Query Corner

Money Today experts answer your queries on everything related to financial planning.
     Print Edition: January 2014
Query Corner

Money Today experts answer your queries on everything related to financial planning -

INVESTING

Q. I want to invest for a diploma, I have two years and can invest Rs 10,000 every month. I have a recurring deposit of Rs 5,000 per month for two years at 9.5% and a fixed deposit of Rs 25,000 for two years, also at 9.5%. Can I hope to get returns of 9-12%? -AK Kalra, Ahmedabad

A. Equity mutual funds are a good option for an investment tenure of 3-5 years. However, in the shorter term, you could see volatility and even negative returns. For a short-term goal, such as yours, equity might not be the right option. You can consider investing in short-term debt mutual funds, which are less risky as compared with equity or, even, fixed deposits if you are in the lower tax bracket. However, with lower risk, you can only expect a post-tax return of between 7.5-8.5% (based on the prevailing interest rates).

Q. The government is planning to launch inflation-index bonds. How does it work? Will there be any tax exemption on these bonds? I'm looking for a long-term investment. Would this suit this need? -R Rajaratanam, Anantpur

A. The principal of this inflation-indexed bond (IIB) is linked to the Consumer Price Index (CPI). You will have to invest a minimum of Rs 5,000 and can invest a maximum of Rs 5 lakh in a financial year. The interest rate is a fixed percentage point over the CPI. For example, as the proposed bonds will yield 1.5 percentage points over the CPI, with the CPI at 10%, the bond's yield will be 11.5%. Interest is compounded half yearly. CPI rate is the reference, but with a lag of three months. For instance, final combined CPI for September 2013 would be reference CPI for December 2013. Taxation on an IIB is similar to that of any bond-interest income will be taxed as per your tax slab. IIBs have a tenure of 10 years. So, it could suit your needs.

Q. I have gold jewellery, valued at about Rs 6 lakh when I purchased it in 2008. I'm told I have to declare its value for taxation. How is it valued and what are the rules? -Dev Singh, New Delhi

A. Valuation of gold is based on the fair market value, or FMV, to calculate wealth tax. Bullion rates on the valuation date is used to determine the FMV of gold and silver. A statement in Form No O-8A is to be submitted if the value of the jewellery does not exceed Rs 5 lakh. However, if it is valued at over Rs 5 lakh, a registered valuer's report must be submitted with Form No O-8. Of course, the report is not binding and an assessing officer can determine the FMV separately.

Q. How do I calculate capital gained from a mutual fund. I have equity, debt and liquid mutual funds. -Akilesh Oberoi, Noida

A. Capital gained on equity mutual fund units that are held for over a year are free of tax, while units held for less than a year are taxed at 15%. Units of debt mutual funds that are held for over a year are taxable at either 20% with indexation or 10% without indexation. Short-term fund units are taxable as per your income tax slab.

Q. Have gold prices stabilised? I have invested in gold mutual funds. Should I stay invested in the fund or sell my units and reinvest the earnings in an equity fund? -Abishek Sahay, Patna

A. The price of gold in India is dependant on its price in the commodity market and the US dollar. Therefore, though gold prices have dropped globally, due to the weakening of the rupee, there has been only a marginal impact on prices in India. This means that it cannot be said with certainty that gold prices have stabilised. We recommend you to have an asset allocation of about 8% in gold mutual funds.

Q. Can I have two term insurance plans from different insurers? If I die, can a claim be made on both policies? -Dibyendu Bhattacharya, Mumbai

A. Absolutely yes, you can. In fact, it is advisable to have multiple term policies, but not more than three, as it acts as a hedge against rejection of a claim. Factor in claim settlement ratio when selecting an insurer. You can opt to break the cover into two or three smaller plans of terms ranging from 10 to 30 years. This means you will have three different plans with different maturities to adjust your cover with changing liabilities.


INSURANCE

Q. My uncle had a heart attack at his home. His doctor has recommended that he be not moved and that a it would be better for him to be treated at his house. His insurance agent has advised him to claim 'domiciliary hospitalisation'. What is this? -Tarun Kumar, via email

A. The medical expenses incurred by a person for treatment taken at his home, which would have otherwise required hospitalisation, can be claimed under domiciliary hospitalisation. It must be on the advice of the attending medical practitioner and he must attest that the insured could not be transferred to a hospital or a hospital bed was unavailable for his use. The doctor's certification is the most important document for your uncle to be eligible to make a claim for treatment at home.

Q. My employer has provided a family health insurance plan for a cover of Rs 5 lakh. I am 33-years-old, with no history of major illnesses, but was recently diagnosed with diabetes. My dependants are my wife and my 4-year-old daughter. Should I take an additional plan? How will my diabetes affect the premium? -RS Panag, Ludhiana

A. The cover provided by your employer is not sufficient in your case. It would be prudent to purchase an individual health insurance plan. Also, it is a possibility that any complications due to diabetes may not be covered by the current insurer. As expected, the diagnosis of diabetes will probably mean a higher premium than standard rates.

It is recommended that you buy a new plan immediately. There might be a two-year waiting period for certain ailments and a four-year waiting period for pre-existing conditions. Disclose your illness in the proposal form and leave the decision of acceptance, loading, exclusion or rejection to the insurer's underwriting guidelines. Compare policies to get one that suits your needs and with the most useful features.

Q. My 63-year-old uncle wants a health insurance policy. He was a central government employee and has a Central Government Health Scheme (CGHS) cover. However, he thinks it's inadequate for his needs. Could you suggest a cost-effective plan, which is accepted anywhere in India? He travels through the year to meet his three children. -K Chandran, Bengaluru

A. Your uncle needs to take a policy soon as most insurers have set the maximum age at which someone can buy a plan at 65 years. The CGHS cover is definitely not sufficient at his age. There are many options available, but keep the following features in mind when making a decision:

1) Ensure the policy allows lifelong renewal
2) Record of efficient cashless claim settlement across an extensive network of hospitals
3) Comprehensive cover for hospitalisation and afterwards, day-care procedures and domiciliary expenses without sub-limits
4) If he wishes to try non-allopathic treatment, a new feature, Ayush, covers some expenses
5) No co-pay
6) No premium loading in case of a claim

(These features are provided by Tata AIG, Apollo Munich, ICICI Lombard and Max Bupa.)


TAXATION

Q. I will be travelling to Australia for six months, from January to June 2014. I will be paid a substantial sum for freelance work there (visa and other paperwork are in order). How and where will this income be taxed if I bring back some of the money to India? -RG Manchanda, via email

A. Your residential status for 2013-14 is (probably) resident Indian as you've been here for over 182 days of this financial year. So, your global income-already earned in India during April-December 2013 plus income you will earn in Australia till March 2014-is taxable in India. If you do have to pay taxes to the Australian Government, you can get it adjusted here. It will be based on the average tax rate for India and Australia. Make sure that you pay your tax liability before filing returns in India (before 31 July 2014).

Q. When should I pay tax on interest from an NRE rupee account? -Ashok Kumar, Kolkata

A. Interest income from an NRE, or Non-Resident External, account is exempt from taxation.

Q. This year, I received salary arrears of Rs 1.35 lakh. This has put me in the 30% tax bracket. The arrears were on account of my salary from 2006. How do I avoid the additional tax? -Riju Jose, Bhopal

A. You can adjust tax on your arrear income as per Section 89. It will be adjusted based on your income tax slab for the assessment year in which you received arrears and the assessment year for which the arrears were given.

Q. How will the new income tax rules on HRA (House Rent Allowance) and rent exemption affect my salary? When does the new rule become applicable? -Vijay Goswami, Mumbai

A. As per the new notification, to claim exemption with regard to HRA, you are required to provide your landlord's PAN number to your employer if annual rent exceeds Rs 1 lakh. If not, you are required to submit a declaration to this effect from the landlord. This notification is applicable from this financial year, 2013-14. In absence of these documents, you are eligible to claim only so much of the HRA deduction that is available on an annual rent of Rs 1 lakh.

Q. What is the new taxation rule pertaining to commodity trading? How will it change how trade earnings is taxed? -Surendra Deo Sahay, via email

A. As per the amendment in law, profit or loss from commodity trading will be taxable under the head 'Profit and Gains from Business or Profession' as 'Normal Business Income'. This amendment is applicable for this financial year, meaning for all trasactions after 1 April 2013. Earlier, such income was taxable only as 'Speculative Business Income'.


(Anil Rego, CEO, Right Horizons, has tackled financial planning; KK Mishra, CEO, Tata AIG General Insurance, has answered insurance queries; and Sudhir Kaushik, Co-founder and CFO, Taxspanner.com, has provided tax solutions.)

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