Is your financial life going well? Are you on the growth path or on the verge of disaster very soon? Your financial life might be in trouble, but maybe there is some more time left before you really take charge of your financial life and really do something about it, else it will crumble and you will be destroyed beyond recovery.
I see lots of people who are not in agreement with the fact that their financial life sucks and they really need to take giant leaps. Somewhere they are comfortable with the whole situation and keep expecting that “somehow” their financial life will improve. So, I am giving you 5 simple indicators, which you can look at and decide if you are headed towards financial disaster or not. The more these indicators are true for your financial life, the bigger is the problem and you need to get really serious about it. If none of these indicators are true for you, then congratulations! , you are mostly in a good situation.
Sign 1 – You cant live for 3 months without a job
The first and the biggest sign of disastrous financial life is that you cant live for a few months if you do not bring money on the table through your job or business. If you have been earning for a few years now, you should at least have a year’s worth of income saved with you, but that’s not the case with many people. Their monthly expenses make sure they are left with nothing at the end of the month. Worse, many people have the negative cash-flow and they are piling up debt each month to survive. These people are mostly dependent on credit cards and keep using them whenever they are in a “crisis” situation. The credit card should be held for benefits + reward points and not because of its a survival tool for you.
Ask yourself, how many months’ salary have you drawn to date in last so many years and how many worths of salary you have saved till now? If you cant survive for more than 3 months (or 4-6 months), you are in big trouble. I asked this same question on my facebook wall a few weeks back and I got responses like “6 months”, “3 months”, “10 yrs” and all kinds of numbers. So better look at your number of months. Do not focus on income alone, because income is not the same as wealth.
Sign 2 – You find it tough to get a higher paying job
Your job/business is the means to bring money to the table each month. Every year or in few years, ideally you should be able to move one ladder up and command a high salary because over the years you will gain experience, add new skills and would be wiser/knowledgeable. However, if you cant move upwards in your professional life, the amount of money you will bring back home will not increase and if that’s the case, you are in trouble.
Ask yourself– Do you see yourself earning 10X of your current salary someday in the future like the next 5-10-15 yrs or not? Are you dead scared of losing your job and never be able to find another? Do you feel that you have reached a level in your professional life, where if you lose your current job, you will find it tough to get the same salary job somewhere else?
If that sounds your case, you are in trouble financially because your biggest asset is your earning capability and not your this year’s pay package only? If it sounds your story, its time to find out how you can increase your skills and take better jobs in coming times, don’t wait for the last moment, it takes few years to hone your skills!.
Sign 3 – You are paying back EMI’s for depreciating assets
There is two kind of debt – good debt and bad debt. Any debt which helps you build assets and grows in value over time is better (I am not saying, go for it, but it’s just better than the bad debt). The bad debt is mainly the debt which is used for CONSUMPTION purpose. You use it and its gone. Examples are personal loans, consumer durable loans, credit card debt or even a car loan(especially the car, which you really don’t need, you can do with a two-wheeler, I am not talking about the car which is really required and can’t live without), then you are paying an outsider on a regular basis, without building any assets for yourself.
It’s like – you are doing the job to help others squeeze money out of you. If you are doing this, better stop it now and see how you can change your direction, you still might have the time to come back on track.
Sign 4 – It has been 5 yrs working, but you have nothing worth called “ASSETS”
You have worked for 5 yrs in the job, now even if you had saved 2 months’ worth of salary each year, you must have had 10 months’ worth of salary with you saved today? Is it there? You must be having some investments in Fixed Deposits, or some gold, or some mutual funds or at-least a small part of your future house down-payments which you are fantasizing about? Is it with you or you have blown up? In my 1st book – “16 personal finance principles every investor should know”, I have explained in the first chapter how the early start of your financial life can break or make the rest of your financial life. Grab it and read it.
Ask yourself, how much you can show off for the last 5 yrs of earning? Just add up all the salary you have drawn in last 5 yrs (let’s say at 4 lacs per year, its 20 lacs in total 5 yrs), how much you currently have in assets? Even if you have saved 3-5 lacs, I would say its fine. But if you are still trying to locate where has all that gone, it’s not a good sign. Remember, how do you start your financial life can be an indicator of your whole financial life. Dont neglect the first 5 yrs of your financial life because it matters a lot.
Sign 5 – You like to spend a lot of social functions!
Most of the people with the worst financial life in India are too social in nature (not vice versa). They keep spending on all the useless social functions either due to social pressure or by choice. Examples like – “How can I not celebrate my child’s 10th Birthday with a grand party, all relatives are looking forward to it” or “I have to gift something worth to this friend/relative because of reasons reasons reasons.
Social functions in India are one the largest wealth-destroying activities, which are not comparable to anything. Dont get me wrong, I know you need to celebrate marriage, birthday, anniversaries and that’s an important part of life, but when it stops being celebration and becomes showoff and obscene display of imaginary status (which others know very well that you are faking), it’s utter nonsense and destroys your financial life. Please stop it
I know the current young generation does not believe too much into showoff and useless social functions, but due to parents’ pressure and mindset, even children have to kneel down at times and cant avoid this social spending’s even if they hate it from the core of their heart. Ask those children, who are struggling to buy a house because they do not have money and their parents blew up 30 lacs on their wedding to invite 800 people (500 of them you meet the first time in your life and they eat maximum ice-cream at food counters). What a joke !. A small bold decision would have made so many lives easy.
It would be a good idea for you to write down how much % of your income to date, have you spent on social functions (which you could have avoided) in the last 5 yrs. If its more than 2 %, I am sorry for you.
I must mention that all the views are my personal based on my ideologies, If you don’t agree with some point, You are equally right and much like anyone else. The points are general in nature and might not be 100% true for every person’s case.
Take some bold step
I can tell you from my experiences – Most people have bad financial life and they do not do anything about it, because it’s not affecting them in the short term. Every additional bad decision does not hurt their next day, the food will still be on the table, the next movie will still be watched and the small Sunday outing will still happen, but how long if you continue having these 5 signs in your financial life? In our 3rd book – “11 principles to achieve financial freedom” written by Nandish, the coach helps a guy in changing his mindset about his financial life and helping him think like a pro in his financial life, Its an amazing book I would say which no investor should miss.
You need to take some massive action, some really bold step, it has to be 20 times stronger than what you have in mind, you have to really upset few people in your life and have to embrace discomfort for few years. Just a tiny “try” will not help. Imagine you get a deadline from your employer that you can only work for the next 5 yrs and then you will not get any job in the whole world for the next 3 yrs, how will you prepare for this situation? That’s your game plan now!
It has been 5 yrs when the first draft of the Real Estate Regulatory Bill came and then there were many amendments in it over the years. However on 4th June 2013, it was passed by cabinet and now the next step is to table it in parliament this monsoon season and if our country people are really lucky, it will finally become an ACT of law.
Real Estate Sector is hugely unorganized and against buyers
We all know that the real estate sector is so much unregulated and unorganized. There are no proper guidelines on any thing and builders use this to make maximum out of the situation and take buyers for the ride at every level. Builders and Politician nexus are very known and from last 10-15 yrs, the real estate prices have crossed the level that a common middle-class family would never afford their own house.
In this scenario, the real estate regulations are not just a requirement, but a big need of the industry if our economy and society need to some stability over the long term. In this article, we will discuss all the major points in real estate regulations. There are many good points in the regulation and it will help the industry, however like any other law, this bill also has many loopholes and many rules can be exploited by the builders. This bill whenever becomes the final act, will only be applicable to new real estate projects, not the ongoing and completed projects.
From the last few days, there has been a great number of discussions over various news portals and discussion forums on how these regulations will be a great thing and how it is just another failure. So let’s see major highlights of the regulations
1. Mandatory to acquire all clearances before the launch
As per the bill, it would be mandatory to acquire all the required clearances from relevant authorities and govt bodies before formally launching the project. Right now builders launch the project when there is nothing more than plain land on the site and have no permissions for anything. They give rosy pictures to investors, start taking the money from the public and then start the overall process of acquiring the land, getting approvals, and coming up with the structure. This means there will be obvious delays and lots of confusion and frustration for investors.
With this, the concept of “pre-launch” offers will vanish and you can expect the prices of the property to be high on launch. A lot of people are saying that because of this, there might be a slowdown on the supply side because right now a builder keeps launching new projects. Another requirements is that these permissions taken are to be displayed on the website of the developer.
2. Use of Photograph of actual site for advertisements
As per the bill, the builders will have to use the actual sire pictures or the actual construction work pictures for advertisements for the project. Right now builders do not use the actual pictures for promotional purpose.
It’s easy to create an illusion by using graphics and shiny pictures and that is what happens most of the time. Builders use the classic graphics image of the project site which is full of greenery and nature around it and the feeling it gives you is that its an opportunity one cant miss. However, in reality, the project site is quite different. It might happen that there are buildings around it and no trees or any natural habitat. The roads around might be bad and the elevation of the project site might be high or low than the normal.
If a builder is found to be putting up misleading or wrong advertisements, then there can be a jail term of up to three years, if it’s done repeatedly.
3. Sale of property as per prices linked with Carpet Area
The bill says that any sale proceedings should be using the prices which are linked with carpet area and not super built-up area. Generally, builders use “super built-up area” as the parameter and define the per sq ft price as per that. Carpet area is the net usable area which can be used for living purpose (imagine you lay down carpet, then how much area it will cover), however super built-up area (or salable area as called by many builders) is combination of net usable area, area covered by walls, doors, parking area, staircases, temple in side the project, gym, garden and everything you can imagine which is part of your package (divided per buyer). So super built-up area becomes high and the per sq ft price looks small, however, if you divide the whole cost by the carpet area, then you will realize how much you are paying.
You should also know that even in agreement, only the carpet area is mentioned. However, builders quote the pricing only on super built-up area.
4. State Level Regulators and central appellate tribunal to be set up
The bills also say that a central appellate tribunal should be set up as a central body and each individual states should also have state regulators. This means that there would be some central guidelines for the real estate sector and builder and each state will focus on regulating their states real estate builders. There might be few rules different from states to states. I personally feel that there might be some confusion due to this.
5. Real Agents/Dealers need to register themselves
Right now, real estate agents and dealers are not at all registered with any central/state body and hence due to highly unregulated environments, they do not have any code of conduct or service standards defined. Now they will have to register themselves and will have clear responsibilities and functions. Consumers will be able to demand their rights from agents and dealers for the amount of commissions paid to them.
6. Separate bank accounts for every project
As per the bill, A builder will have to maintain separate bank account for each and every project and up to 70% of the funds for that project has to be there in that same bank account. In the previous drafts, this number was 100% (means no money for Project A can be used in Project B) , but looks like the builders and politicians lobby has been successful in diluting the quality of the bill wordings and in new draft now the number is 70% or less. It does not serve the protection of buyers because builders will still be able to divert 30% of the funds from one project to another.
Right now, the way it works is that a builder when faces a severe cash crunch launches a new project and uses the money collected in another project to complete the old project and this cycle goes on. This creates a lot of issues for home buyers because there are huge delays at times. Firstpost did an excellent article on this topic and concluded that real estate is a kind of Ponzi scheme
7. Builders cant take more than 10% advance without a written Agreement
A builder will not be able to take more than 10% advance money from buyers without a written agreement. Right now a lot of dealings happens by paying huge advances and the agreement part is delayed by many. In many cases, agreements happen after many months or years, as lots of transactions happen on a trust basis. This might help in curtailing some part of black money transactions. However only you guys can tell some real-life cases which this clause might not help and fail.
8. Full refund with interest, if property not handed over time
As per the bill, the builder has to refund your money along with the interest, if he fails to deliver the project on time. At this moment, this point gets added in the agreement and almost all the times, builders make sure that this point is omitted in the agreement and if it’s not there, you have to file a consumer court and after a long time, you are rewarded your right. However, the bill will make it a standard rule or clause.
The Bill rules apply to project over 4,000 sq meters in size
The biggest worry about this bill is that it’s applicable only to projects which are of 4,000 sq meters and above size overall and if a project is bigger than 4,000 sq meters, the bills allow to break the whole project into different phases and see each phase as different project. Now this clause itself destroys the protection layer for consumers. Because a builder can always break the whole project into different phases and show them as a separate project. Many builders anyways run various projects under different companies’ names to save on tax. So running two or more sub projects on different names (which are actually just one project side by side).
The old draft of the bill had this number at 1,000 sq meter, but this current recent bill has it at 4,000 sq meter, so again someone has been able to influence the bill.
No Single Window Clearance for Approvals
One of the major challenges and problems builders face is about the govt clearances and various approvals. This takes a lot of time and opens up the gate for bribes and bureaucracy, the bill does not address this problem at all. It would be great if there would be a separate govt department which would have a single-window clearance. This would help in defining the project completion time with more accuracy.
Will all this reduce the property prices or not?
This is the million-dollar question which is in every body-mind, that with this bill, will the prices of real estate come down or not, which is the biggest issue common man is facing right now, compared to any other issue. Delays and consumer exploitation is all fine if prices are normal and affordable, but if prices itself are so high that its out of reach of common man, then every other problem is secondary.
Here is a copy of the Real Estate Bill which I got from Moneylife article
There are many implications of this bill and tons of factors and variables which can affect real estate prices. Some are saying that prices might go up and some are saying pricing might come down. But It would only be clear when the bill becomes a reality.
However, we would like to hear what you think about this real estate bill and how it might impact the real estate prices?
Few weeks back, I posted an interesting question on our Facebook Page asking – “Given limited money – which is more important product to buy from security point of view – Term Insurance or Health Insurance ?” .
Lets say there is a guy – who wants both a term plan and a health insurance for his family and he only has Rs 10,000 per annum left with him, now he can either buy a 1 crore term plan for his family or buy a 5 lacs cover for his family. But he will be able to get only one of them from this Rs 10,000 left with him, then which out of term plan and health insurance is makes sense for family and is more useful? Lets see some points, raised by our facebook fans, which will help us to think about it.
1. Death is less probable compared to hospitalization
One of the argument is that, there are far greater chances of getting hospitalized because of some reason then dying. So if you look at this problem from probability point of view, you can be almost sure that in next 5-10 yrs, you or one of your family member will be hospitalized for some or the other reason – big or small. But meeting death is very less likely in comparison. So a lot of people argued that Health insurance is much more important than term plan, if you have limited money.
2. Premiums are increasing fast in Health Insurance and its can be claim every year
Another argument in favor of health insurance over a term plan was that, its a product where you can claim every year and protects your financial life from regular attacks of money sucking illnesses and accidents and anyways premiums are increasing very fast for health insurance (or would increase in future) because of the health care inflation. However for term plan the premiums are coming down over the years (now we might be close to saturation) .
3. Hospitalization Costs can be arranged in worst case
Now some people said that term plan is more important than health insurance and the biggest reason for it was that health insurance expenses are somehow manageable in worst case. You can take a loan, swipe a credit card, ask your friends and relatives or in worst case, sell some of your home stuff.
Life will again be on track somehow. But if you ignore term plan, its a very big risk for your family future, because the amount required by your family cant be arranged by asking it from someone (just imagine you die and now your family would need their monthly expenses for lifetime , your children expenses for current and future, their whole life is at stake now). It would generally run into several lacs or few crores.
High Probability – Low Impact
So its very clear that term plan has a very high impact on your financial life, but less probability of its occurrence , however health insurance has low impact on your financial life (compared to term plan) , but is high on probability and its has potential to occur multiple times in your lifetime.
Balancing both Health and Life Insurance Costs
Another workable option is to divide the money into premiums for both term plan and health insurance, but in this case you will compromise with the cover amount of both the things however small it is. This way you will have both the things in your financial life, even if its small . Do you think its a workable solution ?
Naresh recently visited a new residential project in Pune which was ready for possession. The property cost was in his budget and he was about to finalize the deal. The total cost of property was around Rs 40 lacs. Stamp duty and Registration cost was to be paid separately which would take total cost to around 43 lacs. This was a bit heavy on Naresh pocket, so out of his regular habit, he inquired if there is any trick by which he can save some money on the deal ?
The builder was quick to give him a great saving advice – “Sir , You have to pay 6% stamp duty and 1% registration cost on the agreement price. Which comes to 7% of 40 lacs, thats 2.8 lacs additional, thats the reason the total cost comes around 43 lacs . Now if you want to save money, what you can do is pay some part of the deal in cash to us (means pay in black) and we will reduce the agreement cost by that much, that way – we will also save our tax on the black money part and you will save 7% on that cash amount. Like if you pay us Rs 10 lacs in Cash, then we will make the agreement for Rs 30 lacs only and you will have to pay stamp duty and registration cost on only 30 lacs which will be 2.1 lacs, and it will save you Rs 70,000 without doing anything extra ! . Cool na ! .”
The offer was tempting and Naresh fell for it, how cool is saving Rs 70,000 , all you need to do is pay some part in cash and lower the agreement amount in records. But do you understand, what is your loss in long term because of this kind of deal ? Let me break some hearts today, who have already done this mistake while buying their properties.
Stamp duty and Registration Costs
First understand that stamp duty and registration costs vary from one state to other state. For example – In Maharashtra, its 6% + 1% = 7% in total , so whatever is your total agreement cost , you will have to bear additional 7% on that amount as stamp duty + registration costs. Given the huge amount involved and the financial crunch every buyer faces at the last moment of the deal and hunger of builders to save every bit of tax, makes sure that buyers fall for this trick of paying huge amount in CASH (black money) and register the property at lower price just for few thousands (actually sizable if you look at it). This looks like win-win situation to buyers and they are pretty happy about it, however truly speaking, this is a loosing deal for the buyers in a very long run (if you are going to sell the property later) and only benefits the builders and let me now explain you why is it so ?
At the time of selling – The cost of house matters
I hope you are very clear that when you sell your property in future , you pay the tax on the profits made. And the profit is decided by your COST of the house and the sell price. So lower the cost of your house, the higher the profits on paper for you in future. You might be aware of the fact that indexation is applied in case of real estate transactions and 20% tax is paid on the profit.
Now lets take this same example we are discussing and see how much you save at the time of purchase and how much you loose at the time of selling , which can be in distant future. See the working below and try to understand the whole situation
In the example above you can clearly see that by paying Rs 10 lacs in cash, a person is able to save Rs 70,000 instantly. However they are not able to look beyond the obvious and visualize the kind of loss they will incur in future when they decide to sell the property. The same person will pay 3.4 lacs of additional tax in future because he/she paid Rs 10 lacs in cash years back.
Now there are few points which can be debated here like there can be changes in laws in future, or one can save the tax by investing in another real estate properties (which again depends on future laws) , but the point here is to educate you on the long term implications of this. Now if you fully understand the message of this post, you can take your decisions with full responsibility.
I don’t want to shock you, but there are tons of cases where employer happily deducts your EPF amount from your salary, but they do not deposit it with EPFO. This goes on for years and one day you come to know that you are stuck ! , because there is no EPF money for you. Your employer has severe cash crunch or is about to shut down and now you have to run pillar to post to claim your money. The whole situation gets ugly and you feel cheated, because your company never deposited the Employee Provident Fund amount. Now you go to Police and file a case against employer. But this all can be avoided if you are careful a bit, from starting itself.
How about making sure your employer is depositing your provided fund money into your EPF account ? Before I tell you, how you can do that, let me first share with you some REAL LIFE cases where employer failed to deposit EPF money and employees are suffering ! . These are some of the examples shared by readers of this same blog over comments section in various of EPF related articles.
Case 1 – How Abha’s company didnt deposit EPF money for 2 yrs
Dear Manish,
Thanks for such an informative post. At last i do see some hope. Here is my situation:
Worked for this company A for almost 4 years and left them in Nov 2011 as they were downsizing…yes it’s been more than a year and half of torture they have given me thus far. Company is kind of closed now as I don’t get any proper response from them, CEO is just not bothered. Company first asked us to wait for 2 months to file the claim as it is a rule, did that patiently. Later came the story of change of PF office from one (under which it was originally registered) to another and that went on for several months
They kept saying PF offices are not coordinating among themselves, the real reason was even shocking and more disappointing, PF guys were not updating because this company didn’t not deposit our PF amount for long time (2 yrs appx), they however kept deducting the same from our salaries (was surprised how come there was no annual audit by PF office and how this company could continue doing so for this long), anyways they cleared things in January this year and said we have applied again. When filed a grievance online, PF person says we haven’t received any claim whereas this X employer says they have already applied. Don’t know what the real truth is but on the basis on experiences I have… most certainly it is the X employer at fault.
Another strange thing is, when I checked by balance online in January this year it looked fine (updated up to 2012… I do have SMS proof) but from last 2 times it saying updated up to 2010, I am worried if this employer has dome some mischief here too, is it possible for a company to take back money from an employee’s PF account or it is the issue with PF website?
I don’t want to apply for my claim via options you suggested above unless I see the balance updated. Thank you so much for reading thru my query/concern. Appreciate your feedback.
Case 2 – Balaji Company asked him to Wait till they deposit the Employee Provident Fund money
Hi Manish,
I switched jobs in August this year. Before I quit the job, I had submitted form with my previous employer for withdrawing the amount in my PF account. I had not received the amount due till December. When I called my previous employer, they told that they have not yet deposited the money and I will have to wait till March 2013.
My question is, is what my employer did legal? How frequently should the employer deposit the PF money with the EPFO? I have been working with the organisation for little more than a year now.
Case 3 – Sarabjeet Kaur company not replying her because they did not deposit EPF amount
I worked in an organisation for 2 years. They have not deposited the PF amount which they used to deduct it from our account. Its been 1 year I am asking them to refund the PF. They have stopped replying to the emails and have stopped answering everybody’s call. Is there any ways I can withdraw the amount? The firm is based out in Mumbai and I used to work in Delhi Branch.
Employer can be Jailed if they do not deposit EPF money
An employer has no right to deduct the employee share from salary and not deposit it with EPF. There can be any excuse or justification for this, because its employee hard earned money. Once the employer deducts the Employee Provident Fund money from the employee salary, its their duty to deposit it with EPFO , and if they fail to do so for any reason, its a crime.
Whatever is the case, you can always complain about it with the EPFO department and the concerned officer has all the rights to proceed the legal complaint against the Employer and in the worst case, employer can also go to jail, because what they did is a criminal offence under section 405/406 of IPC .
1. Complain to CVO officer – You can also email your situation and case to the CVO (chief vigilence officer) at EPFO, who is appointed by Ministry of labour for EPFO to look after these kind of irregularities. You can email them at [email protected] . More at this link
2. File a Police Complaint – You can also file a criminal case, against the employer in police station which comes under the jurisdiction of your working office (not the registered one) . All you need to show them is the salary slip, which shows the EPF deducted, note that its always better to mail CVO about it anyways, so that the chances of local authorities influencing the matter will reduce.
3. Complain to Regional Provident Fund Commissioner (RPFC) – You should also complain about the matter to the RPFC officer if under the EPFO office, which will be investigated by him/her.
How Employers Deposit your EPF contribution to EPF account ?
How exactly your EPF money gets deposited in your EPF account ? Here is what I found on this website
Employees’ PF a/cs are maintained under these two different methods are –
1) All accounts are with O/o the RPFC
Every registered employer remits the Employee Provident Fund contribution by challans to the RPFC’s Bank a/cs. which in turn gets accounted in the respective A/c No.of every such employee. And the employer submits monthly returns to the RPFC showing the details, employee wise of contribution thus remitted.
Every such money is maintained by the RPFC who in turn disburses, thro’ the employer towards refundable loans, F & F settlements together with accrued interest to the respective employees. Once in a year a ledger sheet showing the transactions of any employee for one full year is issued to the concerned. Similarly from the PF contribution pension contribution is divided and remitted to the Pension a/c. of the employees thro’ a separate A/c. code. This method is the largest.
2) The other method is called “Exempted Establishments (PF Trust)”
An employer/company who employs more 100 employees on roll is eligible to apply to the RPFC for “exemption” from maintaining the EPF under the above said (1) method. RPFC grants the “exemption orders” under certain conditions after examining various aspects. After which the Employer sets up a EPF Trust to be run by Employer (employer’s nominees & Employees’ representative (Union nominees) which manages all the contributions of employees & employer (excepting Pension Fund which is never maintained by the Trust). A set of Bye laws, in the lines of EPF Act & Rules is prepared & duly approved by the RPFC for running the Trust.
This PF Trust money is invested in the Govt.approved securities for earning the assured interest from which accrued interest to the employees’ PF a/cs is credited. The Trust once in a year prints the Employees’ PF ledger a/cs and distribute to the concerned. The Trust accounts are audited by the CA and submitted to the RPFC. RPFC also periodically inspects the Trust a/cs and oversee. Monthly, annual returns in the Forms have to be submitted. The convenience under the Trust is quick disbursement of loans, withdrawals and F & F settlements to the employees. Surplus, if any never distributed but any shortfall is made good by the employer.
How to find out if your employer is depositing your EPF contribution or not ?
Let me share with you some steps you should follow, to find out if your company is depositing your EPF contribution properly or not.
1. First thing is the do not rely on hearsay’s here and there. It might happen that you come to know from some one that your company is not depositing your EPF money, but it might not always be true . Delays happens at times .
2. Every month on 25th , your employer is suppose to send few documents to EPFO department to intimate them on
Form – 2 (for new member during the month)
Form – 5 (detail of new joinees during the month)
Form – 10 (detail of left employees during the month)
Form – 12 – (Details of money deducted from employees salary)
3. The best thing is to first contact your employer and ask them for a copy of these forms for last 2-3 months, do double check if they deposited the money or not.
4. As per my opinion, the best way for a common man and most convenient option is to file a RTI against EPFO and ask them all these questions . Mention your EPF account number, your employer Code and simply ask if your employer has been depositing your contribution or not.
Conclusion
Mostly the big size employers might be depositing the Employee Provident Fund money properly on time, but some of the companies which are small sized or whose owners and management teams are unethical might be into these illegal activities of not depositing employees hard earned money. Its always a good idea to spend some time to be assured, in-case you feel your company is one of those who are not depositing EPF amount with EPFO 🙂
Do you know of any case like this ? Also Please share this article with more and more people
Do you have some doubt on Income Tax Return Filing Process or some question whose answer you are not getting anywhere? This post might be the end of your struggle.
Few weeks back, we ran a survey and asked investors to send us their queries and doubts on Income Tax Return Filing, whatever it may be. We then picked up some of the most asked and common doubts which investors face and thought of creating this comprehensive guide which will act like the bible to your ITR related queries.
Nobody in this world likes the annual exercise of filing Income Tax Return. Yet due to legal responsibility, everybody has to file his Income Tax Return. Now before understanding the Income Tax Return filing, let’s understand few common things first, which will help you to resolve your queries on ITR.
1. Permanent Account Number (PAN)
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department, to any “person” who applies for it or to whom the department allots the number without an application. PAN enables the department to link all transactions of the “person” with the department.
These transactions include tax payments, TDS/TCS credits, returns of Income/wealth/gift/FBT, specified transactions, correspondence, and so on. PAN, thus, acts as an identifier for the “person” with the tax department.
A typical PAN is AFZPK7190K
First three characters i.e. “AFZ” in the above PAN are alphabetic series running from AAA to ZZZ
Fourth character of PAN i.e. “P” in the above PAN represents the status of the PAN holder.
“P” stands for Individual,
“F” stands for Firm,
“C” stands for Company,
“H” stands for HUF,
“A” stands for AOP, “T” stands for TRUST etc.
Fifth character i.e. “K” in the above PAN represents first character of the PAN holder’s last name/surname.
Next four characters i.e. “7190” in the above PAN are sequential number running from 0001 to 9999.
Last character i.e. “K” in the above PAN is an alphabetic check digit. (More Details on PAN)
2. Tax Deduction Account Number (TAN)
TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting tax. It is compulsory to quote TAN in TDS/TCS return (including any e-TDS/TCS return), any TDS/TCS payment challan and TDS/TCS certificates. (More Details on TAN)
3. Financial Year
In India, the Financial Year is defined as a period starting from 1st April of a Calendar Year & ending on 31st March of the next immediate Calendar year. All the income earned by a tax assessee has to be accounted for segregation on the basis of dates in different Financial Years.
4. Assessment Year
The applicable Assessment Year for a given Financial Year is the next +1 year. For example, if a FY is 2012-2013, the relevant AY ‘ll be 2013-2014. All the income earned by you in a FY and taxes paid by you in that FY ‘ll be assessed only in the relevant AY.
5. Form-16
It’s the statement of your yearly income provided by your employer to you after the end of FY. This includes your gross income, deductions claimed by you, net income, tax liability there on, Tax deducted by your employer, any tax liability or refund.
The most important thing to be remember in form 16 is the TAN of your employer should be written clearly & so do your own PAN.
6. Form-16A
Form 16 is issued by the Tax deducting authority where the TDS is applied on your investments (say FD in banks) or non salary cases. Say TDS applied by tenant against rent paid to landlord. Here again TAN & PAN quotation is must.
7. Types of Income
As per Income Tax Act 1961, the income can be classified only under the following heads.
1. Income From Salary or Pension
2. Income from House Property – Rental Income
3. Income from Business or Profession – Say Income to a Doctor or an Agent or Advocate or a Shopkeeper
4. Income from Capital Gains – Income arising out of sell of capital assets like Property, Gold, Art, Coins, Mutual Fund Units, Equity, Precious stones
5. Income from other sources – Any income which can not be classified in the previous 4 categories, comes under this head. Interest income, winning amount in Lottery or Quiz show (example KBC), Horse racing winning, Amount received as Gift from non relatives are some examples.
Now from the above list you can identify that you are having at least 2-3 income sources. Income Tax Deptt. has created different types of Income Tax Return Forms for the combination of different income sources.
Before Discussing Income Tax Return Forms, let’s discuss Income Tax Return itself.
8. What is the importance of Income Tax Return
If your income exceeds the zero tax limits, it’s mandatory for you to file an Income Tax return. During your income earning in the whole FY, there may be a situation that the tax deducted from you is more than the actual liability or there are some losses or deductions which you could not claim during the income earning phase or you paid less tax than the actual liability.
In all such case, you can only save yourself by filing an Income Tax Return. Actually your Income Tax Return form is the account statement of your income, tax liability there on & the tax paid by you. If there is excess tax payment, you ‘ll get refund. If the paid tax is less than your tax liability you w’d have to pay the difference amount.
Below is the official version for Income Tax Return filing essentially.
“The filing of income tax/wealth-tax return is a legal obligation of every person whose total income and wealth tax during the previous year exceeds the maximum amount which is not chargeable to income tax or wealth tax under the provisions of I.T.
Act, 1961 or Wealth Tax Act 1957, as the case may be. The return should be furnished in the prescribed form on or before the due date(s). Penalty of Rs. 5000 is imposable for non-filing of return within the assessment year.
Interest is also chargeable for non-filing or late filing.”
Watch this video to know why you should file income tax return:
9. Types of Income Tax Assessees
As there are multiple source & types of Income, so are types of Income Tax Assessees. Here are few examples –
Individual
Hindu Undivided Family
Firm
Limited Liability Partnership
Association of Persons
Company
Trust
Body of Individuals
Artificial Judicial Person
Local Authority
10. Types of Income Tax Return Forms
On the basis of the income combinations as well as Assessee types as discussed above, the Income Tax Deptt. has issued multiple Income Tax Return forms. these are numbered as ITR-1, ITR-2 ……. ITR-7.
Here is a table to understand the combinations of types Incomes for Individual Assesses & the applicable ITR form. Please do note, ITR-5, ITR-6 & ITR-7 are used by assesses other than Individuals & HUFs, hence not discussed here to keep this matter relevant for general public & common Individual assessee.
Majority of common individual tax payers fall in ITR-1 & ITR-2 category.
11. Online & Offline filing of Income Tax Return
The Income Tax Department is slowly transforming itself. Earlier all the returns were only offline mode. First non Individual & non HUF ITRs were made online filing compulsory. After that for Individuals & HUFs having income more than 10L Rs. were made online filing compulsory.
Now From AY 2013-2014, the income limit has been reduced to 5L Rs. for online filing. So we can safely assume that from next AY i.e. 2014-2015, the online return filing ‘ll be compulsory for each & every tax payer.
12. How to file online ITR
It’s quite easy. Now a days, a person can e-file either self by logging into the official site of e-filing. Apart from this, there are many other private online portals who are helping you to e-file your ITR. (Taxsmile, Taxspanner, Taxyogi, Cleartax are few examples)
Frequency asked doubts on Income Tax Return Filing
We hope that you are very clear about the basic information which every tax payer should be aware about. Now lets see some of the most commonly asked questions on Tax Filing. We collected these questions from one of our surveys and just categorized them into 13 questions. Here are they –
1. I forget (or could not produce in time) to claim HRA/Savings/Home Loan/LTC/Medical Bills etc from my employer. What to do?
Please relax. For all such cases, where either you could not claim on time or forget all together, your return filing is the time to tell the Income Tax department about the same & now you can claim the refund for the excess tax deducted from you. Note that the declaration given to employer is just to make sure that your TDS cut by employer is inline with your plans in a financial year. Incase something does not match, It can be finally done at the time of tax returns filing.
2. Where should I produce Bills/papers/receipts of the things related to Q. 1 above
Please do note that current ITR forms are ‘annexure less’ forms. Which means, that you need not produce any support documents to the Income Tax Department at the time of filing. Just keep the documents safely with you, so that you can produce the same if Income Tax people demand it from you in future. Documentation should be surely done by you, because incase there is a scrutiny case in future, you should have to documentary evidence.
3. I could not file my previous years income tax return on time or forget it .
It happens ! . There are penalty provisions if you do not file your due Income Tax Return on time. To correct the mistake, please file a delayed return now if you have not filed the previous years return. For ITRs related to previous years, please take help of a Tax professional to do the same. Filing late is better than not filing at all. Just contact a CA or tax filing portals, and they will be able to help you. Read this article on Late Tax Filing for clarity
4. I did not get the refund order/cheque . What to do ?
First check your refund status here. In case your refund status is available as cheque issued & the same is not received by you. Please contact at the E-mail or Phone nos. in the shared link. Also you read this article on how to Check your Income tax refund status online & Learn how to use RTI
5. I received the Refund cheque but I misplaced it/delivered at wrong address/wrong bank account number.
A lot of these issues happens because the address you provided at the time of filing returns years back is not the same where you are residing now, and the cheque goes back. For all such cases, you should contact your Jurisdictional Assessing Officer for offline filed ITR or CPC Bangalore for online filed ITRs. For online filed ITR, there is a link within your login window for Refund Reissue Request, use this for refund reissue.
6. How can I calculate my tax liability arising out of capital gains
Relax. You just need to punch in the required data in the excel sheet for ITR e-filing available at the e-filing portal. The sheet ‘ll calculate your tax liability on it’s own. Or you can refer to this article which will guide you on how to calculate capital gains.
7. How can I pay my due taxes as per calculation done by me or ITR excel sheet
Paying your due taxes is very easy. There are 2 ways to it. a) Use your net-banking account . b) Use the Official Portal . Please do note for self payment of Income tax, the applicable challan number is 280.
8. I fall in 20-30% tax slab. Bank deducted TDS @ 10%. Should I pay more Tax
The answer is yes. Bank has merely done it’s legal responsibility. Your Tax liability is more than the work done by bank. So please calculate your actual tax liability by adding the interest income into your gross income & pay your due taxes. Here is a full article on TDS related issues.
9. I forget to put in some data or wrong data was put in during my original return filing. How to rectify it ?
No problem, you can file a revised return to rectify these mistakes. The revised return can be filed before the assessment year is over for your original filed return. Here one important point is that the original return must be filed within due date. Just note this point, that if you have filed your returns and if there are any issues or errors, you can always file a revised return later.
10. I own a house in the same city & reside in a rented accommodation. Can I claim HRA & Home loan benefit simultaneously ?
The answer is YES. If you are actually residing on rent due to your Job or any other issues & the home loan house is also in the same city, you can claim both HRA as well as Home Loan benefits. Read this article for more on this
11. I was earning salary earlier. But now there is no income due to break or because I have become NRI with no Indian Income. Should I still file my ITR for zero income ?
The answer is no. if you do not have income or income is within the zero tax slab, you need not file your ITR. Yes in case, some TDS was there, you w’d have to file your ITR to claim the refund of this TDS amount..
12. My wife is a home maker & investing small money into direct Equity & earning some income. Which ITR should she use ?
First of all make sure her income is under zero tax slab or more than it. In case she is earning more than zero tax slab, she should file her ITR. Now the quantity of trades done by her to earn that income ‘ll decide the applicability of ITR. In normal situations, such earning ‘ll be Capital gains (Here it’s assume that gains are short term in nature due to holding less than 1Y) & she should use ITR-2.
For a very high quantity of trading activities, the applicable form ‘ll be ITR-3.
13. I worked with 2 employers in a FY. How to handle & file my ITR ?
First of all please collect form 16 from both of your employers. Now consolidate the income from both employers & check for an pending tax to be paid. Pay it now. Once all this is over, please file your ITR.
We hope all your queries about income tax return filing is solved in this article. If not, please post your doubts over comment section.
This article is contributed by Ashal Jauhari . A key member of Jagoinvestor community and a Tax expert . He writes on his blog here
In this article we are going to share SBI Maxgain Home Loan review with you. Now a days many home loan borrowers are opting a particular type of home loan from State Bank of India which is called Max Gain because it has many advantages compared to other kind of home loan scheme’s. In this SBI Max Gain home loan, an Overdraft (OD) account is assigned to the customer’s home loan & any amount parked by customer is treated as loan repayment for the purpose of interest calculation, for the days, the amount stays there in that OD account. As on date following banks are offering similar types of home loan to their customers. I would like to thank to Mr. VKS Nathan who gave the Idea of this article.
SBI, IDBI, CITI, HSBC & Standard Chartered. Punjab National Bank can also be added in this list but it’s offering a combo of normal loan + Overdraft. In this article, we are going to discuss only SBI Max Gain as in OD linked home loan, the maximum business is with SBI & the most discussed topic on Jagoinvestor Forum is also related to SBI Max Gain Scheme
What is an Overdraft account?
Before we discuss Max Gain, first understand, what is an Over Draft Account? All of us are well aware of functioning of an ordinary saving bank (SB) account. Here account operates between zero to positive & positive to zero. As we deposit our money, it’s used by bank & we get interest on our money from bank. In case of an OD account, bank first ask for a security & then assign a credit limit on the basis of the market value of that security. This security may be Fixed Deposits, Insurance Policies, National Saving Certificates, Shares, Mutual Fund units, house/commercial property etc. Now when we are using this assigned credit limit, the amount is going from zero to negative zone & when we are repaying, it’s coming from negative to zero. As we are using bank’s money in this case, the interest ‘ll be paid by us to bank. That’s how an OD account works.
So what is the correlation between Max Gain home loan & Over Draft account?
For Max Gain borrowers, State bank of India opens an Over Draft account where the Credit limit as discussed above is equal to the loan value assigned to the borrower. Here underlying security is the home you have purchased or constructed from that loan amount. Now as & when you are parking any surplus amount into this OD account, the parked amount is treated as payment towards loan (effectively you are bringing down your loan liability from negative towards zero position) and thus the interest ‘ll be charged only on the difference amount i.e. total loan amount – parked surplus amount.
What is the primary benefit of SBI Max Gain Scheme?
Well the primary benefit of MG is to keep your liquidity intact & still bringing down your interest outgo. To understand it better, please imagine a situation you are running a home loan of 30L Rs. & now you do have 2L Rs. with you to prepay. In normal home loan, your 2L Rs. ‘ll be accepted by bank & adjusted towards home loan & your amount is gone forever so no liquidity for you of that 2L Rs. amount. On the other hand, if you are MG customer, simply park those 2L Rs. in your MG account & your interest outgo ‘ll be lower from that month itself till those 2L Rs. or a part of it is there as surplus in MG account.
What is Drawing Power ?
Drawing Power is nothing but your as on date actual outstanding loan amount. Before final disbursal or start of loan repayment, it’s your sanctioned loan amount. Once your EMI starts, it’s your as on date actual outstanding loan amount. Please check Image below, Drawing Power here is 1867053 Rs. as on date. (Click here to understand it better)
What is Available balance?
Before final disbursal, it’s the sum of undisbursed amount + parked surplus & post final disbursal, it’s your parked surplus amount which is available to withdraw. Please check Image below, Available Balance here is 1084177.72 Rs. as on date. (Click here to understand it better)
What is book balance?
It’s the adjusted loan amount arrived after deducting the Available Balance amount from Drawing Power. In your account statements it’s shown with a negative sign. Please check Image below, Book Balance here is – 782875.28 Rs. as on date. (Click here to understand it better)
Is there any extra interest for Max Gain?
No, the interest for home loan is same in SBI be it for normal home loan or for Max Gain.
I’m an existing SBI home loan customer. Can I convert my old term loan to Max Gain?
Yes, you can. Please contact your loan serving branch or RACPC for the required paperwork to be done. This may be an outdated info so please do check with your loan serving branch for current day rules on conversion.
I have taken the Max Gain for an Under Construction Property. Can I park surplus amount to save on interest outgo?
The answer is yes & no both. Yes you can park your surplus during under construction phase but do remember SBI is disbursing partially at this juncture & in case due to any emergency you want to liquidate your surplus, SBI ‘l not allow the same. so park only that much surplus, you feel you ‘ll not need even in an extreme emergency.
If I’m parking some money on monthly basis or in lump sum, will my loan term come down or EMI go down?
No. Neither your EMI ‘ll come down nor your loan term. The only saving is in terms of interest outgo. To understand it better, Let’s assume a test case of loan amount 30L Rs. @ 10% Rate of Interest for 20Y term. The normal EMI for these nos. ‘ll be 28951 Rs. The break up of your EMI for first month ‘ll be 25000 Rs. interest & 3951 Rs. for principal repayment.
Now if you do have 2L Rs. surplus in the very first month & prepay the same as below –
Case – 1 Normal home loan
Your 2L Rs. is gone & outstanding loan amount ‘ll come to 2796049 & interest outgo ‘ll still be 25000 Rs. but the no. of months ‘ll come down from original 240 to 198 months.
Case – 2 Max Gain home loan
Your 2L Rs. are parked in that OD account & the interest for the very first month ‘ll be calculated on 28L Rs. & thus it ‘ll be 23334 & thus there‘ll be an interest saving of 1667 Rs. which‘ll remain available in your OD account as surplus along with your parked surplus 2L Rs. so for next month, the parked surplus amount ‘ll be 201667 Rs.
Please do note in case 2 above, Your loan term is still 240 months but the saving of interest ‘ll keep on increasing on mly basis from the parked surplus & of course the liquidity of those 2L Rs. is there.
How can I calculate my saving in Max Gain?
To know your actual saving, first of all please demand a loan amortization schedule from your loan serving branch & now for each month compare the scheduled interest outgo as per your loan amount. schedule & the actual interest outgo.
What should I do to maximize the savings in Max Gain?
If you are paying your EMIs from SBI’s SB account, you can maximize your benefits. How? here it goes. Say 15th is the EMi date on which EMi amount is debited from your SB acct. Now in a normal home loan, people ‘ll keep at least 2-3 months’ EMI amount as buffer in SB account. but in case of Max Gain, you do not need to keep buffer in SB account. Keep this buffer amount also in your MG account along with your routine surplus amount. now use the power of net-banking of SBI for your own good & create a schedule transaction of your EMI amount 28951 Rs. (in the above example) to be transferred on 13th of every month from MG account to SB account. At a time you can schedule for next 12 months by using standard instruction. So it’s technology that’s helping you.
I can transfer to MG account from my existing net-banking enabled SB account but reverse is not happening. why?
The answer lies in the fact that Net-banking transaction rights on your MG account is not enabled yet by your loan serving branch. if final disbursal is done, you can apply for transaction rights. if only partial disbursement has been done, sorry, you can’t apply for transaction rights till final disbursal.
Is it mandatory to purchase property insurance & life insurance along with Max Gain?
Having property insurance as well as sufficient life insurance is compulsory but purchasing the same from SBI’s sister cos. like SBI General ins. & SBI Life ins. is not at all mandatory. if you feel that policies are being cross sold to you to exploit your position (home loan seeker), please contact the AGM of your local RACPC where your loan application is under processing.
Is SBI charging higher processing fee for Max Gain?
No, as on date there is no differentiation in fee for term loan & Max Gain but SBi reserves the rights to charge different fee.
Can I claim section 80C principal repayment benefit for the surplus amount parked in Max Gain?
The answer is NO. Only the regular principal repaid by you from your EMI as part of your loan amortization schedule is available for tax benefit under section 80C. the parked surplus amount is liquid money & you can withdraw it any time, hence it’s not considered as actual repayment of loan & thus not eligible for tax benefit.
Can I avail cheque book & ATM card for my Max Gain account?
Yes, as & when you‘ll demand these, SBI ‘ll offer you the same. In case you are already holding an SBI SB acct. linked ATM card, you have the option to link your MG acct. also with this existing ATM card.
Can I enroll my MF SIPs in Max Gain?
Yes but do note, there should be a surplus balance i.e. available balance on the date of SIP, else your ECS or SI mandate ‘ll bounce.
Can i pay for my utility bills, credit card payments, online shopping from Max Gain?
Yes, you can do all this & more. In fact it’s in your best interest that you treat your MG account as your primary money parking account & route all your transactions through it so that money is lying there for maximum possible time & thus helping you to bring down your interest outgo.
I used my MG account ATM card to withdraw cash from other bank’s ATM & I was charged the money very first time in the month. Why?
The reason is, as per RBI’s circular 5 transactions on other banks’ ATM are free only for SB account & in this case, you forget the point that your MG account is not SB account. it’s an overdraft account.
For an imaginary situation, my loan amount is 30L Rs. & parked surplus amount is also 30L Rs. Does it mean, my loan is closed & I can claim my property papers from SBI?
No, your loan is not closed. Only interest outgo ‘ll become zero & EMi ‘ll remain continue as it is. Yes the interest part of your EMI ‘ll keep on accumulating in your MG account. If you want to close your loan at this point, you w’d have to inform SBI in written & now SBI ‘ll adjust your parked surplus amount towards the outstanding loan amount. you ‘ll lose the liquidity of your money but loan ‘ll be over & now you can get your property papers back.
How can I transfer my loan from other banks to SBI Max Gain?
For loan transfer, first of all contact your existing lender & ask for following things.
Loan Account statement from day one.
List of Documents, which were submitted by you at the time of availing original loan. In day to day language of bankers, it’s called LOD.
As on date outstanding loan balance with applicable interest, penalty & any other fee to close the loan.
Now contact, the nearest SBI Branch (if you do have an existing SB account with SBI, it’s advisable to contact there for ease of operation). Inform in that branch that you want to transfer your loan from existing bank to SBI Max Gain. fill the application form, submit the necessary papers & SBI’s RACPC ‘ll do the back ground job.
Once SBI is ready to accept the transfer, it ‘ll issue you a sanction letter of the loan amount & ‘ll ask you to go for loan related agreement documentation work with SBI. If you are not having property insurance, SBI may ask to purchase one. Same ‘ll be the case for your life insurance. Once legal documentation is over, the cheque of the loan balance ‘ll be issued directly into the name of the bank in question. After the amount is credited to your existing bank, within next 20-30 days, you ‘ll get the original documents submitted by you, from the existing bank. Now you w’d have to submit these documents to SBI. In some states like Gujarat, Maharashtra, Karnataka, SBI may ask to go for registration of mortgage deed on your property in the office where your property was originally registered in your name.
SBI Max Gain
Normal Home Loan
Liquidity of your part prepayments is there
No Liquidity. Money is gone for ever, once you prepay.
A bit complex to understand
Easy to understand
For people who can generate regular surplus amounts
For people who can only manage regular EMIs
Click here to know the real life example of Mr. Sudhir S for SBI Max Gain.
Do you feel, this article was able to answer your all queries related to SBI Max Gain? Was this article helpful for you to understand the overall concept of SBI Max Gain home loan? Please feel free to ask for more help
I have written almost every possible article on Life Insurance and even Health Insurance, but strangely I still find a lot of investors asking questions which clearly shows that somehow, somewhere they do not understand what is the underlying business model of insurance business and how are the products designed overall. Let me use simple stories and recreate some examples which will show you how things work in any insurance business. Lets move on ..
I see a lot of people saying something like – “How can these companies offer 1 crore term plan by charging just a small premium of Rs 10,000. Its surely a racket!”
Then a lot of people still feel that insurance companies are cheats and they will not pay out when a claim arises, just to make sure that they do not have to pay a big amount from their pocket. I am not advocating any insurance company here, nor am I saying that I have a solution to your doubts. All I can do is share what insurance is all about. This should surely help you understand the business model of insurance companies and how they make money. You can then choose to trust the system or reject it. Note that In our 100moneyactions program we have one of the tasks as completing your life insurance and health insurance with basic support system, So if you have still not registered for it, do it now.
Insurance Centuries Back – Lets go back in History
Insurance as a concept, is not a new thing in this world. It’s been in existence for centuries. Let me start with story which will give you some idea about insurance business and its evolution. Long back, there were businessmen all over the world, who traveled from one country to another for doing trade and business . They sent their stocks, inventories and material across globe on boats and ships. A lot of times when they used to send their ship from Point A to Point B, it so happened, that some ship drowned and everything on the ship got wiped out.
And this happened 10% of the time on an average. Out of every 10 ships which started from Point A, only 9 reached the destination and one businessmen almost surely went bankrupt. So you can see that the certainty was about the loss of 1 ship, but there was uncertainty about “whose” ship it will be (just like there is certainty that one an average 1-2 person will die in a city in accident for sure, but who will it be is not sure) .
So all the businessmen started to think over the issue and they found the solution. They started collecting 10% worth of the stocks from each of them, collected it in a bag. When each of 10 businessmen did this, the bag was full of money which would compensate any ship owner who was the unlucky one and lost his ship. If there was no accident and all the 10 ships arrived safely at their destination, there was no issue at all. But when there was a ship lost, the whole bag of money was given to the one who was affected, which meant that he didn’t suffer other than temporary shock and resentment.
So now if you see closely, you can relate this with insurance. These businessmen were doing nothing but mutually insuring their risk by pooling in the money (premium) and then compensating the unlucky business man in case of a disastrous eventuality (sum assured equal to 1 ship worth).
Any ship owner, who did not wanted to participate in this (thinking he would loose that 10% money if his ship was safe), was free not to participate, but then he was just taking a huge risk of wiping out everything he owned and going bankrupt.
So you learnt – What is Insurance exactly !
So you are still not clear about the concept of insurance with this small but simple story? Let me now rephrase it in modern terms.
Insurance is all about transferring the risk to someone else, by paying a small cost called a premium. The person who runs the insurance business (for profit!), takes care of all the research and data which makes the business viable in long term. Let me attempt to build a simple (imaginative) job loss insurance business right in front of you.
Job Loss Insurance for Software Industry
Let’s say, I decide to launch an insurance product called “Job Loss Insurance” for IT professionals . So, I research and find out that out of every 100 people in IT sector sector, 3 lose their job each year for some reason or the other, but then they are able to secure another job within 6 months (just an assumption). Now assuming that the average salary of a software professional is Rs 50,000 per month, it means that I can create a job loss insurance product which says –
“Pay a premium X each year and in case you lose your job, we will pay you 6 months salary to you, so that you can keep your mind cool and search for another job and pay your home loan EMI, children school fees and other commitments.”
Why am I suddenly feeling that some of the IT guys reading this really want this kind of product …
Anyways, so I know that out of 100 people, 3 people on an average will lose their jobs who would need 6 months of oxygen till they find another job (50k X 6 months = 3 lacs) . So, I would need 9 lacs to pay all these 3 claims which will arise each year. So now, I need a market of 100 people to whom I can pitch this product and generate 9 lacs of total money. Which means that I will have to price it as Rs 9,000 per person per year. In short 100 people will pool in Rs 9,000 and generate 9 lacs and then out of those 100 people, 3 will loose the job and file for a claim.
But wait, where is my profit ? I am not doing a charity ! Its a business for me ! . So for that reason, I will not charge Rs 9000, I will charge Rs 12,000 per year. So I keep a cool Rs 3 lacs as profit!
But , There is a problem …
Each year, its not that, only 3 out of 100 will loose the job! It could be 4 or 5 in some year and it can be 1 or 2 or even ZERO! in some other year. The 3/100 was just an average over long term . So while I know that a particular year can be very very bad or very very good, over a 10-20 yrs period, the average will be 3/100.
So, I will make sure that I keep sufficient capital with me before starting the business (what if in first year itself, there are 6 job losses out of 100). That’s the reason, why there are IRDA norms that a particular amount of net worth should be there with every insurance company before they get a licence and its called Solvency Ratio.
So now, based on their premium pricing strategy and overall experience in next many years, an insurance company is very profitable in long run (high probability) or they suffer a loss. That might explain, why most of the new insurance companies are in a loss at the moment (insurance is a long term business, very long term).
Premium Increase for some customers
Now a lot of people wonder, why insurance companies increase the premium for some customers (called as loading the premium) . Let me show you with same example.
Now as per my data research, There might be a category of IT guys who have a higher changes of 5/100 job loss and that one is Software Engineer whose company is not US based and they are into Embedded systems . So in short a IT guy who is into Embedded systems with a Non-US based company is more dangerous customer to me . While I will still give him insurance, but I cant charge him same premium like every other IT guy. So I would charge him not 12,000 per year, but 24,000 per year – because he is risky! .
While he might not get fired by his company, I am taking a very high risk against him and I deserve to be paid more, otherwise it does not make any business sense to me. Now if he hides this information from me and does not tell me before hand while filling up the form that he is working in embedded systems, that too with a company which is not US based (guys, just a random assumption, don’t take it seriously), should I be paying him any insurance money if he actually loses his job? the answer is rude NO. I can’t be emotional here and look at your tears! You cheated me, so you pay for it!
This might explain to you, why insurance companies apply loading, when you tell them you are a smoker, or you drink, or you are obese or you are working for the Army!. You are a high risk customer, and as per business rules, they will definitely increase your premium, even you will do the same, if you started up a insurance business. Wont you ?
Will company really pay me at the time of claim ?
Yes, it will. Because for you 1 crore at Rs 8,000 per year might look very absurd, its actually not . Because Insurance is a volume’s game. One individual case is not going to affect a company, because it was already factored in. It was known to happen. Thats why the premium was collected and you will be paid because thousands like you will NOT file for claim. My premiums might be used to pay your claims! . So Like in my example, when a person loses his job, I know that he is part of that small group which is surely going to lose his job. I will not be worried paying you 50,000 per month for next 6 months even if you paid me just 12,000 in a year. I know for sure, that the rest of the 97 people will not lose their jobs and I can surely pay you what you are insured for.
Amount Accumulates and grows into a big pool
If in the first year, less than 3 people lose the job, then I have extra money left at the end of the year and I can carry forward this money into future for those bad years when more than 3 people will lose the job. I can also invest this money, which will grow over time, and If I have done my research right, I am surely going to be profitable over long term.
But my research will be different than your research, you might find different kind of data, may look at the job loss data differently, may look at scenarios in other ways, which does not match my philosophy and hence you might charge Rs 15,000 per year and not 12,000 per year, or you can charge Rs 8,000 per year and not 12,000 per year like me.
Which explains why premiums are different for different companies.
Auto Insurance – They know all the data that if a car is older than X number of years, what the chances of it crashing into another one, and then how many premium makes the business viable and profitable.
Health Insurance – Health insurance companies know the data about the hospitalization charges, the probability of a person of certain age to get hospitalized in next X yrs and all those kinds of data. So when they price their policies, they are smarter than you. You might look at an individual case of yours and feel that you will profit from it (which can be the case), but surely its will not be a loss making proposition for the company either (over a long term, collectively).
Life Insurance – They know how many people out of 100, will die on an average in a year and within how many years. So if a big number of people pay for some years at least, it will be enough to pay the dead ones families.
Credit Card Insurance – There are insurance businesses around insuring credit cards. They know on an average out of 100 credit cards, how many are lost and on an average what is the loss amount. So they keep the premium such that they still make profits over a lot of customers.
Conclusion
I would like to conclude this article by telling you to understand the business model of insurance companies. Once you get it, suddenly all the doubts you had over years will go away. Insurance is a very strong concept which is a win-win model for the companies and for customers. At-least we used some stories and examples in this article which was just for illustration purpose and dont start arguing the data and numbers from examples 🙂 .
Are gold saving schemes by jewellers really a great investment option? There are huge number of people who become part of gold saving schemes offered by jewellers, assuming that they are amazing deals which they should not miss! There are few advantages and disadvantages about these gold saving schemes. It’s important to understand them before you invest in those.
Ankur asked this simple question on our jagoinvestor forum which triggered this article
Lately there are ads coming on TV abt this Golden harvest scheme (GHS) from Tanishq, where you pay for 11 months and the company will bear the installment for 12 month to buy Gold. Any reviews abt the scheme?
1. Most of the schemes are plain money saving schemes
The way a lot of gold saving schemes project their plan is as if you are buying real gold each month, but majority of them are just plain money saving scheme where you deposit a fixed amount each month for X months and in the last month the jeweler deposits the “bonus” installment and then finally you use the money to buy the gold jewelery at the price prevailing at that time! Not at the gold price the time of joining the scheme! So in practice the whole scheme becomes like a recurring deposit where you deposit some money each month. The bonus installment deposited by jeweler makes sure you get a return around 8-10% on the overall installment.
2. You cant redeem Money
Unlike recurring deposits, you can’t use the money accumulated in gold saving schemes for any purpose. The gold saving schemes make it mandatory that you have to buy gold jewellery and only gold jewellery, not even gold bars or coins. So in case you need money for some other purpose, you can’t use it. But you will say that it’s fine, because at times you also are offered “Zero Making Charges” under these schemes, but you miss reading the terms and conditions which says that it’s only on selected designs and models. What if you do not want to buy those designs? In that case you have to pay the making charges which are applicable and what happens if the design and model which you like have much higher price than you have accumulated? In that case you have to shell out more money. The making charges which you will pay will cancel out the 8-10% returns which you make on the whole scheme.
3. Not as safe as Recurring Deposit
Now as you have understood that gold saving schemes deep down are just like a recurring deposit. However they are not as safe as a banks recurring deposit, for the simple reason that jewelers are not as strong financially as banks and some jewelers actually deposit the money they get in schemes in banks as fixed deposits only. Some jewelers might even be using the money for their operating expenses also.
4. Gold saving schemes are designed to guarantee future sales
If you look into the design of gold saving schemes, it’s clear that it’s a way to assure future sales. People join these schemes, start saving money with jewelers and after 1-2 yrs, they will buy some thing from them. So if X people join the program, all X people will buy something at the end.
R.K. Sharma, executive director from PC Jeweller confirms this – “This scheme is a business building programme. By getting customers involved in this scheme, we ensure future sales. A majority of the times, people purchase a jewellery for a higher price than the amount invested. It is a sure shot business opportunity through which we seal our future sales.” – source
Some of the gold schemes in market
Gold Harvest from Tanishq
Jewels for Less from PC Jewelers
Shagun from Gitanjali
Kalpvruksha from Tribhuvandas Bhimji Zaveri
Gold Tree from GRT Jewelers
Jos Alukkas Gold Saving Scheme
Kothari gold deposit scheme
Gold Schemes – Bhima Gold
When you should join these Gold Saving Schemes ?
So given these fine points, there are few advantages to these gold investing schemes and there are conditions when you might want to invest in those. The first thing is that, a lot of investors who do not understand what are other kind of options for investment in gold like Gold ETF, e-Gold etc which are popular ways to buy gold online these days. Because of not having full information, investors get inclined to these schemes and invest on the name of “Gold”. However good part of these schemes is that, because of these gold schemes, they atleast develop the habit of regularly investing some money, which they would not have done otherwise. So these schemes can be your monthly gold investing plan in a way. These investors will not invest in gold ETF and simple recurring deposits anyways, so its better that they atleast invest in these gold investments schemes by jewelers atleast. So these schemes are good from that point of view.
Another reason when you can look at these schemes is when you have a marriage or function due in next 1-2 yrs and you might want to systematically invest some fixed money for the purpose of buying gold jewellery. Even in that case it makes sense to get into these schemes.
Have you invested in these kind of gold saving schemes online without understanding how it works? What are your comments on these kind of schemes?
While I was working out in gym in morning, I has a strange feeling that I can connect every aspect of ‘staying healthy’ with ‘building wealth’. There are various things which can be used as an analogy to teach good things about ‘creating wealth’ , but the area of health is best as an analogy. I am sure a lot of you who take health seriously and exercise regularly will be able to connect well and appreciate this article, others who do not take care of their health might get the maximum value because they will appreciate both the things (health and wealth points) . Lets see those points .
1. Starting is Easy, Continuing is not
Its very easy to go for a jog/walk at 6:00 am for 2-3 days. A lot of people decide they will do it, and a lot actually achieve it . But what happens after a week/month ? We discontinue it and life is back at square one and we are just lost in our daily life exactly the same way we were earlier . You break your promise of “I will exercise in morning at 6:00 am” , and it all starts with a very small violation, which takes a big shape. Starting out something is damn easy, but the real question is how long you continue it ! and with what commitment. So don’t tell me you got up at 6:00 am . Tell me how long have you been doing it , that’s the real parameter.
In the same way, its too easy to start reading a new blog, starting your SIP , start writing your budget and even working on your financial life. A lot of people get some adrenaline rush, after I write some good article which makes them feel – “Its high time now. I should do something about my financial life” and they start doing something, but the real parameter to look at it is – “Are you consistently doing it ?” . Is your SIP running from many years, month after month without fail ? Are you writing the budget month after month and following it ? A Rs 5,000 SIP running for 10 yrs would always (well , in most the cases) beat a inconsistent SIP of Rs 12,000 . A consistent written and followed budget which was not that detailed, will be much better than a inconsistent budget which was very detailed. A simple strategy followed for years with consistency will just be better than a complex one which is not followed regularly.
2. Focus has to be on Long Term
Imagine you a trainer in gym and someone recently joined with 90kg weight, and complains to you that – “It has been 1 week, and my weight is still the same !” . What will be your reaction to that ?
You need to give sufficient time and patience to see results. You need to understand how things work in health and only when you understand the internal working , you will have faith in exercising , only then you will continue it. Over 6 months, you will see some results , over 1 yrs you will see good change, over 2-3 yrs , you will be a transformed person all together. Short term is just short term ,you can only build some artificial muscle in such a short time. But if you need some serious health, it can come in long term only.
In the same way, wealth can not be created in short term (I am talking about investments here) . Wealth multiples itself over long term and if you want to build 1 crore rupees in 3 yrs with your Rs 50,000 per month salary (god knows what is left at the end of the month) , you are probably from Venus , not Earth for sure. Just like long journey starts with a small step, you need to start your wealth journey with small steps and then built upon it . You need to understand some of the fundamental principles of personal finance (which I have shown in my book – “16 personal finance principles every investor should know“) . Unless you understand them, you will always doubt short term volatility in your portfolio, you will just get too much attached with security aspect of your money and will not allow your wealth to grow.
3. Diversification is Important
Imagine you are only and only working on your left hand when you exercise . Try to visualize it . You are concentrating only on your left hand and how to make it strong. What will happen in next 2-3 months ? I am sure you will not even last that long, but even if you do , your left hand will surely look artificial on your body and ache like anything because you just never cared about other parts of your body and other aspects of your health. A good health is function of good diet, good sleep , good exercise and your life style. Imagine you work out brilliantly , but then, all you eat is junk like Mc’D , KFC , Pizza’a , maggi etc etc .. Or imagine your diet is excellent , but you do not work out at all and sleep at 3 am and wake up at 11 am daily. This all is going to reflect in your health and you are not giving 100% to your health. You cant expect a lot !
In the same way, when it comes to wealth, you just cant be sitting on only and only Fixed Deposits or only and only ETF’s, or just 100% into real estate fully (unless you are a pro and understand what you are doing). You have to make sure you keep a balance and understand each component’s importance in your financial life. A good mix of real estate, equity, debt , cash , gold is desirable for most of the people (for a common man) . While Debt part will give you security and some peace of mind, real estate will make sure you do not feel left out in the race, the equity part makes sure, you are earning some real return at the end after tax and inflation, gold will keep you wife happy and cash will bring smile on your face and tears in your relationship managers face. The point is – don’t over-invest in one category without understanding its impact and accepting the outcome. Always keep balance and harmony among each other depending on your age and risk profile.
4. To get best quality, you need to invest your time/money/energy
I recently invested a huge annual fees in a well known gym. We get best equipment’s, best environment, best facility, dietitian to look after what we are eating and a good tracking of where we are in our health chart, regular track of our weight, measures and it helps me and my wife move in the direction we want to reach. You need to invest money to get the best most of the times. Apart from the money, you need to put a lot of times and energy from your side. This brings good health over long term. While you can also just go to a park in morning or jog on a road, you still need to invest your time and energy. You need to invest in good shoes, a comfortable work out dress. The point I want to convey is – while you can always look out for free things in life, which works , at-times you need to invest your money, time and energy to get the best. Do not look for money when it comes to your health, you can earn 10x times more if you have a better health.
Just like that, I see a lot of investors destroying their financial life, because they just do not want to invest money, time or energy in their financial life. You can get best, if you are open to invest money, time and effort from your side. The good things do not come cheap always. Hire a good advisor/planner who you think will be able to deliver what you want out of him. Invest in good programs, good books , invest your time to learn things, go to that extra mile to understand concepts and how things work. We have around 550 articles at this moment on this blog and 6,000 questions answered on our Q&A forum, ask yourself how much energy and time have you dedicated to learn things and find out new ideas. We have written 3 books, which we feel can really transform your financial life, all it takes is Rs 1,000 to buy them. Go ahead and just read all of them and you will at a new level. I recently paid Rs 3000 to attend a TIE session in Pune, just to hear Naranyan Murthy (for 1 hour) and Devdutt Patnaik (for 30 min) . What I got back was tons of their experience and whole new ideas which made my Rs 3,000 a tiny thing. Good things always comes when you make an investment , you just have to focus on value.
5. It keeps you energetic
When you exercise in gym or at park near by or at home, there is a point where you feel – “I cant do more exercise, Its paining now” . At that point if you stop, you do not get the best results. The best results are always on the other side of your comfort zone – Always in every area of your life. When you feel exhausted, gave your 100% , when you are wet with sweat, your whole day goes amazing. The kind of energy and excitement you feel inside you is awesome. You are more happier, you smile more, you are more kind and you feel more energetic, ideas inside your head are better. Just one activity leads to a great day. And when you do it every day, then each week and each month is great.
Just like you feel energetic when everything in your health area is good, you feel really blessed and good when thing are right in your financial life. When you have completed all your pending tasks in financial life (Join our massive action revolution called 100moneyactions), when you have achieved a sufficient milestone in accumulating wealth, when you have some respectable bank balance, when you have good emergency fund in place, term plan and health insurance already taken and completed. The kind of energy and excitement you have in your financial life is different . You look at your financial life and feel better. You can concentrate on other areas of your life.
6. Structure and Environment increases your dedication and consistency
Good health comes when you are into a nice structure and environment, which fuels your appetite to exercise and improve your health. You will not feel like working out when you are inside your office space, you will not feel like exercising when you are into a movie theater. But when you are inside a gym or a park in morning, you suddenly ‘feel’ from inside that you want to exercise. Thats the power of Environment. Just see anyone who has amazing health, its because they are part of some great environment and structure, it can be as simple as getting at 6:00 am and going for a walk. That’s also an environment.
In the same way, a proper environment helps a lot when you want to improve your financial life. When we did a 1 day full workshop in Mumbai recently, It was all about creating an environment, where you 100% focus on your financial life and discussing ideas which can take your financial life to next level. This blog is an environment, our 100moneyactions is a dedicated environment for taking actions in your financial life . I want you to look at the following video which will help you understand more about power of environment and structure in your financial life.
7. Starting early helps
While its never too late, its always a good idea to start early in life. Imagine two cases, one where you have had a healthy life all your life, and then second case is when you are extremely unhealthy till now and now trying to have a health life at 45 yrs ! . Most of the people around 40-50-60 yrs old today are facing so much issue getting a health plan and also dealing with life overall. They have medical issues and its affecting everything in their life, even people who are connected with them.
Imagine if they had taken care of their health long back, it would be a different situation today. If you are not joining the gym right now, just because it costs money or you have less time, you get very clear that you will pay both of them later with huge interest. In Nandish Book – “11 principles to achieve financial freedom”, In one of the chapters, he has put a quote by Dalai Lama , when asked what surprised him most about humanity ..
“Man. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”
The same applies to your wealth and financial life. The mistakes you make today, will come back to you later and hit you hard very much. I cant say more on this, but just say you this – A lot of people are not able to lead their financial life properly when they are earning right now. Imagine what they are going to do when they will not earn and still be living on this planet for 30-40 more years. I am talking about retirement. You work for 30 yrs and earn, and you struggle a lot. Imagine retirement of another 30-40 yrs, when you are not earning. Its a life sentence followed by death if you do not start earning and do something about your financial life. A good start will always give a great support to your financial life. Here is an article showing you the power of starting early
8. Neglected, because it does affect you in short term
This is my favorite. This I think this is one of the biggest reasons for a bad health life and a bad financial life. A single action if not taken does not affect our health or wealth at that moment, but collectively they destroy our health and wealth in long term.
Coming to Health, When you eat a sweet (I used to eat a lot of them, when I worked in Yahoo) , skip your meal, skip your gym/exercise , that single act is not going to affect you at all (it looks like that) . You cant see its impact on your health in a long run. Each Pizza you put down your stomach instantly gives you taste, but instantly it does not give you a shock. You only see it months and years later. When you put on weight, you suddenly one day realize – that you have put on weight, it does not appear in parts. Suddenly one day you feel , your are too weak or do not feel energy in your body. It all starts small.
In the same way, I see a lot of messed up financial life which all started with one small mistake and then just grews SLOWLY ! . Every time you swipe your credit card, you feel like you will deal with the debt somehow, how troubling can one credit card swipe (which was really not needed) be anyways ! and then you create history !
Each month, when you blow up your money and do not save a single rupee, it does NOT affect you at that very moment. Every time you stop you SIP for something which is URGENT, it does not mess your financial life at that very moment. But all these things combined are just destroying your financial life. Each time you postpone taking some action in your financial life, it just messed up your financial life even more. So nothing hurts in short term, because its not visible – and its true in all the area like health, wealth, relationships, career or whatever it is ! . Stop looking for instant gratification, and suddenly you will have the half battle won !
9. There are shortcuts offered
You must be seeing a lot of shortcuts offered in the area of Health on TV and Newspapers. Some magic belt which will eat off all the fat, some majestic coffee, which has divine properties and can reduce your fat, health clubs offering packages which promise you things like – “Reduce 20 kg’s in 2 weeks” .. etc. A lot of people take these shorts cuts and end up paying huge costs, Money is lost, time is lost, health takes a hit and your trust reduces on anyone who comes to offer you any advice in future.
The same thing happens in the area of wealth too. We often get a lot of paid clients, who had a bitter taste with some other financial advisor in past, who sold them junk or didn’t provide any thing valuable to them even when they charged them good amount of advisory fees.
There are too many people offering you free advice, some good and some bad, there are too many short cuts which are offered to you and even you as investors are keen on taking short routes to build wealth, but eventually end up paying huge cost. There is no alternative of doing your homework and really spending your time and effort in building your financial life.
10. You act on it when you feel a sense of Urgency
Its a strange thing, but most of the people start to take any action in the area of health, when they see there is some ‘problem’ . When its URGENT to do something, when its too late and now its a matter of Do or Die. Didn’t those people who are very obese, knew from many years that some thing needs to be done ? Are you not aware right now, that you need to improve your health ? Yes you are , but you will take action only when you have a sense of urgency in that area, then you will suddenly have time, money and that effort required, which you do not have at the moment (this is what you believe).
The area of money is same. You do not work on it, until there is no option left. Most of the people who come to us for financial life come at the last moment. We always tell them, if only they would have come lot earlier, we could have served them in a better way. You go to a paid workshops, only when you are very sure now you need an external help, you go finding a solution, not to learn and explore new ideas . You are too needy in your financial life then and remember one thing – “Needy people do not have power in life”
I would suggest that you get my latest book – “How to be your own Financial Planner in 10 steps” and start planning your financial life in a better way. So do things not when they are urgent, but when you should do it. Dont take health insurance when you have a illness, you will not get it. Take it when you are in the best of your health. Don’t start SIP in mutual funds, when you can see your goals has almost arrived, do it when its very far and you have good time left for your money to work hard.
Wish you best of luck !
I hope you got some realization today, do let me know which area of your life did you get realization on ? Wealth or Health ! .. or BOTH !
