Jeevan Saral vs Recurring Deposit/PPF: What's Good, What's Bad?

"Boond boond se sagar banata hai" If one goes by this saying, small but periodic investments can grow to a large sum at maturity. This is the basic investment logic behind recurring deposit schemes. Banks and post offices have been offering such schemes in India. LIC, the largest life insurance company in the country, has now joined this club. LIC launched a special plan called Jeevan Saral a couple of years back to cater to such investor needs.

Jeevan Saral is nothing but an endowment assurance plan where the policyholder simply has to choose the amount and mode of premium payment. The plan provides protection against death throughout the plan term to the extent of 250 times of the monthly premium. For example, anyone opting to pay a monthly premium of Rs 1000 will get a risk cover of Rs 2,50,000 during the policy period.

The policy term varies according to the age of the policyholder. The death benefit includes the total risk cover and loyalty bonus, if any. LIC also promises return of premiums, excluding first-year premiums and extra/rider premiums. 

This scheme also offers an accidental death benefit. In real life, it's rare for a policyholder to die during the term of the policy. Even LIC accepts that over 95% of its policyholders survive the policy period and for most policyholders, insurance becomes just another investment. However, unlike pure investment, in case of insurance policies, one would have to wait till end of the policy term to get back the amount assured. This may be as long as 20-25 years. Early policy surrender involves costs in terms of penalty. But this does not hold true for Jeevan Saral.

The policy offers high liquidity to the policyholder. After five years of active policy (premium paid without default), which corresponds to the term for which premiums have been paid under the policy, one may receive 100% of the Maturity Sum Assured (MSA). (These MSA values are given by LIC). However, one can withdraw partial or full MSA amount after the 10th year.

Moreover, this is a with-profits plan. Loyalty additions (i.e. bonus) are payable from the 10th year, along with guaranteed maturity benefits. Loyalty addition is nothing but terminal bonus, which actually depends on the profits of LIC's life insurance business. Thus, it is variable return that cannot be estimated at the beginning of the policy.

Jeevan Saral as an investment option needs to be compared with other avenues such as recurring deposit (RD) offered by banks and post offices or periodical investments in Public provident Fund (PPF). Recurring deposits enjoy liquidity but no tax benefits, while PPF carries tax benefit minus liquidity. Since Jeevan Saral offers both the benefits, it is necessary to compare its returns with other schemes. 

EXAMPLE

Suppose 30-year old Mr A opts for a policy involving monthly premium payment of Rs 1000 for 20 years. The total premium paid will be Rs 2,40,000 at the end of the 20th year, which assures maturity sum of Rs 2,73,500 and loyalty addition at the rate announced for the corresponding year. (The average rate at which the bonuses were offered for the past five years was around 5-6%). So if we assume that 6% loyalty will be paid in the 20th year, the total lump-sum earnings at maturity will be around Rs 3,48,000. Thus, the net earnings will be around Rs 1,00,000 in 20 years.

Instead, Mr B opens a recurring deposit with a PSU bank for 20 years. (The maximum RD period offered is 10 years, but we have assumed RD of 20 years to make it comparable). The deposit rate offered by most banks for 10 years is 7% per annum compounded quarterly.  

So, the amount receivable after 20 years will be around Rs 5,21,000. Thus, the interest earnings will be Rs 2,81,000, much higher than the guaranteed returns on Jeevan Saral. But one should not forget that the interest income on RD is taxable. Assuming Mr B is in the highest income tax bracket, the total tax paid will be Rs 87,000 and the net interest earned after tax adjustment will be Rs 1,94,000, which is still higher than the returns offered by Jeevan Saral. But not all investors need to pay the highest applicable rate of income tax as RDs don't attract TDS.

Now consider Mr C, who opts to make monthly investment of Rs 1000 in PPF account for 20 years. He enjoys tax benefit under sec 80c similar to Mr A. At the end of 20th year, he receives almost Rs 5,93,000. Thus, the net earnings for Mr C will be Rs 3,53,000, which will be absolutely tax-free. Moreover, these assured earnings may be much higher than the receivables of Mr A.

To sum up, if one is looking for a pure long-term investment with periodical payout, traditional fixed investment avenues such as RDs and PPFs score for insurance based investment plans. As for risk cover, one may go for pure-term policies which have very low premiums. 

source:ET

Three Personal Finance Risks for Salaried Professionals

The three major risks involved in personal financial planning for salaried professionals can be categorized under 3 broad areas:

1. Personal life

2. Loss of income

3. Inflation

Let us look at what each category means.

PERSONAL RISK

This is a broad category, which includes the risk of falling ill or any other health issues. Personal risk also includes the threats associated with the people in our life about whom we care or are responsible for. There are many kinds of safety issues associated with our personal life. The best way to protect ourselves against personal risk is insurance (health insurance, fire insurance for the house, vehicle insurance and most importantly life insurance). Nowadays there are very niche insurance policies available like wedding insurance.

INCOME LOSS RISK

Although we would always like to believe that our jobs are forever, it may not always be the story. Companies which are stable could close overnight. We may be forced to quit our job at anytime due to personal reasons. The best way to protect against income loss risk is to have at least 6-8 months' salary as cash balance in a savings bank account. At the same time keep honing your skills so that you can immediately get jobs if the need arises.

INFLATION RISK

The best way is to set goals for high cost purchases and keep a track of the prices continuously. If at a point you realize that the prices may jump and also have enough cash accumulated, buy it. Small value purchases and regularly used stuff cannot be protected against. You cannot buy 100 kg of onions and store just because someone said onion prices are going up. Stocking up is a good way to protect against inflation risk, provided the items can be stored for long time. Many families buy a year's quota of pulses, cereals etc to protect against monthly price fluctuations.

source: bankbazaar.com

Get pension from your Home

Reverse mortgage can unlock the value of the property and provide tax-free pension to the owner.

Looking for a source of regular income after retirement? You don’t have to look beyond the four walls of your house. Reverse mortgaging your house can get you a regular income in your sunset years. What’s more, it is completely tax-free. “Reverse mortgage is the most tax-efficient way of earning a pension”.

Reverse mortgaging is especially useful if you have not saved enough for retirement or concentrated your wealth in real estate. Financial planners advise clients to put away at least 10% of their monthly income for retirement. This is not possible if you have a hefty home loan EMI to pay and loads of other expenses.
However, this should not mean a life of penury after retirement. Banks are willing to give loans against property to senior citizens. In return, the bank becomes a part owner of the house. In this way, cash-strapped senior citizens can unlock the value of their property without actually selling it.

Though the concept is very common in developed markets, reverse mortgage has not picked up in a country where real estate also has an emotional value. People love their homes so much that they cannot bear the thought of selling the property.

It’s time to get rid of this misconception about reverse mortgage. If an owner puts up his house for reverse mortgage, it does not mean he has sold it. He has merely taken a loan against it. After his death, his legal heirs will have the option to either repay the loan along with the interest and regain the property or let the bank sell it and give them the proceeds after deducting the borrowed amount.

How reverse mortgage works

1)    Reverse mortgage is the opposite of a home loan.

2)    Instead of paying EMIs, the house owner gets monthly payments from the bank.

3)    The sum depends on the value of the property. The owner can borrow up to 75% of the value.

4)    The money received is a loan and, therefore, tax-free.

5)    With each payment, the bank’s ownership of the house increases.

6)    After the owner’s death, his heirs have to repay the reverse mortgage loan to the bank.

7)    Only senior citizens can avail of reverse mortgage. They should be living in the house that is being mortgaged.

source:ET Wealth

Interest on borrowed capital for self occupied property

The maximum amount of interest permissible in cases of self-occupied property is ` 1,50,000 (in respect of funds borrowed on or after 01.04.1999). Interest upto ` 1,50,000 is deductible if the following conditions are satisfied:

• Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property;
• The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed; and
• The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principal amount outstanding under an earlier loan taken for such acquisition or construction.

In the above context the following further aspects have to be kept in view:

1. If capital is borrowed for any other purpose (e.g. if capital is borrowed for reconstruction, repairs or renewals of a house property), then the maximum deduction on account of interest is ` 30,000 (and not ` 1,50,000).
2. There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the residential unit could have commenced before April 1, 1999 but, as long as its construction/acquisition is completed within 3 years, the higher deduction of ` 1,50,000 would be available. Also, there is no stipulation regarding the construction/acquisition of the residential unit being entirely financed by the loan taken on or after April 1, 1999. It may be so in part. However, the higher deduction upto ` 1,50,000 can be taken for the loan which has been taken and utilized for construction/acquisition after April 1, 1999. The loan taken prior to April 1, 1999 will carry deduction of interest upto ` 30,000 only (CBDT’s circular No. 779, dated September 14, 1999).

` 1,50,000 maximum deduction will not be available in the following situations:

1. If capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or renewals of a house property;
2. If capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property; and
3. If capital is borrowed on or after April 1, 1999 but construction is not completed within 3 years from the end of the year in which capital was borrowed.

In the above situations only deduction upto ` 30,000 can be claimed.

source: www.taxguru.in