The dream that seems to unite all 20-something overachievers of our time is to retire
early. The formula: get into the fast lane, work your guts out, make a pretty packet,
get out of the rat race -- and get a life. What separates the dreamers from the
daydreamers is some amount of planning -- a roadmap and some course corrections
along the way. With this versatile tool, you won't go wrong. It tells you:
The assumptions
Some guidelines
As you go along in life, your expense chart goes through considerable change. Give
yourself a moment to consider how you think yours will when you input your post-
retirement monthly expenses. You might expect considerably higher medical
expenses, for example, or that you'll spend far more on indulgences like food and
travel, or entertainment.
By
A. N. Shanbhag
I have repeatedly observed that, our legislators, particularly the authors of taxation, revel
in making tax laws complicated. So complicated that it is very difficult to understand
these, leave alone follow them. No wonder there is a spate of litigations overburdening
the judiciary.
To understand the complications, let us examine the method of computing the tax on
capital gains and the ways to save it through a real-life case of Mrs. Khorshed Rateria.
Before proceeding further, I must warn you - The complications are so confounding that
if you do not have the perseverance to read it over and over again until you have
understood the fundas, go to 'Strategy for Multiple Scrips', at the end of this Chapter. For
ease of understanding, we shall ignore surcharge without any loss of generality.
Case Study
After accepting VRS, Mrs. Rateria had deposited her total investible funds of Rs.
5,15,000 on 27.10.99 in UTI Bond Fund. She gets a pension of Rs. 59,177 which,
translates into a taxable income of Rs. 35,506 after standard deduction of 40%.
She has a carried forward LT loss of Rs. 5,440 from earlier years.
She desires to know how much minimum amount she has to subscribe to NABARD
Bonds or the amount she should invest in a new housing property to earn total exemption
leading to nil tax.
The LT gains are to be computed always with indexation. The carried forward loss should
be setoff only against this gain with indexation. The gap between the tax threshold of Rs.
50,000 and her normal income (pension) of Rs. 35,506 is Rs. 14,494. This certainly can
be adjusted against the gains with indexation.
In her case, it is advantageous to pay tax @10% without indexation (See the box in the
Table-1). She also has a right to claim a tax rebate of Rs. 5,000 u/s 88C for non-senior
women assessees.
She has to arrive at the exact contribution required to be made in NABARD Bonds (or to
a housing property) for reducing her tax liability (@10% without indexation) exactly to
the level of Rs. 5,000, which is exempt u/s 88C.
Suppose she contributes Rs. 70,348 to NABARD. The capital gains with indexation come
down at Rs. 25,652. It is necessary to arrive at the proportional sale and the cost. The sale
is Rs. 1,63,950 and the cost (without indexing) is Rs. 1,13,950. The difference is Rs.
50,000. Tax @10% thereon is Rs. 5,000 which is exactly the tax rebate she is entitled to.
How did I arrive at this magic figure of Rs. 70,348? By trial and error! Try and try, you
will succeed at last.
The manner and process of setting-off of losses and the subsequent carry forward of
balance losses flow in the following manner:
However, all the above are subject to certain conditions which have been presented in a
nutshell.
• No loss can be set off against winnings from lotteries, crossword puzzles, races
including horse race, card games and other games of any sort or from gambling or
betting of any form or nature --- Section 58(4).
• Loss from non-speculation business can be set off against speculation or non-
speculation business
The tax implications of the house rent allowance (HRA) seem to baffle most people. Taking the
case of two individuals, Ram and Shyam, who work in the same company, Ganesh Jagadeesh &
Co have explained this allowance in detail.
Two significant differences between the two individuals, which is necessary for this study, is that
Ram resides in his own house while Shyam in a rental accommodation.
Yes. Because the payment of HRA by an employer does not depend upon its end-use by the
employee. An employee may prefer to stay in his/her own accommodation but will still be eligible
to receive HRA if it is a part of the salary package. This is so, because HRA, as its name
suggests, is an Allowance supplementing the Basic Salary and Dearness Allowance/Pay, if any, in
a salary package.
Is HRA taxable?
In the case of Ram, who stays in his own house, tax is payable on the full amount of HRA
received by him. Shyam, living in a rented accommodation, may qualify for relief on the HRA
received by him, such relief being dealt with under section 10 (13A) of the Income Tax Act, 1961.
A salaried individual, in order to get an exemption on his/her HRA, must fulfil the following basic
conditions:
Shyam fulfils the first two conditions. The amount of his salary and rent paid by him will determine
whether he meets the last condition too. If Shyam's monthly salary is Rs 10,000, he will qualify for
HRA exemption should the rent paid by him exceed Rs 1,000 (10 per cent of salary).
The extent to which HRA is exempt is limited to the least of the following:
Assume:
Shyam's annual salary = Rs 1,20,000
HRA = Rs 42,000
Monthly rent = Rs 3,000
Rental accommodation situated at: Cochin
Shyam will be eligible for exemption on HRA to the extent of Rs 24,000 being the least of the
following:
• Rs 48,000 (being 40 per cent of salary since rented house is at Cochin)
• Rs 42,000 (being HRA actually received)
• Rs 24,000 (annual rent of Rs 36,000 - Rs 12,000 which is 10 per cent of salary)
Provide your employer with information about the rent so that he can credit you with the eligible
amount of relief before deducting tax at source. You can also claim such exemption when filing
your tax return and seek a refund.
In all cases where HRA exceeds Rs 600 per month (Rs 7,200 per annum), evidence of rent paid,
meaning rent receipts, have to be produced. The assessing officer has the right to call for proof of
payment.
Points to remember
• Allowances are different from reimbursements in that they are usually fixed in value and
are paid irrespective of whether the recipient incurs expenditure or not. They are aimed at
meeting specific requirements like entertainment and travel. They could also be of a
compensatory nature like a border area/remote area allowance could be paid to an
individual posted in the Lakshadweep Islands.
• Salary for HRA purposes = Basic Salary + DA/DP + commission (only if calculated as a
fixed percentage of turnover achieved by the employee)
• Salary will not include any arrears for earlier years, which are received during the
previous year.
• If a bonus is received for the last year in the current year, such amount of bonus will not
be included in HRA salary for the purpose of determining HRA exemption. You can
include the amount of bonus due to you for the current year which you will receive only in
the next year.
• Salary will include all amounts due (even if not received) pertaining to the period during
the previous year during which the rental accommodation is occupied by the employee.
• HRA actually received has to necessarily pertain to the period in the previous year when
the rental accommodation is occupied by the employee - meaning, HRA received for that
period during which the employee was not occupying the rental accommodation will not
be exempt. (If Shyam were occupying his rented house for only 9 months during the year,
then the HRA exemption of Rs.24,000 computed above will get restricted to Rs.18,000
(pertaining to the period of his occupancy).
Larissa Fernand
Granted. They can be pretty mind boggling. To help you in your tax planning, here is an
explanation of the various sections of the Income Act, 1961.
• 50 per cent of the salary where residential house is in one of the four metros or 40
per cent if it is in another metro
• Actual HRA received by the employee
• Excess of rent paid over 10 per cent of salary
Assume your salary is Rs 10,000, HRA amounts to Rs 2,000 and actual rent is Rs 2,500.
According to the first criteria, the deduction will amount to Rs 5,000, Rs 2,000 according
to the second and excess of rent paid over 10 per cent of salary is Rs 1,500. Since the
least qualifies, the sum valid will be Rs 1,500.
Want to know in which tax bracket you fall? Interested in figuring out what it actually
amounts to? Read on to find out.
Percent of
Annual income of Rs 2,00,000 Amount
tax
Rs 60,000 - Rs 50,000 = Rs 10,000 10% of Rs 10,000 Rs 1,000
Rs 1,50,000 – Rs 60,000 = Rs 90,000 22% of Rs 90,000 Rs 19,800
34.5% of Rs
Rs 2,00,000 - Rs 1,50,000 = Rs 50,000 Rs 17,250
50,000
The above calculation is based on the assumption that no investment has been made in
any tax saving instrument.
How to harvest a tax-free crop
Murali Iyer
Everybody would love to avoid tax. And a lot of them took the route of buying
agricultural land farm houses to make some non-taxable income. The definition of
agricultural income under the Income Tax (IT) Act is exhaustive and covers rent or
revenue from land being used for agricultural purposes, income from agricultural
operations and income from farmhouses.
Rent or Revenue
As per the Income Tax Act, "Rent" is described as periodical or pre-determined payment
in cash or kind, while "Revenue" implies a sharing agreement depending on agricultural
produce.
Cultivation of land to some extent is necessary for the income to be treated as agricultural
income. While growing of crops is covered under agriculture's ambit, activities like
poultry farming, dairy farming, aquaculture and sericulture on the same land are not
treated as agricultural activity. There is no tax on rent or revenue accruing from such
land. The land should be assessed to land revenue in India or subject to a local rate.
Moreover, a direct link needs to be established between the land and revenue.
Thus, while rent on land being tilled will be treated as income, interest on late payments
is taxable. Owners of agricultural land, tenants who have sub-leased the land and
mortgagees of such land - all enjoy tax-free agricultural income.
With SEBI cracking down on plantation companies, a lot less is heard nowadays on that
front. As these companies were offering tax-free income, many urban residents were
attracted to such schemes for it was their only way of earning agricultural income. What
needs to be examined here is whether the buyer gets leasehold rights to the land, or to
some trees, or whether he gets rent. If the scheme provides for the investor owning the
trees or getting leasehold rights on the land, then it is considered to be agricultural
income, and hence tax-free. In the absence of either of the two, any other income is
considered non-agricultural income, chargeable to tax.
Agricultural operations
All tillers (whether a tenant or sub-tenant of the land) are deemed as agriculturists and
enjoy freedom from tax. Processing of agricultural produce to make it fit for sale in the
markets is also covered under the ambit of agricultural income. Here, ownership of the
land is not a necessity.
In many cases, raw agricultural produce may not fetch the right market price. To make it
marketable, further processing may be necessary. Even though the final objective of the
processor is to sell the produce at a higher price, such sales are treated as agricultural
income. But if the farmer buys processed product and sells at a profit, such income will
be taxed.
Further, if substantial value addition is involved (with the whole character of the primary
produce undergoing a sea change), the entire operation is not treated as agricultural
income. In such cases, the process will be broken down into primary, secondary and
tertiary activities. While the primary and secondary activities will be treated as
agricultural income, the rest will be treated as business income (taxable).
Similarly, if you get tempted to get into lumberjacking or cutting down a large growth of
trees for tax-free profits, you could be in for a nasty shock. This income will not be
treated as agricultural income, as your involvement lies only in cutting, sawing and
selling of the trees etc and such profits will be taxed. Activities such as cultivation, soil
treatment and others associated with farming have to be indulged in for such an activity
to be non-taxable.
Farmhouses
The definition of "farmhouse" covers buildings owned and occupied by cultivators of
agricultural land as well as assessees who receive rent or revenue from such land.
According to the law, the sole purpose of such houses should be as residing places or
usage as storehouses. But there are ample instances of these "farmhouses" being used for
private parties, conferences, marriages and even being rented out with the revenue being
shown as agricultural income! So now, thanks to the first millennium budget, all non-
agricultural income from farmhouses are subject to tax.
• Tax is first calculated on the assessee's net agricultural income plus total non-
agricultural income.
• Tax is then calculated on the basic exemption slab increased by the assessee's net
agricultural income.
• Amount of tax payable by the assessee is the difference between the above two
UNI
In view of the amendment in the definition of the word ''income'' the court pointed out,
any special allowance or benefit, specifically granted to an assessee to meet expenses
wholly, necessarily and exclusively for the purpose of the duties of an office would be
included in the word ''income''.
''It has also been pointed out that under sub-clause (iiib) of clause (24) of section 2 of the
act, any allowance granted to an employee-assessee either to meet his personal expenses
at his place of work or his place of residence or to compensate him for the increased cost
of living is also to be included in income. Therefore, it is conceded that the payment of
the HRA or the CCA would be covered by the word 'income'," the court clarified.
Larissa Fernand
How often have you heard that term but never knew what to make out of it? Here are
some FAQs to help you come to grips with this issue.
So if I sold it before the stipulated holding period, I don't get the indexed benefit?
Correct. And to make it more clear, lets work with some figures.
Long-term capital gains Short-term capital gains
You bought a home for Rs 5,00,000 Rs 5,00,000
In the financial year 1985-86 1993-94
You sold it for Rs 15,00,000 Rs 15,00,000
In the financial year 1995-96 1995-96
You repaired the house for Rs 5,000 Rs 5,000
In the year 1990-91 1994-95
Expenses on transfer Rs 5,000 Rs 5,000
Capital gains Rs 4,30,890.25 Rs 9,90,000
How long should I hold the asset to avail of long-term capital gains?
Equity, preference shares and units of Unit Trust of India (whether they are quoted or
not), debentures or government securities (listed on a stock exchange), units of mutual
funds specified under section 10(23D) (whether quoted or not), have a holding period of
just 12 months. For all other assets, like property and diamonds, the holding period is a
minimum of three years.
If you sell it before this time frame you will have to pay short-term capital gains.
Are there any transactions that do not come under capital gains?
Yes, certain transactions are not considered as transfer and hence not considered as
capital gains. They are:
Also see
Larissa Fernand
Having the tax boys ransack your home and turn it upside down can be a harrowing
experience. Thus, it would make matters a lot easier if you are aware of your rights and
duties when faced with such an eventuality.
• Scrutiny: When they decide to conduct a detailed and in-depth review of the
return.
• Survey: Could be routine (often conducted in an area from time to time) or acting
on specific information. A factory showing a low turnover may have the
authorities snooping around checking stocks. A restaurant showing losses may
have them sitting there a couple of hours, or maybe the entire day, to check how
business is doing. Don't ask them for a warrant, they don't need one, anyway. But
then they cannot walk away with any of your possessions, either. Don't worry
about them coming home. A survey is only done on commercial premises.
• Search & Seizure: In plain English, it is a raid. And it can be done on commercial
or residential premises, need not be preceded by a survey and they can walk away
with whatever they feel is undisclosed. This time around, however, they do need a
warrant.
• Panchnama: A document, detailing the entire 'Search & Seizure' operation, which
has to be signed by you and two witnesses.
Information has various ways of reaching the Income Tax Department. It could come
from other government departments, newspapers, magazines and publications, or from
informers. Did you know that informers are awarded 10 per cent of the tax on
unaccounted money if the lead proves to be a genuine case of tax evasion?
However, before you convince yourself that this is a lucrative way to earn a few extra
bucks, think again. Informers are liable to be prosecuted under Section 182 of the Indian
Penal Code if the allegations prove to be false.
Once the Income Tax Department is satisfied that they have a genuine case of tax
evasion, the information is passed on to the Director of Investigation who can then
authorise a search.
In the course of a raid, if officials discover illegal foreign exchange or ascertain that
money has been siphoned off into overseas banks, the relevant information is passed onto
the Foreign Exchange Regulation Act (FERA) officials. Incidentally, raids can be
conducted under various Acts. The most common being the Income Tax Act, the Central
Excise and Salt Act, and FERA. The only difference is that while you can't be arrested
during a raid under the Income Tax Act, you enjoy no such advantage in the other two.
It starts as a wake-up call with the tax sleuths knocking at your door as early as 6:00 am
so that they have the luxury of spending the entire day at your place. Not a great way to
start the day. For you, i.e. Also, you certainly can't tell them to come back later or refuse
to let them in, lest you want to land up in jail.
Now that you are forced to greet them (they never come alone), have the presence of
mind to ask for a warrant of authorisation and check to see if it is actually issued in your
name: for, maybe it is your neighbour they are actually after. Convinced that it is you
they have set their sights on, check out the credentials of the search party and then
introduce them to each and every one at your house. If you have guests, they too have to
be introduced. And don't try packing them off because nobody is allowed to leave once
the tax authorities come calling. After the introductions, ask two witnesses over. Make
sure they are not the gossipy folks next door or else the entire neighbourhood will hear of
your plight by that evening.
Then starts the grilling. Don't try to use the line: "I won't talk without my lawyer
present." The law does not require your lawyer to be present. Try to be as honest as
possible. Questions will vary from how much you earn, what your monthly expenditure
is, how many people you support, how much of money is currently on the premises, do
you have any gold or valuables at home, and do you possess a bank locker. If you are not
sure of an answer, say so.
Then comes the crucial part when they may just decide to tear your house apart. Here,
you can't do a thing except watch. And when you see them rip your Shyam Ahuja
furnishings in the hope of finding dollars stashed in the mattress, or tear down the wall-
paper in a bid to find a hollow in the wall, you can cry your heart out. Of course, you
have the option of ignoring them and going right ahead with your day. Do you need to
eat? No one can stop you, though chances are you would have lost your appetite by then.
Their's, nonetheless, is whetted. They may follow you into the kitchen and check jars,
bottles and cupboards to see if anything interests them, and they wouldn't be looking for
food. There is no room in the house that is not accessible to the raid party.
Since all your statements will be recorded along with the entire proceedings in what is
called a 'panchnama,' read them carefully before you and the independent witnesses sign
it. If the authorities want to seize any 'evidence', you can't stop them. But they can only
take books and belongings of the person named in the warrant. They will make a list of
these articles which will have to be signed by you and the two witnesses.
Whew! They've finally gone. Now get on the phone and call your lawyer and chartered
accountant. Then write to the officer who authorised the search requesting for a copy of
the warrant as well as reasons and the statements recorded.
And, if the tax boys found nothing incriminating, you can challenge the action of the
department and file a writ petition to get the raid declared null and void. However, in case
you were thinking of nailing down any particular officer, forget it. The income tax
officials have immunity under Section 293 that states that they cannot be sued if nothing
is found during a raid.
Your duty: You cannot stop them from entering your house.
Your right: Check for a sealed warrant of authorisation in your name and with your
address signed by the commissioner or senior commissioner.
Your duty: Allow them to seize account books, cash, jewellery, ornaments, antiques,
property papers, documents, bullion, valuables and any other article which they feel is
incriminating. They can also keep them in a cupboard and seal it.
Your right: All documents, books and belongings taken by the authorities will have to be
returned within 180 days, except for a specifically recorded reason that has the approval
of the commissioner.
Your duty: Answer each and every question put forth to you.
Your right: To get a copy of any statement before it is used against you in prosecution
proceedings.
Now you have to file a special return for search proceedings. A notice estimating your
undisclosed income will be served and tax at the rate of 60 per cent will be imposed. The
notice will specify when you have to pay up (15 to 45 days) with an interest of 2 per cent
per month imposed on delayed payments. If you state that you have an undisclosed
amount of Rs 10,00,000 but the tax authorities figure it out to be Rs 20,00,000, then you
pay a penalty that could be as high as three times the difference of Rs 10,00,000. Failure
to furnish such a return can you three months imprisonment under Section 276 CC of the
Income Tax Act.
Trying to figure out if you need to file a return? Need to know if you fall under the 'one-
by-six' scheme? Want to know what a PAN is? Read on.
Section 139 (1) of the Income Tax Act, 1961, requires every individual, whose total
income exceeds the maximum amount which is not chargeable to tax, to file a return.
That means, only those individuals whose annual income is less than Rs 50,000 are
bypassed. However, if the person fulfills any of the conditions mentioned below, he is
obligated to file a return.
If an individual is 65 years old or more, and not engaged in any business or profession, he
is not subject to immovable property and telephone conditions.
If you are not filing the return or belated return within the time allowed, you will be
treated as an assessee in default, irrespective of the fact that TDS is deducted from your
salary.
Not furnishing a return of income is not a crime, but attracts penal interest and penalty
under section 234A and 271F of the Income Tax Act, 1961.
A duplicate PAN card can be issued when the PAN card has been lost or misplaced. This
could be when the assessee has not received the PAN card from the department, even
after the department has despatched it or there is an error in the PAN card issued to the
assessee owing to wrong or incorrect information furnished by the assessee/applicant
while filling Form 49A or due to subsequent change of name or other details.
In case of reported loss of PAN card by the assessee, a copy of the First Information
Report (FIR) filed with the police should be obtained before processing the request for
issue of a duplicate PAN Card.
In case the assessee claims that the PAN Card, despatched by the tax department, has not
been received, an affidavit to this effect may be obtained from the assessee for providing
a duplicate PAN Card.
Assume you made the PAN application in one place, say new Delhi, and then got
transferred on business to another city, say Bangalore. Since you had made an application
while you were in New Delhi, the official letter intimating the PAN will be sent by the
Income-tax Department to your New Delhi address.
Since you will be filing your returns in Bangalore, it would be advisable for you to write
a letter to the PAN Cell, Bangalore, intimating to them the fact that you have already
applied for the PAN at New Delhi and that now you are going to be assessed at
Bangalore.
Attach a photocopy of the said application to the letter and request them to allot the
number to you.
An individual must intimate his assessing officer as to any change in the name, address or
the nature of the business on the basis of which the PAN was allotted.
There are two factors that go into determining the applicable form for filing your return
of income. One is the type of income that comprises your total income. The second is
your net total income for the year.
To be more precise, you may determine the form applicable to you from the following:
FORM: 2A or 2D ['Saral']
SOURCE OF INCOME: All income except business income.
INCOME LIMIT: Net total income should not exceed Rs 2,00,000 during the year.
FORM: 3 or 2D ['Saral']
SOURCE OF INCOME: All income except business income.
INCOME LIMIT: Total income for the year is above Rs 2,00,000.
FORM: 2 or 2D ['Saral']
SOURCE OF INCOME: Total income includes business income.
INCOME LIMIT: No limit
You can get these forms from any Income Tax office falling under the jurisdiction of the
area in which you stay, you may even get these forms from some specialised stationery
shops. After ascertaining the form applicable to you, you shall have to fill the relevant
details on the form.
The Maharashtra government decided to do away with the stamp duty imposed on
Leave and Licence (L&L) agreements and impose instead a registration fee.
So you own a flat (or office or, maybe, even a shop)in a co-operative housing society.
And you decide to sell it. Or, maybe, just transfer it on someone else's name.
Execution of the agreement is just part of the procedure. There are lots of other
procedures to follow.
• A member who desire to transfer his flat in the society has to give 15 days'
notice to the secretary of the society. This has to be done in a prescribed form
whereby he has to state his intention for doing so.
• A committee meeting will then be called and this shall be placed before them.
It will then be decided whether the member is eligible to transfer his shares
and interest in the society.
• If the committee finds that the member is not eligible to do so, the committee
shall direct the secretary to inform the member about the same.
• Whatever be the decision of the committee, the secretary is bound to convey
this information to the member within three days of the decision of the
committee.
If the seller is given the go-ahead signal, here are the formalities to be followed:
Rule 24 of the Maharashtra Co-operative Societies Rules, 1961 states that the
member has to give a 15-days notice in writing, addressed to the secretary of the
society stating his intention to transfer the flat/shop/office in the society to the
proposed transferee. This notice has to be written in the prescribed form, containing
the name of the transferee and also the consideration for sale.
• Letter of Consent of the proposed transferee for the transfer of the shares and
interest in the capital/property of the society from the transferor to him.
In this letter the transferor is required to state reasons for the transfer and he is also
required to state that the shares/interest in the society have been held by him for a
period of not less than one year.
Under Model Bye-Law No 19(viii), the proposed transferee, who is an individual has
to submit to the society, a declaration on Rs 20 stamp paper stating that he does not
hold any land, whether vacant or otherwise exceeding 500 sq metres in area,
anywhere in any urban agglomeration, mentioned in the Urban Land (Ceiling and
Regulation) Act, 1976.
• Undertaking by the proposed transferee to use the flat for the purpose for
which it is purchased.
This undertaking must also state that he shall dispose off the said plot/flat/house
within a period of six months from the date of transfer of the flat in the society to
him.
A certified copy of the sale agreement executed by the parties to the transaction in
respect of the flat, on a Rs 20 stamp paper has to be submitted.
Proof of payment of stamp duty in the form of copy of receipt issued by the stamp
authorities.
A copy of the letter issued by the transferor to the transferee, stating that the
transferee has been put in vacant, peaceful and physical possession of the flat, has
to be submitted.
A certified copy of the Power of Attorney on Rs 100 stamp paper by the transferor to
the transferee, empowering the latter with certain authorities to act, argue or to
represent the transferor and also to sign letters, documents etc. related to
transferring the ownership of the flat in the name of the transferee.
The flat purchaser is also advised at the time of transfer, to submit a nomination
form as required under Bye-Law No 34. This nomination form should carry details
such as the share certificate number and distinctive numbers of the shares held by
him, the flat number and the area of the flat.
Please note that there are different formats of nomination forms in respect a case of
single nominee and that of more than one nominees. Also the nomination form has
to be attested by two witnesses.
A buyers' market
Aparajita Saha
Home is where the heart is, or so they say. But actually purchasing one (a home,
that is) relies on more practical factors such as low interest rates, attractive and
competitive home finance packages and great tax incentives. And, believe it or not,
the home buyer actually has all these factors in his favour.
Interest rates on home loans have never been lower. Real estate financers are
bettering one another with their respective loan packages and services. The
government has redefined its role from being a provider to that of a facilitator. Real
estate prices have bottomed out. Builders are pulling up their proverbial socks and
improving their act.
That leaves the consumer faced with one issue: to buy or not to buy? Let's see if we
can answer that one.
Property aspect
Where prices of property are concerned, Pranay Vakil, chairman, Knight Frank (real
estate consultants) advocates making a purchase. "Reasonable prices and a balance
between the construction and land cost make it a good time to buy a house," he
opines.
Around four years ago, the real estate market witnessed a crash in prices.
Consequently, potential buyers adopted a wait-and-watch strategy. However, a lot of
them who had been sitting on the fence are convinced that this is the right time to
make a move simply because of the reasonable and stable prices.
Have property prices bottomed out? Unlike the stock market where the sensex acts
as a barometer, the real estate market lacks a scientific index to measure property
prices. Hence, it is not possible to answer that question candidly. The biggest
hinderance to developing an index and monitoring it is the lack of transparency in
transacted prices. The 'black' component in the price makes it difficult to develop and
utilize an index.
Added to this are other problems such as the lack of a base for statistical estimates,
lack of published data, unavailability of dependable data and the absence of macro-
figures make index construction very difficult.
In spite of the absence of a scientific and reliable index, experts feel that real estate
prices are at their lowest best now and can go only in one direction - upwards. "The
volatility with respect to prices has subsided. In fact prices are going to increase in a
steady manner due to the spurt in demand," feels Rajiv Jamkhedkar, manager, retail
assets, personal banking, HSBC.
According to real estate observers, property prices have come down by almost 35
per cent in the last four years indicating that probably the market has bottomed out.
Mathru Prasad, assistant vice president, GIC Housing Finance Ltd (GIC), is of the
opinion that the "pricing policy has undergone a change. Earlier prices would be
based on what the traffic could bear. Now it's far more reasonable as prices consist of
the cost and a certain profit level. Property prices have leveled out."
"Builders are offering a lot more quality, service and value for money than they did
earlier. They have introduced international features and raised their standards to
benefit the consumers. The recession has brought about professionalism in the
construction business," says Raymond Dastoor, deputy general manager, marketing,
GESCO Corporation Ltd.
The financials
Interest rates, which are a prime determinant while purchasing real estate, are also
at an all time low. Interest rates were around 17-18 per cent six-seven years ago.
Today we see a substantial drop to 12-13 per cent. In fact, these are the lowest rates
being witnessed in the past 22 years.
Hence the trend of thought that with interest rates touching such a low, they can
only rise. There is not definite answer on this front. Suresh Chandnani, assistant vice
president, ICICI, chooses to be cautious and says, "It is difficult to say whether
interest rates have levelled out or if they will fall further or rise, but they are at a low
right now."
Last but not least, what should ultimately convince the buyers is the presence of a
large number of flexible and attractive loan packages, each of them striving to be as
competitive and alluring as possible. Real estate financers are emphasising on
qualitative aspects such as service that assign utmost importance to the consumer.
Free insurance, waiver of prepayment dues, extended tenure of loans and flexibility
with respect to loan repayment are just some the features used to lure consumers.
Larissa Fernand
Buying land? It can turn out to be quite problematic if you don't tread carefully. For
starters, make sure that the title is clear or else claims on your land will result in years of
litigation. The moment the land is yours, fence the entire area to prevent encroachment.
Simultaneously arrange for security to prevent any illegal occupation.
Once you start developing your property, you may be faced with a whole new range of
issues. Getting hold of basic amenities like plumbing, water and electricity may prove
problematic. Of course, if you have purchased agricultural land, the government may not
permit any construction on it.
In fact, extreme care should be taken when buying agricultural land since the terminology
is different and so are the local laws. For example, one person may own the land while
another the crops. This will cause a problem regarding possession of land. Always ask for
a copy of the plan approval by the Town and Country Planning Board or any other similar
authority before buying vacant land.
That brings us to an apartment under construction. This one will be cheaper than an out-
right purchase of one ready for occupation. But do check for the commencement
certificate for full work and make sure that all the titles are clear. Construction should
have commenced with at least two slabs completed. Make sure that there is sufficient
work going on at the site.
As far as a readymade apartment is concerned, you have to check the finish of the flat:
flooring, painting, amenities, switches, windows, doors, permanent fixtures, plumbing
and common area finishes. If you take a housing loan, then the actual repayment of the
loan commences after the housing finance company makes the final disbursement. Until
the final disbursement is made from the housing finance company to the real estate
developer, the consumer has to pay a pre-EMI rate of interest.
So if construction is delayed, then the final disbursement too is delayed and the buyer
loses out by paying more pre-EMI. This problem will not arise in the case of a ready
apartment where repayment starts immediately.
If nostalgia and sentiment are pushing you towards buying an old home characterized
with its Gothic architecture, hold on. Chances are that the government might have
categorised it as a heritage property.
Grade I constructions are those that have a historical value and no changes in
construction are permitted on the structure. These are usually held by the government and
not available to the general public. You might be eyeing a Grade II or III structure. Under
these categories, repairs and modifications are permitted with the approval of the
authorities. Limited interior changes and repairs are permitted under Grade II while
alterations (including design and reconstruction) are permitted under III though they have
to match the original plan.
Jyoti Dialani
Imagine you want to sell your apartment. At long last, you manage to zero in on a
buyer who is ready to offer what you want. And then, you find that the co-operative
society wants a 'fee' to allow you sell your own apartment.
Now, imagine yourself as the buyer. You just manage to cough up hard-earned
money to buy that apartment and then you realise that the society wants a transfer
fee. In both the instances, you are bound to be furious.
At the time of transfer, the transferor is requested to give a letter to the society
stating that he is giving the donation as a voluntary contribution towards the
common amenities fund, maintenance fund or major repairs fund, and that he has
instructed his accountant to reflect the same as a voluntary contribution in his books
of accounts.
Also, sub-clause (vii) of the Model Bye-Law No 40(d) provides for a payment of
premium at a rate to be fixed by the general body meeting not exceeding 2.5 per
cent of the difference between the book value of the flat and the price realised by the
transferor on a transfer of flat or Rs 25,000, whichever is less.
However, today the transfer fees are not restricted to an amount of Rs 25,000. It
fact, there are no guidelines for societies to follow. The amount is fixed by passing a
resolution at a special general body meeting of the society. It is paid at a fixed rate
per square foot or as a lump-sum. And, make no mistake, this amount could be
huge.
Let's talk about legality
So, while it is legal to pay transfer fees, is it legal to demand huge amounts from a
buyer or seller? Let's see what the law says on this issue.
In the case of The Poona Hindu Middle Class Co-operative Housing Society Ltd v/s
Sudhakar Gopal Palsule before the Maharashtra State Co-operative Appellate Court,
Bombay (Pune Bench), it was held that any donation demanded by the society in
excess of what was permitted by the bye-laws, if such bye-laws are not amended, is
illegal.
In another case of (1989) CTJ 319, Ramana Co-operative Housing Society Ltd v/s S
D Chittar, Bombay, before the Maharashtra State Co- operative Appellate Court,
Bombay, it was held that the society had no right to charge transfer fees in excess of
the provision of Re 1 under the bye-laws and that the member had a right to demand
the money back with damages in the form of interest. This is applicable in the case
of a society which has not adopted the model bye-laws. Such a society can recover a
maximum transfer fee of only Re 1 at the time of transfer of a flat. It should be
clarified that this amount shall remain the same, regardless of the area of the flat
transferred and it is not Re 1 per sq ft, but only Re 1 fixed.
It is clarified that The Maharashtra Co-operative Societies Act and Rules do not
provide for any right to the society allowing it to charge transfer fees in addition to
the Re 1 as prescribed by the bye-laws when the member intends to transfer his
property in the society in favour of a third party.
In fact, The Bombay High Court went a step further in holding that the resolution
fixing transfer fees, even if passed by the general body of the society, would have no
over-riding effect and binding on the members, if it is not approved by the Registrar
and, even if approved, it would be totally illegal.
Larissa Fernand
A huge undeclared amount can get the tax men sniffing at your door
Let's say that you have set your sights on this palatial apartment in a prime location
in Mumbai offering you a fabulous view of the sea. It's going to set you back by Rs
10 million. The hitch: the seller has no intention of declaring Rs 2 million to the
authorities. So the papers are drawn up for Rs 8 million.
Section 37(I) of the Income Tax Act states that properties where the transaction cost
is Rs 7.5 million or more (Mumbai), Rs 5 million (Delhi), Rs 2.5 million or more
(Calcutta, Bangalore, Chennai, Ahmedabad, Pune) and Rs 2 million and above (other
cities) is to be brought to the notice of the income tax department.
If the authorities feel that the property has been undervalued, then they can auction
it to the nearest bidder. On record, since you have just paid Rs 8 million, that is all
that will be reimbursed. You lose the balance Rs 2 million which you have already
paid to the seller.
Larissa Fernand
Totally ecstatic about buying your new home? After all, you are getting fairly good
bargain for 2,000 sq ft of area. Don't mean to be a kill-joy, but, can you tell me how
the area is defined?
Is it carpet area? If not, is it 'built-up' area or 'super-built up' area? What's the
difference, you ask? Quite a bit.
With no common criteria for measuring constructed space, the quote could be on the
basis of any of the above three concepts. Of course, it goes without saying that there
is no universally acceptable definition of these terms too.
Generally speaking, the carpet area is defined as the actual area within the walls of
your house. To demonstrate, if you had to lay out a carpet, how much area would it
require? That's the carpet area for you.
Built-up area goes a step further and it includes the carpet area as well as the area
of the inside walls.
This break up is extremely essential as builders can place anywhere from 60 per cent
to 80 per cent of the super built area as carpet area. That means, if the quote is on
2,000 sq ft, the carpet area could be anywhere from just 1,200 sq ft to 1,600 sq ft.
If this break up is not mentioned in the agreement, demand that the builder mention
it in the sale deed.
Larissa Fernand
So you are all set to go in for a Leave and License agreement. But don't sign on the
dotted line just yet. Before you go any further, here's what you should make note of.
Deposit amount
Security deposit return clause stating that the deposit has to be returned to the
tenant within 7 days of expiry of the lease term or else interest will be charged per
day
Rate of interest to be paid in case of deposit not being returned must be specified
Monthly rent
Car parking
If furniture is being provided, the agreement should be split into two: Leave &
License / Furniture & Fixtures agreements
A clause indicating that the agreement will be terminated due to earthquake, riot
or such acts of nature so the tenant need not pay for the period that premises are
not occupied
A clause stating when the deposit has to be returned to the licensee if all bills are
settled and, if not, the rate of interest to be imposed
A clause indicating that the licensee stays in possession of the apartment till the
landlord returns / settles all his dues
A clause regarding what causes a breach of contract by either party and what the
penalty is
A clause indicating that the licensee has a right to stay in the apartment for the
specific time period even if the owner decides to sell, transfer or mortgage his
property
A provision of at least three months notice in case either party wants to break the
contract earlier than the original period
Don't permit the licensee to stay on the premises until the agreement is written on
a stamp paper and duly signed by both
If you are open to negotiations, fix the rentals slightly higher than what you would
like to earn
Municipal taxes and monthly society outgoings will have to be paid by you
Utilities like the telephone and electricity bills have to be paid by the licensee
•
A client has the right to verify if past electricity and telephone bills have been
paid (keep paid bills ready)
A client has the right to check the title papers and the floor plan to verify the area
of the apartment
Ask for a no-objection certificate from the society giving permission to lease the
apartment
The society may levy a non-occupancy charge on the owner of the premises
Leakages: Check for leakages and ask the landlord to rectify them. If he does not
and you are still willing to stay there, negotiate for a lower deal.
Title documents: Does the person leasing the apartment to you actually own the
apartment?
•
Electricity bills: The electricity meter should be in the owner's name and the past
bills should have been cleared.
Plans: The floor plan should clearly tell you what the area of the apartment is and
a qualified architect must have certified the plan.
Payments: All the payments (monthly rent and deposits) required from you should
be stated in the agreement.
Cheque payments: Make each and every single payment only by cheque
If the owner of the apartment is not signing the agreement then make sure that the
person doing so has the Power or Attorney to that effect
Larissa Fernand
You have a vacant apartment. But, you will never rent it out. After all, what if your tenant
decides not to vacate and makes your apartment his own. That's why tenancy has been
put on the backburner and L&L is now the most popular option.
A Leave & License agreement does not give the occupants any ownership rights. The
agreement only permits occupancy for a specific timeframe which could range from 11
months to 33 months. Should he refuse to vacate, the matter can be brought before the
Competent Authority who will then take action.
A lease, on the other hand, generally refers to a plot of land and has a much longer
timeframe which could extend to 99 years. Where a lease is concerned, the occupant can
sub-lease it to a third party (if permitted in the lease deed), a right not given in the case of
L&L.
A rental is shunned by landlords as the issue of permanent occupation often causes
problems. With no definite timeframe, the tenants often refuse to relocate and claim
tenancy rights. If the matter is taken to court, it is dragged on for years.
Is permission required?
So what's the logic? In case he decides to play tough and refuses to vacate, apart from the
apartment owner filing a suit, the society can also do so in the co-operative court. If it is a
company, then suits can be filed under the Companies Act.
The most lucrative deals can be got by letting out your apartment to a company looking
for residential space for its employees. If you are lucky enough to own an apartment in a
building used for commercial purposes or situated in a commercial area, then you can
offer it for office space.
However, corporates are extremely finicky when hunting for space. The Money Channel
has listed some of the criteria they consider necessary. While your premises may not
fulfill all the criteria, at least satisfying most of them should suffice.
There are two ways to make money on L&L: investing the refundable security deposit
and earning a monthly income. Let's assume that according to the market value of the
property, the cost to the tenant should be Rs 3,00,000 for 11 months. You, as a landlord,
will make more money if you take a lower deposit and a higher rent. Here is the range
within which you can negotiate with the licensee (person you are leasing out the premises
to).
• Make sure the returns you are expecting are in tune with the market value.
• Fix quote on the basis of the market value. If you are open to negotiation, fix it
higher than what you would like.
• You will earn more if you take a higher monthly rent versus a deposit (assuming
you place the latter in a bank fixed deposit).
• If the monthly rent is surplus income, open a recurring deposit for the amount or
at least part of the amount. It will increase your returns, however minimal.
• If you are repaying a loan, make sure that the monthly income earned on this is
more than the equated monthly installment, or EMI, that you pay to the housing
finance company.
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- NRI Larissa Fernand
- Real Estate
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- Travel What's in a name? If it is property that is the subject of discussion, then
it's all in the name.
Listed below are the various options available that will take care of the
inheritance factor.
Individual ownership
There is one sole owner who calls the shots. No one else's permission or
signature is required to sell (or even lease or rent).
While this leaves no room for conflict, it might turn out to be a problem
if you reside in a different town. You can take care of this issue by
handing over the power of attorney to a neighbour, relative or friend to
deal with any property matter that might crop up.
Christians, Jews and Parsees come under the Indian Succession Act.
Buddhists, Jains and Hindus come under the Hindu Succession Act. The
Muslim law is further divided depending on the various sects but a
common feature is that the owner can pass on only one-third of his
property. The balance goes in accord with the Muslim law.
Joint ownership
Now it does not make much of a difference if you don't draw up your
Crucial real estate documents
Larissa Fernand
Real estate is an aspect of personal finance that touches virtually each individual's life. At
some point in your life, you may decide to buy a house or sell the one you have.
Incomplete documentation can mean big trouble.
Agreement of sale:
All important information regarding the sale is recorded here, such as the area, apartment
number, cost of the apartment, mode of payment, tenure of payment and date of
possession.
Title deed:
A title deed in your name indicates that the property is indeed yours. And if you ever
decide to mortage your property for a loan, you will need to give the original title. Should
you sell the property, retain a copy of the sale deed. In fact, every original document
concerning the legal title of the property has to be handed over to the new owner. But
don't do so unless you make photocopies of each and every single one of them. This will
help you in calculating your long-term capital gains.
If the property is sold in parts then do not submit the original sale deed. Since you bought
the entire property in one lot and are disposing it in parts, you need not surrender this
document. It will suffice if you just hand over certified and true photocopies of the
original purchase deed to the new buyers.
The first is the original title deed. If the property is mortgaged, he will not have this in his
possession. The second is the letter attesting to ownership of property. This one is usually
given when buying land or when the amount being transacted is large. In other cases, the
buyer's lawyer will need to check up on his own. He can do this by either asking the
society or going to the registrar of assurance's office (the registrar will know if the
property is mortgaged). Later on, if you ever decide to mortgage the property, you will
need the original title and this document.
Memorandum of understanding:
If you are unable to make the entire payment upfront, you will need to format a
memorandum of understanding which will state all the conditions as to when the
payments are to be made. Make sure that the period as well as the amount owed is
recorded correctly since this will be the one document that can prove how much you owe
the selling party.
Form 37I:
In case the value of the property is more than Rs 75,00,000 (Mumbai), Rs 50,00,000
(Delhi), Rs 25,00,000 (Calcutta, Chennai, Bangalore, Ahmedabad, Pune) and Rs
20,00,000 (Chandigarh, Jaipur, Cochin, Trivandrum, Nagpur, Faridabad, Gurgaon,
Gaziabad, Noida, Kanpur, Patna, Lucknow, Bhubhaneshwar, Cuttack, Coimbatore,
Madurai, Hyderabad, Surat, Indore, Baroda, Bhopal), government permission is needed
to transact a sale. This document has to be filed by both the buyer and seller, and the
entire procedure will take around three months excluding the month in which it is filed.
Stamp duty:
Since stamp duty is levied by state governments on all real estate agreements, it varies
from state to state. The amount is dependent on the purchase price that is shown in the
agreement of sale. For example, in Maharashtra, a purchase valued at Rs 10,00,000
would invoke a stamp duty of Rs 38,750. For amounts exceeding Rs 10,00,000, the duty
is 8 per cent of the amount plus Rs 38,750. Stamp duty is to be paid at the time of
registration.
Registration:
Registration refers to the recording of the contents of a document with a Registering
Officer appointed by the state government. The registration of the agreement has to be
done after a fixed period of time from the due date of execution. The date and amount to
be paid for registration varies between states. The deadline in Maharashtra is four months
from the date of execution and the fees are 1 per cent of the amount with a maximum of
Rs 20,000.
Fard:
Where a purchase of agricultural land is concerned, all details regarding ownership,
quantity of land, mortgage of land, if any, and details on who is cultivating the land is
mentioned in a document called Fard. Obtain the latest copy of Fard from the seller. Once
the sale deed has been executed in your favour, apply for a new Fard in your name after
meeting the concerned Patwari of the area. Make sure that the new Fard contains your
name as the owner and cultivator.
Coping with the pink slip
Larissa Fernand
Yes. We are actually talking about what you should if you do get sacked. Most people
don't think much about it till it happens. And then, they are too shocked to react. In
case you have landed in such a spot, read on.
• Tell your family about it. Immediately. You will have to start cutting corners
and you will need your family members to also do so, specially if you are the
sole bread earner or the main bread earner.
• Take stock of all your liabilities and see where you can cut down. Of course,
you can't cut down on food but you can do away with the 'goodies' or with the
imported cheese. Entertainment will have to drop.
• Take stock of all your assets to see if you need to sell any. Will any of the
debentures be maturing in the near future? Till then would you need to sell
some shares to see you through. Don't consider selling your house in a hurry.
You may never be in a position to buy one again. Instead, you could move to
a cheaper location and rent the current home.
• Look at various sources of income that you may be getting. Are you getting
rent from somewhere which will help pay off all your bills? Any income
scheme which assures you of a regular return?
• Don't stop any payments on housing loans or insurance. You may end up
losing your home and, if you fall sick, then you will not even have a medical
insurance to see you through.
• Stop using your credit card. And if you do, then make sure that you settle all
bills at the end of the month. If you decide to carry over payments in the
hope of getting a job in the near future, you are walking on a thin rope. If the
job does not materialize, your debt will mount fast.
• Don't take any loans. Don't think of going in for a personal loan to make ends
meet. Anyway, you won't get one if you don't have a job. If you are desperate
for cash, try and take loans from your assets. You could explore options like a
loan from your public provident fund (PPF), provident fund or insurance policy.
You could also use your house as a mortgage but that would be a more
expensive method.
• And do file your returns. It could be that you were sacked mid-way through
the year, so the tax man will want an account of your income till then. Make
sure you sit with your accountant to ensure that you don't have any taxes to
pay. And, if you do, please pay them. Of course, this is assuming that you do
have substantial income that does put you in the tax bracket.
Larissa Fernand
You can't figure this one out. All you seem to do is service your loans and pay your
bills. You are in a debt trap and you want out. Hopefully these tips will show some
light at the end of the tunnel.
• Started revolving credit on one of your cards? Stop making any payments on
that card. Each and every single payment will get caught in the revolving
credit. Start using cash or another credit card.
• The interest on the card is killing you. Switch cards. Opt for any of the other
cards, like the Amex, ICICI or Stanchart card, which offer a low rate of
interest for six months (if you transfer debt). Transfer all your debt onto this
card and stick to the date of six months to clear your outstandings.
• Alright. You are in a soup. You are revolving credit on all your cards.
Consolidate your debt. Opt for a personal loan and repay all the other loans.
Then focus on servicing just this one loan. The personal loan will be cheaper
to service than revolving credit.
• List all your inflows (salary, interest, dividends, rent earnings, gifts, windfalls,
bonus, LTA) and outflows (money spent every month). The inflows should be
more than the outflows or at least match them if you are steeped in debt. If
outflows are more than inflows, start cutting down. Here's how: Don't stop
payments on electricity bills, water bills, telephone bills, gas bills, doctor/
dentist/ chemist bills, children's school fees, insurance premia, household
help, house rentals or loan repayments. Keep money aside for taxes and
sudden expenditure like an illness or a repair job. Cut down on your
newspaper bills (you can do away with one or two of the international
publications for some time), clothing and footwear. Knock out CDs, video
cassettes, LCDs, books, holidays, gifts, impulsive buys, eating in expensive
place and consuming alcohol. Keep entertainment to the bare minimum.
• Leave home without your credit card. That will stop you from using it. Tear up
your ATM card. Don't keep much money in the savings account except what is
needed for your monthly expenditure. Put the rest in bank fixed deposits so
should an emergency arise you can just break the deposit. And do not keep
spare cash at home.
Larissa Fernand
Not sure where you stand where your finances are concerned? Take a look at these
questions. If you answer positively to even one of them, then you do have a cause
for worry.
The first step is to Get out of debt. Once that is done, follow these tips on How to
start saving. Finally, be disciplined. The trick is in opting for investments which keep
going only if a particular amount is constantly fed into it.
• A Public Provident Fund (PPF) account allows you to make a maxium number
of 12 deposits in a year. So either you can put in an amount every month,
every alternate month, an annual lumpsum or whatever intervals between
deposits you wish to maintain. Since it is not mandatory that you deposit an
amount every month but every year, you probably need an instrument that
will force you to be more disciplined.
• Opt for a recurring deposit in a bank or even the post office recurring deposit.
Here you are forced to deposit a fixed amount every month for a fixed time
frame. At the end of the tenure, you get the principal and the rate of interest
earned over that period. This is basically targeted at the risk-averse. You are
assured of a fixed rate of return over this time frame and you can reinvest the
full amount at the end of the tenure.
• Willing to take a little more risk? Opt for a systematic investment plan (SIP)
of a mutual fund. Here too you are forced to keep a fixed amount of money
aside every month. Assume, you deposit Rs 1,000 on a monthly basis. If the
net asset value (NAV) of the fund is quoting at Rs 50, you will get 20 units of
the fund. The next month if the NAV drops to Rs 20, you will get 50 units. If it
rises to Rs 60, you will get 16.7 units. So over time, your units in the fund will
increase. You can take an income fund or if you are really keen on investing in
stocks, then you can go for an equity fund. But the bottom line is to keep
investing every month. There is no need to invest only in one fund. You can
even try small amounts in different funds.
Previously, Rohit Sarin analysed how an individual at three different stages of his
life can plan for his retirement. This time around, he tackles another financial goal
which virtually everyone faces: house purchase.
We will restrict this analysis within the following parameters:
CASE I
• A recommended debt to equity ratio of 40:60. For this, a mix of debt and
equity based funds should be selected.
• Estimated current value of the desired property of Rs 2.5 million would inflate
to a little more than Rs 7.9 million after 15 years.
• This would be part financed by a loan to the extent of 25 per cent which is Rs
1,980,000.
• Therefore, the balance amount of Rs 5,950,423 would need to be saved over
a period of 15 years.
• With a debt to equity mix of 40:60, the person needs to begin with a total
monthly investment of Rs 5,954. This monthly saving/contribution would keep
on increasing every year.
CASE II
• Recommended debt to equity ratio of 50:50. For this, a mix of debt and
equity based funds should be selected.
• Estimated current value of the property of Rs 2.5 million would inflate to Rs
53,97,312 after 10 years.
• The value of the current investment would grow to Rs 404,556.
• Therefore, the target amount to mobilise after 10 years would be Rs
49,92,757.
• This would be part financed by a loan to the extent of 25 per cent which is Rs
12,50,000.
• Therefore, the net amount to save in next 10 years would be Rs 37,42,757.
• With a debt to equity mix of 50:50, the person needs to begin with a total
monthly investment of Rs 10,429. This monthly saving/contribution would
keep on increasing every year.
CASE III
• Recommended debt to equity ratio of 50:50. For this, a mix of debt and
equity based funds should be selected.
• Estimated current value of the property of Rs 2.5 million would inflate to Rs
36,73,320 after 5 years.
• The value of current investment would grow to Rs 4,02,271.
• Therefore, the target to mobilise after 5 years would be Rs 32,71,049.
• This would be part financed by a loan to the extent of 25 per cent which is Rs
8,20,000.
• Therefore, the net amount to save in next 5 years would be Rs 25,51,049.
• With a debt to equity mix of 50:50 the person needs to begin with a total
monthly investment of Rs 24,150. This monthly saving/contribution would
keep on increasing every year.
Rohit Sarin
In the previous piece we saw that identifying goals is a first step in financial
planning. Taking that as a lead, we have taken case studies of three individuals of
varying ages: 25, 30 and 35.
One common criteria being their goals:
With the assumption that all of them share a balanced risk profile, here is how they
should plan for their retirement.
CASE I
• A recommended debt to equity ratio of 40:60. For this, a mix of debt and
equity based funds should be selected.
• Estimated current value of monthly expenses of Rs 10, 000 would inflate to
Rs 100, 627 on retirement after 30 years.
• To generate such an amount of regular income Rs 12,075,188 would need to
be invested in financial instruments giving a steady annual return of 10 per
cent.
• A major chunk (86 per cent) of this would be financed through accumulated
PF balance which would have grown to Rs 1, 03, 71, 655.
• Therefore, the balance amount of Rs 17, 03, 534 would need to be saved over
a period of 30 years.
• With a debt to equity mix of 40:60,, the person needs to begin with a total
monthly of only Rs 143. This monthly saving/contribution would could keep
on increasing every year.
CASE II
• Recommended debt to equity ratio of 50:50. For this, a mix of debt and
equity based funds should be selected.
• Estimated current value of monthly expenses of Rs 20, 000 would inflate to
Rs 136, 970 per month on retirement after 25 years.
• To generate such an amount of regular income Rs 1, 64, 36, 340 would need
to be invested in financial instruments giving a steady annual return of 10 per
cent.
• About 50 per cent of this would be financed through accumulated PF balance
which would have grown to Rs 76, 73, 755.
• Therefore, the balance amount of Rs 87, 62, 586/- would need to be saved
over a period of 25 years.
• With a debt to equity mix of 50:50, the person needs to begin with a total
monthly of Rs 1,740. This monthly saving/contribution could keep increasing
every year.
CASE III
• Recommended debt to equity ratio of 50:50. For this, a mix of debt and
equity based funds should be selected.
• Estimated current value of monthly expenses of Rs 30, 000 would inflate to
Rs 139,829 per month on retirement after 20 years.
• To generate such an amount of regular income Rs 1, 67, 79, 446 would need
to be invested in financial instruments giving a steady annual return of 10 per
cent.
• About a third of this would be financed through accumulated PF balance which
would have grown to Rs 56, 37, 516.
• Therefore, the balance amount of Rs 111,41, 930 would need to be saved
over a period of 20 years.
• With a debt to equity mix of 50:50, the person needs to begin with a total
monthly of Rs 4,927. This monthly saving/contribution could keep increasing
every year.
Larissa Fernand
That is something you don't manage to do. You start saving with a particular aim in
mind but then something else comes up and there goes the little piggy bank. Maybe
you are saving, but don't really know what you are saving for. Follow these steps to
help you achieve your financial goals.
1. The first step in achieving your goals is to list them and then prioritise them.
So you need to renovate your house and budget for a holiday abroad and buy
a music system. Which one has to been achieved first? Getting guests over a
couple of months down the road? Then maybe you would like to do the
renovation first. The holiday is anyway not on the cards till the end of next
year. And where the music system is concerned, there really is no hurry.
2. Put a price tag to each. To do this you will have to be very, very concise and
clear on what it is you are working towards. Does renovation mean just a
paint job? Is it restricted to just one room in the house? Are you planning on
changing the furniture? What about the upholstery? Depending on what you
have in mind, you can determine the cost. As for the holiday abroad, take into
account not just the airfare but also the visa costs, airport tax, hotel costs (if
you are not visiting family or friends), shopping and any other sightseeing
expenditure.
3. Now that you are aware of which needs are most important as well as how
much it will cost you, set a time frame. Allocate separate budgets for each
and start working towards it. Or, if your income does not justify saving
simultaneously for three goals, then just save towards one at a time. So once
the renovation is done, start saving for the holiday. But in all this, it is
assumed that you are keeping a separate fund for retirement or for a rainy
day which is not to be compromised on.
4. Another way of achieving your goals is to take a loan. How much of debt can
you incur? The answer can vary from 25 per cent to 40 per cent of your gross
income, depending on whether you pose the question to a conservative or an
aggressive risk take. For this you will have to look at two factors: your
comfort level with debt along with your net worth. If your income is just
sufficient to get you by, it is ridiculous to think of taking a loan because you
won't be able to service it. If you have to urgently meet your goal, then you
may be forced to do so but make sure that you can comfortably repay the
loan. On the other hand, if you have substantial assets and are not
comfortable with the idea of being in debt, then use your money. Also, if you
have to meet your goal with urgency, tapping your assets may be the only
option.
5. Get yourself medically insured. God forbid, but should you meet with an
accident, or, on the other extreme need a bypass, your hospital bill could set
you back by around Rs 1,00,000 at least. Say bye to all your dreams and
start from scratch. The only option: get yourself medically insured. No doubt,
you will have to settle these bills first before you get reimbursed by the
insurance company. But at least, you will get reimbursed. If not, your savings
could get totally wiped out and worse still, you could end up in debt.
Larissa Fernand
A little imagination can work wonders. Yes, but just how imaginative can you be with
your savings? Well, here are 10 points to get your creative juices flowing.
• Was drooling over that pastry in the cafeteria, but decided that Rs 50 was too
much to pay to put on a 1,000 calories? Dump the Rs 50 you would have
spent on it in the piggy bank.
• Just finished repaying a loan? Pretend you haven't. Keep that sum aside every
month (or, at least, part of it). Instead of landing up in the creditor's wallet, it
will now find its way into your piggy bank.
• Start saving all 'extra' money. So the next time you go shopping with Rs 500
and spend just Rs 450, deposit the balance Rs 50 in the piggy bank. Over
time, it will amount to a substantial sum.
• Are you an emotional spender? Angry? A new pair of shoes might help.
Lonely? That new outfit would cheer you up. Depressed? A couple of beers
would be perfect. This can turn out to be a big hurdle in your savings pattern,
especially if you get lonely, angry and depressed often. It may be cheaper to
visit a psychiatrist.
• Should you get a bonus, or a rich relative gives you a gift, or leaves a tidy
sum for you in his will, invest this money instead of spending it.
• Find yourself using your card too often? Start leaving home without it. So that
shoe sale, which would have got you spending on your card, will require you
to make a trip back. If it's irresistible, you will. Chances are you won't. Pat
yourself on the back for this.
• What if you do carry your card along for a genuine purpose and then you saw
this sale and the temptation was just too much? Don't lose hope. Just sign
with your left hand. Chances are that the shopkeeper won't accept the
signature and you will be relieved of your obligation to buy.
• If your credit card gives you the option of putting a picture on it, put on
someone's photo whom you utterly detest. Chances are you will hate using
your card because the sight of that person's face would ruin your day.
• Every time you exceed your monthly budget, burn up calories. Keep a ration:
say Rs 100 will get you walking for a kilometer. The result: a slimmer you, but
a fatter wallet.
• The fact that you are not happy with your savings shows that you are not
earning enough, to maintain your lifestyle. Earn more. That means, work
more. It could mean taking up another job. Look at the brighter side: working
like a dog will not leave you any time to spend money.
Larissa Fernand
Ah! The convenience of Internet banking. You can access details of your account any
time of the day, or night for that matter. Who's to bother with a trip to the bank? You can
operate from your home or office and, maybe, even from a cybercafe.
But before you do decide to opt for Internet banking, make sure that the services offered
match your expectations. Broadly, there are four areas on which you should focus on:
services offered over the Net, transfer of funds, account history and security.
Services
Can you stop payment of cheques? Does the bank permit ordering of cheque books over
the Net? If yes, how many days will it take to reach you? Is it possible to report the loss
of an ATM card online? What about payment of credit card bills online? Can credit card
transactions be viewed over the Net? Requests for a new fixed deposit or renewal of
existing deposits? Payment of electricity or mobile bills online? For demand draft
requests, does the draft get delivered to your own address or to that of a third party?
Funds transfer
Can you transfer funds between accounts of the same bank? Do both the accounts have to
be in your name or can you transfer from your account to someone else's account? Can
you transfer funds from your account to an account with another bank?
Account history
How far back does the account history go? Can you download just the last transaction,
the past four transactions or maybe even the past 10 transactions? Will you get a detailed
report of a particular account? Is account information restricted to balance and statement
enquiry. Can you check the balance in just one account at a time or do you have the
option of checking it in all your accounts. Do you have the option of retrieving
information on the basis of criteria other than name (date or amount). Can you check how
many cheques have been issued or deposited in the past, say, eight transactions?
Security
How many login attempts are permitted before the password is disabled? Can you pre-set
an activity period if your terminal is left unattended? For example, you are accessing
information on your account but some urgent work cropped up and you left your terminal
unattended. After, say 5 minutes or 10 minutes or maybe even more, will access
automatically get terminated? Everytime you log in, will the last date and time of login be
displayed?
Besides hardcore banking, keep an eye open for other facilities as well. Does the bank
offer free Net access for a fixed number of hours, can you customise your account. ICICI
Bank offers to nickname your accounts to avoid remembering detailed account numbers.
Can your balance be monitored and a message sent in case it drops below a particular
level?
In the future, banks plan to introduce e-broking services online and set up shopping
portals so that the money will be directly debited from the customer's account,
eliminating credit card security problems.
For starters, you can take a look at the demo offered by various banks on their sites. See
which one you are most comfortable with. Here are the banks which you can check out:
ICICI Bank (www.icicibank.com), HDFC Bank (www.hdfcbank.com), Global Trust Bank
(www.globaltrustbank.com), IndusInd Bank (www.indusind.com), UTI Bank
(www.utibank.com) and Federal Bank (www.federal-bank.com).
Way back in 1995, when Security First Network (SFN) set the first pure
Internet bank amid a lot of sniggering, critics sat down to write its obituary.
However, a year later, Booz Allen & Hamilton came out with a North
American internet banking survey where the figures made a strong case
for Internet banking.
By way of costs, the survey stated that Internet banking is the cheapest
form of delivery. Here is how they estimated the cost of transactions to be:
$1.07 (full service branch), $0.54 (phone banking), $0.015 (PC banking)
and $0.01 (Internet banking).
· By the end of this year, 78 per cent will have a Web site, up from 55 per
cent at the end of 1999.
· Currently, 17 per cent of all banks say they offer Internet banking
services and another 47 per cent expect to offer them by the end of this
year.
· 28 per cent of all banks cite both Internet portal Web sites and Internet-
based banks as competitive concerns.
· Within the next three years, 89 per cent of banks will offer home banking
via an interactive Web site, 87 per cent will offer electronic bill payment,
and 75 per cent will offer online loan applications.