Saturday, August 29, 2015

NPS: Should you Invest or Not?

What is NPS:
National Pension System (NPS) is a voluntary, retirement savings scheme through systematic savings during their working life. Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime.  The scheme is structured into two tiers:
Tier-I account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.

Tier-II account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber.  The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.

It can be valid across all jobs and locations. This is regulated by PFRDA (pension Fund Regulatory And Development Authority).
At the time of exit subscribers may withdraw the lump sum amount or may convert the amount to an annuity fund to withdraw as monthly pension or combination of both.
Tier-II account may be converted to Tier-I account but vice versa is not possible.

Tax Benefit:
From the FY 2015-16, 10% of the salary contributed in the NPS is eligible for a tax deduction up to Rs.1.5 lakh under the section 80 CCD and above this, you get an additional deduction ofRs.50,000, taking the total deduction benefit to Rs.2 lakh.
Although you will get extra tax deduction for what you invest in NPS, the maturity is still taxable. This is the major drawback I have found.
Under the EPF, PPF you get a deduction of only up to Rs.1.5 lakh under section 80C. But the maturity amount from it is tax-free.
NPS maturity corpus is taxable. This means you have to pay income tax on the 60% that you withdraw from NPS. The annuities that you get are again considered income and are taxable. Once the rules change and NPS becomes tax-free, which we hope, it will become a very good product because of its low costs.
So now the question is, should one open a NPS account to avail the additional 50,000 tax deduction?
Suppose I invest 50,000 a year in NPS for the next 15 years and get a return of 10%. I will get Rs. 17.97 Lakhs before taxes.
The return from NPS will be taxed. Not just the gains. If I am in 30% slab, the post-tax maturity value is Rs. 12.58 Lakhs.
Suppose my taxable income is 12,00,000.  I have managed to save Rs. 1,50,000 in say PPF+EPF+ELSS.
So my net taxable income now is Rs. 10,50,000
Case A: The total tax liability is Rs. 1,35,000. So I am left with Rs. 9,15,000 to manage my investments (other than Rs 1,50,000) and other expenses.
If, I invest Rs. 50,000 in NPS, the net taxable income is, Rs. 10,00,000.
Case B: The total tax liability is Rs. 1,25,000. So now I am left with 10,00,000-1,25,000 = 8,75,000 to manage investments (other than Rs 1,50,000) and other expenses.
In Case A, I do not invest in NPS. So I am left with Rs. 40, 000 extra. I can invest this in an equity mutual fund for 15 Y at 12% return (Min). I will get Rs. 15. 86 Lakhs.
In Case B, I invest in NPS. Meaning I do not have any extra sum left. My NPS investment for 15Y at 10% return will give be the same Rs. 12.61 Lakhs.
Please do not invest in NPS for tax-saving only. It has liquidity issue and If you quit before age of 60 years, 80% of the money will be locked in an annuity. After 60, minimum 40% is the annuity requirement.
Paying the tax and investing in equity mutual funds you will be able to beat NPS return.

Hence, please do Not Invest in National Pension Scheme to save Tax only

Wednesday, May 6, 2015

Contingency Amount: A must have for all

Yesterday, I failed to pay my credit card bill of Rs 80000 because of insufficient amount in my account.
I think you are bit surprised why I am saying like this. Last month one of my best has friend has asked me for some financial help. His father was admitted at the hospital. To pay the hefty hospital bill he needs some help. I had no option other than saying yes to him. I paid the Rs. 80000 from my credit card to pay partial amount of the hospital bill which he required.
I thought the bill payment date of the card was far from the date, so it will be arranged anyway. After some days friend’s father was again hospitalized and I could not ask for the money to him. I decided I have to arrange it by myself only.
I approached to Axis Bank (Credit card provider) for conversion the amount into an EMI. I have found that it will cost the processing fee of Rs 1200 and interest rate is 18%. So, I have decided to go for a personal loan from my company cooperative society.  This loan costs the processing fee of Rs 50 only and interest rate is 12%. I have applied the loan first half of april and ultimately due to some internal procedure I am unable to receive the amount on the last payment date i.e. 05th april. Till now I have not received the loan amount and the credit card bill is outstanding.
I am using credit card since 2011. I have never failed to pay the credit card bill in time. This is the first time I am facing this issue.
I think, if I have the contingency amount in my bank account I may not be having this problem. So everyone should have 3 months expense in their savings account if they not want to face these unforeseen circumstances.
Request everyone to have contingency amount in their savings account as it is very important to shape up your personal finance.

Sunday, March 15, 2015

A Simple 3 Steps Guide to be Tension Free at Tax Season

As the month of March is coming for this year, what comes to our mind first is Tax Saving or how much I will get as Salary in this month. Most of the salaried persons like us started their tax planning when they get notified by their employer about filling up their Form-C. We fill up the Form-B or the projected investment exhausting the limit like Rs 150000/- in 80C. After that we forgot about our commitment. During the filling up of Form – C we ended up with short of investments. As a result we start buying whatever our friends (Insurance agents) suggest. These investment decisions become wrong most of the time. Many of our friends and colleagues are also facing similar situation investing in the wrong instrument. Many persons do not want to invest so many amounts because of shortage of money at this month. They prefer giving 10% tax which gives them more comfort. So I request all to follow simple 3 steps:

  1. Please prepare your tax planning in the start of the financial year i.e. April month. As the budget is announced in the February and one month i.e. March is to understand the budget. After necessary analysis in the March you can go ahead one by one starting from April.
  2. In the September month you review your investment properly. If it is not in line with your planning, please try hard from that time to maintain the schedule.
  3. In January again review your portfolio and if there is any extra money available you can channelize it to some instruments other than tax saving. In March prepare the form-C correctly. 

Hope all of you will follow these steps in the next financial year starting in April, 2015.

Friday, December 26, 2014

New Year: Target with Insurance

We all are in festive mood. Five more days to come to welcome New Year 2015. Usually we make promise for the new year. Let this year we promise about adequate insurance coverage to each and everyone life. For every one of us we need at least adequate Life Insurance and adequate Health insurance. In this regard, other insurances like car, home etc. insurances are also important. For the time being, we concentrate about the life and health insurance.

For an individual, the adequate life insurance cover shall be ten times of yearly income. Suppose, one person is earning 10 lakhs rupees per year, so he or she should take an insurance coverage of at least 1 crore rupees per year. To take one crore rupees insurance one has to spend maximum 10,000 rupees only. This amount of 10,000 rupees is very less amount comparative to the income. Most of the time we are ending with costly life insurance cover which has other benefits like maturity value etc. My suggestion to prospective buyers is that please don’t go by the conventional insurance policy or the endowment policy. Please take a term insurance of adequate coverage which was mentioned earlier in this article. 

You can take the following example from my experience:
When I started my carrier and a new earner I did not know much about personal finance. By the influence of one of my relative I have taken a Jeevan Saral Policy which has sum assured of 5 lakhs rupees and the yearly premium is Rs 24020 for 20 years period. After a few years when I come to know something about insurance I have realized that I have made a mistake.Let us say for the insurance coverage of 5 lakhs rupees you have to spend 500 rupees per year. The rest of the amount you can invest in a mutual fund which can return about 12-15 % interest which can return you more than 5 lakhs rupees. As an example if you invest 23000 rupees per year in a diversified equity mutual fund you will get approximately 1600000 rupees. Moreover if you invest this amount in tax saving fund you can tax benefit of the whole amount.

Next insurance which we need to take is the health insurance for total family. Now a days Health Care costs are rising day by day like anything. Even if you have the cover from existing employer please do not forget to take a health insurance because of the transition period of one job to another job and for the members of the family who are not covered under the insurance. If you have dependents like spouse and children take a family floater cover and if you have dependents like your parents means aged person prefer individual cover for them. For a principal insurer of aged 26 years and family of 4 persons including spouse and two children, the 3 lakhs medical insurance costs around Rs 6000.

So let’s begin this year with securing the adequate life and health insurance.

Wishing all of you a very very happy and prosperous new year 2015.

Thursday, November 20, 2014

Decision on Purchase

Last month I have bought a DSLR camera. I was supposed to get a performance bonus. Instead of saving the amount for uncertain future I was tempted how to spend the money. Then I was explore the option of buying Nikon D3100 costs around Rs 21000 from Amazon. Amazon was giving an offer that time which was inncreased my interest to buy the camera. Since, the camera came to my hand I have not used that like DSLR. It is serving the purpose of point and shoot camera. The same purpose can be served with Rs10000. That means I have lost Rs 11000. When I analysed my decision I found I have made a mistake buying the costly camera. So when buying someconsumrr electronic goods such as camera, mobile, LED tvs etc. please don't go by the flow, analyse the requirement and then go for buying. Ifyou don't do that you are actually losing the savings for your uncertain future.

Wednesday, November 5, 2014


Now a days young generation of our country is more interested in EMI i.e. Equated Monthly Installment over SIP (Systematic Investment Plan) or regular savings. This tendency has been increased due to E commerce portal. Credit card has added fuel to this tendency. In a office floor with a capacity of 500 persons you can easily see at least 50 new mobiles or some other electronic items are coming from Flipkart, amazon etc. They are more interested to buy it on offer even if they don't require it. 

In addition to the above, home loan, consumer durable loans and personal loans are adding burdens to the youth for their status war with their peers.

One should spend as per their requirement. Don' t go by the offer and try saving at least ten percent of your net income in the regular savings scheme like equity SIP or recurring deposit.

Wednesday, November 30, 2011

Home Loan

I have a very bitter experience with the HDFC home loan. My brother has taken a home loan worth Rs 18 lakhs. The loan was applied and processed in Singapore. It was sanctioned very soon because of NRI thing. But when the loan disburesement processing is started in kolkata (Saltlake Branch) it becomes a nightmare for me. The persons in the Saltlake branch are absolutely useless. They dont receive any phone call. Sometimes i have called 20-25 times but they never respond. They dont reply any mail. They can talk with the persons who are physically present at their office at a particular time. They dont commit anything. They dont acknowledge the receive copies. Their behaviour is also not so good. So I want to suggest everyone that please dont go for a home loan to HDFC.

Please also post your experinces about home loans.