My maiden book's pre-launch..patience pays big time.

Robert H. Schuller once said, 

Never cut a tree down in the wintertime. Never make a negative decision in the low time. Never make your most important decisions when you are in your worst moods. Wait. Be patient. The storm will pass. The spring will come.

How true. There were times when it was the easiest thing to lose patience with persistent delays in the launch of my book (From the Rat Race to Financial Freedom), when most of my friend circle inquired about another "new date" that i wish to propose for the launch of my maiden book attempt. There was a stage when i started appreciating even my friends, for having the patience to keep coming back to me and asking for a new date for book launch. 

Ah !! things have changed since then !!

As with wealth management, this needed a hell of a lot of patience. It has taken its own sweet time, but it is worth all the time, energy and effort when I see the end result in front of me. Nothing can be achieved without the support of your loved ones and your family.... and this case is no exception. I wish to thank each one of you who have contributed in your own ways to bring the book to this stage.

The book is now in its pre-launch stage. I have received a limited set of copies for review comments by eminent personalities. Though i always had lot of confidence in what has gone in the book, but some of the comments which i have already got from personalities completely stranger to me have been truly mind blowing and extremely satisfying to the core.

That i need to have patience for another 1-2 weeks before the book starts hitting the book stalls itself seems a long wait, but i know it, once again - it will be worth all the effort !! 

Irrespective of how the book performs, the satisfaction of being the first and only member of my known ancestral chain in my family to have published a book (almost) seems to be a huge reward in itself, the cash equivalent of which will never do justice to the inner happiness it has already given me.

Catch you soon with the book in the stands !!

Cheers

Manoj Arora

Comprehensive or Third Party Insurance for your vehicle

Background
Third party insurance and Comprehensive insurance are two options available for owners who want to insure their automobiles. Owning a new car is a delightful experience and a car is a thing of pride for the owners. Getting it insured is a necessity. There are people who consider their car as an asset and hence go for a comprehensive insurance, while others take it as a utility to cover distances and are satisfied with a third party insurance only.
Whatever the type of car insurance you opt for, it is a fact that getting insurance is a must for your car. Understanding the differences between a third party insurance and a comprehensive insurance can give you the required knowledge to take an informed decision and be prudent about optimizing your vehicle insurance expenses.

Why do you need to insure your vehicle?
Vehicle Insurance is important not only to protect your vehicle, but also to save you from any financial loss caused by accidents, damage or theft of your car. In addition, car insurance covers the safety of the co-passengers, someone else's property, pedestrians and yourself.
Also, it is mandatory under the Motor Vehicles Act 1988 to get your car insured as soon as you purchase it.

The parties involved
In insurance terminology, first party is the individual or business that is getting insurance policy and the insurance company is called the second party. Third party is the person or company that claims damages after suffering a loss through your car. Third party coverage is most commonly used in terms of auto insurance. Comprehensive insurance, on the other hand, as the name suggests, is full coverage that includes third party coverage.

What is Third Party Insurance (TPI)?
Third party coverage refers to damage or loss of property to third party. Third Party Insurance (TPI) is also referred to as Compulsory Third Party insurance (CTP). It indemnifies vehicle owners and drivers who are legally liable for personal injury to any other road user in the event of a motor vehicle accident. Your TPI insurance will cover you for claims made against you by other road users such as drivers, passengers, pedestrians, cyclists, motorcyclists and pillion passengers.
It is a compulsory form of insurance and the TPI premium is included in your registration payment.

Merits of Third Party Car Insurance
- Premium Calculation for 3rd Party Car Insurance is always lower against comprehensive policy

- TPI premium is independent of car value, and therefore gives value for money, especially for expensive cars.
- No Cap on Compensation Amount to the third party injured or damaged.

Demerits of Third Party Car Insurance
- Does not cover injuries or loss to the insured himself or his own car.
- Does not cover for loss, damage or theft of car.


What is Comprehensive Insurance (CI or CCI)?Comprehensive policy on the other hand is all inclusive and covers third party claims. Comprehensive Car Insurance not only covers your car for accidental damage, theft and fire. But also gives you a fixed liability cover for damage you may cause to someone else’s car or property.

Merits of Comprehensive Insurance
- Covers for injuries or loss to the insured himself or his own car.
- Covers for loss, damage or theft of car.
- The Limitations of 3rd Party Insurance is also the biggest difference between Third Party Car Insurance and Comprehensive Policy. However, along with 3rd party insurance, once can also take theft insurance. But combined premium will then be equivalent to Comprehensive Car Insurance Policy making it nonviable to have 2 insurance policies and rather go in for comprehensive policy.

Demerits of Comprehensive Insurance
- Expensive.


Conclusion
In general, Comprehensive insurance gives you a better piece of mind. So go for it.

But in case you want to get more prudent about the vehicle insurance expenses, then you can follow a general thumb rule that if your car is less than 7 years old, go for comprehensive insurance and later you can switch to TPI. The only logic behind this thumb rule is that a car older than 7 years has lesser probability of theft or financial impact of vehicle damage.

Cheers

Manoj Arora

What is Systematic Withdrawal Plan (SWP)

Background

Most mutual fund investors know how systematic investment plans (SIPs) help tide over market volatility by averaging out costs during good and bad times. It’s not only a hedge against ups and downs, but also a convenient mode of investment because you don’t have to write out a cheque, fill up a slip and submit it to the mutual fund every month. What about systematic withdrawal plans (SWPs)?

What are SWPs?

Systematic withdrawal plans (SWPs) are, in a way, the reverse of SIPs. In a SWP, instead of putting money in the fund, the investor redeems a fixed amount from his investment on a predetermined date every month.

Concept behind SWPs

Just like SIPs help tide over market volatility by averaging out costs during good and bad times, exactly in the same way, it is difficult to predict the right time to withdraw money from the market, and a systematic withdrawal plan averages out your returns from the market, and helps overcome the mistakes made by trying to time the market.

Advantages of SWPs 

SWPs has many advantages. Let us analyze a few of those:

1) SWPs score over dividends in case of debt mutual funds because they incur a lower tax. Technically, an investor does not have to pay tax on the dividend received from any mutual fund. But the mutual fund has to pay a dividend distribution tax (DDT) on the dividend paid for debt-based funds. This burden is passed on to the investors by compulsorily deducting the amount from the fund’s NAV. Hence, the so-called “taxfree” dividend the investors receive from any debt-oriented fund comes to them after a deduction of DDT. The DDT rate ranges from 12.5% in case of balanced and debt funds to 25% in case of liquid or money market funds. Only equity mutual funds, which invest at least 65% of their corpus in stocks, are exempt from DDT. The only way to avoid DDT in a debt fund is to go for a cumulative option and start an SWP of the amount that is needed by the investor every month. A major benefit of SWPs is the tax rate, which is lower than the DDT. The profit from the sale of units being redeemed at every withdrawal is taxable. In the first year of investment, the profits are included in the investor’s income for the year and taxed at normal rates. But after a year, the profit is treated as long-term capital gain and taxed at a flat rate of 10% or at 20% after indexation benefit. So the SWP is a better deal than the dividend option. (More about this in the next post)

2) Creates a customized Cash flow

SWPs also help an investor customize the cash flow to suit his needs. This is especially useful if the investor does not have any other source of income. Imagine a situation where a pensioner needs Rs 10,000 a month for his expenses but the dividend from his mutual fund investment is only Rs 7,000 a month. This too is not assured. He would be better off with an SWP of Rs 10,000, wherein the SWP would deplete the corpus by around Rs 3,000 every month.

Important:

1. Some mutual funds charge an exit load if the investment is redeemed before 6-12 months. Make sure you take an SWP that does not attract an exit load, and if it does, start the SWP after the stipulated period.

2. If you require an exact amount regularly then the Fixed Option is suitable for you. If you do not want this withdrawal to disturb your capital contribution and would like only to reap the appreciation generated in the investment, you should opt for the Appreciation Option.

Conclusion

So, while SIP is well known because mutual fund companies sell investments, no one wants to sell withdrawals, for obvious reasons. It is up to you to take an informed decision and sign up for SWPs to save on taxes as well as average out your market returns.

All the best !!

Manoj Arora

Term Insurance Vs Whole Life Insurance

Background

When it comes to buying life insurance, neither there is any dearth of plans nor are the insurance companies and their well meaning agents shying of bombarding you up with options. Two of the most fundamental life insurance plans are Term insurance and Whole life insurance. Knowledge about the right insurance plan to buy for yourself can not only save you lot of money but also give you the appropriate risk coverage.

What is Term Life Insurance?

Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant "term". After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. 

If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.

A few other salient features of Term insurance are:

1) Term insurance is usually least expensive

2) The first thing to be decided while buying a term insurance is the sum assured. This is arrived after considering the lifestyle and the current debts of the person taking it up. In the event of the death of the person the sum assured could be used to repay the debt.

3) Term insurance does not give any maturity benefit to the buyer.

What is whole life insurance?

A whole life insurance policy serves as an investment and offers protection for the entire life of a person or up to 100 years whichever comes earlier.

The buyer of this policy pays a premium every year. Out of this a portion will be for protection aspect and the remaining is invested in the company. If a profit is made, the buyer will get a bonus on the invested amount.

Also, the investment grows in value and is returned to the buyer, normally at the value sum assured, if he chooses to withdraw or surrender or lives till the maturity of the policy. In the case of death of the buyer of the policy before the maturity period the nominee would be given the sum assured.

Term versus whole life

Usually, term insurance is a pure risk cover, and allows you to separate your investments from risk coverage. It is the cheapest form of insurance and therefore, if your immediate need is risk mitigation, go for term insurance.

If it is likely that you may need coverage even after 30 years span (ie when your term insurance expires), then go for whole life policy. Whole life insurance plans cover you for your entire life irrespective of the age of your death (or till you attain 100). If you attain 100, you get your sum assured in any case, while there is nothing in return in term insurance.

Conclusion

In nutshell, if you are 30 years today and want to buy one of these policies, and if you have planned your retirement well, and you are quite confident that you are not likely to have financial dependents on you after another 30 years, ie at the age of 60+, then term insurance is the best policy.

If you are unsure about your retirement planning and have fluctuating incomes, it makes more sense to go for whole life insurance.

Cheers

Manoj Arora

8 Thumb Rules and Ratios you need for your personal budgeting

Making your personal finance work is important, and there are some rudimentary ratios and multipliers that give you a fair idea of where you stand with respect to your budgeting decisions at your home. Let us have a look at those.

1. Debt to Income Ratio

That denotes the percentage of income that goes into your debt repayment. Debt can be in terms of your mortgage EMIs or other personal or vehicle loans that you may be repaying.

Debt to Income Ratio = (Monthly Debt Repayment / Monthly Take home income) * 100

This ratio should not exceed 40% for mortgage based payments and 10% for other debts. Mortgage based payments can go up to 40% because the re-payment is building up a big asset for you.

2. Discretionary Spending

You may be living a frugal life for the sake of your financial freedom but everyday joy is a must. Life is only in the present - neither in past nor in future. At the same time, it is important to make the distinction between wants and needs and take prudent decisions for your and your families future.

Discretionary Spending should not exceed 15% of your net take home income.

3. Savings Ratio

This ratio shows how much of your income you should ideally save. The higher the ratio, the better it is.

Savings Ratio = (Your annual savings / Your annual income) * 100

When you are young and just starting off your career, the ratio can be as high as 40-50%. It gradually keeps coming down as liabilities go up in life, and it can go to as low as 10-15% in the age of 40 to 50 years.

4. Retirement Planning

This should be the most important financial goal for any investor. You can get a loan for anything today but for retirement.

At least 10% of your income should go for retirement kitty.

5. Contingency Ratio

This measures your ability to raise money during extraordinary circumstances such as a  medical emergency or a loss of job.

Contingency Ratio = Liquid Assets (e.g. FDs, Cash etc..excluding house, equity) / Monthly expenses.

One must have a contingency fund to take care of at least 5-6 months of household expenses.

6. Insurance Multiple

Adequate insurance risk cover is the bedrock of financial planning. Use this multiple to find out if you have sufficient cover.

Insurance multiple = (Life Insurance Cover - Outstanding loans) / Your annual income

It is advisable to have an insurance multiple of slightly above 6 to make sure you have adequate coverage.

7. Equity Exposure

Stocks / Equity have the potential to give you highest returns among all asset classes, but also carry the highest risk. Striking a risk-reward balance with age is necessary. Use this ratio to know how much you should invest in equities.

Equity Exposure = 100 - Your age.

If you are 25 years today, 75% of your portfolio should be in stocks. Risk should start coming down with growing age.

8. House Affordability Ratio

This ratio tells you whether it is a right decision to buy the house that you always wanted to buy or would that purchase likely to land you into a financial mess.

House Affordability Ratio = Price of house / Monthly income

If the ratio exceeds 60, then you are buying a house that you cannot afford. However, your final decision can depend on the assurance you have about the rise of your income in the coming years.

Use these ratios and thumb rules, just as a guideline. You need to innovate and explore more into the financial world. Things that work for everyone else may not work for you and vice versa. 

Cheers

Manoj Arora

What is Wealth Tax in India

Background
Most people believe that paying their taxes diligently and timely will help them to get a good night's sleep and so, they discharge their tax liability year after year by paying income tax on time. However, many taxpayers remain ignorant about paying another form of tax -- which is charged on the assets gathered by them over time. Known as the wealth tax, it is the less famous sibling of income tax, which is payable on the wealth accumulated by individuals over the years. As it is an additional tax, it is levied over and above the income tax.

Why Wealth Tax?
While income tax is payable on the total taxable income earned by an individual in one year, wealth tax is paid on the possession of certain assets which fall under the Wealth Tax Act of the Indian taxation system. A wealth tax is a tax on the accumulated stock of purchasing power, in contrast to income tax, which is a tax on the flow of assets (a change in stock). Wealth tax is a direct tax levied on the ownership of certain assets by individuals and Hindu Undivided Families (HUFs) even though these assets may not generate any income. It is governed by the Wealth Tax Act, 1957.

Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following :-
a) Individual
b) Hindu Undivided Family(HUF)
c) Company

Can i ignore Wealth Tax?
Penalties related to ignorance of wealth tax are much more severe as compared to that of income tax. Remember that ignoring wealth tax can lead to serious problems for a taxpayer, with the penalty ranging from 100% to 500% of the unpaid tax, and in extreme
cases, even jail.

 
What is Taxable? 

The assets which are taxable under the Wealth Tax Act are:
1) Residential property other than one house
2) Guesthouse
3) Farmhouse
4) Cars (unless used for commercial hiring)
5) Precious metals including those in the form of jewellery
6) Gold
7) Air crafts, yachts, boats
8) Urban land
9) Cash in hand in excess of Rs 50,000.

In addition to these, all assets transferred by individuals to their minor children and to a spouse for inadequate consideration also attract wealth tax.

What is exempt from Wealth Tax?
Following assets are exempt from the purview of Wealth Tax:

a) any one residential property

b) commercial property

c) financial assets like shares, mutual funds, debentures.

d) any outstanding loan taken to buy the asset.
e) any residential properties which are rented for at least 300 days in a year. Remember that the rental income from such property is counted under Section 24 as "Income from House Property" and taxed under Section 24.

In India, the extent of taxable wealth for individuals differs with their residential status. For resident Indians, net taxable wealth will include all assets in India and abroad whereas for non-resident Indians, net taxable wealth includes only those assets which are in India.

When does one come under Wealth Tax purview?
Wealth tax is paid when an individual's net taxable wealth minus his/her total outstanding debt on all such assets (that are eligible for wealth tax) is more than Rs 30 lakh, as on valuation date (March 31 of a financial year).

How much is the tax?
It is levied at 1 per cent of the net taxable wealth exceeding Rs 30 lakh.
So, if your net assets are 50 lacs as on the valuation date of a particular financial year, you need to pay 1% wealth tax on 20 lacs (amount exceeding Rs. 30 Lacs), which comes out to Rs. 20,000/-

Filing DeadlineJust like Income Tax, Wealth tax return has to be filed by 31 July. You have to use the four-page Form BA for filing the return.

Pay your wealth tax on time and avoid huge penalties later.

Cheers

Manoj Arora

Reduce your tax burden by owning a second house

Background
As your wealth goes up, you need to get innovative about the options that are available to multiply it further and faster. One of the lesser known options is to own a second home and get "unlimited" tax benefit on the interest portion of the home loan. Yes, theoretically, the tax benefit is unlimited since there is no cap to the interest amount eligible for tax benefit (the way you have a cap of rupees 1.5 Lacs on the interest part of the first home loan)

Exemption on interest
We already know that in case of a home loan taken for a self-occupied property, the principal amount repaid up to Rs 1.5 lakh qualifies for deduction under Section 80C, while up to Rs 2.0 lakh of interest paid is tax deductible under Section 24.
However, in case of a home loan for the second property, only interest payment is eligible for deduction. No income tax benefit is available on the principal repayment on the second loan. However, the good part is that there is no limit on the deduction for interest payment on the second loan. This is because the assumption is that the second house has been given out on rent.

A property owner can avail of tax benefits on the interest paid on multiple home loans. Whether the second house is purchased purely as an investment option or as a weekend get away, the interest paid on a loan taken to buy it is tax-deductible. Since the interest payment is a large expense (especially during the first few years of the loan), you can add significantly to your disposable income if you can save on it.
In case the house is yet to be constructed, 20% of the total interest paid during the pre construction period is also allowed as tax deduction. This is available for five years from the time the construction is complete till you get possession.

Deductions allowed on income from second home
Even if the second house is lying vacant, the Income Tax Department will consider that it has a rental value. The notional or deemed income (see How income is computed) will be added to your taxable income.
A buyer can deduct expenses, such as municipal or property taxes actually paid, from the deemed income. Other than this, 30% of the net annual value, which is the difference between the rental income and municipal taxes, is also allowed as deduction. In case the house is rented out, 30% of the actual rent can be deducted from the taxable income, apart from deductions for local and municipal taxes. Details are all available in the earlier post - Sec-24 : Income from Let House Property

After deducting such expenses from the income that you earn from the property, if you incur a loss, you have the option to set it off as follows:

. The current year's loss will first be set off against any other income from property.
. It can also be set off against other incomes, such as that from salary, business or profession and capital gains, earned in the current year.
. If your balance continues to be in the red, you can carry forward the loss for up to eight years. However, the amount that is carried forward is only allowed to be set off against the income that is earned from a house.

How to save on taxes
If you own several houses, you can choose any one as your primary residence. The income from this property (read Income from Self Occupied Property) will be treated as nil and exempt from tax, even if you have actually rented it out. It is for this house that the limit of Rs 2 Lacs applies for deduction on loan interest.

The entire interest on the loan taken for the other house(s), the income from which is taxable, can be deducted from your income. This applies to any number of nonexempt houses that you may own.

So, to maximize your savings, consider the house with the highest loan as the non-exempt one. However, make sure that the interest payment on this loan is higher than the principal-cum-interest payment on the other loan.

Additionally, if you give your second house on rent for more than 300 days in a year, it will not be subject to wealth tax, which is levied at the rate of 1% on wealth that is in excess of Rs 30 lakh.

Save on the money, own more real estate and multiply your income faster.

Cheers

Manoj Arora