Navigating the maze that is personal finance

Monday, 13 February 2017

ULIP (Unit Linked Insurance Plan) 101 – All that you need to know

What is it?
ULIP is a financial product providing both insurance and investment at the same time.

How does it work?
  • A part of the premium is diverted to provide life insurance to the policy holder.
  • In case of death of the policy holder either the sum assured or the fund value, whichever is  higher is paid.
  • The rest is invested in various instruments (typically mutual funds) like debt or equity or both depending on the preference that has been expressed or chosen by policy holder. Presently these options can be switched if the policy holder wishes to do so with changing risk appetite.
  • Another part of the premium goes towards other charges like allocation charge, administration charges, mortality charges etc.The part that goes as investment is allotted units with NAV which changes as the market changes on a daily basis.
Tax treatment
ULIPs are eligible for tax deduction under 80C (maximum limit 1.5 lakh) up to 10% of the sum assured or annual premium whichever is lower. You need to invest for a period of 2 years in order to avail this benefit. What this means is that if discontinue your ULIP before 2 years the deduction claimed in the earlier years will be added back to your taxable income. 

How is it different from a pure play insurance and/or investment instrument?
When you are buying an insurance product the whole premium goes towards insuring you and while buying a purely investment product like mutual funds the money goes in investment except a very small percentage that goes towards management and other charges in both cases.

How can you exit? 
Partial withdrawals from fund value are allowed after completion of five years. A particular number of withdrawals are even allowed free of cost. Some ULIPs may have lock in period and can be liquidated if required. However once dissolved the insurance also goes away, hence this should be kept in mind while buying ULIPs.

My take on ULIPs
ULIPs have higher charges when compared to those of insurance products and pure investment tools separately, you get lower overall returns and are insured for a lesser amount than you could be if you had chosen a pure insurance product. However after IRDA capped the charges that could be deducted by ULIPs, they have become more attractive than before. In ULIPs you are buying insurance and are investing at the same time. What the nominee gets in case of death of the policy holder is the sum assured or fund value whichever is higher. I personally suggest and prefer to rather buy a term insurance and an investment product separately.

Tuesday, 7 February 2017

How to calculate the amount to invest in a Systematic Investment Plan (SIP)?

Are you are thinking of investing in a mutual fund using the systematic investment plan route, commonly called as SIP? How can you calculate the monthly amount that you need to invest in order to meet a particular financial goal? For example, if you want to fund your next overseas vacation (costing Rs. 5 lakhs today) 2 years from now how much money should you put in a SIP month on month?

To answer your question I have created a SIP calculator. Just enter the current value of your financial goal, which in this case is Rs. 5 lakhs, the expected rate of return which I have assumed as 12% per annum (I recommend to take a historical average, around 12-15%), the number of years you want to accumulate the amount in and the inflation rate which I have taken as 8% in this example. The inflation rate is important because it affects the future rate of your financial goal. So at 8% inflation a thing that costs Rs. 100 will cost Rs. 108 in a year from now.

As you can see you will need to invest Rs. 21, 407 in order to fund a vacation that costs Rs. 5 lakhs today.

Go ahead and download the SIP calculator. Happy investing.

Thursday, 2 February 2017

Steps to e-verify cash deposits made during demonetization (during 9th Nov to 30th Dec 2016)

Did you deposit your old 500 and 1000 rupee notes during demonetization? The Income Tax Department (ITD) has used big data analytics to compare of demonetisation data with information in ITD databases to identify taxpayers wherein the cash transactions do not appear to be in line with the taxpayer’s profile. ITD has enabled online verification of these transactions in order to explain the mismatch. Here are the steps you need to e-verify the cash deposits made post the note ban.

Step 1: Login to your account at

Login to your account

Login to your account

Step 2: Click on ‘Compliance’ .... ‘Cash Transactions 2016’

Click on Cash Transactions 2016

Step 3: The details of transactions related to cash deposits you have made during 9th Nov to 30th Dec 2016 will be displayed. This data will be shown only if the deposits do not appear to be in line with the taxpayer profile.

Step 4: Confirm if the bank details displayed relate to your PAN.

Step 5: If yes, you need to provide explanation of the transaction.

Provide detailed explanation of the cash transaction

You can find more details of the process by clicking on ‘Help’ once you have logged in and clicking on ‘User Guide for cash transactions made during 9th Nov to 30th Dec 2016'.

User Guide for cash transactions made during 9th Nov to 30th Dec 2016


All that you want to know about Equity Linked Saving Schemes (ELSS)

What is it?
A mutual fund that provides you tax benefit under section 80C.
ELSS stands for equity linked saving schemes.

Maximum limit of investment
There is no upper limit on investments in ELSS. However, investments of only up to Rs.1.5 lakh per year are tax deductible. 

Lock in period
36 months or 3 years from date of contribution.

Tax on maturity
There is no tax on liquidation after 3 yrs.

Contribution mode
Contributions can be lump sum or through SIP (Systematic Investment Plan).
However each SIP is considered a separate investment and hence can be liquidated only after three years. The contribution can be stopped after making one time payment. It is however advisable to remain invested for a longer time than lock in of 3 years.

How is it different from other mutual funds?
Regular mutual funds do not provide tax benefit, ELSS does.
However a mutual fund can be liquidated after one year without attracting tax as against three year lock in for ELSS.

How is it different from other 80C instruments?
ELSS provides growth from equity market and provides tax break at the same time. This pushes the returns higher, however you should remain invested even after 3 years to maximise your return and should not change ELSS frequently. Since these are equity linked they are related to market risks. The other instruments like PPF generate fixed returns hence your risk appetite should decide what 80C instrument you should choose.

Types of ELSS
You can choose either dividend type of ELSS or growth type. The dividend received is tax free in the hands of receiver. In growth type your returns are reinvested and hence builds a bigger basket in the long run.

Best rated ELSS for 16-17

Fund 3 years returns (%) 5 years returns (%)
Axis Long Term Equity Fund 24.43 21.68
Birla Sun Life Tax Plan 23.53 18.86
Birla Sun Life Tax Relief 96 24.52 19.59
DSP BlackRock Tax Saver Fund 25.88 20.82
Franklin India Taxshield Fund 23.25 17.94

Source: Valueresearchonline


Wednesday, 1 February 2017

Income Tax Slabs for the Financial Year 2017-18

The income tax we pay is based on our gross total income and the income tax slabs announced by the government in the budget at the beginning of every year. The tax slabs have been changed for the financial year(FY) 2017-2018. The union finance minister Arun Jaitely has announced lower income tax rates for individuals earning between Rs. 2.5-5 lakhs during his budget speech on Feb 1, 2017.  What does this change in income tax slabs for FY 2017-2018 (assessment year 2018-19) mean for you and me? How much more money will you have in hand. This blog post will answer this question. 

According to the latest income tax slabs, persons with annual income up to Rs. 3 lakh will not have to pay income tax and those having income between Rs. 2.5-5 lakhs will be charged income tax at 5%. Persons with annual income between Rs. 50 lakh to Rs. 1 crore will have to pay a surcharge of 10%. Those with income above Rs. 1 crore will continue to be charged a levy of 15%.

The table below lists  the normal tax  slabs applicable in financial year 2017-18.

Income Slab Tax Rate
Income up to Rs 3,00,000 Nil
Income from Rs. 2.5 lakh to 5 lakhs 5% of (Total income - 2,50,000)
Income from Rs. 5 lakh to Rs. 10 lakh Rs.12,500 +,20% of (Total income - 5,00,00)
Income above Rs. 10 lakh Rs. 1,12,500 + 30% of (Total income - 10,00,000)
Income above Rs. 50 lakh Rs. 1,12,500 + 30% of (Total income - 10,00,000) + 10% surcharge
Income above Rs. 1 crore Rs. 1,12,500 + 30% of (Total income - 10,00,000) + 15% surcharge
Now lets compare it with the income tax slab for financial year 2016-2017. As you can see from the table below if you fall in the 20% or the 30% slab you can save up to Rs. 12,500 per year as a result of this change.

Income Slab Tax Rate
Income up to Rs. 2.5 lakh Nil
Income from Rs. 2.5 lakh to 5 lakhs 10% of (Total income - 2,50,000)
Income from Rs. 5 lakh to Rs. 10 lakh Rs.25,000 +,20% of (Total income - 5,00,00)
Income above Rs. 10 lakh Rs. 1,25,000 + 30% of (Total income - 10,00,000)
Income above Rs. 1 crore Rs. 1,25,000 + 30% of (Total income - 10,00,000) + 15% surcharge

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