Income tax savings through senior citizen parents

incometaxIn an interview to CNBC-TV18, Subash Lakhotia, Tax & Investment Consultant shared his reading and outlook on tax exemption limits for senior citizens.

Talking on the subject, he says since the basic income tax exemption for a 60-year plus and 80-year plus senior citizen is Rs 2.5 lakh and Rs 5 lakh respectively, it is a good idea for the tax payer to give away money to his/her parents and then parents make investments in their own name.

Here are a few questions he has answered:

Q: Senior citizens enjoy a higher basic tax exemption limit along with a higher rate of returns on savings. Would it make sense for big family investments to be made in the senior citizens’ name? I am referring to investments which are over and above the purview of 80C?

Q: What if the heirs start fighting for it afterwards?

Q: I am a professional who owns a property which is rented out. The property is in joint name of my wife and me. It is a freehold property with no loans. Can gifting this property to my wife reduce my tax liability?

Go here to read the answers.

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How safe is your capital?

Safety of capital will be on top of the financial priority list of a retired individual/senior citizen; and rightly so. With limited means of cash flows, safeguarding the capital, which would provide some income by way of interest, is important.

And yet, have the typical safe modes such as deposits offered you enough by way of return? Not so in recent years suggests this data from JP Morgan Asset Management. Across the Asian countries mentioned below, deposit rates managed to beat inflation and leave you with some surplus (returns mentioned below are deposit rates post yearly inflation) until 2007.

depositrate

Source: Asia Outlook Q1 2013 report of JP Morgan Asset Management

However, since the start of the economic slowdown in 2008, most Asian countries have seen either lower interest rates and low growth or high inflation. As a result, investors in deposits have ‘negative real returns’. For India, rising prices were higher than deposit rates by 1.9%. Simply put, the interest income from deposits has not helped you keep pace with rising cost of goods. Net result, you would have had to dig in to your capital/savings to meet it. Now in a way, that too amounts to erosion of capital does it not? That means, while you may not lose your capital through risky investments, you lose it to a lethal force called inflation.

Way out?

But what choice do you have to combat this? Not much but here are a few suggestions: Ensure that you diversify your investments across a few products. Of course, you do not have to compromise on the quantum of risk you can take. If you want only debt products, look beyond bank deposits. There would be times when top-rated bonds and debentures come up with good rates. Be on the look-out and lock into them. Keep a demat account ready for this purpose as most bonds require you to have a demat account. Explore corporate deposits in credit worthy companies that are rated. Avoid going for unrated companies unless you have knowledge on the financials of such companies.

Ensure that instruments have high credit rating such as AAA before you invest either in bonds or deposits. Look for short-term debt mutual funds that have delivered not less than 7 per cent annually in the past and have at least a three-year record. Use systematic transfer plan in these options if you wish to get a steady payout.

Even with all this, there is no guarantee that you will successfully combat inflation. The fact is that if you had a sufficiently large corpus, you can simply park your money in instruments that earn 6-7 per cent and still not worry too much about erosion in capital.

But such a corpus could have been built only if you had invested in asset classes such as equities and real estate early on in life. If you have missed the bus, advice your children to invest early, invest systematically and in inflation-beating asset classes. They can always move their money later to deposits, when their risk-taking ability diminishes.

This article has been written by Vidya Bala of our financial advisory team.  Write to advice@oldisgoldstore.com if you would like us to answer any of your questions or address a specific topic..

Investments that secure you monthly income

retirement_investmentPost retirement, the need for a regular income stream becomes vital. Even if you are a pensioner, it is likely that you need to supplement it with some regular cash flow to meet your expenses. That is why it becomes imperative for you to build a portfolio of investments that generate income either monthly or quarterly. Here are a few options, with varying degrees of risk, available to you.

Post office schemes

The top choices in terms of capital safety as well as regular income are the post office senior citizen savings scheme and post office monthly income account scheme. Currently the post office senior citizen scheme (five-year tenure) offers 9.3 per cent per annum, with interests paid out every quarter. This is higher than the interest rate of 9 per cent offered by a good number of banks.

What more, the principal investment is available for deduction under Section 80C of the Income Tax Act, up to Rs 1 lakh. Hence, besides attractive interest rates, the scheme is also suitable for those who are in the middle or higher tax bracket and need to reduce their tax outgo. You can invest up to Rs 15 lakh under this scheme.

The post office monthly income scheme has a less attractive 8.5 per cent per annum. Its key advantage is the monthly pay out. While you can opt for this if you are averse to non-government schemes, it may be a better option to go for senior citizen scheme first. The interest from the senior citizen scheme will be credited the post office savings account. Hence, you can also withdraw money as and when you wish to, after the quarter’s interest is credited.

Interest though is taxable under both the schemes. Tax is deducted at source if interest exceeds Rs 10,000 per annum. Ensure that you submit Form 15H if your annual income is well below the minimum tax slab.

Banks and financial institutions

Many banks and financial institutions offer monthly interest payout. But the interest rate mentioned as the annual rate will be accordingly discounted. For example, if you had an interest payout of say 9.35 per cent a year for quarterly payouts, the monthly interest rate applicable could be say 9.3 per cent a year.

Currently, Karnataka Bank, IDBI Bank, Yes Bank, to name a few, offer interest rates higher than the Post Office Senior Citizen Scheme. But if you avail the 80C tax deduction benefit available in post office senior citizen scheme, then your yield would be higher than the rates offered by banks. Do note that interest income is taxable in these cases too.

Bank deposits are relatively safe as your deposits (plus your savings account balance) are insured up to Rs 1 lakh in each branch of a bank.

Among finance institutions, you should be careful about the credit worthiness of the company. Therefore, always check for their credit rating and go for those with highest credit rating of AAA. HDFC’s Platinum deposit, for instance, offers 9.3 per cent annual rate for monthly interest payout option and 9.35 per cent for quarterly payout options. It has AAA-rating.

If you are not confident about investing in private institutions, then look for government-backed ones. Currently, National Housing Bank, a wholly owned subsidiary of RBI offers 9.85 per cent a year across various maturity periods. But the interest payout is only on a half-yearly basis.

Savvier options

If you have limited- or no-source of regular income, you will do well to allocate a chunk of your savings in safe options. But if you have other sources of cash flow like pension or rental income, then a fifth or less can be parked in savvier options like debt mutual funds. We are not suggesting the universe of equity funds for reasons of high risk.

Mutual fund investors may be aware of Monthly Income Plans or MIPs that seek to offer a monthly/quarterly/half-yearly dividend payout to investors. These funds predominantly invest in short and long term fixed income instruments issued by government or corporate, in debentures and in commercial paper. MIPs however, have a 15-20 per cent exposure to equities to provide some kicker to returns.

The flip side here is that while most schemes strive to declare dividends every month, there is no guaranteed payout. The quantum can also vary based on the gains made in various interest rate cycles. Also, debt funds suffer a 13.5 per cent (including cess and surcharge) dividend distribution tax DDT). Although paid by the fund, this is adjusted in the NAV.

If you wish to avoid the uncertainty in dividend payment and the NAV erosion from DDT, then systematic withdrawal plan (SWP) is a good option. You can invest a lump sum in a short-to-medium-term debt fund or MIP. Avoid the dividend option in this case. Allow the lump sum to grow for at least 1-3 years. This will also help avoid short-term capital gains tax (mf investments less than one year suffer short-term gains taxed at your income tax slab rate) and exit load.

Opt for SWP which will allow you to withdraw a fixed amount systematically, on a monthly, quarterly or half-yearly basis. But you will suffer long-term capital gains at the time of withdrawal. That will be 10 per cent on the gains without indexation or 20 per cent with indexation. Hence, if you are among those in the high tax bracket, this would be a superior option to the traditional fixed income options.

As far as possible, have a judicious mix of the above options in line with your risk appetite.

Happy investing and have a safe 2013!

Note: Products recommended in this article are general suggestions. Investors would have to keep in mind their specific requirements and risk appetite before choosing their investments.

Author: Vidya Bala, Head, Mutual Fund Research, FundsIndia

Staying informed

eco-timesA behavioral pattern observed when it comes to senior citizens’ personal finance and investment habits is as follows:

  1. When they make investment decisions on their own, they tend to be very conservative and safety conscious. Left to themselves, they choose risk-averse, stable products which place safety above profits.
  2. However, when they are approached by product sales people from financial services with product pitches, they tend to take decisions that are completely opposite from the above – going in for the promise of high returns without taking caution or doing due diligence. Sales people often find it easiest to sell bad and ill-suited products to senior citizens just for this reason.

Why this dichotomy? How does a person who generally has a conservative outlook to finances easily fall prey to such sales talk?

Honestly, I do not know the answer to these questions, and a study about this behavior is not the objective of this article. Rather, I think we need to be aware of this pattern and recognize if we or a friend or a family member fit into it.

More importantly, we need to identify how to avoid this pattern of behavior. And for that, I believe the answer lies in staying informed.

When we are working in an office, we get a chance to interact with different people during the course of a day. It provides us with an opportunity to get to know both about genuine new opportunities as well keep away from scams and bad products.

After retirement, such opportunities are scarce, and this is one of the main reasons, I believe, that senior citizens make incorrect financial decisions.

Hence, it is especially important for our retired elders to make reading about personal finance and economics a regular part of their news intake.

This can be done quite easily actually. There are quite a few publications that recognize this and provide useful articles regularly.

For example, the Hindu Business Line had a great article by B Venkatesh a couple of weeks ago about how to save and invest in the post retirement period of one’s life:

http://www.thehindubusinessline.com/features/investment-world/personal-finance/how-to-adjust-retirement-portfolio-for-inflation/article4178597.ece

I also noted another article by Dhirendra Kumar on Value Research Online a few weeks back along similar lines:

http://www.valueresearchonline.com/story/h2_storyView.asp?str=21516

Specifically, I would recommend two weekly publications that every senior citizen should at least skim through regularly:

  1. The Hindu might be staple reading for local and national politics coverage, but when it comes to personal finance, the Hindu Business Line’s Sunday edition’s Investment world takes the cake. This 3-4 page spread does admirably well in general, but more so while addressing the needs of post-retirement finances.
  2. The Economic Times might be heavy reading on a daily basis, but their Monday edition comes with a personal finance tabloid supplement that is very good and worthy of perusal.

Just by getting these two issues – Sunday issue of the Business Line and the Monday issue of ET – will keep one well informed about the happenings in the personal finance – good and bad.

Happy reading!

This question has been answered by Srikanth Meenakshi of our financial advisory team.  Write to advice@oldisgoldstore.com if you would like us to answer your question.

Thinking of returning to India – A house should be your first priority

Home-Tax-BenefitThere comes a day in the lives of mid-40 year old NRIs when they realizes that their parents are getting old and can no longer fend for themselves.  To many this comes as a rude shock when during one of their trips to India, they see that their parents have significantly aged since their last visit. At this time, two primary options come to mind.

Option 1:  Take the parents back with them.  In many cases, when it is a single parent, this is a viable option, especially when the other parent has just passed on.  This helps the surviving parent to be with close family during a time of grief and the change in scene may also in some ways ease the pain.  The flip side is of course is that the parent may feel uprooted from familiar surroundings and friends and rebuilding a life half way around the world can be quite challenging. Additionally issues with insurance and medical coverage etc will need to be worked out.

Option 2:  The NRIs return to India to stay with the parents.  This would mean that the NRIs will have to give up the life they have build in the foreign country and restart from scratch in India. Again a lot of challenges involved.  Of these one big challenge is getting a house in India.

In earlier times, if you were to sell a house in the US or gulf and come back to India, you would have enough money to buy a same sized house here with lots of money to spare.  Those days are long gone.  Now a house in an Indian city costs much more than a house in most other parts of the world!  However, with some foresight and planning, a decent house or apartment could become a reality for you.

a.  Start looking for a house now.  Everyday, the real estate prices are going up, so the sooner you begin the better.
b.  Look for options outside the city with proximity to industrial zones and hospitals. Options outside the city limits are often much cheaper than those inside the city, especially when you book your apartment at the beginning of the project (when rates are at the best).
c.  Check out bank loan options.  Every bank in India provides NRIs with attractive home loan options.
d.  Many gated communities are coming up with schools and hospitals within the complex.  These could be ideal for your children and your ageing parents.

If your parents are not too old yet and you have not reached the mid-40s yet, now would be a good time to buy the house. That way, a good home will be available when you decide to come back to India.

Question related to Company FDs

Q: Can you throw some light on the pros and cons of investing in company FDs ?  Also please let me know what you think about the following companies in terms of ratings and other service attributes
1. Shriram Transport Finance
2. Deewan Housing
3. JP Associates

Ans:  Thanks for the question. Before we answer it, a quick primer on the subject matter of your query – company fixed deposits – for the uninitiated.

companyfdMost people are very familiar with fixed deposit products offered by banks – both private and public. These FDs are secured by RBI up to Rs 1 lakh per deposit per bank branch, which means that to a certain extent the investor money is protected in such cases.

Company fixed deposits, on the other hand, are offered by Non-banking finance companies or by public limited companies, and not by banks. These too offer a fixed rate of return depending on the tenure of the deposit. However, they are not secured by RBI or any other regulatory body. Due to this inherent risk in the product, such deposits are offered at a higher rate of return compared to bank FDs – typically 1-3% higher.

As an investor, we need to be prudent and choosy in picking the company deposits that we invest in – one cannot sacrifice security in search for higher interests nor can we ignore better returns by being completely risk averse.

And that brings us to the question – as the questioner correctly points out, we need to look at the ratings of a company and other service attributes before choosing where to invest.

When it comes to ratings, we should note one important thing – there are different kinds of companies offering deposits and not all of them are rated. There are NBFCs, government entities, and manufacturing companies (publicly listed companies) offering deposits. Of these, ratings firms such as CARE and CRISIL provide ratings only for NBFCs and government entities. Publicly listed manufacturing companies’ deposit products are not rated.

One can see the ratings of these companies and more at MoneyControl’s Company FD page:

http://www.moneycontrol.com/fixed-income/company-deposits/

As you can see, Shriram Transport Finance and Deewan Housing (DHFL) are rated. JP Associates (manufacturing conglomerate) is not. Shriram has a rating of CRISIL FAA+ and ICRA MAA+, while DHFL’s rating is CRISIL AA+ and Brickworks FAAA.

(Explanation of ratings here – http://www.moneycontrol.com/news/fixed-income/credit-ratings-ratingsdebt-instruments_653221.html)

Regarding service quality:

At FundsIndia.com, we offer all three of these deposit products although JP Associates has been a rather recent entry into the fold. So, we have a bit of experience to comment on the service quality offered by these firms.

In our experience, Shriram’s service has an excellent track record. We have rarely, if ever, received customer complaints in this regard, and even when we did, we have been able to sort out the issue with their staff easily.

We do not have as much of a track record with DHFL or JP to comment confidently.

My advice would be to go with a good service provider such as Shriram even if their interest rates are marginally lower than the other two.

This question has been answered by Srikanth Meenakshi of our financial advisory team.  Write to advice@oldisgoldstore.com if you would like us to answer your question.

Managing finances during golden years

This post is by Srikanth from the investment advisory team.

Hello.

My name is Srikanth, I run a company called FundsIndia.com in Chennai. We are an online investment services company specializing in mutual fund investments.

At the outset, my thanks are due to the folks at OldIsGoldStore (Sanjay, in particular) for giving us the opportunity to communicate with this esteemed audience.

I, along with my colleague Vidya Bala, plan to write here periodically. We’d like to share with you our thoughts regarding financial issues that are important to senior citizens.

It would be an understatement to say that we approach this task with some trepidation given the fact that we are writing to folks who have had long, successful careers. Many of you have been in banking and financial services and are much more knowledgeable on finance than us. Hopefully, we’ll be able to provide you with some useful information about what’s happening currently.

We would also be happy to answer questions from you regarding any personal finance issue that you may have. If you have a question for us, please write to us at advice@oldisgoldstore.com.

We would like for you to let us know especially if you are considering investing in some new product that is being offered to you. We have a pretty good understanding of the different products that are available in the market today, and will be able to tell you whether some product is good and whether it is suitable for you.

This is especially important since it is a well-observed fact in our society that elderly people are more vulnerable to being victims of financial scams. I myself have been witness to such incidences and have prevented people from buying wasteful products.

scamIn fact, there has been a scientific article recently that shows how the process of ageing adversely affects senior citizens and how it makes them more vulnerable to scams. I would like to draw your attention to this article published recently:
http://meadvilletribune.com/ourhealth/x1685968624/Why-seniors-may-be-more-vulnerable-to-scams 

As the article cautions, seniors need to be especially vigilant about what they are being sold, and should always take trusted outside counsel before committing to anything. It would be useful to make it a habit to say ‘No’ to anything at first, and then re-visit later. This is especially true if one is being pressured to buy/invest in something stating that this is a ‘once in a blue moon/life time opportunity’.

Hopefully our counsel will be of some help to you in this regard and would keep you safe.

In future installments of this series, we hope to write on more topics of interest in terms of where and how to invest. If you’d like for us to write on any specific topic, please do let us know!