Query Corner

     Print Edition: March 2012

Money Today readers write in with their financial queries to have the magazine's experts help them out with sound advice.

INVESTING

Q : Markets in India have been unstable in the recent past and have swung unreliably. So, how should an investor view index funds? I think fund managers have performed better than the index over time. Is this a valid argument while investing in mutual funds? -RK Salunke, Nashik
A: For a conservative investor, an index fund is better as there is no risk of underperformance compared with the market as an index fund also has a large cap bias. But over the long term, diversified equity mutual funds would work better.

In a volatile market, a portfolio with mid-cap fund bias would also underperform but could make up when markets go up. It is best to choose a diversified mutual fund with a long-term record of outperformance. It would also be better to invest through SIPs as it would take care of volatility.

Q: I'm 27, married without children and my mother is the only other dependant. I have an outstanding personal loan of Rs 2 lakh to be cleared in two years. I earn about Rs 5 lakh per annum. I have a few mutual fund investments but no life insurance. I was considering LIC Jeevan Anand. Is that a good plan? What should be the ideal sum assured? I want insurance for the sole purpose of cover and not for investment. I also wish to start SIPs in two long-term funds (about 15years). What would be the best funds for this purpose? I can invest Rs 3,000 every month.-David Abraham, Goa
A: Since you are looking at insurance from the sole purpose of cover, you can consider availing a pure term plan. Having said that, Jeevan Anand is a good traditional insurance plan and can be aligned to your retirement need.

As a thumb rule, one should hold 10x of the annual income as sum assured, another alternate is to conduct an elaborate human life value assessment and arrive at the life cover requirement.

For mutual fund SIP investment we suggest the following 2 funds-HDFC Top 200 Fund (large-cap bias) and Sundaram Select Mid-cap Fund (mid-cap bias). This will help diversify your investment within mutual funds into a large-cap or mid-cap fund to get optimised returns.

Q: Which is a better option with mutual funds - growth or dividend reinvestment for 3-5 years? I thought dividend reinvestment is better as one gets more units. So, even if there is a correction, you have more units unlike in the growth option wherein the whole NAV will correct with the number of units being the same. Does this argument make sense? Also, which is a better investment option for 5 years - a flat on a home loan in suburban Chennai or a mutual fund investment? I don't have a lump sum to invest currently. -Pramod T, Thiruvananthapuram
A: Mutual funds are unlike investing in shares. There is no difference in taxation between growth and dividend reinvestment if held for more than one year. For funds, the NAV is the value of the assets divided by the number of units.

When dividend is paid out, it is from the fund's assets and the NAV is proportionally reduced to the extent of the dividend payouts, which means pre-dividend, number of units x NAV will give you the same value as post-dividend. The number of units goes up, but the NAV is proportionally reduced. Dividend reinvestment as a concept came up only because of differential taxation between the two methods.

On your other query, realty and funds are completely different and cannot be compared. Global studies have shown that equities have delivered the best long term returns. However, many investors do not get the timing right. Only proper financial planning can determine whether you should choose realty or funds. If possible, you can look at a combination of the two. Housing also provides tax benefits.

TAXATION

Q: What would be the taxation rules for the following scenario: A company in the US that does not have an office in India wants to hire me as a contractor and I will have to file tax on my own. What is the procedure for filing income tax in India? How can I reduce tax on income and what declaration and documents should I submit? - Madhu Shweta, e-mail
A: Assuming you are a resident taxpayer in India, the first step is to get a Permanent Account Number (PAN). Since, you will be appointed in contractual capacity; you will be able to claim the business expenses as deductible expense, which shall be reduced for the purpose of calculation of your total taxable income. If your total receipts from business or profession shall exceed Rs 15 lakh, you will need to get your accounts audited by a chartered accountant. Due date of filing of return is 31 July. If your accounts are not required to be audited, it is 30 September.

In addition to the business income, any other income, viz., income from capital gains, house or property and other sources would need to be declared and tax to be paid. For reducing tax, investment up to Rs 1.2 lakh can be made under Section 80C/CCF and interest on home loan up to Rs 1.5 lakh is also deductible.

Q: I own a proprietorship business and have taken a Rs 5 lakh loan (through an account payee cheque) from a friend at the time of purchase of a house. In my books of accounts, I have shown this as an unsecured loan. What would be tax implications of this loan?-Vijay Ranjan, Bareilly
A: Since you have taken the loan for the purchase of a house, the interest deduction can be claimed from your taxable income. It cannot be claimed as business expense. Make sure that there is an agreement having repayment and interest terms for income tax purposes. The income tax officer can charge tax on the entire Rs 5 lakh if you are not able to provide evidence to support your claim of a loan from your friend.

INSURANCE

Q: I'm planning to buy a family floater health cover but have a few doubts. What happens to the policy if the proposer (primary) person in the family floater plan dies? Does the policy terminate? -Sahil Kumar, New Delhi
A: With regards to your question, if the proposer or primary person named in the policy dies, the family floater policy can be transferred in the name of another member in the family, as long as that person is over 18 years of age. Rest assured that a family floater policy will not be terminated following the death of the proposer in most cases.

Q: I have a health plan from my employer. However, I plan to increase my cover. What will be the best way to do it----a top-up plan or a new policy -Shruti Prasad, e-mail
A: It is advisable to have an additional health insurance cover apart from the one offered by your employer. At the time of retirement or while shifting jobs, one should have his own health cover to remain insured. It is important to remember that all individual policies include a certain waiting period and are subject to underwriting before they start covering all diseases. Therefore, go for a complete medical check-up before opting for a policy.

Q: I have a floater health plan which covers me, my wife (non-salaried and dependent), my parents as well as my in-laws. Can I show this policy taken under 80D? -Romit B, e-mail
A: Under the present tax regime, the premium paid for health insurance qualifies for rebate under Section 80D of the Income Tax Act, subject to a limit of Rs 15,000. A further exemption is applicable on the health cover(s) bought just for parents to the extent of Rs 15,000 (Rs 20,000 if they are senior citizens). To sum up, you can save up toRs 35,000 under Section 80D of the I-T Act.

Q: I want to avail a floater health insurance plan which covers me, my wife (who is non-salaried and a dependent), my parents (retired) as well as my in-laws (also retired and receiving pensions). Can I show this policy for deduction taken under 80D? -Sanjiv Maheshwari, Pune
A: Under the present tax regime, the premium paid for health insurance qualifies for rebate underSection 80D of the Income Tax Act, subject to a limit of Rs 15,000. A further exemption is applicable on the health cover(s) bought just for parents to the extent of Rs 15,000 (Rs. 20,000 if they are senior citizens).

To sum up, you can save up to Rs 35,000 under Section 80D of the Income Tax Act as an exemption to pay health insurance premium. This may change in the recently proposed direct taxes regime.

REAL ESTATE

Q: My son owns property that was gifted to him by his grandfather (my wife's father). I now plan to take a loan to build a house on the plot as a gift to him. Will I be eligible for home loan benefits? What would be the particulars of the home loan that I can avail as the house will be registered in my son's name? Will I be entitled to tax benefits if I take the loan jointly with my wife? -BP Singh, Noida
A: You can avail of a loan to construct on your son's plot, but he will need to be a co-applicant to this loan. You will be entitled to the appropriate tax benefits even if your wife is a co-applicant. However, the total benefit will be divided between the two of you if she is also a claimant.

Q: I am planning to buy a house. As my finances are limited, I will need a loan. Should I find the property first or get a loan pre-approved? -N Krishnamurthy, Coimbatore
A: It is useful to get a loan pre-approved so that you would have an exact picture of the resources available for buying your house.

Q: I live in a flat for which I am still repaying a loan. Should I invest in other properties to benefit from appreciation in valuation of properties? Only less than 30 per cent of my investment portfolio is realty. Also, should I prepay my loan with the cash that I now have? -Rohit Agarwal, Ghaziabad
A: Yes, real estate is an attractive investment option and should form a part of your portfolio of investments. Also, it is the only asset that can be financed by borrowing. You should determine how much of your investments should be in real estate in consultation with an investment advisor. Also, a home loan is the cheapest source of finance available to a salaried person. As there are other avenues that could provide better returns than the home loan interest you pay, consider investing the money instead of prepaying.

Anil Rego, CEO, Right Horizons has tackled financial planning issues; Antony Jacob, CEO, Appollo Munich, has advised on insurance; Anil Kothuri, CEO, Edelweiss Housing Finance, has responded to real estate related queries and Taxspanner.com has answered tax queries. Log on to www.moneytoday.in to submit your questions.

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