Your daughter – have you planned for her goals?

Having a girl child is a moment of great joy for parents! But planning for the darling daughter’s future is also something that is always top of the minds of Indian parents. Early and sound planning can go a long way in ensuring the future of your daughter. Following are some ideas that as a parent you could consider when planning for your daughter’s future:

Ensuring Medical Cover is in place:In an ever changing environment and the growing threats of lifestyle related health problems, children are no more immune to major health concerns. As such, having them medically insured should be on high priority. While a stand alone health policy might be excessive, including them in your family floater is a practical option. Depending on the policy you chose, the minimum age requirements can range from 91 days to 3 years old.

Investing for your Daughter’s Future:Indian parents today are still actively looking to fund for their child’s future. Additionally parents of the daughter are still largely expected to fund for the “Big Fat Indian Wedding”. Following are some of the investment options out there which parents could consider and evaluate basis their requirements:

 

 

• Sukanya SamriddhiYojana: A government initiative to encourage Indian parents to invest specifically for their daughter’s future. It provides the highest guaranteed returns of all government investment schemes and is currently providing 8.4% p.a. tax free. Furthermore, contributions to it are eligible for tax deductions upto Rs. 1.5 lakhs under Sec 80C. While some might criticise its lock in policy, the other way to look at this that it is a significant tool to partially, if not fully fund, the most important requirements of the daughter i.e. Her Education and Marriage

 

• PPF: Another popular government scheme. Similar to Sukanya SamriddhiYojana in providing tax benefits under Sec 80C. However the current tax free returns are 7.9%. With a 15 year fixed lock in policy, its highly advisable that the parents open the account during the daughter’s early childhood and invest regularly in it to achieve a sizable corpus.

 

• Mutual Funds: A combination of Equity and Debt Mutual Funds are a great way to ensure both short and long term goals of the daughter are met. One needs to identify which type of mutual fund and subsequently which scheme under that type would be most appropriate to invest into basis the requirements.

 

• Gold: An all time favorite for Indians. While traditionally Indians have always bought and kept physical gold, there are more convenient options now available. Gold ETFs and Sovereign Gold Bonds are becoming increasingly popular among Indian investors.Both track gold prices and have the added advantage of no storage/making costs and no risks of theft/tampering.

 

• Child Plans: Various Mutual Funds and Insurance Companies provide plans that are specific for children. Most of these options have a stringent lock in period and take exposure in equity and debt markets.The lock ins on these plans may work in favor when parents are looking to match the lock-in with the daughter’s goals.

Estate Planning:As a minor, two aspects become critical in ensuring that whatever hard work that went into planning for the child does not go to waste in case of a sudden demise of one/both parents. A will helps to confirm who will be the legal guardian of the child in case of an unfortunate event. It will also ensure that the money meant to go towards the requirements of the daughter actually is received by her at an appropriate time and the wishes of the parents as regards their monies for the daughter are honored.

Parents are always concerned with providing for their children. As such, it is always advisable to start planning early on in the child’s life. Understanding the child’s near and long term needs is a good way to start planning. And the correct planning can ensure peace of mind and happiness for both the parents and the daughter.

 

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Thinking about retirement in your 40s…?

We all have multiple goals, which we plan to achieve at different points in our lives but retirement tends to be one of the biggest goals. Unlike other goals, which have limited periods of outflows, for example higher education for children could last for 4-7 years depending upon the choice of course, but in the case of retirement,you chalk out a plan for the rest of your life,possibly for almost 1/4th of your life assuming life expectancy till 80 years and retirement age to be 60 years. This implies that the sooner you start the better it is.

If you are in your 40s then your kids might be in school and as you move towards the late 40s, your kids will be finishing schooling and you may be nearing you child’s graduation goal. The fact that retirement occurs very late in your life maymean that you tend to keep it aside and start working towards your near term goals like your child’s higher education. This way you will never really find an appropriate time to start saving for your retirement.

If you have not started yet, then start now.

Here is what you can do:

Determine goal value

Determine the current value of your expenses. Calculate the cost you would need in the year of your retirement by applying inflation to it. Estimate the expenses which you will incur post retirement. Remember there will be some difference in those expenses. For instance your household expenses will reduce since your kids will be independent by then. You lifestyle expenses could decrease, your medical expenses could go up, your loans could be totally paid off so you may not have any EMI burden, most insurance policies may have matured, so there will not be any premiums outflow to be planned for. Be reasonable while estimating expenses. Do not go overboard nor be overly conservative.

Investment for your goal

You may find the amount of investment that you need to make this goal achievable, will be greater than what it would have otherwise been had you started earlier. This does not mean you need to go up to 100% equity or riskier assets just to accumulatethe desired corpus in lesser amount of time. The correct approach is to have an asset allocation in place depending upon your risk tolerance and appetite. Take calculated risks. If you are too conservative, it may not serve the purpose because it will keep you from generating inflation beating returns. Being too aggressive on the other hand will also not help because risk of loss will be higher since you are not diversifying across asset classes.

After you have an asset allocation in place, you will need to choose products to invest. Since equity performs well if you stay invested for the long term, you can allocate more towards equity, little less towards debt and some amount in gold for diversification purpose. On the equity side you can look at Equity mutual funds. Go for open ended diversified mutual funds. Avoid closed ended products. Within equity funds you can look at flexi cap funds where it is a mix of large, mid or small cap. If you are in a higher tax bracket and you have not exhausted your 80 C limit you can look at Equity Linked Savings Scheme (ELSS).

As you get older, increase exposure to debt and reduce equity. On the debt side you can look at Public Provident Fund which has a lock-in period of 15 years. Beyond that it is extendable every five years. NRIs cannot open a PPF account. If you already have a PPF and in between your status changes to NRI then you will not be allowed to extend for five years once your PPF matures. The EEE ( Exempt Exempt Exempt) status of PPF makes it an attractive investment option especially in a falling interest scenario like the one we are in right now.If you are employed, look at contributions to the Voluntary Provident Fund ( VPF). You can also look at balanced funds which are a mix of ~65% in equity and rest in fixed income if you want a bit of both.

New Pension Scheme (NPS) is another option which is again a good investment option for retirement since it will provide regular income post your retirement. It will also enable you to take an additional deduction of Rs. 50,000 under section 80CCD 1 B which is over and above the Rs. 1.50 lakh benefit under 80C.

To add gold to your portfolio you can use a Gold ETF or buy Gold bonds.

Remember, we are in a dynamic environment. Therefore your investments will need to be reviewed and rebalanced periodically.

Image credits:      www.arabianbusiness.com            , www.workingmother.com

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Is PPF still a good option to save for your child?

There was a time when most Indians saved in bank Fixed Deposits, insurance policies and PPF accounts for various goals including child’s education. However, with the cost of education escalating rapidly and domestic education aspirations turning to international, there arises a need for inflation beating products to invest in, for securing your child’s future aspirations. With PPF rates traditionally being kept at an elevated level plus their significant benefits of offering tax free income, the recent decision to make them market linked, and subject to a quarterly review, makes PPF returns a significantly more volatile product in our view. Relying on them in isolation for goals like your child’s education will not help.

Image Source: www.uncwpse.org

What to do?

If you wish to send your child abroad the cost of education will be higher. To be able to beat the escalating costs and to ensure you do not fall short of funds when you are nearing your goal you must approach it in a planned manner. Choice of products is important but strategy is equally important. When you know how far the goal is and what is the current cost, apply inflation to it to know the future cost. Do not forget to factor in possible currency depreciation impacts.

Choice of products is important but strategy is equally important.

Image Source: doablefinance.com

Strategy: Equities perform well over longer terms. Therefore, keep a higher percentage allocation towards equity. Take exposure to gold as a partial currency hedge in the portfolio. As time passes move towards fixed income exposure. When you are 3 years away from the need for the monies shift all your money into fixed income to avoid a dent to your savings due to market volatility. Towards the end maintaining the amount that you have saved will be a priority rather than increasing them because education is a goal which cannot be delayed due to financial market volatility.

When you are 3 years away from the need for the monies shift all your money into fixed income to avoid a dent to your savings due to market volatility. Towards the end maintaining the amount that you have saved will be a priority rather than increasing them because education is a goal which cannot be delayed due to financial market volatility.

Image Source: finvisionconsultants.com

Products: To start with, broadly divide your portfolio between equity, debt and gold. Based on your risk tolerance, choose products for yourself. Since education tends to be a goal that is hard to fully realize the scale of when your child is younger, ensure that you get into a flexible product that enables changes with minimal cost impacts.. On the equity side use a combination of diversified equity funds and equity ETFs . Ensure that you stay diversified between sectors, Asset Management Companies and market capitalisations. You can also look at balanced fund which have approximately 65% towards equity and rest towards debt. Avoid exposure to direct equity, unless you can give it time. On the fixed income side you can look at PPF, debt mutual funds, and bonds. For gold you can look at gold ETFs and sovereign gold bonds.

Since education tends to be a goal that is hard to fully realize the scale of when your child is younger, ensure that you get into a flexible product that enables changes with minimal cost impacts..

All in all, keep it simple and keep it flexible.

PPF still works, but only for a portion of the portfolio.

 

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Budget2016 and your money

 

Reams of paper have probably been dedicated to the Union Budget already, but here is a detailed analysis after going through the fine print in terms of Budget 2016 and its impact on your personal finances.

Your Income

1. House Rent Allowance change: This has been hitherto a lesser used deduction as it comes with multiple conditions. Section 80GG allows individuals to claim a deduction in respect of house rent paid. The limit has gone up from Rs 24,000 previously to Rs 60,000 subject to following conditions:

a.If the person is either self-employed or salaried but does not receive deduction for       HRA from the employer

b.Does not own a residential property in the city in which he is staying on rent.

c.If the tax payer owns property at any place other than the one mentioned above, he        should not be claiming benefit of the property as self occupied. That property should be deemed to be let out.

To claim this deduction the tax payer has to furnish a declaration in Form 10 BA

The deduction allowed under section 80GG for payment of rent shall be least of the following:

1. 5,000 per month
2. Rent paid less 10% of the total income
3. 25% of the total income of the tax payer for the year.

Your Expenses

1. Tax collection at Source introduced – TCS of 1% on purchase of luxury cars of value greater than Rs. 10 lakhs and purchase of goods and services in cash exceeding Rs. 2 lakhs is now being levied. This does not change the price of the product but will create a trail of transactions in cash of high values, targeting cash usage.
2. Increase in service tax – Service tax has been increased by 0.5% on all taxable services, with effect from 1 June 2016. As a result, expect the costs of all services to go up.
3. Infrastructure cess- 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars and 4% on high engine capacity vehicles and SUVs, will mean that cars will become more expensive.
4. Excise duty on branded ready made garments – garments with a retail price of Rs. 1000 and above has changed from Nil to 2% without input tax credit. Thus, expect garments to become a wee bit more expensive.
5. Excise duty on tobacco hiked – expect cigarettes to be more expensive as a result.

Your Investments

1. Long Term Capital Gains tax on equities and debt investments did not see any change – This is positive for investors, as there were fears around tax being introduced on equities or the holding period for equities being changed. Status quo is good news.
2. New Pension Scheme (NPS) – There are 3 types of withdrawals currently allowed under the NPS.
3. Normal Superannuation – Lump sum withdrawal on retirement, which was 60% earlier has been changed to 40% now. Earlier this withdrawal was taxable. Now the government has proposed withdrawal upto 40% to be tax free. The balance 60% can be used  for purchasing annuities, to make the annuity portion tax free as well. Thus, the NPS is far more attractive as an instrument to be used for your retirement goals now, especially as its ability to permit equity exposure enables you to get the wealth creation benefit of equities over the long term.
4. Upon death- The entire 100% would be paid to the nominee/ legal heir and there won’t be any purchase of annuity. These entire 100% proceeds are tax free.
5. Exit before normal superannuation( 60 years) – At least 80% of the acculturated pension wealth of the subscriber should be utilized for purchase of an annuity and remaining 20% can be withdrawn as lump sum. Considering that this is a long term retirement product, be sure to use the NPS to fund your retirement goals, as early withdrawals make it less flexible.
6. Other pension products like EPF and superannuation – There has been an attempt to bring all pension products on the same page in terms of taxation. Therefore, EPF and superannuation will also permit 40% of the corpus withdrawn to be tax free. The interest earned on the balance 60% of the contributions made post April 1, 2016 will be subject to tax unless it is used to purchase an annuity.

There is also proposed a monetary limit for contribution of employers to a recognized Provident and superannuation fund of Rs. 1.50 Lakh per annum or 12% of employer contribution, whichever is less, beyond which the same will be taxable in the hand of the employee. You could see smaller contributions towards the EPF from employers going forward as a result, and voluntary Provident Fund contributions could also reduce as a result.

4. REITS (Real Estate Investment Trusts) and InvITs ( Infrastructure Investment Trust) – Real Estate Investment trusts are listed entities that primarily invest in leased office and real assets allowing developers to raise funds by selling completed buildings to investors and listing them as a trust. Previously REITs did not take off due to taxation challenges. This budget has done away with Dividend Distribution Tax, thus enabling exposure to commercial real estate at lower values.

Expect Infrastructure Investment Trusts to also take off as a result of this change in dividend distribution tax provisions.

5. Gold Bonds- Long term capital gains from the sale of gold bonds will continue to be taxable but now eligible for indexation benefits. This facilitates taking exposure to gold in a paper form.

The budget has also proposed to make interest and capital gains from the gold monetization scheme tax free. Thus yields from gold are possibly now more attractive than rental yields from residential real estate, considering that the returns are tax free.

6. Measures for deepening of corporate Bond Market-

a. LICof india will setup a dedicated fund to provide credit enhancement to infrastructure projects. The fund will help in raising credit rating of bonds floated by infrastructure companies.

b.Development of an online auction platform for development of private placement market in corporate bonds.

c.A complete information repository for corporate bonds covering both primary and     secondary market segments will be developed jointly by SEBI and RBI.

d.A framework for an electronic platform for Repo market in corporate bonds will be    developed by RBI.

This will enable investors to invest in corporate bonds and give them another option to add fixed income exposure to their portfolio.

7. Fiscal target to be maintained at 3.5% – With the government sticking to its target of 3.5% of GDP for FY 17, fiscal discipline has been adhered to for now. This could lead to drop in bond yields and could be particularly positive for duration funds or portfolios having longer duration bonds. Transmission of falling interest rates could finally be a reality.

Your Taxes

1. There has been no major change in income tax slabs , for individuals earning upto Rs 1 crore.
2. Surcharge- There has been an increase in Surcharge on income above Rs. 1 Crore from 12% to 15%.

For an individual below 60 years with an income above 1 Crore ( eg. 1.1 Crore), he will end up paying approximately Rs 91,000 more due to the 3% increase in Surcharge.

3. Rebate- Under Section 87A, for individuals with income not exceeding Rs. 5 lakhs, the rebate has increased from Rs. 2,000 earlier to Rs. 5,000.

3. Dividend Distribution Tax- The amendment in dividend distribution tax law is applicable to dividend declared under Section 115O. The section is applicable to domestic companies and it is proposed to amend the Income-tax Act so as to provide that any income by way of dividend in excess of Rs. 10 lakh declared by such domestic company shall be chargeable to tax at the rate of 10%.The above amendment will have no impact on the dividends received by the Mutual Fund unit holders as dividend paid by a mutual fund scheme to a unit holder is covered under Section 115R of the The Income tax Act, 1961. This will hit investors drawing higher dividends but since it is not applicable to dividends from mutual funds it’s a relief.
4. Presumptive Tax – This scheme is available for small and medium enterprises with turnover not exceeding 1 crore rupees. These were free from getting audited and maintaining detailed books of account and could pay tax at 8% .This turnover limit has increased to Rs. 2 Crore.

Also under the presumptive taxation for professionals with gross receipts up to Rs. 50          Lakh, the presumption of profits has been introduced to 50% of gross receipts.

This should result in significant time saving and costs for professionals and small business owners. However, remember to read the fine print on this clause.

6. Reduction in tax slabs for companies with business income upto Rs 5 crores – The path to reduction of corporate tax rates has begun with a 1% reduction in tax rates for smaller businesses. Expect more to follow going forward.
7. Undisclosed income – A window from 01 June 2016 to 30 Sep 2016 has been introduced for people to pay 45% on their undisclosed domestic income. This undisclosed income will not be subject to any scrutiny if done within this window. This is an attempt to garner additional revenues and solve the challenges of black money.

Your Loans

1. Additional deduction of Rs. 50,000- For first time home buyers an additional deduction of Rs.50,000 on top of already existing Rs. 2 lakh has been proposed for loans upto Rs. 35 lakh sanctioned during the next financial year subject to the value of property not exceeding Rs. 50 lakh.

All in all, it’s a budget that will probably not change your money life significantly – but it has a little here and a little there. “Fortunately, there is a sane equilibrium in the character of nations. As there is in that of men.”

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Are you saving enough

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Best ways to Invest for your Child’s Education – Vishal Dhawan in TOI

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#AddMeaningToFinances Tax Planning tips for Big Savings for the year 2015 – Vishal Dhawan in TOI

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