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.

FAQs on EMI Moratorium – Most questions answered

The EMI Holiday package announced by RBI on account of CoVID19 has raised many questions with respect to applicability, coverage, eligibility, and impact.   We answer the basic questions through the FAQs that are put together which cover most of the doubts regarding these. 

  • Is moratorium compulsory or optional; what loans are it applicable to?

The moratorium is optional both for the borrower and the financial institution(lender).  ie The lender can choose to offer this option to its clients. The borrower can also choose to avail of the option if it is offered by the lender from whom the loan is taken.  

This is applicable for all kinds of credit facilities such as retail loans, Home Loans, Business Loans, Cards and Farmer Loans, term loans, and working capital loans of any size and duration and applicable both for individuals and businesses.

  • What is meant by moratorium?

A moratorium is temporary postponement of payment of interest/ principal/installments (and is not a waiver) for the period from Mar 01, 2020, to May 31, 2020. Interest will continue to be payable on all amount(s) for which payment is being postponed pursuant to the Moratorium.

  • For what period can the moratorium be granted?

A moratorium may be granted up to a period of three months for all amounts falling due between Mar 01 and May 31, 2020.

  • Is the moratorium on principal or interest or both?

The moratorium can be offered for below payments due during the moratorium period:

  1. Principal and/or interest component
  2. Bullet repayment
  3. Equated Monthly Instalments ( EMIs)
  4. Credit Card dues
  • Will the interest accrue during the moratorium period?

Yes, lenders will charge interest during the moratorium period as per the relevant terms and conditions of the loan agreement between the lender and borrower/s.   

  • How can you opt for the moratorium?

For most PSU lenders, there is blanket access to the moratorium, and it applies to all loans irrespective of size/category/sector. For private lenders, it would be prudent to get in touch with the respective client relationship manager/branch/phone banking/mobile banking/internet banking etc. and communicate your preference since this is NOT a default option and needs to be availed categorically. Failing which, there is a chance that the deduction of EMI would go through on the scheduled date set.

  • What is the interest charging mechanism for retail term loans such as Home Loans, Personal Loans, Consumer Durable Loans, Two-Wheeler Loans, Auto Loans?

The accrued interest would be added to the principal amount which will increase the residual tenure of the loan except in cases where extension of tenure is not possible in which case the EMI amount will increase. Please refer to the terms and conditions in the loan agreement for further details.

Illustration: Mr Ravi availed of a home mortgage on Mar 01, 2020 amounting to Rs one crore with a loan tenure of 240 months at an interest rate of 7.5%. If Mr. Ravi wants to avail of a moratorium of installment of Rs 89,972 which is due on Apr 01, 2020, then the interest for the month of March amounting to Rs 75,000 will be added to the principal amount and the outstanding principal amount on Apr 01, 2020, will become Rs 10,075,000. The interest will be computed on an outstanding principal. Similarly, the interest for the month of April which is payable on May 01, 2020, of Rs 75,562 will be added to the opening principal on May 01, 2020, which will be Rs 10,150,562. The interest will again be computed on the outstanding principal. In this case Mr Ravi’s tenure will increase from 240 months to 250 months considering the unchanged rate of interest and installment amount during this period.  To reduce this, Mr Ravi can choose to prepay part of the loan when normalcy returns to his cash flows, based on the prepayment clauses in his agreement.

  • How will interest be charged and recovered for SME / MSME / Businesses which use cash credit/ overdraft facilities? 

The accrued interest will be due and payable immediately after the end of the moratorium, and interest keeps accruing for this moratorium period.

  • Will there be late payment charges/ default interest/ additional interest for the deferred installments during the moratorium period?

No late payment charges/ default interest/ additional interest shall be levied during the moratorium period has to be charged during this period as specified by RBI.

  • Can the borrower make payments in between the Moratorium period?

This option to defer payments on loans is a relief granted to borrowers due to disruption caused due to the unprecedented outbreak of COVID-19. However, the borrower has the option to continue scheduled payments during this moratorium; or avail of the benefit of the Moratorium.

  • Will the seeking of Moratorium by the borrower have an impact on their credit/bureau score?

The moratorium on payments will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs)/credit bureau by the Bank. Hence, there will be no adverse impact on the credit history of the borrowers. This is specifically for this moratorium period only.

  • If the borrowers have enough balance in the accounts and installment is due, will the lender debit the EMI during this period?

Yes, if you have NOT opted in for the moratorium, then the normal EMI dates would apply and the deduction would occur as per the loan schedule.  It may be noted that some banks are offering moratorium as a default, hence, it is advisable to check with the communication from the bank. However, if one has opted for the moratorium, then the EMI would not be deducted even if there is sufficient balance for the EMI. 

  • Does the borrower need to submit any documents for availing this Moratorium? 

For PSU lenders the default option is the borrowers would get this moratorium irrespective of which category he belongs to. For borrowers of private lenders, the borrowers would get instructions from his/her respective lender on what needs to be done. Currently, the paperwork is limited to communicating the choice of option to the lender via – email /phone banking/internet banking or branch banking.

  • Does it make sense to continue to pay the EMIs rather than availing of the moratorium? 

Yes, if there is NO pressing need or shortage of cash flow then it makes sense to continue to pay as per schedule. This way you save on the additional interest that would be charged on the amount outstanding.

  • What happens to payments due and made or defaulted in March 2020 

If the payment has been made during the 1st March 2020 – 31st March 2020 period, then the borrower will effectively get two months of the moratorium period. If there has been a default due to cash flow issues or any other reason, then you would now get protection against any penalty/charges that might be due or have been deducted. And effectively such borrower would get the 3-month moratorium period. 

  • What happens to loans/credit facility started in March or April 2020?

The borrowers of all classes, old and new are eligible to avail of this moratorium; however, different lenders might have different rules, so it might be good to check with your lender on their policy with respect to the same.

  • If the borrower has multiple borrowing facilities within the same lender of different lenders, can he/she get a blanket moratorium? 

The borrower needs to specifically select and mention every facility that he/she has availed from the lender or in case of multiple lenders, then the borrower will need to communicate/opt with all such lenders.

EMI Loan Calculator and Impact Assessment

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 .

When should I exercise my ESOPs?

-Most of the time, people look at the exit point in the esop and not the exercise period.

-Since there is a significant tax liability when you exercise, lowest price is best.

-This reduces the perquisite tax thereby resulting in tax savings.
Know more about how do we deal such problems in easy ways

Talk to our certified “Senior financial planning advisors and Risk Management advisor”.

Call us +91 98453 99780
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PMS vs. MF? Which is better?


PMS vs. MF? Which is better?

Portfolio Management Services (PMS) is investment option in which you appoint fund manager to manage your funds

In a PMS, the portfolio is generally much smaller in assets and is much more concentrated with lesser number of stocks than equity mutual fund schemes.
The biggest advantage of PMS is the way they are allowed to operate.

Confused whether to choose Portfolio Management Scheme or Mutual Funds? Anil Rego, Founder & CEO of Right Horizons Financial Services makes an easy distinction between the two.

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Tax Rebate upto Rs 5 lakh: The real story

 

 

Ever since Interim Budget 2019, there is some confusion on whether there is income tax relief given to all citizens or not. Some people are convinced there is an income tax relief for all. Others say they have read or heard news reports about tax rebate relief.

For a common man with limited financial knowledge, all this can be very confusing. So, let us clear that confusion once and for all. The Budget has allowed individuals with taxable income up to Rs 5 lakh to get full tax rebate and so they pay zero tax. Read on to know more.

Tax slabs unchanged

There is no change in the income tax slabs. You must understand what is the difference between taxable income and total/gross income. Gross income includes all of the income a person has received during a financial year. This amount is not explicitly exempt from taxation. On the other hand, taxable income is the amount of income that is actually subject to taxation, after all deductions or exemptions. So, typically taxable income will be lower than gross/total income.

For a person aged below 60 years, up to Rs 2.5 lakh of their taxable income is not taxed.

Income between Rs 2.5 lakh to Rs 5 lakh is taxed at 5% of total income exceeding Rs 2.5 lakh. This tax comes to a maximum of Rs 12,500.

Income between Rs 5 lakh to Rs 10 lakh is taxed as at 20% of total income exceeding Rs 5 lakh.

Income above Rs 10 lakh is taxed at 30% of total income over Rs 10 lakh.

In the Interim Budget, these tax slabs remain the same. However, the Budget has allowed individuals with taxable income up to Rs 5 lakh to get full tax rebate under section 87A of the Income Tax Act.

Do remember for senior citizens aged 60 years and above but below 80 years, income up to Rs 3 lakh is exempt from tax. Income up to Rs 5 lakh is exempt from tax for super senior citizens (ie. aged 80 years and above).

Tax rebate is not tax cut for all

What does full tax rebate for those with taxable income of Rs 5 lakh mean? Read the example below.

Let us assume you, a person below 60 years, has a taxable income of Rs 5 lakh. As per income tax slabs, you fall in two slabs.

First, your income up to Rs 2.5 lakh is not taxed.

Second, the excess amount above Rs 2.5 lakh is taxed at 5% of the exceeding amount. Since your taxable income is Rs 5 lakh, this means you have Rs 2.5 lakh extra over the zero tax-slab.

At 5% income tax rate, the tax liability comes to Rs 12,500. However, the full tax rebate of up to Rs 12,500 given in the latest budget means you will also pay no tax!

But what if your taxable income is Rs 5.5 lakh or Rs 6 lakh or more? The moment your taxable income crosses Rs 5 lakh, then the rebate is not applicable for you.

If your taxable income is Rs 5.5 lakh, for example, your gross tax liability shoots up to Rs 23,400. For somebody with taxable income of Rs 6 lakh, the tax rises further to Rs 33,800.

In essence, all this means your tax liability rises sharply once you cross Rs 5 lakh taxable income zone. For earning just Rs 50,000 more than Rs 5 lakh (taxable income of Rs 5.5 lakh), your tax liability is nearly 47% on the extra Rs 50,000 income.

Importance of tax-planning

Under the new income tax rules, it becomes highly important to plan taxes properly and carefully. A small mistake can cost a lot as you can understand.

Not just the pay structure, full focus and attention needs to be given to tax planning.

Those in the marginal area (just above Rs 5 lakh taxable income) should use all the tax deductions available. This is so that such individuals are not taxed more just because they forgot to claim exemptions, or were not aware of how to lower tax dues.

So, try to consult a good financial planner and prepare your tax blue-print for this year and beyond.

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