Wealth Tax

Source: ET Wealth – 14 Jan 2013

 

Smart things to know – Wealth Tax

·         Wealth Tax is an annual direct tax imposed on the net wealth of individuals and HUFs with reference to the preceding financial year or the current assessment year

·         Net wealth is calculated as the aggregate value of all chargeable assets on the valuation date, minus the outstanding debts on these assets

·         Financial Assets, one residential property as well as cars, property and other assets used for commercial or business purposes are exempt from wealth tax. Any property rented for at least 300 days in a year also doesn’t attract wealth tax.

·         The taxable assets include real estate and land other than a house, precious metals, including jewellery and bullion, motor cars, urban land and cash more than 50000.

·         Wealth tax is charged at 1% on the amount that exceeds 30 lakh of the net wealth of the assessee on the valuation date, which his 31 March of a financial year.

·         For resident Indians, wealth tax is payable on all taxable assets in India or abroad. For NRIs, wealth tax is applicable only on the assets that are in India.

Bank: Valuation Report

Source: ET Wealth – 14 jan 13

 

Q: I took a home loan from a private bank. After the loan was disbursed, I asked the bank for a copy of the valuation report, but it refused to give it, stating that the report was an internal document and could not be given to customers. Is the bank right in refusing the report or am I entitled to a copy generated by the bank on the property that I am buying?

 

A: the Code of Bank’s Commitment to Customers does not say anything when it comes to certain documents obtained by the bank for the purpose of processing loan applications. These include the valuation report, lawyer’s report and so on. However, since you have already paid the amount for obtaining the valuation report, there is no reason why the bank should not give you a copy. You can submit your representation to the bank in writing. If it sticks to its stand and denies access to the document even after taking this step, you can consider taking up the issue with the banking ombudsman for a clear picture on the matter.

Your guide to debt funds: How you can gain from less-known fund category

Tax Treatment

1)       While the interest earned on deposits and bonds is added to your income and taxed at the applicable rate, the income from debt funds held for more than one year is treated as long-term capital gain and taxed at a lower rate. This is a bonanza for anybody with a taxable annual income of over Rs 10 lakh. Instead of paying 30% tax on interest from fixed deposits, he can pay only 10% tax on long-term capital gains from debt funds. The tax could be even lower if he opts for the indexation benefit, which adjusts for inflation during the holding period

 

2)       A major draw is that you can indefinitely postpone your tax liability by investing in debt funds. The interest income is taxable on an annual basis, irrespective of the time that you actually get it. You need to pay tax on the interest accruing on a cumulative fixed deposit or a recurring deposit even though the instrument has to mature in 5-10 years. On the other hand, your investments in debt funds will not have a tax implication till you withdraw them. This also makes these funds the best way to invest in your child's name. When you put the money in your minor child's name, the income from the investment is treated as that of the parent who earns more. This clubbing of income is meant to prevent tax leakage, but investments in mutual funds can circumvent this provision. If the funds are redeemed after the child turns 18, the capital gains will be treated as his income, not yours

3)       There are other ways to earn tax-free income from debt funds. You can set off losses from other assets against the gains from these schemes. Tax rules allow carrying forward of capital losses for up to eight financial years. For instance, if you had booked short-term losses on stocks and equity funds when the markets slumped in December 2011, you can adjust them against the gains from your debt fund investments till 2019-20

4)       Any short-term capital gain is taxed as income, but you can get past this with the dividend advantage. Though they are tax-free, dividends of debt schemes reach the investor after the deduction of dividend distribution tax. This is 13.8% for debt funds and 27.4% for liquid funds. Even so, this is lower than the 30% tax an investor in the highest income bracket will pay on withdrawals before one year of investment.

Liquidity

Liquid funds live up to their name. If you redeem before 3 pm, the money is in your account by 12 noon of the next working day. In other debt funds, it is with you by the second working day

 

 

Five common circumstances where debt fund schemes can prove beneficial

Five common circumstances where debt fund schemes can prove beneficial

1) Saving for a short-term goal

If you need the money in 6-12 months, go for ultra short-term or short-term debt funds. The returns of these funds are not volatile because they invest in bonds of very short maturities. Any change in interest rate does not affect them. You can expect a return that is comparable with those from fixed deposits of the same tenure. While there is no difference in the applicable tax rate if you are withdrawing your investment within a year of investing, you do get the liquidity advantage, as also the flexibility of a mutual fund. You can also opt for a liquid fund for this purpose, but a short-term debt fund may be able to give you slightly better returns. Of course, the difference of 10-20 basis points in the returns should not matter if you invest for six to eight months. Do consider the exit load of the fund when you invest.

2) Need money at a very short notice

The tenure of the investment is not always fixed. Noida-based Feroz Mehmood (see picture) may need the money at a short notice if he comes across a good deal in real estate. A liquid plan is best suited for goals with undefined tenures. These plans do not levy any exit load and the growth is slow and steady. The most important aspect of these schemes is the safety of capital. Since the funds are invested in the call money market, there is virtually no chance of a default or credit risk. There's also the liquidity they offer. If you redeem the investment before 3 pm, the money is credited to your account by 12 noon of the next working day. The returns are only a tertiary concern. In recent months, liquid plans have given decent returns comparable with FDs.

 

3) Avoiding high tax on fixed deposits

The tax advantages of investing in a debt fund have already been spelt out in detail. However, income funds can give you more than just a low tax rate. In a scenario where interest rates are expected to go down, these medium-term debt funds stand to gain. In the past 6-12 months, these funds have given returns that are at least 100-200 basis points higher than the prevailing fixed deposit rate. This is because of the inverse relationship between interest rates and bond fund NAVs. By that logic, long-term funds may appear attractive, but they are also very volatile.

 

4) Large sum to invest in equity funds

The benefits of debt funds extend to equity investments too. Financial planners say that if you have a large sum to invest, you should not do it at one go, but in monthly SIPs. However, if you put the money in a savings bank account, it will earn a piffling 4-6% interest. Instead, put it in a debt fund and then create a systematic transfer plan (STP) into an equity fund. This is similar to an SIP, except that the money comes from the debt fund, not your bank account. This is possible only in schemes from the same fund house. This means you must first identify the equity fund you wish to invest in and then put the money in a debt fund from the same fund house (see table). Some fund houses even waive exit loads on STPs

 

Term Insurance: HDFC Click2Protect

Term Insurance – Finally made a decision

After searching extensively for a Term Insurance policy with the following requirements, i finally went ahead with HDFC Click2Protect – 50L – 30 years - Plain Vanilla policy with no riders

Requirements:

* My age: 35 ; Tenure required - 30 years

* Amount: 50Lakh

*  A company with a good claim settlement ratio.

* Possibility of any inbuilt riders or additional riders like Critical Illness riders or Accident disability riders at minimum cost

Why HDFC?

This is the list i prepared

	Sum Assured	SA Term	Premium	CI amount	CI term	Premium	Total
Aegon Religare	10L	45	2240
Met Suraksha Plus	10L	30	6191	10L	25	5472	11663
Met Suraksha TROP	10L	20	7402	10L	20	5303	12705
Met Suraksha	15L	25	7079	10L	25	6270	13349
Aegon Religate	20L	45	4000
Met Suraksha	20L	25	8876	10L	25	6270	15146
Aegon Religate	30L	45	6000
Aviva iLife	30L	30	5729
Aegon Religate	40L	45	6440
Aviva iLife	40L	30	7639
Aegon Religate	50L	45	5650
Aegon Religate	50L	30	5846				5846
Aviva iLife	50L	30	5920				5920
Aviva iLife	50L	30	6030
Aviva Lifeshielf platinum	50L	30	10450
HDFC click to protect	50L	30	8150				8150
Kotak epreferred	50L	30	9635				9635
Kotak Preferree	50L	30	11826
MetProtect	50L	30	10148				10148
ICICI icare	50L	30	12303				12303
Aegon Religate	55L	45	6215
Aviva iLife	55L	30	6634
Aegon Religate	60L	45	6780
Aviva iLife	60L	30	7236

My shortlist included: Aegon Religare's online policy, Aviva ilife and HDFC click2Protect.

Catch: Claim settlement ratio:

http://www.onemint.com/2011/03/23/comparing-term-insurance-claim-rejections/

As per the Section 45 of Insurance Act, 1938 states: In accordance with Section 45 of Insurance Act, 1938, no policy of life insurance shall, after the expiry of two years from the date on which it was effected, be called in question by an insurer on the ground that a statement made in the proposal of insurance or any report of a medical officer, or a referee, or a friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statements was on material factor or suppressed facts which it was material to disclose and that it was fraudulently made by the policyholder and that the policyholder knew at the time of making that the statement was false or that it suppressed facts which it was material to disclose

Going by the statement above, after 2 years of spending time with a policy, the company should ideally not reject any claim. So, all this claim settlement ratio is for the first two years. Here, HDFC outshines all private insurers and obviously, Aegon is the worst.

Now consider the claim settlement ratio for cases after 2 years, you would find Aviva and SBI showing a small percentage of rejections. Other companies including Aegon have negligible values.

My logic:

·         Why did I reject Aviva?

o    if a company has a considerable amount of rejection after 2 years, there is a culture in the company to reject claims.

·         Why did I reject Aegon?

o    My friend suggested a logic that if I konk off, my wife should not run pillar to post to get the money, hence, for me, it is better to go with a company which has good service rating. Hence, I chose HDFC Click2Protect for me.

o    I plan to go with Aegon for my wife.

Next steps:

·         I am looking for a critical illness cover.

·         Aviva has an independent critical illness cover. I should explore this further. I want to check if it makes sense to avail of this or to have it covered as part of health insurance.