Financial queries answered: Better to borrow against gold than take loan?

Money Today experts answer your personal finance queries
     Print Edition: February 2014
Query Corner

Money Today experts answer your personal finance queries -

INVESTING

Q. I quit my job to pursue an interest. My income has gone down about 60% to Rs 40,000 a month. I have investments in two large-cap funds and a mid-cap fund (through SIPs) and a unit-linked insurance plan (Ulip). Which should I let go, one of the funds or the Ulip? -Rahul Dagia, Ahmedabad

A. You can take a call after considering the cost of the Ulip after the lock-in period and the liquidity it offers. Some Ulips have lower charges in subsequent years. If the Ulip charges are higher later on, assess if it makes sense to re-invest elsewhere. In addition, keep in mind that liquidity is an important factor since you earn less. Check if the Ulip scheme offers you the flexibility to withdraw a part (or full) of your investment once the lock-in period is over. All of this is assuming that you have completed minimum premium payment tenure for the Ulip.

Q. I am 55 and have two sons. I used some of my savings and have taken a loan of Rs 8 lakh for my older son's education. He will complete his education this year, after which he will take over payment of the loan. Now, the younger son has also been admitted to a foreign university. This will require another Rs 15 lakh. Should I spend more money from my savings or take another loan? I earn Rs 80,000 a month. I have investments in funds worth Rs 15 lakh and savings of about Rs 10 lakh, apart from some gold and property. -Rohit Sharma, New Delhi

A. Considering that you are nearing your retirement age, which is generally between ages 55-60 years, taking an education loan would be the better option. Spending from your savings just before your retirement age might have an impact on the funds available to you once you stop working. However, if you are concerned with reducing debt burden on your son, you can consider funding part of the cost of education from your own savings. In this case, the rate of interest on the education loan is an important factor in deciding the proportion of the cost of education that you will provide from your savings and the amount you will borrow.

Also, as per taxation rules, payment of interest on an education loan will attract a tax benefit as per Section 80E. Hence, your son can also get a tax benefit on his education loan.

Q. I am 30 and I need Rs 5 lakh urgently. I'm thinking of withdrawing my Employee Provident Fund (EPF) savings or I could get a personal loan. Which would be the better option? I earn about Rs 60,000 a month. -Aarati Shah, Pune

A. Getting funds through a personal loan is often an expensive option. So, you could consider withdrawing from your EPF account. However, there are certain conditions under which you can withdraw from your EPF. These are:

>> Education or marriage
>> Medical treatment
>> Purchase of a plot
>> Construction or purchase of a house
>> Repayment of a home loan
>> Alteration or renovation of your house

Each of these have preset conditions to be fulfiled to facilitate withdrawal. If your need does not meet these conditions, you may have to opt for a personal loan.

Q. Which is a better option in the current financial market, a personal loan or borrowing against gold as security? -Chhavi Oberoi, Noida

A. The interest rate charged on a gold loan is lower as compared with a personal loan. The interest rate is a percentage of the market value of the gold you're using to avail the loan. While it varies in a particular range, it is still cheaper as compared with a personal loan. Even the lender or your banker would be more comfortable lending against a security (gold), which is not the case for a personal loan. Even the disbursal of a gold loan is quicker than a personal loan. Although banks do charge a nominal processing fee, the process is easier and less expensive.

Q. My wife and I have separate demat accounts. We buy shares separately and keep these as personal investments. I wish to gift some shares to my wife. How can this be done? What are the taxation rules pertaining to the transaction? -Sandeep Jain, Ahmedabad

A. As per the Income Tax Act, transfer of shares to a spouse is not considered a gift. If your wife sells the shares, any short-term capital gain must be declared along with your income. It will be also be taxed as per your income tax slab. This is because the transfer of shares did not happen for 'a consideration', meaning you were not paid anything in return. If, on the other hand, she plans to hold the stock, any long-term capital gain on it will not be taxable (provided it is sold in the market and Securities Transaction Tax is paid).

Do note that since there is a provision for 'clubbing of spousal income', the transfer will not be a means of saving tax on the stock.

Q. What should I consider when investing in debt funds and what are the risks? Is it better for short-term goals? -Sijoy Abraham, via email

A. Based on the duration of your investment, you have the option of debt fund categories such as ultra short-term, short-term, income, GILT, and so on. The risks involved in investing in debt funds, especially for the long term, are the credit quality of the papers the fund invests in, interest rate fluctuations, liquidity in the economy and the yield-tomaturity on the securities held by the fund.

If you wish to invest for a short duration, consider investing in a liquid fund. These are relatively insulated from interest rate fluctuations. You can also choose a fixed maturity plan, which is the closest to a bank deposit. There will be no interest rate risk if you hold till maturity. Debt mutual funds are especially useful for investors in higher tax brackets. It is most beneficial when you hold for over a year and the return is considered long-term capital gain for taxation.

Q. My aunt wishes to transfer ownership of her apartment, situated in a co-owner society, to my father. However, the society secretary says a gift deed has to be executed between my father and his sister. Is this the only way this transaction can be done? -Manisha Singhal, Amritsar

A. As per Section 122 of the Transfer of Property Act, 1882, a gift is defined as the transfer of 'moveable or immovable property made voluntarily and without consideration'. An offer and acceptance between the parties is required. Hence, if it is not a sale, then a gift deed must be executed. It is also safer for your father to execute a gift deed and register it as such. This would protect against any potential claims to the property.

 


TAXATION

 

Q. I am planning to buy my first house in February. What are the various deductions available on home loans and purchase of a house in the financial year 2013-14 as per Section 80C? Are any other deductions available on the purchase of a house? -Ashok Kumar Singh, via email

A. Tax deduction available on repayment of home loan principal is up to Rs 1 lakh (per Section 80 C) in 2013-14, provided you have possession of the house. Deductions on interest is available as per Section 24 (up to Rs 1.5 lakh) for a house occupied by you and as per Section 80EE (up to Rs 1 lakh). Deduction as per 80 EE is available if, the loan is sanctioned in 2013-14, the amount does not exceed Rs 25 lakh, the cost of house and property does not exceed Rs 40 lakh and you don't own a property when the loan is sanctioned.

Q. I am an NRI working in a Singapore-based subsidiary of an Indian company. I have been given shares under employee stock options (Esops) of the Indian company. I am not on the Indian company's payroll. I have exercised my options by paying from my non-resident external (NRE) account in India. How and where will I be taxed when I sell these shares? -Suresh Naik, via email

A. Since the shares are of the Indian company, transfer of this equity would be taxable as assets being held in India even though you are a non-resident Indian. Therefore, when you sell these stock options, capital-gains tax would be payable in India based on how long you hold the stocks and whether it is listed in India.

Q. How is long-term capital gain and short-term capital loss on sale of shares taxed during the same financial year? -Rajiv Ganguly, Kolkata

A. Short-term capital loss can be adjusted against long-term capital gain. There are two possible situations: One, the shares are not listed in India and Securities Transaction Tax (STT) is not paid. Here, long-term capital gains is not exempt from tax. Hence, short-term capital loss can be adjusted against long-term capital gain. The remaining loss, if any, is carried forward. If long-term capital gains is more than the loss, it will be taxable at 20%.

Two, shares are listed and STT is paid. Since, long-term capital gain is exempt, shortterm capital loss cannot be adjusted against it and will be carried forward. Where income is exempt from tax, loss from the same source of income cannot be adjusted in your taxable income.

Q. I have filed my taxes online for 2008-9. I have the printed acknowledgement and have sent it to the IT Commissioner's office. However, they seem to have not received or processed it. Tax liability is still being shown for 2008-9. What can I do? -Raju Jose, Pune

A. If the Income Tax Department has not acknowledged receiving your ITR V or there is a chance it could not be processed, then return is considered to be not filed. You have to file it again under Section 148 and re-submit ITR V at the earliest.

Q. I am a consultant and have an income of Rs 10 lakh per annum. However, as I just started the consultancy, my expenses are very high as well for this financial year (2012-13). I have bills for Rs 7-lakh worth of business expenses. How can I use these bills to get tax deductions? -KumarSharma, via email

A. In this case, let's assume that the total expenses of Rs 7 lakh has been incurred for purpose of running your consultancy business and that this is including depreciation on assets, if any. If depreciation is not added, please consider doing so. The profit from your consultancy is Rs 3 lakh (Rs 10 lakh -Rs 7 Lakh). Deductions under chapter VI A, ie as per Sections 80 C, 80 D, 80 E, 80EE, will be allowed on profit. The balance income will be your taxable income. In your case, income falls under the 10% tax slab.

 


Anil Rego, Chief Executive Officer, Right Horizons, has tackled financial planning issues; and Sudhir Kaushik, Co-founder and CFO, Taxspanner.com, has provided tax solutions.


 

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