Family Trusts : How it helps in your Estate Planning

Posted on December 11, 2023 by Team Jagoinvestor

Who doesn’t want to ensure the financial safety and security of loved ones?

You work so hard for your entire life to build the required corpus, assets or to grow your family business (if any) to inherit the legacy to your family.

But, what if there are many heirs to your property? In the case of having children from a previous marriage? In other words, you have a very complex family structure.

Have you given a thought that how will a smooth inheritance process take place after your demise? Who doesn’t want to avoid family disputes on property-related issues? This is where one needs estate planning.

In this article, we will introduce you to the concept of family trusts and the basics of estate planning.

Having an estate plan in place is to achieve seamless intergenerational legacy distribution, continuity of business, and safeguarding the benefit of all the heirs, are the best thing you can do for yourself and your loved ones.

What is Estate Planning?

Estate planning is nothing but writing it down, how you want to distribute your wealth among your family members after your demise. It can also be a plan that defines, how will your family legacy be carried on or who will head family business, in case you are ill or in a critical health condition.

Estate includes immovable like home (real estate), agricultural land, etc, as well as immovable assets like gold jewelry (commodity), our bank balance & fixed deposits (cash). Items such as our collections like coins and paintings are also a part of the estate.

When should one do estate planning?

People have a myth that estate planning is for rich, not for poor or it is a thing to be done after retirement. At the same time, it is suggested to do estate planning as soon as you are having any liability on you (Debt/Loans) and you have any asset whether physical or financial (whatever amount it can be).

You need to write it down, how will your debt be met, what asset should be used to pay off and who is answerable to things. It is to ensure that your loved ones are not troubled for loan related issues after your demise.

Most of us defer estate planning for a later date or time due to various reasons such as—to avoid discussion on demise, avoid difference of opinion with a better half on the distribution of asset, lack of knowledge, etc. But, the time is now and we must put this on our priority list and not postpone it, thinking it to be irrelevant.

As I said estate planning should be done by every person. However, a more important question is how to do it and what are the ways to do estate planning.

What are the ways to do Estate Planning?

In India, it includes making a nomination (for financial assets – it is suggested to always nominate a person whom you want to actually transfer the asset), joint ownership, will or setting up a trust.

If there is no such thing or there are any disputes like nominee is different from the legal heir, then wealth distribution will happen as per the succession law depending on the religion you belong from.

As per succession law, the Property of a Hindu resident will be distributed as per Hindu succession law i.e. equally among class – 1 legal heir (spouse, mother, and kids).

For eg. You have a house worth Rs. 3 Cr. and there are 4 kids. You have not made any will or trust. So, it is not necessary that 4 of them will agree to the not single point of selling the house and distributing the proceed equally. One or two may disagree and keep the property with them.

If you want to know more about succession law, you can watch the video given below –

Estate Planning – using Trust

If there is a complex family structure like kids from first marriage, many kids, stepmother, special child or a minor, or you have a business empire and due to a lot of drawbacks/disadvantages of another source of estate planning like nomination, succession law or will (whether registered or not) it is suggested to have a living trust (private trust) to enable smooth inheritance of wealth.

Trust is an agreement between the settlor (maker of trust) and the trustees to transfer legal ownership of assets/property to the trustee with an obligation that the same should be held and used for the benefit of all the beneficiaries as specified in the trust deed.

For forming a trust, you (the giver of wealth) need to write a trust deed that specifies all the instructions for the distribution of wealth. The settlor then appoints a trustee to execute the trust deed and he/she also needs to fund the trust by transferring the assets (movable as well as immovable). Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

Trust deed – The trust deed should specify the purpose of the trust, it’s objective and how will it function. You need to identify the trustee or trustees which can be a friend or relative or it can also be a corporate entity. You also need to give instructions in the trust deed about execution in case of any incapability happens to you (critical health conditions) and about its dissolution.

Trustee – Corporate trustees are professional firms or companies that provide or arrange different services as required by the trust. In a trust deed, you need to specify the successor trustees (if first trustees are not alive or are retired).

Myth about Trustee

People think that if they form a trust, their wealth will be owned by the trustee and they will lose control over it. So, yes the trustee becomes the owner but in a virtual world. In reality, the trustor has an obligation to fulfill the purpose of the trust deed.

A trustee has no right to use the property for himself/herself. He/she can use property just for the benefit of beneficiaries. However, while the settlor is alive, he has full control over the activities as well as an asset transferred.

In fact, nowadays there are various professional trust agencies that provide trustee arrangements. They don’t have any biased or personal sake in your wealth and they will stand as whole-time executor of your trust deed.

Drawbacks of Will

We know that a will is one of the traditional method used to do estate planning. But, will whether registered or unregistered can be challenged in the court of law. Let’s see in detail, what all are the drawbacks of will?

1. Will can not take care of unforeseen eventualities – As the will is a final declaration of your intention with respect to your property, which the courts endorse only after your demise. Thus a Will can not take care of unforeseen eventualities like any disability or illness as it is towards the disposition of property of the deceased rather than management.

2. Probate of will takes long period – A Probate which is necessary for establishing the rights of the executor or the beneficiaries under the Will in certain cases may take 6 months to 1 year and until such time, the beneficiaries would not be able to use the assets.

3. Can be challenged in court – Authenticity of a will can be questioned in the court on the grounds of fraud, forgery, undue influence (made in the pressure of something), mental illness of maker, lack of will-maker’s capacity, lack of knowledge and approval, and revocation. Even a registered will can also be questioned as registering a will does not lend it any legal sanctity or remove suspicion about its validity it’s just that it reduces the grounds on which it can be contested in court.

In India, a traditional way of estate planning has been setting up Hindu Undivided Family (HUF) which is a distinct unit for tax policy as per the provisions of section 2 (31) of the Indian Income Tax Act. However, it may be noted that after a property gets apportioned to a HUF, every coparcener has an equal rights to it and partition of HUF land has often led to clashes and court cases.

Therefore while the HUF with its archaic tax treatment and confused entity fails to cater to the requirements of present-day wealthy the Will is posed with un-certainties and the nonsense of a Probate. In such an atmosphere, one approaches the Family Trusts with a lot of hope and expectations that Family Trusts have managed to standby.

Why private trust should be used for a special child or minor child?

As an investor, we focus more on wealth creation. However, how will this created corpus devolve on the child and who will provide for & take care of the children when the parents are no more are important questions as well.

Hence, estate planning for parents with a special child (mentally or physically challenged) or minor children is even more crucial. Those parents need to plan in advance that who will take care and provide the needful to their special child.

A parent can grant responsibility of guardianship to a close relative but, it is a whole-time job and no one is sure that the things will work out as per the plan. In today’s world, everyone has their own priority and problem, there is no surety that he/she will be able to spend enough time on this responsibility.

So, to deal with it, a parent is suggested to form a trust and appoint two trustees – one from relative/friend and second should be a corporate trustee. In this way, the corporate trustee is a professional has all the arrangements mentioned in the trust deed of a parent with a minor child or a special child. It will also help parents to pass on the day-to-day operation and execution responsibilities to corporate trustee

Following are the services with a professional trustee can provide or arrange for a special child

Full-time helper
A cook
Health care attendants
Specialist doctor
Basic household groceries
A channel for making payments of all bills/expenses

Conclusion

For a special child or minor child, as they are not able to claim there right, you need to appoint an executor along with a will. And due to various drawbacks of a will like long probate period or execution-only after the demise of the maker, it is suggested to have a trust formed.

Surrender v/s Paid-up – which is better option for your old insurance policies?

Posted on January 22, 2020January 27, 2020 by Anuradha Singh

Do you want to get rid of your old money back insurance plans, but are confused if you should “surrender” or make it “paid up”?

Today I will explain which one is the best option amongst the two.

Surrender vs Paid-up option in Insurance policies

All those assured insurance plans which your parents made you buy from your friendly neighbourhood uncle is nothing less than a high premium low return policies with not more than 1-5% CAGR return.

These policies don’t provide enough life insurance cover neither they create enough wealth for you for your long term goals like children education, child marriage or retirement and on top of that, these policies have pathetic returns value if you want to close them before maturity and take back your money.

Mainly there are two ways to discontinue these insurance policies which are –

Paid-up Policy
Surrender Policy

What is “paid up” option?

Under this option, if a policy holder does not close the policy, but stops paying any further premium. However, note that this option is generally applicable only after one has paid for at least 3 yrs. (however, check your policy wordings for exact years)

The amount which you will receive at maturity will be reduced, in proportion to the premiums paid. This sum assured is called the paid up value. It is calculated using the following formula:

Paid up value = Original sum assured x (No. of premiums paid / No. of premiums payable)

Example – A traditional insurance policy with sum assured of Rs. 10 Lakhs for 20 years with a premium of Rs. 30,000 p.a. paid for 8 years. Let’s find out what will be its paid up value if one wants to stop paying further premiums.

Paid up value = 10,00,000 * 8/20 = 4,00,000

At a high level, the numbers don’t look back. You will get 4 lacs, but you paid just 2.8 lacs overall, however, remember that you will get this 4 lacs after so many years and you will lose the purchasing power because of inflation.

You can simply say that real worth of Rs. 4 lac received after 12 years is Rs. 1,58,000 today, taking inflation at 8%.

Therefore, if you are choosing policy paid up option, keep in mind that converting the policy into a paid-up policy will lock your money for the remaining term of the policy and also, actual worth of the amount, which you will receive in later years will be very less if the maturity of the policy is very far from now.

What is “surrender policy” option?

Under this option, you close the policy completely and take back your money. The money you get will be some percentage of your premiums paid minus the first year premium. And this percentage increases depending on how many years the policy premium has been paid.

A policy generally acquires any surrender value only after 3 yrs of premium payment, which means that if you choose to surrender your insurance policy before 3 yrs, you lose all your money and don’t get back anything.

Note that the surrender value starts with 30% and goes up depending on the number of years you have paid the premium.

Following is an indicative table which shows the surrender value as a percentage of premiums paid

[su_table responsive=”yes” alternate=”no”]

Time of Surrender	% of premium paid – first year premium
After 3 years	30% of premium paid
After 5 years up to 8 years	50% of premium paid
After 8 years	65% of premium paid
Last 2 years to policy maturity	90% of premium paid

[/su_table]

This percentage can change from company to company and depends on factors such as the type of policy. Every policy brochure mentions details about surrender value but, it is not compulsory that all the companies mention this percentage which is also called the surrender value factor in their brochures.

Example of surrender policy

Mr Pratik has bought a traditional insurance plan of 20 years with a sum assured of 6 Lakhs premium amount is Rs. 20,000 per year. After paying the premium of 6 years, he wants to surrender the policy.

Surrender Value = 50% of (premium paid – first year premium)

= 50% of (120000 – 20000)

= 50% of 1,00,000

= Rs. 50,000

You can see that he will just get Rs 40,000 from surrendering the policy even if he paid Rs 1,20,000

flow chart for surrender vs paid up insurance policy

When to choose “Surrender” and “Paid up” option?

Surrendering a policy is suggested when

You are not able to pay the premiums
You need money for some reason
When remaining number of years in policy is more than 8-10 yrs

This option is suggested because you still have many years left and you can pay the same premium amount in a better product which will do wealth creation for you.

Making a policy paid up is suggested when

You don’t need money but don’t want to pay further premiums
When you don’t want to pay premiums, but still want the policy to run
When your policy maturity is very near (2-4 yrs)

Making a policy paid up is generally not suggested, but a lot of times, investors are not able to take the pain of getting the reduced amount from their policy and feel like “they will get something in future”, however considering “time value of money“, it’s not a great option.

How to deal with the emotional part “I am facing so much loss”?

In both the options, there will be a loss for sure. Money back insurance plans are designed to give low yields and penalize you if you quit in between.

I think dealing with closure of insurance policies is more of a psychological battle You know you have got a wrong product and its bad for your future, but people can’t deal with the fact that they are facing so much of loss – “I paid 8 lacs, and I will get back only 4 lacs, I will lose 4 lacs”

Note that if you consider TIME VALUE, things will be easier to decide.

If your friend borrows Rs 100 from you and returns you Rs 110 after 10 yrs, you are not in profit, you are actually in LOSS. Because you could have created Rs 250 with an alternate investment and now you just have Rs 110, that’s Rs 140 loss.

Just looking at it from absolute numbers point does not make sense.

For example, imagine a sum assured of Rs 10 lacs with a yearly premium of approx. Rs 53000 per year. Now if a person has already paid 5 premiums and wants to surrender the policy, they will just get back around Rs 85000 (assuming 40% of 4 premiums, as one premium is deducted). The immediate loss of mind is for Rs 1.8 lacs (paid 2.65 lacs and getting back 85,000)

This is a tough situation for the mind and very tough to handle. A person feels why to take a loss when one is not recovering the amount paid also and just continues the policy till the end. The person will get back anything between 15-18 lacs, depending on the bonus amount declared.

This translates to only 5.69% and this the best case (it will get better if you die early after taking the policy, but I am sure you would not like it)

Now if the same person reinvests the same 85,000 along with Rs 53,000 premiums yearly into some equity-based products like equity mutual funds or index funds, even if assume a modest 12% returns which have happened in past, the wealth one will have will be 24.5 lacs and the IRR will be approx. 7.4% of the whole scenario. This second option also gives you better liquidity and exit option whenever you wish to get money.

Learn how to save money to do what you love [PODCAST – 49 min]

Posted on December 23, 2019December 24, 2019 by Jagoinvestor

Do you want to know how to save money to do what you love in life?

I recently did a 49 min audio podcast with Sanjay Khandelwal of The Break School. The podcast is mainly aimed at those who want to do something on their own by quitting their jobs, but they get stopped because of a lack of money & planning or fear of starting out. The podcast will also help those who want to know some of the best principles of savings and investing. Please listen to the podcast below

Here are iTunes link along with google podcast link

Here are the 11 things we discussed in the podcast?

Why did you start Jago Investor ( 02 min, 48 Sec)
Two biggest challenges in last 10 years in building Jago Investor ( 05 min, 43 Sec)
What have been your 3 biggest learning as a personal finance coach? ( 06 min, 54 Sec)
Have you come across people who wanted to quit their job and be freelancers or be on their own? What do you think holds them back?
Is it just money or something more? ( 10 min, 47 Sec)
What kind of habits makes people spend more and save less? ( 15 min, 11 Sec)
Do e-wallets increase our propensity to spend ( 21 min, 49 Sec)?
How can personal finance help? And how does it not help? ( 26 min, 11 Sec)
Can you share 3 to 4 financial concepts that layperson must be aware of? (30 min, 30 Sec)
How much money does one really need? (35 min, 33 Sec)Are there any misconceptions/Illusion that people have with respect to money? ( 39 min, 38 Sec)
Can you suggest a basic Financial Plan for someone who wants to quit her job in two years and start a blog? What are the things that the person must look at? ( 41 min, 05 Sec)

Please share what you think about the podcast after listening to it?

What is Cost Inflation Index (CII)

Posted on December 19, 2019 by Team Jagoinvestor

Can you guess, what these numbers are for 200, 220, 240 or 264?

Don’t worry it is not some math thing. These numbers are used as measures to save you from paying higher taxes on the sale of any capital asset like real estate or gold. It’s the value of the “Cost Inflation Index” (CII) from the financial year 2012 – 13 to 2016 – 17.

Let’s understand what is this and how CII can be used to save tax?

What is the Cost Inflation Index?

Imagine you have bought a house in 2015 worth Rs. 2 Cr. and you are selling it for Rs. 3 Cr. in 2018. So, what will be the capital gain here? It is Rs. 1 Cr., can you imagine how much tax you might have to pay for it? That will be really a big chunk of the profit to be paid as tax.

To save you from heavy tax payments, the government has come up with CII. It is used for calculating the estimated increase in the prices of goods and assets year-by-year due to inflation.

With the help of CII, the cost of purchase of an asset will be indexed, in other words, it will be revalued or increased from its original price, considering the effect of inflation and will result in lowering capital gain tax payable on the sale of the asset.

How?? we will see later, but lets first understand…

Why CII is used in income tax?

CII is used for capital assets like real estate, gold, debt mutual funds or debentures. Asset class whose price will increase by a period of time as the value of money gets eroded due to the country’s inflation.

However, we record capital assets at cost price, despite increasing inflation, they exist at the cost price and cannot be revalued. Therefore, when these assets are sold, the profit amount remains high due to the higher sale price as compared to purchase price. This leads to a higher tax to be paid on capital gain arisen on their sale.

In the above-mentioned example, we all know that the value of 2 Cr. at the time of 2015 can not be equal to the value in the year 2018, it will be increased. The house purchased in 2 Cr. will cost much higher today, and the reason is “Inflation”.

And therefore, the Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over a period of time will lead to an increase in the prices of capital assets and eventually result in lesser capital gain and tax.

In simple words, CII helps in calculating Real gain =

Selling Price of the Asset – Inflation Adjusted Purchase Price of Asset

How the cost inflation index is calculated?

How will you calculate the Inflation Adjusted Purchase Price? If let on investor, each person will have his own view in inflation, hence the CBDT (Central Board of Direct Taxes) notifies a unique number based on their calculation on consumer price index every year in the official gazette, which is used for calculating the indexed cost.

Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.

Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the price of the same basket of goods and services in the previous year to calculate the increase in prices. How CII is calculated is not much of our use, but let us see, what are the rates notified?

What is the concept of the base year in the Cost Inflation Index?

For this purpose, the government has defined a base year i.e 2001 – 02. For all purchases before 2001, the factor used is the base factor which is 100.

Any capital asset purchased before the base year of the Cost Inflation Index, taxpayers can take the purchase price as higher of the “actual cost or Fair Market Value (FMV) as on 1st day of the base year. Indexation benefit is applied to the purchase price so calculated. FMV is based on the valuation report of a registered valuer.

Suppose a land was purchased in the year 1995. So, for calculating the indexed cost of acquisition, the fair market value of land in the year 2001 – 2000 will be considered for calculation of the indexed cost of acquisition.

Change of base year from 1981 – 82 to 2001 – 02?

Initially, 1981-82 was considered as the base year. But, taxpayers were facing hardships in getting the properties valued which were purchased before 1st April 1981. Tax authorities were also finding it difficult to rely on the valuation reports.

Hence, the government decided to shift the base year to 2001 so that valuations can be done quickly and accurately.

Chart of Cost Inflation Index

[su_table responsive=”yes” alternate=”no”]

Financial Year	Cost Inflation Index (CII)
2001 – 02 (Base Year)	100
2002 – 03	105
2003 – 04	109
2004 – 05	113
2005 – 06	117
2006 – 07	122
2007 – 08	129
2008 – 09	137
2009 – 10	148
2010 – 11	167
2011 – 12	184
2012 – 13	200
2013 – 14	220
2014 – 15	240
2015 – 16	254
2016 – 17	264
2017 – 18	272
2018 – 19	280
2019 – 20	289

[/su_table]

Applicability of CII in capital gain tax calculation

The cost inflation index can be used for calculating long term capital gains (LTCG) for investments in securities and real estate.

Since LTCG is flat 10 % (above the gain of Rs. 1 Lac) for investments in Equities, hence it has no relevance for calculating LTCG for investments in shares and equity mutual funds. But, it is useful to calculate LTCG in debt-oriented mutual funds (especially Bond funds and Fixed Maturity Plans).

Debt Mutual Funds – LTCG can be claimed only if the holding period is more than 3 years.

Properties / Real Estate – In the case of property, LTCG can only be claimed if the holding period is more than 2 years.

How CII is applied?

When the indexation benefit is applied to the “Cost of Acquisition” (purchase price) of the capital asset, it becomes “Indexed Cost of Acquisition”.

[su_box title=”Calculation of Indexed Cost of Acquisition”]Indexed Cost of acquisition = Cost of acquisition * CII for the year of transfer / CII for the year of purchase or base year (in case of the asset purchased before 2001)[/su_box]

Let’s understand this with the help of the same example given at the start. You bought a house for Rs. 2 Cr in the financial year 2015 – 16 and sold it in F.Y. 2018-19 for Rs. 3 Cr. So, what will be the capital gain after considering CII?

CII for 2015 – 16 = 254

CII for 2018 – 19 = 280

Indexed Cost of acquisition = 2,00,00,000 * 280/254 = 2,20,47,244

Therefore, Capital gain = Cost of sale – Indexed cost of aquisition = 79.52 Lakh (3 Cr. – 2.20 Cr.) which would have been Rs. 1 Cr.withour CII.

Hence, taxed at 20% (rate for LTCG) saved on Rs. 20.48 Lakh i.e Rs. 4 Lakh approx.

I hope, this article helped you in understanding the concept of CII and its importance. Let us know what you think about CII and revision made by CBDT in the base year in the comment section.

How PMS (portfolio management services) works?

Posted on December 11, 2019December 18, 2019 by Team Jagoinvestor

If you are a high net-worth individual, looking for investing in a professionally customized portfolio of stocks, then PMS (Portfolio management services) can be a good choice for you.

In this article, we will discuss everything about PMS – Portfolio Management Services.

What is Portfolio Management Services (PMS)?

PMS is a service targetted at HNI investors who have a high-risk appetite, and the minimum ticket size of the investment required in PMS is Rs. 50 Lakhs – as increased by SEBI recently.

A lot of investors want to have a direct equity portfolio and may want high returns by taking a huge risk. A lot of investors manage their portfolio, but not everyone might have all the expertise needed to manage the stock portfolio. For this kind of investor, PMS can be a good option to look for beyond equity mutual funds.

There are 3 types of PMS

Discretionary: Discretionary Portfolio provides the service provider a right to make decisions on behalf of the client, whether he wants to sell or buy the shares. He is not bounded to consult with the client.

Non-discretionary: The portfolio manager suggests investment ideas suitable to risk appetite investor, while the decision is taken by the client. The client at his discretion can select stocks or other investment products. However, the execution of trade is done by the portfolio manager.

Advisory: Under these services, the portfolio manager only suggests investment ideas. The choice, as well as the execution of the investment decisions, rest solely with the Investor.

Note: In India, the majority of Portfolio Managers offer Discretionary Services. Most of the portfolio management companies provide model-based services. A standard model is followed and a bit alteration is done for individual client preference.

PMS is an individualized pool of funds

When you opt for a PMS scheme, a bank account, Demat account, and trading account are separately opened in your name and all investments are made in your name only. Accordingly, any income or dividend coming out of the investment made will also be credited in your bank account and the shares will be held in the Demat account in your name.

It means you hold all stocks individually, unlike mutual funds, where there is a pool of funds managed by a fund manager and performance is evaluated based on per day NAV. Each fund performance is influenced by all the investors jointly based on their sentiments, whereas in PMS the behavior of individual investors is isolated from one another.

PMS agreement

When you opt for a PMS service, you need to sign an agreement, which specifies all the details of services to be provided along with strategies and models of portfolio to be followed by the portfolio manager. When you sign it, you give a power of attorney for operating your trading and bank account to the portfolio manager.

If you are having a Demat account, trading account and bank account, you have to open all of these again to avail PMS. So that a portfolio manager can clear power of attorney. Therefore, whenever dividend or interest income or any other amount is credited to the bank account linked to PMS, the portfolio manager will redirect that amount in your portfolio.

As per market regulator Sebi’s instructions, a portfolio manager is required to furnish performance reports to their clients every 6 months. Most portfolio managers give a username and password which can be used to login to their website and see the portfolio statements.

The fee structure in PMS

PMS has a high cost of maintenance as compared to any other investment option. It has entry load, yearly management cost as well as profit sharing. However, they vary from provider to provider.

1. Entry Load – When you opt for portfolio management service, you are charged an entry fee which is generally termed as the Entry Load or Set up cost. It is 1 to 3% or it may vary. It gets deducted from the amount of your investment.

So, as we said, to avail, this service minimum amount is Rs. 50 lakh. So, you have to keep aside Rs. 50 Lakh + 2 or 3% of set up costs to start investing in PMS.

2. Management Charges – This is a service charge for managing your portfolio. It may vary from 1-3%, depending upon the service provider.

3. Profit-Sharing Fees – If a PMS has profit-sharing agreements between the client and provider, in addition to other fixed fees, then this charge is based on such terms of an agreement. Some charge this fee-based in the hurdle rate.

The hurdle rate is a promised rate of return. If a portfolio has given more than that percentage, then 10% or any percentage will belong to PMS company. It means you have to share profit if your portfolio has managed to give returns above what was promised.

Apart from the charges mentioned above, the PMS also charges the investors on the following counts as all the investments are done in the name of the investor:

Custodian Fee
Demat Account opening charges
Audit charges
Transaction brokerage

However, the fees of the service providers are negotiable, so you can exploit it as much as you can. There is no standard norm defined for the PMS fee.

Advantages of PMS

A portfolio of stocks and debts monitored and professionally managed by an expert.
PMS promises to outperform benchmark i.e Higher returns than the benchmark in the long run.
You get to invest across asset classes – debt, equity, gold, and mutual funds.
No limit to the extent to which you can invest in a certain stock.
No herd behavior is followed by an expert, they keep your requirements in their mind and accordingly invests in the segment preferred.
Diversified as well as focused portfolio depending on investor’s profile.

Disadvantages of PMS

As per SEBI guideline Minimum investment required is Rs. 25 lakhs (From 1st Jan 2020 it will be increased to Rs. 50 Lakh) because of which a small investor won’t be able to enjoy services offered under PMS.
PMS providers share profits but not losses.
Long documentation procedure, you need to open a new Demat Account, trading, as well as bank, account for PMS.
High set up cost – you have to pay 1 or 2 % of your AUM i.e. the amount you want to invest, at the time of investment. Along with this you also have to pay yearly management cost.

How PMS are taxed in India?

PMS taxation has always been quite debatable in the past whether it should be treated as Business Income or Capital Gains, but from the last few years after a recent court ruling, it’s now clear that profits from PMS will be treated as normal Capital gains and equity taxation rules will apply.

This means that any short term capital gains (before 1 yr) will be taxed at 15% and any long term capital gains will be taxed at 10% (after 1 lac limit per financial year) without indexation benefits.

Difference between mutual fund and PMS

A lot of investors might wonder how much PMS is different than an equity mutual fund. Here is a video which talks about the difference between PMS and Mutual funds.

Also, here is the tabular comparison between PMS and mutual funds

[su_table responsive=”yes” alternate=”no”]

Basis of difference	Portfolio management services	Mutual Fund
Impact of sentiments	Individual portfolios are isolated from other investors behavior	The sum total of all the investors’ in fund impacts the overall performance of a fund
Limitation	No caping on the purchase of listed stock. However, PMS can not invest more than 25% of AUM in unlisted equity shares.	Caping of 10% of AUM of a fund in a single stock, it means a limitation on investment
Public Data on past performance	No standardized terms of working & publication of data	Standardized method of representation of data on the website of every fund house
Cost structure	Variable or fixed fee structure (usually very high but negotiable)	Fixed fee structure
Entry Load	High set up cost i.e 1 or 2% of AUM of an investor is chargeable as set up fee	No setup cost or entry load
Initial requirements	Accounts required Demat + Trading + New bank account (new accounts are to be open if required by the PMS company)	Existing Bank account
Required Minimum investment	The Minimum ticket cost Rs. 50,00,000	SIP Rs. 1000 Lump-sum Rs. 5000

[/su_table]

We hope this article helped you to understand PMS in brief. Please comment on how you liked it and if you have any queries regarding PMS. In case you want to invest in PMS, we can also help you in that regard. Just email us at [email protected] and we will get back to you.

PIS account for NRI’s – Invest in Direct Equities in India

Posted on November 11, 2019December 18, 2019 by Team Jagoinvestor

Are you an NRI who is planning to invest in direct stocks or other equity options? Indian economy is one of the fastest-growing economy and many NRIs and PIOs are planning to invest in Indian equities, but they are not sure, whether they can invest in India or not? And what is the procedure for investment?

As per rules, an NRI can also invest in direct equities, equity mutual funds or future & options (F&O) in India just like a resident but NRI’s have to open a separate account called as PIS account (portfolio investment scheme account) for investing in direct equities and we will look at that today.

PIS Account (Portfolio investment scheme)

PIS or portfolio investment scheme account is an account to be opened by NRI’s if they want to invest in stocks directly. This PIS account allows NRIs to buy and sell shares and convertible debentures of Indian companies on BSE & NSE by routing such transactions through their NRE/NRO bank account.

How to get PIS Account activated?

Step 1 – Open an NRE account/NRO account or you may already have it
Step 2 – You need to ask your bank for PIS form, fill a form ‘Application for designating bank account for PIS’ and submit it to the bank. Bank will send the form to RBI for approval.
Step 3 – Once approved by the RBI, the requested bank account (NRE or NRO) is designated as PIS Account.
Step 4 – Your Demat account and the trading account will be linked with the PIS account to enable the buy and sell off stocks at NSE/BSE.

Once your PIS account is linked with a Demat and trading account, you can invest in stocks online.

Non-PIS Account

By default, every NRE/NRO account is a non-PIS account (PIS is not activated). The following are the investments which can happen with the non-PIS account.

Mutual Funds and IPOs.
Sale of shares acquired through Right Issues/ ESOP
Sale of shares received in inheritance
Sale of shares received in bonus
Sale of shares bought when NRI was resident Indian.

Many banks make it mandatory to open a separate Non-PIS account along with a PIS Account. They offer 4-in-1 Account which includes:

NRI Saving Bank Account (Non-PIS)
NRI Saving Bank Account (PIS)
NRI Demat Account
NRI Trading Account

Important points

Transactions from a Non-PIS account are not reported to the RBI.
The PIS account cannot be a joint account
NRIs cannot do intraday trading with the PIS account. NRI’s can’t sell stocks without taking delivery of the shares/convertible debentures purchased.
Short selling is not permitted under PIS.
One can have only 1 PIS linked account. If you would like to open a PIS account with another bank, you will have to close the existing PIS account first.
In the case of POI, the POI card is also required in documentation
In case your overseas address is not in English, you need to get it translated by a translator in your city and get their stamp
In case you do not want to travel to India just for making investments, you can always give POA (Power of attorney) to someone trusted who can do the process for you.

3 account to be opened along with PIS account

Note that PIS is mainly permission and not an account in itself. If you want to buy and sell stocks in India, you would need NRE/NRO bank account along with the Demat and Trading account. Below are the details for each of those.

NRE/NRO Saving Bank Account

For any type of investment in India by NRI, whether it be mutual funds, commodities, or stocks, IPO having an NRE or NRO account is mandatory.

NRE Account – NRE account is a bank account where the money is deposited in Indian as well as foreign currency. You can use the money deposited in it, in the country of your residence or in India. Therefore, it is called as repatriable.
NRO Account – NRO bank account is only partially repatriable, means you can use the money only in India. And you can only deposit Indian income in this account. It is used to deposit rent, interest, other source income earned from India.

So depending on your situation and income type, you need to open these accounts. One can have any number of NRE/NRO accounts if required.

Many NRIs are using a saving bank account for transacting in India, which is illegal. So, once you become an NRI, you should convert your savings bank account into NRE/NRO account.

These are just marking on the existing saving bank account. One needs to fill a required form and attach required documents like PAN, Identity proof of country of residence, Passport, etc.

Demat Account

Demat account is to hold securities (shares) in electronic format. Unlike most developed countries where equity holding is kept with the broker, in India, they are kept in a separate account called Demat account. The Demat account is a secured online account.

First time NRI investors need to open a Demat account with a registered broker. Various brokers like Zerodha, ICICI, and Axis, IIFL, etc., are available for NRI investors.

Every broker offers different services and charges different fees and brokerage for the same. It is wise to check every detail of the broker before opening a Demat account. To open an NRI Demat account, the following documents are needed to be submitted-

Bank Account Statement/ Passbook Bank proof should indicate NRE/NRO saving a/c bank details
Foreign address proof
Indian Passport
PAN card
Photograph of investor
Canceled bank account cheque
If NRE or NRO is not mentioned (pre-printed) on the cheque, then bank verification letter is required.

All the photocopies of the KYC document should be attested by any of the entities like Notary Public, any Court, magistrate, judge, Local banker, Indian embassy, Consulate General of the country where NRI is residing.

Trading Account

In addition to a Demat account, an NRI also needs an NRI trading account to trade in stock exchanges i.e. to place buy/sell orders. The documents required to open NRI Trading accounts same as NRI Demat account.

Most brokers offer 2-in-1 account services wherein an NRI can open both trading & Demat account at once. Some stockbrokers who are part of a banking group such as ICICI Direct, HDFC Securities and SBI Capital, etc., offer all services like NRE/NRO account, Demat and Trading accounts are opened at once.

Let us know if you have any more queries related to PIS account? We will be happy to answer them in the comments section

CRED App Review – Earn rewards on paying credit card bill

Posted on October 14, 2019August 18, 2021 by Jagoinvestor

Today I want to do the review of the CRED app. I have been using it for the last 12 months already.

CRED is an app, which gives you rewards on timely payments of your credit card payment. If you are not using this app, you may be making credit card payments anyways by other online methods. All you have to do is to make payments using the CRED app, that’s all.

It’s that simple to use!

There are various brand offers and coupons from categories like dining out, food delivery apps, flight tickets, and even shopping? Here is one instance.

We get different kinds of rewards for using or raising the credit card bill amount. Like, in my case, I have a PVR credit card of Kotak bank, for every Rs. 15,000 credit card bill, I get points to redeem against 2 PVR tickets (max. Rs. 400 for 1 ticket). Because of this, I get influenced to pay my bills mostly by credit card to reach Rs.15,000 of a bill every month.

Here is how an offer looks like

This is how banks influence us to use a credit cards. But, when we pay bills of credit cards we never get any discount or reward on that amount?

However, now it is possible with the help of the CRED app. This app gives you rewards for paying your credit card dues via this app.

What is CRED App?

CRED is an app on which you add your multiple credit cards and make payments by the app itself, which gets credited to your bank in few hours. The app is exclusively for those people who have a good credit score (checked automatically from Experian or CRIF) and have some history of credit card payment. This is checked when you register for the app for the first time.

It is also equipped with the cred to protect feature which is an AI (Artificial Intelligence) backed system, that keeps track of every single nuance of a credit card payment journey – right from due date reminders, spending patterns and other card usage statistics.

There are two things you can earn on CRED App

Coins – You will earn coins equivalent to your credit card bill amount every time you pay the credit card bill. So if you pay the credit card bill of Rs 40,000, you will get 40,000 coins. The coins will keep accumulating month after month. So you can keep collecting coins and later redeem it in any manner. There are some offers and benefits which requires a very large amount of coins, so it’s beneficial to collect lots of coins. I currently have around 3,50,000+ coins in my own account.

Gems – You can also earn “gems” in the CRED app. These are different kinds of currency that are required by some offers. Right now one earns 10 gems on each referral. So if your referral signs up on the CRED app, then you will earn 10 gems. If you like Jagoinvestor, please help us earn some coins by registering on the CRED app using this link.

Here is a sample of some of the offers on the CRED app

iXigo flight bookings – Rs. 1000 off on using 5,000 coins
Flo Mattress – Rs. 5,000 off on using 20,000 coins
Swiggy – Free delivery for 3 months on using 5000 coins
UrbanClap – Flat 50% off on man grooming using 25000 coins
Flea Bazaar cafe – Flat 20% off on total bill using 5000 coins
Cashback – Get Rs 1,000 cashback for 30 gems
Flipkart – Rs 500 gift card for 20 gems

There are various kinds of coupons and offers available under the CRED app under different categories. Depending on what offer you want, you can go into that category and explore the offers available in your city.

3 steps to register for CRED App

You can avail of the benefits of this app only if you meet the eligibility criteria defined by the app. Which is – to have a good credit score. Following is the step-by-step process for this –

Step 1 – Download the Cred App from here

Step 2 – Register to cred using your phone number

Login to cred using your name and phone number registered with a credit card.
The app will prompt you to grant permission for phone access to verify the number and SMS (which is needed to send a reminder on your due credit card bills), just grant the permissions.
Cred will process this data and check your eligibility, on the basis of your credit history. Cred has a tie-up with credit bureaus like Experian and CRIF.
If your credit score meets the standards of cred then you will receive an OTP to proceed further

If your membership is rejected, improve your credit score and apply after a few months again. It may also happen that you are using multiple mobile numbers for banking, so try again using another number. So, if you have just got your credit card some weeks back, please wait for a couple of months before you apply.

Step 3 – Add your credit cards

Once registration is successful on the CRED app home page all your Credit Cards would be displayed. You just need to verify these cards by entering the last 4 digits of the card. To ensure the active status of these cards, cred will instantly deposit Rs. 1 to each of the cards.

You will not be asked to enter an expiry date or CVV of your cards which ensures the safety of this app.

Once successfully getting your card verified, you can exclusively earn rewards and scratch cards on every bill payment. Master card, American Express, Diners Club, and VISA cards are presently being handled by the CRED app.

5 benefits you get in the CRED app

Coming to the main point of getting rewards and benefits from the CRED app, below are the following things

Cashbacks on paying bills
Discounts
Free gifts and offers
Spending Analysis
Credit Score tracking

Let’s look at each of them

Benefit #1 – Cashback on paying bills

You may earn cash back (all called #killthebill) on every transaction. At the time of payment of more than Rs. 1000, you may be notified that you have won a scratch card and you might earn some amount which will be credited back to your credit card.

rewards earned on cred

Benefit #2 – Discount Offers

Now, this is the major part of the benefits. CRED app has associated with various brands and it offers you some discount (cash discount or percentage discount) when spending a particular amount.

For example one of the offers is a “20% discount on the next 20 orders from BOX8”, so you can see that you will get 20% on the Box8 for a long time, but you still have to pay the rest amount. So even if you are getting a discount, you need to SPEND on it. So these discount offers are truly good only when you are anyways going to spend money on these brands.

Sometimes, it may happen that these offers also give you a chance to experience things which you might not have done without a discount, so technically it’s beneficial in that manner, but still, spending has to be done.

Benefit #3 – Free Gifts and benefits

There are some rewards that are truly free for you by burning some coins or gems. You don’t have to pay anything to get the benefits. These I personally think are the real benefits in a way, because you are not spending anything out of pocket, but just availing an offer.

Below you can see an example, where you can burn 2,00,000 coins and get a pass for 2 people Bacardi NH7 weekender event and even lounge access. Apart from that, I have shown 3 more offers for complimentary benefits without paying any extra from your own pocket.

So you can keep collecting the coins and wait for the right offer or reward to arrive which is useful for you.

Benefit #4 – Spending Analysis

One small benefit of the CRED app is that you get some insights into your spending pattern and the history of your credit card payments in one single place. This is good for those who have multiple credit cards and want some visibility on how their spending is happening.

Benefit #5 – Credit Score Tracking

CRED app will keep showing your credit score from time to time, so this will help you to stay motivated to make timely credit card payments and you can also keep a track of how your credit score is moving over time. Right now CRED has done a tie-up with Experian and CRIF and pulls your credit score from both places.

How to make payment in the Cred app?

Paying credit card bills via the CRED app is very easy, just click on pay now, enter the amount and click proceed. Nowadays the bill amount along with the minimum due amount automatically gets pre-populated. You can make payment via debit card/net banking (NEFT/IMPS) or UPI. It may take some time to reflect on the money credited to your credit card account.

On Completion of Bill Payment of your Credit Card, you will be rewarded with CRED Coins and Kill Bill Scratch Card which you will have to redeem.

Is the CRED app safe?

I am sure that you must be having this question about the safety of this app because you are putting your credit card details and authorizing the app with all details.

First, this is this app is founded by Kunal Shah, the person who started Freecharge and the startup is heavily funded. The past record of the founder is intact so you can trust the company.

Next point is that the CRED app never asks you to provide the date of expiry or CVV on your credit cards, hence you are not giving any critical information to this app.

Then, you should know that when you install any other app, those apps also get various permissions like reading your SMS, making calls on your behalf, tracking your activity etc, and this app is nothing different from others.

If you want, you can deny access to emails and messages then you won’t be able to receive a notification on due dates and also you won’t get any expense analysis.

Nothing is FREE in this world

While it feels great to get great offers and benefits and freebies, remember that nothing is FREE in this world. Behind everything which looks amazing, there is a business model and the reason why you get those free rewards and offers.

You should be aware that CRED or any other coupon company does various tie-ups and associations with brands and companies and acts as a lead generation company. You are nothing but a lead to some other company and CRED is helping in growing sales for the other party.

They will mostly get something back in return and that’s the business model. Nothing wrong with it, but you as an investor should be aware of what you are getting into.

The discounts and awesome benefits you get from CRED or any other similar app are basically tempting you to spend on the pretext of a “great deal”. If you spend on something which you originally did not intend to buy then it’s an extra expense for you at the end of the day. The coupons are pure rewards only when you were anyways going to spend on something and if you get an additional discount on the deal.

So, we need to be conscious while spending and getting discounts by using CRED coins, it should not happen that you are spending on some unwanted stuff to just redeem Cred coins.

Let’s take my example, I attended two live concerts in Pune, VIP pass of Rs. 5,000 each. No doubt I just paid Rs. 4,000 (Rs. 2,000 each) instead of paying Rs. 10,000. But, if this reward would not be in the pictures so, I would have never gone to that concert and saved Rs. 4,000.

Download the Cred App from here

Who should use this app?

The app is more suitable for the below-given categories of credit card users –

High credit card bill payers
People living in metro cities/tier 1 or 2 cities (most of the rewards are dining out or live concerts)
People who pay credit card bills before the due date (no reward on late payments)

Do let us know if you have any comments or questions regarding the app?

Reduce your premiums by 20% – Zone Based Health Insurance

Posted on October 7, 2019December 18, 2019 by Team Jagoinvestor

Do you know that your health insurance premium may depend on your city? Yes, there is something called “Zone-based premium” in the health insurance industry which I will share in this article today.

For instance, the premium amount for a person aged 30 years, living in Delhi, might be higher than the person of the same age living in Pune. So, apart from age, the sum insured & health conditions, even the city which you mention at the time of health insurance purchase also impacts your premium amount.

Zone-based pricing in Health Insurance

Here is how zone-based pricing works in health insurance premium calculation. Various cities in India are divided into 3 zones at a high level which defines Metro/Tier-1, Tier-2 cities and other rest of the cities (tier 3/4). Here is an indicative list of zones (may vary from insurer to insurer)

[su_table responsive=”yes” alternate=”no”]

Zone 1	Metro cities like Delhi, Mumbai including thane
Zone 2	Tier-II cities like Chennai, Pune, Bangalore, Hyderabad
Zone 3	Rest of India excluding areas falling under Zone 1 and Zone 2

[/su_table]

List of companies which provide zoned based insurance pricing

Given below is the name of health insurance companies which use zoned based pricing model-

Max Bupa Health Insurance
L&T Health Insurance
Star Health Insurance
New India Assurance
SBI General Insurance

Why health insurance companies adopt zoned based pricing?

You will agree that the overall expenses in a metro or tier-1 city are usually higher than a tier-4 city or a comparatively smaller city. Imagine if someone gets treatment for a big illness in Mumbai/Delhi compared to a smaller city like Meerut or Akola. There are various reasons why this happens

Higher Room rent charges
Higher charges for diagnostic tests
Higher doctors fees
Higher stress levels
More prone to lifestyle illness
Higher consultation charges pre/post-hospitalization

The point is that a policyholder living in a smaller city will claim less amount compared to a policyholder living in a bigger city, even if they both have the same amount of sum assured and claimed for the same thing.

Check an example below where we checked the yearly premium for a 30 yr old person for sum assured of Rs 10 lacs for 3 different cities from each zone. You can see how the premium reduces by approx 10% each time for zone 2 and zone 3 cities.

So you can see above that the premiums were as follows

Zone 1 (Delhi) – Rs 9862
Zone 2 (Pune) – Rs 9041 (9% less than zone 1)
Zone 3 (Varanasi) – Rs 8201 (17% less than zone 1)

So you can expect zone 2 pricing to be approx 10% lesser and zone 3 pricing to be approx. 20% lesser than zone 1. This is just approximations, for exact difference refer to policy documents.

Hence the zone-based premium pricing comes into picture. This is exactly the reason why companies charge a lesser premium if you are from a smaller city and vice versa.

What if, a policyholder of a small city wants to avail of treatment in the metro city?

Note that, there is no restriction on the city where one wants to avail of the treatment. In some cases, it may happen that the policyholder might want to go for a better hospital in a bigger city. In those cases there might be some extra amount policyholder has to pay from their own pocket. Like in some policies, if a policyholder of zone 3 (smaller city) avails treatment in zone 1 or zone 2 city, then there will be a clause of co-payment.

It means that the claim amount will not get settled 100% by the insurance company. For eg. If a person of zone 3 claimed Rs. 50,000 for getting medical treatment at Delhi, he will be paid Rs. 40,000 (80% of the claim amount) and balance 20% has to be borne by insured.

This clause changes from company to company and on a zone to zone basis. Please go through the policy document of the health insurance policy to know the exact rules and clauses applicable.

So in case, you do not want that co-pay applicable to you, then you can choose the city as any metro or bigger city of your choice so that you pay the premiums for zone 1 cities, but at the time of providing the address proof, you can give any address.

Important points regarding Zone-based premiums

In case you shift your city in the future, you can always inform the company at the time of renewal, and the premiums as per new zone will apply
In case you port your policy from one insurer to another, it might happen that your premium changes depending on the pricing model of the old/new company.
In zone-based pricing only premium changes depending on the city of residence. It will not change any benefits or other features of the policy.
Note that very few companies follow the zone-based premium pricing model, so please inquire about it.

Conclusion

As you are now aware of the zoning concept, see if there is any scope of using this to your advantage, provided the insurer of your choice provides it for your policies.

Please share what you think about zone-based premium pricing? Do you feel if its the right thing to do or not? Is it useful or not?

Detailed Guide to Pradhan Mantri Awas Yojana (PMAY) scheme

Posted on July 26, 2019December 21, 2019 by Team Jagoinvestor

Have you dreamed of your own house? Are you planning to buy your first house?

But, buying own house is not possible without taking loans and paying heavy EMI’s. However, now it is quite possible for new home buyers with subsidized loan given under “Pradhan Mantri Awas Yojana” which is an initiative by government under “Affordable Housing for all by 2022” in the country. It is also referred as credit linked subsidy.

With this scheme you can buy a new home/flat, construct a house or you can enhance your home by adding room, toilet or kitchen. Till date 15 Lakhs house has been constructed and 75 Lakhs loans has been sectioned under this scheme. The overall structure of the scheme is not easy to understand. So, let’s understand all the elements in simple points.

1. Who can opt for PMAY?

A First time home buyer, who does not have any home on his name or in name of any family member.
He or his family should not have availed any central assistance under any housing scheme of government.
An individual who has a pucca house and wants to enhance it by adding toilet, room or kitchen etc.

Family includes Self, Spouse and Children. But, if daughter/son is earning adults(irrespective of marital status), than he/she will be treated as a separate entity. So, this means even if parents and earning children are staying in a house owned by parents, they can individually opt for PMAY provided he/she doesn’t have nay house own name.

2. What will be the eligibility and subsidy?

Government has categorized different groups taking their annual earning in to consideration, which will be helpful in evaluating eligibility and amount of subsidy. Following table shows different groups and other criteria.

[su_table responsive=”yes” alternate=”no”]

Groups	Annual Income	Maximum loan amount for subsidy	Interest rate for subsidy	Maximum Subsidy Amount	Allowed Area
Economically Weaker Section (EWS)	Upto Rs. 3 Lakhs	Upto Rs. 6 Lakhs	6.50%	Rs. 2.60 Lakhs	30 sq. mt. (322.917 sq. ft.)
Low Income Group (LIG)	Rs. 3-6 Lakhs	Upto Rs. 6 Lakhs	6.50%	Rs. 2.60 Lakhs	60 sq. mt. (645.834 sq. ft.)
Middle Income Group-1 (MIG 1)	Rs. 6-12 Lakhs	Upto Rs. 9 Lakhs	4%	Rs. 2.35 Lakhs	160 sq. mt. (1722 sq. ft.)
Middle Income Group-2 (MIG 2)	Rs. 12-18 Lakhs	Upto Rs. 12 Lakhs	3%	Rs. 2.30 Lakhs	200 sq. mt. (2152.78 sq. ft.)

[/su_table]

*1 sq mt = 10.7639 sq ft

*Maximum term allowed for subsidy is 20 years for all the 4 groups. That means subsidy will be calculated for the term of loan or 20 years whichever is less.

*Interest portion of EMI at subsidized rate will be discounted at 9% to get the net present value of subsidy.

Let’s understand the above table through case studies-

1. If your annual earning is Rs. 3,00,000 and you have taken home loan of Rs. 10 Lakhs for 15 years at 8.50% interest p.a. So, what will be the subsidy amount?

As your earning is Rs. 3 Lakhs, you fall in EWS group. So, You will get 6.5% of interest subsidy on Rs. 6 Lakhs of loan for term of 15 years provided the house area is not exceeding limit of carpet area of 30 sq. mt. The amount of subsidy will be Rs. 2.09 Lakhs (Back calculation – considering EMI at 6.5% on loan amount of Rs. 6 Lakhs for 15 years and interest portion out of it discounted at 9% to get NPV).

2. If your annual earning is Rs.8,00,000 and you have taken home loan of Rs. 20 Lakhs for 25 years at 8.50% interest p.a. So, what will be the subsidy amount?

As your earning is Rs. 8 Lakhs, you fall in EWS group. So, You will get 4% of interest subsidy on Rs.9 Lakhs of loan for term of 20 years and not 25 years (as maximum term is 20 years) provided the house area is not exceeding limit of carpet area of 160 sq. mt. The amount of subsidy will be Rs. 2.35 Lakhs (Back calculation – considering EMI at 4% on loan amount of Rs. 9 Lakhs for 20 years and interest portion out of it discounted at 9% to get NPV).

You can refer the video given below to understand PMAY –

3. Will subsidy be given for existing home loan?

The subsidy under this scheme can be availed on existing home loans sanctioned on or after 17/06/2015 for EWC section and LIG section. And for MIG 1 & MIG 2 subsidy can be availed if loan is section on or after 01/01/2017.

So, if you have an on going home loan which you received in 2017. In that case also you can apply under PMAY to avail subsidy. And the amount of subsidy will be calculated as per your current income earning section i.e. if now you are earning 10 Lakhs then you will fall under MIG 1 and original term of loan will be taken in to consideration.

4. How to enroll to avail benefits under this scheme ?

You can enroll for this scheme online or offline. In offline mode you need to visit the bank from where you want to apply loan or where your home loan is existing, get the form of PMAY and fill & submit the same.

For the online mode you need to follow following steps –

Step 1#: Go to the website of PMAY. Below given page will appear –

proceedure for enrolling under PMAY scheme

Step 2#: Click the citizen assessment drop-down and select the benefits under three components as shown below.

pradhan mantri awas yojana citizen assessment

Step 3#: Once you click the benefit under other 3 components, the below window appears. Now enter your Aadhaar details and or virtual ID and click on check.

pradhan mantri awas yojana check aadhar existence

Step 4#: Once you check your Aadhaar card existence, the below page will appear. Fill the form with required details. To give you a glimpse, screenshot is attached.

information of beneficiary being covered under PMAY slum development

Step 5# Attach required documents

documents required for loan under PMAY scheme

Once your application is submitted, after due examination if you are a eligible beneficiary under PMAY, you will be added to the list of beneficiary. You can find it on the website of PMAY in beneficiary tab. If your name comes in beneficiary list then you need to inform about the same to the bank from where you have granted loan.

5. How will I receive the interest subsidy benefit under PMAY Scheme?

The Bank (where you have applied for a loan under this scheme) will claim subsidy benefit for eligible borrowers from National Housing Bank (NHB). The NHB will conduct due diligence to exclude claims where the customer has submitted multiple requests. Then all the eligible borrowers will receive the subsidy amount to the Bank.

Once the Bank receives the interest subsidy, it will be credited upfront to the loan account. Therefore it is called credit linked subsidy. For example, If the you avails a loan for Rs. 8 lakh and the subsidy received is Rs. 2, 20,000. The subsidy amount (Rs. 2, 20,000) would be reduced upfront from the loan amount (i.e., the loan would reduce to Rs. 5, 80,000) and then you would pay EMIs on the reduced amount of Rs. 5, 80,000.

And also in case your EMI is on going and you are eligible for subsidy. Then you may be offered by your bank for using subsidy as credit so your EMI will be reduced or for reducing the term of loan. I would suggest to go with reducing term of loan.

FAQ OF PMAY SCHEME:

Is woman co-ownership is mandatory for availing subsidy?

Yes, for EWS and LIG class of subsidy woman co-ownership is mandatory whether it be the case of new house or addition of kitchen/toilets etc. And for MIG 1 & MIG 2 it is not compulsory to have a woman co-owner to the house property.

Can I do renovation/up-gradation in an existing house with the help of this scheme?

Yes, you can if you fall under MIG 1 or MIG 2 section. You can not avail subsidy for renovation if you fall under EWS or LIG.

Is it mandatory to fetch Adhaar card details for all the members of the beneficiary family?

Yes, for processing the subsidy under PMAY for MIG 1 and MIG 2, it is mandatory to furnish the Aadhaar card details of all the family members.

I hope this article has helped you in understanding that how one can avail benefits under PMAY Scheme. Please feel free to ask your doubts or queries the in comment section.

Don’t keep too much money in your saving bank account – Here are 2 strong reasons !

Posted on February 21, 2019November 4, 2019 by Jagoinvestor

Today I want to talk about a mistake which we are all guilty of at some point of our life – “Keeping too much money in saving bank account”

I can understand how confident and great we feel when we know that we have a big amount in our savings bank account and if required we can just walk to the ATM and get the money within minutes. Nothing can beat that feeling !, however, there are some downsides to it too.

Should you keep too much money in your saving bank account or not?

I want to talk about 2 problems (one small and one big) associated with keeping too much money in your bank account today.

You must be thinking, how can keeping money in my account be a problem? After all, more money into account is a good thing – RIGHT?

Let’s see

Problem #1 (small problem) – Negative Real Return

Let’s talk about the small issue first.

The money in your savings bank account earns a small interest of just 3.5% per year (in most of cases). Inflation is around 7-8% on average and if you consider that, you are actually earning a negative real return (real return = return – taxes – inflation).

So your purchasing power is only diminishing over time. What you can buy in the future is less than what you can buy today!. If the excess amount you keep in your saving account is very small, then you can dismiss what I said because the excess money in a way serves as your emergency fund, but when you keep big amounts, its an issue.

Impact of inflation on returns

Don’t keep too much money in savings accounts

I have seen investors keeping a very large amount in savings accounts for a very long period of time.

We recently saw the data of one of our client, and he was having 90 Lacs in his saving bank account from the last 4 yrs. He had sold his house because he wanted to purchase a new house, but then he did not finalize the new house for a long time and never invested that money for better returns. It just did not hit his mind! (not taking any action is so EASY)

So he earned just 3.5% on that 90 lacs for 4 yrs, which is around 13.2 lacs of interest (without considering taxes). If only he had put that in a liquid mutual fund or a fixed deposit, he would have earned 26.2 lacs as interest (without considering taxes again).

Which means that he said NO, to that potential extra 13 lacs by just leaving that big amount in his saving bank account.

Now in your case, the quantum of potential loss will be only to the extent of the money you have in your account.

A lot of us, don’t keep 90 lacs in saving bank account (do we even have that much networth?), but its not very uncommon, to see large amount like 3 lacs, or 8 lacs lying in saving bank for many months just because the investors does not calculate the potential loss, or is just lethargic of breaking the status quo (I think, this is the real issue)

What you can do to solve this issue?

The simple approach you can take is, that apart from 4-6 months of your monthly expenses, you can park rest of the money at least in short term debt mutual funds (earns around 8% per annum, with better taxation than a FD) and deploy the rest amount as per your financial goals in other avenues and let it go out of your bank account and your sight.

The 6 months’ worth of emergency fund can be broken into 2 parts, where you can keep one part in saving account and other parts into a liquid fund (earns 6.5-7% and available in 24 hours notice). This is a far better arrangement compared to just leaving all the money in saving bank account.

Problem #2 (Big problem) – That excess money gets SPENT unconsciously

I don’t see many people talking about this 2nd point often and its related to behavioral finance. This is a very big topic, which deserves a whole book, but I will try to cover it quickly here.

Money is like water, it finds its own direction, if you don’t give it one!

Our mind works in a very different manner when we have money lying in front of us. Supply creates its own demand is one of the principles of economics and very much applicable to money. If you have money in a savings account, you can be sure that your mind will come up with every possible reason to spend it.

So if money is lying around in your saving bank account, which can be easily accessed then,

Your TV will look old enough to you and your mind would like to upgrade it for a bigger one
That Amazon Cart will automatically have those unwanted items which you really don’t need (but you feel you need it)
You will feel that you can easily afford to give a bigger and fancier gift when you are invited to a marriage
Those swiggy / uber eats orders will never stop
The next vacation will feel within the reach somehow
The eating out will often happen

In short, your spendings will increase sub-consciously

The human mind is very interesting. You always feel that you are in control of your spendings, but research on this topic has shown that we humans are our own enemy. It’s extremely tough to be in control and think rationally about spending’s especially when you have the excess supply of money.

Your environment and which kind of situation you are in, mostly decides how you will behave and think, not rationally! (you need to exercise right? Did you wake up in the morning and go for the jog if that’s the rational thing to do?)

Let money go out of your bank account automatically each month

The beautiful thing about a recurring deposit or SIP is that it takes away a part of your money out of your sight and makes it tough for you to access it. It creates wealth for you because your manual intervention is not involved in it. You are not taking manual decision each month if you want to save it or not. I don’t claim that manual investing is superior or not, but it looks great on paper, but not in reality.

If you are struggling to save each month, I think 90% of the reason is that you might be trying to do it manually, thinking – “I will save something for sure if I am left with it at the end of the month” . Trust me it will not happen.

Pay yourself first equation

We have had clients, who tell us that they are surprised after 2-3 yrs when they accumulate so much wealth, which happened only because they started a SIP and nothing else changed in their life. It’s a structure that automatically helped them in their wealth creation. Its the battle half won when you want to create long term wealth for meeting your financial goals.

Paytm, Amazon Pay and Cashbacks!

Have you observed that the money you add in your paytm wallet, Amazon Pay or similar wallets gets spent without guilt and so fast. The moment you add it in Paytm or other wallets, you look at that money in a very different way. It’s now “available” for spending (that’s called mental accounting). Well, this is a topic in itself, but I wanted to just make a point that when money is not visible, you think about it totally differently.

Listen to the below podcast to learn more about behavioral finance (its an audio uploaded on youtube) which I did along with Siddhartha K Garg.

You become a bit careless with money and don’t think too much when you have Rs 2,34,965 in your bank account compared to say when you have Rs 12,500.

What you can do to solve this issue?

Here are a few things you can do.

Start your SIP / Recurring deposit 2-3 days after your salary date for your financial goals.
Keep minimal amount in your saving bank account (unless is needed in next few days).
Open a Liquid mutual fund folio, just to transfer the extra cash, and whenever you need it, you can redeem it and get the money in 24 hours
Don’t keep more than 6 months of expenses in your liquid mutual fund.
Try to use cash, if possible and add only small amounts in online wallets.
Artificially create the “Low account balance” especially, when your spouse or you yourself are a shopaholic
Do your financial goals planning and be aware of the future targets to achieve, it will help to know if you are lagging behind in reaching your financial goals
Try to forcefully lock your money in financial products just to win over your ‘lack of self-control’

These were two common problems with having too much money in saving bank account or by any other means. It’s always a great thing to let money get locked somewhere (only that part which is not needed for long term).

What are your views about his topic? Do you agree with what I said?