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Query Corner

     Print Edition: May 2012

Money Today experts answer reader queries on tax changes, loan buying, real estate issues, insurance policies etc.

INVESTING

Q: I earn Rs 1 lakh a month and have four insurance plans, 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? I am married and have a daughter. -Adil Ahmed Khan, Lucknow

A: The life cover is on the lower side, you could increase that to Rs 50 lakh, depending on age and risk profile. A plain vanilla term cover should work. Choose the one that has the lowest quote and coverage for the maximum years. Further, for your child's education and marriage the child plan alone may be insufficient. If your current Ulips are the older ones with a higher cost structure, consider closing these. You can choose to invest in the revamped ones or look at alternative investment avenues based on your goals.

Q: I am a 23-year old mass communication graduate earning Rs 38,000 per month. I wish to start investing immediately for the long term. I am sure of being able to save as much as Rs 15,000 every month. What do I start with if I am interested in mutual funds? Also, I might need cash in the short term (1 year) to fund an additional diploma, for which I need Rs 50,000. Are there investments that can raise this money in the current market? -Druv Mahajan, e-mail

A: You can start off by investing via systematic investment plans in equity mutual funds. Since you are a novice investor, we suggest you invest in low-risk equity funds (largecap). For the stipulated amount of Rs 15,000 every month, you can choose about four funds, one of which can be a gold fund-HDFC Top 200, FT India Dynamic PE FoF, IDFC Premier Equity, HDFC Gold/Goldbees are options.

For the amount that you would need for further education, you need to park it in liquid investment avenues. Consider investing in one-year fixed maturity plans, monthly income schemes or term deposits.

If you do not have such cash now, decrease your SIP to Rs 10,000 and have a SIP in liquid or liquid-plus funds. HDFC Cash Management Fund and Reliance Money Manager are options. When investing in equities, look at a time frame of 3-5 years.

Q: I am 34 years old. I have been investing in five equity-diversified funds for the past three years via SIP. Presently, since the Indian market is not cheap and some global markets are at a much more attractive valuation, would it be wise to invest in some international funds via SIP. Should I discontinue a fund to do so or add another fund to my portfolio? Which global funds would be good investments? -Jeevan Zacheriah, Thiruvananthapuram

A: Global cues have been negative and most economies have come down to attractive valuations. However, investing in international funds alone is a risky call. One needs to time the entry and exit appropriately, just like in the case of sector funds. From a diversification perspective, you could include a fund or two into your portfolio. Some of the options that you could consider within this theme are Principal Global Opportunities, Kotak Global Emerging Market and Sundaram Global Advantage.

TAXATION

Q: I have been working abroad for three years and moved back to India in July 2011. I have received salary till the month of June, cashed my leave salary and earned a bonus in April 2011 from the former company. Should I pay tax on the bonus received in April 2011 as it pertains to performance for 2010? Is the encashment for 60 days leave received in June 2011 (50 days from 2008, 2009, 2010 till 31 March 2011 and 10 days from April to June 2011) taxable? Also, is gratuity earned during employment abroad taxable? Should I notify the new employer of these payments to calculate deduction for the year 2011-12? -Sukpat RG, e-mail

A: Your status as per the income tax rules is that of a resident so any income accruing abroad but received in India will be taxable in India, meaning the leave encashment received in India will be taxable in India. The leave salary will be exempt to the extent of minimum of the following amounts-Rs 3,00,000, ten months' average salary, cash equivalent of un-availed leave calculated on the basis of average salary of maximum 30 days leave for every year of actual service rendered or leave encashment actually received at the time of retirement.

Exemption under the gratuity fund can be availed only if the amount is invested in the approved gratuity fund. You should notify your present employer about the gratuity so that he can deduct your taxes accordingly or else you will have to pay the taxes with interest at the time of filing the income tax return.

Q: I want to gift my wife some shares. Will either of us have to pay income tax? If my wife sells these shares, how will the profit be taxed? -Sapnil Diwakar, Mumbai

A: In case the gift is received from a spouse, it is not taxable. So, when you get the shares, you will not be taxed on them. But if your wife sells such shares then the income arising from the sale will be clubbed with your income.

The taxability of the profit will depend upon the following conditions: Under the Income Tax Act, the capital gain on the transfer of shares is treated as short-term capital asset if the same is held for less than 12 months. The units held for more than 12 months are treated as long-term capital asset. Long-term capital gains is exempt from tax. Short-term capital gains are taxable at a base rate of 15 per cent (increased by education cess of 2 per cent and secondary and higher education cess of 1 per cent). If a transaction is not covered by STT, the long-term capital gain tax rate would be 10 per cent without indexation or 20 per cent with indexation, depending on which the assessee opts for. Short-term capital gains on such transactions are taxable at normal slab rates.

Q: I was recently granted NRI status. Is the interest earned by the deposits in my accounts abroad taxable in India? I send part of my income to my family and have investments in India that have been funded through my earnings abroad. -Pankaj Mathpal, Pune

A: An NRI has to pay tax only on Indian income and foreign income is exempt from income tax in India. Indian income comprises any that accrues or arises (or is deemed so) in India or which is received (or deemed to be so) in India. Therefore, any income because of investments made in India will be taxable as Indian income.

This means that interest income from a foreign bank account is not taxable. Also, anything given to relatives, in cash or otherwise, as a gift is also not taxable in the hands of NRI.

INSURANCE

Q: Our car was involved in an accident while being driven by the driver. We purchased the car nine months back and have insurance. The cost of repair is about Rs 13,000. Is it better to claim so early in the policy term? Does it matter that the driver was responsible? -Gaurav Singh, New Delhi

A: In case no claim is made during the policy period for a full one year, the insured is entitled to a no-claims bonus on renewal of the policy. If the cost of repairs is lesser than the same, it is advisable that you do not claim and enjoy better insurance history. It does not matter if the driver was responsible unless a clear deliberate act leading to damages on the part of the driver can be established. Some general insurance companies also offer an add-on insurance cover which protects your no-claims bonus, even when you have a claim. You may consider buying such an add-on cover to cover a similar situation going forward.

Q: I am travelling to Russia and will be carrying electronic gadgets such as a smartphones, an iPad, my kindle reader and a laptop etc. Can all my gadgets be insured? -Gautam Marat, e-mail

A: Personal gadgets may not be insured on a stand-alone basis under a travel insurance policy. However some insurers cover personal gadgets in transit under an 'all risk' cover. It is a stand-alone policy that includes protection of electronic gadgets against fire and allied perils along with burglary, theft and accidental damage during transit.

Q: I had purchased an insurance policy with a sum assured of Rs 30 lakh and had purchased a rider for accident double benefit. The rider cost me close to Rs 6,000. I am employed with the Merchant Navy. However, I came across a policy by the same insurer (general insurance) which offers equal to that of the rider cover included-Rs 30 lakh for myself, half of my cover for my spouse and one-fourth of my cover for two children for a marginally higher premium. Should I discontinue the rider? The new policy offers an increase in sum assured of 5 per cent per year up to a maximum 25 per cent for no additional rise in premium if I hold onto the policy. -Mohan Menon, e-mail

A: While switching your investment from one product to another, it is recommended that you look at the sum insured, product features and additional benefits attached with it.

If your general insurer is offering you a cover which will give you coverage up to the sum insured that you had as a rider with your life policy, evaluate the general insurance product from your insurer. That also gives you an option to continue the general insurance policy even if you were to discontinue your life policy in the future. It is however recommended to check with your life insurer if the discontinuation of the accident double benefit rider would affect your primary life insurance policy or result in any penalties. Factor in these costs to make the final decision.

REAL ESTATE

Q: I made an LTCG of Rs 25 lakh in March 2012. I have a house loan on another property, which was taken in October 2010 and possession of the house was in February 2012. Can I save on LTCG by repaying the home loan as I took possession in February 12? -Thomas Mathew, Kochi

A: Yes, you can save on capital gains tax on theRs 25 lakh made as you have invested the amount in purchasing a new house within one year of the sale of the property you gained from.

For the purpose of claiming exemption, the new house or property should be purchased within the specified time as per the Income Tax Act. Moreover, the source of fund is irrelevant for claiming exemption. This means that even if you borrow the funds required for purchasing a new house, you can still claim exemption.


Anil Rego, Chief Executive Officer, Right Horizons has tackled financial planning issues; Gaurav D Garg, Managing Director & Chief Executive Officer, Tata AIG General Insurance, has advised on insurance and Taxspanner.com has answered tax queries.

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