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www.livemint.com New Delhi, Mumbai, Bangalore, Kolkata, Chennai, Chandigarh*, Pune* Monday, January 11, 2010 Vol.4 No.

10 Vol.4 No.9 Rs. 3.00 24 PAGES

CHAPTER 1: 80C investments


CHAPTER 2: ELSS advantage
CHAPTER 3: Life insurance
CHAPTER 4: New pension system
CHAPTER 5: Health insurance

SENSEX Ææ® NIFTY Ææ® DOLLAR Ææ® EURO Ææ® GOLD Ææ® OIL Ææ®

TAX
FRIENDLY
INVESTMENTS 2010
It’s that time of the year when many of us rush to invest in tax­friendly
products that get us the 80C deduction. Unfortunately, most of us get
taken in by noise of products that scream to be bought. We listen to the
noise and forget to hear our own needs. Money Matters analyses the
tax products in the market and help you cut through the clutter to find
the best ELSS, insurance and retirement schemes.
MONEY MATTERS 15
CHAPTER 1: 80C INVESTMENTS MONDAY, JANUARY 18, 2010, DELHI ° WWW.LIVEMINT.COM

TAX SPECIAL MORE OPTIONS

11 tax­savers to choose from There’s much more to


Don’t get conned into buying one more insurance plan this year. There are 10 other products you can deductions than 80C
choose from and get the same Rs1 lakh tax kick. In some of them, you don’t even need fresh investment
B Y A S TAFF W RITER
B Y M ONIKA H ALAN feedback@livemint.com
monika.h@livemint.com ····················································
·························
T he most popular deduction is the Rs1 lakh knock out under

T he office accounts guy


calls. And you know the
task you’ve been avoid-
ing is now staring at you. It’s
tax saving time and your dead-
section 80C. But there are six other deductions under sec-
tion 80 that you may need to use to reduce your taxable income.
And, of course, using your home loan as a tax deduction tool is
always a great idea. Not only do you get a deduction of up to Rs1
lakh under the 80C umbrella on the principal, but the interest up
line is approaching. to Rs1.5 lakh is tax deductable too. If you rent the house out, the
Amazing coincidence, the in- entire interest is a deduction.
surance agent happens to call
just then. Luck, by chance. And
you find yourself signing a new 80D
policy document. One more pol- The government wants you to have a safety net
icy to keep with the several oth- that will give you cash in case of a medical
ers you already own. But did you emergency that requires hospitalization.
know that there are several oth- Therefore, the premium you pay on mediclaim
er—non-insurance—products reduces your taxable income up to a limit. You
that can get the same tax benefit can buy a policy to cover yourself, your spouse,
that an insurance policy does. dependant children and parents and claim a
Even within insurance, there are deduction under section 80D. The maximum deduction you can
plans that get tax deduction and claim is Rs15,000 a year. A mediclaim policy for a family of four
work better as a life cover. But with an individual cover of Rs2 lakh costs around Rs5,031 a year. If
these remain the financial you are a senior citizen, you get a higher limit of Rs20,000 a year.
world’s best kept secrets. And if you are paying the premium for your parents (who may not
Here’s a run down of products be dependant on you), the government shows its approval by al-
that get you the Rs1 lakh deduc- lowing you a joint deduction of Rs35,000 a year. That’s quite
tion. In some cases, you don’t enough for building a safety net for the health needs of your family.
even need a further outflow of Tip: Cash payments don’t work. You need to pay by cheque to
money to get this tax break, you get the deduction.
can claim it on existing invest-
ments. We’ve split the products 80DD
according to the risk-return at- Up to Rs50,000 a year can be taken as a deduc-
tributes and spending. tion for spending on the medical treatment or
specified insurance scheme of a dependant
Zero-risk products (spouse, parents, kids or siblings), who has a
These carry either a govern- disability, including blindness, hearing im-
ment guarantee or have a fixed pairment, locomotor disability and mental ill-
interest payout. The first two ness. This is for up to 40% disability. For “se-
products should form the core vere” or 80% disability, you can claim up to Rs1 lakh. The deduc-
of your 80C investments. And tion is not for the actual expenditure, but the whole amount is a
if you exhaust the entire limit deduction. Look out for a full review on Friday.
in this, no need to buy more. Tip: You need to submit a medical certificate (issued by a
1. Employees’ Provident specified medical authority) with your tax return.
Fund (EPF): The first scheme
that you get to buy the minute 80E
you begin work as an employee. The entire interest payment on a loan to fund
Under this, 12% of your basic (in- all fields of study after passing senior second-
cluding dearness allowance and ary or its equivalent exam from any school,
retaining allowance, if any) goes JAYACHANDRAN/MINT
board or recognized university can be taken
to this fund and your employer as a deduction. The loan can be taken for
matches this by 12% of his con- and post offices: One of the bug Look out for a full review on loan, kids’ fees and other run- yourself, your spouse or kids or even for a kid
tribution. From your employer’s bears senior citizens had with Tuesday. away expenses? You can actu- of whom you may be the legal guardian. The
contribution, 8.33% goes to- section 80C was that it leaned Return market­linked ally use two of your expenses deduction carries on for a maximum of eight years or till the in-
wards the Employees’ Pension towards the younger genera- Duration 3­year lock­in to fill the 80C tax break bucket, terest is fully paid off, whichever is earlier.
Scheme (EPS) and 3.67% to EPF. tion by giving tax breaks for Safety market and fund without spending more. Tip: Remember, the loan should be from the “approved” list of
Your EPF earns a tax-free inter- long-term corpus building manager risk 9. Tuition fees: School fees of charitable institutions or a notified financial institution.
est that is currently 8.5% a year. products or on home loans. .................................................................................................... up to two kids (trust the gov-
It’s not a good idea to reduce There was nothing that al- ernment to push its two-kid 80G
your PF contribution, as some lowed a retired person to earn 7. Unit-linked insurance agenda in tax break deals as Even charity gets your money back. Depend-
employers may suggest, since an income and yet get a tax plans (Ulips): A hybrid product well!) can become part of your ing on who you give to, half or the entire do-
you get an investment option break. The extension of specif- that includes an insurance cover section 80C tax kick. Pay by nation can become a deduction from your in-
that is one of the best in India in ic five-year bank and post of- on your life along with a market- cheque and keep the receipts come.
terms of risk- and tax-free return. fice deposits to come under linked investment plan. The to file along with your return. Tip: You need a receipt from the eligible in-
Return 8.5% section 80C fills this gap. The premium needs to be paid for a 10. Principal on home loan: stitution to get this deduction.
Duration working life current rate of interest is be- minimum of five years. Ulips Up to Rs1 lakh of the principal
Safety zero risk tween 5.70% and 8.25% a year. work only in the long run of over on your home loan can be used 80GG
Return 5.70­8.25%
................................................................................. 9-10 years. Given the non-trans- as a deduction. Spouse is a co- The rent you pay to live in your house gets you
Duration 5 years parency and non-portability of owner and borrower? You can a tax break as well. To be eligible, you should
2. Public Provident Fund Safety zero risk the product in its current state claim double that. not own a residential accommodation in India
(PPF): An 8% 15-year cumula- ..................................................................................... and sustained mis-selling in the or abroad. The deduction you get is the least of:
tive recurring deposit that is fair- industry, we do not recommend Special case of insurance • Rs2,000 per month, or
ly illiquid and is good to use as a 5. Senior Citizens Savings that you use this vehicle for your 11. Life insurance premium: • 25% of your total income, or
long-term corpus building tool. Scheme (SCSS): It allows a re- 80C tax break. Look out for more Anybody who’s been working • Excess of rent paid over 10% of total income
Risk- and tax-free today, maxi- tired person having a lump sum details on Ulips and other insur- for over 10 years is holding a Tip: Remember that you will need receipts to go with the re-
mize your contribution to to invest it at a reasonably good ance plans on Wednesday. minimum of two to three life in- turn to get this deduction.
Rs70,000 this year, irrespective of interest rate. If you are 60 years Return market­linked surance policies. The first one
whether you need the tax break old (or took voluntary retirement Duration 5­year lock­in will have a premium of around 80U
or not. The new direct tax code at 55), you can put up to Rs15 Safety market and fund Rs5,000, the next could be For the physically and mentally challenged,
rules will apply from next year lakh for five years in this scheme, manager risk Rs10,000 and a more recent one there is a deduction of Rs50,000 for having
and we don’t know the exact earn 9% interest a year and get ................................................................................. could be Rs60,000 a year. Tot up 40% of an “approved” disability, such as blind-
treatment of old accounts today. the 80C benefit on Rs1 lakh. In- the total sum assured or life cov- ness, hearing impairment, low vision and
Rs70,000 a year for 15 years at 8% terest, however, is taxable. 8. New Pension System er, and you find you are holding mental retardation. This rises to Rs1 lakh for
will give you Rs19 lakh. Tax free. Return 9% (NPS): This is a new, market- under Rs 10 lakh of life cover. 80% disability. The individual does not need to
Return 8% Duration 5 years linked vehicle for those who do The flaw is firmly in the submit any proof of medical expenses. The en-
Duration 15 years Safety zero risk not have an EPF facility to tar- manner in which life insurance tire amount is a deduction.
Safety zero risk ........................................................................ get long-term retirement plan- has been sold in India all these Tip: You can’t claim under this if you have already used sec-
............................................................................. ning. Money Matters likes the years—as a tax-break. It was tion 80DD.
Market-linked products product due to zero front not what cover you needed,
3. National Savings Certifi- 6. Equity-linked savings loads, tiny annual charges, full but what you needed to save to 80C and 24(B)
cate (NSC): Through this, Rs1 schemes (ELSS): These are di- portability between schemes get the tax break decided the Your home on loan: the biggest deduction of
lakh grows to Rs1.6 lakh in six versified equity mutual funds and fund managers. Although premium. them all
years. The interest generated that allow investors with risk- NPS comes under section So, we hold endowment and You take a home loan and open a whole box
each half year is treated as “re- taking ability to target a higher 80CCD, the available deduc- money-back plans that carry a of claimable deductions. The loan can be
invested” and becomes part of return. You are locked into the tion is up to Rs1 lakh under return of 3.5-4%. We would used to get a section 80C deduction. This
your overall 80C contributions. investment for three years, but section 80C. Look out for a full have been better off holding a means that you need not invest in any insur-
But if you have exhausted the the long-term capital gains are review on Thursday. PPF account. But the agent ance plan or provident fund but use the entire
cover, you need to pay tax on zero tax. Return market­linked never told us. The only insur- Rs1 lakh to soak up the 80C tax break from the principal due on
the interest. You can choose a lump sum Duration lock­in till age 60 ance cover you need to cover the loan. If your spouse is a co-applicant on the loan, he can
Return 8% investment route or a systematic Safety market and fund your life is a term insurance claim up to Rs1 lakh as well.
Duration 6 years investment plan. The average re- manager risk policy. New policies in the An additional Rs1.5 lakh each can be claimed by your spouse
Safety zero risk turn in an ELSS scheme over the ................................................................................. market cost as little as and you on the interest due on the loan, if you live in the house.
....................................................................... last three years was 8% and over Rs10,000 a year for a Rs50 lakh Already, on a joint loan and property, the deductions are at Rs5
the last five years was 22%. Or Spending-linked cover. The premium comes lakh. It gets even better if the house you own is on a loan and is
4. Fixed deposits for a dura- Rs1 lakh invested five years ago Starting life with a home under 80C as well. So, no more rented out. The entire interest due on the loan becomes a de-
tion of five years with banks will be worth Rs2.7 lakh today . loan, a car loan, a furniture insurance this year. ductible expense for you and your spouse.

Disclaimer: The articles and data in Money Matters aim to help readers with their money­related decisions. Each person will have a unique solution that would fit his personal situation, and we advise you to work with a certified financial planner before you buy a financial product.
MONEY MATTERS 15
CHAPTER 2: ELSS ADVANTAGE TUESDAY, JANUARY 19, 2010, DELHI ° WWW.LIVEMINT.COM

TAX SPECIAL
MONEY GURU
Sixequity­linkedsaving schemes Gautam Nayak
Partner—Contractor, Nayak & Kishnadwala Chartered Accountants

to choose from this tax season Direct taxes code will


Among tax­saving vehicles, these are the most efficient full­equity options that investors have. We list
out three schemes each in the lower and higher risk categories to help you choose good ELSS schemes
change tax planning
B Y K AYEZAD E . A DAJANIA
T he direct taxes code (DTC) is expected to be effective from
1 April 2011. The draft DTC has already been circulated
and gives an idea of what to expect, though actual provisions
kayezad.a@livemint.com
························· may be different. DTC would have a major effect on the taxa-
tion of investment income. To get prepared for this, one
I nvestors seeking the section
80C tax kick would do well to
look at the track record of some
would need to understand and factor in the likely effect.
The dividend on shares would continue to be exempt from
tax and the company would continue to pay dividend distribu-
equity-linked saving schemes
tion tax. However, capital gains on the sale of shares would
(ELSS) in the market. Well-
neither be exempt nor subject to a concessional rate of tax. All
picked schemes have turned
types of capital gains, whether on shares held for a consider-
Rs1 lakh invested 10 years
able period of time or for a short period, would attract tax at
ago into at least Rs7 lakh
the slab rate which applies to each individual. The only benefit
now.
available would be that of indexation of cost for shares held for
a long period. This long period would not be 12 months, as is
Why ELSS?
the case under the current law, but 12 months from the end of
One, it is the only
the year of acquisition of the shares. One may, therefore, con-
efficient, full-equity
sider selling shares that have appreciated considerably before
tax-saving vehicle.
DTC kicks in so that the gains thereon are not taxed or are
The New Pension
taxed at lower rates. One can always buy these shares later and
System allows just
get the benefit of higher cost.
50% investment
There seems to be a drafting
into equity, while
mistake as far as mutual funds
unit-linked insur-
(MFs) are concerned because
ance plans (Ul-
the discussion paper on DTC
ips) are non-
envisages taxation of investors
transparent, non-
on income distributed by an
portable and
MF. However, the draft provi-
mired in mis-sell-
sions indicate that income
ing.
earned by investors in respect
Two, the three-
of MF units, including income
year lock-in for
distribution and capital gains
ELSS is the short-
on sale of units, would be ex-
est among compa-
empt from tax. There is also no
rable products. You
provision for any income distri-
get zero tax status
bution tax in respect of in-
on long-term capital
comes distributed by MFs, nor
gains and dividend.
any tax on the MF itself. Therefore, the benefit of total exemp-
tion would be available not only on equity-oriented MFs, but
What to buy?
for all types of MFs—an unintended benefit indeed. Therefore,
Crowded with over 30
MFs would remain attractive.
ELSSs, most of them
The deduction for savings is being increased to Rs3 lakh, but
dangling the dividend
restricted to only four types of investments—provident fund
carrot, the ELSS mar-
(PF) and superannuation fund approved by the Pension Fund
ket may get confusing
Regulatory and Development Authority, life insurance and
for you. The only filter
New Pension System (NPS). Equity-linked saving schemes,
you should use is con-
home loan repayments, five-year term deposits with scheduled
sistent performance.
banks, National Savings Certificates (including interest accru-
Don’t get attracted by
ed thereon), senior citizens savings scheme and five-year post
dividends ever because,
office time deposits would no longer qualify for deduction.
typically, ELSSs declare
Not only that, the proposed move to the EET (exempt ex-
dividends around this
empt tax) method of taxation means that all investments eligi-
time of the year.
ble for deduction at the time of investment would be taxed at
Money Matters helps you
the time of withdrawal along with income thereon, irrespec-
decide by doing the numbers
tive of whether deduction was actually obtained or not. All
and background search. The
withdrawals—principal contribution and interest—from a PF,
six funds we shortlisted fall in
superannuation fund, and NPS would be taxed at the time of
two groups. Three of them are
withdrawal. The only saving grace is that the accumulated
conservative equity funds having
balance as on 31 March 2011 in a PF would not be taxable at
lower risk. The others carry
the time of withdrawal.
slightly higher risk, but also have
In life insurance policies, the maturity proceeds would not
the potential for higher returns.
be taxable only if the premium payable each year is less than
Conservative funds: HDFC Tax-
5% of the sum assured and the proceeds are received on the
Saver, Franklin India Taxshield
completion of the policy period or on death. Amounts received
and Fidelity Tax Advantage are
under money-back policies or endowment plans during the
conservative ELSS schemes ILLUSTRATION BY JAYACHANDRAN; GRAPHIC BY AHMED RAZA KHAN/MINT
policy period would effectively get taxed. There is no provision
and have given good returns.
for exemption for policies taken before DTC, and, therefore,
One of these can form the core tor—about 27% at present. This 9% in March and then back to Suzuki India Ltd) and stuck to
one may end up paying taxes on the maturity of old policies.
of your ELSS portfolio with an is because the fund manager 5% in May. Its exposure to the it despite the fall in 2008. Its in-
So, all the carefully-designed investments plans would need
investment up to Rs50,000. feels that banks still have a financial services sector was vestments in engine maker
a complete relook before these proposals come into effect.
Launched in June 1996, wide market to penetrate. Its 20% in May 2008, went down to Cummins India Ltd and Hon-
Fresh plans would need to be drawn up to factor in the
HDFC Taxsaver is one of the investments in lubricant maker 7% in June and was back up to eywell Automation India Ltd
changed tax effect on one’s investments.
oldest open-ended tax-saving Castrol India Ltd and agro- 28% in October the same year. also benefited the fund. It has
Queries and views at feedback@livemint.com
funds in the industry. Its more chemical company Rallis India Its investment in Tata Mo- reduced its exposure to the
than 13 years old and still Ltd in early 2009 paid off well, tors Ltd, Mahindra and Mahi- consumer goods sector in 2009
packs a punch. along with its earlier invest- ndra Ltd and Hero Honda Mo- on account of increasing its in-
Franklin India Taxshield has ment in home appliances man- tors Ltd during falling markets vestment in more aggressive
given steady returns across var- ufacturer Whirlpool of India of 2008 helped the fund even sectors, such as information
ious time periods. The fund’s Ltd. during the 2009 market rise. technology and industry mate-
strategy to limit its mid-cap ex- Return-kicker ELSS funds: The However, its investment in rials. The fund is well-diversi- Dividend reinvestment in ELSS locks your money forever
posure to around 25%, its pref- three funds under this category Satyam Computer Services Ltd, fied across sectors and has a
erence for large-cap stocks and come with more risk but do hit it in the first quarter of 2009. good mix of large- and mid-cap Your equity­linked saving scheme again for yet another three years.
a well-diversified portfolio en- have the potential of higher re- It seems to be on a recovery stocks. (ELSS) fund carries a lock­in of This way, you get into a vicious cy­
sures that the fund does well in turn. Put up to Rs50,000 in one path now; in the past six Though Religare Tax Plan is three years. However, if you choose cle of perpetual investment.
falling markets. of the three: Sundaram BNP months, it returned 40% a relatively new kid on the the dividend reinvestment plan (in­
Launched in March 2006, Fi- Paribas Taxsaver, Religare Tax against the category average of block, having just completed stead of growth or dividend), there The way out
delity doesn’t have a long histo- Plan and Birla Sunlife Tax Re- 37%. At present, the fund has three years, we feel it has a is a good chance that a portion of Most fund houses allow you to
ry yet, but has managed consist- lief 96. high holdings in industrial and good future. With a corpus of your investment would get switch from a dividend rein­
ent performance. It’s a diversi- Sundaram Taxsaver proved energy sectors as fund manager just over Rs100 crore and fund locked in forever. vestment option to a divi­
fied fund that invests in sectors its critics wrong when it man- Satish Ramanathan feels they manager Vetri Subramaniam’s dend option. For this, you
and stocks across all market aged to lose just 48% against would bode well in a rising good track record, the fund did The problem need to write a letter, re­
capitalizations. Fund manager the category average of minus economy. well in both the falling markets Historical records show questing for a change and/or
Sandeep Kothari manages a 55% during the 2008 crash. De- Birla Sun Life Tax Relief had of 2008 and rising markets of that every ELSS fund de­ fill up a “change in option”
portfolio of around 60 to 70 spite being a fund that was a disappointing 2008 because 2009, despite having around clares a dividend at least once slip at the bottom of your ac­
scrips, which could be a chal- geared to a rising market, its its investment calls in the capi- 56% investments in mid- and during any given three­year period. count statement.
lenge going ahead as the fund’s agile management and high tal goods sector and stocks small-sized companies. If the In a dividend reinvestment plan, the A switch to dividend option is
size is already Rs1,130 crore. cash levels (22% between July such as United Breweries Ltd fund manager plays his cards dividend gets reinvested into the easy. A switch to the growth option
This fund, typically, holds up and December 2008) helped it and ICICI Bank Ltd went well, the fund is set for a good fund. Any such reinvestment is con­ is also possible with some fund
to 10% of the portfolio in cash, float in choppy waters. It wrong. But it has bounced run ahead. If you must invest in sidered fresh investment and gets houses. However, your fund may
according to mutual fund churns the portfolio hard. For back. Between April and De- Religare, we suggest minimal locked in for three more years. Sub­ impose a lock­in from the time you
tracker Morningstar India’s example, its investment in the cember, it returned 126%. Like exposure due to the presence sequent dividends declared on this switch your units to the growth op­
data. It has a high exposure to software sector swung from 2% Sundaram, this one too invest- of other long-term funds. But reinvested amount gets reinvested tion. KAYEZAD E. ADAJANIA
the financial services sec- of its portfolio in February to ed in the auto sector (Maruti do keep it on your watch list.

Disclaimer: The articles and data in Money Matters aim to help readers with their money­related decisions. Each person will have a unique solution that would fit his personal situation, and we advise you to work with a certified financial planner before you buy a financial product.
MONEY MATTERS 15
CHAPTER 3: LIFE INSURANCE WEDNESDAY, JANUARY 20, 2010, DELHI ° WWW.LIVEMINT.COM

TAX SPECIAL
MONEY GURU
Why you should not give in to the Veer Sardesai
CEO, Sardesai Finance, & CFP

salespitchandbuymoreinsurance BUYING INSURANCE IS


If saving taxes is what draws you towards insurance, think again. You should consider more serious
questions, such as do you need insurance at all and how much would be enough for your dependants BAD TAX PLANNING
B Y D EEPTI B HASKARAN
deepti.bh@livemint.com
·························
S uhrud, 33, and Atul, 34, are childhood friends. Suhrud is
now a doctor and Atul, an engineer, works for an infor-
mation technology company. As the fiscal year was coming

T his insurance policy will to an end, they both felt they should make tax-saving invest-
give the best returns and, ments under section 80C. “Which insurance should we buy
of course, tax benefit,” is to save tax?” was their first question when they met me.
what most calls selling insur- I knew it was that time of the year when a lot of people get
ance right now will promise. If the tax-saving bimari. “I thought you had already had the re-
it was any other time of the quired insurance,” I said. “Of course, we have enough to pro-
year, you would hang up. But vide for our family in case of our demise,” replied Atul. “We
with the deadline to make tax- just want to save tax,” added Suhrud softly. “What happened
saving investments inching to the policies that you bought over the last seven to eight
closer, you would pause a bit. years?” I asked. “Oh, some are going on, others have lapsed.
Chances are you will succumb. We don’t really need the insurance you know,” said Suhrud.
Premiums that you pay to- I smiled. “You will need to
wards an insurance policy make additional payments to get
qualify for a deduction up to the lapsed policies reinstated. It
Rs1 lakh under section 80C. may not be possible to reinstate
But that’s not the reason why some of these policies and,
you should buy insurance. hence, the invested amount
Here are three questions you would be lost. In case of the cur-
should ask before you suc- rent policies, you are paying for
cumb to such sales pitch. insurance that you do not need.
“Tax planning is not about
Agent spiel: You’ll get insur- saving tax. It does not make
ance, market-linked returns as sense to save Rs30,000 by spending Rs1 lakh on a product
well as tax benefit in this Ulip. that you do not need. That way you would waste Rs70,000.
You need to ask: Do I need in- Insurance is essential for most of us but it has to be pur-
surance at all? ILLUSTRATIONS BY JAYACHANDRAN/MINT chased as a calamity protection. You must identify the appro-
The agent will never tell you accumulated enough assets to to choose an investment ve- premium for a sum assured of priate insurance amount you need and purchase the same.
that you don’t need insurance. provide for your dependants. hicle that helps you reach a Rs2 lakh, you have bought one Tax benefits are just a bonus. Do not mix insurance with tax
But, belive it or not, not every- You should review your in- particular goal most efficiently. of the most expensive insurance planning. You must focus on maximizing your post-tax yield.
one needs insurance. You surance needs every year to But you need to ensure that policies. If you have Rs20,000 to Look for products that will help achieve this goal. The post-
need insurance to provide for factor in your income and ex- this vehicle is serviced appro- spare, chances are a Rs2 lakh tax return on insurance policies is lower than on pure invest-
your dependants in case of penses. The idea is not to over- priately even after your death. cover is just a fraction of the to- ment products. This is because they carry administration and
your untimely death. If you insure, but to appropriately in- Taking on debt: After your tal insurance you need. So, look mortality charges for the insurance cover they offer you.”
have no dependants, you don’t sure yourself at all times. death, your lenders can lay claim for the cheapest cover. “But I thought one of the biggest advantages of investing in
really need insurance. Also, if Increase in income: Most of on your assets. So, if you have a Money Matters recommends life insurance policies is that the complete maturity amount is
you have enough assets, you us get an annual salary hike. house on loan or have credit that you buy a term plan, the tax-free. Thus, we save tax not only at the time of investing, but
can give insurance a miss. This would mean an upgrade card debts, ensure these are cheapest and the simplest in- also get completely tax-free returns after maturity,” said Atul. I
Says Satish Mehta, managing in lifestyle. Evaluate whether serviced through your policy and surance product. It is a pure said: “It is true, but returns from equity-linked saving schemes
director and CEO, Quantum In- your dependants will be able your assets are left untouched. insurance cover, which has no (ELSS) and Public Provident Fund (PPF) are also tax-free. In
formation Services Pvt. Ltd, a fi- to sustain the same lifestyle on investment component. Under fact, both these have better post-tax returns. This is because
nancial advisory firm: “A person the income from your current Agent spiel: This Ulip has out- this, you pay only for the sum they have much lower charges than an insurance plan. If you are
needs insurance only if he has investments and insurance performed the market. assured. There are no returns looking at retirement planning, ELSS will give you better returns
dependants or liabilities, such as policies till the time they are You need to ask: But is it at the end of the tenure. than an equivalent unit-linked insurance plan (Ulip), though re-
a home loan. Somebody having able to manage on their own. cheap? Shop for the cheapest term turns from both the instruments would be linked to the stock
assets that can take care of the Financial goal: It is essential If you are paying Rs20,000 as plan through insurance portals market’s performance. If you are not keen on undertaking the
expenses, financial goals and lia- such as Policybazaar.com. risk of equities, then invest in PPF which offers assured safety to
bilities need not buy insurance.” While insurers such as ICICI your capital and a guaranteed tax-free return of 8%. On a risk-
If you are young, have just Prudential have their term adjusted basis, returns from both these investments are likely to
started working and have plans online also, Aegon Relig- be better than Ulips or other insurance policies.”
working parents, you don’t are Life Insurance Co. Ltd has Looking convinced, they asked, “So, what should we do?”
need insurance just yet. On the launched iTerm, which is spe- “Atul, you are a salaried employee so your PF contribution
other hand, if your parents are cifically designed for online along with your home loan principal repayment will be in-
retired and do not have suffi- sale only. It is cheaper than cluded under 80C. In addition, any genuine premium will
cient pension income, a non- most term plans. also be included. These amounts themselves will be close to
working wife or children, you Between the simplicity of a Rs1 lakh. Any shortfall could be made up by using an ELSS.
must buy insurance. term plan and the complexity On the other hand, Suhrud, apart from your genuine insur-
of a Ulip, lies a third vari- ance premiums, you can invest up to Rs70,000 in a PPF ac-
Agent spiel: You will get a ety—traditional insurance cum count and the remainder in an ELSS,” I advised.
cover of Rs2 lakh by paying a investment plans. They range Both smiled and left, hopefully cured of the bimari!
premium of Rs20,000. from endowment plans, which Queries and views at feedback@livemint.com
You need to ask: How much in- return the sum assured and the
surance do I need? bonus, if any, to whole-life
Your sum assured or life cov- plans that cover you for life.
er would depend on the premi- These are very expensive prod-
ums you pay. Remember that ucts, but that’s not the only
the sum assured is the amount reason why we don’t recom-
your dependants would get in mend them. In these plans, the
case of your death. Therefore, costs are not mentioned up-
the premiums you pay should front and there is no way to
not depend on how much tax track them. Since these prod-
you need to save but on the ucts invest primarily in debt in-
amount your dependants struments, the returns are in
would need. the range of 3-6%. This means,
You can decide your sum as- that for a 30-year-old opting for
sured on the basis of four pa- Rs10 lakh sum assured over 30
rameters: income, expenses, fi- years, a term plan would cost
nancial goals and liabilities. Rs2,912 against Rs31,368 in a
Says Pranav Mishra, senior traditional endowment plan.
vice-president and head (prod- Ulips are relatively more Undergo test at own cost for health policy
uct and sales), ICICI Prudential transparent and offer better re-
Life Insurance Co. Ltd: “As a
thumb rule, take a cover equal
to 12-15 times your annual ex-
turns, but the insurance compo-
nent in these is minimal. Says
Mishra: “On an average, a Ulip
I f your salary (basic plus dear­
ness allowance and retaining al­
lowance, if any) crosses Rs8.34
much you wish to contribute in
this rock solid investment haven,
your HR will usually deduct 12%
penses or 8-10 times your an- offers 70 times your annual pre- lakh, you needn’t worry about of your salary (basic plus dear­
nual income. Those with debts mium as the sum assured. But,
that last­minute scramble to ex­ ness allowance). This 12% quali­
should factor in that too.” most people buy Ulips offering
Your savings can bring down 7-10 times their annual premium haust your section 80C limit that fies for a deduction under section
your insurance liability. Says as the sum assured.” allows deduction from income up 80C up to Rs1 lakh. Once you
Mishra: “A young individual may There has been a marked im- to Rs1 lakh. cross the basic annual income
need a higher cover as com- provement in Ulips recently threshold of Rs8.3 lakh, your EPF
pared with somebody in their with the insurance regulator, Here is why contribution would automatically
late 30s or early 40s, who may the Insurance Regulatory and According to rules, 12% of your become Rs1 lakh every year.
have some savings to provide a Development Authority, cap- basic pay goes towards the Em­ Since your 80C is taken care of,
cushion to his dependants.” ping their costs. However, Mon- ployees Provident Fund, which is you could look at other tax­sav­
By that logic, insurance be- ey Matters will wait before it one of the most popular invest­ ings products such as a health in­
comes redundant when you re- recommends Ulips due to trans-
tire. Typically, by then, your parency and portability issues.
ment vehicles under section 80C. surance policy that comes under
earning capacity would be- But if you already have a policy, If you don’t tell your HR how section 80D. DEEPTI BHASKARAN
come zero and you would have keep funding it.
GRAPHIC BY AHMED RAZA KHAN/MINT

Disclaimer: The articles and data in Money Matters aim to help readers with their money­related decisions. Each person will have a unique solution that would fit his personal situation, and we advise you to work with a certified financial planner before you buy a financial product.
MONEY MATTERS 15
CHAPTER 4: NEW PENSION SYSTEM THURSDAY, JANUARY 21, 2010, DELHI ° WWW.LIVEMINT.COM

TAX SPECIAL will have to go to the original


branch. In case of a grievance,

NewPensionSystem:new product, the customer can approach the


CRA and subsequently the PFR-
DA.”

same old Rs1 lakh tax deduction


What are the costs?
NPS has two sets of charg-
es—flat and variable. You would
need to pay about Rs470 as flat
charges every year, but this is ex-
NPS has a tax disadvantage compared with other retirement instruments. While it loses out to EPF pected to come down as volumes
and PPF, it manages to beat all mutual fund and most insurance pension products in the market go up. The annual variable
charges are custodian and fund
management charges—0.0075%
B Y D EEPTI B HASKARAN (of the fund value) and 0.0009%,
deepti.bh@livemint.com respectively. The fund manage-
························· ment charges are the lowest in

T his year, we’ve got a new


tax-saving vehicle to get
the Rs1 lakh tax deduc-
tion. After many near misses,
the Pension Fund Regulatory
the industry.

What’s the tax treatment?


There’s no upper limit on the
amount that you invest but only
and Development Authority 10% of your income is applicable
(PFRDA) launched the much- for tax deduction under section
awaited New Pension System 80CCD. However, the deduction
(NPS) in May 2008. would be available subject to a
Its tier I account can build maximum of Rs1 lakh under sec-
you a snug retirement nest egg, tion 80C. On maturity, the 60%
even if you work for the unor- that you get as lump sum is taxa-
ganized sector or are self-em- ble. The remaining 40% that goes
ployed. The fact that it invests into buying annuity is exempt,
your money partly in index but the pension money you
funds, has the lowest cost would get would be taxable as
structure in the market-linked income in your hands.
space and has a lock-in up to
60 years of age, makes it an ef- What to do?
fective retirement vehicle. In its current form, NPS is at a
However, it’s still no match for slight disadvantage compared
our age-old trusted retirement with other products in the retire-
vehicles, Employees Provident ment stable. NPS has been given
Fund (EPF) and Public Provi- the EET (exempt, exempt, tax)
dent Fund (PPF). status. This means that while
your investment is exempt at the
What is NPS? time of contribution and at the
It is a pure defined contribu- time of accumulation, it would
tion product, which has a lock- be taxable at the time of with-
in till 60 years of age. You can drawal.
begin with a minimum annual It is at this point that it loses
contribution of Rs6,000. out to EPF and PPF, which enjoy
There are two investment the EEE (exempt, exempt ex-
strategies available to you. empt) tax status. Also, in EPF
Active choice: You can allo- and PPF, the returns are guaran-
cate your funds across three fund teed. But despite the tax short-
options: equity (under which coming, NPS manages to beat
you can invest up to 50% in equi- mutual fund pension plans and
ty index funds), fixed income in- most unit-linked pension plans
struments other than govern- (ULPP). While ULPPs have EEE
ment securities and government status, pension plans by mutual
securities. funds are taxed for capital gains.
Auto choice: Under this, your Pune-based financial planner
fund allocation is linked to your Veer Sardesai says: “NPS invests
age. Till 35 years of age, you get your money in an index fund
50% exposure to equity, which which takes away the risk linked
tapers off to 10% by age 55. to the performance of the fund
The six fund managers you manager. However they take a
can choose from are ICICI Pru- beating in terms of the tax treat-
dential Pension Fund Manage- ment on the maturity amount.”
ment Co. Ltd, IDFC Pension “For effective retirement plan-
Fund Management Co. Ltd, Ko- ning,” says Sardesai, “one should
tak Mahindra Pension Fund Ltd, exhaust his section 80C with EPF
Reliance Capital Pension Fund and PPF. If there is still scope, go
Ltd, SBI Pension Funds Pvt. Ltd for NPS instead of MF or insur-
and UTI Retirement Solutions ance pension plans. Beyond 80C,
Ltd. one should look at index funds.”
While it is too early to judge If you are not an aggressive in-
the performance of the fund vestor, then you could look at
managers, a huge variation is not NPS since it works like a bal-
expected since the funds will pri- anced fund.
marily invest in debt instruments But, once again, do this only
ILLUSTRATION BY JAYACHANDRAN; GRAPHIC BY RAHUL AWASTHI/MINT
and the equity component will after you have exhausted your
be restricted to index funds. How does it work? and IDBI Bank Ltd. Number (Pran). This number is payments, you would just need EPF and PPF benefits.
On maturity, you get 60% of There are designated points of To open an account, go to one unique to your account and is your Pran, which can be used at Also, under the proposed tax
the fund value as lump sum. The presence (PoP) that can distrib- of PoP branches, fill up a form, portable across jobs and loca- any designated PoP. regime, direct taxes code, all
remaining goes into buying an ute NPS. Currently there are 22 give your fund preference and tions. You would also be given a Says Rani S. Nair, executive di- pension plans will move to EET,
annuity to ensure regular pen- points of presence. Some of the make your deposit. This PoP will telephone and Internet pass- rector, PFRDA: “An investor can making NPS the most cost-effec-
sion. NPS discourages early popular ones are State Bank of then send your details to the word for fund transfer. make contributions in any of the tive market-linked pension plan.
withdrawal. If you do so, you get India, Central Bank of India, central recordkeeping agency Once this card is issued, the designated branches. However, For now, maximize your EPF and
only 20% as lump sum and the ICICI Bank Ltd, Axis Bank Ltd, (CRA), which will issue you a PoP sends the funds to the trust- to make changes in, say, address PPF for 80C before you turn to
rest is annuitized. Citibank, Union Bank of India Permanent Retirement Account ee bank. To make subsequent or fund preference, the customer NPS.

ductible. Income generating prod­ and live off, up to Rs60,000 a


ucts such as Senior Citizens Sav­ month can come as tax­free in­
ings Scheme and five­year fixed come.
deposits can soak up Rs1 lakh un­ A possible break up of products
der section 80C. that a senior citizen with Rs50
Senior citizens can get Additionally, senior citizens can lakh in assets could use is: Rs15
up to Rs30,000 as get Rs20,000 as a deduction for lakh in the Senior Citizens Saving
tax­free income premiums paid for health insur­ Scheme and Rs23 lakh in a fixed
ance. So, a total deduction of Rs3.6 deposit.
Tax threshold lakh a year. While this is a zero­risk portfo­
We know that senior citizens lio, we would advise a person who
have a tax threshold level that isTax­free income is 65 to use at least 10% of his
higher than others. And this limit Up to Rs3.6 lakh a year, or funds to get the growth to the
keeps getting hiked almost every Rs30,000 a month, can be tax free corpus that only equity invest­
budget. The current tax rules say for a senior citizen if he uses the ments can give.
that income for both men and current tax rules and breaks. A cor­ Using an index fund is a great
women over 65 years of age till pus of about Rs40­45 lakh will be idea for money that is not needed
Rs2.4 lakh a year is tax free. good enough to generate this in­ today. Income laddering is another
come and would be tax­free. strategy that you need to use to
Deductions For a senior citizen couple, who get a steady, inflation­adjusted in­
The same deduction rules ap­ lives in their own home and has a come even after 10­15 years.
ply—up to Rs1 lakh is the tax de­ corpus of about Rs1 crore to invest STAFF WRITER

GRAPHIC BY RAHUL AWASTHI/MINT

Disclaimer: The articles and data in Money Matters aim to help readers with their money­related decisions. Each person will have a unique solution that would fit his personal situation, and we advise you to work with a certified financial planner before you buy a financial product.
MONEY MATTERS 15
CHAPTER 5: HEALTH INSURANCE THURSDAY,
FRIDAY,JANUARY
JANUARY21,
22,2010,
2010,DELHI
DELHI °° WWW.LIVEMINT.COM
WWW.LIVEMINT.COM

TAX SPECIAL
MONEY GURU
Let your health insurance battle Amar Pandit
CEO, My Financial Advisor

rising costsof medical treatment DON’T JUST SAVE TAX,


Health insurance is a must-have cover and the earlier you buy, the better. Go for a regular plan and top
it up with a family floater, then look at a benefit plan. Tax benefits will, of course, come along
ASSESS YOUR NEEDS
B Y D EEPTI B HASKARAN M ost Indians have a myopic view ofl ooking at tax plan-
ning—it’s either saving tax or not paying tax at all. So, at
the end of the year, there’s a mad rush to buy insurance poli-
deepti.bh@livemint.com
························· cies, mutual funds, Public Provident Fund (PPF) and other in-

A cardiac treatment could struments. Because of this blinkered view, many individuals
cost anywhere between end up with lower post-tax income, higher costs and an un-
Rs2 lakh and Rs4 lakh. healthy mix ofi nvestments over the years.
For a cancer treatment, you On the contrary, tax planning must always be seen within
may end up paying Rs10,000 the broader framework offi nancial planning. The actual goal
per week. Treatment for a gas- of tax planning should be to maximize post-tax income, which
tric problem could cost up to typically is a function of higher returns, lower costs and so on.
Rs50,000 or even Rs1 lakh if Most people lower their total taxable income through de-
the situation warrants a sur- ductions. Among the various deductions available, the most
gery. Though mere estima- common is section 80C with a limit of Rs1 lakh. Under this,
tions, these numbers would you can invest in employees provident
not be comforting at all if you fund (EPF), PPF, five-year fixed de-
were to foot the bills. posits, National Savings
A more discomforting fact is Certificate (NSC), life
that the cost of medical treat- insurance premiums,
ments is steadily going up. Says equity-linked saving
Deepak Mendiratta, managing schemes (ELSS), pen-
director, Health and Insurance sion policy premium,
Integrated, a health insurance mutual fund pension
consultancy: “New technologies, plan and Senior Citizens
drug discoveries and limited Savings Scheme. There are two
supply of medical infrastructure other non-financial investment avenues that can be utilized
are pushing up medical costs by under this section—principal amount of home loan and tu-
about 18-22% every year.” A 22% ition fees.
hike is more than the average If you are already contributing towards your EPF, servicing
salary hike or the return on in- home loan equated monthly instalments and paying your chil-
vestment you may get. dren’s tuition fees, you are exhausting part of your Rs1 lakh
But there is a way to battle section 80C limit. Deduct this amount from Rs1 lakh. You only
such costs. Buy health insur- need to invest the difference from a tax-saving perspective.
ance. By paying around However, if you do not have a house or children, you need
Rs3,000 per year, you would to proceed differently. Look at your overall situation.
get a cover of roughly Rs5 lakh. Assess whether you need a house. You will get a deduction
In other words, your insurer on the principal investment as well as the interest component
will pay up to Rs5 lakh for your of the loan. A lot of people are tempted to buy a house just to
medical expenses. save tax. Don’t do that.
You will also get a tax benefit Also, if you have any dependants or liabilities and you are
on the premiums you pay. Un- 25-50 years in age (the accumulation phase), calculate your
der section 80D of the Income- exact need for life insurance. Go for term insurance.
tax Act, your premiums qualify If you want a fixed-return investment, then you should first
for tax deduction up to look at PPF. It’s an excellent investment for anyone in the
Rs15,000. If you are a senior highest tax bracket. The only risk here is interest rates may go
citizen, you can claim up to down. However, considering political compulsions, this is un-
Rs20,000. likely to happen. Although traditional insurance policies, NSC
But tax benefit is not the rea- and 5-year tax-saving fixed deposits also fall into this catego-
son why you should buy health ry, PPF and Senior Citizens Scheme remain the best debt in-
insurance. Says Sumeet Vaid, vestments so far.
managing director and found- On the equity front, the choice is between unit-linked insur-
er, Ffreedom Financial Planner ance plans (Ulips) and ELSS. Skip most Ulips as they are very
Pvt. Ltd: “Health insurance expensive compared with ELSS. You can, however, look at sin-
should be seen as a risk man- gle-premium Ulips. The performance of an ELSS depends en-
agement strategy and not as a tirely on the stock market and there could be periods of nega-
tax planning strategy.” tive returns. When opting for an ELSS, look at consistency
rather than a one-offperformance. Opt for a scheme with a
Plans on offer proven track record in good as well as bad times.
Regular indemnity plans: Of all the choices above, the best ones for you will be a
Your basic health insurance function of your needs, dependants, liabilities, return expecta-
policy is an indemnity cover tions and the risk that you are willing to take.
that reimburses expenses in- Queries and views at feedback@livemint.com
curred during, before and after
hospitalization. Nowadays,
ILLUSTRATION BY JAYACHANDRAN/GRAPHIC BY YOHESH KUMAR/MINT
policies offer the cashless fa-
cility for claims. To avail it, you invest a part of your premium claim. In some policies, if you policy late and your pre-existing
just need to inform the hospi- or return the premium at the are diagnosed with an illness, ailments are not covered, pre- up to Rs15,000 on behalf of
tal, which will take it up with end of the policy tenure. you need to have survived the miums are very high or you may your parents if your parents
your third-party administrator, Most defined benefit policies illness for a month before get- have to settle for a lower insur- are below 65 years of age.
who will settle your claim. are long-term, have a standard ting the benefit. ance cover. In some cases, the This deduction is applicable
The minimum age require- premium for a certain number Says Antony Jacob, CEO, cover may be denied altogether.
ment for this policy is about of years and are offered mostly Apollo Munich Health Insur- Rahul Aggarwal, CEO, Opti-
over and above the Rs15,000
three months. Insurers, typi- by life insurers. A typical ance Co. Ltd: “Before buying a ma Risk Brokers, says: “A basic Look after parents, get deduction that you are enti-
cally, insure a child as a de- health insurance policy offered policy, one must read the ex- health insurance should be more tax deduction tled to as an individual under
pendant of his parents. This by a life company is a bundled clusions. Go through the wait- bought as early as possible. You section 80D for health insur-
can be done either through an policy that combines the bene- ing period, sub-limits, and ex- can then top it up with benefit The taxman nods his approval ance taken for yourself. So, in
add-on to the parent’s individ- fit of critical illness plan, hos- cluded ailments. Understand policies.” if you look after your parents. all, you can claim up to
ual policy by paying an extra pital cash plans and surgical how the benefits are paid out.” Take benefit policies last: Tax laws reflect a changing Rs30,000.
premium, or by adding the benefits. In some plans, a Most benefit policies can easi- society and this particular de-
child under a family floater death cover is also available. Your strategy ly be given a miss if you are
duction shows recognition of If parents are senior citizens
plan. These policies qualify for tax Keep it simple: Just like life sufficiently insured. If your get health insurance
Family floater plans: Here, deduction both under section covers, keep these policies If your family has a history of the way contemporary Indian
the sum insured is the same for 80D (up to Rs20,000) and un- simple and cheap. Typically, serious ailments or your life- families live. There is a tax for your parents, who are se-
all the members of a family. If der section 80C (up to Rs1 health insurance is meant to style is stressful, you can take a break for extending a health nior citizens, you can claim an
one member makes a claim, the lakh). take care of expenses in case of critical illness plan. But it is no insurance cover to your par- additional deduction of up to
sum insured is reduced for the hospitalization. Buy a basic substitute for health insurance ents even if they are not de- Rs20,000, apart from the
entire family, to that extent. What to consider? health insurance and top it up or life insurance as it is meant pendant on you. Rs15,000 you get on your
Defined benefit plans: There You are spoilt for choice with a floater for your family. to support your loss ofi ncome own cover. So, in total you can
are many hybrid plans on of- with different policies offering Do not rely entirely on the if you are diagnosed with a se- If parents not senior citizens claim up to Rs35,000.
fer. Critical illness plans are different benefits. But buying a group cover offered by your em- rious ailment. Says Vaid: “In- You can claim deduction of
the most popular among these. health insurance policy is not ployer as a job change or retire- surance is meant to cover you If you are a senior citizen
These give you a one-time simple. Here, there are cave- ment could leave you unin- for three losses: income, However if you are a senior
benefit if you suffer from any ats, which could result in seri- sured. And with portability still health and assets. We recom-
specified critical illness such ous financial loss. some time away, you may not be mend our clients to avoid bun-
citizen, which means that you
as a heart attack, cancer, dia- For instance, a critical ill- able to carry over the benefits to dling products.” can claim up to Rs20,000 as
betes, kidney failure, major or- ness plan would give you a any new policy you may buy. You can avoid the hospital deduction on your own policy,
gan transplant or paralysis. hefty lump sum, but only for Buy early: When you are cash plan if you have emergen- and are funding your parents’
Hospital cash policies work pre-defined critical illnesses young, the premiums would be cy funds for six to eight months health plan, then your total
as a buffer and provide you a and that too after a waiting pe- cheaper, you are unlikely to of expenses. deduction shoots up to
pre-defined daily cash benefit, riod. After buying the policy, have any pre-existing diseases This tax season, take a step- Rs40,000. STAFF WRITER
irrespective of hospital costs. you need to wait for about six and your cover would keep in- by-step approach towards
Health-cum-savings plans months before you can make a creasing on its own. Buy the health insurance.

Disclaimer: The articles and data in Money Matters aim to help readers with their money-related decisions. Each person will have a unique solution that would fit his personal situation, and we advise you to work with a certified financial planner before you buy a financial product.

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