Tax deduction on HRA

Some conditions to avail a tax deduction on HRA
Employees usually get a house rent allowance (HRA) from employers. HRA is given to meet the cost of rented premises taken by the employee for his stay. A person can claim exemption on his HRA under the Income Tax Act, if he stays in a rented house and is in receipt of HRA from his employer.

The exemption of HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.

The conditions for allowing the exemption on HRA are - the assessee for the rented premises, which he occupies, and he must not own the rented premises, must actually pay the rent.

The amount of HRA exempt is the least of - the actual amount of allowance received by the assessee for the period during which the rental accommodation was occupied in the previous year, and the amount by which the actual rental expense incurred by the assessee exceeds one-tenth of the salary in the relevant period.

If the accommodation is situate at Mumbai, Calcutta, Delhi or Chennai, 50 percent of the salary in the relevant period. If it is situated at any other place, 40 percent of the salary in the relevant period.

Salary, for the purpose of arriving at eligible deduction, means basic salary and includes dearness allowance and commission based on a fixed percentage of turnover achieved by the employee.

The deduction for HRA is not available in case the employee lives in his own house. It is also not available in case the employee does not pay any rent for the accommodation used by him. It will be available only for the period during which the rented premises is occupied by the employee and not for any period after that.

Arriving at HRA

To take an example, during the year 2007-08, an employee resides in Bangalore and gets a salary of Rs 5 lakhs as basic salary and Rs 2.5 lakhs as HRA. He pays an actual rent of Rs 2 lakhs.

In such a case the amount of HRA exempt would be calculated as:

1) Actual HRA received - Rs 2.5 lakhs
2) Excess of rent paid over 10 percent of salary - Rs 2 lakhs less Rs 50,000 (10 percent of salary) - Rs 1.5 lakhs.
3) An amount equal to 40 percent of salary, as the accommodation is in Bangalore - 40 percent of Rs 5 lakhs - Rs 2 lakhs.

As out of these Rs 1.5 lakhs is the least, it will be allowed as a deduction from salary for the year.

In case the accommodation is situated in Delhi the limit of 40 percent is increased to 50 percent. The deduction on HRA is available even in case an employee has his own flat and has rented it out.

Non-life insurers may raise premium rate from next year

Non-life insurance companies say premium charged on policies sold by them is likely to increase from next year because of a proposed change in the way their income is calculated.

The Union Budget for 2009-10, presented on July 6, wants to classify profits or gains made from their investment as business income, which would be taxed at the corporate tax rate. Similarly, loss from the sale of investment can be set off against taxable income.

At present, profits from the sale of investment by non-life insurance companies are not included in their business income. State-owned general insurance firms make a profit of Rs 2,000 crore from the sale of equities on an annual basis.

“It will mean a capital loss of Rs 600 crore. Therefore, the only way insurance companies will deal with it is by increasing the rate of premiums,” said M Ramadoss, chairman and managing director of state-owned Oriental Insurance Company Ltd, at a conference organised by industry body Ficci.

Analyasts say that the intent of the exemption was to provide boost to the market and was intended to be temporary in nature. Adding to this, the recent de-tariffing of insurance companies has made the market open to private players and has led to competitive pricing so the effect on customers, if any should be very limited.

“When the exemption was introduced there was only the government-operated insurance industry, now that there are private operators in the fray,the government has probably chosen to review the exemption in this changed context,” said Amit Agarwal, principal consultant, Price Waterhouse Coopers.

IRDA to come up with revised IPO norms

IRDA Chairman J Hari Narayan on Friday said the regulator would come up with revised guidelines on allowing insurance companies to sell equity under Initial Public Offer (IPO). At present, IRDA norms prohibit insurance firms from tapping the IPO route in the first 10 years of their operations.

Pre-Tax Yield

My brother says that the investment in public provident fund (PPF), which gives 8 per cent, is the best. Isn't 8 per cent a low rate of return?

An investment's pre-tax yield tells us if its return is high or low. The return on PPF (8 per cent) is tax-free. Also, this has to compared with returns of a taxable income to estimate its worth. For someone paying a tax of 30.9 per cent, the pre-tax yield in PPF is 11.57 per cent. At present, there is no fixed, safe and assured-return option that has 11.57 per cent return and a post-tax return comparable to PPF's 8 per cent.

Formula: Pre-tax yield = ROI / (100-TR)*100

Type in: =8/(100-30.9)*100 and hit enter. You will get 11.57%.

ROI: rate of interest,

TR: tax rate, (depends on tax slab)

Also used for: Calculating the yield on an Employees' Provident Fund or any other tax-free instrument.

Insurance firms set to adopt uniform Policy lapsation definition

Policy Lapses In Ulips Higher Than In Traditional Products: Irda

DOMESTIC life insurers may have to adopt a uniform definition for lapsation of insurance policies to give more leeway to policy holders on premium payments. The insurance regulator Irda has recommended a uniform grace period of 30 days for policy holders paying their premium every quarter, half-year or every year. A 15-day grace period has been suggested for policy holders paying monthly premium.

An insurance policy lapses when the subscriber does not pay the premium within the grace period. IRDA has recommended re-instatement of a policy if the premium is paid within the revival period of two to five years, as per the internal practice of the insurer.

Currently, companies have varying definitions on lapsation of policies and this creates a lot of confusion.

The suggestion for life insurers to adopt a uniform “grace period” and “lapse definition” has been made in Irda’s first occasional paper on “Lapsation of insurance policies and its impact on the domestic industry”.


Lapsation of insurance policies is of worldwide concern and impacts all stakeholders. Irda chairman J Hari Narayan reckons that results thrown up in such research studies could help stimulate a policy debate and make course corrections, if need be.

The occasional paper has been authored by a team led by R Kannan, member, actuary, Irda. The recommendations, if adopted by insurers, would give more leeway to policy holders and curb policy lapses.

The study reveals that the lapse rate — in terms of the number of policies — increased from 5.62% in 2002-03 to 6.64% in 2006-07. The lapse rate by premium rose from 4.4% to 6.95% during the period under review.

number of policies and 10% by premium — was also much higher compared to most traditional plans. Ulips are popular savings instruments that offer flexibility to the policy-holder in terms of investment and also a life cover. A part of the premium is invested in equities or government bonds, depending on the choice of the policy-holder. Term assurance products showed the highest rate of lapse, while pension policies had the lowest lapsation rate. The lapse rate for non-medical policies was, however, higher than that of medical covers. When a policy lapses, the policy holder forfeits the premium paid and the insurance cover.

Equity portfolio mix is determined by Risk appetite, investment horizon

A well-known fact about equity investments is that it doesn't rob you of your returns in the long run. In fact, equity has always been kind to those who have showed patience and the perseverance to be invested during tough times. While such a strategy is gainful in the long run, it also needs a careful selection of funds. Diversification of risk among different schemes is an unwritten rule for a perfect investment strategy. In addition, one has to follow a few tips for building a good equity portfolio.
Diversify according to risk appetite

While diversification is a prerequisite, divide your portfolio according to your risk appetite and investment horizon for the portfolio. For instance, splitting the corpus among five diversified funds will be meaningless as all funds will have similar investment strategies. Hence, diversification has to be according to your needs. One of the smarter options could be to divide the portfolio into short-term and long-term, and then choose funds according to the tenure. While higher allocation is recommended towards debt for the short-term fund needs, equity can be for the long-term corpus.

Regular review

Within a long-term portfolio, the choice of equity options needs to be monitored more regularly, as the prospects of equity is associated with the prevailing economic environment. While equity can be expected to generate 12-15 percent returns over the long term, they can vary during the intermittent periods and hence need a close watch. In the case of stocks, the monitoring will have to be more regular as not many companies have the potential to run a cycle of 10-15 years without hiccups.

In the case of mutual funds, the monitoring may be less demanding though funds too have been going through cycles with respect to their performance. Investors can be more relaxed when they opt for diversified funds as the basket of stocks is much wider in the case of these funds. Also, your portfolio is less prone to sectoral risks, which is the case with a sector fund.

Hence, a long-term investment allocation can focus on diversified funds with good track records. Choose your funds carefully, and rely on their past performance and investment strategies. The allocation in favour of diversified funds could be towards large and mid-cap.

Combination of themes

For mutual fund investors, the advantage of investing in a fund is that they have a wider range of products to choose from as mutual funds have a wide basket of schemes. Besides dividing the portfolio between long-term and short-term, build the portfolio across themes. For instance, a larger portion can be towards large-cap funds in the current environment. This share can be as high 60-75 percent. The balance can be in favour of balanced funds, gold, debt and income funds. However, income funds need to be for a period of 1-2 years as their performance is directly dependent on the interest rate environment. Since interest rates go through cyclical performance pressures once in 5-7 years, they should not be considered for long term wealth creation. In fact they should be looked at only during interest rate peak seasons as has been the case at present. Also, they should be avoided when the rates are in an up trend.

In the case of stocks, the portfolio creation should be a combination of growth and cash flow. The latter is met by dividend stocks which have a good track record. Typically, these companies should have a history of good dividend record over a period of 2-3 decades and should be priced well. A high dividend-paying company with a huge market price may not be of any help as they will not allow you acquisition in large numbers.

Must Know about Stocks

What are stocks and shares?
Many people fall in to the misconception that stocks and shares are different things but they are just different ways of saying the same thing (stocks generally used in America, shares used in England). A stock or share is basically just a stake in a companies capital, ie if you have own a share you own basically own a tiny bit of that company.

What is a dividend?

A dividend is nothing more than a share in the underlying profit's of a company. Most companies pay dividends quarterly (four times a year).Its generally the larger especially blue chips stocks which pay dividends. The choice of buying and owning a stock that pays a dividend is up to the individual investor. There are both positive and negative aspects that come with receiving dividend. A company offering dividends is likely to be a larger stable one offering a lot less potential for growth.

Share Types

When consider to purchase stocks and shares it is handy to know that there is generally two different types of shares that you can purchase.

• Preference shares/preferred stock

The first is known as preference shares/preferred stock. Preference shares provide a specific dividend that is paid before any dividends are paid to common stock holders. They also take precedence over common stock in the event of a liquidation. Disadvantages are that preference shares do not enjoy any of the voting rights of common stockholders also the dividend never fluctuates even in times of prosperity.

• Ordinary shares/common stock

The second type are known as ordinary shares/common stock. They are the most common form of share. An ordinary share gives the right to its owner to vote at the annual general meetings of the company. Since the profits of any company can vary from year to year, so can the dividends paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good years they may be substantial.

ADR's (American Depositary Receipts)

Put simply an American Depositary Receipt (or ADR) represents the shares of a foreign company trading on US financial markets. The stocks of a variety of non-US companies trades on US exchanges through the use of ADRs. They enable US investors to buy shares in foreign companies without having to undertake cross-border transactions. An investment bank will generally buy the shares on the foreign exchange and then apply to list them on the U.S market's.

Share Status

When you are evaluating shares potentially to invest in, it is important to understand that different shares have different status'. Generally there are two different types

1) Blue chips
2) Penny share.

Blue chip shares will generally have proven track record's, as well as having a track record of proven dividend payment's.

Penny shares are generally new companies that generally have recently been bought to the market. As a result they are generally smaller companies and as a result have a higher element of risk.

These are the 5 main elements that you need to be aware of when you are looking at evaluating potential investment opportunities with reference to individual stocks and shares.

Motor Insurance - Think Street Smart

Motor insurance is not just a legal requirement. Read the fine print before signing on the dotted lines to save money
AT A TIME when motown customers are facing heat over high fuel prices and soaring interest rates, shouldn’t they strive to extract every penny they spend on their automobile purchase? Valid question, you may say, but most customers choose to ignore an important component while purchasing a vehicle — motor insurance. They just consider it a legal requirement without which they can’t bring their new vehicle on road. Indeed, motor insurance is a necessity which covers you against damage to your own vehicle and damage to the third party.

Broadly, there are two types of auto insurance —
1) Comprehensive policy and
2) Third party insurance.

1) Comprehensive policy

In comprehensive insurance, you get full cover for every possible damage, including dents, technical problems, repair, accidents and even for car theft.

To make sure that an individual gets the best deal while buying an insurance policy, he/ she should make sure that the policy is a comprehensive one. The policy should have cover for the loss or damage to the vehicle or accessories due to natural calamities such as fire, explosion, self-ignition or lightning, earthquake, flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost landslide, rockslide, burglary, theft, riot, strike, malicious acts, accident by external means, terrorist activity, any damage in transit by road, rail, inland waterway, lift, elevator or air and others, head, motor insurance of ICICI Lombard. Too exhaustive a list, but you never know when an emergency would strike.

2) Third party insurance

In third party insurance, your cover is limited to the claims payable to the third party in case of an accident. Incidentally, third-party insurance is the only insurance compulsory under the law. The other type of insurance is called ‘third party theft’ insurance. Here the premium is less than comprehensive cover and you get insured for the theft of the vehicle. But make no mistake here. Consumers opting for this type of insurance don’t get any cover for repairs and other damages.

Consumers should also keep in mind that third party insurance is mainly offered by government-owned companies such as General Insurance, New India Assurance, United India Insurance and Oriental Insurance. Though private companies such as Iffco Tokyo, Baja Allianz, ICICI Lombard, Royal Sundaram, Tata AIG and others also offer third party insurance, they generally don’t push these since they are not very lucrative for them. Though none of the policies cover medical expenses, the Motor Insurance Tribunal covers medical claims on account of loss of salary income due to hospitalisation or any other disability. There exists a personal accident cover for individual owners under optional accident cover.

Now, once you have decided on which type of insurance you plan to take, you should be clear on some issues to enable you to take informed decisions. Though almost every dealer from where you buy your vehicle offers you insurance at the showroom only, you have the right to choose your own insurance company. You may be able to save some money by choosing a company different from your dealer as now different companies offer different rates and discounts with the de-tariff regime in place.

In this regime, insurance companies have the option to offer you rates lower than other players. Of course, you just don’t have to jump the gun. Check various companies for the rates and discounts and then negotiate with your dealer. If you have a good history — like your vehicle has had no accident in the past or if you haven’t claimed bonus in the previous years — then the auto insurance companies will give you further special rates. The region where the vehicle is bought also plays a role in deciding premiums as some locations have higher risk profiles.

Continuity of your vehicle insurance is also important. The gap in your insurance policy will not go well with insurance companies and you may have to shell out more premium. Also, always check if you have cashless facility and make sure that your nearby workshop or garage is covered under it. The cashless option will save you from the hassle of tedious claim reimbursement procedure.

Another must is that you should never take the agents’ word for granted and ensure you get the best deal. Incidentally, companies such as ICICI Lombard and Bajaj Allianz also offer interest-free instalments for the premium payment if you are paying online.

So the next time you buy your dream car, don’t forget to look into the finer points of insurance.