS is mainly permission and not an account in itself. If you want to buy and sell stocks in India, you would need NRE/NRO bank account along with the Demat and Trading account. Below are the details for each of those.

NRE/NRO Saving Bank Account

For any type of investment in India by NRI, whether it be mutual funds, commodities, or stocks, IPO having an NRE or NRO account is mandatory.

  • NRE Account – NRE account is a bank account where the money is deposited in Indian as well as foreign currency. You can use the money deposited in it, in the country of your residence or in India. Therefore, it is called as repatriable.
  • NRO Account – NRO bank account is only partially repatriable, means you can use the money only in India. And you can only deposit Indian income in this account. It is used to deposit rent, interest, other source income earned from India.

So depending on your situation and income type, you need to open these accounts. One can have any number of NRE/NRO accounts if required.

Many NRIs are using a saving bank account for transacting in India, which is illegal. So, once you become an NRI, you should convert your savings bank account into NRE/NRO account.

These are just marking on the existing saving bank account. One needs to fill a required form and attach required documents like PAN, Identity proof of country of residence, Passport, etc.

Demat Account

Demat account is to hold securities (shares) in electronic format. Unlike most developed countries where equity holding is kept with the broker, in India, they are kept in a separate account called Demat account. The Demat account is a secured online account.

First time NRI investors need to open a Demat account with a registered broker. Various brokers like Zerodha, ICICI, and Axis, IIFL, etc., are available for NRI investors.

Every broker offers different services and charges different fees and brokerage for the same. It is wise to check every detail of the broker before opening a Demat account. To open an NRI Demat account, the following documents are needed to be submitted-

  • Bank Account Statement/ Passbook Bank proof should indicate NRE/NRO saving a/c bank details
  • Foreign address proof
  • Indian Passport
  • PAN card
  • Photograph of investor
  • Canceled bank account cheque
  • If NRE or NRO is not mentioned (pre-printed) on the cheque, then bank verification letter is required.

All the photocopies of the KYC document should be attested by any of the entities like Notary Public, any Court, magistrate, judge, Local banker, Indian embassy, Consulate General of the country where NRI is residing.

Trading Account

In addition to a Demat account, an NRI also needs an NRI trading account to trade in stock exchanges i.e. to place buy/sell orders. The documents required to open NRI Trading accounts same as NRI Demat account.

Most brokers offer 2-in-1 account services wherein an NRI can open both trading & Demat account at once. Some stockbrokers who are part of a banking group such as ICICI Direct, HDFC Securities and SBI Capital, etc., offer all services like NRE/NRO account, Demat and Trading accounts are opened at once.

Let us know if you have any more queries related to PIS account? We will be happy to answer them in the comments section

What is FCNR Deposit Account? Fixed Deposits for NRI’s in India

Posted on by Team Jagoinvestor

Since India offers higher interest income as compared to many other countries, many NRIs prefer India for fixed deposits or term deposits. However, they are afraid of foreign exchange risk as well as taxation norms.

So, if you are an NRI, looking for a safe investment option in India without obtaining approval of RBI, then FCNR (Foreign Currency Non-Residence) term deposit account could be one of the best option considering Forex and tax. In this article, I will be covering all the aspects of FCNR term deposit.

What is FCNR Term Deposit?

FCNR stands for Foreign Currency Non-Resident, it a type of fixed deposit for NRI of Indian nationality or PIO. An NRI can maintain a fixed deposit in foreign currency and earn regular interest on the same without prior approval of RBI with authorized dealer banks in India i.e. a bank authorized to deal in foreign exchange.

FCNR accounts allow deposit as well as withdrawal in foreign currency. Therefore, it avoids foreign exchange risk, which is involved in other option of investments in India.

These are the currencies, which are allowed to be deposited in FCNR account –

  • US Dollar
  • British Pound
  • Euro
  • Japanese Yen
  • Australian Dollar
  • Canadian Dollar

Along with these, RBI has allowed, authorized dealer banks to accept deposits in “Permitted currency” as well. Permitted currency means a foreign currency which is freely convertible and mainly includes, Danish Krone, Swiss Franc, and Swedish Krona.

Features of FCNR Term Deposit

  • FCNR account has a maturity ranging from 1 year to 3 years.
  • It can be opened jointly with 2 or more NRIs provided, all are persons of Indian nationality or origin
  • With FCNR, you can easily repatriate the principal as well as interest to the country of residence/origin
  • Nomination facility is available and any NRI, POI or Indian resident can be the nominee
  • Recurring deposits are not accepted under this scheme
  • On premature withdrawal/transfer to NRE account from FCNR, 1% penalty might be charged (varies from bank to bank)

Below is a video about FCNR account which will give you brief knowledge about it.

What can be the mode of investment?

For FCNR deposit, it is not mandatory to transfer funds from NRE/NRO account, as in the case of other investment options. One can transfer funds from overseas bank account directly to open FCNR account through cheque.

One can also use travelers cheque or foreign currency notes to deposit in FCNR account, on visit to India. Even one can also use an existing FCNR for creating new FCNR term deposit.

Documents required for opening FCNR Account

For opening this account, an application form duly attested by your banker/embassy of India/public notary must be submitted to the bank along with the following documents attached-

  • Copy of passport
  • Latest overseas bank statement
  • Latest overseas address proof

If you are unable to visit India, then you can open this account by issuing power of attorney to a resident individual, who can fulfill all the requirements on your behalf.

Loan facility against FCNR

You can also avail loan against FCNR, provided that the proceeds of loan are not used for the purpose of re-lending i.e granting loan, carrying on agricultural/plantation activities or for investments in real estate sector. However, one can use the loan amount for other financial investment purposes like stocks or mutual funds, etc.

Loan can be availed in rupee or in any foreign currency.

Interest calculation and Taxation

The interest rate on FCNR  is compounded yearly and the rate of interest depends on the currency deposited and maturity term of FCNR account. For instance, the rate for a 1-year FCNR deposit in the US dollar would be in the range of 2.5-3% while the same for a deposit in the Australian dollar would be 5-6%.

Interest is calculated at an interval of  180 days each (i.e 6 monthly) and for remaining actual number of days in a year. However, the yearly interest amount is credited at the end of 360 days as per RBI guidelines.

Interest earned on FCNR deposits is tax-exempt as long as an individual qualifies as an NRI or not ordinarily resident. But, it might be taxable as per the prevailing taxation rules of your country of residence/origin.

What are the norms, if NRI status changes to resident Indian?

On change of status, it is your responsibility to inform the bank about it, so that the FCNR account will be designated as a resident account. FCNR will continue to earn interest. However, as the interest income is tax-free in the hands of NRI, now if you are qualifying as a resident or ordinarily resident, you will be taxed as per Indian slab rates, irrespective of the fact that you will be taxed in other country.

Conclusion

If you are afraid of bearing loss due to currency fluctuation then FCNR is a good option as compared to NRE/NRO saving deposits. It is specially designed to cover foreign exchange risk. However, it is very important to choose a good bank for FCNR, because if deposits are made at weak banks, it may be unable to pay back upon maturity.

Reduce your premiums by 20% – Zone Based Health Insurance

Posted on by Team Jagoinvestor

Do you know that your health insurance premium may depend on your city? Yes, there is something called “Zone-based premium” in the health insurance industry which I will share in this article today.

For instance, the premium amount for a person aged 30 years, living in Delhi, might be higher than the person of the same age living in Pune. So, apart from age, the sum insured & health conditions, even the city which you mention at the time of health insurance purchase also impacts your premium amount.

Zone-based pricing in Health Insurance

Here is how zone-based pricing works in health insurance premium calculation. Various cities in India are divided into 3 zones at a high level which defines Metro/Tier-1, Tier-2 cities and other rest of the cities (tier 3/4). Here is an indicative list of zones (may vary from insurer to insurer)

[su_table responsive=”yes” alternate=”no”]

Zone 1 Metro cities like Delhi, Mumbai including thane
Zone 2 Tier-II cities like Chennai, Pune, Bangalore, Hyderabad
Zone 3 Rest of India excluding areas falling under Zone 1 and Zone 2

[/su_table]

List of companies which provide zoned based insurance pricing

Given below is the name of health insurance companies which use zoned based pricing model-

  • Max Bupa Health Insurance
  • L&T Health Insurance
  • Star Health Insurance
  • New India Assurance
  • SBI General Insurance

Why health insurance companies adopt zoned based pricing?

You will agree that the overall expenses in a metro or tier-1 city are usually higher than a tier-4 city or a comparatively smaller city. Imagine if someone gets treatment for a big illness in Mumbai/Delhi compared to a smaller city like Meerut or Akola. There are various reasons why this happens

  • Higher Room rent charges
  • Higher charges for diagnostic tests
  • Higher doctors fees
  • Higher stress levels
  • More prone to lifestyle illness
  • Higher consultation charges pre/post-hospitalization

The point is that a policyholder living in a smaller city will claim less amount compared to a policyholder living in a bigger city, even if they both have the same amount of sum assured and claimed for the same thing.

Check an example below where we checked the yearly premium for a 30 yr old person for sum assured of Rs 10 lacs for 3 different cities from each zone. You can see how the premium reduces by approx 10% each time for zone 2 and zone 3 cities.

How health insurance premium changes based on city (zoning)

So you can see above that the premiums were as follows

  • Zone 1 (Delhi) – Rs 9862
  • Zone 2 (Pune) – Rs 9041 (9% less than zone 1)
  • Zone 3 (Varanasi) – Rs 8201 (17% less than zone 1)

So you can expect zone 2 pricing to be approx 10% lesser and zone 3 pricing to be approx. 20% lesser than zone 1. This is just approximations, for exact difference refer to policy documents.

Hence the zone-based premium pricing comes into picture. This is exactly the reason why companies charge a lesser premium if you are from a smaller city and vice versa.

What if, a policyholder of a small city wants to avail of treatment in the metro city?

Note that, there is no restriction on the city where one wants to avail of the treatment. In some cases, it may happen that the policyholder might want to go for a better hospital in a bigger city. In those cases there might be some extra amount policyholder has to pay from their own pocket. Like in some policies, if a policyholder of zone 3 (smaller city) avails treatment in zone 1 or zone 2 city, then there will be a clause of co-payment.

It means that the claim amount will not get settled 100% by the insurance company. For eg. If a person of zone 3 claimed Rs. 50,000 for getting medical treatment at Delhi, he will be paid Rs. 40,000 (80% of the claim amount) and balance 20% has to be borne by insured.

This clause changes from company to company and on a zone to zone basis. Please go through the policy document of the health insurance policy to know the exact rules and clauses applicable.

So in case, you do not want that co-pay applicable to you, then you can choose the city as any metro or bigger city of your choice so that you pay the premiums for zone 1 cities, but at the time of providing the address proof, you can give any address.

Important points regarding Zone-based premiums

  • In case you shift your city in the future, you can always inform the company at the time of renewal, and the premiums as per new zone will apply
  • In case you port your policy from one insurer to another, it might happen that your premium changes depending on the pricing model of the old/new company.
  • In zone-based pricing only premium changes depending on the city of residence. It will not change any benefits or other features of the policy.
  • Note that very few companies follow the zone-based premium pricing model, so please inquire about it.

Conclusion

As you are now aware of the zoning concept, see if there is any scope of using this to your advantage, provided the insurer of your choice provides it for your policies.

Please share what you think about zone-based premium pricing? Do you feel if its the right thing to do or not? Is it useful or not?