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Print Edition: March 2013

Money Today experts answer your personal finance queries -

INVESTING

Q. Life insurance companies recently launched pension plans with a 'capital guarantee' feature. I am a public sector employee with mandatory contribution to the National Pension System (NPS). So, does it make sense for me to invest in the scheme offered by insurers? -Ankita Virmani, e-mail

A. NPS and capital guarantee pension plans offer similar benefits, including tax benefits under Section 80C, based on what is known of the latter. While NPS has a cap of 50% on the amount that can be invested in equities, experts expect capital guarantee plans to follow similar conservative investment to ensure that the initial investment is safe. Both are low-risk investments. Since annuities from pension plans are taxable, consider monthly income plans that are tax-free and work on similar principles

Q. I have an endowment policy from LIC with a sum assured of Rs 5 lakh for a 21-year tenure. I have paid premium, Rs 2.65 lakh in all, for 8 years and the bonus accrued is Rs 2.4 lakh. The expected return at maturity is Rs 15 lakh. Now, I'm thinking about surrendering the policy. Is this a good idea or should I continue with the policy? -Manoj Rajdhan, New Delhi

A. Buying a life insurance policy is a long-term commitment. It is not advisable to terminate a policy early as the surrender value will be less than the total premium paid. Also, if you surrender the policy, you may not be eligible for the accrued bonus. The accrued bonus is payable only at maturity for most traditional plans.

Q. I have substantial investment in gold, but all of it is in physical gold. How can I earn from this holding without selling it? Can I convert the holding into Gold ETF or e-gold? -Manjeet Oberoi, Mumbai

A. You can consider depositing the physical gold in a gold deposit scheme (GDS) set up by banks. Such schemes are available with maturity periods of three, four or five years and gives 0.75%-1% interest per annum. You can deposit a minimum of 500 grams of gold in gross weight. There is no upper limit for such deposits. As of now, there is no option available to convert physical holding to gold ETF or e-Gold.

Q. I am single, in my late 20s and working in the Middle East. After setting aside money for a family floater plan, and repaying a home loan (Rs 15,000 per month for the next ten years), I still have Rs 45,000 to spare each month. Should I prepay my loan with this cash or should I invest in property or mutual funds? -Paromita S, e-mail

A. Before prepaying a home loan consider the following- interest charged on the loan, required liquidity and available investment options and returns thereof. Investments in mutual funds can return 12-15% on compounded basis in the long term. Since you are young, consider taking more risk and investing in diversified equity funds. An investment in property requires a considerable initial investment and is less liquid. You already own one property and, so, another investment is not recommended.

If your home loan rate is low, invest in mutual funds through a systematic investment plan (SIP) and use it to prepay the loan a few years later.

Q. I am 42 years old and live abroad. My wife and I are returning to India this year. My savings of about Rs 15 lakh is inadequate to buy a house in Bengaluru. So, should I get a loan to buy a house or rent a place for now? My monthly income is about Rs 80,000 while my wife will be earning about Rs 20,000. -Prabal Joshi, Dehradun

A. Consider the following:

a) You buy a house (value Rs 50 lakh): You will need Rs 10 lakh as down payment, which can be taken from your savings and the balance from a home loan. There will be an EMI of about Rs 38,000 for 20 years. Buying a house gives you a tax benefit, wherein you can claim principal repayment under Section 80C and the interest repayment under Section 24 (maximum of Rs 1.5 lakh). Maximum deduction under Section 80C is Rs 1 lakh, which also includes contribution towards PF and insurance.

b) You rent a house: Considering rental prices in Bengaluru, you can find a house for a rent of about Rs 15,000. Rent paid can be used to claim tax deduction.

However, considering you are shifting to Bengaluru, there will also be other expenses. Hence, it would be better to stay on rent for a few years and then buy a house.


INSURANCE

Q. The building I stay in is already insured by the housing association. Will it make sense if I still buy a householder's policy? -Faizal Haq, New Delhi

A. An insurance policy taken by the housing association usually covers the overall structure and common amenities. But, damage to the internal structure due to, say a fire, and the contents of the house will not be covered under this plan. Further, if you renovate your apartment, the changes in the flooring, ceiling and so on will also not be covered. It is therefore advisable to go for an individual home insurance policy. This home insurance plan can be customised as per your individual needs.

Q. My family floater plan covers my parents, me and my sister. However, my sister is planning to marry by the end of this year. Will the policy continue to cover her after marriage? Can the policy be split to cover her? -Suresh D'Sa, e-mail

A. Normally, family floater policies cover only dependant family members. Also, it is not possible to split a plan. So, it would be better to take a separate insurance cover for your sister after her marriage and opt out of floater policy.


REAL ESTATE

Q. The housing project in which I wish to buy an apartment is preapproved by a bank. If I wish to take a loan from a different bank, what documents do I have to submit? -SK Sinha, Benaras

A. A pre-approved project means that the bank has examined the legal documents for the property and has found it in order. The process for applying a home loan remains the same except that it is processed faster for a pre-approved project. Also, a project pre-approved by a couple of banks does ensure a certain standard of quality. You will have to submit documents relating to ownership and approvals for a project that is not pre-approved.

Q. I have availed a home loan of Rs 32 lakh and personal loan of Rs 5 lakh. Would it be possible to top up my home loan to pay up my personal loan? -Aparna Surya, e-mail

A. A top-up loan is likely to have a lower interest rate compared with a personal loan. So, it would make sense to prepay a personal loan with a top-up loan.

Ask your home loan lender to sanction a top-up loan with the house as security. Of course, you will be eligible for a top up only if you have a stable repayment record and your income is sufficient to service both the home loan and the top up. Moreover, the value of the property should also be sufficient to cover both.

Q. My father has a home loan from his employer and the house is registered in his name. Is there a way to convert it to joint ownership and transfer the loan so that the remaining amount can be paid by me. We want to do this as my father wishes to retire early. -Kiran K Reddy, Bengaluru

A. Your father can sell or gift half the property to you. But, change in ownership must be approved by the lender, your father's employer. There will also be stamp duty and registration expenses to be paid (concessional rates if it's a gift).

You can transfer the home loan to another bank by foreclosing it and you can be the coapplicant. Of course, this can be done without you having to become a co-owner of the property. But, you will be able to claim tax benefits on your share of loan repayment only if you are a co-owner.


TAXATION

Q. I deposited Rs 1 lakh this financial year from my NRO account to a PPF account, which was opened before I got NRI status. Can I claim deduction under Section 80C? Also, where will I show the interest earned on NRE deposits and dividend earned on equity shares and mutual funds in my tax returns. Interest income from a savings bank account up to Rs 10,000 is exempt from tax. Is this exemption applicable to interest earned on an NRO account as well. -Sudhanva Atri, Hyderabad

A. Yes, the deduction up to Rs 1 lakh can be claimed under Section 80C of the Income Tax Act for any amount deposited in PPF account during the financial year. The dividend from non-listed firms or companies outside India should be shown under the head 'income from other sources'. The dividend income from listed companies and interest income on an NRE deposit in India should be shown as 'exempt income'. Also, you can claim the exemption of Rs 10,000 on interest income earned on NRO savings bank account.

Q. I had taken an education loan in 2009 and managed to repay it within two years using my salary and money that I had inherited. I am eligible for a raise in April, which will make my income taxable. Can I claim tax exemption on the loan now? -Ravi Menon, e-mail

A. No, you can claim the deduction under Section 80E only for interest paid on an education loan during the financial year. The deduction is available for a maximum of eight years or until the interest is paid, whichever is earlier. Get the interest certificate from the bank to claim deduction. Submit it to your employer to adjust tax deducted at source or claim deduction when filing your tax returns.


Anil Rego, CEO, Right Horizons has tackled financial planning; Harsh Roongta, CEO, Apnapaisa.com has responded to the real estate financing query; 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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