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- How much insurance do you really need?
- Growth Versus Dividend Option - Tax Liability
- Understanding various components of your cost to company (CTC)
| How much insurance do you really need? Posted: 16 Jan 2013 05:24 AM PST Call 0 94 8300 8300 (India) The amount of insurance you would require depends on your needs, along with current or expected circumstances IT IS said that destiny is not by chance, but by choice. While this may or may not apply to all aspects of life, when it comes to financial security of our near and dear ones, it isn't very far from the truth. One of the many steps to shaping our financial destiny is to provide adequately for the future. That's where insurance comes in. But often, the question is not about whether insurance is needed, rather how much is adequate? The amount of cover required depends on individual needs, along with current or expected circumstances.
The next task is to determine your current sources of income, besides salary, which will be available to your family even after your death. These include stocks, bonds, mutual funds and income from property. Subtracting the needs from the assets gives a fair picture of what you need to provide for. But the answer is not always that simple. Today, life insurance is also a significant element of your personal investment portfolio that secures your financial future as well as that of loved ones. The topics below shed some light on how to approach insurance.
There are several plans in the market, which cover you as well as your family. Before choosing a plan, study all options available. Do not rush into choosing a plan as this would result in opting for something that is not entirely suitable and one that you will be committed to for a very long time. Also, one needs to look beyond general incentives such as tax breaks and savings through life insurance. Insurance addresses four key needs in a person's economic lifecycle, which includes savings, protection, investment and retirement. Financial literacy initiatives by the insurance companies play a big role in educating customers and increasing penetration.
The things you must consider before investing in any insurance policy are coverage of that policy, benefits in the long run, and term and premium amount to be paid Choose a policy depending on your income so that you will not face concerns over premiums. Note that the inability to pay premiums is the main reason to discontinue the policy. Take a good look on the plan and the benefits. While you take feedback from financial consultants, it is important to do your own study either through discussions with people in the know or desk research.
As there is more than one methodology to calculate HLV, it becomes even more challenging to understand. The most common definition of HLV is the expected lifetime earnings of an individual, that is, what is the total income that the individual is expected to earn over the remainder of his working life, expressed in present rupee terms. For the uninitiated, inflation eats away the value of money; a rupee today is worth more than a rupee tomorrow and therefore, you need to suitably discount future earnings to express the value in present rupee terms. HLV, in my view, is the monetary value of all the yet-to-be fulfilled needs of the dependents plus all the outstanding liabilities. Even though expected income may not be sufficient to meet the needs, the needs are still there. And an individual strives to meet the needs of his dependents. So, the HLV thrown up by our definition is a target that you should have in mind, you can and possibly may have to plan for a lower HLV, but don't despair over that. The important thing is to set a goal for yourself so that your dependents are well taken care of, whether you are there for them or not.
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| Growth Versus Dividend Option - Tax Liability Posted: 16 Jan 2013 03:26 AM PST Call 0 94 8300 8300 (India) Given a choice between paying tax at a higher rate or a lower rate on the same instrument, what would you choose? Or, to rephrase the question: given a choice between paying tax at 30 per cent or at 12.5 per cent, what will you choose? The obvious answer would be 12.5 per cent, since it is lower. However, one could benefit by paying tax at the higher rate. This is no trickery with numbers; it's just plain mathematics and one can practically implement this tax maneuver. It is easy to guess the significance of the numbers. The maximum tax rate payable is 30 per cent and 12.5 per cent is the rate of dividend distribution tax applicable to non-equity schemes. (The education cess of three per cent is being ignored for simplicity purposes) With equity schemes beckoning left, right and centre, coupled with the market exploring the stratosphere, why are we even talking of non-equity schemes? The reason is on account of asset allocation. Every portfolio, irrespective of how aggressive the investor is, should contain a fixed income portion. It is possible to optimally operate this fixed income allocation in one's portfolio. INVESTMENT STRATEGY Let us understand the investment strategy by taking the example of two individuals. Naresh and Sachin, both belonging to the 30 per cent zone, have invested `10 lakh in a non-equity scheme. The scheme is a regular, run of the mill, assembly line income scheme. It has earned a distributable profit of 10 per cent. This works out to `1lakh on the originally invested capital of `10 lakh. Naresh has chosen the dividend option. His objective is make the investment, sit back and enjoy the tax-free income. On the other hand, Sachin has chosen the growth option and withdraws `1lakh just aday before completion of one year. Note that this is the same amount as Naresh receives as dividend. However, for Sachin the withdrawn amount represents shortterm capital gain. Going through a bit of number crunching - nothing serious, just some additions and multiplications, you will see the results are interesting. Now, 10 per cent of `10 lakh works out to `1,00,000. But Naresh gets a dividend of only `88,889. Why? The mutual fund (MF) has to pay a distribution tax of 11,111. The math is simple: 11,111 is 12.5 per cent of 88,889 and 88,889 plus 11,111 equals 1,00,000. TAX LIABILITY Let's see what happens in Sachin's case. Since he has chosen the growth option, in one year at 10 per cent, the NAV would have grown to `11. To redeem `1,00,000, he would need to sell 9,091 units (100,000 divided by 11). Let's quickly calculate the tax. Though Sachin has sold units worth 1,00,000, the entire amount is not taxed. It is only the capital gain that will be taxed! The capital portion of `1,00,000 is 1,00,000 into 10 divided by 11, around `90,910 (rounded off). Thus, the capital gain works take-home for Sachin is `97,273, compared to `88,889 for Naresh, almost 10,000 higher. The table summarises what we just discussed. In the end, both have their original investment intact. In other words, here, 30 per cent works out to be lower than 12.5 per cent. Looking at it another way - when the mutual fund pays you income, it's called dividend. Instead of dividend, if you withdraw the same amount of money from the mutual fund, it's short-term capital gains. The objective of this exercise is to demonstrate that earning shortterm capital gains is better than earning dividend income. Suppose Sachin was in a lower tax zone, his take-home would be much higher. But there would be no such benefit for Naresh. He would have to bear the same amount of tax, notwithstanding whatever tax slab he came under. Also, if Sachin had been able to wait for only two additional days before applying for repurchase, he would be in a position to take advantage of the 10 per cent TO CONCLUDE The general misconception is that there is no advantage in earning short-term gain, since it is taxed at the normal rates. However many do not realise that, the advantage flows from the fact that a large portion of withdrawals is capital and, simultaneously, an equal amount from the income gets converted into capital. In other words, you are consuming capital and investing income. Obviously, this principle would work only for the long-term investor. If you have ashort-term view and were to sell your entire holding at one go, this investing strategy will not work. However, if your holding period is more than one year, then investing income and consuming capital is the way to go. Look at it any which way, the only way to make the dividend truly tax-free is to avoid it altogether. The rule is simple — no dividend, no tax!! Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
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| Understanding various components of your cost to company (CTC) Posted: 16 Jan 2013 03:07 AM PST Call 0 94 8300 8300 (India) Appraisal season, for many, kicks in with the new financial year. You may be gearing up to justify your place in the organisation and demand -or request - a pay rise from your boss. Whether joining a new company or asking for more, understand the various components of your cost to company (CTC) to get the best deal on your salary. Some companies offer employees flexibility of structuring their own salary. A little understanding and negotiation of various components can ensure you increase your take-home salary, reduce your tax liability and enjoy higher job benefits. CTC is different and always more than the net monthly take-home. There can be instances wherein your annual CTC is `6lakh but only around `30,000 is being credited to your salary account every month. Where the remaining `20,000 goes, is for you to make out! Here are some things to look for. BASIC EARNINGS Try and maximise the 'basic component'. A higher basic ensures higher contribution from your employer and you to the provident fund (PF) kitty, which plays a critical role in your retirement planning. For example, if your basic is `20,000 per month and growing at five per cent yearly over a 35-year career, the PF balance when you retire at 60 would accumulate up to `2crore! A higher basic will also fetch more gratuity payout, either when you retire or leave the job after five years. About 40-50 per cent of CTC as basic salary is a healthy percentage. Any allowances dipping into the basic should be minimised, as it reduces the company's obligation towards PF, gratuity and leave encashment. ALLOWANCES Some allowances in the CTC are exempt from tax. Like conveyance allowance to the extent of `800 per month, medical allowance of `15,000 per year and leave travel allowance for two years in a block of four years. Ensure your employer is including all these components in the CTC and to the mentioned limits only. Others like special allowance and additional allowance are taxable components and usually included to keep the 'basic' component lower, while increasing the pay. Check if you can have a say in this and increase your basic. REIMBURSEMENTS Most companies have a reimbursement component, wherein you are reimbursed to the extent of bills produced on expenses such as mobile bills, books, newspapers, business promotion, restaurant BONUS Would also like to push a higher percentage into this component, to minimise employee turnover. You should check this component's percentage and also the terms and conditions related to its payout. A higher percentage of bonus component reduces your basic salary. Also, you need to discount the bonus with a tax deducted at source (TDS) of 10-30 per cent. It's better to take the maximum in the form of basic salary or allowances. It helps you get a higher package in the next job. JOB BENEFITS Many of the bigger and established companies run employment benefit schemes, the PF being the most common. The government mandates an employer to match employees' contribution to PF, which is 12 per cent of basic pay, plus dearness allowance. It is important that the employer communicate clearly what forms a part of CTC while promising a particular salary structure to you. Gratuity is payable only at the time of retirement or if you complete five years with the organisation. So, ideally, this should not form a part of CTC, but some companies include a notional value of the expected outflow from their end. If so, seek clarity. Similarly, you should get clarity on group insurance policies, transportation facilities and superannuation contribution. In some cases, employers may also include training costs, interest on loans / advances, entertainment costs, canteen costs and club facilities. Make sure the company doesn't create an illusion of higher CTC by including these components. Don't be swayed by the CTC figures offered to you. Check the above items to figure out, if, what is being offered is really worth the lure! BASIC EARNINGS Basic Salary Higher the better House Rent As per actual rental Allowance outgo Special/Additional Try to move as much Allowance to basic Tax-free Allowances Conveyance `.800 pm Allowance Medical Allowance `.15000 pa Leave Travel Allowance As per actual outgo REIMBURSEMENTS Telephone, Internet, books & papers Business Development (travel & food) Car (Fuel, Maintenance, Insurance) BONUS Annual Bonus Performance/Variable Bonus EMPLOYMENT BENEFITS Provident Fund Max out yours and employer's contribution Gratuity Ensure a notional value is not included as part of CTC Group Mediclaim / Good if company is Life insurance providing this benefit even if at a cost
Happy Investing!!
We can help. Call 0 94 8300 8300 (India)
Leave your comment with mail ID and we will answer them
OR
You can write back to us at PrajnaCapital [at] Gmail [dot] Com
---------------------------------------------
Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs
Download Mutual Fund Application Forms
Best Performing Mutual Funds
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