Monday, December 15, 2008

Savings Tip: Save on service charges

With airfares becoming unaffordable once again and new airports under development in different cities charging UDF ( in addition to the already high fares ), we middle-class people will have to rely on our "garib rath" the Indian Railways.
Thankfully, now IRCTC offers online booking facility for train tickets and you don't have to stand in queue for hours to get a reservation ticket. But this facility comes with some additional charges ( obviously! )

When you buy a ticket from IRCTC, there are 3 costs that you incur:
1. The ticket fare and reservation cost ( this goes to the Indian Railways )
2. The IRCTC commision ( depends on the class for which ticket is booked, for Sleeper it is Rs. 10 and for Third AC is it Rs. 20 and so on. IRCTC also pays some service tax out of this, but that is not relevant here )
3. The service charges payable to the payment gateway/bank.

We cannot do anything about the first two costs, but the third one depends on the bank you use to make the payment.
Let's have a look at the service charges of different booking for train ticket booking. Go to IRCTC Terms & Conditions and scroll down to section 2.1

This section is divided into two parts:
- Payment by Credit Cards
In this section you will notice that almost all payment gateways charge around 1.8%, but the Axis Bank payment gateway charges only 1.65%
So when paying by Credit Card, you can choose Axis Bank payment gateway for lower charges.
Update 1: A reader has faced problem with Axis Bank with respect to refunds, and he advises not to use Axis Bank payment gateway.

Update 2
: Chinmay Shah has suggested to use Kotak Credit Cards for railway ticket booking. Kotak Credit Cards have the facility of railway surcharge waiver which means no payment gateway charges for Kotak Credit Cards. I'm not sure about the annual fees and other charges of Kotak Credit Card, so do check them out before getting yourself a Kotak Credit Card.

- Payment by Direct Debit
Most of the banks, charge a constant amount ( 10-11 rupees ) but there are some who don't levy any charges. These banks which don't levy any charge are much better than any credit card payment gateway, as the third cost ( in the list above ) is zero now. The list of banks which don't charge any amount for payment by Direct Debit are:
  • Bank of Punjab
  • Punjab National Bank
  • ABN-Amro Bank
  • Federal Bank
  • Syndicate Bank
  • IndusInd Bank
  • Karnataka Bank
  • Bank of India
  • Bank of Baroda
So, if any of these Banks are near to your house, do consider having an account in them with Internet banking facility. Then you can book railway tickets through internet without paying any service charges to the Bank. I personally use Punjab National Bank and till now I haven't faced any issues with its Internet Banking site.

Savings Tip: Flexi RD

Everyone must be aware of RD ( Recurring Deposit ) wherein you deposit a fixed amount of money every month which accumulates into a large sum ( along with interest earned ) over long term ( usually 3-5 years ).

I would like to tell you about another innovative product offered by some PSU Banks which, although known by different names in different banks, I would call as Flexi RD (FRD). I am not aware of any private bank ( like ICICI, HDFC, Kotak Mahindra etc. ) offering such a product. Let me know if any private bank offers it.

Let's have a look at its features:
1. Period of deposit can be chosen at will. But some banks have fixed tenures ( of say 3 years ) for such flexi RD schemes.
2. Rate of interest is the same as that offered for a fixed deposit of the same duration.
3. The monthly deposit can be upto 10 times the initial deposit. Let me try and explain this with an example, say your first installment was Rs. 500/-
Subsequent deposits in the FRD have to be a minimum of Rs. 500/- and maximum of Rs. 5000/- i.e. you may choose to vary the deposit amount provided it remains within the maximum and minimum limits for such deposits
Eg. 1st month - Rs. 500/-
2nd month - Rs. 2500/-
3rd month - Rs. 1000/-
4th month - Rs. 3000/-
5th month - Rs. 5000/-
6th month - Rs. 4500/- and so on.

4. Each of your deposits will continue to earn the same rate of interest, which was decided at the time of account opening.

Now let me explain how you can use FRD to your benefit:
- Open a FRD account in the bank paying a small amount as the first installment. This first deposit must be an amount that you can comfortably pay every month without putting any strain on your finances. For somebody earning a salary of 20,000/- to 30,000/- , an amount of Rs.500/- would be decent enough to start an FRD.
- Open the account somewhere around the end of month ( preferably after 25th ) so that the deposit due date falls near the end of the month. I will tell you the reason for this later.
- Since your initial deposit was Rs. 500/- your limits are as follows:
Minimum : Rs. 500/-
Maximum: Rs. 5000/-
Towards the end of the month, you may have some amount left in your salary account which you can deposit in this FRD account ( only subject to the limits above ). Months during which your expenses are higher, you just contribute the minimum of Rs. 500/- , but during months when your expenses were lower you could deposit a higher amount to FRD account.
Thus, by depositing a flexible amount every month over a period of 3-5 years you will amass a substantial amount on maturity.

Above were listed all its advantages, but I would advise you to keep the following also in mind:
1. The interest earned in FRD is taxed as part of your income (similar to a fixed deposit )
2. Liquidity may be a concern, some banks may not allow pre-mature withdrawal from FRD accounts before maturity ( or may place some other restrictions ). So don't keep your emergency funds in a FRD account.
3. If you happen to be out of town for some time, please make sure that some arrangements are in place to pay the FRD installments in time. Otherwise the bank may levy some fine. This isn't a major concern with PSU Banks, since charges levied by PSU banks still aren't that high.

I would list list below the names by which it is known in some banks:
1. In Corporation Bank it is known as Corp Recur which has a fixed tenure of 3 years.
2. In UCO Bank, it is known as Lakshmi Yojana
3. In Punjab National Bank it is known as Swecha Jama Yojna

Please comment below, if you were already aware of this scheme and the different names by which it is known in different banks.

Tax free bonds are back!

Remember 6.5% tax free bonds issued by RBI, which were dis-continued in July, 2004. Now RBI only issues 8% taxable bonds.

Govt of India has decided to re-introduce tax-free bonds, as part of the stimulus package for the economy. But this time they are being floated by IIFCL and not by RBI.

Its features:
- Comes with sovereign guarantee ( it means that the returns are guaranteed by Govt. of India )
- Coupon rate is 7.5 % ( much better than the older RBI 6.5% tax-free bonds )
- Will have a lock-in period of atleast 10 years
- The first issue will be through private placement, but the subsequently there will be a public issue as well.
- I speculate that they will be listed on atleast on one of the stock exchanges ( probably, BSE ) in order to provide early exit option to investors.

The article in link, also describes how this scheme is going to work:
- IIFCL raises money through these bonds at 7.5%
- IIFCL pays 0.25% annually to the Central Govt. for the sovereign guarantee it offers
- IIFCL lends this money to banks at 8.5%
- Banks can then use this to re-finance infrastructure projects at any rate between 8.5% - 11%

Tax-free bonds are a very good option for HNIs ( High-net worth individuals ) and those in the higher tax slab ( i.e. 30% ). Individuals in the lower tax slab may stick with Bank FDs, since they are offering higher yields presently.

Thursday, December 11, 2008

LIC Jeevan Aastha - an update post

I had previously written a post about LIC Jeevan Aastha policy. You can find it here.

Some (infact all!) of the comments did not agree with my opinion. I would like to answer each of the questions posed by the comments posted.

- I am against Insurance/Insurance companies

I have nothing against Insurance or Insurance companies. Infact I believe that everyone should have himself and his family covered against all types of calamities. Every one should a proper life insurance, accident insurance, mediclaim, home insurance etc. One should also have a proper plan for his/her retirement in place. So you see I recommend everyone to insure himself/herself appropriately.
What I am against is the mis-selling practiced by the Insurance companies and Insurance agents alike. The previous sentence is more true for ULIPs, where mis-selling is more prevalent.
I am also against combining Insurance and Investment. When you combine Insurance and Investment either you don't get sufficient insurance or you miss out on the yield.

- I want to malign LIC

I have no doubt about the service quality and track record of LIC in claim settlement. But you can't ignore the fact that our govt has in the past ( also in the present stock market crisis ) used LIC to shore up the market. You can read one very informative article by Sucheta Dalal .
If the track record of LIC in claim settlement is very good, this does not mean that it cannot be accused of some other mistake it has committed. Its like saying a politician cannot be charged of corruption cases, simply because he runs a charitable school.

- LIC Jeevan Aastha is the best Insurance product

Here again I would like to repeat my previous statement, don't combine Insurance and Investment. If you want to buy Jeevan Aastha as an investment product go ahead and do it. But somebody should not be duped into thinking that it is an Insurance product. A gullible person who buys this with a Basic Sum assured of Rs. 9 Lakhs, may be under the impression that his life is insured for Rs. 9 Lakhs. But in reality, second year onwards, the assured amount would be only Rs. 3 Lakhs+

So I will just rename my previous post to "LIC Jeevan Aastha - Do not buy as an Insurance product" for more clarity.

- and Last of all, a comment says that I am a CA
I would like to reiterate the fact that I am not a CA. Please read the complete disclaimer about this site here.

Automatic transfer from Post office MIS to SB account

Since many people have asked me about this in different forums, I am creating a post on how to transfer the monthly interest earned in PO Monthly Income Scheme (MIS) to an Savings Bank(SB) account.

Please note that to avail this facility you will have to open the MIS and the SB account in the same HPO(Head Post Office). As per my knowledge, this facility of auto credit is only available in Head Post Office and not in all the Post Offices. Every Pin code area has its own HPO.

When opening an MIS ( or even later if you already have an MIS account open ), give a letter to the person handling the MIS counter, stating that you want the monthly interest to be transferred to your SB account. Mention both your MIS and the SB account number in the letter.
Once this facility is activated, the interest from MIS scheme will automatically get transferred to your SB account on the date interest becomes due.
Now, no worries about going to the post office to collect the interest every month. The interest will keep getting accumulated in your SB account.
The Post Office SB account comes with facilities like Cheque book, so you can simply withdraw money from there by depositing a cheque in any of your other Savings account ( in any bank ).

A simple tip, if you don't need the money immediately you can arrange for a scheme wherein the monthly interest gets transferred to a RD ( recurring deposit ) account via the SB account i.e.
MIS ---> SB a/c ---> RD

Post Office offers a 5-year PORD. If you want to transfer to an RD, you will have to give two letters:
1. One letter to transfer monthly interest from MIS to SB account.
2. Second letter to transfer the monthly installment from the SB account to the RD.

Make note of the below points:
- Interest gets transferred from MIS to SB on the date it becomes due.
- But, the installment of RD is transferred into it on the 15th of every month.

PS: A small tip, one month after you have setup this scheme ( after the interest becomes due), do visit the post office to get your pass books updated to check whether this has come into effect or not. Sometimes, even after giving letters to post office authorities, they forget to activate this facility for your accounts.

LIC Jeevan Aastha - Do not buy as an Insurance product

LIC of India has launched Jeevan Aastha on December 8th, 2008. The scheme is open for subscription for 45 days.

You can get the details about this scheme here.

When reading through its features, please make note of the two terms used in this:
Basic Sum Assured - This is insured amount during the first year of the policy.
Maturity Sum Assured - This is equal to ( Basic Sum Assured / 6 )

Thus, if you purchase a policy with basic sum assured of Rs. 3,00,000/- , the maturity sum assured is only Rs. 50,000/-

In a way, this insurance policy is quite stupid and absurd ( truly speaking this does not look like an insurance policy at all ):
1. Decreasing Insurance benefit: This is the first insurance policy I have come across in which the death benefit decreases with the increase in the term of the policy. If you purchase a policy for Rs. 3,00,000/-, then only during the first year the death benefit is Rs. 3 lakhs. Second year onwards the death benefit is in the range of Rs 1 lakh - Rs. 2 lakhs. You can see the benefits illustration here.

2. Guaranteed additions are not on the Basic sum assured but on the Maturity Sum assured ( which is one-sixth of the Basic Sum assured ). So when you read the policy features, keep this thing in mind.

Infact, this looks like another of LIC's tricks to fool the common public. The purpose of this scheme is not to provide insurance, but to mop up huge sums of money from the public so that LIC can shore up the sinking stock market.

Update: This post was previously titled "LIC Jeevan Aastha - Do not buy". To know why I have renamed it, please read this.

Tuesday, December 9, 2008

Why the Employees' Pension Scheme (EPS) is a scam?

Whatever I write below is applicable only to employees of Private sector in India ( including IT and BPO employees ), since Govt. companies have their own separate pension fund ( as far as I know ).

Employees' Pension Scheme (EPS ) is operated by EPFO http://www.epfindia.com/ , the same organisation which handles your Provident Fund( PF ) as well.

12% of your Basic salary goes to EPFO.An equivalent amount is contributed by your Employer as well i.e. in total 24% of your basic salary goes to EPFO.

This amount ( i.e. 24% of your basic salary ) is allocated into different accounts as follows:
1. EPS - 8.33% of your basic salary goes towards EPS, subject to a maximum of Rs. 541/- (i.e. 8.33% of Rs. 6500 )
2. The rest of the amount goes into the PF account.

An example of this allocation can be found in this file.


You earn certain % of interest on the amount in your PF account. The rate of interest is decided by the Board of EPFO. Whatever is the amount accumulated in this PF account by the time you retire, you receive that as a lump sum.

But we are only interested in what happens to the amount deposited in the EPS account. The amount accumulated in your EPS account is paid back to you as a monthly pension after you retire.

Now it's time for some serious number crunching, here we go:

Ram joins a company at Age 25, works there for 35 years and retires at the age of 60.Let's assume his basic salary was Rs. 10,000/- from the beginning of his employement to his retirement.
Since his basic salary was greater than Rs. 6500/- the amount that went towards EPS was Rs. 541/- ( the EPS rules place a cap on the maximum basic salary which is used to calculate your contribution and your monthly pension )

After retirement his monthly pension would be calculated using the below formula:
( Pensionable salary X Pensionable service ) / 70

Here,
Pensionable salary = Rs. 6500/- (remember, EPS rules place a cap on basic salary )
Pensionable service= 35 years ( the number of years he was in service, and contributed to EPS )

So, the calculation yields.
( 6500 X 35 ) / 70 = Rs. 3250/- ( Ram's monthly pension )
i.e. his annual pension is Rs. 39,000/-

So now we need to calculate whether Ram got a fair deal. Whether this monthly pension paid to him was just?

Let's use a recurring deposit calculator, to estimate how much he would have accumulated in his EPS account by the time he retires. We assume a conservative rate of interest 8%

It would be Rs. 12,49,263/-
To calculate:
1.Go to this link
http://www.teacherone.com/Business/recur_deposit/recur_deposit_maturity_calculator.php
2. Enter amount as Rs. 541/-
3. Frequency of deposit: Monthly
4. Rate of interest: 8 %
5. Duration: 420 months ( 35 years X 12 months )
6. Press "Calculate Maturity amount" button. You will get 12,49,263

There are annuity ( i.e. immediate payment of pension ) schemes offered by public and private life insurance companies. Let's take LIC ( a govt. owned life insurer ).
It offers a scheme known Jeevan Akshay which is an immediate pension plan.
http://www.licindia.com/jeevan_akshay_plan_009_features.htm
A PDF printout of the page in this link is here.
Observe the table on top of Page 2 of this PDF file.
For Rs. 1 lakh price, anyone retiring at age 60 can get a annual pension Rs. 9350/- ( constant and guaranteed for his lifetime )

Since Mr. Ram has Rs. 12,49,263/- with him ( I am assuming that the amount accumulated in his EPS account is given back to him on retirement, but as per the rules this does not happen ), let's calculate how much annual pension he can get from LIC. We use the premium calculator available on LIC's website to do this.
1. Go to this link. http://www.licindia.com/premium_calculator.htm
2. Choose Jeevan Akshay from the drop-down.
3. Press on 'Select Product' button.
4. Enter date of birth as 31/12/1947, so that he is 60 years today.
5. Enter purchase price as 1249263 (the amount accumulated in Mr. Ram's EPS)
6. Annuity type is" Annuity payable for life"
7. Annuity mode is yearly.
8. Press on Calculate premium button.

The annual pension is shown to be Rs. 1,21,803/-
This translates into a monthly pension of approx. Rs. 10,000/-

What a scam!!!
A person who deserves a monthly pension greater than Rs. 10,000/- is paid only peanuts ( Rs. 3250/- ) by the EPFO.

This is a scheme by the Govt and for the Govt, to cheat people of their retirement money. Anybody who has the option to take money out of EPS scheme and purchase annuity on his own, will get three times the pension he gets from EPFO.

PS: EPS rules can be found at this link
http://www.epfindia.com/Circulars/EPS95_update102008.pdf

Disclosure: I am not an accountant or CA and the above calculation is as per my understanding of the EPS rules. I am writing this post so that an qualified CA can comment on the above, whether my concerns are genuine. If you know a CA or accountant, please pass this blog post on to him and ask his opinion on it.