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Monday, September 29, 2008

Insurance Cover: Buy travel insurance and enjoy your trip

The vacation season is drawing closer and you’ve made a perfect plan for that much needed break. All nitty gritties have been taken care of and you are sure nothing is amiss. Just one fear remains: What if things don’t go according to plans? One goes on a holiday to unwind, but this fear can play spoilsport.


So what’s the solution? You can either keep your fingers crossed and pray that you have a smooth trip or opt for travel insurance. An increasing number of travelers today are realizing the significance of travel insurance. It is your ticket to a tension-free holiday.


Why travel insurance?


Consider this: You are faced with a medical emergency in a foreign land with no one for help and limited cash — an ideal recipe for a disastrous holiday. Add to this, the fact that the cost of medical treatment in the US and European countries is very steep and you know why travel insurance needs to be a critical part of your travel plans.


If you have such a policy, you effectively transfer the headache of zeroing in on a hospital and paying the bills to a third party — the insurance company. General insurers offer cashless service for hospitalization, which means that you can avail of services abroad though you would have incurred the costs (i.e. premium) in rupees.


If you happen to visit a doctor during your stay abroad for consultation, the amount will be reimbursed to you on the submission of the bill. Apart from medical risks, insurance companies also cover certain other emergencies such as accidents, loss of passport, delay or loss of baggage, missed flights, trip delay or cancellation, missed flights, financial emergencies, home insurance and even hijacking.


Cost of insurance


Four factors influence premium calculations:
- Age,
- destination,
- duration of travel and
- Insurance plan opted for.


Depending on these four factors, the travel insurance premium could vary from Rs 350 to Rs 36,000. Typically, the duration of the policy is in the range of seven to 180 days. Usually, the policyholder is allowed an extension too.


If you happen to travel frequently, you can also buy an annual insurance policy, which will be valid for several trips made during the year. A point to be noted here is that many insurers also provide such policies in collaboration with tour operators. It comes as part of your travel package. If customized, the costs might be higher.


A thorough study of plans offered by various insurers and a comparison of features is the best way of identifying the policy suitable for you. The reputation of these companies in disposing of claims is of utmost importance because at the end of the day what matters to you is the reimbursement of expenses incurred during the trip. “Quality of customer service and product innovation are the key differentiators.”


The key in travel insurance is service, because here, the insurer will have to come to rescue of the insured at the place and the time of the incident’s occurrence. Also, the reach is important. We have a presence in 130 countries, which means more convenience for the customers.


The age factor also needs to be looked into closely. Certain insurance companies insist on medical reports in case of those over 70. You should also watch out for the exclusions and deductibles in the policy. Usually, pre-existing illnesses, addiction to alcohol and drugs, mental disorder, war and warlike situations are not covered by insurers. Also, most insurance policies have a clause wherein the first $100 incurred during the course of an emergency has to be borne by the insured.


Claim settlement


Documents to be submitted for making a claim could vary according to the reasons. If you are seeking a reimbursement for fees paid to a doctor for consultation, the bills will have to produced. Similarly, if the claim is for loss of baggage, a letter from the airlines confirming the same has to be submitted.


Ideally, an insurance company should take between 7-10 days to process. Traveling light, as we all know, is advisable as it reduces the clutter, thereby making the trip more enjoyable. Travel insurance is also a part of this approach, because buying such a policy would mean carrying the worry baggage less.


Insurance cover: Window to the world


It’s summer and time to holiday for many. And international destinations are fast catching up as options, thanks to affordable flight fares and higher disposable incomes. Industry sources put the number of people who traveled to foreign destinations at six million from India. This number is likely to touch the 10-million mark by the year end. If you are one of those, read further.


One of the must-haves before you embark on an international travel is travel insurance. What does travel insurance cover? Like most other mediclaim/health insurance covers, travel insurance covers your expenses on medical treatments. It is similar to cashless service available in case of a mediclaim policy. So you pay for your premium in India in rupee denominations to meet the cost of the medical treatment at the foreign destination.


It’s mandatory to take an overseas insurance in before visa application in all of the 15 Schengen countries, which include France Germany and Finland. This cover could really come in handy as the cost of medical treatments in the US as well as Europe is steep.


When you travel to the US or any European country, you are moving to a higher price index zone. So the local mediclaim policy will not cover you once you cross the Indian peripheries.


And the medical costs are higher outside India. For instance, an appendix operation in India will cost around Rs 50,000 while a similar operation may cost you around $200,000 in the US. America is the most expensive place for medical treatment.


A) Beyond health cover


Now let’s imagine a situation where you land at Chicago and you lose your passport while travelling. That’s the perfect beginning for a disastrous holiday. For all you know, you may not be able to return back home. And typically, by choosing a relevant plan, you could have passport and baggage loss covered as well.


Apart from medical and sickness, travel insurance also covers you against a range of mishaps such as personal accident, loss of checked baggage, loss of passport, personal liability, trip delays or missed flights, financial emergencies, including house burglary while you are away on a holiday.


Once you lose a passport, you to have to visit the concerned consulate at least three to four times. Additionally, you may have to click photographs over and above the application fee. These unexpected inconveniences have costs attached, which these insurance policies cover. Similarly, you could break a flower vase in a hotel, which could cost you $500. The personal liability clause in the travel insurance cover looks after that aspect..


B) Things to look out for:


1) Do you need a high sum?

You may be cautious and sign up for a cover of $1,00,000 or above. But there are sub limits and caps on medical charges as well as checked baggage or lost passport. So read the fine print. Some policies cap the claim amount to be paid for baggage loss at $500 or even lesser, irrespective of the sum insured.

Also, most insurance policies have a clause wherein the first $100 incurred during the course of an emergency has to be borne by the insured.


2) Age Factor

Look at the age limit. Certain insurance companies insist on medical reports in case of those over 70.


3) Exclusions

Some policies do not cover adventurous sports, flying schools and trainees going on sea. There are separate policies for adventurous activities like bungee jumping, parasailing or deep-sea walking. Insurers do not cover even pre-existing illnesses, such as mental disorder or war-like situations. Other common exclusion includes individuals who go overseas for a medical treatment.


4) Claim settlement

Paperwork for claim settlement varies as per the case. For medical reasons, original bills have to be produced. In case of claims for loss of baggage, you have to submit a letter from the airlines confirming it. Insurers claim that they process the claims by 10 days. It’s worth taking travel insurance. After all, it could be your ticket to a safe and peaceful holiday. However, read the fine print to make the best out of your policy. Bon Voyage!

Friday, September 26, 2008

Insurance Basics VII : Money Back Policy - Money Wise

A money back policy has dual benefits of insurance cover and periodic returns

MONEY back life insurance policies rank high on the popularity chart. And for good reason: they offer dual benefits of insurance and redemption of money at regular intervals. But little do people realize that they pay more towards premium amount in comparison to a term policy. Here’s a lowdown on what it takes to buy a money back policy and the issues involved.

FIRST THINGS FIRST

According to life insurers, money back policies fit perfectly in the scheme of things of traditional investors who seek financial instruments that provide insurance and investment, with a low risk element and guaranteed returns. In other words, the plan is meant for individuals who require money at certain intervals in their lifetime to meet fixed long and short-term financial needs (buying a house or car, vacations abroad). “Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, it provides for periodic payments of partial survival benefits during the term of the policy, of course as long as the policy holder is alive.

What makes these products even more attractive is that in the event of death of the policyholder at any time during the policy term, the death benefit is the full sum assured without deducting any of the survival benefit amounts, which may have already been paid as money back components. “Similarly, the bonus is also calculated on the full sum assured.

It is a good safety net for individuals who are in their late 30s or early 40s and are looking at significant payouts after 10-15 years to fund their children’s higher education, marriage and other expenses. It creates a long-term savings opportunity with a reasonable rate of return, especially since the payout is considered exempt from tax except under specified situations.


READ THE FINEPRINT

Before buying a money back plan, insurance advisors recommend that you should carefully check out the actual amount allocated towards the premium, how much of it is going to be accumulated and how much is the insurance company’s charges. The most crucial aspect, they believe, is reading the terms and conditions thoroughly and understanding each clause well.

Also, you should make sure that the periodic payouts are sound enough to meet your anticipated needs. It is also beneficial to analyze the past performance in terms of declared bonuses. Though the past is not necessarily an indication of future performance, it gives a fair idea of the insurance company’s commitment to its policy holders.

Some money back policy provides additional optional benefits such as critical illness benefits, additional term benefit, accidental death benefit and waiver of premium benefit.

Singh points out that an enquiry on the minimum number of years for which the premium is to be paid to keep the policy alive, is also a must check. The tax benefits on the survival benefits may not be available under certain circumstances for example where the premium in any year exceeds 20% of the sum assured. You should watch out for these pitfalls since tax benefits are key to the attractiveness of this policy.


THE FLIPSIDE

One of the primary disadvantages, insurance advisors feel, with money back policies is its low rate of return, when compared to market-linked insurance-cum-investment products. Also, while on the one hand, payout intervals are fixed and helpful for crucial life stage planning, on the other, you don’t have the flexibility to increase or decrease premiums and have a choice of sum assured to suit growing incomes and lifestyle. You don’t have the freedom to change the payout intervals. In case of surrender as well, it offers low paid-up value. For those who like to ascertain the charges of their investment products, it may not be the right choice as it is not disclosed to the policyholder.


MONEY, MONEY

PROTECTED SAVINGS - As the premiums paid are not linked to the capital market
Guaranteed returns

LIQUIDITY - Meet intermittent liquidity requirements at important stages of life stage

LIFE INSURANCE - In case of an eventuality to the insured person

Wednesday, September 24, 2008

Insurance Basics Part VI: Tax Benefits

Tax Benefits on Insurance and Pension


Life insurance and retirement plans are effective ways of saving taxes.
The tax breaks that are available under our various insurance and pension policies are described below:

1 Our life insurance plans are eligible for deduction under Sec. 80C.
2 Our Pension plans are eligible for a deduction under Sec. 80CCC.
3 Our health insurance plans/riders are eligible for deduction under Sec. 80D.
4 The proceeds or withdrawals of our life insurance policies are exempt under Sec 10(10D), subject to norms prescribed in that section.


INCOME TAX GROSS ANNUAL HOW MUCH TAX CAN YOU SAVE?

SECTION SALARY
Sec. 80C Across All income Slabs. Upto Rs. 33,990 saved on investment of Rs. 1,00,000.
Sec. 80 CCC Across all income slabs. Upto Rs. 33,990 saved on Investment of Rs.1,00,000.
Sec. 80 D* Across all income slabs. Upto Rs. 3,399 saved on Investment of Rs. 10,000.


TOTAL SAVINGS POSSIBLE ** Under Sec. 80C + 80 CCC - Rs. 37,389

Under Sec. 80 D - Rs.3,399 , calculated for a male with gross annual income exceeding Rs. 10,00,000.

Sec. 10 (10)D Under Sec. 10(10D), the benefits you receive are completely tax-free, subject to the conditions laid down therein.

* Applicable to premiums paid for Critical Illness Benefit, Accelerated Sum Assured and Waiver of Premium Benefit.


** These calculations are illustrative and based on our understanding of current tax legislations, which are subject to change.Please contact your tax consultant for exact calculation of your tax liabilities.



Tax Rates for Individuals financial year 2007- 08


Total Income RATE OF TAX

Resident Resident Others Senior Women Citizen below 65 yrs
Upto Rs 1,10,000/- Nil Nil Nil

Above

Rs. 1,10,000/- to Nil Nil 10%

Rs. 1,45,000/-
Above Nil 10% 10%


Rs. 1,45,000/- to

Rs. 1,50,000/-
Above Nil 20% 20%

Rs 1,50,000 to

Rs. 1,95,000/-
Above 20% 20% 20%

Rs . 1,95,000/- to

Rs. 2,50,000/-
Above 30% 30% 30%

Rs. 2,50,000/-

In case where the Total Income exceeds Rs 10,00,000, there would be a surcharge @ 10%.Marginal relief is available to assessee whose income just exceeds Rs. 10,00,000.

Education Cess on Income Tax
Education Cess @ 3% will be payable on the amount of income tax (including surcharge).



Planning investments in insurance instruments has always been an important part of everyone's investing exercise. While it is important for individuals to have some risk cover, it is equally important that they buy insurance keeping both their long-term financial goals and tax planning in mind. Insurance polices are often bought between the January and March quarter as they qualify for tax rebates/exemption under Section 80C and 80D of the Income Tax Act. However, investors should not buy an insurance policy just to save on tax, there should be a well thought-out plan behind the purchase decision of the insurance policy.


The first thing an investor should do before buying an insurance policy is to evaluate his insurance needs and then narrow down on the most appropriate policy types. There are many insurance players in the life insurance market. Also, there are many life insurance variants available in the market. Every insurance product has its own positives and negatives, and investors should carefully weigh the pros and cons before making an investment decision. Diversification and building a portfolio of multiple products is one way to deal with this confusing situation.


These are some broad categories of insurance plans available:

a) Life insurance

This product is available in three broad flavors - endowment plans, term insurance plans and unit linked insurance plans (ULIP). Endowment plans provide insurance cover as well as give returns on maturity. These plans invest most of their corpus in corporate bonds, G-secs and the money market instruments. They provide a safe and guaranteed return in the range of 5-8 percent. Child plans and money-back plans are two variants of endowment plans.


Term insurance is a basic pure insurance plan. The premium in this plan covers the risk element (mortality charges), sales and administration expenses. That is why the premium charged in term insurance plans are much lower than the endowment plans. The premium charged in term insurance does not have any savings element and hence the individual does not receive any maturity benefit.


Unit-linked plans invest the corpus in market-linked instruments like stocks, corporate bonds etc. Investing funds in stocks is the basic difference between ULIPs and traditional insurance plans. These funds promises to provide better maturity benefits as historically the stock market gives better returns over a long term. However, one should keep in mind that investments in stocks come with a certain degree of risk of losing money.


Investors should take life insurance cover as early as possible in life as age is one of the key determining factors in deciding the risk premium. Investors should increase life cover as their earnings/responsibilities grow over time. A thumb rule is to have a life cover of 4-5 times a person's annual earnings. Individuals should invest in a mix of endowment plans, term insurance and unit-linked plans to balance the return and risk cover in the limited cash outflow from their pockets.


b) Medical insurance

Medical insurance premium qualifies for income tax exemption up to Rs 15,000. This Rs 15,000 is in addition to the Rs 1 lakh exemption allowed under Section 80C. Medical insurance schemes provide cover against medical expenses incurred in medical treatment.


Plan based on need

It is very important for investors to plan their insurance investments based on their needs rather than hurrying up. Since insurance is a long-term alliance with the insurance company, it is important to check the clauses of the insurance, the history of the insurance company, formalities to file a claim, time it take to process the claims etc. Investors should look for building an insurance portfolio that maximizes their returns and also offers the required risk cover to them.

Monday, September 22, 2008

Compound Annualised Growth Rate - CAGR

If you had invested Rs 1 lakh in a mutual fund five years back at an NAV of Rs 20. Now the NAV is Rs 70. How should youcalculate my returns on an annual basis?



Compound annualised growth rate (CAGR) will be used here to calculate the growth over a period of time. The gain of Rs 50 over five years on the initial NAV of Rs 20 is a simple return of 250 per cent (50/20 * 100). However, it should not be construed as 50 per cent average return over five years.



Formula: CAGR = {[(M/I)^(1/N)] ? 1} * 100



Type in: =(((70/20)^(1/5))-1)*100 and hit enter. M: maturity value; I: initial value; N: time in years. CAGR here is 28.47%.



Also used for: Calculating the annualised returns on a lumpsum investment in shares.

Wednesday, September 17, 2008

Personal Finance: Eight ways to make your Budget Work


  • ACCEPT THE LEARNING CURVE
Living within a budget is an educational curve for any new entrepreneur. Trimming your expenses, knowing how long a pay cheque will last, or how much of a cash reserve to keep around are issues which require skilful management. Knowing these techniques takes time. But a start-up can learn to adjust its budget mostly through practical experience, and what was once a shot in the dark would gradually become a more predictable and useful practice.


  • BE PREPARED TO MISS YOUR ESTIMATES
Knowing that you are going to miss your estimates doesn’t make an entrepreneur unintelligent or a bad businessperson. Instead, a good businessman must in such cases try to miss them intelligently and start thinking of ways this can be corrected at the earliest. To keep things in line as much as possible, try to adjust from some other area within your overall budget to account for the adjustment.


  • WORK FLEXIBLY
As with setting up a budget, sticking also often boils down to a willingness to be flexible. For instance, if your start-up’s revenue does not match what you expected — and there’s a good chance this might be the case in the first few years — trim expenses to compensate. By the same token, if you are taking in more than anticipated, it might be time to invest in better equipment.


  • WATCH YOUR CASH FLOW

If you want to stick to a budget, make sure that your inflow more than compensates for your outflow. Monitor your income closely to make certain that you have adequate funds to pay your bills, particularly if your business is prone to long lapses between pay cheques.


  • ERR ON THE SIDE OF BEING CONSERVATIVE

When setting up your budget, it is always a good idea to overstate your expenses and lowball your expected revenue. Look at budget savers and other ways to lessen the burden on your income, when initially planning your business expenditure.

  • NURTURE A CASH CUSHION
The uncertainty of budgeting — both in terms of income as well as expenses — stands as one of the biggest threats to the survival and success of any start-up. While trimming expenses to the absolute bone is always a good idea, it’s also prudent to set aside income whenever possible. Not only can that money come in handy for predictable expenses, it also can prove an absolute lifesaver, should an unexpectedly high expense suddenly crop up.


  • CHECK YOUR BUDGET EVERY MONTH
It is always helpful to check budget every month and examine your cash flow to make certain your available funds are sufficient to meet your liabilities. If you’re adjusting your budget as you go, it is of some help to have some emergency fund to take care of monthly overruns.


  • BUDGET AS A FORM OF RESTRAINT

Setting up and sticking to a solid budget is the most effective teacher of fiscal discipline there is. But don’t be shy about busting your budget if an occasion should truly warrant it. It’s often impossible to budget for a valuable last-minute seminar or a trip to a trade show to make valuable contacts. If you are too rigid with your budget, you’ll refuse to spend when you really should.

Monday, September 15, 2008

Beware of tax implications on pension funds

1) Voluntary pension fund

Pension funds and retirement planning go hand in hand. A typical pension scheme involves making a voluntary contribution during one’s working life. The pension fund in turn invests it to create a corpus and pays a pension income to the individual on his/her retirement.

A 39-year-old salaried individual contributes Rs 10,000 monthly to an eligible pension fund and is planning to retire at 45 years. On his retirement, he/She will receive a monthly pension of Rs 12,000 from this pension company. His taxation would be as follows:

Pre-retirement, the contribution to the pension fund of Rs 1,20,000 is allowed as a deduction from his taxable income up to an aggregate amount of Rs 100,000 under Section 80C of the Income-Tax Act. He/She being in the highest bracket would get a tax break of Rs 33,900 on this account.

On his retirement, his monthly pension will be taxed as salary at the applicable slab rates. Where He/She opts for a commuted amount of pension at the time of retirement (i.e., lump sum amount instead of periodic payouts), the same will be tax free in his hands.

Commuted amount of pension is determined with regard to the age of the recipient, health, the rate of interest and officially recognized tables of mortality. While taking a lump sum option may be beneficial from a tax perspective, He/She will need to ensure such a commuted amount lasts him a lifetime, unlike a monthly pension, which is anyway assured for life.

2) Employer’s pension fund

The monthly pension from the employer would also be taxed as salary, as discussed earlier. However, where the employee passes away and his family receives a monthly pension from his employer, the tax treatment would differ. This monthly pension received would be taxed as ‘Income from Other Sources’ in the hands of the family member receiving the pension, a deduction of one-third the pension amount up to Rs 15,000 is allowable.

Taxation of lump sum (commuted) pension from the employer on retirement depends on whether gratuity is also given to the employee. Let us consider the example of a person who is eligible for a lump sum pension of Rs 250,000 at time of retirement.

Commuted pension received by this person would be exempt to the tune of Rs 83,333 (i.e., one third of the pension amount) where this person is eligible to gratuity and to the extent of Rs 125,000 (i.e., half) where this person is not eligible to gratuity.

The gratuity this person receives is tax exempt to the extent of half-a-month’s salary (average of past 10 months’ salary) for each year of completed service, limited to Rs 350,000. Where gratuity was claimed exempt in earlier years, only the unutilized portion of Rs 3,50,000 is permissible as exemption.

Friday, September 12, 2008

Financial Planning for Kids

A wise investment plan may help you secure a bright future for your children.

YOU may want to give the best to your children, but lining up the facilities — properly and prudently — is no kid’s stuff. And when it comes to financial planning for them, it’s even more difficult, particularly in the light of rising inflation rate and increasing cost of education and health services. However, if you can account these factors into your calculation before you invest on behalf of your child, you can make the exercise less burdensome and productive. Here’s a guide on the best possible avenues where you can put your hard-earned money and secure a bright future for your children.


  • START EARLY FOR LONG TERM GAINS

Financial Planners hold the view that with ever increasing cost of healthcare and education, the significance of planning for your child’s future has acquired new dimensions. Today, it’s not only about buying an insurance policy but also investing in financial products which give good returns when your children need them the most. Of course, these costs cannot be met just from liquid assets, and hence require methodical planning. The most important thing to keep mind is the objective of investment before taking any decision. One of the best ways is to create a bucket for each of the objectives. This will ensure that you do not deviate and miss the objective. Accordingly, investments need to be done depending upon the cash flow requirements at regular intervals. You should also provide for contingency in case of sudden death of the sole bread earner or for some unforeseen events. Since both the needs will arise at different points in time, two separate buckets will help. Age definitely makes a lot of difference. The earlier you start, the better. So, you can choose the investment product depending upon your need — whether it is to meet the cost of quality education or good marriage.


  • ASSET ALLOCATION WORKS BEST

Financial Planning is important for every individual at every stage of life, especially when you have children. Financial planners hold the view that it is an ongoing process which needs to be reviewed periodically to maintain proper asset allocation mix to meet your goals. The recommended instruments for your child’s portfolio are equities, insurance and fixed income investments. Financial Planners allot a weightage of 30% in direct equities, 20% of SIP in equity MF, insurance 25% (child plan and term plan) and fixed deposits and bonds 25%. Insurance acts as a buffer and meets contingency in your planning, in case equity investments do not provide adequate returns and fixed income acts as a base on which exposure is taken in other risky asset classes. Analysts believe that the asset allocation can vary with time and you should diversify your child’s portfolio accordingly. For instance, if your child is young, say five years of age, and you are planning for his higher education or marriage, you can have a higher equity asset allocation. Similarly, if he/ she is 15 years’ old, probably you can have a moderate portfolio with a combination of both debt and equity for meeting his higher education needs. If it is for wedding, he/ she can have an aggressive portfolio with higher equity assets as the investment will work for a longer period of time.


  • ACCOUNT FOR INFLATION

It’s a known fact that inflation reduces the purchasing power of money and no matter how well you plan, there are chances that the fund you have marked for your children may be insufficient for their future needs. Imagine, the child is five years’ old and you estimated a cost of Rs 10 lakh for his higher education. The value of Rs 10 lakh will be much lesser when the child actually needs the money, which means the requirement will be far higher. Any financial planning without factoring in inflation is like a half-baked cake which will be tasteless. Another concern is the uncertain and volatile investment climate being seen today. Earlier, parents had the comfort of investing in assured return schemes offering 10-12% rates. Since then, these rates have halved and even then the future of assured return schemes, as they exist today, is suspect.


  • INVOLVE CHILDREN IN FINANCIAL MATTERS

Financial Planners believe that as a parent, you should inculcate the concept of savings and value of money in your children. You need not start straight with investment products as awareness is important. It’s important to involve children as you’re planning for his/ her future and you need to understand their interests. You also need to make them responsible for their decisions and plan their career.


  • NO CHILD’S PLAY

  1. Create individual buckets for your objectives. This will ensure you do not deviate and miss the objective

  2. Recommended instruments for your child’s portfolio are equities, insurance and fixed income investments

  3. An ideal portfolio allocation can be 30% in direct equities, 20% in MFs through a SIP, 25% in insurance (child plan and term plan) and the rest in FDs & bonds

  4. Financial planning should factor in inflation, otherwise it will be like a half-baked cake which will be tasteless

  5. Inculcate the concept of savings and value of money in your children

Wednesday, September 10, 2008

Income Tax deduction on donations

Outlines some funds that offer tax deductions on donations

The Income Tax Act permits deductions against donations made for specific purposes. All donations don't qualify fir deductions under the Income Tax Act. Only donations to specific funds and charitable institutions are exempt. An assessee can claim deductions up to specified amounts. The relevant provisions are contained under Section 80G of the Income Tax.

The deduction is available to any taxpayer - individual, firm, company, or HUF. Further, the assessee may be a resident or non-resident. The donations should be made in cash or through a cheque. Donations made in kind are not eligible for a deduction. The amount should be paid during the relevant previous year.

You can claim a deduction if you donate to:

  • National Defence Fund set up by the Central Government

  • Jawaharlal Nehru Memorial Fund

  • Prime Minister's Drought Relief Fund

  • Prime Minister's National Relief Fund

  • Prime Minister's Armenia Earthquake Relief Fund

  • Africa (Public Contributions - India) Fund

  • National Children's Fund

  • Indira Gandhi Memorial Trust

  • Rajiv Gandhi Foundation

  • National Foundation for Communal Harmony

  • A University or any educational institution of national eminence as may be approved by the prescribed authority

  • Any fund set up by the State Government of Gujarat exclusively for providing relief to the victims of earthquake in Gujarat

  • Any Zilla Saksharta Samiti constituted in any district, under the chairmanship of the collector of that district, to improve primary education

  • National Blood Transfusion Council or any State Blood Transfusion Council Any fund set up by a State Government to provide medical relief to the needy

  • Army Central Welfare Fund, Indian Naval Benevolent Fund, Air Force Central Welfare Fund

  • The Andhra Pradesh chief Minister's cyclone Relief Fund 1996

  • National Illness Assistance Fund

  • Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund

  • National Sports Fund to be set up by the Central Government

  • National Cultural Fund

  • Fund for Technology Development and Application

  • Any authority constituted for housing, planning, or improvement of cities

  • A contribution towards the renovation of any place notified by the Central Government to be of historic, archaeological or artistic importance

  • The Indian Olympic Association
In some cases, the net qualifying amount eligible for deduction is limited to 10 percent of the adjusted gross total income of the assessee. In case the aggregate of donations exceeds 10 percent of the adjusted gross total income, the amount in excess of 10 percent is not eligible for deduction.

The amount of deduction is specified for different types of donations and the percentage can be either 50 percent of the amount or 100 percent, as specified. According to the IT Department, employees making donations to the Prime Minister's National Relief Fund, Chief Minister's Relief Fund or Lieutenant Governor's Relief Fund through their employers will be allowed deduction under Section 80G of the Income Tax Act on the basis of the certificate issued by the Drawing and Disbursing Officer (DDO) or employer. The CBDT has clarified that in such cases, the funds will not be required to give individual receipts to employees making contributions through employers.

An assessee must attach a proof of payment in order to claim the deduction. Once a deduction is claimed under this section, the assessee cannot claim a deduction under any other provision of the IT Act.

Monday, September 8, 2008

New mode of payment for IPOs

Retail investors applying for initial public offerings (IPOs) of companies are expected to get a huge relief relating to refunds from such offerings. On Thursday, Securities and Exchange Board of India (SEBI) said an alternate payment system, aimed at mitigating time taken for refunds, would come into effect from Monday. The new system, will ensure that the money of such investors is not withdrawn from their bank accounts but are just blocked till shares are actually allotted to them.

The new system, called Applications Supported by Blocked Amount (ASBA), will be helped by a host of SEBI-certified lenders called Self Certified Syndicate Banks (SCSBs). In the first tranche, three banks — Corporation Bank, HDFC Bank and Union Bank of India — have been allowed to act as SCSBs. “These banks will act as SCSBs in public issues which open on or after September 1 onwards,’’ SEBI noted in a release. The IPO application forms for this payment mode will be submitted to banks which have been selected as SCSBs, the release noted. As of now, both — ASBA and the prevailing system of payment through cheques — would co-exist, SEBI chairman C B Bhave had said earlier this month. The new payment system will allow retail investors to pay only after shares are allotted in an IPO. Earlier, money used to be debited from the bank accounts of retail investors soon after the close of the offer and before the allotment of shares. Under the new system, SCSBs would accept applications under ASBA, only block the fund to the extent of the IPO bid amount and upload the details in the electronic bidding system of the bourses. Once allotment is done, they would release the funds as per allotment of shares. The new payment system will be available only in IPOs taking the book building route.

Additionally, only those retail investors who bid at the cut-off price as the single option and agree not to revise their bids, will be allowed to bid using ASBA.

Friday, September 5, 2008

NRI Corner Part II - Mutual Funds

With India being one of the most promising emerging markets, non-resident Indians (NRIs) have a keen interest in being part of the Indian growth story.

Here are five questions that NRIs tend to grapple with.

Can NRIs invest in mutual funds?

Yes. NRIs can invest in mutual funds in India. But they must do so in Indian currency. The money should be channelised from an account specially designed for NRIs. But all investors, including NRIs, need to have a permanent account number (PAN).

How must one invest so that the money can be taken out of the country?

Payments can be made by inward remittance through funds held in the Non-Resident (External) Rupee Account (NRE) and the Foreign Currency Non-Resident Account (FCNR). Indian rupee drafts can also be purchased from these two accounts and submitted with an account debit certificate from the bank.

NRE accounts must be maintained in Indian rupees but must be opened with funds remitted from abroad. The account can be in the form of a savings or current account or a recurring or fixed deposit. Money can be transferred out of India and interest on income is free of income tax. FCNR accounts are opened and maintained in specified foreign currency: Dollars (US, Canadian, Australian), Sterling Pound, Japanese Yen and Euro. This account can only be held in the form of a term deposit. Just like the NRE account, interest on income is tax free.

How does on invest on a non-repatriable basis?

NRIs wanting to invest on a non-repatriable basis can do so through a Non-Resident Ordinary Rupee Account (NRO). This is a rupee-denominated account and can be in the form of a savings or current account or a recurring or fixed deposit. This account can be held jointly with an Indian resident. What's interesting about this account is that the interest earned on it is repatriable, net of taxes.

What is the tax impact?

The tax treatment for NRIs is somewhat similar to that for resident Indian citizens. Tax is payable when the units of a fund are sold (capital gain) or dividends earned. In the case of equity funds (those with an equity exposure exceeding 65 per cent), short-term capital gain is taxed at 10 per cent. This is for units sold within a year of being bought. There is no tax on long-term capital gain. For non-equity funds, the long-term capital gain is 10 per cent with indexation and 20 per cent without. The short-term capital gain is added to income and taxed at the relevant income tax slab. Dividends are tax-free in the hands of the investor. But a dividend distribution tax (DDT) is directly levied on a debt fund. The latter will make this payment out of the amount that is set aside for dividends. So in effect, the investor proportionately receives lesser dividend, but tax free. Equity schemes are exempted from DDT.

Can investments be done online?

Brokers like ICICI Direct, India Infoline and Share Khan allow you to buy stocks and mutual funds online. The flexibility of having an online account is the convenient monitoring of the portfolio and the ease of transaction. You need not fill a form or issue a cheque every time an investment has to be made. One just needs to place an order online and the amount gets debited from the linked account. The account opening and annual charges are not very high but are at a premium when compared to the rates offered for domestic investors.

Wednesday, September 3, 2008

Credit Card Fraud – Tips For Prevention

  • DON’T give out your credit card number(s) online unless the site is a secure and reputable site. Sometimes a tiny icon of a padlock appears to symbolise a higher level of security to transmit data. This icon is not a guarantee of a secure site, but might provide you some assurance.

  • Don’t trust a site just because it claims to be secure.

  • Make sure you are purchasing merchandise from a reputable source.

  • Make sure the transaction is secure when you electronically send your credit card number.

  • Do your homework on the individual or company to ensure that they are genuine.

  • If you are making online purchase from a previously unknown seller, try to obtain the physical address rather than a post office box and a phone number. Call the seller to see if the number is correct and working. Do not buy from sellers who won’t provide you with this type of information.

  • Don’t judge a person/company by their website.

  • Be cautious when responding to special offers (especially through unsolicited e-mail).

  • Be cautious when dealing with individuals/companies from outside your own country.

  • If anything looks suspicious or if you lose your credit card(s) contact the card issuer immediately and deactivate the card.

Monday, September 1, 2008

Compound Interest

I want to take a loan of Rs 1 lakh to buy a used car. How much will the car cost me at an annual interest rate of 8 per cent for four years?

The compound interest formula can be used here to calculate the final cost, which would include the loan amount and the interest paid. The amount that is actually paid for Rs 1 lakh is Rs 1,36,048.90. The total amount of interest charged for borrowing Rs 1 lakh is Rs 36,048.90.

Formula: Future value = P(1 + R)^N

Type in: =100000(1+8%)^4 and hit enter.

P: amount borrowed;
R: rate of interest;
N: time in years.

Also used for: Calculating the maturity value on lumpsum investment (bank fixed deposits and National Savings Certificate, for example) over a fixed period at a certain rate of interest.

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