Is premium of Rs 76,000 adequate for the cover of Rs 10 lakh?

You are paying a very high premium for very little cover. To reduce your premium outgo, you can convert your policies to paid-up plans, where the premium stops but your cover continues.

     Print Edition: February, 2010

Insurance

I earn Rs 75,000 a month and have four insurance policies, including two Ulips, one child plan and an endowment plan. I am paying an annual premium of Rs 76,000 for these policies and my cover is Rs 10 lakh. Is this amount adequate?
—Rajesh Ojha, Delhi

You are paying a very high premium for very little cover. To reduce your premium outgo, you can convert your policies to paid-up plans, where the premium stops but your cover continues. However, this is possible only if you have paid premium for at least three years.

You need to raise your insurance cover by at least Rs 20 lakh. Buy a term insurance cover of Rs 10 lakh and add an accidental death rider of Rs 10 lakh. Such a plan for 25 years will cost you about Rs 3,800 a year. If you survive the term, you won't get any money, but the premium is very low compared with other insurance policies. The money you save could be invested in more lucrative options such as equity mutual funds and the Public Provident Fund.

Tax

I worked abroad from February 2008 to March 2009 and invested my savings in that country. Now, I am planning to transfer these to India. What will be my tax liability? Also, I had returned to India for two weeks in November 2008. Will this affect my residential status for the period?
—Harish, Chennai

An Indian citizen who works abroad for over 182 days during a financial year is treated as a nonresident Indian (NRI). Hence, for the financial year 2008-9, your status would be that of an NRI. You do not need to pay tax on the remittances to India from the income earned as an NRI. Also, the overseas stay of 182 days need not be continuous. Even if you came home for a short break, your residential status would remain the same, that of an NRI.

I have bought a life insurance policy in my wife's name and avail of tax benefits on its premium. Can I also claim tax benefits for ELSS investments made in her name? Will the income from these investments be clubbed with mine? Do I have to pay tax when these investments are redeemed after the lock-in period?
—Dipak, Pune

You can claim deduction under Section 80C for life insurance premium paid for self, spouse and children. However, subscription to an ELSS makes you eligible for deduction only if it is in your name, not in your wife's name.

The income from such investments will be clubbed with your income. However, under the current rules, long-term capital gains from equity funds are tax-free. So, the redemption of ELSS units will be exempt from income tax. But the new Direct Taxes Code has proposed to remove all exemptions. It is possible that after it comes into force from April 2011, the gains from ELSS investments will be taxed.

I have exhausted the Rs 1 lakh annual tax saving limit under Section 80C. Is there any other way I can save tax?
—Vivek Kumar, Pune

Following are the deductions that can be claimed besides those under Section 80C:
1. Interest on home loan for self-occupied property up to Rs 1,50,000.
2. Premium on medical insurance paid for self, spouse, children or parents up to Rs 40,000.
3. Interest paid on education loan is fully deductible.
4. Donations to Prime Minister's Relief Fund, etc.
5. House rent paid by a self-employed person can be claimed as deduction up to Rs 24,000.
6. Loss from house property can be set off against salary income.

My wife is a joint holder in my Senior Citizens' Savings Scheme (SCSS) account, in which I have deposited Rs 15 lakh. Can she open a separate account in the scheme after she turns 60? Since she has never been employed, the money will be given to her by me and our children. How will the income from the investment be taxed?
—Prahlad Kumar Wahi, Panchkula

Yes, your wife can invest up to Rs 15 lakh in the SCSS in a separate account, in addition to the joint account with you. Deposits in the scheme are eligible for tax deduction under Section 80C. However, the income received as quarterly pension is fully taxable. If the money is given by your children, the interest income will be taxed in your wife's hands.

The gifts from a spouse are subject to clubbing. If the money is given by you, the interest income will be clubbed with your income. However, if your wife invests the income received from the SCSS, any amount earned from that investment will be treated as her own income and taxed.

What are the rules for qualifying as a resident but not ordinarily resident (RNOR)? According to the RBI, NRIs need not declare their foreign investments to the tax authorities. Is income from these investments taxable?
—D.N. Das, Dubai

To be an RNOR you have to fulfill either of these conditions:
a) You should have been a 'non-resident' in India for nine out of the 10 previous years immediately preceding that year, or
b) You should have been in India for less than 730 days during seven previous years immediately preceding that year.

For a person who has returned to India, the income earned from foreign savings or investment becomes taxable after one year of arrival. So, if you have stayed in India for 730 days in the last seven years, or you have been a 'resident' for two or more years in the last 10 years, then your income from foreign investments will be taxable in India.

I have been offered my first job. As part of the salary package, I am eligible for certain allowances. What is the taxability of various allowances?
—Vinod, Mumbai

The 2009 Budget abolished the fringe benefit tax. So, perks and allowances will now be taxed in the hands of the employees. However, some allowances are exempt from tax. Medical allowance of up to Rs 15,000 a year is tax-free if actual receipts are submitted. Similarly, actual telephone expenses up to a certain limit are tax-free. Conveyance allowance is also tax-free if incurred for official use and certified by the employer. For house rent allowance (HRA), the least of the following is exempt: a) actual HRA received; b) 50 per cent of salary (in metros) or 40 per cent (elsewhere) and c) actual rent paid, less 10 per cent of the salary.

Mutual Funds

I want to invest Rs 1 lakh in mutual funds and also start a systematic investment plan. Which fund should I invest in?
—M.S. Iyer, Kozhikode

The choice of fund will depend on your risk profile. For first-time investors, a good diversified equity fund is the best option. The Fund Report section of this magazine (see page 87) analyses a fund in detail. You can choose from the following funds that we have analysed in the past five issues— Reliance Growth Fund, HDFC Top 200 Fund, DSP Black Rock Equity Fund, Franklin India Prima or IDFC Imperial Equity Plan A.

Avoid investing a lump sum. Instead, put Rs 1 lakh in any short-term debt fund from the same fund house and start a Systematic Transfer Plan in an equity fund of your choice. Under this plan, a fixed sum is transferred from one scheme to another every month. You will earn higher returns, about 6 per cent a year, on the debt fund than if you keep the money in a savings bank account.

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