A second house can reduce your tax burden

In 2005, Mitul Vora, a marketing executive with an auto company, took a Rs 8 lakh loan for 15 years to buy a house in Gandhidham, Gujarat. Currently, he is paying an EMI of Rs 8,700. However, a year later, Vora switched jobs and shifted to Ahmedabad.

Instead of renting a place, he bought another house, again through a home loan of Rs 20 lakh for 20 years, for which the EMI is about Rs 20,650. "I could have sold the house at Gandhidham to fund the second purchase, but didn't do so because I'm sure the value of the property will appreciate in a couple of years," says 43-year-old Vora. Instead, he has leased the first house at an annual rent of Rs 84,000.

However, the high interest rates are making it difficult to service both the home loans. "I come under the highest tax bracket and have to pay 30% tax on my income, which makes it difficult to save enough to pay both the EMIs," he adds. What Vora doesn't know is that he can reduce his tax liability if he avails of the deduction on home loans, especially in case of the second house.

Exemption on interest

In case of a home loan taken for a self-occupied property, the principal amount repaid up to Rs 1 lakh qualifies for deduction under Section 80C, while up to Rs 1.5 lakh of interest paid is taxdeductible under Section 24.

However, in case of a home loan for the second property, only interest payment is eligible for deduction. No tax benefit is available on the principal repayment on the second loan. However, the good part is that there is no limit on the deduction for interest payment on the second loan (see Benefit of buying a second house). This is because the second house has been given out on rent, explains Adhil Shetty, chief operating officer of Bankbazaar.com.

According to Homi Mistry, partner, Deloitte Haskins & Sells, a property owner can avail of tax benefits on the interest paid on multiple home loans. "Whether the second house is purchased purely as an investment option or as a weekend getaway, the interest paid on a loan taken to buy it is tax-deductible. Since the interest payment is a large expense, you can add significantly to your disposable income if you can save on it," says Mistry. In case the house is yet to be constructed, 20% of the total interest paid during the preconstruction period is also allowed as tax deduction. This is available for five years from the time the construction is complete till you get possession. Deductions allowed on income from second home Even if the second house is lying vacant, the Income Tax Department will consider that it has a rental value. The notional or deemed income (see How income is computed) will be added to your taxable income. Sonu Iyer, tax partner, Ernst & Young, says, "A buyer can deduct expenses, such as municipal or property taxes actually paid, from the deemed income. Other than this, 30% of the net annual value, which is the difference between the rental income and municipal taxes, is also allowed as deduction. In case the house is rented out, 30% of the actual rent can be deducted from the taxable income, apart from deductions for local and municipal taxes." After deducting such expenses from the income that you earn from the property, if you incur a loss, you have the option to set it off as follows: . The current year's loss will first be set off against any other income from property. . It can also be set off against other incomes, such as that from salary, business or profession and capital gains, earned in the current year. . If your balance continues to be in the red, you can carry forward the loss for up to eight years. However, the amount that is carried forward is only allowed to be set off against the income that is earned from a house. How to save on taxes If you own several houses, you can choose one as your primary residence. The income from this property will be treated as nil and exempt from tax, even if you have actually rented it out. It is for this house that the limit of Rs 1.5 lakh applies for deduction on loan interest. The entire interest on the loan taken for the other house, the income from which is taxable, can be deducted from your income. This applies to any number of nonexempt houses that you may own. So, to maximise your savings, consider the house with the highest loan as the non-exempt one. However, make sure that the interest payment on this loan is higher than the principal-cum-interest payment on the other loan. Additionally, if you give your second house on rent for more than 300 days in a year, it will not be subject to wealth tax, which is levied at the rate of 1% on wealth that is in excess of Rs 30 lakh.    If any of the houses is sold after three years, the profit will be taxable as long-term capital gains. However, there are beneficial provisions under which this gain is exempt from tax. So if you invest the money to construct a house within three years or buy another house within two years, your income will be tax-exempt. However, the exemption is reversed and the amount taxed as capital gain if the new property is sold within three years of being constructed/purchased. This will be considered a short-term gain and taxed according to your slab rates. You can also save tax if you invest the profit in a special bank account under the capital gain account scheme. A similar exemption is available for investments of up to Rs 50 lakh in bonds, which are redeemable after three years. This investment should be made within six months of the sale.

How to get your home loan rate lowered

When Delhi-based Mahendra Gupta opened the recent letter from the housing finance company, there was both good and bad news for him. The dismal bit of information was that the 20-year home loan he had been repaying since 2008 still had 22 years to go.

Despite four years of regular repayments, the loan tenure had been extended because of the rise in the home loan rate from 10.25% in 2008 to 13% now.

The good news was that Gupta's lender was ready to convert the loan to a lower rate if he paid a one-time conversion fee. He paid Rs 7,300 and got the interest rate lowered to 10.5%. "My loan tenure came down from 272 months to 166 months. It was a straight gain of almost nine years," gushes the 35-year-old.

Gupta can consider himself lucky. Not every lender offers its customers this option. Worse, very few keep their customers updated about changes in interest rates or how they impact their repayment schedules.

Most banks just go by the wording of the loan agreement, which says the lender can increase the rate and accordingly extend the repayment tenure. If the term cannot be extended, the bank raises the EMI amount or asks the borrower to pay a lump sum.

Be a proactive borrower

You need to be proactive about your loan repayment and check the interest rate you are being charged. When the base rate was introduced, home loan customers thought they would get more transparent deals from their lenders.

However, many banks continue to discriminate between old and new customers, charging the existing ones a higher rate than that being offered to new borrowers.

If you are being charged a higher rate, ask your bank to convert it to the rate applicable to new borrowers.

Don't assume your bank will not listen to your request. A slowdown in growth and intense competition in the housing finance sector have pushed banks to the wall.

Home loan growth slowed down from 15% in 2010-11 to 12.1% in 2011-12.

More importantly, the RBI has abolished the prepayment penalty levied by banks and housing finance companies. So, shifting to another bank is not as costly as it used to be.

"The RBI move has boosted borrowers' ability to negotiate," says Kapil Narang, chief operating officer, Ameriprise India, a financial planning firm.

Banks are willing to negotiate, especially if the borrower has a good repayment history. If a bank refuses to budge, a mild threat of shifting the loan to another lender can work wonders.

"There are instances where banks have offered to cut rates when the clients expressed their intention to transfer the loan to another bank," says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm.

Balance tenure is crucial

Keep the remaining term of your loan in mind when you sit at the negotiating table. When Gupta got his interest rate converted to 10.5% from the earlier 13%, his tenure of 22 years and 8 months was cut down by 8 years and 10 months. Remember that if your loan has less than 10 years to go, the benefit may not be as spectacular. As the table shows, the benefit progressively reduces if your balance tenure is lesser.

A 1.5 percentage point cut in the rate will shave off nearly five years from a 20-year loan, but it will reduce the tenure by just 1 month if the loan has only five years to go. Since you are paying a conversion fee upfront, the change may not lead to any significant gain. Go for it only if the reduction is at least 2 percentage points and your loan has more than 10 years to go.

Cut the tenure, not the EMI

When the interest rate on your loan is lowered, don't make the mistake of reducing the EMI. It's a tempting thought because it eases the pressure on your monthly budget.

However, lower EMIs mean longer tenures and higher interest costs. Instead, bring down the tenure of the loan. "Our standard advice is to avoid reducing the EMI amount. As far as possible, one should opt for cutting down the loan tenure," says Patel.

Only if you genuinely find it difficult to pay the EMI, should you opt for a lower instalment.

This is especially true of individuals who have taken a large home loan on the basis of a projected income, but have not got the kind of pay hikes they expected.

Also, double-income families, where one spouse has lost a job or stopped working, may find this option useful.

Besides, you should check if the new rate that is being offered to you is linked to the base rate of the bank. Make sure it is not a promotional rate that is being offered to new customers. Banks offer low rates to attract customers but hike the rate after 2-3 years. Since home loan tenures are typically 10-15 years, don't go by just the short-term benefit offered on the loan. The loan agreement should clearly specify the spread between this rate and the bank's base rate.

The cost of change

Don't think you can opt for a new and lesser interest rate for free. This conversion entails a minor cost, with banks charging 0.5-1.5% of the outstanding amount (see graphic). It is also a fairly straightforward procedure, which can be completed with one visit to the bank branch.

However, switching to a new bank is a lot costlier and requires more paperwork. Even if your previous lender does not levy a prepayment penalty, the new lender will demand 0.5-1.5% as processing charges. There is also the convenience aspect. You will have to go through the entire process of submitting documents-proofs of income and identity, and PAN card, etc. Therefore, do a cost-benefit analysis before deciding to convert or switch to another lender.

 

Five tips for Credit Card Beginners

7 May, 2012, 08.49AM IST, Preeti KulkarniPreeti Kulkarni,ET Bureau 
It's thrilling to get your first shiny plastic card and the sense of freedom that comes with it. But tagging along with these feelings is responsibility, something you need to learn before you begin swiping your card. It might be tempting to just flourish your card everywhere, but there are a few lessons you must adhere to if you don't want to end up in a debt trap. Here are some points to keep in mind.

Stick to a budget:

When you carry only cash, you can't spend more than what you have. Unfortunately, the convenience of a credit card could be your financial downfall as you may end up spending more than what you can afford. So, keep a monthly limit for your expenses and stick to it. Every time you swipe your card, you receive an alert on your mobile phone (this is why it's a good idea to register your phone number with your credit card account), and this can help you keep a check on your card budget.

Always pay the full amount on time:

You will receive a monthly statement telling you how much you need to pay. Ensure that you pay the full amount on time or you will be charged a late fee. Don't be tempted to pay only the minimum amount due and roll over the balance to the next month. You'll be charged a high interest rate, usually 1.5-3.5% a month, on the amount that you rollover and this will inflate your bill for the next month, making it much harder to pay the bloated bill. Preferably, pay your bill through Net banking as you will be charged about Rs 100 if you pay through cash at the bank.

Don't increase your credit limit:

When the bank offers you a card, it will set a credit limit based on your income. You may want to enhance this limit to fund more expensive purchases. But avoid doing so for a year, at least not till you're more confident about how to use your card. Though the bank will be willing to raise the limit, you still have to pay from what you earn, don't you? So, unless there's a substantial increase in your salary, stick to a low credit limit.
Avoid cash advances:

Don't use your credit card to take a cash advance from the bank or at an ATM. One, you will be charged a one-time transaction fee which could be as high as 3% of the advance. Secondly, you will have to pay a high interest rate on the money, and this interest will begin to accrue immediately. Only take this route in case of an emergency.

Secure your card:

Don't provide your credit card information to anybody, especially the CVV number at the back of the card. Don't let anybody else use the card as you are responsible for all the charges on the bill. When you give your card to be swiped, keep a check that the salesperson does so properly and that there is no chance of skimming, that is, your card information being stored somewhere else. When using it online, ensure that it is a secure and trusted website. Keep track of your usage and compare records when you receive your monthly statement.  

Why it's important to scan your health policy

7 May, 2012 Preeti KulkarniPreeti Kulkarni,ET Bureau 

 Sushil Jain, 75, has a major grouse against his health insurer of almost two decades. "I've made only one claim so far, in February 1999, for the surgery of my lower spine," he says. "I have been in perfect health since then. In fact, I have not been to a doctor in the past 15 years. Yet, at the time of renewal, the company insists on treating this as a preexisting illness and has turned down my request to increase the value of insurance cover," he adds.

Another policyholder, Mumbai-based DP Jambusaria, is peeved with his insurer for introducing new exclusions in his policy at the time of renewal. "They have limited the amount payable for a cataract surgery to Rs 24,000," he says.

Jain and Jambusaria are not alone. The widespread discontent among policyholders has been underscored by the series of consumer court verdicts against health insurers. "The most common disputes relate to preexisting diseases, suppression of facts, and insistence of the insurance company to lodge a claim within 7-30 days of discharge," says consumer activist Jehangir Gai.

Such complaints are so common that the Insurance Regulatory and Development Authority ( Irda) had to issue an advisory last year, asking insurers to refrain from repudiating claims on flimsy grounds. The regulator has also directed industry lobbies, CII and Ficci, to work on guidelines that are aimed at simplifying policy terms and conditions. However, buyers too need to understand these while buying or renewing policies to avoid nasty surprises later on.

Pre-existing illnesses

"The confusion over pre-existing diseases and time-bound exclusions can be attributed to misleading promises by the adviser during the pre-sale process or failure on the part of buyers to understand the policy's terms," says SS Gopalarathnam, MD of Chola MS. Pre-existing diseases are the ailments for which you may have undergone treatment up to 48 months before buying the policy. Insurers are not under any obligation to honour such claims until a prespecified period is over. Some insurers, however, use this clause as a tool to deny claims. "If you have diabetes or hypertension, claims for other illnesses are rejected on the pretext that they have risen as a complication in these problems," says Gai. 

So, it will serve you well to go through the list of pre-existing diseases and the duration for which they are not covered.

Exclusions

You also need to study the exclusions while buying the policy. These include the treatment procedures and ancillary expenses that the insurer will not pay for. For instance, claims related to pregnancy, dental treatment, outpatient department expenses and cost of external aids like pacemakers and wheelchairs, are not entertained in many policies.

Sub-limits

Sub-limits refer to the ceiling on room rent, surgeon's fee, operation theatre charges, etc, within the overall cover amount. "You need to be wary of policies that have sublimits on charges, such as doctor's fee and daycare procedure expense. Also, keep an eye on the limits for various treatments, wherein the amount you can claim for a particular surgery is capped," says Divya Gandhi, head, general insurance and principal officer Emkay Insurance Brokers.

Now, however, some private insurers have eliminated these internal ceilings completely. "If a policy's cover is Rs 5 lakh and the claim amounts to Rs 3 lakh, policyholders tend to assume that the entire claim will be disbursed. However, due to restrictions on, say, room rent, the admissible claim could work out to only Rs 1.5 lakh. This can lead to disputes, so we have done away with the sub-limits," explains Gaurav Garg, MD and CEO, Tata-AIG General Insurance.

Suppression of facts

Often, claims are rejected on the ground that expenses were related to a pre-existing condition that was not disclosed at the time of issuing the policy. "Minor and common ailments, which are completely curable, need not be disclosed while buying a policy. Yet, insurance companies reject claims stating that these were not revealed while applying for the policy," adds Gai.

To avoid rejection on this ground, make sure that you list out all your medical problems while filling up the form.

Claim loading

While insurers have the right to revise their premium rates every year, this cannot be done arbitrarily. Insurance companies have to follow the claim loading structure mentioned in the policy document. So, ensure that your policy clearly spells out this framework before you buy it.

Renewability

Health insurers have never been enthusiastic about renewing policies of senior citizens or those with a history of making huge claims. However, they are bound by regulations to renew policies irrespective of the claims made. In fact, all products that are yet to be launched will have to offer lifelong renewability. "A policyholder must not permit the insurer to unilaterally change the terms and conditions without his consent. Renewal of policy cannot be considered a fresh contract; it's an extension of the original contract for another year. So the policy has to be renewed on identical terms and conditions," says Gai.

 

Invest while you are in debt

Authored By: Ajit Panicker

"When you are in debt, why should you invest, there is no need". This is what we say to ourselves when we are in debt, with the loans taken from banks to purchase our own house or cars we buy or consumer durable items we purchase.
Most of us think like this, and this is even logical. Why should you pay unnecessary interests when you are already in debts?
 Let us take a situation where a family of four with husband , wife and their two kids stay together. Both husband and wife are working and the children are going to school. They have recently taken a home loan and a car which they purchased three years back. many household items are also financed by various financing companies.
Both husband and wife earn handsomely, but still this kind of debts are still there, the reason being , that they want to live a better life and banks and financial institutions being there to provide such credit facilities.
Now what i think, are they not investing for their retirement or for their children's future, they must be.
What i need to understand is that are they DOING INVESTMENTS while being in DEBT.?
Yes they are, and this is what almost all of us do, barring a few.
In this situation what should be done is , the individual should analyze what is the total debt, which he has taken, and what is the interest he is paying on them. He should at the same time calculate what is the total investments he is making and what would be the interest he would earn over a period of time, he has taken that investment for.
After doing both the calculations, present value of money  for all the corpus (from the investments made)which would be created after the tenure should be calculated. Then with the debt he has and the interest he is paying on the assets, or items he has purchased and would be paying till the tenure ends, he should calculate the benefit of assset he is having and the appreciation of the assets which would happen over a period of time.
If there is a positive outcome , in the present value of future money and present outflows, then investments should be made regularly.
But if there is a negative outcome, then still, investments in systematic way should be made so as to maintain the discipline of saving and thus not allowing all the earnings either outflowing as interest to banks or debt repayment or expenses for the household.