Financing your child’s overseas education through ESOPs

ESOPs are a priceless tool for attracting and retaining talent at start-ups and MNCs. Many of us working here get ESOPs in overseas companies. Since the Indian Rupee has depreciated against other currencies like the dollar over the years, overseas investments may be a good option to help reduce currency risk. And with strategic planning, parents can secure their child’s overseas educational dreams through ESOP benefits. The lumpsum that ESOPs provide, could be suitable to fund the large investments required.

If your company’s ESOPs are overseas, it would help to reduce the currency risk. A lumpsum gain from your domestic ESOPs could also help fund education.

Multiple factors must be considered while signing up for ESOPs. They may not be good for the risk-averse as they are linked to the volatile stock markets. They may also not suit someone looking for liquidity in the near term. Sure, stocks can be volatile. This is why it is important to time the sale of ESOPs. 

The decision to sell the shares acquired under ESOP is like any other investment decision. You need to take into account the capital gains implication as well as the need for liquidity for arriving at the decision. Moreover, whether and when to sell will also depend on the prospects of the company and how the stock is performing.

So, before you decide to liquidate the amount, take note of your three options:

When stocks are performing well.

Sell when the stock is performing well. If your child’s education is a few years away and the stock price of your company is already faring well, it is best you exit the plan and park it in debt options.  

When you expect a better performance in the future.

Alternatively, you may also choose a staggered exit at a few higher prices. But take note of your risk appetite if you decide to do so. Since stocks can be volatile, don’t keep these investments for the last minute.

When stocks are performing poorly.

If the company’s stocks have seen better days, you might as well take a loan to finance your child’s education. When your ESOPs begin to look up, you may exit and square off the loan.

ESOPs can be very successful when implemented in the right situation. They can be a good way to fund your child’s education. They allow their owners to create sustainable and transferable value and a well-prepared and successful exit. However, keep in mind that they can also be volatile. Take heed that you exit it in advance when the stock price is doing well and move it to non-market-linked options. That way you guarantee yourself good returns at an optimal time.

Choose wisely – Annuity options for retirement

ideal retirement image

The hard-earned retirement corpus secured in accounts such as the NPS, PPF, and/or the EPF is the final nest egg for public or private sector individuals who retire after a few decades of continuous service. While certain central government retirees are eligible for pension and lumpsum fund benefits, almost all the private sector employees are not entitled to a pension from their employers and have to fall back on lumpsum (defined contribution plan) corpuses.

As a result, the post-retirement monthly expenditures of the family, most often, depends on corpus inwards from such accounts. There are two important considerations for such corpus inward for individuals – Safety and return on such corpus since this impacts the amount of derived pension on the same for the rest of the life.

Upon retirement, most individuals rely on traditional plans such as a combination of fixed deposits, Sr Citizen savings Schemes and/or plain vanilla Savings accounts to create cash flows for longer duration and this raises several risks of the safety of corpus, interest rate risk and thereby risk of variability of periodic cash flows and the possibility of hardships during retirement years.

Annuities – Should be the first choice for retirement corpus

Annuities should be the preferred choice for retired individuals; however, this product is not very popular due to lack of awareness, perceived lower rate of returns and liquidity issues. Annuities offer the best hedge against the variability of cash flows, against interest rate risks and consistent cash flows for most of the living life.

Today annuities offer a wide range of choices which were not available 5-10 years ago. Flexibility, market comparable rate of return, and wide range of options are available from over half dozen annuity service providers. Besides this, regulations and oversight of annuity providers make this product extremely safe as compared to other market-linked products.

A quick glance of the variety of options from annuity service providers is summarized as below.

Table 1: Choose the option wisely
Annuity for life Annuity for life with return of purchase price on death Annuity payable for life with 100% annuity payable to spouse on death of annuitant Annuity for life with a provision for 100% of the annuity payable to the spouse of the annuitant for life on death of the annuitant, with return of purchase price on the death of last survivor Annuity payments would be made to the annuitant and his/ her spouse throughout their lifetime. Thereafter, these pay-outs would be made to the subscriber’s mother and after her, to the father. On death of the father, the purchase price would be refunded to the annuitant’s child/ nominee.
Source: NPSTRUST.org.in

 

Which option makes sense?

This depends upon a variety of factor and the retired individual’s objective, dependents, and other personal factors. For instance, for couples with no dependents the easiest choice would be to choose option 1: Annuity for life. Here, they are likely to enjoy higher cash flows or put in lower corpus to enjoy required cash flows. The standard of living could be higher for such couples since this option pays the highest pension as compared with other plans across annuity service providers. Options #2 and #3 might suit retired couple with legal heir (children / grandchildren) where they might want to gift such corpus earned.

Option #4 & #5 could severely impact the current cash flow for the retired individual since the objective is to return the corpus. Unless there is adequate liquidity and other assets these options defeat the very purpose of buying an annuity and therefore can be avoided.

NOT a Contagion – Impact of the FT Debt Debacle

Introduction
Last week, Franklin Templeton India funds, in the debt category, went into freeze with investors in 6 of the large schemes locked out of redemptions and any sort of movement till further notice. This has come at a distressing time of CoVID19 crises where incomes of individuals, businesses, and MSME’s have been severely impacted. The investors in these funds are severely impacted due to their dependence on these funds for their immediate or medium-term cash flows and now above all the safety of their monies. In some cases, it could be most of the savings/corpus that has been put to work. The investment rationale for most investors in these funds have been
1. The general safety of such category of funds
2. Getting regular incomes on their investment
3. General faith in the system and/or
4. Established product type.
While this might be the case, in good times or bad the onus of safety of investors’ fund lies with himself and the rule of “Caveat Emptor” or “Buyer Beware” always prevails. This is true for any investment or generally parting of monies from an investor to a third person.
The FT Debt Debacle
The situation with Franklin Templeton funds could have happened with any other AMC given the dislocation in the financial markets and the positioning of the funds in the current market environment.
For starters, Franklin debt funds were positioned to deliver higher returns as compared with competition and thereby were invested into marginally higher risk than the general markets. This strategy works well under most circumstances given that liquidity and funds flows keep investors and borrowers from accessing / rolling over monies quickly.
Secondly, the line between swimming in the middle of the pool to the deep end of the pool is often non-existent (not even blurred). This results in asset managers taking marginally higher risk without any commensurate return benefit. This is obvious in hindsight and might appear rationale during normal times. Both for investors and asset managers. In the case of FT funds, most investments were in risky papers without commensurate returns.
Thirdly, the diversification in asset managers strategy on funds ought to save the day. Unfortunately, the asset manager had not differentiated between its medium-term funds and ultra-short-term funds, using the same strategy across these funds. Clearly, the investor has been taken for a royal ride here, for no fault of his.
Finally, most of us are guilty of being slightly complacent when things are going to get rough. The first indication of the FT issue was evident when in a couple of these funds’ exposure to Vodafone and Yes Bank papers were side pocketed in 2019. Prudence dictates that the troubled ship be abandoned before the stampede begins.

How are we impacted, and are we prepared?
The current CoVID19 pandemic has been mild so far and there are numerous reasons – including on-time assessment and steps taken, higher immunity, sunshine factor, etc. There is much literature on the topic in the public domain. The financial impact is still yet to come to full-blown proportions but can be assessed individually by each one of us. The individual and collective response to the situation is developing in nature and as weeks go by, the complete impact of the same would be evident.
There is a great economic impact on several direct sectors such as tourism and aviation, transportation and logistics, and MSME’s. Stage II of the financial contagion (Risk Aversion) is being felt across businesses and individuals alike. The central bank (RBI) and capital market regulator (The SEBI) has so far responded to the situation like other peers across the globe. Stage III of complete liquidity freeze and volume collapse is unlikely to happen soon in India given the evolving situation and talks about normalcy returning in a phased manner soon. The systemic liquidity so far has been managed; however, the deeper impact could be felt if the situation lasts longer than everyone is prepared for.
Most of the participants are barely prepared for such emergency situations which is all-pervasive and systemic. And yet some sectors/participants are better than those who are severely impacted. Staples, non-durables, and certain services have been relatively smooth, so far. The lessons from the current episode for individuals and institutions should be to be prepared for a war-like situation for 4-6 months during any market cycle. This means putting up safety nets around – Liquidity, business/income continuity, risk management, back-up plan (secondary work-related stuff), and communication. For instance, unscheduled maintenance for industries, skill upgrade for workforce or individuals, and strategic planning for normalcy. All these and more should be a part of any individual or business plan when there is still time.
Conclusion
From an individual perspective, investors who are now stuck into the current frozen FT debt funds; the following things are necessary.
1. Access your liquidity conditions and work on a plan to sort it out. There is a great likelihood that your money would be returned soon
2. Ask questions around your investment methods and know why you ended up in the current situation. If only a small portion of your overall investment is in these funds, you have already done a good job.
3. No, there is NO reason to panic and start pulling out of every conceivable investment, since that way you could be creating a chain reaction and worse you will end up jeopardizing your objective (goals) and your return profile

For those who have no exposure to FT funds frozen or have FT equity funds, it might be a good time to reassess your exposure. While that might be the case, if your liquidity profile, asset allocation and goal planning is mapped, there is little concern for you. There is no point in losing sleep over things in which everyone is in the same boat and you are well prepared than others. Chances are you will come out stronger than most.

STOP – Should you use the EMI Holiday?

RBI Announcement for CoVID19; Impact for borrowers 

A 3-month moratorium for borrowers of all kinds.

  • Lending institutions are “permitted” to grant a moratorium on installments between March 1, 2020, and May 31, 2020.
  • All banks/lending institutions are covered in this scheme and all types are payments are covered – unsecured / Agri loans/retail/ working capital loans include credit cards.
  • This is ONLY a postponement of EMIs/Interest and NOT waiving of EMIs/interest. 
  • Interest would get accumulated for the period and added to the principal outstanding.  This means you need to pay additional interest during the course of the loan. There is no penal interest or adverse impact on credit rating/score.
  • You can check the applicability and procedures with your financial institution.

While the above decision from the RBI has been a welcome relief to people with temporary cash flow issues faced by many borrowers, this article helps you evaluate whether to avail of the moratorium. 

Who is it meant for?

This is meant primarily for individuals and businesses impacted by the economic fallouts from COVID-19.  The lending institution may need to be satisfied that the deferral is necessitated on account of the fallout from COVID-19.  This would be useful for affected businesses and salaried employees working in Aviation, Retail, F&B, Contracting, Travel/Leisure, and other high adverse impact sectors. However, it is not restricted to any sector.  One can opt for this measure if one would like to create a small buffer to tide over what might be a slightly long draw battle for these sectors to get back to normalcy. Those unaffected need not avail of this option since interest continues to be charged during the moratorium period. This will only extend the tenure of your loan.

Use early repayment if possible

A practical approach for you-

  1. Must Avoid: If your interest rate is very high (eg. Credit Card outstanding), one should avoid availing of the deferral of payment.
  2. Those whose salaries/business cash flows are impacted and are extremely stressed on their finances should avail of this benefit in toto. Take this break to put things in order, rack up some liquidity to tide over the current situation; and work out a plan on how you will service these loans from June 2020. The opportunity is God sent for this category and should be availed.
  3. Those who are tight on their finances and uncertain about their business recovery/ salary impact can also avail of this moratorium period. However, they can do two things
    • First, create a buffer of 2-3 months basis this savings in EMI paid out to help tide over the immediate liquidity situation. 
    • Payback part of the whole of deferred installments post the moratorium period, once favorable clarity emerges on the potential impact on one’s finances. 

Impact assessment for borrowers taking this moratorium over the medium term

If you have a current outstanding of Rs 50 lakh, with 10 years remaining on a home loan with an interest rate of 8.75% and you defer the full 3 months of your EMI, the following is the higher payment you would make on the full tenure of the loan based on when you pay back the deferred EMIs to the lending institution:

When repayment of deferred EMI is made Additional payment on loan(Rs) Closure of loan (months)
At end of the loan                                  263,456                                    123 
Repaid in full in 12 months (with interest) 14,169                                    120 
EMI repaid after 3 months 6,398                                    120 

 

In summary

  1. There would be additional interest on interest (since the amount of interest would be effectively added to your principal outstanding on the date of deferment). If you don’t make any prepayment during the tenure of the loan, the impact is significant.
  2. This would, therefore, mean that you should NOT utilize the total EMI holiday unless your cash flow position during the 3 months is stopped or disrupted.
  3. Do try and repay these installments at the earliest possible date to reduce the interest burden on your loan.
  4. Avoid deferring the payment of your credit card outstanding as the interest rates are high.

Further, Read FAQs on EMI Moratorium – Most questions answered

Your Checklist On Taxes For The Financial Year End!

We are just a few days to go before this financial year (2019-20) comes to a close. Though you have time till July 31st, 2020 to file your income tax returns, there are a number of activities that you need to do by March 31st, 2020 to claim the benefits in this assessment year (AY 2020 – 21). The finance minister came out with a series of extensions in dates till June 30th, 2020; but this is restricted mainly to tax saving investments.   Thus, you may have a bit of a breather on your tax saving investments.  Here is a checklist of items that you should go through to make sure that you have availed all the tax benefits available under different provisions of the Income Tax Act.

 

  • Set off your capital gains for the year with the losses:  If you do have capital gains for the year upto January 2020 when markets were relatively buoyant, you would have a number of stocks or even mutual funds that would be showing losses.  You can book some losses and set off the capital gains. You would want to optimise your capital gains in a difficult year. Do check if you have exit loads on your mutual funds before booking the losses.  This needs to be executed by March 31 for one to avail of the benefit.
  • Section 80C: You can claim deduction of up to Rs 1.5 lakhs from your gross taxable income by investing in schemes eligible u/s 80C. These schemes are EPF, VPF, PPF, NSC, tax saver bank FDs, life insurance premiums, mutual fund ELSS etc. Tax payers who are not getting a salaried income and not having PF and other tax saving investments must make sure that they avail maximum benefits. Senior citizens and parents of girl children can claim deductions by investing in Senior Citizens Savings Scheme and Sukanya Samruddhi Yojana subject to the overall Rs 1.5 lakhs 80C limit. Investors paying home loan EMIs can claim deduction for principal payments made during the financial year. Benefit extended till June 30th.
  • Section 80D (Medical insurance): You can claim Rs 25,000 of additional deduction for medical insurance premiums for yourself and your family (seni or citizens can claim up to Rs 50,000). You can claim a further deduction of Rs 25,000 for medical insurance premiums of dependent parents (Rs 30,000 if your parents are senior citizens).  Benefit extended till June 30th.
  • Section 80CCD (NPS): You claim additional Rs 50,000 deduction, over and above Section 80C limit of Rs 1.5 lakhs, by investing in National Pension Scheme. You can claim total deduction of Rs 2 lakhs by investing Rs 1.5 lakhs u/s 80C and Rs 50,000 in NPS. Benefit extended till June 30th.
  • Section 24 (Interest payment on home loan): You can claim up to Rs 2 lakhs deduction for interest payments in your home loan EMI for self-occupied house. If you are paying home loan EMIs for a let out house, the loss is restricted to Rs 2 lakhs in a financial year.
  • Section 80E (Interest payment on higher education loan): If you have taken loan for your, spouse or children’s higher education, then the entire interest payment can be claimed as deduction from your gross taxable income.
  • Section 80G (donations to charities): Donation made to tax exempt charities is allowed to be claimed as deduction at the rate of 50% or 100% (of the contributed amount) depending on the charity and as per approval granted by prescribed income tax authorities.

 

  • Check your surcharge bracket:  You maybe able to claim exemptions/deductions and set off your losses to reduce your net income to below the surcharge brackets (Rs 50 lakh / 1 Cr / 2 Cr / 5 Cr) if your income is on the border.  Plan before March 31st, because only tax saving investments are extended till June 30th.

 

  • Pay Advance Tax by March 31st: Tax payers who have income from other sources (e.g. rent, FD interest, capital gains etc) should make sure that they pay advance tax by March 31st, 2020. If you have worked in two different companies, you are likely to have to pay additional taxes for the year when you consolidate the two form 16s. If do not pay Advance Tax on time, you will have to pay interest @ of 0.75% per month of delayed tax payment (reduced from 1% per month for the period upto June 30th), even if you file your IT returns on time. For example, if your tax obligation over and above tax deducted at source (TDS) on March 31st is Rs 5 lakhs, you will have to pay Rs 16,250 as interest if you are filing your ITR and paying tax on July 31st

Summary

You can save a lot of money in taxes by availing the benefits available under different provisions of Income Tax Act. In this article, we have shared with you a checklist of items that you should review and make sure that you get maximum benefits. In addition to the tax savings avenues shared in this article, there may be other depending on your specific situations. If you need help with your tax planning feel free to email us at contactus@righthorizons.com .

How much health insurance cover should I take?

Health Insurance


* The highest form of risk is a medical risk.
* The inflation is higher than normal.
* One needs to take cover post exit or retirement.
* If you don’t have a steady income, you need it most and a medical risk can eat into your savings.
* A major surgery cost about 10- 15 Lakhs as of today.
* Recommend
– 25 – 5 Lakhs cover.
– For 10 – 25 – 50 Lakhs, premium is marginal.
– Top Up Insurance.

Talk to our certified “Health Insurance planning advisors”.

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How do I retire early


Let me give you an example of myself. I had a goal of retiring from corporate life and getting into the entrepreneurship mode at the age of 35. However, I was able to do this almost 5 years earlier. I will share with you what actually helped me achieve this goal of mine.

Talk to our certified “Senior financial planning advisors and wealth managers”.

* – Firstly, you need to outline your goal clearly. Many people I know do not end up achieving their goal is because they have a moving target.
* – Secondly, you need to have a clear game plan for the same. Ideally, you should do a financial plan and then decide on a practical time frame for retiring.
* – Thirdly, be disciplined as you work towards your goal. This is actually the most boring phase and needs to be followed though over many years. Hence, tracking on how you are doing Vs your goal is an important factor towards achieving your goal.
* – You need to be able to find the right mix of aggression to be able to achieve your goal early, but also be cautious so as not to lose you returns.

Talk to our certified “Senior financial planning advisors and wealth managers”.

Call us +91 98453 99780

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