Tag: Myths

Dont Declare wrong information while taking Insurance policy

Posted on by Jagoinvestor

An Agent comes to your home or office and tells you about an Insurance plan. It can be a traditional insurance plan or term insurance. Being an agent, he wants to make sure, you do less work. Anyway most  people feel bored or find it tedious to fill out a long form by themselves. After all, the agent is there to do it. It’s an amusing situation, that in today’s generation, we run around all day to different places to buy our TV, Fridge, Washing Machines. We inquire from a million places, read the reviews etc., and make sure you we find out each and every little detail when we buy such products for our home or our convenience, but sadly we don’t care enough to read financial documents or fill them ourselves; documents which will help take care of our little children or family when we are not around; documents that don’t even take few minutes or an hour to look at.

Coming back to the story, this Insurance agent treats the customer as King and customer also feels great about it. The maximum he will do is sign the document (after having a super quick look at the pages, making agent feel that he actually cares about it !)  The customer is a smoker, but agent doesn’t even bother to ask. Even if customer tells him about it, the agent does not put “Smoker” in the form as it might reduce the chances of getting the policy and hence no commission 🙂

Why Mistakes Happen in Life Insurance details ?

Now tax saving is coming for the year (not the protection of family, mind you !), and the customer is ready to raise his hands for questions like “Who all have Insurance?” or “Who is adequately covered through life insurance” ? The agent get his commission and mostly disappears, and customer is happily living his life under a happy impression that he has life insurance; until one day, he dies…

The family is devastated, but time goes on and once things settle down, they go to the insurance company and ask them for the Insurance Money… and Pow! The family gets sucker-punched! . The insurance company happily tells them that the customer was a smoker, but has given false information in the documents at the time of taking the policy hence by law, they are will not honour the claim! They are correct . Read a case between LIC and one customer on claim rejection.

This happens with a lot of insurance customers. They tend to give wrong information in the documents; as giving correct information increases the premium. (This happens a lot with smokers.) What’s so wrong if company asks for a higher premium for smokers? If you are a smoker, definitely from a business standpoint (and even logically) you have higher chances of dying than a non smoker. So, it’s natural to charge you a higher premium. But, if you give wrong information in the documents or try to misrepresent anything, it means company is covering a higher risk person for a a normal premium and they are very correct to reject the claim. Read this article to understand more on giving wrong or incomplete information in insurance documents.

Comment from Insurance Company Official

Sourav Shah, a senior Manager at Aegon Religare, shares some of his thoughts for claim rejection in comments section.

Hi Manish, To give you a detailed explanation of why the plan ‘iTerm’ is cheap.

The simple reason is ‘There are no middlemen – Agent – involved in selling this product.’ Since this product is sold online there are no agents commission involved and hence the company is not paying anything to the Insurance agent and thus passing on the benefit of the low cost to the consumer. We all know that most insurance products have a commission of 30-40% in the first year premium that is paid to the agent. The reason this product is cheaper because there are no agents commission involved. Secondly, Aegon Religare is the only company that has sought IRDA approvals to sell the product online since we are very keen on providing the customers what a product that they need – a simple term plan – at a price that is affordable.

Regarding the claims ratio, Manish, the 3 customers whose claims were rejected were due to wrong declaration at the time of taking the policy. They had declared themselves as non smokers. I would request all customers who are buying a term plan or any insurance product from any Life insurer, to not hide any facts while taking a policy. The insurers build up the cost based on your declaration, so its always advisable to declare truely in order to ensure that all claims are met. And if any customer faces any issue with any isurer he can contact the insurance ombudsman and he will immediatley look into their issues. Happy buying. Manish this is a beautiful and unbiased platform that you have provided for customers to clarify their doubts. Please keep up the gr8 work.

Regards,
Sourav Shah
([email protected])

(Link)

How to correct the false Information ?

In case, you have provided any wrong information in your policy document, it’s almost certain that your claim will be rejected. Don’t try to fool insurance companies. They are smarter than you at figuring it out. So contact your Insurance company and give them factual information . This may lead to increase in premium or rejection of policy, but it’s a better situation than getting rejected at the time when you are in the sky.

Is Gold worth Buying ? A shocking Study

Posted on by Jagoinvestor

To understand this Study, we have to go back to years when human civilization started. Surprised! But yes, lets go back to those times where human civilization just started. Those days, economic activity was bare minimum and there were few trades between humans. For example, if a farmer wanted to build a home, he used to give some quantity of grain to carpenter, plumber etc and that system was called BARTER SYSTEM. So goods itself were basically used as currency.

Economic activity grew and then emerged an alternative currency which was in the forms of coins and we had what is called ASHRAFIYA. We had gold, silver and copper coins which were used as currency and it was Emperor who used to control the currency system. Then economic activity picked up further and since there was a limitation to the amount of gold, silver and copper we had, Paper currency emerged and till date such currency is the main form by which we all trade. Though now-a-days, we are witnessing another form of currency which is called Plastic Card Currency/ Credit Currency which if not used judiciously, can be a disaster. In fact,the entire US came to a halt in 2008 as credit currency was mis-used to unimaginable extent.

Today also, each emperor (so called Government) produces and controls their own currency as DOLLOR, Rupee, Dinar etc. But internationally, gold still remains the purest form of currency as it cannot be manipulated. Now in paper currency world over, Dollar became the most acceptable currency as US economy is still the biggest and almost all countries trade with US. After US dollar, the most acceptable form of currency is GOLD. If you have gold and you are not carrying dollar, you can still buy items in any country of the world but you cannot do so with Indian Rupee. Hence, in economic terms, gold is a currency.

 

 

Gold in relation to Dollar

Gold is a recognized international currency and currently Dollar is the most recognized Paper Currency. Hence gold is valued in terms of Dollar and not in Rupee. Now if we go back in the history, in the year 1976-81, gold had a dream bull run. From $100 per ounce in 1976, it had gone as high as $850 per ounce. That rise took place as people feared that US economy would collapse and $ would have no value. That time, US was in war with Vietnam & then came Iranian Revolution – inflation in US was at very high levels and in a way, there was hyper-inflation.

Once the war was over and inflation eased out, Gold came crashing down. In the year 1990, it was $400 per ounce and in the year 2000, it was close to $250 per ounce. That means the effect of bubble was so big that even in 20 years, the gold could not recover its original price and was languishing at less than 1/3 of its peak price. So please don’t be surprised if you will be able to buy gold again at levels of Rs 10000-12000.

 

Gold Price Chart from 1975 to 2010

Now, Dow Jones was at 10000 in the year 2000 and today also it is at same levels. The US economy is in bad shape and in last 10-12 years, it has not really made any significant progress, rather its debt is so much so high, that there is a fear that US would only have to print further paper currency i.e., dollar either to repay the loan or to keep in the economy going. The moment any government print notes without significant growth in the economic activity, the currency loses its value because of high inflation as same quantity of goods and services are being chased by more money. Anyway, US government is printing billions of dollar just to keep the economy afloat.

 

So, the rise in Gold is happening on the background that the most recognizable international currency is loosing its value. If US economy further goes down and government there keeps printing notes, again gold may rise in dollar terms. Such fear exist, even in 1979-80. We don’t know what lies ahead as we are not astrologers.

Dollar in relation to Rupee

In the year 1980, $1 was equal to Rs.8 and today as we are writing this article, $1 = Rs.46. Dollar has appreciated more than 5½ times in last 30 years. In the year 1991, there was a time, when Indian government was literally bankrupt and they had to devalue INR more than 25% in just a single day, just to repay the debt we had. That was the time, India was liberalized and government opened their economy and allowed foreign companies to do businesses. Since then, India has grown dramatically. The fact of the matter is that in the year 1991, sensex was close to 1000 and today it is at 18000.

As Indian economy keeps rising and US economy keeps doing down or at the max stands where it is, the likelihood is that dollar should depreciate. In the year 2007, dollar had depreciated to as low as Rs.37.

Gold with relation to Rupee

Gold was Rs.1450/- in the year 1980 and today it is Rs.18800/-. The rise of 13 times in last 30 years @ 9% p.a. But 5½ times of such rise is on account for Rupee depreciation in terms of dollar. So if we were to analyse the rise in gold price in relation to rupee alone without taking dollar factor, it is only 2.35 times. You see, even in terms of dollar, gold has risen only 1.5 times in last 30 years.

What can happen in future?

As we have said, we are not astrologers, so we can’t predict future. Though we can give some options that may happen:

  1. If dollar in comparison to INR were to stay at the same level of 45-46, then there is a likelihood that gold may rise further.
  2. If due to the sheer strength of Indian Economy, dollar flows to India by way of FDI, FII etc continues, rupee would strengthen and that would mean that even if gold were to rise in dollar terms, it will still decline in rupee terms. In fact, as it happened from 1980 to 2000 that gold kept going down in dollar terms but since the rupee was depreciating in dollar terms, the gold kept rising in Rupee terms. The reverse can happen now and gold may decline in rupee terms.

Basically, the price of gold depends on currency movements; for example,  in Yen terms (Japan) gold have moved 240% & in Pound terms (Britain) 390% in the same period (Check below Chart).

And you already know about Gold price in Rupee term. So what do you feel – whether India will grow & its currency will appreciate or economy will slow down & our currency will depreciate further? We don’t know what lies ahead, but looking at the history, we are not bullish on gold as much as we are bullish on Indian Equities. As long as world keep rising, gold will not give much return. Here we would like to add a recent quote of  legendary investor Warren Buffet – “We live in a world where 80 years out of 100 will be good. But we don’t know which 20 will be bad.”

We always used to suggest investors that gold is not an investment, it is an insurance which would save you in case the entire financial markets were to tumble down. The live example is that of Zimbabwe where, paper currency has lost its value and if you are holding paper currency, it is depreciating at a rate which is unimaginable. You have to carry crores of Zimbabwe currency just to buy a loaf of bread. Now if you are holding gold, you can actually buy or barter goods there. At least, you can go to neighboring country South Africa and buy what you want as gold is recognized everywhere.

Now, if an average Indian household were to look at their asset allocation, they already hold more gold in the form of jewelry or otherwise than they hold Indian equities. In fact, Indians are the biggest consumer of gold. One must consider gold as part of asset allocation tool and over-boarding on it may not be that a great idea. It may happen that in short run, gold may give better returns but mind you, it is Indian equities that will create a long lasting wealth for investors.

One more important point to note

It is often said that Gold is a Hedge against Inflation. But if you were to look at the graph below, you would find that gold has not kept pace with rising inflation. The blue line shows the actual price of gold and the red line shows the price which gold should have carried in order to match with inflation

In October 2009 when Gold was $ 1072, Bloomberg made this statement “While bulls say gold is cheap, the inflation-adjusted price is 15 percent above its 30-year average, Bloomberg data show.” First time in 100 years gold has touched it’s inflation price – what will happen next?

What they meant is that it is for the first time that gold price is above its inflation-adjusted price which clearly states that gold is over-priced as it is a sheer currency and nothing else.

Research on investor psychology

The following are Google trend charts. It analyzes a portion of Google web searches to compute how many searches have been done for the terms you enter, relative to the total number of searches done on Google over time. This clearly shows that people start searching for investment which have gone higher in recent past. Check 2nd Graph of Mutual funds which peaked in December 2007 when equity markets were also at their peak. No one was searching for Mutual funds in the end of 2008 or start of 2009 when actually it was the best time to invest. Upto 2007 end when it was best time to invest in gold but no one was searching for it but when price went up, the number of searched went up.

Few points that we would like to leave open for discussion:

  • What will happen if Indians were to start selling gold as it is at its highest price
  • Why IMF sold gold when it was at $ 1045 per ounce
  • Today experts are saying – Buy Gold. why did not they said when gold was at Rs.5000
  • Gold has appreciated 13 times in last 30 years and sensex has appreciated 140 times. Still why Indians love gold more than sensex

But the problem is “The markets can stay irrational longer than you can stay solvent…“. So never try to time the markets/assets & keep a proper asset allocation.

 

This is a guest article by Hemant Beniwal & Ashish Modani. They both are CERTIFIED FINANCIAL PLANNERCM & writes at The Financial Literates.

Agents commission in Insurance Policies ?

Posted on by Jagoinvestor

In this article we will see the commission structure of Insurance Policies . We will look at Endowment/Moneyback/ULIP plans and how much commission an agent earns per year out of those policies.

As per Insurance Act, 1938, The insurance companies are allowed to pay a maximum commission of 40 per cent of the first year’s premium, 7.5 per cent of the second year’s premium and 5 per cent from there on. The commission paid is limited to 2 per cent in case of single premium policies. In case of pension plans, the commission is limited to 7.5 per cent of the first year’s premium and 2 per cent there on. Currently most of the policies are very much paying these kind of commissions . Let us quickly look some of the facts on Life Insurance .

  • Average sum assured of the insured Indian is around Rs 90,000
  • 1 trillion worth of policies lapsed in 2008-09 , this is mostly because investors have discarded their old policies to buy new one’s , thanks to agents who tell people about another “hot” plan in market. Another reason is that investors buy policies which have higher premium than what they can afford in reality and later feel that its time to stop it .
  • India Insurance penetration is around 7.5% of global numbers . i.e: 0.16% of the GDP, which is , against a global average of 2.14
  • As per IRDA report 2008-09 , Insurance Industry had 29.37 lakh agents by the end of Mar 2009 , out of which 13 lakh agents were added during 2008-09 .

Life Insurance Commission Example

 

Policy Type Premium Paying Term Upfront Commission (1st Year) Trail Commission (2nd & 3rd yr) Trail Commission (from 4th yr)
Endowment / Term Plans 15+ yrs 25% – 35%  * 7.5% 5%
Endowment / Term Plans 10-14 yrs 20% – 28%  *
 7.5% 5%
Endowment / Term Plans 5-9 yrs 14% 5% 5%
Endowment / Term Plans Single Premium 2% 0% 0%
Money Back 15+ yrs 15% – 21%  *
 10% 5%
ULIPs Regular Premium
 20 – 40% 2% 2%
ULIPs Single premium 2% 0% 0%

 

Note : Some of the numbers are in range, which means the commission can lie between that range . Mostly its minimum commission + Bonus if any

Example

  • Policy Type : Endowment Policy
  • Premium Paying Term : 20 Yrs
  • Premium/Year : Rs 1 Lacs

Agents Commission

Year
 Commission Amount
 Method
1st Year Rs 35,000 1 X 35%
2nd Year Rs 15,000 2 X 7.5%
4-20th Year Rs 85,000 17 X 5%
Total Rs 1.35 Lacs 6.75%

Q: So are you imaging which is more costly ? Mutual funds or Insurance Policies ?

Read subramoney’s article on this topic.

How to use this information ?

Agents have to make sure that they follow-up with clients and track the premium payment, this leads to overheads and regular feedback from agents side , apart from that there are operational expenses incurred by agents , so we should not forget those points . As a customer , you should be knowing how much an agent is making out of you , this should form the basis of the quality service for you . An agent should help you understand your Insurance requirement and provide you the best solution , He should assist you in buying the Policy and over the years he should update you/ help you with all the changes .

Hot discussion topic

As per a govt-appointed committee , Insurance commissions should totally be removed by 2011 . “Immediately the upfront commissions embedded in the premium paid (to agents by insurance companies) be cut to no more than 15 per cent of the premium. This should fall to 7 per cent in 2010 and become nil by April 2011”, said the consultation paper prepared by Committee on Investor Awareness and Protection. (Link) .

What do you feel about removing the commissions from Insurance products totally ? Will it impact the Insurance Industry , how much ? Do you think it will lead to fall in premium payments or new policy getting issued ? I personally feel YES . What are your views ?

How do Highest NAV Guarantee Plans work ?

Posted on by Jagoinvestor

Now a days, we are seeing a new “Innovative” product in the market. They’re called Highest NAV Guaranteed Plans .These products have come in, after the recent crash in the market, and companies are taking advantage of the fact that Investors are looking for some kind of a safe investment equity product. Hence, they’ve launched these Highest NAV Return ULIP’s which confuse investors and make them (the investors :)), believe that they are going to get the highest return from the Stock market in long run – generally the tenure is 7 yrs, for these plans .

In this article, we look at how Highest NAV Guarantee ULIP’s work, and you will understand, how any Guarantee product can be created by simple methods . The simple catch, here is that these schemes, are structured in such a manner, that the collected funds can be invested either in equities, debt instruments or in money-market instruments in proportions varying from zero to 100%

How Highest NAV Guarantee Policy Works ?

These plans use strategies like Dynamic Hedging and CPPI (Constant proportion portfolio insurance), which are advanced strategies used in Derivatives world. But, let me explain a simplified version of the whole process.

Supposing a policy starts today and is guaranteed to give highest NAV in next 7 yrs  and we can control how money moves to debt and equity, its pretty simple.

In the beginning, let’s assume a NAV of Rs 10, and the Asset allocation is 100% in equity and 0% in debt . Now suppose, the market moves up and NAV goes upto Rs 15 by the end of the first year, at this point, try to understand what Insurance company has to provide – they have to make sure, that they provide at least Rs 15 as the return after 6 yrs . Now in order to achieve this, all they have to do is keep X amount in debt instruments which will mature in next 6 years and provide Rs 15 at the end of 6 yrs, so assuming the debt return at 7%, they need to put around Rs 10 in Bonds , so that the maturity of the bond is Rs 15 at the end of 6 yrs .

=>  10 * (1.07)^6
=>  15.007

They can now invest the rest Rs 5 in Equity as Rs 10 is allocated to Debt . So, now they’ve made sure that whatever happens to the market, they get Rs 15 for sure at the end of 6 yrs. Now, there are two possibilities

Case 1 : Market Goes down : If market goes down, the NAV will go down correspondingly, but as per the strategy, the maturity value will be at least Rs 15.

Case 2 : Market Goes up again : If market goes up at this point and the NAV rises above 15, for example say to Rs. 18, now again they will pull out money from Equity and allocate such an amount to debt, that the maturity at the end of total 7 yrs would be Rs 18 and so on…

Note :

  • These highest guaranteed schemes do not provide wide range of product categories, such as equity-oriented growth funds, balance funds and debt funds.
  • Guarantee on highest NAV is available only if you survive the term. If you die during the term, your nominees will get the prevailing value of the fund. This is inferior to even a regular debt product because of the high cost structure involved.

Following is a pictorial description of how the Guaranteed NAV plan works with assumption of a 7 year tenure.

How does a Highest NAV guarantee plan works

How Investors get Confused

You have to read in between the lines; Investors need to understand that these schemes guarantee the “Highest NAV”,  READ AGAIN! , it’s Highest NAV and not “Highest Returns” .  Normal Investors don’t give much thought before buying these products and normally assume that the returns will be linked to the Equity Markets .

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Returns from Highest NAV Guarantee Plans

So, what are the return expectations of these funds? We know, that long-term equity returns, are normally in the 12-15% range while, debt returns turn out to be 6-7%. So, considering the fact, that these products will shift most of their money to debt, by the end of the tenure , we can expect the returns to be in range of 9-10%. We do get some equity upside in these products, but that will be limited. After a point, this product will turn into a debt oriented fund with a major portion in debt . Also if you factor in costs, like premium allocation charges , fund management charges and other yearly charges, the returns will not be what you actually expect.

You will be amazed to know, that the returns expected from these schemes, may be lower than the returns offered by equity-oriented Ulips. The reason being, that the basic objective of protecting the previous high NAV of the fund, may constrain the fund manager’s ability to take risks while allocating funds. So if the market has fallen down, the fund manager can’t take the risk of shifting the money from Debt to Equity to gain from the potential upsides in future , because they have to provide the “Guarantee.”

Read : Important Questions you should Ask an ULIP Agent ?

Source :  LiveMint Research

Current Products in Market with Highest NAV Guarantee

  • ICICI’s Pinnacle
  • Birla Sun Life Platinum Plus-III
  • Bajaj Allianz Max Gain
  • SBI Life Smart Ulip
  • Tata AIG Apex Invest Assure
  • LIC Wealth Plus
  • Reliance Highest NAV Guarantee Plan.
  • AEGON Religare Wealth Protect Plan

Controlling your emotions with these products

Let’s talk about mistakes from the investors point of view. We, as investors, don’t think with inquisitive, susceptive minds. Getting good returns from stock markets is anyways a tough thing in itself. So when these companies come up with plans like these, which say “highest NAV in 7 yrs”, we have to ask, “How is this possible?” . Dont say it’s not possible at all, just ask how? How do they achieve it? Stop seeing dreams of getting high returns without looking at the risk involved, and try to find out – what is the strategy they’re using , Is there something in between the lines ?

We all want to get great returns, but we have to shed this belief that, companies come up with plans specially for us. All the companies out there exist to earn money, and their motive behind every product is to make money, & generate profits for their companies, so that they keep their shareholders happy. So next time a product like this comes up , you have to control your emotions before getting in and first investigate. The worst part of this whole business, (of guaranteed highest NAV products) is the timing and how it gives naive investors, high illusions about the product. Products like these, take major advantage of psychology of the ordinary saver. Many Investors in smaller towns have broken their Fixed Deposits and taken some loan to invest in products like these, especially SBI Life Smart Ulip and LIC Wealth Plus because of the trust factor with LIC and SBI . See How Agents are Misselling LIC Wealth Plus

Why you should be “Pissed off” At these Insurance Companies

  • Do you Know that, The Securities & Exchange Board of India (SEBI) , the stock market and mutual fund regulator, does not allow mutual funds to guarantee returns. Therefore Mutual funds can not provide guaranteed products which are related to stock markets, but IRDA can approve things like these and all these insurance companies come under the ambit of Insurance Regulatory and Development Authority of India (IRDA). So any Insurance Company can come up with a new Plan , link it with market and start providing “Guaranteed products” . You have to understand that “equity markets” and “guarantees” are a very risky idea together , so please stay away.
  • Do you observe when do all these “Innovative” products come up in Market ? The answer is around end of the year, which is a premier Tax Investment time (Jan , Feb , Mar) . Is innovation in Finance space limited to End of the year ? Why dont these products come through out the year? Why ? The answer is simple , if it comes after anytime other than last 4-5 months of the Financial Year (ie Dec , Jan , Feb , Mar) , no body will bother to invest in these, because no body is bothered to “invest” at all . Companies very well understand investors psychology and their helpless ness at the end of the year because they have to provide investment proofs for Tax exemption as soon as possible . This is not just limited to these products , its true for NFO’s , IPO’s in booming markets , More Sales calls at the end of the year, and other new products .
  • The so-called “Guarantee” is a marketing gimmick and is implicitly a result of the way the investment is structured . what it means is that the strategy they use itself is such that it will provide you the highest NAV , even we can create our own Plan and do what they are doing . But they make sure that Investors  feel like they have done years of research and came up with these amazing plans .
  • You have to understand that there is nothing “Innovative” in this product , the fact that 7 companies have come up with the same product proves that its not “innovation” because Innovation is unique . Aegon Religare has gone ahead in this stupidity and introduced their Guaranteed Plan which guaranteed 80% of the Highest NAV , Looks like they think that it makes them look different from others .

Who should Invest in These Products ?

If you are looking for modest returns, like 8-10%, you can invest in these policies. The return of these policies may be high in the beginning, if market does well; but when market starts performing badly, the returns can take a hit and then be in a tight range. Your NAV will be protected for sure, but the returns wont be, since over time the CAGR return will go down. Remember, if your NAV is 10 today and you highest NAV is 20, for a 2 year period, the return is a good enough 41%, but by the 4th year it’s just 18.9% and by the end of 7th year it’s a measly 10.4%. So what you really need, is protection of returns, not the NAV which is just a fixed number.

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Do not Invest just for Tax Saving

Posted on by Jagoinvestor

“Tax saving should be result of your Investment planning and not vice versa” . Understand this very well . For most of the people, saving tax is such a big thing , that they forget the primary rule of Financial Planning and concentrate all their energy into Tax Saving .

I see most of the people are trapped in idiotic products because of their obsession with Tax Saving . Most of the people today are invested in products which does not suit them, which they dont need, Which they do not understand .

All because of their idiotic decision of “Investing for Tax Saving !!”  .

tax saving joke

 

For some people the Products they buy for Tax savings are like This Pond , They are not sure what they will get from buying it , but they are happy about the fact that they are saving some money in Tax . Which is idiotic .

Typical Scenario

Most of the people dont do their Tax Planning in the start of the year . They just neglect The Tax Planning part. Somewhere at the end of the Year around Feb, They recieve a letter from their company that they need to submit their Documents for Tax savings so that they can avail the benefit of 80C and other Tax saving benefits like HRA , LTA ,  Medical Reimbursements , etc .

Even then they dont budge and most of the people wait till the deadline date to come very near .

Then finally comes the deadline date and now “Giving The proofs of Investment” is much more important than “Making Sensible Financial Decisions” . Its too late to Plan for things . ULIP agents , Insurance agents and Mutual funds agents are ready to take the charge and they will brain wash you with all their nice words , They themselves dont understand the product a lot of times .

You have no choice but to invest so that you save tax now . You cant even imagine a scenario where you dont invest your money and pay the tax . It feels like the most idiotic Decision ever . Which I feel can be a good decision sometimes .

Top Reasons for Investing

Below is a small diagram which tries to show how what are the biggest reasons people invest their money . Please Note that this is based on my understand and experience with so many investors over the years . And this is what I feel depicts the scenario closest to actual .
Investing Pattern for Tax Saving in India

Problems arising Due to This

  1. The worst Sufferers are those who invest in LIC and other companies Endowment Polices and Money Back Polices  for the primary reason of Tax Savings. These people do not think that even though they are saving tax for this particular year , they are actually getting into commitment for next 15-20 yrs (or Policy Tenure) and Have no Idea how its going to meet their Future Goals . Read a Review on LIC Jeevan Tarang Policy .
  2. Similar problem is with people who take ULIP’s . They Invest for a year to save tax and then next year they have no idea if they would be able to even afford it or not !! . This happens with mostly new joinees in Companies .They have no idea what to ask their ULIP agent at the time of Buying the product .
  3. Next is “Liquidity Problem” . Most of the people do not think about the lock in period and do not take into consideration their Liquidity Requirement for coming Years . They Invest in ELSS and then next year they need money . They Invest in Tax Saving FD’s and then cry for any Expenses which were very obvious to arise down the line .

What we must Learn

Tax Saving is just a benefit provided when you Invest your Money, dont make it as a Primary objective to Invest. What you have to concentrate on is your Investment Planning , and after you have to restructure your Investment planning in such a way so that you also get Tax Benefits from them.

Investment Planning First and Tax planning second .If you are not able to save tax , its fine , Pay taxes . Its always better to avoid getting into messy products which dont suit you and suck your blood out . Tax Planning is Important, But the more Important things is that you don’t get to obsessive about it and do it only if its needed.

Its not a big deal to save tax at the cost of your Finances future . See an article on Gfactor , a decision making tool for Financial Products

I can relate this with “Not using Protection during Sex” and then suffering for a long time because of that small mistake .  This is exactly True with all people who dont not need Crappy Insurance and then one single mistake, Investing in it for Tax saving and then every year , Suffer with it, Paying a huge premium for the Small Insurance not sufficient for you and for the Maturity Amount which is not at all exciting .

Make sure that you invest in some product only if matches these 4 criteria .

So are you one of them who tax Tax saving with High Priority ? Have you invested for Tax saving as primary reasons ? Share with us . We can talk about it and make sure that it does not happen again . Post your Views on this ..

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How much Insurance Cover is Enough ?

Posted on by Jagoinvestor

A reader asks me “How much Insurance is Enough ? Is 1 crore Enough ? ” . Now this is an extremely important and very easy to answer . How do you think about it is very very easy .

There are two models of answering this , One is to sum up everything as per your situation and then come up with a Figure and the other one which I recently thought about is a reverse answering yourself (yes !! , yourself) on how it will take care of your dependents after you are gone .

How Much Insurance Is Enough

Are you Wondering How much Insurance you should take ?

Many people I interact with come up with Weird Figures for their Insurance Cover , Without any calculations they will cough up numbers like 5 lacs , 20 lacs , 50 lacs , 80 lacs or 1 crore (Come on .. this is not a game called “Even Figure , Even Figure” , Its not a Game !! ).

I ask them a very Simple thing, I ask them to explain me, literally explain me in writing, How the money your Dependents are going to receive will be utilized and How it will take care of things once they are not there.

Not even one of them succeeds in allocating that money for different goals which are pending after they are gone and be satisfied with it.

There are numerous things to be taken care of after the earning person is gone, like –

  • Providing Regular Income to your Family (like you would have done if you were Alive)
  • Making sure all the Debt is Paid off (Which you were going to clear off If you were there, Things like Home Loan, Car Loan, Any other loan)
  • Making Sure that your Children Future Expenses like Education and Marriage are taken care of (Some money might be required to be Invested for these goals which will haunt you later in life)
  • Enough Money for Emergencies which could Arise and Literally Destroy your Family Happiness like Unexpected Accidents, Some Critical Illness etc

Seriously !! .. This is Common Sense .

Read an article on Process of Calculating you Insurance Cover

Insurance Cover as 10 times of Yearly Income is not a good Idea

Now most of the Insurance agents definition of Insurance cover is “10-15 times of your yearly Income”. I ask Why?

Ajay Earns 8 lacs, Just one dependent, Has some good asset corpus, Should he just buy 10-15 times of Insurance cover … No !!

Robert Earns 4 Lacs , Has a home loan (Read how to find the cheapest Home Loan), 4 Children and a personal Wife along with Old Parents, High Expenses, No other Earning or “Capable of Earning” Member in Family. Should he buy 10-15 times of Insurance only? NO !! .

The Model just gives a rough Idea on what can be your Requirement but most of the times it does not work, have the guts and logical mindset to Deny what People in personal Finance space tell you , they are not GOD, they lack common sense sometimes (Read “most of the times”)

Calculating Insurance is not a very tough process, Its just Logical and step by step process.

An Example

Robert tells me that he earns 4 lacs a year and he thinks that 50 lacs is enough for Insurance cover. Some one told him that 10-15 times of his yearly Income is what he should be Covered for.

Conversation goes like this

Me : So you believe that 50 lacs is a good amount for you to be Covered. Fine !!, You are dead and tell me what happens Next !! .
Robert : hmm .. ok , See , my Family expenses is around 20k per month If I am not there , So that is one thing which should continue , so I will put 30 Lacs in some Instrument Like some Best Fixed Deposit (FD) or MIP and it will pay 20k per month to my family , I think 30 Lacs would go for that . 30 lacs getting 8% interest will be 2.4 lacs and that means 20k per month .
___

Me : OK , Not the best way of doing it , but looks workable and safe .. Go ahead
Robert : Another 20 Lacs will be enough for other Important things 🙂
___

Me : No .. Get Deeper !! , Dig out things and tell me exactly How !!
Robert : OK , I have 3 children .. I think a Good Education today can be taken care by 20 lacs for all of them .
___

Me : Talk About Future , Its 12 yrs away , They are kids now .. Today 20 lacs is good , but what about 12 yrs from now ? Do you know that Education costs are increasing by 10% per year now a days . You require 60 lacs after 12 yrs For Higher Education of your Children . Understand Inflation .
Robert (quiet) : Hmm.. That’s something I didn’t think about . So I will need 60 lacs , I need 40 lacs more of cover .

___ Read Top 10 Financial Planning Doubts

Me : Actually No !! , All you need is to get 20 lacs only , because you will actually Invest it , You need 60 lacs at the time of their Education , not now . So you Invest that money in such a way that you get around 10% return and you will have enough savings for your Child Education , Make sure you dont take more than required risk for this .

Robert : ok , Got it . So the 50 lacs exhausted . I am not sure what are the other things which needs to be taken care of ?
___

Me : DO you have some liabilities, Like Loans?
Robert : I had a Car loan, but only 6 lacs is remaining. Should I take care of that also?
___

Me : I don’t mind if you don’t think about it , just tell me how is that going to taken care of if you I kill you just now !! If Its paid from 20 lacs , then somewhere your Child Education is compromised . (This Idiot Doesn’t have a Home yet and He is riding a Honda , and smartie earns 4 lacs a year)
Robert (Dying to kick me) : OK OK . Add another 6 lacs , now its 56 lacs .

__

Me : Good 🙂 . Was there anything you wanted to provide your Family if you were there with them.
Robert : (after a lot of thinking and trying to hide his guilt now) Well Actually We dont have a Home yet. I am planning to buy a Home soon, may be around 30 lacs. [doesn’t fits his Budget, but smartie recently bought A Home Theatre (Doesn’t Have a home yet), This is what I call “Not understanding Difference Between Needs and Wants” ]

__

Me : So definitely you want to make sure that they have a Home once you are not there , the same way you were going to buy one , or you want to live on rent on life because you are not there to enjoy the “Sweet Home”.
Robert : So that adds up 30 lacs more and the requirement is around 56 + 30 = 86 Lacs .

__

Me : I am happy to say “YES” 🙂 . you made my day …
Robert : So that’s it .. I need 36 lacs More .

__

Me : So your Parents are Old , correct ? And you people have spacial blessings from god that your Family can never have accidents or your family will never get into Emergencies ? Right !!
Robert : Well .. That can Happen , But lets skip it . It has never happened and I don’t think it would happen with my Family .
__

Me : No !! I refuse to accept it .. You have taken care of other things, All your 86 lacs is going to help them in some or the other way. Now tell me how will your Family will Handle with emergency situations which might demand 10 lacs of Expenses. I know you cant calculate exactly how much they might require. It can be 5, 10 or 20 lacs, but lets take a good figure of 10 lacs and better prepare for something if not anything .
Robert : OK, Lets add 10 lacs more for anything unexpected or Emergency expenses which we have not taken care of .. Its 96 lacs now ..

__

Me : OK, this is a better situation !! I would not say that this is the best Insurance Planning, but you have done a good planning and this is a much better situation than earlier. This is what a common person can do for himself and this should work.
Robert : Yup .. I accept .. I understood it now ..

__

Me : So Robert , Make sure you understand that Insurance is something which you need to take for your Family and it should be enough to make their life comfortable once you are gone, this extra 46 lacs of cover will cost you not more than 20k per year (10k for people around 28-29 yrs). If you are planning why not plan systematically and 100% , why mess it up.
Robert : Yup, Actually my Uncle told me that I should take around 10-12 times of my Yearly Income as my Insurance Cover, so I came with figure of 50 lacs

__

Me : F^&%#!^#(@^……….F#*(^$(*@^*$^@*(…….F*&#^&^$*#^$
Robert : Yes, you are right !! I understand it now.

Note : the assumption is that there are no assets, If there are Assets, then you need to deduct it from your Insurance cover.

Learning from This

So if you think you should have Rs X amount of Cover, Just ask yourself how is that amount going to take care of everything after you are gone and you will be surprised to know how wrong you were . This is specially for people who have those Endowment Policies stinking in their portfolio.

I ask them openly if they want to share with us How is that helping their Families if they are not there. Some Important learning are.

  • Covering your Dependents is P1 (software guys will understand this), P1 means some thing with Highest Priority, something for which you should stop all other tasks and make sure you fix that.
  • It does not cost a bomb if you fix this, Term Insurance is Cheap

That’s all ..

@Ganesh has a very good comment which completes the post with his awesome thoughts . please go through it ..

I don’t think any part of the example is incorrect or unnecessary. In fact, a thought process like this can open up someone’s mind completely, and arrive at a well adjudged decision on his/ her insurance needs. Kudos to you.

But having said that, drawing a line between one’s insurance needs and his means to cover premium expenses is critical as well.

Let us take Robert’s example. He has a salary of 4 lacks per Annam (33.5K per month). Expenses include 20K per month living expenses (excluding his own) and roughly 13.5K per month EMI (for 6 lakhs, at 12%, for 10 years) among many other.

So he is living way beyond his means already. How will he ever pay premiums for insurance? Beats me 🙂

But it is just an example, right? Characters like Robert, though rare, do exist. Before he starts with high insurance cover, he should start building assets or save/ invest for building assets.

So in my opinion, Robert should cover living expenses, loan liabilities and sufficient contingency to begin with and slowly increase his cover based on how his earning/ saving potential progress. It is unfortunate that he is in this position already, but that’s the truth.

So providing exclusive cover for children’s education and future home, though very important, is beyond what he can afford at present. (By the way, LIC’s Anmol Jeevan – a term plan – for a cover of 96 lakhs and 25 year term would cost 36.5K per Annam or around 3K per month)

Here is another view point (bit radical) on being heavily insured. The amount at stake is 96 lakhs in case of Robert’s death. It’s a scary thought, but in today’s world it might just be enough for greedy, evil minds to devise devilish ways to stake claim for the bumper jackpot (given his current earning potential).

To put it simple, the insurance amount should be sufficient enough for Robert to say “I care about you” to his dependents and not so much to hear “Hell with you” from them!

Comments are Welcome, If you read this and feel like you learnt some thing useful, you are obligated to put your Comments here ..

What are Income Clubbing Provisions and Tax Implications?

Posted on by Jagoinvestor

I have invested some money in Fixed Deposit in the name of my wife as she is not earning any income. Will she have to pay tax on this?

This is an innocent questions because of inadequate knowledge of Tax Provisions on Clubbing of Income and how it attracts tax liabilities. Let us see some Must know tax rules for Clubbing of Income.

Income Clubbing Provisions and Tax Implications

Top rules of Clubbing of Income

  • Income of a minor child is added to husband or Wife’s Income depending on whose total income is greater. So if Child earns Rs. 1 Lacs and Wife is earning 5 lacs and Husband is earning 4 lacs, then the income of Child will be added to Wife’s Income and it will be 6 lacs of income for Wife and it will be taxed accordingly. Do you think you can live with 90% of your Salary?
  • If you invest money in your Minor Child’s or Spouse’s name then all the income earned from that investment will be clubbed into your own income. The main thing to note here is whoever is the original owner of money will be taxed on the income.

Exception: Income of a minor child shall not be clubbed and is taxable if the child is suffering from a disability (under Section 80U) such as physical disability, complete blindness or if he earns the income through manual work or any activity involving application of his skills or talent or if both his parents are not alive.

  • The compounded income is not subject to clubbing. Which means that the income arising from the income which is clubbed is not clubbed. So, if Ajay invests 30 Lacs in an FD in his Wife’s Name, suppose the Interest on this FD comes earns Rs. 2.4 Lacs and the interest from this FD will be included in Ajay’s income, but any income which comes from this interest of 2.4 lacs will be considered as his Wife’s income and not Ajay’s income and hence will not be clubbed back to Ajay’s income. So if his Wife uses this Rs. 2.4 lacs and makes an income of 1 lacs from it, then this 1 Lac will not be considered in Ajay’s income. Do you know How to find the Best Fixed deposit?

Some Tips Use can use to save Tax

#1: For High Net Worth Individuals

If you are a High Net worth Individual and your Spouse does not Work, you can make the investment on his/her name. So that the income which comes from the income arisen from that investment is at least not taxed.

Example : If Robert invests 50 Lacs in Stocks and Earns 20 Lacs, It will be considered as His income and Taxed and now if he invests this 20 Lacs in FD, all the Interest he gets is also taxed.

But If he Invests this 50 lacs on his Wife name, the 20 Lacs income generated will be taxed as his income, but then when that 20 lacs is invested in FD, all the interest coming from that will be treated as Wife income and If Wife is not doing anything, Her Total income will just be this interest, around 1.6 Lacs considering 8% interest and hence It will not be taxable at all as its below the limits.

#2 Invest on your would-be-Wife or Son’s-Would-be-Wife name

Tax Clubbing rules do not apply when you invest money on some one’s name before Marriage (only your would-be and Son-would-be, not your-friends-would-be). So Any income earned from that investment will not be clubbed within your Income.

Example : If Manish is going to be married (thanks you guys) and He wants to invest 20 Lacs in an FD . He can do a simple tax trick, He can invest this money on his would-be-wife name.

Now by doing so, all the interest coming from this FD will be considered as his wife Income and if her total income comes under minimum limit, She will not pay any tax on this. Where as If he invest this 20 Lacs on his own name or in his wife name after marriage, The interest will be taxed.

#3 Make sure the Investment on your Child Matures after their 18th Birthday

Clubbing Rules applies only for Minor Child’s, It’s not applicable for Children above 18th. So make sure your Investments on Child Name mature after they are 18th so that any income which arise from it is not your income. Read why you should open a PPF account even if you don’t need it.

Example : So if you have a child aged 12 and you are planning to buy a Bond for 5 yr on this name, It will mature when child is 17 and hence will be taxed in your hand, better extend the Tenure by 1 yr and make it to 6 yr or 6.5 yr, so that The income arised from it is Child income and not taxed in your Hands.

#4 Give a Loan to your Spouse or Child, not a Gift

Clubbing Rules does not apply for genuine Loans Given to your Spouse or Child. So instead of just Gifting some money or Doing investment on their name, give Loan to them which they can use to invest them self. All the income from those investments will not be clubbed in your income.

Make sure that you have a documentary proof of Loan, A simple letter of Loan with Signatures of both the party will be enough as Documentary Proof, no need to run for Lawyers for these.

#5 Create a HUF for Family investments and Family Properties

If you have a Joint or Big enough Family, Its better to Create a HUF, so that then all the investment which are for whole family and all the assets which belong to whole Family are on HUF name, in that case HUF will enjoy all the Deductions and exemptions just like an Individual.

I don’t have much idea about HUF more than this .. so please control yourself before shooting detailed questions on HUF 🙂

Conclusion

Knowing Clubbing of Income rules can help you in saving your Tax in different ways and Without the knowledge you may also loose many times. So better use these Tax rules to make best use of your situation.

Note: There are many exceptions and details in Clubbing Rules which are not covered here. These are just high level rules and not detailed rules. So please handle with Care.

Key to Excellent Financial Planning is Early Investing

Posted on by Jagoinvestor

Today’s article is my favorite, Today we will see that what is the biggest secret of Generating Long term Wealth.

Most of the people run after choosing great Mutual fund and choosing right policy, but they do not understand the most important element of Investment Planning, which is Early Investing.

In this article we will discuss how important is Early Investing, We will see that what you contribute early in your Life is what matters the most.

early investing

I did some Excel calculations and found out some important Rules you should remember. All the Examples in this articles assumes 12% or 15% CAGR annual return over long term (30+ yrs). Lets see some Important Ideas you should keep in Mind.

If you are reading this article in Email, you wont see important charts and graphs, make sure you visit the blog for this particular post. thanks

The amount you invest does not increase drastically when you cut your Tenure by huge Margin.

What I mean to say here is that if you have a goal of generating a fixed amount at the end of a long period like 30 yrs and If there are two cases

  • Case 1 : You invest amount A per month for 10 yrs and then let it grow for next 20 yrs .
  • Case 2 : You invest amount B per month for all 30 years .

In this case amount A will be too big compared to amount B. It would definitely be more, not by great extent. Lets take an example. If you want to generate a corpus of 2 crores in 30 yrs and you assume a return of 12% annually.

You need to invest Rs.5666 per month to achieve this target if you can invest for whole 30 yrs. But what if you want to invest only for 20 yrs or 15 yrs? In that case how much money you need to invest per month?

The answer is Rs.6065 (20 yrs) and Rs.6611 (15 yrs). So you can see that the monthly contribution required to meet the same goal does not increase drastically even if you reduce the tenure by 10 or 15 yrs. See the chart below (Click to Enlarge)

The Tenure and amount required are :

30 yrs : 5666
25 yrs : 5801
20 yrs : 6065
15 yrs : 6611
10 yrs : 7903

In the above chart you can see how “Monthly Contribution Required” increase at very small amount if you want to save the investing years later in your Life . Download this Monthly Contribution Calculator to calculate how much you need to invest monthly for your Financial Goals.

Even if you cut your Contribution at the end of the Tenure, It wont affect the final Corpus Drastically.

What this means is that If you want to invest for long term and in case you are not able to invest for many years at the end, the final amount generated will not be drastically less .. The difference will not be worth a concern.

Lets see an example, If you want to invest Rs.4000 per month for next 30 yrs (retirement amount, see 6 steps of Retirement Planning) and you assume 15% annual CAGR return, you would be able to generate a corpus would be 2.8 crores, But in case you just invest for 20 yrs and don’t invest for rest 10 yrs, in that case your corpus will still be 2.69 crores, 96% of the original amount.

If you invest for 10 yrs and don’t do anything for 20 yrs, still you will be left with 2.19 crores. You can see that how your corpus is not getting affected a lot because of laziness in investing.

If you are successful in early investing, your 90% job is done, even if you are not able to invest money in later years, your final amount will not be affected a lot.

See the chart Below (Click to Enlarge). See this Video to understand the CAGR or Annuity Calculation, Or see this Article if you are on Slow Bandwidth.


If you see the chart above, you can clearly see that in the first 15 yrs, the total corpus at the end does not decrease with great rate. Its more than 2 crores even if you miss 22 yrs (thats more than 70% of total tenure).

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Investments Done in Initial years are the main chunk of your Final Corpus

What this means is that what you in the start has major chunk in your final corpus , the money you invest at the end generally has no major contribution because the money compounding has done its work on the money you invested in the start , not end .

See the chart below . .

The time frame of this example is 30 yrs investment with assumption of 12% annual CAGR return. You can see two kind of lines here. Blue Line shows contribution of a particular year in the final corpus and Red line shows cumulative share of years till then in the final corpus.

If you see the chart and concentrate on 6th yr, you will realize that what ever you invested till 6th yrs contributes to 52% share of your Final corpus which means that if you stop at 6th year, you will still be able to make 52% of original amount.


You can also see that last 12 yrs contribution helps in 10% of final corpus, this we saw in the first chart itself.

So at the end, lets see some numerical facts which will help us understand power of early investing.

  • “Investing 1500 per month for 10 yrs and letting it grow for next 20 yrs” will generate more than “Investing 1000 per month for 30 yrs” @12% return.
  • “If your Original time frame was 30 yrs and later you want to cut your Tenure by 50% , you corpus will decrease just by 14%” @12% return .
  • A : “Investing 5000 per month for 30 yrs” B : “Investing 6,000 per month for 15 yrs and do nothing for next 15 yrs” C : “Investing 11,000 per month for just 5 yrs and do nothing for next 25 yrs” Here, C will make 1.95 crores.

If you are a young person below 25 and you have 35 yrs in your hand and want to make 5 crores, If you start right now, you will have to invest just Rs.3,400 per month, But if you are later by 10 yrs, then you will have to invest more than 15,000 per month to achieve same target.

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Conclusion

Start Early, The secret of Sound Financial Planning is Early Investing, not making excellent return or choosing great funds or buying multibagger stocks. If you can take little pain and invest more money now, then better do it, It will save you from lot of trouble later.

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Please put your comment and let me know how was the article and if you liked it? What do you think that early investing is not the most important element of Investment planning, if not, what other thing do you think is the Key 🙂

Why people don’t buy Term Insurance?- Analysis of a case study on Indian people’s mindset

Posted on by Jagoinvestor

“We have no desire to make anybody look like a blithering idiot, but we do love it when they do. “– Stephen Colbert. One of the reasons why most people do not take Term Insurance is because “They don’t get anything back at the end”.

In this article, I will show you why this is a psychological issue. Even if you get your money back at the end of the tenure it won’t make much difference. In this article I will prove that the argument “Term Insurance is waste of money because you don’t get anything back” is amazingly idiotic.

term insurance

What is the main Issue with People not liking Term Insurance

Why people don’t like Term Insurance is the question. The answer is simple: because you don’t get anything if you survive the whole tenure and hence the amount paid as premium is wasted – this is claimed by millions. Fair enough!

The first thing is, these people do not understand or appreciate the Importance of Life Insurance. Now let’s see this situation from a different angle. Assume you get the money at the end in your Term Insurance.

Let’s see a case study of a general Family. How does a family look like:

Manish is 28 yrs old and got recently married (oops!!). He earns close to 40,000 per month. His monthly expenses are around Rs.25,000 overall and he saves 15,000 per month (hehe). He also has his parents as financially dependent on him.

He is 30 yrs away from his retirement. He calculated his Insurance Requirement and it was close to 50-60 lacs minimum. Let’s take it as 50 lacs for simplicity for now. (Get more of Insurance Articles from Archives section.)

Analysis of Case Study

Now is the fun part: his current monthly Expenses are close to 25k. Now what will it be when he retires after 30 yrs?

So the average inflation for last 30 yrs was 6.5% (based on past data). Let’s assume it will be 6.5% for next 30 yrs on an average. Then the monthly expenses after 30 yrs would be 25,000 X (1.065)^30 = 1,65,359 (1.65 lacs). If he takes a Term Insurance at the start, his yearly premium per year for 50 lacs cover would be Rs.11802 for 30 yrs tenure from Aegon Religare.

Do you know how you can do your Retirement Planning in 6 steps ?

Click on image to Enlarge

Which means, he is going to pay total premium of 3.54 lacs in his entire life. How even if he gets this money back at the end, how much will it benefit him? How many months can he survive on this money? 2 months is the answer!!

With expenses of 1.65 lacs per month, the money he gets back from term insurance is enough for not more than 2 months. Let’s take maximum 3 months. That’s it!!! Are you confused with Calculations, See this Video presentation by me where I explain how to do important Calculations in Personal Finance.

So Following are the questions needed to be asked

  • Do you want to put your Family at Financial Risk because you are not getting 2 months’ worth of expenses back?
  • For a small amount you “don’t get” at the end are you not being childish to Secure your family?
  • Don’t you think you are seeing Term Insurance from a wrong attitude?
  • Are you not concentrating on “what you are not getting” rather than “what you are getting”?

We already have “Return of Premium Term Policies”, but they are themselves idiotic because they are again designed to just exploit the weakness of people who feel that term insurance is waste of money because they don’t get their money back.

Read this to understand why Plain Term Insurance is better than “Return of Premium Term Insurance policy”.

Watch this video to learn why Term insurance is better than regular insurance policies:

Reason why Indians don’t like Term Insurance’

Reason 1#: Most of the people concentrate on number and explicit data, like the money they are not getting back or it’s a waste of premium if nothing happens to them. They fail to look internal advantage which term Insurance provides.

Reason 2#: We are emotional with Money, we are more concentrated with Growing money and getting money back rather than what value it provides in our life.

Reason 3#: Most of the people think that the probability of dying is much lower than an average person which is again totally idiotic. We just don’t want to visualize a bad situation and hence do not concentrate on that situation.

Conclusion

In life we don’t appreciate things like Health, small moments of happiness, nature, time spent with our loved ones which are most wonderful and real things in life. Term Insurance is one of the similar things in personal finance domain.

You just need to shift your focus of view from “what you are losing” to “what you are getting” once you do this with Term Insurance and your Life, both will become wonderful.

Please comment on what do you think about this and do you agree with it. Are you victim of such mindset?

Why it is mandatory file Income Tax Return even if your taxable income is below tax limit?

Posted on by Jagoinvestor

Filing Income Tax Return  is an important thing and as the date for filing ITR is approaching you should have a clear idea about how to file ITR. But is it mandatory to file Income Tax Return?

A lot of people are confused about this simple question of when to file your tax return, In this short article lets see what are the conditions under which you need to file your tax return.

Filing Income Tax Return is mandatory

Who should file Income Tax Return?

As per Indian Income Tax Act 139(1), it is mandatory to file Income Tax Return, for every individual who’s income exceeds the exemption level.

People say that if you don’t have to pay tax , you don’t have to file returns which is not true totally. Lets see the simple rules.

Rule : You have to file your tax returns if your Total Income for the year exceeds the exemptions limit. That’s it !! This is the only rule which applies.

Exemption limit can be different for male (1.5 lacs), female (1.8 lacs) or senior citizen (2.25 lacs). So if your Total income for the year exceeds your exemption limit, you have to file tax.

Do you know how to calculate your tax?

Should I file Income Tax Return even if I don’t have to pay any tax?

Didn’t you read what is said above :-). The only rule is already mentioned above. You don’t have to pay tax. This can happen in two cases.

Case 1 : Income itself is below exemption limit

In this case you don’t pay tax and don’t file your Returns.

Case 2 : Your Income exceeds, but not taxable income

Though your Income exceeds, but After all the exemptions and deductions like 80C investments, HRA, Home loan interest exemption etc etc, your taxable income is below your exemption limit. In this case you don’t have to pay tax, BUT !! you have to file tax returns because your income (not taxable income) was above the exemption limit.

What are the other cases when I have to file the returns?

There are other cases also when its more than paying tax. lets see those cases

  • If you have some form of losses carried forward in subsequent years to write off against profits in future, in that case its obvious, that you will have to file a return so that you can give this information.
  • If Govt itself gives you notice to file tax return, it may happen that you are cheating this nation and making black money , then tax department can ask you for details and you will have to file tax return.
  • If you want a Tax refund because of TDS (Tax deducted at Source by your company). This happens with people who do part time jobs for some months or with Interns in the company who are there for 3 months or 6 months and TDS is cut. So in order to get back the amount you have to file a tax return.

Watch the video given below to know why it is necessary to file ITR:

Why is it necessary to file Income Tax Return?

There are some reasons why should file income tax return, which may look simple but they have a major impact on your financial life. Lets see what are those reasons:

  1. If you are planning to take loan in future, the lender may ask the proof of your ITR filing.
  2. The ITR filing proof is also essential to get VISA if you want to travel abroad.
  3. It is also important if you want to claim the adjustment against past losses.
  4. ITR report is provided by Income Tax departments, so if you file Income Tax  Return regularly on time, it will make your future transactions easier without any complications.
  5. In some states, you can not but an immovable property if you don’t have the Income Tax Return filing proof.

Besides all these reasons, filing Income Tax Return on time makes you a responsible citizen.