Warning! Read home loan documents well
Warning! Read home loan documents wellDecember 19, 2006
You have zeroed in on your new house, negotiated with the builder and the bank, and are all set to sign your loan papers. Buoyed by dreams of moving into a dream house that is owned by you, you are in a rush to get the deal sealed as quickly as possible.
The loan document runs into 50 pages and its legal language so arcane that it does not even look like English. So you think, "Hey, everyone signs the same agreement with the bank, what is there to read? It can't compromise my position; otherwise somebody would have pointed it out to me before". If this sounds like you, think again! There are a whole lot of potential dynamites in all the leading banks' home loan agreements.
In the last few years, with the number of players and home loan offers multiplying manifold, getting a home loan has become a fairly easy process. Competition among housing finance companies has ensured that at least you will have no dearth of lenders.
But, almost as if a cartel was operating behind the scenes, the terms and conditions behind the home loan are framed in such a manner that the HFC acquires a strong legal cloak and your position is often compromised.
Internationally, there are strong legislations ensuring that both the borrowers' and lenders' rights are expressed in all loan transactions. (See: When will we see truth in lending?) Unfortunately, in India this is not the case.
The home loan agreement is the most important document here. But HFCs are often hesitant to provide you with a copy in advance so that this could be read and understood before you sign the agreement. HFCs use every method to refuse or delay handing over a copy to the borrower. Their excuse? "No one really reads them," states a State Bank of India official.
It is important that you read the agreement before committing to the terms and conditions laid down by the HFC. Outlook Money attempts to assist you in this by pinpointing a few of the clauses in the agreement that side with HFCs.
1. Reset clause on fixed rates. With the current trend of rising interest rates, most borrowers choose to opt for a fixed rate loan. So does this mean your interest rate is locked at 11.5 per cent for the entire life of the loan? Not anymore. This is because banks have introduced a reset clause in their fixed rate home loan agreement that allows them to change the interest rate in the future, even on fixed rate loans. For instance, SBI has introduced a clause according to which it has the right to revise the fixed rate after two years. Corporation Bank and Canara Bank have reset options at the end of five years.
Sachin Shinde, a Pune-based software engineer, thought he had made a "prudent" decision by opting for a fixed-rate home loan five years back from IDBI Bank. Three years after the date of disbursement, Shinde received a letter, which said it was time for renewal of his loan and that the interest on his fixed home loan had been increased by 0.5 per cent.
On checking with the bank he learned that there was a clause in the agreement that said the fixed rate was only for a period of three years and not for the entire tenure.
A senior official with Bank of India points out that no lender can have an agreement that says a fixed rate can be fixed for the entire tenure of the loan, say 15 or 20 years, as this is likely to cause an asset-liability mismatch.
Clearly, most borrowers are misled by the 'fixed rate' loan. Read the loan agreement carefully, look out for the reset clause and quiz your HFC about it.
2. Force Majeure Clause. Often a semi-fixed rate loan gets advertised as fixed rate loan. You can find out the real picture only if you happen to read a clause such as this: 'Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement.'
This is called a force majeure clause, which allows an HFC to 'un-fix' and raise the rate under exceptional circumstances. But what constitutes an exceptional circumstance for the HFC is ambiguous.
3. Defining a default. Also ambiguous and uncertain are the numerous clauses on what constitutes a default. A lay person cannot be faulted for thinking that default purely means non-payment of one or more loan installments. But HFCs go way beyond this.
Here's a look at Citibank's home loan agreement as to what constitutes default - (i) "where the borrower, or where the loan has been provided to more than one borrower, any of the borrowers is divorced or dies (applicable in case of an individual)", and (ii) "if the borrower or any of the borrowers is/are involved in any civil litigation or criminal offence."
Clearly, something is amiss. Says Ahmed Abdi, a Bombay high court advocate, "No loan agreement can impose restrictions on citizens' constitutional rights to litigate. Even in the situation of the borrower himself being a respondent in any court case the person cannot be held guilty until the final court verdict."
4. Other kinds of default. What happens in case you face financial difficulties and miss paying a few EMIs? In the face of default, the attitude of some banks is appaling. Delhi-based couple Pallavi and Rahul Narvekar took a home loan from Standard Chartered Bank two years ago.
Says Rahul, "When my wife, who has high blood sugar content and blood pressure was recuperating from a surgery recently, they would call her for EMI payments, despite my request not to bother her." Now the Narvekars are switching to SBI.
Can the HFC send rude recovery agents to your home? Under the law of the land, it cannot. Says Abdi, "Possession of property or any other physical action has to be through a court order under some legislation."
An Allahabad high court judgment in a car loan case can provide an indication. In August 2005, an ICICI Bank car loan borrower, Someshwari Prasad, (an advocate with Allahabad High Court) was abducted by collection agents of the bank and taken to the bank branch where he was beaten up by bank officials. Prasad filed an FIR with the police and had the bank officials and collection agents arrested.
Hearing a habeas corpus petition filed by ICICI Bank to release its arrested officials, the Allahabad high court raised numerous questions about recovery agents and the process. It asked, "Whether ICICI Bank or its collection agency can take coercive action against the borrower by snatching the vehicles or taking possession of the property without following the procedure established by law and take further coercive action by locking the individual borrower in the bank or at some other place?"
Says Prasad, "Direct snatching is not provided by any law and in fact violates multiple provisions of the Indian Penal Code."
Lending HFCs' legal remedy for defaults on loans having outstanding amount of Rs 10 lakh and above, is to file a suit against the borrower under the Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act). For lower amounts they can file a suit in the civil court.
Security cover when property prices decline. You may be paying your EMIs on time. But when property prices crash you may be asked to provide security over and above the home mortgage. The clause that enables this reads: 'the bank may declare all sums outstanding under the home loan (including the principal, interest, charges, expenses) to become due and payable forthwith if the value of the property or any security (including guarantees) created or tendered by the borrower, in the sole discretion and decision of the bank, depreciates entitling the bank to call for further security and the borrower fails to give additional security.'
The bank will deem you to be a defaulter if you don't give the additional security.
5. Direct disbursement to builder. A clause in ICICI Bank's home loan agreement stipulates that the "disbursement of the loan may be made directly to the builder or developer and in the case of a ready-built property to the vendor thereof and/or in such other manner as may be decided solely by bank."
"This clause gives too much leeway to the bank", says a Delhi-based lawyer. It is the borrower whose original property papers are retained with the bank, so ideally the bank should disburse the loan amount to the borrower and not to the builder.
6. Un-enforced discount clause. A Delhi-based executive, who works with a fashion house, took a home loan from HDFC in 2004 on a house that was under construction, the possession of which was to be given in April 2006. The bank issued the cheque on the developer's name. Last month, he finally received the possession of the house, more than six months late.
He says, "The documents had a penalty clause that stipulates that if the possession of the house is delayed the developer will give a discount." While taking possession Dasgupta asked the builder to adhere to the delayed delivery clause.
"But the builder told us to take the keys of the house or leave it and that they are not running short of buyers who are ready to take the house even at an escalated price now". He feels that his HFC should have taken a tough stand with the builder on the delayed delivery.
7. Assignment to third parties. HFCs take your authorisation to assign collection and administration rights on your loan to third parties. A Citibank home loan agreement does it through this clause: "Borrower expressly accepts that the bank shall be entitled to appoint third parties as the bank may select which gives to such third party all or any of its functions, rights and powers under this agreement including the authority to collect MMR (minimum monthly repayment) due by the borrower."
Elsewhere, this agreement further states, "the bank may assign any of its rights or obligations herein without any approval or consent of the borrower." This is clearly an unfair provision.
Suggests Abdi, "You look at a bank's reputation and credibility before entering into a loan agreement with it; so when an unknown, undisclosed, and potentially un-credible third party takes over, you should be allowed an exit option whereby you could move your home loan from bank X to bank Y." Again, unfortunately, no HFC offers such an exit option.
8. Other twisted clauses. Some clauses are ambiguously worded. Take this one for example: 'The bank/HFC will be notified of any change in the borrower's employment, business or profession well in advance.' Questions a Delhi-based lawyer, "The clause of 'well in advance' is very vague. How much in advance will be well in advance, the bank should specify that."
In your early EMIs, the proportion of interest charge is far higher than principal repayment. Says H K Awasthi, a legal advisor to Delhi -based consumer rights organisation, Consumer Voice, "Banks should recover the interest and principal amount simultaneously".
Pre-loan procedure is also full of potholes. Points out Awasthi: "For document processing, banks charge around one per cent of the loan amount which should be refunded if the banks ultimately deny the loan."
The legal jurisdiction in case of disputes is always at the place where the HFC's central office is located. Says Abdi, "Individual borrowers, who are spread across the country, cannot afford to travel long-distance to seek legal enforceability of their rights."
Cross default is another faulty clause where the HFC deems you a defaulter on your home loan if you have made any kind of default in any other loan or facility with the same HFC. Argues Abdi, "These are two different transactions and each one's performance or non-performance should be measured independently."
The biggest twist in the loan agreement is in the amendment clause. This is a sample from a Citibank home loan agreement: "The bank shall at its sole discretion alter the terms of this agreement by written intimation sent to the borrower by courier. Any amendment proposed by the borrower shall be valid only if made by a written agreement signed by both the parties." So there you are, heads they win, tails you lose.
What you should do. Asking for what is fair and due to you is not that difficult. Make sure that that you bring these lopsided clauses to the notice of the HFC, suggest changes and bargain hard to get them implemented.
If the HFCs persist, then lodge a formal complaint with National Housing Bank, a wholly-owned subsidiary of the Reserve Bank of India. As recently as September 2006, NHB had come out with guidelines for HFCs regarding fair practices (see: Code of Conduct). Says S. Sridhar, chairman and managing director, NHB, "Borrowers from HFCs can send their complaints to us but complaints against banks' home loans are dealt with by RBI."
Are NHB's guidelines effective and enforceable? Sridhar claims that NHB monitors compliance with the mandatory and other requirements through the mechanism of off-site returns submitted by HFCs and on-site inspection of HFCs. He says, "HFCs are expected to function in a fair and transparent manner and follow customer friendly practices."
So, if your home loan is from a non-bank HFC, then write in your observations on all the unfair clauses of your agreement to NHB at nhbh01@bol.net.in or through its website www.nhb.org.in. For banks, write in to RBI at helpprd@rbi.org.in or go through its website www.rbi.org.in. It's time that borrowers make an effort to balance the scale.
Code of conduct
National Housing Bank has framed guidelines on fair practices code for Housing Finance Companies (HFCs) to serve as a part of best corporate practices and to provide transparency.
Some of them are mentioned here as these can empower you further in dealing with the HFCs and violations can be taken up legally.
At the time of sourcing a loan product, HFCs shall provide information about the interest rates applicable, as also the charges for processing, and pre-payment options and charges.
If an HFC increases any charges or introduces a new charge, it should be notified one month prior to the revised charges being levied.
HFCs should keep end-users informed about changes in interest rates, charges, terms and conditions. The information should be passed on through any one of the following:
1. Putting up notices in their branches 2. Through telephones or helplines 3. On the company's website 4. Through designated staff/help desk
HFCs should provide service guide/tariff schedule.
HFCs should provide their customers information about the penalties liable to be levied in case of violation of any terms.
Whenever loans are given, HFCs should explain to the customer the repayment process by way of amount, tenure and periodicity of repayment. However, if the customer does not adhere to the schedule, a defined process in accordance with the laws of the land shall be followed for recovery of dues.
When will we have truth in lending?
In mature economies, the borrower is made more comfortable than the lender for all loan transactions. For example, in the US, the purpose of lending is viewed from the point of economic stabilisation, which, it is said, is attained by informed use of credit by consumers. Credit transactions are serious, transparent matters, which are monitored in unambiguous legal terms by way of Truth in Lending Act (TILA) in the US.
TILA requires that a full and meaningful disclosure of the credit terms and other related costs be made available to the borrower in simple and easy-to-read language. This includes the amount and definitions of annual percentage rate, finance charges and other related terms. These disclosures must be clear and noticeable and must appear in a document that the consumer may keep.
The Act shifts the focus from 'let the buyer beware' and puts the thrust on 'let the seller disclose'.
In addition to this, the Federal Reserve Board and the Federal Home Loan Bank Board have published a booklet titled 'Consumer Handbook on Adjustable Rate Mortgages'. The booklet is a guide for consumers to understand the uses of adjustable rate mortgage loans. According to Regulation Z in the booklet, which applies to each individual or business that offers or extends consumer credit, the lender who is offering an adjustable rate mortgage loan must make this booklet or a similar one available to their borrowers.
The Act also requires that before credit is extended, disclosures are made to borrowers. In certain cases, it must reflect in periodic billing statements. Regulation M, which includes all the rules for consumer leasing transactions, also details rules for disclosing terms when leasing personal property for personal, family or household purposes.
In case of non-compliance with TILA, penalties are severe. A lender who violates these disclosure agreements may be sued for twice the amount of the finance charge (the amount charged to the consumer for the credit). The Act says, "TILA is to be liberally construed in favour of consumers, with creditors who fail to comply with TILA in any respect becoming liable to consumers regardless of the nature of violation or creditors' intent".
More Specialssource :
http://in.rediff.com/money/2006/dec/19home.htm
How to get rich by tax planning
How to get rich by tax planningDecember 05, 2006
Two types of people complain about taxes: men and women. Every year, taxpayers try to save and invest so that they minimise taxes and maximise disposable income.
Tax planning, as part of your overall financial planning exercise, helps you figure out how to make full use of the breaks on offer.
The ideal time to plan your taxes is in April, at the beginning of the financial year. But for those who couldn't and are doing so now with just about four months to go for the year to end, there are still enough investment options that would substantially lighten the burden while deploying funds profitably.
Investment-related tax breaks: Finance Bill 2006-07 offers a deduction from income of up to Rs 1 lakh (Rs 100,000) on specified investments, expenses or payments like notified bankdeposits with a minimum period of five years, life insurance premiums, Employees' Provident Fund (EPF), public provident fund (PPF), repayment of principal amounts on housing loans, payment of tuition fees, national savings certificate (NSC) and equity-linked savings schemes.
Bank deposits: The term deposits in a scheduled bank with a minimum period of five years under the Bank Term Deposit Scheme, 2006, in addition to giving you a fixed and assured return (around eight per cent) comes with a tax advantage. There is a one-time investment and there is no commitment to pay in future. Since the benefit of Section 80L (interest income up to Rs 12,000 from bank deposits and NSC were exempted) has been removed, the entire interest income from any such deposits would be taxable.
State Bank of India (SBI) and HDFC currently offer 7.25 per cent interest over five years, while ICICI Bank offers 7.5 per cent.
EPF: This is a forced saving that happens in the life of an employee and helps him save for retirement. Twelve per cent of your salary is deducted every month and put into a kitty maintained either by the government or your company's trust. The contribution currently earns a tax-free return of 8.5 per cent and is fixed by the government every year in March-April.
PPF: This is a self-directed investment option. It is essentially a 15-year investment that carries a tax-free interest rate of eight per cent as of now. The rate is subject to change. Investments of Rs 500-70,000 qualify for a tax rebate under Section 80C.
Home in on home loans: The interest payable on home loans taken on or after 1 April 1999 is tax-deductible up to Rs 1.5 lakh a year. If you factor in the tax advantages, the effective interest rate works out to 6.3 per cent for an eight per cent loan -- against which you get to build a long-term asset. Those eligible for Section 80C benefits stand to gain even more. The total amount eligible for deduction under this section is Rs 1 lakh a year. and principal repayment of home loans up to that amount also qualifies.
Children's fees: Under Section 80C, parents can also claim a deduction for tuition fees -- up to Rs 12,000 per child -- for a maximum of two children. This means that parents with two children can claim a deduction of Rs 24,000. However, any payment towards any development fees or donation to the institution are excluded.
National Savings Certificates: For those who are less averse to risk, there's the National Savings Certificate. This government-backed security is available at post offices and comes with an interest rate of eight per cent, compounded half-yearly as of now. The interest is entirely taxable and is right for those in lower tax slabs with an investment horizon of around six years.
Equity-linked savings schemes (ELSS): It is eligible for a deduction under Section 80C. By investing in these schemes, those with a penchant for risk stand to gain from the benefits of equity market returns. Do note that like all tax savings options, these plans have a lock-in period of three years. ELSS does not allow moving out of the investment in case of market volatility, unit-linked insurance policies (Ulips) allow this, through their switching facility.
Life insurance: The premium that you pay towards a life insurance policy is eligible for a tax deduction up to Rs 1 lakh under Section 80C. If the premium paid in any of the years during the term of the policy is more than 20 per cent of the sum assured, then deduction will be allowed only for premiums up to 20 per cent of the sum assured.
This applies to all term, endowment or unit-linked plans bought from any of the 14 private life insurance companies as well as from LIC.
Health insurance: Under Section 80D, medical insurance premium of up to Rs 10,000 is tax-deductible, with an additional deduction of up to Rs 5,000, where the premium is paid by a senior citizen (65 years or older).
Pension plans: If you have a pension plan with a premium of more than Rs 10,000, you can now claim that under Section 80CCC. If any investment has been made under this section, then the qualifying amount under Section 80C will stand reduced to that extent.
What to do: Risk and return have a close relationship with each other and is an important pillar in building wealth over a long time. An investment under Section 80C is a step towards that. Removal of sectoral caps this year on investments for tax-planning purposes means that investors can invest in line with their risk appetites and needs.
However, investments in tax instruments should never be done merely to save taxes. The choice of an instrument is as important as the amount of tax saved. Liquidity is a crucial factor in all the instruments and, hence, short- and long-term objectives should be clear before you lock your funds in them. the value derived through liquidity, returns and security over the next few years should be an integral part of your investment decision.
If your immediate need is only to save taxes and your investment horizon is not very distant, then ELSS would be suitable. Remember, the risk involved is high too. If you can commit to pay regularly for a longer duration, ULIP would be a better option. A risk-averse investor can select small savings schemes like PPF or the bank deposit with assured return on investment.
Finally, having made your investments and claimed the tax breaks, don't forget to keep the records and documents of your investments and tax deduction certificates, since you will have to attach them with your returns.
10 top mutual funds you MUST own
10 top mutual funds you MUST ownDecember 06, 2006
Throughout the year, on several occasions, Outlook Money tells you to invest in mutual funds. And now we come to you to say it one more time. Rational thinking says that the equity markets cannot go much higher than the current levels. Yet, who knows?
With each milestone that the Sensex crossed in the past year, experts claimed that a big correction was due. Even today, stockmarket experts do not see much steam in the markets for the next one year.
Yet, on November 22, the Sensex closed at another all-time high of 13,706.53. By the time you read this, don't be surprised if there has been another high. So, what do you do?
Multiple investment options are at your service, but none are as regulated or sharply focused on you, the small investor, as mutual funds.
10 Top Mutual Funds*
DSP ML Opportunities FundFranklin India Flexi CapHDFC Equity FundHDFC Top 200Prudential ICICI Dynamic FundReliance VisionSBI Magnum ContraSBI Magnum Global 94Sundaram BNP Paribas LeadershipSundaram BNP Paribas Select MidcapClick on each fund to find out why you MUST buy it.
* The fund names are in alphabetical order and not in order of any ranking
Outlook Money gives you a list of 10 diversified equity schemes that must form a part of your core portfolio. Why 10? Because putting all your eggs in one basket is risky and it is necessary to diversify across schemes. Because 10 is an easy number of schemes to monitor; it is difficult to manage too many.
Because if Nobel laureate Harry Markowitz showed the risk reduction benefits of holding a diversified portfolio, academicians Evans and Archer, showed that most of the risk reduction due to diversification takes place with the aggregation of eight to 10 securities.
How we chose the 10: To come up with the 10, we considered diversified equity schemes with a two-year track record and crunched their risk-adjusted returns.
We took the one-year rolling returns (an average of one-year returns over the past two-year period) and divided it by their downside risk - the possibility of a scheme giving negative returns - to get their RAR.
We left out sectoral schemes, as these are the riskiest of all equity schemes and merit frequent churning depending on your sector view. We also left out thematic funds, as they are less diversified than plain-vanilla diversified equity schemes. They work best when part of your satellite portfolio.
Next, we looked at a set of qualitative parameters. For instance, our list of 10 schemes comes from fund houses with good pedigree and a long-term track record. Schemes that have witnessed frequent fund management changes were avoided. We also avoided excessive fund house concentration, though HDFC and Sundaram BNP Paribas Mutual Funds have two each of their schemes in our list.
Two schemes that have made it to our list are a slight deviation from the above. While one has a lower RAR, the other is a little less than two years old. Despite this, we feel you must own them; we'll tell you why once we get to them.
Our schemes are not necessarily the 10 best performing schemes in the past year. Our focus is to give you 10 schemes that we think will perform well in the next two to three years, using a healthy mix of numbers and qualitative parameters.
While it's good to own these schemes, you need not own all of them. Depending on the amount you want to invest, you may pick and choose from the list. Read more about each scheme to see which fits you the best.
Just holding is not enough: Your job is not done once you buy into a mutual fund. It's imperative that you consistently, not day-to-day, but, say, once in a month or two, monitor your scheme's performance.
Remember, you invest for the long term. So ignore short term blips. But if your scheme consistently underperforms its benchmark index, it's time for you to look around for better options.
Also, watch out for a change in fund management. The past two years has seen a lot of churn of fund managements. When fund managers change, styles and, at times, even fund strategies change. So watch out. You may want to give a year's time to the new fund manager to perform. If he does not match up to his predecessor, it is time for you to move out.
For now, it's time for you to move in. Over the next few pages, in no particular order, we present the 10 schemes we think you should own.
Here's how to make income on Rs 70 lakh tax-free!
Here's how to make income on Rs 70 lakh tax-free!December 13, 2006 13:36 IST
Have you noticed ELSS (equity-linked savings scheme) funds are being launched left, right and centre? That insurance companies, not to be left behind, are busy with their single premium, multiple premium and premium back ULIP offerings? That financial dailies are awash with fixed deposit ads offering tax breaks?
Just like mangoes appear in summer, these products tend to emphasise their presence in and around December. For December is tax-planning season: a season when investors wake up to the rather unpleasant, but necessary, task of making investments to save tax.
But if you ask me, this is too much ado for a paltry Rs 30,000. And look at the number of products competing in the same space -- bank deposits, mutual funds, ULIPs (unit-linked insurance products), life insurance products, PPF, NSC and pension plans -- all vying for the aggregate limit of Rs 1 lakh (Rs 100,000) offered by Sec. 80C of the Income Tax Act. And this is not even considering mandatory cash flows like employees provident fund, home loan installments and children's tuition fees.
Which means that the maximum tax most people can save is Rs 30,000. Period.
If you happen to be in the highest tax bracket of 33 per cent, the amount is marginally higher at Rs 33,600. The lock-in period that the tax saving brings in its wake is another irritant. PPF (Public Provident Fund) or NSC (National Savings Certificate) means locking your money for six years. ELSS and ULIPs offer a marginally lower lock-in of 3 years, but you take equity risk with your hard earned money.
'No exit route' in an equity investment is not everyone's cup of tea. And most of all, the 30-odd thousand is hardly going to make a dent in the tax outgo for most investors.
So what's the solution? Does one be a mute spectator and accept the inevitable?
Well, perhaps not. In this article, we are going to discuss two tools that if used optimally can save you heavy taxes. Both when used simultaneously create such synergy in tax savings that it is really mind-boggling. Read on to know more.
The first tool is your basic tax threshold. Readers would know that the first Rs 1 lakh of income is exempt from tax. For non-senior ladies, the limit is Rs 135,000. And for senior citizens (65-plus) the limit is Rs 185,000.
So far, so good.
The second tool that works hand in hand with the first is known as Sec. 56 of the Income Tax Act.
Sec. 56 basically exempts cash gifts between relatives. Although there is a long list specified in the section of what constitutes 'relatives,' for our purposes, suffice it to know that as per the Income Tax Act, you, your parents, your brothers and sisters as well as your children are all relatives of each other.
Now in order to understand how these two tools can be used for some smart tax planning, let us take the example of one Mr Mehta who is 49 years of age.
He happens to be in a senior management job which puts him in the highest tax bracket. He has retired parents who live with him. His wife is a home maker. And he and his wife are also proud parents of an 18-year-old daughter and a 20-year-old son who are both studying in college.
Read Mr Mehta's profile once more if you must because it is important in our scheme of things. Also remember that some of the numbers that are going to be thrown up are astonishingly large. Don't get thrown off because of that.
This is just the power of these tools at work. You can use them at any income level to suit your particular situation. What is important is understanding the concept. . . individual numbers can always be plugged in.
Now Mr Mehta, like most of us, finds that all the tax saving investments in the world can help him save only Rs 33,600. That's not enough. His tax outgo is much more. Moreover, every rupee of post tax paid income that he invests in, say, RBI Bonds, Bank fixed deposits, Post Office MIS, et cetera, is subject to the highest rate of tax.
If he doesn't want to pay tax, he is forced to adopt market risk by investing in equity shares or mutual funds as long-term capital gains are tax-free. But this was hardly a solution.
He has found the stock market to be too whimsical for his liking -- while it gives a reasonably good return for a period of time, it also suddenly falls by around a 1,000 points in a couple of days. Already suffering from hypertension, no beta blocker in the world could prevent his pressure from outswinging the market.
It was at this delicate juncture that Mr Mehta was introduced to our tax planning tools by an old chartered accountant friend of his. This is what Mr Mehta did after his brief, but illuminating, chat with his friend.
He gifted Rs 21.25 lakh (Rs 2.125 million) to his father and a similar amount to his mother. Out of the gifted money, his father invested Rs 15 lakh (Rs 1.5 million) in the Senior Citizen Savings Scheme (SCSS). The balance Rs 6.25 lakh (Rs 625,000) was invested in RBI Savings Bonds.
His mother did the same.
Now what happened was the following. The SCSS yielded an interest of Rs 135,000 (9% of Rs 15 lakh). The RBI bonds yielded a return of Rs 50,000 (8% of Rs 6.25 lakh). The total interest earned by Mr Mehta's father was Rs 185,000. His mother too earned a similar amount.
However, not a penny of this was taxable as it is not beyond the initial tax slab available to senior citizens.
In one stroke, Mr Mehta, effectively made income from over Rs 42 lakh of capital tax-free in the family's hands. Realise that had Mr Mehta invested the funds himself, he would have paid full tax on it. However, since the gift was tax-free and the tax slab was available, this strategy could be put to work.
Now, Mr Mehta finds that his children have some time to go before they start earning. His daughter can earn up to Rs 135,000 without having to pay tax, while his son can earn Rs 100,000 without having to pay tax. But they aren't earning as of now, are they? They are studying and will continue to do so for the next five to seven years.
So what does he do? He gifts them around Rs 17 lakh (Rs 1.7 million) and Rs 12.50 lakh (Rs 1.25 million), respectively. This money in turn they invest in the 8% RBI Bonds. Rs 17 lakh earns Mr Mehta's daughter around Rs 135,000. Of course, as explained earlier, no tax would be payable. Now you can work out the math for yourself in case of Mr Mehta's son.
In effect, by using two simple tools that the Income Tax Act offers, Mr Mehta had managed to make almost Rs 6 lakh (Rs 600,000) of income tax-free for the family. Putting it differently, over Rs 71 lakh (Rs 7.1 million) of capital was deployed, however, the income therefrom was totally tax-free.
Now admittedly, Mr Mehta is an extremely rich man. He had Rs 70 lakh (Rs 7 million) to spare in the first place before trying to make it tax-free. Not everyone will have this kind of money.
However, the example given is an optimal one. You can use a similar strategy with the funds at your disposal and the benefit you derive will be proportional. In other words, it is not an all or none strategy. . . use it to the best of your ability.
Also note that Mr Mehta's profile was an ideal one. A man working in the highest tax bracket with retired parents having no income of their own and two major children who are still studying. Again, not every taxpayer will have a similar profile. You father may have income of his own, but your mom may not be working. Or your children may be earning already. However, the point is to use that particular element in the equation which applies in your case directly. The rest can't be helped.
Note that we have left Mr Mehta's home maker wife out of the picture. There are reasons for this -- the Act specifies that any income earned out of money gifted to spouse is added back to the donor's income for tax purposes. There are ways out of this too, but that is the topic for another column.
Last point
Beyond a point (barring ideas such as discussed above), tax saving is not possible. The worst mistake any investor could make is to invest with the primary objective of saving tax. The question to ask is would you have made the investment if it didn't offer tax saving? If the answer is no, don't touch the investment. It is better to try and optimise post-tax income instead of making a sub-optimal investment just to save on tax.
Or like Donald Trump says, some of your best investments are the ones that you don't make.
The writer is Director A N Shanbhag NR Group, a tax and investment advisory firm. He may be contacted at sandeep.shanbhag@gmail.com
IITs see highest pay packages
IITs see highest pay packagesDecember 18, 2006 10:36 ISTLast Updated: December 18, 2006 14:08 ISTHaving dominated the summer placement scene at IIMs, companies like McKinsey, Boston Consultancy Group and UBS showed up for the first time for placements at IIT Bombay.
IIT Delhi and IIT Kharagpur also had companies like Barclays Capital, Bain and Company, Opera Solutions, Lehman Brothers for the first time on their campuses this year.
So far, companies in the core industry functions like manufacturing, software and research and development have been the major recruiters at IITs. Adobe, Google, Tata Motors, Maruti, Shell, Infosys, Wipro, Halliburton, Schlumberger, Creidt Suisse, McKinsey, Deutsche Bank, UBS and Deloitte figured among regular recruiters' list.
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Click here to register now!Moreover, with the IITs just a week into their placements' process, the number of companies making placement offers this year has increased, almost doubling in a few cases. Moreover, these companies have already made huge offers to the students. Besides, while the highest international offer has seen a 11 per cent increase this year, domestic offers have risen anywhere between 20-100 per cent.
For instance, at IIT Delhi an overseas offer of $100,000 (around Rs 45.50 lakh) was made by a US-based speciality fixed income manager Pimco. At IIT Bombay, the highest salary package offered so far is $92000 (around Rs 42 lakh) by Mercer Oliver Wyman -- a Boston-based financial consulting firm.
At IIT Kharagpur, the highest salary package offered for domestic placement is Rs 23 lakh. Kharagpur does not have overseas placements.
Last year, the international offers made at IIT Bombay was $90,000 (Rs 41 lakh) by UBS. On the domestic front, the salary package stands at Rs 12 lakh against Rs 5 lakh last year. So far 180 companies have visited the institute and the institute expects the offers to go beyond 200 companies. Last year the institute had seen offers from 170 companies. IIT, Delhi will have more than 300 companies on campus this year.
IIT Madras saw at least five companies visiting it every day against two companies visiting it earlier. A total of 30 companies have visited it so far. The highest domestic package received is Rs 8.5 lakh against Rs 6.5 lakh last year. "The institute however, has not received any confirmation on offers for overseas placements," said Jaykumar, registrar IIT Madras.
At IIT Kharagpur however, the highest domestic salary package has gone up from Rs 16 lakh to Rs 23 lakh this year. "The institute does not have international placements as it is dedicated itself to the service of the nation, " said G Sinha, Professor in-charge, training and placement.
Among all the IITs, IIT Kgp has the highest student strength with 1,250 students and it is looking at increasing the intake from 5,000-10,000 in the next five years.
At IIT Roorkee, however, a multinational oil major Schlumberger, has made the highest salary offer for Rs 34 lakh. Around 150 companies have visited the campus so far against 118 last year.
The IIT brand has made these companies flock to the IIT campuses this year. "The good word is spreading around. IITs are the store house of intellectual capital with IIT-JEE being the toughest exam in the world to crack. Our students are good at number crunching and thus even financial companies and consulting firms require students with an engineering background," says IIT Kgp's Sinha.
The campus placements however, are on a halt with the inter-IIT sports meet taking place at Guwahati. The process will resume in January and will end by February.
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Working out..
Middle-Aged Woman Gains Youthful Figure and Fame
With no special diet and just a lot of exercise, Cho Young-sun (40) has made a transformation into a hot body. “Who would think that she’s a middle-aged woman who’s had two children,” reads a typical comment on the Internet, where she has acquired a kind of fame. “She’s more like an older sister,” reads another. The Chosun Ilbo caught up with Cho at a fitness club in Ilsan, Gyeonggi Province. Wearing a sleeveless, navel-free sports top and hot pants, she was a toned 163 cm at 50 kg. The taut skin of her arms and legs was covered in a light healthy sweat.
“After I started exercising, my life, my whole world changed,” she says hoisting a dumbbell. Cho, who has two sons, a 12-year-old and a six-year-old, ballooned to 70 kg after giving birth to her second son. After the first pregnancy she quickly shed the weight she had gained, but the second time, things were different. She continued to just eat whatever made her mouth water, and soon found herself at 75 kg. She wasn’t sure if it was an aftereffect of the pregnancy or due to her increased size, but she was experiencing worsening pains in her neck, shoulders and waist. The pain was especially severe whenever she bent forward, making household chores like dishwashing and housecleaning next to impossible.
“The house was a disaster area, but I could hardly move, so I had to ask the kids to do the dishes for me. I couldn’t be a good mother, or a good wife, and I started to feel sorry for myself as the only thing I could do was gain more weight,” she says. “I was caught up in a deep depression and lost my spirit. I avoided going out whenever possible, I was like a hermit.”
Then a doctor at an Oriental medicine clinic in her neighborhood told her she was suffering from postpartum weakness, which had caused her muscles to atrophy and her bones to warp out of shape. The way to remedy the bone problem was chiropractic, while sports could build the muscles back up, the doctor said. The clinic stressed that exercise is a must to help women recover from the condition. Cho immediately registered at a fitness center near her house, starting out not with the idea of losing weight but in the hope of eliminating the pain.
When she started, she set a rule that no matter what happened that day, she would spend more than two hours a day exercising. Her trainer had her focus on stretching and walking. At first, she was short of breath even when she walked at slow pace. But her firm determination kept her going with the two-hours-a-day regime. At the beginning, the more she exercised, the more severe the pain became. When she got home, every move she made was accompanied by an “exclamation of agony,” but she didn’t give up. “Strangely, I got really into it, I worked out desperately.” After two months, her breathing became comfortable, and she stated to feel lighter. The pain in her shoulder and waist faded to the point where it became bearable. After another month, the pain went away, and she started to lose weight.
But she wanted to go further and get back to the shape of her single days. She started to buy books and eat properly like a bodybuilder. The result is now there for all to see on the Web. One year after she started to exercise, she got down to 55 kg, and another seven to eight months later, she was closing in on her goal of 50 kg. “In the old days, I saw a funny-looking woman with a paunch and sagging buttocks in the mirror, but these days I have found the meaning and vitality of life.” Cho advises people to stop feeling stressed by clothes size whenever they go shopping and start exercising right now. Since people tend to get addicted to exercising once they start, they can indulge in the pleasure of it as well as get in good shape and gain confidence, she said. Trying to lose weight without exercising is “a shortcut to failure,” she added.
source :
http://english.chosun.com/w21data/html/news/200612/200612140010.html
Kim Yu-na to Meet Rival Japanese Skater on Russian Ice
Skating ace Kim Yu-na will go head-to-head with fellow sixteen year-old Japanese skater Mao Asada in the figure skating Grand Prix Final on Dec.15-18 in St Petersburg, Russia. Kim defeated Asada at the World Junior Championships prior to their first upcoming adult event.
From left: Kim Yu-na, Mao Asada and Emily Hughes during the 2005 World Junior Championships
Kim holds 26 points after ranking third in the second Senior Grand Prix and first in the fourth Senior Grand Prix. Asada came home first in the sixth competition that ended Saturday in Nagano, Japan with 199.52 points, gaining her ticket to the final round with a combined 26 points from a third place finish in the first competition.
Asada, who won last season’s Grand Prix Final, scored 199.52 points at Saturday’s event, the highest score awarded by the new system of the ISU (International Skating Union). Ando Miki with 28 points and Fumie Suguri, 26 points secured their places in the final, confirming the Japanese dominance of the sport. Hungarian Julia Sebestyen with 28 points and Swiss Sarah Meier on 24 points also qualified.
Can Strong Exports Make Korea an Advanced Country?
Can Strong Exports Make Korea an Advanced Country?Korea has become the 11th country to reach US $300 billion in annual export volume. The first 10 were the U.S., China, Japan, Germany, the U.K., France, Canada, Italy, Belgium and the Netherlands. Except for China, all of them became nominally advanced countries as measured by per-capita income of US$30,000-40,000 once they reached $300 billion in exports. Can Korea do the same?
Germany and Japan, with which Korea has most in common, suffered an economic slowdown once they surpassed the mark. Many Japanese indiscriminately bought overseas real estate and companies with their abundant dollars, and the country saw its property prices skyrocket. What's worse, Japanese companies hurried to move their manufacturing bases overseas, which led to a sluggish economy. The collapse of its real estate bubbles caused the economy to slip into the decade-long economic recession. Germany was mired in a vicious cycle of low growth and high unemployment to fund its all-too-sudden unification. Korea has much to learn from the two countries since it has the same industrial structure as Japan and is divided like Germany.
Japan’s trial and error
Japan reached $300 billion in export volume in 1991 and posted $594.4 billion last year, landing in fourth place after China with $762 billion. It exceeded $27,000 per capita income 15 years ago and reached $38,900 last year. But given the exchange rate, there has been little progress. What happened to the Japanese economy over the past fifteen years? The engine of growth for exports in Japan is manufacturing. It came top in the world in terms of competitiveness in almost all segments, from cars to electronics and shipbuilding. Enormous pressure from the U.S. in the 90s caused the Japanese yen to appreciate sharply, and emerging economies such as Korea and Taiwan doubled their efforts to catch up. Lee Ji-pyeong, a fellow at LG Economic Research Institute, said, "The Japanese economy found a solution to the situation by exporting more sophisticated items.”
Japan gave up on run-of-the-mill consumer goods, which lost competitiveness from the appreciating yen, and focused on producing cutting-edge products that were light, thin and small. It also concentrated on forming a so-called “flying-geese formation” where core technology comes from Japan and is assembled in countries like Malaysia and Thailand. As a result, its car, machinery and parts industries rushed overseas to establish operations. It hurried to restructure industries like shipbuilding, where it expected to lose competitiveness.
Moving manufacturing bases overseas, however, failed to produce the synergy the nation expected. They were dispersed too widely -- in Korea, Taiwan and Singapore -- to be truly effective. In addition, competitors including Korea dramatically developed their technology. As some manufacturers return home, experts in Japan say the hurry to make its manufacturing industry sophisticated rather hollowed out local manufacturing. Korea today is very similar to Japan 15 years ago: the won is appreciating, the real estate bubble is inflating, and manufacturers are moving their operations overseas.
Germany’s unification albatross
Germany’s exports exceeded $300 billion in 1988. Its flagship industries -- cars, chemicals and fine machinery --still lead the nation's exports. Last year, Germany came top in the world by posting $969.9 billion in exports. Its per capita national income more than doubled from $16,000 in 1988 to $34,500 last year. That is a considerable success considering that some 17 million from former East Germany were absorbed into the unified country.
The secret was constant investment in the top industries. Lee Seo-won, an economist at the LG Economic Research Institute, said, "It’s said that one in four Germans makes a living from the car industry. The country is highly competitive in the auto industry and services like finance and insurance.” It also benefited from European integration, which has accelerated since 2000 and helped export expand. Yet the German economy is mired in high unemployment and low growth. Parts of the former East Germany have 18-19 percent unemployment, which is causing serious social problems there. High taxes are driving businesses and capital overseas, and the low birthrate and aging society are eroding economic vitality. The huge financial burden of unification is pressuring Germany, once considered the example to follow among European economies.
Strategies for Korea
Korea is in a way worse off than Japan and Germany. The North Korean economy is one of the worst in the world, and the South has only a handful of cutting-edge technologies where it can claim to lead the world. It has immensely powerful trade unions much more inclined to disrupt production than their counterparts in Germany and Japan. What's more, Korea’s service industry is far less competitive than the manufacturing industry -- a serious stumbling block to evolving into an advanced nation.
“The Korean economy has no future if it fails to nurture its financial, medical, education and legal services, which lag behind,” says Dr. Choi Gong-pil, a senior researcher with the Korea Institute of Finance. "The country is expected to post a $19 billion service account deficit including travel, education and medical sectors this year.” In short, what we earn from exporting cars and mobile phones is spent on studying or traveling overseas.
Shin Seung-kwan, a research fellow at the Trade Research Institute, said the German and Japanese economies are based on manufacturing, but the service industry accounts for a whopping 70 percent of their economies. "We need to increase the proportion of the service industry in our economy from the current 55 percent to keep our economy active,” he added. Prof. Kim So-young, an economist at Korea University, said, "Our medical, education and legal services lag behind due to resistance from interest groups at home, and the financial service industry is in the same situation due to red tape.”
source :
http://english.chosun.com/w21data/html/news/200612/200612110011.html
