Category: Knowledge and Concepts

What are Arbitrage mutual funds and how they are safe and tax efficient ?

Posted on by Jagoinvestor

Do you want to invest in a mutual fund which has near zero-risk, offers returns in range of 6-9% with high liquidity and at the same time, they are tax efficient? Welcome to the world of “Arbitrage Mutual Funds”.

arbitrage mutual funds

Arbitrage mutual funds are a category of mutual funds which are comparable to liquid funds or a pure debt fund whose returns are in range of 6-9% per annum, but from taxation perspective they are treated like equity mutual funds. These arbitrage funds have suddenly become very famous with investors after this tax budget, because the taxation on debt funds changed and became unattractive compared to past.

How does an Arbitrage mutual fund work ?

You should first understand the word “arbitrage”. In short arbitrage means – “simultaneous purchase and sale of an asset in order to profit from a difference in the price”.

Let me give you an example

  • Imagine that a person wants to buy a second hand phone and is ready to pay Rs 2,000 for it. You go to OLX and see that the same phone is selling at Rs 1,200 there. You then buy the phone at 1200 and sell it at 2000 and make the profit of Rs 800 . This is one example of arbitrage
  • Another example is gold. Gold prices are different in various cities. So there is a possibility that gold can be cheaper in bangalore compared to chennai and a gold dealer buys it from Bangalore and sells it in Chennai. This is another example of arbitrage

In the examples above, the problem is that the buy and selling happens at two different times, and hence there is small risk.

But what will happen if you are able to buy and sell at the same time? In that case, there is no risk, because instantly you are locking the profits (the difference price)

This is exactly what happens in Arbitrage mutual funds

In case of arbitrage mutual funds, the funds explore the arbitrage opportunities where the same stock is quoting at two different prices at BSE and NSE at the same time and they buy and sell in different markets and make the profits.

The other thing which an arbitrage fund does is use cash and derivative markets. For example, a stock might be available at Rs 100 on stock market, but it might be selling at Rs 104 in future’s market (if you dont understand derivative markets, thats ok , dont worry) and they make the difference as profits.

Lets not go to much into detail of how they work, as of now just understand that arbitrage funds use the arbitrage technique to earn the profits from the gaps in markets and its almost risk free.

Arbitrage funds returns are tax free after a year

So lets come to the biggest plus point of an arbitrage fund.

The biggest advantage of arbitrage funds is that they are treated as equity mutual funds, when it comes to taxation. Hence any return you earn after holding it for 12 months is tax free, and incase you hold it for less than 12 montsh and make any profits, the taxation is 15% (short term capital gains tax).

So, return wise arbitrage funds can be compared to a liquid fund and the returns potential are in range of 6-9% depending on the time frame and the yield of the instruments they have invested into.

Now think about this scenario

If you want to park a big sum of money for some months or approx one year, but you dont want to take a lot of risk on the capital and at the same time want a highly tax optimized solution, what are your options?

FD is not that great option, because if you are in 30% tax bracket, you will be paying tax at the rate of 30% and if you break your FD in between before maturity, you will also pay penalty. In that case, these arbitrage funds can be a very good alternative, because they can give decent returns, high liquidity and lower tax (no tax if held for more than a yr)

Below you can see some of arbitrage mutual funds and their performance over the last 1 yr (as on sep, 2015)

arbitrage funds in India - some examples

You will see that the returns from these funds have been in the range on 8%, which is quite good and comparable to Fixed deposits and liquid funds.

Are there any risk in Arbitrage Funds?

Yes, But more then risk, I would say these are some points which every investor should be aware about before they invest in arbitrage funds.

You should understand that arbitrage opportunities must exist if arbitrage funds have to perform better, means if the markets are uncertain, then good opportunities will exist for arbitrage funds and they will give decent profits, but if markets are not volatile enough, it might happen that the returns from arbitrage funds are unattractive.

If you look at past 3 yrs returns, you will find that the returns have been very good, but if you go a bit in history you will see that they have not give the same kind of return always. See the chart below for Kotak Equity Arbitrage fund, a very good fund in that category

arbitrage mutual-fund performance and risk

You will see that in the year 2009 and 2010, the fund has not performed well like it did in earliar years or after 2011. So be very clear that you cant expect them to return in the range of 8-9% always. There will be times when they will return 4% or 5%, but that happens rarely.

How liquid are Arbitrage funds ?

Lets talk about liquidity factor now.

You will often hear that arbitrage funds can be compared to liquid funds as they are highly liquid and risk free. So some extent this is very true, but if you go deeper, there are few differences.

  1. Arbitrage funds redemption can take 3-4 days : An arbitrage fund redemption can take 3-4 days compared to just 1 day in case of liquid fund, so if your requirement is that the money should come back to you the next day if you want to redeem, then arbitrage funds are not the right choice.
  2. Arbitrage funds have exit load for 90 days – Most of the arbitrage funds have a small exit load anywhere from 0.25% to 0.5% if you take out the money before 90 days. If compared to liquid funds, there does not exist any exit load and you can take out the money even in a week without any loads. For example, incase of ICICI Prudential Equity arbitrage fund, its exit load is 0.25% if redemption before 30 days

The above two points conclude, that one should ideally choose arbitrage funds if one is looking to park funds anywhere from 3 months to 2 yrs. Also someone who is falling under a lower tax slab, will not benefit too much from investing in arbitrage fund because anyways their tax slab is less.

Comparing Arbitrage fund with Fixed deposit and Liquid fund

Finally, let me give a rough comparision of arbitrage fund with bank FD and liquid funds, which will make you more clear. The comparision chart below shows various criteria and how these products compare.

comparision of arbitrage mutual funds vs fixed deposit vs liquid fund

So shall you invest in arbitrage funds?

I think based on the above information, you can now take the call if you want to invest in arbitrage funds or not. Let me know what you are going to do and what comes to your mind about this category of mutual funds.

Here are the 5 most important things to know before you Submit Investment proofs for tax saving

Posted on by Jagoinvestor

Do you know everything regarding investment proofs which you provide to your employer at the time of tax-saving season? If your answer is NO, then this article will help you understand a lot of things which you don’t know or partially know about.

So, I will talk about some of the common things you should take care while giving your investment proofs to your employer for tax saving purpose.

investment proof for tax saving

1. Investment declaration helps employer to deduct appropriate tax

The first and most basic thing, that you as an employee should know is that your employer is supposed to deduct your income tax on monthly basis and deposit it with govt on 7th of the following month.

For this, the employer should calculate your taxable salary and it can only happen if you before hand give him an idea about how you are planning to save tax, and apart from that how much of  HRA, LTA, Medical reimbursements you are entitled for.

For this purpose, your employer asks you to declare your various investments in the start of the year itself, so that they can compute your net taxable salary and then pay your salaries accordingly, after deducting TDS from your salaries.

And then, finally around Dec/Jan, they start asking you to provide them the actual proofs of your investments and receipts so that they can match things with their initial calculations and if there are any difference they have 2-3 months in hand to handle the discrepancies. Below is a small example of it

investment proofs importance

What If you failed to submit investment proofs?

If you failed to submit your investments proofs (you declared them, but didn’t invest in reality), in that case you are liable to pay higher income tax, but employer has not deducted it and hence they get a 2-3 months of extra time to adjust it from your salary.

Following things are required by employer as investment proofs.

  • To claim LTA, you need to provide Travel receipts (flight boarding pass, train tickets)
  • Home loan certificates if you want to claim deductions under principal and interest repayment
  • ELSS investments proofs or any other 80C investments
  • Life insurance and health insurance premium receipts
  • Various donations receipts
  • Rent receipts to claim HRA

2. You can also share your saving bank interest, FD interest with employer

A lot of people do not know this, but you can share your saving bank interest, FD/RD interest earned during year, any capital gains from shares or mutual fund, rental income and other kind of incomes with your employer, so that they get a complete picture of your taxable salary and deduct your income tax which will be more accurate.

If you do not disclose these additional incomes to your employer, in that case – you will have to separately pay additional income tax yourself and then take these things into account while filing your income tax returns.

Note that another advantage of declaring these additional income with employer is that you will not have to pay any penalty which might arise due to not paying advance tax on time.

Also, you won’t have to take the burden of paying the additional tax at the end of the year, the tax will get distributed almost equally throughout the year.

3. Didn’t submit income tax proofs to employer? You can claim things later

A lot of investors have this myth, that if they didn’t do their investment proof submission to employer, they will never be able to claim the deductions and will have to pay higher income tax. This is not true.

Yes, it’s a good practice to give the investments proof to your employer on time, and that will save you a lot of headache later while filing the returns.

But for some reason, if you fail to provide the investment proofs (example, like you don’t have money in the month of Jan and you decided to buy a life insurance policy only in Mar), in that case – your employer will deduct the income tax, but then at the time of filing your tax returns you can claim the tax refund, if you finally managed to invest in tax saving products later.

Here is a chart which will give you a better idea

investment proof work for tax saving

Here is another detailed example of how it happens

  • Ajay has the salary of 12 lacs a year, and he declares to his employer that he will invest Rs 1.5 lacs in 80C products
  • Employer based on Ajay declaration will calculate that Ajay taxable salary is 10.5 lacs and will be based on that suppose the total income tax for the year is 60k (just for example) . So Ajay final salary will be 10.5 lacs – 60k = 9.9 lacs. This 9.9 lacs divided by 12 will be 82500 which he will get on monthly basis and the employer will deposit Rs 5,000 as his tax to govt on monthly basis
  • Now in Jan, when the employer asks Ajay to give them the investment proof, suppose Ajay realizes that he forgot to make the investments and does not have money to invest 1.5 lacs in 80C products. But he will do it in Mar himself. And he fails to provide the income tax proofs to his employer.
  • Now his employer will come to know that Ajay real taxable salary is 12 lacs and not 10.5 lacs as declared by him and lets say on this his income tax is 1 lac, so additional 40k is to be recovered from Ajay, which will be adjusted from Ajay’s salary in Feb/Mar
  • Ajay then invests 1.5 lacs in Mar and finally his taxable income should be just 60k , as per the planning (because his taxable income is 10.5 lacs as declared in the start). However his employer has deducted 1 lac in total from his salary and paid to govt.
  • Now Ajay can declare in his tax returns that he has invested in 80C products and he is liable to get refund of Rs 40,000 which he will get in next few months.

In the example above, you can see that not giving investment proofs on time has resulted in some inconvenience for Ajay, but that does not mean that he will lose out on his tax benefits. One can always invest around the end of the year and then claim back the tax refund later.

However, there is one exemption here

Few exemptions are made only at employer level, like LTA and medical reimbursements. So if you fail to provide LTA and Medical reimbursements proof to your employer on time, then you lose the benefit. You can’t claim it back at the time of filing returns.

4. You DONT need to submit any proofs while filing your tax returns

Another important point you should remember is that while filing income tax returns, you just have to furnish the information about your investments, and not attach any investment proof.

Please do not attach xerox copies at all. It’s not required.

Its required by the employer because they are deducting the TDS and as a third party they need the documents for verification purpose.

But if you are claiming at all the benefits yourself at the end of the year, you just need to declare things. However note that you should keep the receipts and all the required documents with you for some years, because if their is any scrutiny later, you need to be prepared to answer income tax authorities along with documentary evidence.

Which means that you should never lie about your investments which you have not done in reality. Always provide true information.

5. You need to give “proposed investment” proofs for the month of Feb and March

A lot of people are confused on how will they provide the investment proofs for the month of Feb and Mar in Jan itself, when the employer asks for investment proofs. It might happen that your life insurance premium is due in Mar or if you are doing SIP in ELSS funds, you still don’t have the statements showing the investments.

In those cases, you have to provide a declaration that you are going to make the investments for Feb/Mar and based on that declaration, your employer will process the TDS.

All the employers provide you with the declaration form. You just need to write there that you promise to do the investments for tax saving in next 2 months and your exemptions should be given to you based on your declaration.

Let me know if you have any questions or if you want to share some important information on this topic

When can you call yourself RICH in India? [SURVEY of 381 people]

Posted on by Jagoinvestor

Are you RICH or not? Do you have enough income or networth, so that others will consider you RICH in India? This is all this post is about.

I was day dreaming about get RICH few days back (I do it every week) and visualising how much should I earn so that I can call myself as RICH and how much net worth I should have, so that people would start considering me RICH? Is it 1 crore or 10 crore ? Is income of 5 lacs a year or 20 lacs will make me look RICH in others eyes?

Are you RiCH

So, I created a survey around this topic and 381 people took that survey. But before I share the survey results below, note that the group which took this survey does not represent the common man on street. This survey is mostly taken by net-savvy high-income earners, which only represents the higher income group. These people are on web, work in big companies and are considered to be doing very well in life by society.

How much Income makes you RICH ?

One of the questions asked in the survey was – “In India, How much yearly income one should earn, so that you will call him RICH ?” . Below are the results

RICH in India - by Income

As you can see above, only if you are earning more than 20 lacs a year, most of the people will consider you as RICH, otherwise you will be seen as middle class which is a very big range and not defined at all in our society. People earning 1 lac a year, 5 lac a year and 12 lac a year – they all call themselves as “Middle class”. Let me share some important stats with you on income.

As per a website www.globalrichlist.com if you earn the income of 10 lacs a year, you would be in top 0.22% of the population globally. Can you believe that !

globalrichlist ranking for India

This means that if there are around 1000 people in the world, almost 997 people earn less than you if you earn Rs 10 lacs a year. Hence, you should be quite happy about this fact, but obviously we don’t think that way. We look at people above us and keep cursing how bad we are doing in life.

What networth makes you RICH in India in other’s eyes?

The next question I asked was – “In India, How much networth a person should have, so that you can call him RICH ?”. Below were the results

Are you RICH india by networth

If you look at the chart above, only 1 out of 4 people will call you RICH if you have 2 crores of networth in today’s value. 48% people who took the survey feel that anything above 2-10 crores is a good networth to be called RICH. Some even said 50 crores and 100 crores.

Forget crores! . What if you have a net worth of 100,000 Dollars or just approx Rs 60 lacs in wealth ? How rich are you?

As per a research published in 2013 by Credit Suisse, if your net worth is above Rs 60 lacs, you are among the richest 8% in the world and richest 0.4% in India. Think once again !

Out of every 1000 people in country, 995 people are below you in terms of net worth. I know some will say, that there is black money and many are there who do not disclose their income. Yes – that’s true, but we can’t find out how many are there like that. Even if you consider that, still you would be doing very very well.  Below is the snapshot from the report.

How rich are you because of your networth

Note that – we are not talking about ASSETS here, but Networth, which is ASSETS – LIABILITIES. A lot of people hold real-estate whose value they consider, but they forget to account for the home loan and other liabilities. So a lot of people who feel they have high net worth actually don’t have it.

Along with most countries in the developing world, personal wealth in India is heavily skewed towards property and other real assets, which make up 86% of household assets. 

- Credit Suisse Report 2013

But feeling RICH is a state of mind

I know a lot of people will say that “feeling rich” is a state of mind and we should not just evaluate it with money. Agree to that. I am of the same opinion that it’s not others who will decide if you are RICH or not, but only YOU.

But thats not this article is all about. We are purely look at how others perceive your RICHNESS by income and your wealth.

Most of the people are not happy with their current status

Let me give us some interesting information. If you have low income or networth and you are not happy about it. You should know that majority are like you only, even though they are on high income.

I asked another question in the survey – “Are you happy with your current Salary and Networth ?”

Guess what was the result?

On an average, most of the people are not happy if they are earning less than 10 lacs a year. I can understand that 10 lacs a year is not a very high income these days, especially in big cities. And if you consider the expenses, home loan EMI, education costs and lifestyle expenses, a lot of people are literally struggling to keep pace with rising expenses.

What looks a great salary to people in small cities, is not that amazing in big cities these days. Here is the result of survey, showing you how many people are happy or unhappy about their current income and net worth.

income and happiness

If you see people in higher income bracket which is more than 10 lacs a year, almost half of the people said that they are happy and another half said they are not. But one thing is very visible that in the higher range of income, most people said they are happy (I am not sure if they are really happy or not, but they said they are) compared to the people in lower range of income. To some level, we all can relate to it.

You are doing well at absolute level

After I did this article, I got a feeling how much our lives have got messed up due to money. We are literally lost in this world with the sole objective of earning money. You should be more happy about what you have achieved and not be unhappy about what you have not earned.

I am not saying that you should not be aspirational. Surely, you should have a higher target each year, but dont feel unhappy about what you have created till date. Let’s slow down a bit.

Wealth is important, very important, but also cherish and be proud of how you have done well till date compared to millions of others who are struggling in life due to money issues

You are way ahead of majority. Congratulations for that.

Let us know what you think about this whole article. What are your thoughts on who is RICH? What’s you definition of RICH in your own terms?

X+Y theory – A simple theory explaining, why its important to invest money for future

Posted on by Jagoinvestor

Today’s article is going to be very very basic. It’s one of the lessons which we should teach our kids when are growing up. The question is “Why Invest money at all?”

A lot of investors are not very serious when it comes to save enough money and invest it properly so that it grows well. A lot of investors are quite consumed in their life and don’t deal with this conversation fully. Only after years of working they realise that they have done a very bad job when it comes to investing their money.

I thank Mandar Rane to raise this question in Ashal Jauhari facebook group and shared what he faces with his siblings and many connected to him

why should I invest

X+Y years theory – Why you should invest money at all ?

There is a simple conversation which I think everyone should go through once. I call it as X+Y theory. Its very simple.

Every person will be living for X+Y years in total.

X is the number of years when they will go to work and bring back money to pay their bills and acquire all they want to enjoy (movies, clothes, eating out, travel, food, fees). This is mostly ACTIVE income and money will come only when you work.

Y is the number of years, which we will spend without earning. We will still need food, clothes, travel, eating out and various other things, but the problem is we will not be working in those years, either by choice or mostly because we are unable to. Now where will the money come in that phase? The money has to come from somewhere?

Right?

So you mainly invest so that you create enough wealth which can last your Y years. I know I am making retirement planning very jazzy at this moment, But NO, this is just going one level deeper and answering the basic question of “Why should I invest at all?”

reason why to invest money

Note that when we are in X yrs phase, we are not too much concerned about the Y yrs, because the X yrs phase itself has many issues. Kids , House, job, health, parents, relationships and many issues which keeps us occupied enough and only when we approach the Y phase, we are bit scared and tensed, but then it gets too late.

3 basic level reasons you should invest your money?

Below I will talk of primary level issues why one should invest their money to grow in future. And when I say grow your money, I am not talking about saving it in bank account, I mean talking about really letting it grow beyond inflation.

1. Because of Inflation 

The most basic reason to invest your money is to protect it from Inflation. Your money will decrease after many years in its purchasing power. A Rs 100 note will not be able to buy the same thing in future, what it can buy today. So you need to invest money properly so that you are able to at least buy the same quantity tomorrow or preferably a larger quantity.

2. Financial Independence

This is exactly what I was talking above. I am sure everyone want to work, but not becoming money slave’s. If you do not invest your money, you will never be able to create a corpus of money you can rely on, and will never be able to get free from your work. If you want to make sure your reason to go to job should be “because I love my job” and not “I need to pay my bills, I am helpless”, then start building that corpus as soon as possible.

And I am not talking about cutting down your desires and entertainment. Do all that, but also start creating that corpus. Keep a balance.

3. Reach your life goals

If you earn Rs 100 per month, and you need Rs 50 for some purpose suddenly you can surely handle is somehow. But what if you need Rs 5000, but you earn only Rs 100? In that case, you need to make sure you have accumulated that amount before hand, slowly and steadily.

We all know some of our financial responsibilities will be coming up in distant future and they would need a big amount. Things like house downpayment, children college education, marriage and many other things like that. If you do not invest, how will you fund those goals? It’s as simple as that.

You are sum of your experiences in life

A lot of youngsters have seen their parents struggle for money and their mindset is already set in a way that they understand the importance of saving properly and growing their money. However a big number of people have had a bad relationship with money. They live paycheck to paycheck, splurge beyond the limit and are careless enough when it comes to money.

A lot of people might say that they are just stupid to act like that and are highly careless and irresponsible. But I think its just a matter of lack of financial literacy or their way of looking at life is different. Everyone is raised differently in their lives and we all have difference experiences. We become what we experience at some level. If you save enough or do not save enough, at the end its just has an outcome which you need to be aware about. That’s all.

How to teach this lesson to your kids (and some adults)?

The simplest way to teach this lesson to small children is to tell them the Ant and Grasshopper story. It’s one of the most simple and powerful stories.

Here is the story for those who can’t see the video

In a field one summer’s day a Grasshopper was hopping about, chirping and singing to its heart’s content. An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest.

“Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”
“I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”

“Why bother about winter?” said the Grasshopper; we have got plenty of food at present.” But the Ant went on its way and continued its toil.

When the winter came the Grasshopper found itself dying of hunger, while it saw the ants distributing, every day, corn and grain from the stores they had collected in the summer.

Then the Grasshopper knew… It is best to prepare for the days of necessity.

Invest early and with discipline

To get the maximum benefit, make sure you start your investments as early as possible. Even if it’s small in the start, that’s ok. At least you will prepare yourself to invest bigger amount in future if you at least invest small amounts in the start. You will build some wealth (even though its small) and build your mindset to invest regularly.

Atal Pension Yojana – Features & Eligibility explained in detail

Posted on by Jagoinvestor

Recently the govt has announced the pension scheme called “Atal Pension Yojana”, which is targeted at workers from lower class who work in unorganized sector which constitutes around 88% of the workforce.

An account needs to be opened under this scheme and monthly contributions needs to be made till the time of retirement after which a pension amount ranging from Rs 1,000 to Rs 5,000 per month would be paid to the account holder and on death of subscriber and spouse, the nominee will get the lump sum accumulated by the end of the period.

Any person below 40 years of age can open an account.

Atal Pension Yojana

The retirement age will be set to 60 years, hence one will get at least 20 years of contribution. Any person below 40 years can open an account. The retirement age will be set to 60 years, hence one will get at least 20 years of contribution.

How to open Atal Pension Yojana Account?

  • Go to the bank where you have your saving bank account like SBI, ICICI, HDFC or any other bank..
  • Fill up the form (download english form or hindi form)
  • Make sure you fill all the fields
  • Mobile number is compulsory, hence that needs to be filled
  • If you have Aadhar card, provide the number in the form (but its not compulsory)
  • You also need to provide spouse details if applicable and nominee details, which is compulsory
  • You will select the pension amount you need in future and based on that the bank official will write the monthly contribution required on the form

Below is a sample form

atal pension yojna sample form

Note that the form itself contains a section which mentions that you are authorizing the bank to deduct the monthly contribution from your account till the age of 60 yrs. So once the Atal Pension Yojana account is opened, your bank account will then get auto debited in future every month.

If one does not have a bank account, then one can give their KYC documents along with account opening form with the Atal pension Yojna account form.

Eligibility Criteria for Opening an account

  • The age of the subscriber should be between 18 – 40 years.
  • One should have a saving bank account or should open a new saving bank account
  • One should be having a mobile number, which needs to be furnished at the time of filling up the form

Governments co-contribution for 5 years

If one joins this scheme between 1st June, 2015 to 31st December, 2015 , the govt will co-contribute 50% of the total contribution or Rs. 1,000/- per annum, whichever is lower for the 5 yrs period from 2015-16 to 2019-20, But this govt contribution will be available only for those who are not covered by any Statutory Social Security Schemes and are not income tax payers.

What that means if that if you are an EPF subscriber, then you will not be eligible for govt co-contribution part.

Below is the indicative monthly contribution required in this scheme at various age limits.

atal pension yojna contribution chart

The subscriber can increase or decrease their contribution amount at some later stage if they want to do it

Will you get statements of transactions?

Yes, you will be getting regular intimations on your account information through SMS and even a physical statements each month. Note that you can move to any part of India without interrupting your contributions because the deductions will happen automatically from your bank account.

Can you exit or partially withdraw from the scheme ?

1. On attaining the age of 60 years – The first option is when you reach 60 yrs of age. At that time you will be able to use 100% of the money, but only in the pension form. You will only get the pension per month and not the lump-sum amount.

2. In case of death of the Subscriber (once they cross 60 yrs) – In case of death of subscriber, pension would be available to the spouse and on the death of both of them (subscriber and spouse), the pension corpus would be returned to his nominee.

3. Exit Before the age of 60 Years – The Exit before age 60 yrs, would be permitted only in exceptional circumstances, i.e., in the event of the death of beneficiary or terminal disease. As per Wikipedia, Terminal illness is a disease that cannot be cured or adequately treated and that is reasonably expected to result in the death of the patient within a short period of time. This term is more commonly used for progressive diseases such as cancer or advanced heart disease than for trauma.

What is your want to discontinue the payments or delay in payments ?

Non-maintenance of required balance in the savings bank account for contribution on the specified date will be considered as default. Banks are required to collect additional amount for delayed payments, such amount will vary from minimum Re 1 per month to Rs 10/- per month as shown below

  • i. Re. 1 per month for contribution upto Rs. 100 per month.
  • ii. Re. 2 per month for contribution upto Rs. 101 to 500/- per month.
  • iii. Re 5 per month for contribution between Rs 501/- to 1000/- per month.
  • iv. Rs 10 per month for contribution beyond Rs 1001/- per month.

Discontinuation of payments of contribution amount shall lead to following

  • After 6 months account will be frozen.
  • After 12 months account will be deactivated.
  • After 24 months account will be closed.

Subscriber should ensure that the Bank account to be funded enough for auto debit of contribution amount. The fixed amount of interest/penalty will remain as part of the pension corpus of the subscriber.

Are there any Tax benefits in Atal Pension Yojna scheme ?

No , there are no tax benefits available in this scheme. A lot of people might think that they will get any exemption under 80C or on maturity, but no benefits are available. The pension amount will be considered as the income for the person and will be added in the taxable amount.

What if someone is already a subscriber of Swavalamban Yojana under NPS ?

All the registered subscribers under Swavalamban Yojana aged between 18-40 yrs will be automatically migrated to APY with an option to opt out. However, the benefit of five years of Government Co-contribution under APY would be available only to the extent availed by the Swavalamban subscriber already.

This would imply that if, as a Swavalamban beneficiary, he has received the benefit of government Co-Contribution of 1 year, then the Government co-contribution under APY would be available only for 4 years and so on.

Existing Swavalamban beneficiaries opting out from the proposed APY will be given Government co-contribution till 2016-17, if eligible, and the NPS Swavalamban continued till such people attain the age of exit under that scheme.

Note that, the ultimately the money under this scheme will be managed through NPS only and thats the underlying thing. All the investments decision will happen as per the guidelines of PFRDA.

A good support system for Poor

As I mentioned, this scheme has the maximum pension of Rs 5,000 per month, that too when the person reaches 60 yrs of age, that too will happen only after a minimum of 20 yrs from now (only people below 40 yrs of age can open an account), so Rs 5,000 at that time would be a very miniscule amount.

However note that we are talking about the people in lower section’s who are really poor. At least this Rs 5,000 per month would be a great support in their old age when they won’t be working. A subscriber can open only one APY account.

With this scheme, people will be encouraged to save a small portion each month ranging from Rs 40 to Rs 210 per month. Below is the full chart showing how much money would be required to be deposited each month depending on the time of entry in the scheme and the pension amount chosen.

What is the returns of this scheme and should you invest?

So the question finally is, how good is this scheme and its returns if you consider the returns? I did a XIRR analysis of the scheme considering a 40 yrs old person is investing Rs 1,454 per month for 20 yrs , and then gets a pension of Rs 5,000 all this life (till age of 100 years). The returns I get is 7.74% through the excel sheet.

When I do the same thing for a 25 yrs old person invests Rs 376 per month for next 35 yrs (till age 60) and gets pension till he turns 100 yrs . The overall IIR is 7.9% . This includes the lump sum payment at the end to the nominee

So looking at the numbers, we can conclude that the returns from this scheme is in range of 7.5% to 8%. Considering that, Its a guaranteed return from govt of India, I will leave the judgement of its being good or bad to you only.

You should also read, Debasish Basu critical analysis of this scheme on this link to get more understanding about the issues of this scheme.

I would like to again reiterate the point that this scheme is more for the people of poor background who do not have access to any social security scheme already and will be somewhat beneficial for them, and not high-income earners because Rs 5,000 even after 20 yrs will be very very small amount.

If one wants to still open this account, one should find a good enough reason for themselves.

Are you investing in this scheme?

I would like to know what you think of this scheme and if you will be opening an account for yourself? You can also suggest this scheme to your maid, driver or any person who you think should get a minimum pension by the time they turn 60 .

At the end, I would like to share that we are doing our Bangalore workshop on 2nd Aug, please register asap for the event before its full

Care health insurance Review – 12 features explained

Posted on by Jagoinvestor

Today I am going to review features of “Care“, one of the good health insurance policies in the market. It was launched few years back and it’s really one of the most comprehensive health insurance products available in the market as on date. So what I will do is, share with you, its features one by one, so that you can know what all it covers, along with few disadvantages in the policy

I digged deeper in its policy wordings and I will explain them in detail, so that anyone who is looking forward buy a health insurance policy can take the decision in a better way by reading this Care review. Here you go..

1. High Sum assured up to 60 lacs is allowed

The sum assured offered by the policy ranges from 3 lacs to 60 lacs. Gone are the days when 2-3 lacs of sum assured was sufficient. Now it’s very common to see people buying a cover of 10-20 lacs. Many people even want to go for a cover of 30-40 lacs also and there are very less options right now if someone wants to buy a high enough health cover. Care gives you an option to buy up to 60 lacs of health cover, and the best part is the high cover comes along with added benefits which we will look very soon

2. Single Private Room (no rent limit)

If you choose the sum insured of more than 5 lacs, then you are eligible for a single private room. The wordings in the policy is of “Single private room” and not some percentage of sum assured.

Most of the policies cap the room rent limit, however this policy caps the room type. Here, if the user takes a room higher than the type eligible he still is required to pay the difference of the room rent as well as all other expenses which increase due to choosing of a higher room type

I love this point especially because room rent limit is such a critical factor while calculation of your claim amount, you can read how room rent limit affects your claim process if you choose the room with higher rent

3. Cashless treatment in network Hospitals

Care has a network of around 4,100 hospitals around the country. If your hospitalization is planned after few days, in that case, you don’t have to shell out any money from your pocket. You can choose to take cashless treatment and the bills will be settled by the health insurance company directly to the hospital.

This is not a special feature in Care. It’s present in almost all the health insurance policies these days. But I thoughts it’s a good mention in this article as we are looking at all the features. Also, note that cashless treatment is an additional benefit which helps a customer. You can always choose to not have a cashless treatment and pay the bills yourself and settle the claim later by submitting the bills. In case of emergencies, you anyways can’t choose cashless treatment.

4. FREE Health Check each year

You also get free health checkup’s facility every year for all the adult policy holder’s lifetime!. There are no terms and conditions for this. Just that the facility is there only for sum assured of more than 5 lacs. Also, the number of health checkups depends on the sum assured amount. You get more detailed checks done when your sum assured is high.

I have realized that a lot of people do not spend their own money for regular health checkup’s, so in a way it’s a great feature in the policy, due to which one will form the habit of regular checkup’s and will be informed about their health issues.

Each year you just need to contact the company and express your desire for the health checkup and they will schedule it for you in one of the centers they have tie-up with and which is also near your house. You can choose the timings and place as per your convenience. You can collect your health reports after 24 hours of the checkups. It’s a really great thing offered by any company.

Below is the health checkup list for various kind of sum assured slabs as per their brochure.

Care review - free health checkup

5. Restore of sum insured up to 100% amount

The policy has a feature called restore. In this feature, if there is a large claim in the policy due to which the sum insured is exhausted or reduced substantially, in case of a subsequent unrelated claim, if the sum insured falls short to pay the claim, the policy reinstates/restores to cover to 100%. Let me explain that in detail.

Let me give an example

Suppose you have a 10 lacs sum assured. Now due to some heart-related issue, you were hospitalized and the expenses were Rs 4 lacs. So your remaining sum assured is 6 lacs. You can utilize the 6 lacs sum assured for any purpose.

But if some another hospitalization comes up for an unrelated claim, and the expenses are more than your remaining sum assured, then your sum assured will be restored to the full amount of 10 lacs. Even your other family members can avail for the full sum assured even for the same illness. Note that in case of family floater plan, it’s highly beneficial because even the other family members can take benefit of full sum assured for the same illness.

6. No claim bonus up to 50% of sum assured

No claim bonus is a very simple concept, where you get rewarded if you don’t have any claim in a year. In Care, your sum assured gets increased by 10% of the base sum assured if you do not claim in a year and keeps increasing upto 50%. Which means that if your sum assured is Rs 10 lacs, then if you do not have any claim in a year, then next year it will increase by 10% (10% of 10 lacs) , and your sum assured will become 11 lacs . Again if you do not have any claim in the next year, it will increase to 12 lacs and so on..

So your cover of 10 lacs can go up to 15 lacs maximum if you do not claim for 5 yrs consecutive. A lot of policies (like Oriental Happy Family Floater), they reduce the premium by some percentage as no claim bonus and many people are happy about that, because that means less money going out of their pocket. But truly speaking what you need is the increase in sum assured, not a reduced premium, because every year due to inflation and rising medical costs, you need higher sum assured.

I don’t see a big benefit in saving few thousand or hundreds in premium in the name of no claim bonus.

Super No-Claim Bonus

This policy also gives an additional benefit called Super No-claim Bonus which will cost you extra premium if you wish to take it. In this super no claim bonus facility, your no claim bonus will be 50% extra each year up to the maximum of 100% of sum assured.

What that means is that if you do not have any claims, then within 1 yr, your sum assured will increase to 1.5 times and in 2 yrs, it will double. So if you have a policy of 5 lacs sum assured, then

  • Sum Assured in first year – 5 lacs
  • Sum Assured in 2nd year (assuming no claim made in previous year) – 7.5 lacs
  • Sum Assured in 3nd year (assuming no claim made in previous 2 years) – 10 lacs

And this super no claim bonus is over and above the no claim bonus which you anyways get in the policy. So truly speaking your sum assured can increase anywhere from 60% to 150% in some years if you take super no claim bonus option while purchasing the policy. At the time of applying for the policy itself you need to mention that.

Care review - super no claim bonus

7. Around 170 Daycare Treatments covered

The policy covers around 170 day care treatments (In-patient treatments) , which are mentioned in the policy document. A lot of times you don’t need to get hospitalized for many days or even 24 hours. Some treatments can be done in just few hours. You can get admitted in morning and get things done by the evening or just few hours.

Even these kind of in-patient treatments are covered in the policy. A common myth is that you need 24 hours of hospitalization to claim your health insurance benefits, but it’s not true. Many years back when health insurance was a new thing in India, it was probably true. But not anymore.

Below is a snapshot of the policy terms and conditions pdf and you can see some of the day care treatment names mentioned. There are total of 170 treatment names listed in the document.

Care day care treatments names

Please do not confuse these day care treatments with OPD. OPD treatments are not covered in any health insurance policies

8. Second Opinion and Organ Donor Cover

If there are any expenses which are incurred on the organ donor, then even those expenses (along with hospitalization expenses) will be covered in the policy. The limit for this expense ranges from Rs 50,000 to Rs 3 lacs depending on the sum assured. A lot of times, in critical cases, if there is any organ which needs to be replaced and you get any donor, then you will not have to incur the expenses from your own pocket due to this feature. While this is an extreme care, still we should appreciate that the policy takes care of this point.

Also the policy has a feature called “Second Opinion”. In this, if any of the policy-holder is diagnosed with a critical illness, then the company will arrange a free discussion with a qualified medical practitioner for you. This is great feature, because a lot of times, you want to consult another doctor before taking a big decision like surgery, operation or any hospitalization. The policy lists down the critical illnesses for which you can take second opinion. Note that the second opinion facility is only for sum assured above Rs 5 lacs.

Below are the critical illness mentioned in the policy

  1. Benign Brain Tumor
  2. Cancer
  3. End Stage Lung Failure
  4. Heart Attack
  5. Open Chest Coronary Artery Bypass Graft
  6. Heart Valve Replacement
  7. Coma
  8. End Stage Renal Failure
  9. Stroke
  10. Major Organ Transplant
  11. Paralysis
  12. Motor Neuron Disease
  13. Multiple Sclerosis
  14. Major Burns
  15. End Stage Liver Disease

Each member of the policy can avail the second opinion facility for each illness every year if required.

9 – Avail Medical Treatment anywhere in world

If you have opted for sum assured of 50+ lacs, in that case, you can avail the medical facilities through the world, where-ever you wish to , but it’s limited to only 5 major illnesses. Also, the benefit is available only on reimbursement basis only. Means you first have to spend the money from your pocket and then claim it back later. So I think this will mainly be helpful for the high net worth individuals and not to the middle class. Anyways a good feature, because some people might look forward to this.

10 – Pre and post hospitalization expenses

The policy also pays for any medical expenses related to the claim before and after getting admitted to the hospital. It covers 30 days of pre-hospitalization expenses and 60 days of post-hospitalization expenses. A lot of times a big amount is spent before and after the hospitalization in medicines, checkup’s and other things. It’s very important that a policy takes care of these facts. However, note that this is a basic feature, and almost all the policies in market gives this benefit.

11 – Domiciliary Expenses Covered

The policy covers the medical expenses incurred on the home treatment. A lot of times a patient is not in the condition to the hospital, in which case the treatment can be done at home. The policy will pay upto 10% of the sum assured in this case. The condition to avail this offer is that

  • The patient is no in condition to be moved to hospital
  • OR, there is non-availability of the room in hospital

Note that there are many illness for which the domiciliary expenses cannot be claimed, please check that list in the brochure of the policy.

12 – Lifetime renewal and no restriction on entry age

Once you buy the Care policy, you can then renew it lifetime. This is one of the most important points one should remember while buying any health insurance policy, because you buy the policy looking at a very long-term and not just for next few years. The policy should be able to help you when you are in your late years, because that’s when you really need it badly.

Also, there is no limit on the maximum age by when you can renew it. On top of it, even the entry is not restricted due to age factor, a person can buy the policy at any age, provided they fulfill the health checkups and the restrictions by the company.

Waiting period of 4 yrs for pre-existing illness

Under this policy, any pre-existing illness will be covered only after 4 yrs of taking the policy. This is a common exclusion in almost all the policies. However if you are a senior citizen, then the coverage for that particular illness might be excluded permanently, because once you cross the age of 60, the chances of you getting hospitalized due to that particular illness is high and it does not make any business sense to cover it.

This is precisely the reason why one should take their parents cover as soon as possible, especially before they cross the age of 60 yrs. Apart from the pre-existing illness, a lot of illness have their own waiting periods from 1-4 yrs, which is a standard thing in any kind of health insurance policies. Also nothing other than accidental hospitalization is covered for the first 30 days of taking the policy. I suggest you read this article which talks about exclusions in mediclaim policies in detail.

Other Points

Below are some other important points one should be aware about

  • If your sum assured is more than 5 lacs, then there is no sub-limit on the ICU charges, Doctors fees and Medical fees.
  • The policy provides ambulance expenses ranging from 1,000 to 3,000 depending on the sum assured
  • There is no age limit of buying a new policy. Anyone can buy the policy at any age, just the minimum age requirement is 91 days for family floater and 5 yrs for an individual policy.
  • Maximum 6 people can be covered in a single family floater plan
  • The policy like every other policies in market does not offer any dental care treatments
  • This plan does not cover maternity expenses, but that’s ok. Don’t over focus on this point, as it’s something you can take after yourself
  • You get 7.5% discount if you renew/buy the policy for 2 years and 10% discount of payment of 3 yrs in one-shot.

Disadvantage of Care Policy

Let me mention some the problem and disadvantages of the policy.

1. Average policy, if sum assured is less than 5 lacs

A lot of features are applicable in the policy only when the sum assured is more than 5 lacs, if you want to take a lower cover like 3 lacs or 4 lacs, in that case, Care is an average policy and not the best.

2. Room type capping

You already know that the policy caps the Room type instead of room rent. This was a good advantage also, but at the same time, this can be a disadvantage also. In this case, suppose the room type which your policy allows is unavailable, then you will have to go for some other type of room and in that case you might have to suffer the reduced claim amount. You are tied-up with a particular room type only.

Suppose there is some other policy, which caps the room rent limit at 1% of sum assured and imagine that your sum assured is 10 lacs, then you are eligible for any room with rent of up to 10,000 per day. In that case, you can choose either a single room without AC, with AC or a premium room. It’s totally your wish as far as the room rent is below 10,000. But in case of Care, if suppose you are eligible for a single private room whose rent is 6,000, and the next category of room costs Rs 9,000, then you can’t go for the Rs 9,000 room . You can surely take it, but then your claim amount will get affected. So make sure you think on this point properly before you buy the policy.

It’s totally your wish as far as the room rent is below 10,000. But in case of Care, if suppose you are eligible for a single private room whose rent is 6,000, and the next category of room costs Rs 9,000, then you can’t go for the Rs 9,000 room . You can surely take it, but then your claim amount will get affected. So make sure you think on this point properly before you buy the policy.

I suggest that you also compare Care policy with some other policies like Max bupa plans or Apollo Munich Optima Restore and then take a final decision.

3. Co-payment of 20%, if policy taken after 60 yrs of age

If at the time of entering the policy, the age of the policyholder is more than 60 yrs, then a 20% co-payment will apply. Which means that the policy holder will have to bear the 20% bill amount and only 80% will be paid by the company. But if you enter the policy before 60 yrs, its not the case.

Hence the policy becomes unattractive to senior citizens who are looking for health insurance. In comparision a policy from L&T insurance is better where 10% co-payment applies after the age of 80 yrs. The policy from Max Bupa called Heartbeat, does not even have the concept of co-payment. So the policy from Care scores low on this point.

Premium Chart for Care

Below I have listed down the premium amount 5 lacs sum assured, for various age range with two cases of a single person insurance, and another one is a family floater policy with 2 adults and 1 kid. You can check how the premiums will rise over the years when the policyholder will move to various age slabs. Note that now there is no claim based loading in the premium. Now as per new guidelines of IRDA, a policy premium increases when the policyholder moves in a different age range.

Care health insurance premium chart

An important point to note in the premium chart about is how the premium is very less in the initial years, when you are below 60 yrs and how it increases when you become a senior citizen :), which is quite natural and explanatory. Also you should not be shocked to see these high premium values in today’s time, because these are all future values, and even though today these premium values might look big to you, but when you turn 60 or 70 yrs, at that time these premium values will look very normal to you.

Snapshot of the Care benefits

Care policy features snapshot

Do you want to buy the Care policy?

If you want to buy the policy or want to enquire about it, then just fill up the form below and you will get a dedicated phone call to help you choose the policy and explain you.

I hope you have got a fair idea about the policy. Note that this Care health insurance review is mainly for educating you on various features of the policy. Please check other policies details and make sure you choose the policy which suits your requirements.

Let us know what are the points you liked best about Care and which point you didn’t like ?

EDIT : This is not a paid review. We have started d0ing review’s of various policies and we will do review other products as well. This is just a point by point explanation of each important point in the policy. Also, we have added the disadvantages of the policies, not just positive’s. Care is definitely not the best in market in all respect, but a very good policy considering most of the profiles. Please see the article more as an attempt to help a person understand what all policy provide’s its customer.

Which is the best critical illness policy in India?

Posted on by Team Jagoinvestor

Do you know that, as per Indian health statistics, every year 3 % of the population go below the poverty line due to the heavy spending on illnesses?

It means, because of large financial outgo for treatments, every year 3% of the population, drop down to one level below their present class i.e. high-class people become middle and middle transforms to lower class. So, Imagine how badly our financial life may get affected if we do not have a proper source of funding at the time of facing non-curable diseases.

The probability of getting affected by life-threatening diseases are getting higher day by day.

As per the growing modern trend in our society, our lifestyle has changed in a bit good way but a lot in a bad way (eating junk/overeating & drinking). There is a rapid rise in obesity in India, which leads to diabetes, stroke and many heart diseases.

As per the statistics on Indian health –

    • Diabetes currently affects more than 62 million Indians, and India is projected to be home to 109 million individuals with diabetes by 2035.
    • About 1.7 million Indian’s deaths caused by heart diseases every year, according to WHO.
    • The incidence of cancer in India was 70-90 per 100000 population in the year 2014 which increased to 106.6 new cancer cases in 2016 per 100,000 people.

Along with bad lifestyle, pollution is also affecting our health. 7% of death in India is due to respiratory diseases. Before any of this life-threatening disease happens to us. We should be prepared financially so that we can utilize our energy fully on the treatment and not on the financial burden of that time. So, to meet those uncertain financial needs, having a critical illness policy cover will be the best resort.

If you are in a hurry so just watch the video below to get a brief idea.

 

What is critical illness cover?

Critical Illness insurance is an insurance product in which the insurer (insurance company) is promising to make a lump sum cash payment if the policyholder is diagnosed with one of the specific life-threatening illnesses on a predetermined list as part of an insurance policy. The policy may also be structured to pay out regular income and the payout may also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation, etc.

Every critical illness policy specifies the illnesses covered and not covered. The major illnesses like heart attack, cancer, stroke, and coma are commonly covered by all the critical illness policies. As the probability of occurring these is high and the payment on these illnesses (cancer or coma) are not one time task, it might be the life time operational costs. And the cover for other critical illnesses varies from company to company.

Below given table highlights the commonly covered illnesses with varying and uncovered illnesses.

list of illnesses covered/not covered under critical illness policy

There are some illnesses that are not covered by any critical illness policy, so make sure that you are not buying a critical illness specifically for getting covered from the following illnesses, as these are not going to be covered by any critical illness policy. Before buying any critical illness cover from any insurance company one should carefully read the policy terms and conditions to see which all illnesses are covered under a particular policy.

here are the benefits of critical illness cover

Benefits of Critical Illness Cover –

  1. Financial security for your loved ones– Critical Illness cover not only pays for protecting your life but makes your family feel secure financially.
  2. More than 30 Illnesses are covered -Not all but some companies cover more than 30 illnesses. Before
  3. A second opinion of the doctor – Almost all the companies provide second opinion. Second opinion gives us the chance to get a better review on diagnosed illness from a specialized doctor.
  4. 100% payout -If diagnosed with a critical illness then the company pays the entire sum assured of the policy.
  5. Tax benefit – All the policies of critical illness comes with a tax benefit u/s 80D of Income Tax Act,1961.
  6. Peace of mind – Once you have taken the critical illness policy you can be relieved because your financial state is now taken care off. If you encounter any critical illness disease then you can now focus more on the treatment rather than managing funds from here and there.

Top 5 CRITICAL ILLNESS COVER

For your reference, I have done an analysis of finding the top 5 critical illness cover policies in India. Below given is the list of top 5 critical illness cover policies.

****** The premium details are for a 1-year policy including GST.

comparison table of top critical illness policies in India

6 points to get the best critical illness policy?

As now you know the top 5 critical illness policies, still it is not easy to select the best policy out of many. So, here are some of the points to evaluate the best critical illness policy.

#1 – The Premium amount

Comparing premium amount is as simple as, selecting a critical illness policy of that company which gives the best value for money at the same sum assured and illnesses cover you are looking for.

#2 – Sum Assured

Getting the highest sum assured should not be a criterion for policy buying. The standard cover suggested is of 10 lacs to 20 lacs, so that your financial life should not get affected due to any uncertain illness.

#3 – Waiting Period

A waiting period is a period up til which any of the illnesses specified under the policy are not covered.  For example, if it’s 2 months, then if any of the critical illness happens to you before 2 months, your claim will not be taken. The insurance companies will consider your claim for paying the sum assured only after the period of waiting has ceased after buying a critical illness policy. So, before buying policy make sure that policy is having lesser waiting period. Almost all the companies have a waiting period of 90 days (not including existing illnesses).

***For existing illnesses waiting period is 48 months.

#4 – Survival Period

The survival period is the length of time, for which the insured must survive after being diagnosed with the illness,  in order to get a claim. The insurance cover will be paid only after the survival period has passed. So, if a person’s death happens immediately after a heart attack, even if he has critical illness insurance, his or her family may not receive any payout from the insurer.

The length of survival period varies among different insurers, it can be 14 days or 30 days, etc. So,  for buying a critical illness policy make sure that the policy has the least survival period.

The logic behind the survival period clause is that, critical illness insurance benefits are meant to be used by the insured as a living benefit to recover from illness, not a Death benefit. So, from this it is very clear that you should have a term insurance(life insurance) to provide the cover to your family, even if already having a critical illness cover.

#5 – Diseases covered

On selecting the best critical illness policy do not look for the maximum number of illnesses, it will be very illogical and will also lead you to pay a higher premium. Instead, go for a standard set of illnesses ( i.e. 28-32 illnesses covering major 4 critical illnesses) that might happen due to your life style habits and hereditary.

#6 – Entry Age 

Check the entry age of policy before buying. Mostly the entry age for critical illness policy is of 18-64 years

Why have a Critical Illness Cover if I already have Health Insurance?

One last thing to keep in mind is that health insurance and critical illness are two different products. Critical illness typically covers you from specified illnesses and not regular health-related issues.

Health Insurance provides exhaustive scope of coverage. Such as in-patient hospitalization, pre & post hospitalization, day care treatments, ambulance costs, organ donor expenses, etc. Where as Critical Illness plans provide coverage for a specified list of illnesses mentioned in the policy contract.

Below given table briefly represents the difference between health insurance and critical illness plans,

table showing comparison between health insurance and critical illness insurance plan

So, as you now know why and how to select the best critical illness policy, if you think any critical illness cover is best suitable for you, then go for it. Having one critical illness insurance policy is must in today’s era.

Let us know your views and queries about this article in the comment section.

 

Do something special for your kids along with buying Insurance – Check out How ?

Posted on by Nandish Desai

A lot of you on Jagoinvestor must have bought term plan or other insurance plans, so that in your absence your dependents do not face any kind of financial crunch. It is good to buy life cover, but may be buying life cover is just half job done.

From last few days, I have been carrying a few thoughts in my mind which today, I would like to share with all of you. Whenever I look at the face of my little one, I feel I should do something special for him along with buying life cover for securing his future.

Going beyond life insurance

If something happens to me, my son will get enough financial support from the insurance money, but I will lose out on the opportunity to share my wisdom (my life learning’s) with him. There are a few things, which I would like my son to learn or know from me and my life experiences.

I feel that Life insurance policy is very strong support a parent can give their kids, but it lacks emotions, feelings and love in it. To add my feelings and emotions in it – I have started capturing a few of my experiences in a short journal which I call “Notes from Daddy”.

This little journal, once it gets complete will be kept next to original insurance policy document.

3 things which I captured in my “Notes from Daddy” Journal

1. List of Books that had deep impact on my life

Since my college days, I have been a voracious reader and there have been many life changing books that had deep impact on my life and it has major contribution on my overall learning and development process. I would like to share my reading list with my son when he grows up.

Now, it is possible that he may or may not choose to read books from my reading list but at least I would like to share or communicate my reading experiences and my book list with him. I have started building my reading list which I would like to share with my son. My “Notes from Daddy” journal has a section called “Hidden Treasure- Personal Reading list”.

2. List of Movies that inspired me

There have been many movies and short documentaries which changed my complete outlook towards life. I am sure you also must have encountered and seen such inspiring movies. I have a section called “Movies that will move YOU” in my “Notes from daddy” journal. If you want you can also make list of inspiring movies which you want your son or daughter to watch in their growing years.

3. Teachers who changed my WORLD

It is said that – “when the student is ready, teacher appears”.

I have been fortunate to have right mentors and teachers at different junctions of my life. I am sure my son and your kids will also have many teachers in their life. Sharing from my life my teachers taught me some very important distinctions of life which helped me to look at the world with new pair of eyes.

I am sure you also must have had some “wow learning moments” while you were with your teacher.  Why not capture them at one place so that it gets communicated to your next generation in your absence.

Some final words

Our body is a place to observe the world from, it is a physical representation of you, be clear that your body is not you. Life is beautiful and at the same time highly unpredictable and uncertain. Having life cover is important but I feel it is still half job done. In my absence, I would not just like to pass on insurance amount to my son, I would also like to pass on my wisdom and selective life experiences to him as well.

If you already have life cover and would like to create your little “experience journal” you can start working on it. If you do not have adequate life cover leave your details here and we will guide with the buying process. In the comments section do share some more ideas that you can implement to do something special for kids along with buying insurance.

Lastly, we are all set to announce about our next workshop which will be held in Bangalore. It will be conducted in the month of July and the registrations will open soon.

This article is written by Nandish Desai

Do you know the hidden truth behind ‘Pre-approved loans’ in India

Posted on by Jagoinvestor

Have you ever received a phone call from your relationship manager telling you that, there is a pre-approved loans especially for you?

A lot of people get excited about this fact, that there is a special offer for them and that the bank is ready with the red carpet waiting top hear a – “Yes, I am interested” from them.

However, what’s happening deep down in these cases is often not known to general public. You as a customer should be fully aware of what goes behind pre-approved loans (It’s also called Instant Approval some-times). You should be aware about the reasoning behind lenders offering these type of loans.

Pre-Approved loan

 

What does “pre-approved” loan means?

Let me not reinvent the wheel here. One of the best explanation of pre-approved loans is given by wikipedia. I am quoting it here. You will understand what it means

In lending, pre-approval has two meanings:

The first is that a lender, via public or proprietary information, feels that a potential borrower is completely credit worthy enough for a certain credit product, and approaches the potential customer with a guarantee that should they want that product, they would be guaranteed to get it.

This rarely happens in the financial services industry, and when it does happen, it is usually loaded with fine print that is not immediately disclosed. Usually, what happens is pre-qualification, instead.

Although, to a typical consumer, “you’re pre-approved” means “you already passed the approval process and therefore are guaranteed to be immediately granted the loan if you apply,” the literal meaning is different. The literal meaning is “at a stage before approval.”

Thus, pre-approved creates no obligation whatsoever on the lender and no rights whatsoever to the potential borrower. “Pre-approved” is thus a popular advertising catch phrase to induce people to apply for a loan.

So, in a nutshell, when a lender says that your loan is pre-approved or you are eligible for instant approval, it means that based on your profile information like your income, your payment history till date, your debit/credits in your bank account, your cibil report status and the score and many other things – they have short-listed you and preferred you over other customers.

Few parameters about you are already known to lender and based on that information, you can now apply for the loan. However its not correct to say that the loan is already approved or any kind of guarantee that you will get it for sure.

These offers just means that the first level check is complete and you have passed that, you will most probably get the loan if you move ahead.

But, you still have to follow all procedures

You still have to follow all the procedures, produce all the documents asked and at the end, the final decision will be taken by the lender if they want to give you the loan or not.

An important point to note is that pre-approved loan comes with a time limit. If you get an offer for the loan and if you accept it, you need to close the deal within few months (generally 6 months). You will be paying a processing fees, if its applicable for the instant approved loan.

Advantages of Pre-approved loans

Note that, I don’t want to show pre-approved loans in a bad light in this article. While there are few things one should be aware about, still there are some benefits of pre-approved loans, which you should know

Benefit #1 – Better Negotiation power in your hands

If you have a pre-approved home loan on your side, then you have a better negotiation power in front of builder, you can show him that your loan is already approved and your chances of buying the house is stronger.

Builders love committed buyers and they might extend the discount of few points to you, if they can sense your position. Also you can talk to your lender about anything which is concerning you about the loan and negotiate it with them.

Benefit #2 – Less processing time

Because the loan is pre-approved. Most of the background checks is already done, your basic details are with the lender. Now its all about producing the documents asked and take it to next level. Hence the overall processing time gets reduced and things happen faster.

Benefit #3 – Possibility of Lower interest rates
Most of the times, a pre-approved loan comes with a lower interest rates. This is because of the reasons like its the bank who wants you to take the loan and they have to offer you something interesting.

And the other reason is that pre-approved loans are offered to those who have a good history of payment or who have a stable cashflow and banks don’t mind lowering interest rates to them because they are not high-risk customers.

Pre-approved loans are a tool for cross-selling and meeting of targets by banks

To understand this whole game of pre-approved loans, you just need to think like a lender. A person who already is a customer is a good candidate for other products too. Let’s take an example.

Imagine a customer who had taken a home loan from a bank, and already 1-2 yrs have passed.

Now if you think carefully, you will realise that a person of that profile, might be needed additional money for home furnishing, might want to upgrade his car, might need some money in between vacations, home renovation or might have emergencies in life and above all, this person earns well enough (because he bought a home loan).

Hence, the lender keeps bombarding with offers like car loan, personal loan and other kind offers. So the point to understand is that, these pre-approved loans are a way of cross-selling their other products to you.

Below you can see a screenshot from my mailbox and will understand what I am talking about.

personal loan pre approved loan

Apart from this fact, another thing is that banks have their internal targets to meet. Each branch of bank is given a monthly or quarterly target to meet and in that pressure, they have to find customers and sell the products.

That’s the reason you will see your relationship officer calling you from time to time to tell you about the “exciting offer” especially offered only to “premium customers” like you.

Role of Psychology in pre-approved Loan

“Supply creates its own demand”

This is the best quote of economics which explains why pre-approved loans work many a times. We live in the world, where are consuming mainly because someone wants us to consume and not because we want to consume it. If you offer something to a big group, chances are, few people from that group will come with all the reasons why they need your product.

Coming to the example of pre-approved loans, if you keep offering the loans to a big mass from time to time, Its highly probable that few of them would take it just because its available.

Consider an example:

Assume, that I have an old car (which I have in reality) and I am thinking to upgrade my car (which, I am not thinking in reality). I have some money in my bank account which can be used for making the down payment. Now at this stage, imagine I get an email or call offering me a car loan saying – “Pre-approved card loan only at 8.99% upto Rs 6 lacs”.

Imagine what will happen….

Even though I was not consciously thinking to upgrade my car, still just because an offer like that is available, I might be tempted to go for it. I will magically come up with all the reasons why I must take the loan, and how I deserve a better car .. blah blah .. The deal will give me an external push and look like a win win deal.

I might not have applied for the car loan myself if the loan offer was not there, because, it was not a lot of pain for me to actually apply for loan and upgrade my car. I will be involved in my life issues and keep postponing my wish.

However, not all examples are like this. A lot of times, people take the loans they don’t need at all. The pre-approved loans make them hungry for something their body does not need. Just because it’s available easily, a lot of people fall for it and get into the never ending cycle of debt a lot of times.

Don’t apply for pre-approved, if you don’t need it

You might be aware that any kind of loan application goes into your CIBIL report. So make sure you apply for the pre-approved loans only if you are really serious about the loan. Don’t just opt for it for the sake of it. Don’t click that “Apply now” button just to check if you are really going to get it.

At the end, I would say do not just discard the pre-approved loan, neither see them with too much of doubt. Look at it as a normal loan offer and do all the checkups and introspect if you really require it or not.

Do you have any experience of getting these kind of offers? Do you fall for them?

13 tax-free incomes in India – every investor should know

Posted on by Jagoinvestor

Paying Income tax is one thing, which most of the people do not like. Everyone tries to minimize their income tax by some or the other means. So today, I will be sharing with you the list of some income’s which are 100% tax-free in India.

Yes, you heard it right. If you earn these income’s, then you do not pay any income tax on them at all. This article is mainly for information purpose because I have seen many investors who are yet not clear on the taxation rules of a few incomes. Here we go:

Tax Free Income

1. Interest on saving bank interest – up to Rs 10,000 a year

From 2013 onwards, a new section 80 TTA is introduced under which, the interest on your saving bank account up to Rs 10,000 is not taxable. So if your saving bank interest for a year is Rs 20,000, then out of that Rs 10,000 is exempted and only the rest Rs 10,000 will be added to your taxable income.

This is a great relief for tax-payers because it was really a big headache to find out the saving bank interest from all the accounts and add them up and pay income tax because, for most of the people, it would be few hundreds or thousands of interest income. Now that is gone!

2. Interest earned in NRE account

Any interest you earn on your NRE (Non-Resident Exempt) account is 100% Tax-free in India. Here we are talking about both, the Fixed Deposit and normal saving bank interest. Both of them are tax-free for NRI. NRE deposits are a great way to earn a decent interest on the savings done by NRI.

Some of our clients even go an extent of taking a loan from the country they are working in like UAE/Singapore because they get it at 2-3% and then reinvest the same in NRE deposits here in India where they earn around 8-9%. Also because there is no tax, hence TDS is also not applicable to the NRE account deposits.

And the best part is that the money in NRE accounts is repatriable which means if you are in the US and you invest some money in India in your NRE account, the principle and interest money can be taken back to the US.

3. The share of Profits paid to partners in the firm

If a partnership firm earns some profit and instead of retaining it within the partnership firm, it has paid to the partners as a share of profits, then it is tax-free in the hands of the partner, because the tax is already paid by the firm on it.

Example – If A and B are partners in a firm. They get 5 lacs each in a year as a share in the profits earned by the firm, then it will be tax-free in their hands. But if they are receiving any salary from the firm, then its taxed in their hands.

I would like to request that as this is related to corporate tax, please consult a qualified CA on this issue.

4. Maturity or Claim amount received by Life Insurance Company

The money you get from life insurance companies on maturity, claim or surrender is 100% tax-free provided, If the premium paid does not exceed 20% of the sum assured. I am quoting new amendments which have come in recent years.

As per amendments introduced in the Finance Act, 2003, (i.e., with effect from April 1, 2003), any proceeds received on account of maturity/surrender of an insurance policy were exempt from tax only if the premium paid did not exceed 20% of the sum assured.

As an example, if the annual premium is Rs 10,000, to qualify for exemption, the minimum sum assured under the policy was required to be Rs 50,000.

If the sum assured was less than the said value, the entire maturity proceeds would be taxable. Such limit of 20% was later reduced to 10% by the Finance Act, 2012, (i.e., with effect from April 1, 2012) to increase the insurance coverage amount, i.e., the sum assured threshold was increased from a minimum of five times of annual premium to 10 times.

For policies taken on the life of a disabled person or person suffering from certain ailments, the limit was relaxed to 15% of the sum assured with effect from April 1, 2013.

5. LTA money received from Employer

Most of the companies pay LTA (Leave Travel Allowance) each year to their employees, which can be utilized for traveling purpose. This LTA is not taxable in hands of the investor provided they provide the proof of travel. So if your company is not paying you any LTA, ask them to restructure your salary and label some part as LTA, because almost everyone spends a minimum amount traveling in a year.

For example, if you are getting a salary of Rs 5 lacs and their is no LTA in your salary component, you can ask your employer to label 20k as LTA and rest 4.8 lacs as other components, this way you will be able to save tax on that 20k part at least.

6. Money got under VRS scheme up to Rs 5 Lacs

If a person takes VRS (Voluntary retirement scheme) then any amount received up to Rs 5 lacs is income tax-free. However, not everyone is eligible for it. Only employees of Public sector companies or an authority established under a Central or State govt is eligible for this.

7. Money received from your EPF account after 5 yrs

The money one gets from their EPF account is also tax-free, provided the money is taken out after 5 yrs of service. A lot of times investors change their jobs in 3-4 yrs and withdraw their EPF money only to realize that they could have timed their withdraw in a better manner and save 30% of their EPF money which went into income tax (assuming they are in 30% tax bracket).

8. Profits from shares or equity mutual funds after a year

When you earn any profits from your shares or equity mutual funds after holding it for minimum 1 yrs, it is called Long-term Capital gains, and it is 100% tax exempted as per current tax rules.

For example, if you invest Rs 1 lac in shares and after 2 yrs its worth is now Rs 2 Lacs. In this case, when you sell your shares, you will not be paying any income tax on this Rs 1 lac profit because of long-term capital gains rules.

However, it’s important to know that exemption is allowed only when Security Transaction Tax (STT) has been paid (which is paid by you when you buy on a recognized stock exchange such as BSE or NSE). But if you do an out of exchange sales, then STT might not get paid and hence in future when you sell shares, you will have to pay tax on profits.

Update : Now after budget 2018, the profits from shares or equity will be taxed at a flat rate of 10% above the threshhold limit of Rs 1,00,000 in a financial year. Before budget 2018, the profits from equity after an year was 100% tax free.

9. Dividends received from your shares or equity mutual funds

You receive dividends from your stocks or equity mutual funds (dividend option). This dividend money you get is also tax-free in your hand. However, the bad side of the story is that company anyways pays the dividend distribution tax to govt before giving the dividends to its shareholders. Hence, anyways we are getting slightly less share of profits in our hand anyway.

Update : Now after budget 2018, the dividends from equity shares or mutual funds will be taxed at a flat rate of 10% above the threshhold limit of Rs 1,00,000 in a financial year. Before budget 2018, the profits from equity after an year was 100% tax free.

10. Any amount received through WILL or Inheritance

There is no inheritance tax in India now. So anything you get in inheritance through WILL is not taxable in your hands. It becomes your property and now when you invest that money, only the interest part earned on that property will be taxed.

11. Agricultural Income –

Agricultural Income is exempted from tax. However, the income from agriculture (if earned more than Rs 5000 a year) has to be taken into consideration for calculating the tax payable.

agricultural income is exempted from tax

12. Gifts received in cash or kind –

If you get anything in cash or in kind for your marriage, that kind of gifts are 100% tax exempt. But if cash received from a relative or a friend exceeds Rs 50000 a year will be taxable. It should not happen that you get some gift after 2 yrs of marriage and you try to justify that it was a gift for your

Example #1 – If one of your friend gifts you Rs 40000 and another one gift you 10000 then there is no need to pay tax because the amount is not exceeding Rs 50,000. Let’s take another example.

Example #2 –  If one of your friend gifts you Rs 40,000 and another one gift you 20,000 then the whole 60,000 shall be taxable and the recipient has to pay tax as per his slab rate

cash as a gift received in marriage is fully exempted from tax

 

13. Scholarships and Cash Awards –

Cash Awards received from central and state government is fully exempted from tax. Any kind of scholarship granted to any deserving student to meet the cost of education is exempted from tax under Section 10(16) of the Income Tax Act of 1961. There is no cap on the maximum limit and the entire sum of money received as a scholarship gets the tax exemption treatment.

Conclusion –

Paying income tax is a moral and legal obligation of every proud citizen of the country. The Indian taxation system is designed in such a way that no unnecessary taxes become a financial burden on the taxpayer. I hope you all are clear about tax-free incomes in India.
Do let us know if we have missed any other important point in this article in the comments section.