Post Office Monthly Income Scheme ( MIS ) is very popular among the masses, especially those retired.
Its features are:
1. Monthly income at the rate of 8% per annum + 5% bonus on maturity (which works out to be an effective yield of 8.9% )
2. Income is taxable, but no TDS.
Some of its disadvantages are:
1. Interest rates are not in-line with the market rates. As recently as October-November 2008 when banks were offering more than 10% on fixed deposits, the MIS interest rate was still 8%
2. There is a ceiling on maximum investment.It is rupees 3 lakhs for a single account.
3. Cumbersome visits to the post office and sometimes you have to face long queues ( although this can be resolved by following one of my previous post )
4. Restrictions on pre-mature withdrawal. You cannnot close an MIS account before 1 year.
All the above disadvantages can be overcome by employing the Quarterly Interest option offered by Bank FDs. Usually when customers open a fixed deposit ( FD ) with a bank they go for the cumulative option where interest keeps on accumulating and is paid out only on maturity. Instead they can go for a quarterly interest option FD where the interest is calculated and paid out quarterly. Most banks ( public & private ) offer this option of quarterly interest payout, which can also be credited to your bank account.
With a litte bit of self-discipline you can use this Quarterly interest option as a replacement for MIS. Some banks also offer the monthly interest payout FDs but the interest rate on such FDs is usually lower ( by around 0.5% ).
Let's see how we have overcome the above disadvantages of PO MIS by replacing them with Bank FDs:
1. The interest rates are in line with the market rates. If the interest rates in Banks are higher than POMIS, it makes sense to go for Bank FDs.
2. No upper limit on investment.
3. Interest can be credited to your bank account directly.
4. No restrictions on pre-mature withdrawal. You can break an FD whenever you wish to.
Tax-treatment is same as MIS, except for the fact that TDS is applicable.
Thursday, January 15, 2009
NABARD Bhavishya Nirman Bonds
Bhavishya Nirman Bonds ( BNB) are currently on offer from National Bank for Agricultural and Rural Development ( NABARD ).
In their ads, NABARD are proudly claiming an interest rate of 12.18%, but Investors must keep in mind 12.18% being advertised is the simple rate of interest. The compounded interest rate is 8.93%
This may seem a bit on the lower side ( comparing the high interest rates, currently prevalent for Bank FDs ), but it has some benefits vis-a-vis Bank FDs.
Let analyse BNB features to understand it better:
1. Every BNB has a face value of Rs. 20,000/- and the issue price is Rs. 8500/- which means that one can buy the bond certificate for Rs. 8500/- now and encash it after 10 years for Rs. 20,000/-
2. It is a zero coupon bond ( i.e. interest rate offered is 0%), but all benefits come in terms of capital appreciation ( a bond bought at Rs. 8500/- appreciates to Rs. 20,000/- in one year ). Since the income comes in form of capital gains and not as interest earned on deposit, different tax rules apply. The gains are taxable under long term capital gains which carry a lower tax rate.
3. BNB are tradeable on BSE ( Bombay Stock Exchange ) to provide early exit option for investors.
4. But there are no tax savings available under 80C for investments under this bond.
People in higher tax slabs looking for tax savings in terms of lower tax would like to invest in these. But keep in mind tax laws may change!
In their ads, NABARD are proudly claiming an interest rate of 12.18%, but Investors must keep in mind 12.18% being advertised is the simple rate of interest. The compounded interest rate is 8.93%
This may seem a bit on the lower side ( comparing the high interest rates, currently prevalent for Bank FDs ), but it has some benefits vis-a-vis Bank FDs.
Let analyse BNB features to understand it better:
1. Every BNB has a face value of Rs. 20,000/- and the issue price is Rs. 8500/- which means that one can buy the bond certificate for Rs. 8500/- now and encash it after 10 years for Rs. 20,000/-
2. It is a zero coupon bond ( i.e. interest rate offered is 0%), but all benefits come in terms of capital appreciation ( a bond bought at Rs. 8500/- appreciates to Rs. 20,000/- in one year ). Since the income comes in form of capital gains and not as interest earned on deposit, different tax rules apply. The gains are taxable under long term capital gains which carry a lower tax rate.
3. BNB are tradeable on BSE ( Bombay Stock Exchange ) to provide early exit option for investors.
4. But there are no tax savings available under 80C for investments under this bond.
People in higher tax slabs looking for tax savings in terms of lower tax would like to invest in these. But keep in mind tax laws may change!
The cheapest term life insurance
I often advice people not to combine insurance and investment and the only insurance product which offers such a possibility is term life insurance.
First let's try to find out what's term life insurance. Wikipedia has a very good definition for it.
In simple, term life insurance provides you only insurance and you don't get anything at the end of policy term ( on survival ). Hence those who opt for it treat insurance as a cost ( or expense ) rather than an investment.
Recently I came across this page on the personalfn website. This page lists down the premium charged by different life insurance companies in India for term life insurance. As you would notice the lowest premium is charged by SBI Life Insurance ( which is owned 74% by the State Bank of India ).
An year back, when I was evaluating Indian Life Insurance companies to purchase a term insurance plan, I had chosen SBI Life. In hindsight, that looks like an intelligent decision.
To be precise, I had bought the option under which the "Sum assured increases by 5% annually" so that the Sum assured can atleast keep pace with inflation. But after I had purchased this policy I got a shocker. The 5% increase per annum is not compounded as I had thought, but is rather caluclated as simple interest on the original sum assured. Still SBI Life Shield looks the best that is on offer presently, since no other Inusrance company offers this facility of increase in Sum assured annually.
Disclosure: I am not associated with SBI Life in any way, except for the fact that I have purchased SBI Life Shield, their term insurance plan last year. If you are aware of any other Life insurance company offering a lower premium for term insurance in India, please do comment and I will update this post accordingly.
First let's try to find out what's term life insurance. Wikipedia has a very good definition for it.
In simple, term life insurance provides you only insurance and you don't get anything at the end of policy term ( on survival ). Hence those who opt for it treat insurance as a cost ( or expense ) rather than an investment.
Recently I came across this page on the personalfn website. This page lists down the premium charged by different life insurance companies in India for term life insurance. As you would notice the lowest premium is charged by SBI Life Insurance ( which is owned 74% by the State Bank of India ).
An year back, when I was evaluating Indian Life Insurance companies to purchase a term insurance plan, I had chosen SBI Life. In hindsight, that looks like an intelligent decision.
To be precise, I had bought the option under which the "Sum assured increases by 5% annually" so that the Sum assured can atleast keep pace with inflation. But after I had purchased this policy I got a shocker. The 5% increase per annum is not compounded as I had thought, but is rather caluclated as simple interest on the original sum assured. Still SBI Life Shield looks the best that is on offer presently, since no other Inusrance company offers this facility of increase in Sum assured annually.
Disclosure: I am not associated with SBI Life in any way, except for the fact that I have purchased SBI Life Shield, their term insurance plan last year. If you are aware of any other Life insurance company offering a lower premium for term insurance in India, please do comment and I will update this post accordingly.
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:
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
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.
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.
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.
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.
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