Make your Home Loan EMIs Manageable

The Reserve Bank of India’s battle against inflation seems to be aimed at reducing consumption and demand through higher interest rates. The logic here is that once demand goes down, prices would start correcting and inflation be under control. However, despite last ten hikes, the spectre of inflation remains. And the direct fall-out of the rate hikes is the increasing burden on home-loan borrowers.

The current rate hike comes at a time when borrowers are already reeling under the pressure of increasing EMIs (equated monthly installments). Moreover, it is widely expected that the RBI may hike rates further. Since home loan is the biggest single cash outflow in the Indian households, it is important for a borrower to understand how a home loan works and the ways to reduce the burden.

Principal and interest component

In the initial few years, the interest is the main component in the EMI — around 80 to 85 per cent and rest is the principal. When the lender increases interest rates, the tenure of the loan is increased without disturbing the EMI amount. Ideally, a lender should ask a borrower before increasing the tenure but in practice most lenders just send an intimation letter without giving an opportunity to the borrower to make a pre-payment or increase the EMI to offset the increase in burden. Expert advises “As soon as you get the letter from the lender on increase in interest rate, sit with their executive and do the calculations. You would not want your tenure to be increased from 240 months to 400 months.” There is a limit, however, to which a lender can increase a borrower’s tenure. Once reaching that limit, the lender demands that the borrower make a part pre-payment or increase the EMI amount. Experts advise home loan borrowers to prepare themselves financially and mentally for more rate hikes in the near future.

Part prepayment

This is the time to liquidate investments such as fixed deposits to make partial pre-payment. An FD would give you a return of over 7 per cent post tax, while on a home loan you would be paying interest at around 11.5 per cent. Some part pre-payment would significantly take the pressure off. Along with the FD, you may also look at liquidating some part of your mutual fund or insurance investments in consultation with your financial advisor. If you are locked into an investment or do not have enough bank savings to make the pre-payment, you may look at extending the tenure of your loan.

Loan refinancing

Loan refinancing simply means taking a new loan to repay an old one. Avoid shifting your home loan to some other lender in these times as there is not much difference in the lending rates among various lenders. Only if you get a differential of 2 per cent or more should you look at balance transfer of loan.

Balance transfer to other lenders has its own cost implications and its better to do all the calculations while exploring such options. Through various online tools available on the internet, you may calculate the net outflow on taking a refinance decision. Though you may be able to reduce your EMI but if the tenure increases substantially, it will result in high net outflow making it a bad decision. It depends on your current ability to service the loan. If you feel that the cash saved every month on a lesser EMI can help you lead a better life, then it could make sense. However, if the refinance is going to result in a net outflow of more than 15 per cent of the current loan, it is better to stay away from it.

There have been instances when NBFCs increased the home loan rates which were significantly above the then prevailing market rates. In case your home loan rate is 2 per cent above the market rates, you must renegotiate the rates with the lender and if negotiations fail, refinancing can be a good option.

With further rate hikes expected, you would do well to do your calculations and take a hard look at your liquid assets that can come handy in case your home loan EMI becomes unmanageable. Do not forget to keep an eye on the increase in the tenure by the lender. Doing a little math at this stage would save you from sudden shock later.

KEY TAKEAWAYS

* EMI burden is set to increase

* Discuss payment schedule with lender

* Use FD/MFs to make part payments

* Exercise refinancing option if difference is at least 2 per cent 


 source: www.indianexpress.com

DTC: How will it impact Tax Payers

The Direct Tax Code (DTC) is expected to be rolled out from April 1, 2012 and the proposed bill is likely to be tabled soon before the Parliament. In this article, we discuss how the proposed changes can impact your taxation under the DTC regime.

Salary Income

The limit for medical reimbursement is proposed to be enhanced from Rs 15,000 to Rs 50,000. But the exemptions in relation to Leave Travel Assistance, children education allowance and hostel allowance are missing in the DTC. Salaried class, in fact, would need to wait to know the real impact as rules for valuation of perquisites have still not been rolled out.

Rental Income

Those having rental income will have to pay little more under DTC as the standard deduction is proposed to be reduced from 30 per cent to 20 per cent. The concept of taxing income from house property on notional basis has been done away and it is the income from actual letting which would be taxed.

Capital gains

The concept of long term capital gains (LTCG) and short term capital gains (STCG) has been done away with, in the DTC. Capital gains would be taxable as income from ordinary sources at applicable slab rates. Individuals falling under 30per cent tax bracket having any taxable LTCG are presently taxed at 20 per cent. Such individuals may end up paying 30 per cent tax on such gains under the DTC regime. The LTCG gain arising from shares or equity linked mutual funds (assets) on which STT has been paid would continue to be not taxable as under the DTC 100 per cent deduction is to be allowed from such gains. However, individuals falling in the tax bracket of 10 per cent or 20 per cent and having STCG would pay lower tax at 5 per cent or 10 per cent respectively as 50 per cent deduction has been proposed from such gains under the DTC. STCG from such assets presently suffer tax at 15 per cent.

The benefit of indexation is proposed to be provided in respect of assets transferred after one year from the end of the fiscal year in which it is purchased. The date of considering the fair market value as on April 1, 1981 is also proposed to be advanced to April 1, 2000.

Deductions

DTC proposes to restrict the deduction of Rs 1,00,000 only to the approved funds, namely, approved provident fund, pension fund, superannuation fund, PPF etc. However, an additional deduction of Rs 50,000 has been proposed to cover payments such as life insurance premiums (where premium not to exceed 5 per cent of sum insured), health insurance premiums and the tuition fee. The principal repayment of housing loan, 5 year term deposits with banks or post offices or deposits in senior citizens saving schemes, non pure life insurance premiums etc will no longer be eligible for deduction under the DTC.

Others

Currently, Indian citizens qualifying to be ordinarily resident are subjected to wealth tax in India on their wealth situated anywhere in the world. Assets situated outside India are excluded from the taxable wealth in case of non-residents or even for any ordinarily resident foreign nationals. Under the DTC, ordinary residents be taxed on their wealth situated anywhere in the world irrespective of whether such individuals are citizens of India or not. Although the taxable wealth exemption limit is proposed to be enhanced from Rs 30 lakh to Rs 1 crore, but the definition of taxable wealth is also proposed to be expanded.

Also, Indians settled abroad who come to India on visit may trigger global taxation in India sooner due to certain changes in the tax residency provisions under DTC.

Although the prime objective of DTC is to simplify the provisions, but taxpayers do expect to see simplifications on ground, that is, timely receiving of refunds, less hassles at tax offices etc. One will have to wait for the final print to see what the DTC actually brings.

source: www.indianexpress.com

What to do with your Annual Bonuses?

It’s Feb. Apart from the heat, it’s also the season for your annual performance bonus.

A few of you may already have made plans for the use of this money as soon as it hits the salary accounts. But many of you must be wondering what to do with this money. Often this money gets spent in an unplanned manner and afterwards, you may repent and wish that you had used the money in a better way.

Here is a list of financially prudent things to do (in the order of priority) with your annual bonus rather than blowing it all up in one massive binge.

Build up your contingency fund –

You should build up your contingency fund to at least 3 to 4 months of expenses in case you haven’t done that already. Building up a contingency fund is a crucial part of your financial plan. This contingency fund can be maintained in the form of bank FDs (try opting for sweep in sweep out option if your bank offers) or liquid mutual funds. Contingency fund comes in to picture in case of emergencies like job loss, illness or any other condition due to which one is not able to earn any sort of income for a few months.

Prepay your expensive loans –

In case you are having expensive loans like credit card debt, personal loans, gold loan, loan against security, or such where you are paying high interest rate, you should choose to utilize your annual bonus to prepay these loans and closing them even if there is a stiff pre-payment penalty. This will save you a lot of interest which you are going to pay in future. You can also consider repaying relatively lower priced loans such as home loans and education loans after seeking advice from your financial planner or tax consultant.

Tax planning –

Most of you may try to allocate the money towards tax planning by buying tax savings mutual funds to get deductions under section 80C. Tax savings through equity based instruments should always be done systematically and never in lump sum. Investment in to equities should always be systematically over a period of time rather than putting money in lump sum. So, in case you are planning to invest the money into tax savings mutual fund schemes, you should keep the money in liquid funds or your savings bank account with sweep in and sweep out option and invest the money through Systematic Investment Plan (SIP)/Systematic Transfer Plan (STP) over the balance part of the year.

Save for your future goals –

Keep this money aside for any goals you had in mind but you were not able to save enough or at all for the goal due to shortage of funds. You should invest this money wisely with an appropriate asset allocation between equity and debt keeping your time horizon in mind. In case your time horizon is sufficiently long (more than 5 years), a significant proportion (around 80%) of your bonus amount can be allocated towards equity based instruments. The remaining amount should be invested in appropriate debt products. Also consider balanced funds which give you this kind of asset allocation anyways with tax advantage to boot. While investing in equity products, please remember to do it over a period of time and not in a lump sum.

In case you have a goal which is just a few months away, for example, if you are planning to buy a home in time horizon of less than 3 years, then investment in equities is not prudent. You should choose appropriate debt products like bank FDs, Fixed Maturity Plans and Income Funds etc. for these kinds of investments. Also you should choose debt products in case you are awaiting any investment opportunity anytime in near future.

Of course a certain portion of the annual bonus can be used to go on that dream holiday that you have planned or that LCD TV or home theatre which you have been planning to buy. If at least a significant portion of the annual bonus has been used in the other alternatives, you can splurge guilt free on these kind of expenses.

Ideally you should sit with your financial planner and have a plan in advance on how to use the annual bonus.

source: www.indianexpress.com

Set up an Office at Home

It may help cut down on rent and commuting cost, but check the legal and operational limits before doing so.

Who can set up an office at home?

Full-scale commercial usage of residential flats is often opposed by cooperative housing societies, a certain percentage, or in some cases, a fixed area, is legally marked for official use. This area can vary across the country and even within the city, and you will have to go through the different state laws, local or housing society by-laws to find out the exact figure. For instance, within the Mumbai Metropolitan region, an area of 220 sq ft can be used for certain commercial activities. The rules are as valid for apartments as for independent houses. The usage is also confined to professions, such as those practiced by doctors, lawyers and chartered accountants. Besides, activities like teaching painting or dancing, holding yoga classes, tuitions, or conducting cookery classes, are also allowed in a residential area.

The dual usage of space has been allowed after various court rulings and Acts passed over the past five decades. In one such ruling, the Maharashtra State Cooperative apellate court favoured a resident of Ghatkopar, Mumbai, in 1986, stating that activities such as conducting yoga classes in a residential flat did not breach the by-laws of the cooperative housing society. According to the ruling, professional activities, such as teaching of certain art forms, would not be viewed as commercial activity, even if charges are levied.

In another case filed under the Karnataka Shops and Commercial Establishments Act, 1961, it was ruled that the use of residence as an office by CAs, lawyers and doctors would not be considered a commercial activity. The premise was that the work and skill involved in such professions are predominantly mental or intellectual rather than physical or manual.

However, these should not be considered as blanket rulings.

Seeking mandatory approvals

Before you convert a part of your house into an office, you will need to acquire permission from various authorities. If you don’t, the business will be considered illegal.

You need three types of approvals.

1. Permission from the local municipal authorities

Explaining the kind of commercial activity and the area you will require to conduct the business. Once the go ahead is given, commercial charges will be applicable on property, water and other taxes paid on the said property. Even electricity charges will be levied according to the commercial rates applicable in that area, the size of the property and the commercial activity conducted. A person will also need a shop and establishment license from the local municipal authorities before starting the business.

2. Permission from the town planning authority

Since certain zones are demarcated in the town as residential commercial areas, one will need permission from the town planning authority before starting a commercial activity.

3. Approval from the housing society where the flat is situated

If the person is a tenant, he will need a no-objection statement from his landlord as well. The society may levy higher building maintenance and parking charges on such flat owners.

Pros and cons

Pros:

1. You can save on rent. The savings will be higher if your current office is in an expensive commercial/ business area. As you won’t have to buy the same equipment for your home and office, such as a printer or furniture, you can shave off more expenses.
2. You can devote more time to the family, which is beneficial if you have young children or elderly parents, who need constant care.
3. One of the biggest savings is on commuting time, which could be channelled towards more productive pursuits.
4. Working from home also means that you can be your own boss and fix your timings to accommodate other tasks that need to be completed also you can develop a flexible office schedule.

Cons:

1. Your productivity may fall if there are no deadlines or job pressure or if the demands of home are greater and become more time-consuming.
2. If you aren’t diligent about your work schedule, it could impact productivity, or you could find yourself more involved with personal and familial work.
3. The absence of colleagues and collegial atmosphere may also lead to a diminished competitive spirit.
4. Office and home help to de-stress the pressure in each sphere. You could feel high-strung if you are overworked on both the fronts.
5. There could be the problem of neighbours, who could create a fuss if the number of visitors is large as it may lead to more parking problems and greater commotion in the area.

Despite the charges paid to the society and local municipal authorities, you could end up saving 30-40%:

1) On lease compared with the amount and

2) Charged by commercial establishments.

Source: ET Wealth