Thursday, 11 January 2018

7.75% Government of India Savings Bonds

Government of India has decided to issue 7.75% bond starting January 10, 2018, notice for the same was issued on January 3, 2018.

These 7.75% GOI bonds will replace the 8% bonds scheme which was earlier in place for retail investors. Also the tenure has been increased from 6 years (For 8% bonds) to 7 years now.

In this post we’ll see some of the features of these 7.75% GOI saving bonds.

Who is eligible to invest

The 7.75% Government of India Savings Bonds are open to investment by-

  • Resident individuals.
  • In individual capacity on joint basis.
  • On behalf of minor as father/mother/legal guardian.
  • A Hindu Undivided Families (HUF).

NRIs are not permitted to invest in 7.75% GOI bonds.

Where can you buy 7.75% GOI bonds

You need to make an application in Form A (Reference download- https://rbidocs.rbi.org.in/rdocs/content/pdfs/STB09012018_A1.pdf) for investing in these bonds. The application for the bonds will be received at any number of branches of State Bank of India, Nationalised Banks, three private sector banks and SCHIL(Stock Holding Corporation of India Ltd.). Names of the banks are listed here.

Public Sector Banks

1.State Bank of India
2. Allahabad Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Dena Bank
9. Indian Bank
10. Indian Overseas Bank
11. Punjab National Bank
12. Syndicate Bank
13. UCO Bank
14. Union Bank of India
15. United Bank of India
16. Corporation Bank
17. Oriental Bank of Commerce
18. Vijaya Bank
19. IDBI Bank Ltd.

Private banks

1. ICICI Bank Ltd.
2. HDFC Bank Ltd.
3. Axis Bank Ltd.

Payment options and bond holding form

Payment for the bond can be done in form of Cash/Drafts/Cheques or electronic transfer.

The Bonds will be issued only in the demat form and credited to the Bond Ledger Account (BLA) of the investor.

Holding period of the bond

The Bonds will have a maturity period of 7 years.

Pre-Mature encashment of the bond

Premature encashment of the bond is permitted for individual investors in the age group of 60 years and above. Condition for that are as follows-

  1. If the investor is in the age bracket of 60 to 70 years then the lock in period shall be 6 years from the date of issue.
  2. If the investor is in the age bracket of 70 to 80 years then the lock in period shall be 6 years from the date of issue.
  3. If the investor is 80 years and above lock in period shall be 4 years from the date of issue.

Note that in case of joint holders or more than two holders of the Bond, the premature encashment is not allowed and the lock in period will be 7 years even if any one of the holders fulfils the above conditions of eligibility.

In case of premature encashment there is also a penalty which is calculated as - 50% of interest due and payable for the last six months of the holding period both in respect of Cumulative and Non-cumulative bonds.

Minimum and maximum limit of investement

Minimum amount to invest in 7.75% GOI bond is Rs. 1000 (face value) and in multiples of 1000.

There is no maximum limit.

Interest options

As the name suggests these bonds will bear interest at the rate of 7.75% per annum but you have two options to choose from while buying-

  • Cumulative
  • Non-cumulative

Interest on non-cumulative Bonds will be payable at half-yearly intervals from the date of issue where as interest on cumulative Bonds will be compounded half-yearly but will be paid only on maturity along with the principal.

In case of cumulative bond the maturity value of the Bonds shall be Rs. 1,703.00 (principal + interest) for every Rs. 1,000.

Interest for non-cumulative Bonds will be paid from date of issue up to 31st July / 31st January as the case may be, and thereafter half-yearly for period ending 31st July and 31st January on 1st August and 1st February.

Interest for non-cumulative Bonds will be paid from date of issue up to 31st July / 31st January as per the date of issue, and thereafter half-yearly for period ending 31st July and 31st January on 1st August and 1st February.

Tax treatment

The interest earned on 7.75% GOI saving bonds is taxable as per the applicable tax slabs.

Tax will be deducted at source too at the time of interest payment.

Tax will be deducted at source while making payment of interest on the Non-Cumulative Bonds from time to time and credited to Government Account.

Tax on the interest portion of the maturity value will be deducted at source at the time of payment of the maturity proceeds on the Cumulative Bonds and credited to Government Account.

The Bonds will be exempt from wealth-tax under the Wealth Tax Act, 1957.

Nomination facility in 7.75% GOI bonds

You can nominate one or more persons using Form B. You can also cancel the previous nomination using Form C.

No nomination shall be made in respect of the Bonds issued in the name of a minor.

If the nominee is a minor, the holder of Bonds may appoint any person to receive the Bonds/ amount due in the event of his / her / their death during the period the nominee is a minor.

Tradability or loan against Bonds

The Bonds are not tradable in the secondary market and are not eligible as collateral for availing loans from banks, financial Institutions and Non-Banking Financial Companies.

So theses are features of the 7.75% Government of India saving bonds, based on that you can make an informed decision whether to invest in these bonds or not. I can again sum up the good points and bad points.

Good points about 7.75% GOI bonds

  1. Risk free investment, backed by Government of India.
  2. Assured return of 7.75% with no fluctuation.
  3. Reasonable lock-in period of 7 years with option for senior citizens to encash it prematurely.
  4. Provides an option to get interest income every 6 months if you opt for non-cumulative bonds.
  5. Going by the prevalent interest rates (Jan, 2018 – Mar 2018 quarter) where small saving schemes like PPF are giving 7.6%, FDs are offering 6%-6.5%, Kisan Vikas Patra (KVP) is giving 7.3%, interest rate provided by these bonds looks better.

Bad points about 7.75% GOI bonds

  1. Interest income is taxable making the real returns reasonably less if you are in 20% or 30% tax slab. For a person who is in 30% tax slab real rate of return will be around 5.5%. So in comparison to risk free EEE investments which are available like PPF, SSY it’s returns are low.
  2. Investment in these bonds can’t be claimed under 80C.
  3. Even for Senior citizens who are finding it attractive because of pre-mature encashment option there are better options available like Senior Citizen Saving Scheme which offers 8.3% interest rate (Jan, 2018 – Mar, 2018 quarter) and duration is 5 years.
  4. There are early indications that interest rates may start going up in next quarter or two. So locking up amount at 7.75% interest rate that too taxable may not be a good idea right now if you can wait.

That's all for this topic 7.75% Government of India Savings Bonds. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Tuesday, 9 January 2018

Senior Citizen Saving Scheme (SCSS) Closure And Pre-Mature Closure Rules

Senior Citizen Saving Scheme (SCSS) is a risk free investment scheme for senior citizens looking for options to invest their retirement corpus. It also provides better interest rate than other small saving schemes.

In the post Senior Citizen Saving Scheme (SCSS) we have already see many features of SCSS. In this post we’ll see what options do you have once SCSS account matures and how to close SCSS account prematurely.

SCSS account maturity

Once the SCSS account completes 5 years you have two options -

  1. Close the account and withdraw the amount.
  2. Extend the SCSS account for another three years.

Closing the account

If you wish to close the account and withdraw the maturity amount after the expiry of five years from the date of opening of the account, you need to submit the filled closure form (Form E : Reference download - https://www.indiapost.gov.in/VAS/DOP_PDFFiles/form/FormforClosingSCSS.pdf) along with the passbook to the concerned deposit office.

Extending the account

If you wish to extend the account after the expiry of five years you can do so by submitting Form B (Reference- https://www.indiapost.gov.in/VAS/DOP_PDFFiles/form/ApplicationFormforExtensionofSCSS.pdf).

In case you do not close the SCSS account on maturity and also do not extend the account, the account will be treated as matured. In that case depositor will be entitled to close the account at any time. Post maturity an SCSS account will get the interest at the rate as applicable to the deposits under the Post office Savings Accounts.

Pre-mature closure of SCSS account

Pre-mature closure may happen in case of death of the depositor. You are also entitled to close the SCSS account prematurely any time after it completes one year.

Death of the depositor

In case of death of the depositor before the SCSS account matures, the account shall be closed. Nominee or legal heir needs to make an application in Form F for getting the refund of SCSS deposit along with accrued interest.

Pre-mature closure of Account

Pre-mature closure of the SCSS account by depositor is possible with certain conditions.

  1. SCSS account must have completed one year.
  2. In case the SCSS account is closed after the expiry of one year but before the expiry of two years from the date of opening of the account, an amount equal to one and half percent of the deposit shall be deducted and the balance paid to the depositor.
  3. In case the account is closed on or after the expiry of two years from the date of opening of the account, an amount equal to one percent of the deposit shall be deducted and balance paid to the depositor.

Partial withdrawal

Partial withdrawal in SCSS are not permitted. In case of any emergency you can anyway close the account with some penalty levied on the withdrawal.

That's all for this topic Senior Citizen Saving Scheme (SCSS) Closure And Pre-Mature Closure Rules. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Senior Citizen Saving Scheme (SCSS)

Senior Citizen Saving Scheme (SCSS) is started with an idea to provide a risk free investment avenue to senior citizens who are looking for an investment option to invest their retirement corpus.

Some of the benefits of SCSS are as -

  1. Risk free investment options for retirees. Scheme is backed by government.
  2. Tax benefit, investment is SCSS can be be claimed for deduction under 80C with in a permissible limit of Section 80C.
  3. Provides one regular source of income in form of quarterly interest payment.

Where to open Senior Citizen Saving Scheme account

SCSS account can be opened in any public sector bank or in a network of post offices by making an application in Form A.

Right now only one private bank ICICI can open SCSS acount.

A depositor may open the account in individual capacity or jointly with spouse. In case of joint account age eligibility criteria is applicable on the primary depositor.

Required documents

Eligibility for opening SCSS account

An individual who has attained the age of 60 years and above can open SCSS account.

Any individual who has attained the age of 55 years or more but less than 60 years and who has retired on superannuation or VRS can also open SCSS account. In that case SCSS account must be opened within one month of receipt of retirement benefits and amount should not exceed the amount of retirement benefits.

The retired personnel of Defence Services (excluding civilian Defence employees) can open SCSS account after the age of 50 years. Earlier they could open with out any age limit but the rule has been changed.

NRI's are not eligible to open an SCSS account. Hindu Undivided Family (HUF) is also not eligible to open an SCSS account.

SCSS investment limits

There shall be only one deposit in the SCSS account and the minimum amount that can be deposited is Rs. 1000 and in multiple of Rs. 1000. The maximum amount that can be deposited is Rs. 15 lakhs.

Also the deposits by depositors shall be restricted to the retirement benefits.

So it is either deposit of amount received as retirement benefit or Rupees Fifteen lakhs whichever is lower.

Mode of deposit

While opening SCSS account you can make deposit by -

  • Cash, if the amount of deposit is less than one lakh rupee.
  • By cheque or demand draft drawn in favour of the depositor.

How many SCSS accounts for an individual

There is no limit on the number of accounts that can be opened by an individual subjected to the maximum investment limit. Which means deposits in all accounts taken together shall be restricted to the retirement benefits or Rupees Fifteen lakhs whichever is lower.

Duration of SCSS account

The maturity period of the Senior citizen saving scheme account is five years. The depositor may extend the account for a further period of three years after the maturity period of five years.

For an extension of SCSS account request should be made within a period of one year after the date of maturity period.

SCSS Interest rate

From FY 2016 - 2017 the rate of interest will be reviewed every three months so interest rate on small saving schemes will be fixed on quarterly basis and may change every quarter.

For the quarter Jan, 2018 – Mar 2018 interest rate is 8.3% for Senior Citizens Savings Scheme.

Here note that the prevailing interest rate at the time of opening SSY account will be same for 5 years. Quarterly interest rates changes won’t change the interest rate for already existing accounts.

As Example – If you are opening an SCSS account in Jan 2018 when the rate of interest is 8.3% that is the interest rate you will get for 5 years.

However, if you extend the account after 5 years then the prevailing rate of interest will be applicable on the extended account.

Interest on SCSS is paid quarterly and interest is calculated up to the last day of every quarter i.e. 31st March, 30th June, 30th Sept and 31st December.

Quarterly interest of SCSS accounts will be credited to the attached saving account.

If you have opened a SCSS account in a post office you should have a post office saving account where quarterly interest can be credited.

Tax treatment of SCSS

Investment under this scheme can be claimed as tax deduction under 80C with in the current permissible limit of Rs. 1.5 Lakh.

SCSS is not an EEE saving scheme though, the interest received in the year is taxable. There will also be a TDS on interest if the interest amount is more than Rs. 10,000.

SCSS nomination

You can nominate a person or more than one person, at the time of opening of the account. Nomination addition/modification/cancellation can be done at any time after the opening of the account before it matures. You have to submit an application on Form C accompanied by the passbook to the Branch.

There is no fee for any nomination related activity.

SCSS account transfer

SCSS account can be transferred from one deposit office to another. You can apply using Form G, enclosing the Pass Book for transfer of your account from one deposit office to another.

If the deposit amount is rupees one lakh or above, a transfer fee of rupees five per lakh of deposit for the first transfer and rupees ten per lakh of deposit for the second and subsequent transfers shall be payable.

Points to remember

  1. SCSS account can be opened by any individual who is 60 years and above.
  2. In case of supperannuation and VRS an individual can open SCSS account after 55 also by submitting the required documents.
  3. For retired defence personnel age is 50.
  4. Interest on SCSS is paid quarterly, so it provides a regular source of income for senior citizens.
  5. Deposit in SCSS can be claimed as tax deduction under 80C.
  6. Tax will be deducted at source if the accrued interest is more than Rs. 10,000 in a year.
  7. There will be only one deposit in SCSS. Minimum limit is 1000 and maximum limit is Rs. 15 lakhs.
  8. The maturity period of the Senior citizen saving scheme account is five years.
  9. SCSS account can be extended for a further period of three years after it matures.
  10. Pre-mature closure of the account is possible with some penalty.

That's all for this topic Senior Citizen Saving Scheme (SCSS). If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Tuesday, 2 January 2018

PPF or Life Insurance

Should I start investing in PPF or take a life insurance policy is a question asked quite frequently. Though these two are completely different products and this question PPF or LIC should not be even asked as comparing them is like comparing chalk and cheese.

The thing is; for many individuals investing means somehow provide proofs for tax deduction under 80C. Since premium paid towards life insurance and contribution in PPF both can be claimed under 80C thus the question LIC or PPF.

Similarities in LIC and PPF

There are few similarities in both LIC and PPF -

  • Multi-year contribution – In both of these instruments you need to contribute for long periods. In case of PPF at least 15 years where as in case of life insurance you need to pay premium for 15, 20 or even 30 years based on the policy terms.
  • Regular contribution – In both of these instruments regular contribution is needed. At least once in year you will have to invest some amount in PPF same in case of LIC you do need to pay the annual premium.
  • Tax relief – Both of these instruments provide tax relief as amount invested with in a Fiscal year or premium paid for life insurance can be submitted as proof for tax deduction.

Changing the mindset

Though there are few similarities but that doesn’t make PPF and LIC similar. These two are vry different products with their own importance but it should not be LIC or PPF but LIC and PPF. Let us see why?

For any financial planning and long term stability there are two things we look for -

  • Protection
  • Saving

Protection

In financial terms protection means accounting for unfortunate circumstances like death or medical emergency and that’s where insurance in form of life insurance or health insurance helps. That should be your idea for buying life insurance; to safe guard the near ones from the financial impact of the death of the insured.

Primary purpose of life insurance should not be looking for survival benefits upon the completion of the policy tenure. That is why it is even better to buy term insurance than life insurance but that is another topic.

Saving

In financial planning you should think of protection first and then for saving for goals like buying a house, kid’s education, retirement planning. When you have to save for these goals that’s where you will have to look for saving instruments like PPF.

So, you see it is more of mindset change for many of us and start accepting the fact that not every instrument out there is for saving. We need to change our thought process too that financial planning is not only somehow providing proofs for 80C at year end.

You need to think of financial planning as two distinct parts -

  • Providing protection – Buy life and health insurance for these needs.
  • Saving for goals – Look for investments like PPF, SSY, SIPs in mutual funds for specific saving goals.

What happens in case of death

It’s the accounting for unfortunate circumstances that we have to put protection first and this is the case when life insurance scores over any small saving scheme like PPF.

If subscriber dies, in case of PPF nominee will get whatever is invested till death + accrued interest for that period.

In case of life insurance nominee will get sum assured irrespective of premium paid.

Let’s see it with an example -

Let’s assume a person aged 28 starts both LIC and PPF in the same year, he buys a LIC policy with 1500000 sum assured for 15 years term. In that case, premium he needs to pay will be around Rs. 1.2 Lakhs per year.

Let’s assume he invests the same amount in PPF every year i.e Rs. 1.2 Lakhs.

Unfortunately the person dies after 3 years then in case of PPF, nominee will get whatever is invested in these 3 years + accrued interest which comes to around Rs. 4,21,000 if we take 8% as interest.

But in case of LIC nominee will get sum assured which is Rs. 1500000 + Bonus. Bonus announced by LIC is in the range 36 – 40 per 1000. If we take it as 40 in this case then bonus for 3 years will be 180000. So nominee will get total 1500000 + 180000 = 1680000 (Rs. 16.8 Lakhs).

Comparison points

If you are convinced and agree with me that it is not LIC or PPF but LIC and PPF then you don’t even need to read further. If you are still not convinced and looking for comparison between LIC and PPF then let’s see some of the comparison points too -

  • Yield – If you are buying LIC policy with investment in mind then it is a sloppy investment. Return on maturity benefit comes in the range 4% – 5% only. Where as in case of PPF, even though the rates are down (7.6% in Jan, 2018 - Mar, 2018 quarter), you will get more than LIC policy.

  • Ease of investment – In ease of investment both are similar. In case of insurance policy there are options to pay premium monthly, quarterly, half yearly or annually. In case of PPF also you can invest in lump sum or invest monthly.

    In case of PPF minimum contribution is Rs. 500 which means you can pay the minimum amount of 500 in a year to keep your subscription alive. That may be helpful if you have some financial problem in any year.

    In case of LIC you will have to pay the fixed premium otherwise your policy will lapse.

  • Stopping investment – In case of PPF you can take loan or do a partial withdrawal as per the rules of PPF. Pre-mature closure is also possible after 5 years but only for certain conditions like terminal illness, higher education.

    In case of LIC policy that can be surrendered any time but you will get surrender value as per rules only after paying premium for 3 years.

  • Tax benefits – LIC policy premium amount can be claimed as deduction under 80C (Current limit of 80C is Rs, 1.50 Lakhs inclusinve of all savings). Amount invested in PPF can also be claimed as deduction under 80C. So both provide tax benefits that way.

    Returns from PPF are tax free. If you close your PPF account after completing 15 years then you will not have to pay any tax on the returns.

    Maturity amount on your LIC policy is also tax free except for this condition - If the premium payable in any year exceeds 10% of the actual sum assured, then the policy proceeds would be taxable in the hands of the insured.

That's all for this topic PPF or Life Insurance. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Wednesday, 27 December 2017

Drawbacks of NPS

National Pension System (NPS) scheme was started by GOI in order to provide financial security and stability during old age when people don't have a regular source of income. The subscription to NPS is rising with the lure of additional tax break but still NPS has not got the traction it was supposed to get.

That is because of some of the drawbacks of NPS and some of the fears of the investors. In this post we’ll see some of these drawbacks so that investor gets the necessary knowledge and make an informed decision.

Points that go against NPS

Here are some of the drawbacks of NPS. Mind you some of these may be perceived as drawbacks by investors and not actually be a drawback if seen from a slightly different angle.

  1. Very long duration – In NPS you need to contribute till the age of 60. If you are starting to contribute at the age of 25 that would mean a duration of 35 years where you invest money in NPS. While I do admit that exit and partial withdrawal rules are a bit complex but it is the long duration of the NPS that will help you to build a big corpus. Also don’t forget some of the amount is going to equity and it is a well documented fact that equities pay in a long term.

    You have to see it as a pension plan which should start giving you back only after the age of 60, so long duration should not be a deterrence.

  2. NPS corpus is taxed on maturity – Now this is one sore point and when compared to other long term products available like PPF (which is EEE), the idea of paying tax on the accumulated corpus makes people a bit wary of NPS.

    Though there are ways to reduce tax liability, 40% of the corpus can anyway be withdrawn tax free and 40% has to be used to buy annuity. That leaves 20% of the corpus, which if withdrawn, will attract tax at the applicable tax rate. There is another option though, you can use that 20% also to buy annuity then it will not be taxed.

    But beware of the fact that the amount you get monthly from the purchased annuity will also be taxed as per the applicable tax rates.

    Another way to reduce tax is to defer the withdrawal of lump sum amount of 60%. NPS allows to stay invested till the age of 70 so you can withdraw in instalments and structure it in such a way that your tax liability is reduced.

  3. Mandatory annuity – Another point that is making people not opt for NPS is the mandatory buying of annuity with at least 40% of the corpus. Most of us want to have full control of the amount after investing for so long. Moreover annuity return rate in India are in the range 5.5 – 7 percent. Which means for the amount of 50 Lakhs in annuity your monthly pension will come to about Rs. 30000-32000 and to add to that income from pension is fully taxable.

  4. Partial withdrawal and exit rules - Exit and partial withdrawal rules are not very flexible are another reason given by investors to stay away from NPS.

    If you want to exit before attaining the age of 60, at least 80% of the accumulated corpus should be utilized for purchase of an annuity which means you can only withdraw 20% of the corpus.

    For partial withdrawal you should have been invested in NPS at least for a period of 10 years. Moreover only 3 withdrawals are allowed during the whole tenure of your NPS subscription that too for very specific reasons like like Child's marriage, higher education, treatment of critical illnesses etc.

    There should also be a gap of at least 5 years between two successive withdrawals. Some relaxation in this gap is given only in the case of treatment for specified illness.

    These rules put off few investors who want access to their money with in the tenure of subscription. But don’t forget NPS is supposed to be a long term investment exiting in between without any real emergency or partial withdrawal with out specific purpose will dent the effect of compounding where your accumulated corpus (prinicipal + interest) starts earning an interest.

  5. Investment in equity – Many investors are conservative and don’t want to invest in equities. NPS does provide an option through Active choice to put the whole contribution in Government Securities or Corporate Bond Fund. But Active choice means you have to decide on the asset class and the fund manager. Investors find all that research too intimidating and want to go with Auto choice but in Auto choice equity percentage will be there. To avoid this dilemma people go with other debt options rather than opting for NPS.

    At the same time there is another group of investor who want to be in control of their investment and want to decide how their contribution is invested. For them 50% cap on equity allocation even in Active choice is a source of concern.

    Now we can see it as a balancing act by NPS (50% cap on equity) to keep both classes of investors happy. Investors who prefer equity should opt for some other mutual funds too with more exposure to equity.

  6. Returns are not assured – In NPS returns are market linked. You are not given n black and white that these are your assured returns under NPS. Investors who want to have a clear picture where their money is going and how much they will get after the specific duration find it a bit risky.

    This concern is valid in case market crashes in the year you are retiring which would mean a much smaller corpus than planned.

    That is also one reason equity percentage is capped to 50% and you can also look into the option of keeping your investment with in NPS till the age of 70 and withdraw only in instalments.

That's all for this topic Drawbacks of NPS. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Sunday, 24 December 2017

Investment Habits to Help You Build Wealth

We all have habits, few of us are even slaves to some habits. Some of these habits are perceived as good habits and some as bad. Like sleeping on time, waking up early, eating healthy are all considered good habits while staying up late at night, smoking, eating junk everyday are considered bad.

We may argue over what can be categorized as bad or good as some of us may say that all their creative thoughts come only late at night and that’s when they get most of the work done. That discussion is relative but one habit is universally good “The habit to invest”. Cultivating a habit to invest consistently and with discipline is good for all and intelligent investment is serious stuff which has a direct impact on - how you tackle with any emergency, your future and your life style.

Here are few habits that will help you create the investing discipline.

  1. Start early – There is no ‘better time’ to start investing. You should start as early as you can, even if you start with a small amount. Never underestimate the power of compounding.

    As example – If you put aside Rs. 5000 every month for 15 years and the interest rate you achieve is a modest 9%. Let’s for simplicity’s sake assume that interest is compounded annually on the whole amount, which means on the Rs.60,000 you invested in a year, you are getting 9% interest compounded annually. After 15 years the amount will become close to Rs. 20 lakhs, where principal is 9 Lakhs.

    Now consider the same investment for 20 Years. After 20 years you will get close to Rs.34 Lakhs. A difference of Rs.14 Lakhs where you have invested Rs.3 lakhs extra.

  2. Setting investment goals – You will have some short-term goals, some long term goals and you need to plan your investment accordingly for these goals. Also setting goals helps you think clearly in creating a better road map.

    You can in fact categorize your goals into three categories -

    • Short term goals – Ready cash for any emergency, down payment for, maybe a car, repaying education loan.
    • Medium term goals – Savings for buying a house, marriage expenses, overseas holidays.
    • Long term goals – Kid’s education, retirement.
  3. Creating a plan – Once you have established your goals, you need to put aside some amount to cater to those goals.

    For short term goals you may look into Recurring deposits, fixed deposits, liquid funds.

    For medium and long term goals try to put some money into Mutual funds, buy equities if you are confident enough (not buying it just because you got a tip as an SMS or email).

    Also look into some risk-free long term investment like Public Provident Fund and Sukanya Samriddhi Yojana (if you have a daughter).

  4. Start spending less – Money saved is money earned. Period. If needed, retrospect objectively on where your income is mostly spent and if that expense can be reduced in any way (maybe better planning) then that should be addressed. In the long run, this will definitely have an impact on your financial situation.

  5. Automating the investment – Most of the banks provide automatic debit for deposits, for mutual funds there are SIPs. When you have facility to put your investment in auto-pilot then why not use it. In fact plan your auto-debit in such a way that in the starting of the month itself money is debited and you don’t see a swell account which may urge you into any unwanted indulgence.

  6. Diversify – Never keep all your eggs in one basket, there are so many vistas for investors – equities, mutual funds, bonds, fixed deposits, real estate, gold, silver to name a few.

    Even if your preferred investment is equity there itself there is scope for diversification in form of large caps, mid caps, small caps, sectors. Same way in mutual funds you can create a portfolio of few funds spread among large cap, mid cap, hybrid, multi-cap, debt funds.

    Some money in gold and silver also makes sense but that shouldn’t be your primary form of investment.

  7. Stay invested for long – Ride the tide, there will be periods of despair and there will be periods of euphoria. Experience it all, stay invested, don’t run away !!

    Every time of despair is an opportunity to average your cost, hunt for stocks which pay good dividend (If you get a stock, with good dividend yield, at a lesser price during stock market crash you have a very good chance of increasing your dividend yield for that stock).

    Very few lucky or very well informed people can time the market to perfection, for rest of us it’s the discipline and long term goal.

    Also don’t forget the effect of long term compounding as stated in point 1.

  8. Be informed, be flexible – If I have influenced you to stay invested for long I’ll also stress on the point of being informed and be flexible. Be informed about what is going on around you that may give you a good idea about the emerging sectors and the first mover advantage. That will also give you an idea about what is not working. With that knowledge you are well equipped to revise your investment strategy. Being flexible is as important as staying in the game. Sometimes not cutting your losses at the right time may harm you in a big way. So big flexible, accept what is not working try to get rid of non-performing investment before they become a burden you can’t get rid of.

That's all for this topic Investment Habits to Help You Build Wealth. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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  1. Know about Public Provident Fund (PPF)
  2. Sukanya Samriddhi Yojana - An introduction
  3. Tax exemption benefits of National Pension System(NPS)

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Sunday, 8 May 2016

Kisan Vikas Patra (KVP)

Kisan Vikas Patra (KVP) is a small saving scheme which was initially launched in 1988. It was later discontinued in 2011 after the recommendation of a committee that KVP can be misused for money laundering. Kisan Vikas Patra was introduced again in 2014 with some changes to make it safer like-

  • KYC norms are a must now like any other small saving scheme. So identity proof and residence proof are required now to invest in KVP.
  • PAN is also required if invested amount is more than Rs. 50,000.

Denominations of certificate

The Kisan Vikas Patra is available in denominations of Rs. 1,000/-, Rs. 5,000/-, Rs.10,000/- and Rs. 50,000/-.

Any number of Certificates may be purchased which means there is no upper ceiling.

Who is eligible for investing in KVP

A KVP certificate can be issued to an adult for himself or on behalf of a minor or to a minor. It can also be issued jointly to two adults.

KVP is not available to companies. Hindu Undivided Family (HUF) and NRI also can't invest in KVP.

Procedure for purchase of Certificate

In order to purchase KVP certificate a duly filled Form A should be presented at a Post Office or Bank.

Modes of payment - Payment for the purchase of a Certificate may be made in any of the following modes, namely:-

  • By cash
  • By locally executed cheque, pay order or demand draft drawn in favour of the Post Master
  • By presenting a duly signed withdrawal form or cheque together with the passbook for withdrawal from Savings Account standing in credit of the purchaser at the same Post Office or Bank.

If payment is not done using cheque, pay order or DD a Certificate shall be issued immediately and the date of such Certificate shall be the date of payment.

Where payment for the purchase of a Certificate is made by cheque, pay order or demand draft the Certificate shall not be issued before the proceeds of the cheque, pay order or demand draft, as the case may be, are realised and the date of such Certificate shall be date of encashment of the cheque, pay order or demand draft, as the case may be.

Type of Certificates

Kisan Vikas Patra (KVP) are of the following types -

  • Single holder type Certificates - This type of certificate may be issued to an adult for himself or on behalf of a minor or to a minor.
  • Joint 'A' type Certificates - This type of certificate may be issued jointly to two adults payable to both holders jointly or to the survivor.
  • Joint 'B' type Certificates - This type of certificate may be issued jointly to two adults payable to either of the holders or to the survivor.

Rate of interest on KVP

Update: Earlier the interest rates for the small saving schemes like PPF, SSY, NSC, KVP used to be declared annually once. From FY 2016 - 2017 the rate of interest will be reviewed every three months so interest rate on small saving schemes will be fixed on quarterly basis and may change every quarter.

Interest rate announced for the quarter January 1, 2018 - March 31, 2018 is 7.3% for Kisan Vikas Patra.

For previous two quarters i.e. Jul, 2017 - Sep, 2017 and Oct, 2017 - Dec, 2017 interest rate was 7.5%.

Tax treatment of KVP

There is no tax benefit for investing in KVP. Amount invested in KVP is not eligible for deduction under section 80C. Also the accrued interest is taxable.

There is no official intimation that TDS will be deducted on the interest accrued so it would be safe to assume that TDS is not there.

Kisan Vikas Patra maturity

KVP matures when the amount invested is doubled, so based on the current interest rate (FY 16-17) of 7.8% maturity time is 110 months (9 Years and 2 Months).

For the quarter January 1, 2018 - March 31, 2018 interest rate is 7.3% which means KVP maturity time is 118 months.

Pre-mature encashment of KVP

One advantage of KVP is that KVP certificate can be encashed any time after expiry of two years and six months from the date of issue of Certificate. Based on a pre-determined calculation you will get your prinicipal + interest value for the invested time period.

KVP may also be prematurely encashed any time under the following circumstances, namely-

  • On the death of the holder or any of the holders in the case of a joint holder;
  • On forfeiture by a pledge being a Gazetted Government officer
  • When ordered by a court of law

Transfer of Certificate from one person to another

KVP certificate may be transferred from one person to another with the consent in writing to an officer of the Post Office or Bank.

Cases in which transfer can be sanctioned are -

(a)

  • From the name of a deceased holder to his heir.
  • From a holder to a court of law or to any other person under the orders of court of law.
  • From a single holder to the names of joint holders of whom the transferee shall be one.
  • From Joint holders to the name of one of the joint holders.

(b)

  • From Single or joint holders to another person.

Transfer from Post Office to Bank and vice-versa

A Certificate may be transferred from a Post Office or Bank at which it stands registered, to any other Post Office or Bank to the holder or holders making an application in Form B either at Post Office or Bank.

Nomination

Nomination facility is provided for the Kisan Vikas Patra. For that Form C has to be filled. In case, nomination is not made at the time of purchasing the Certificate, it may be made at any time after the purchase of the Certificate but before its maturity.

Pledging KVP certificate as security

Another adavntage of KVP is that this certificate can be used as a collateral against a loan from the bank or in other cases where security deposit is needed.

To sum it up let's see some of the pros and cons of the KVP -

Pros of KVP

  1. Risk free as the returns are fixed and secure.
  2. It provides some liquidity as it can be encasehd after 2&1/2 years.
  3. It can be pledged as a collateral.
  4. TDS is not deducted on the interest earned. However, it is the responsibility of the certificate holder to show the interest income and pay the taxes accordingly.

Cons of KVP

  1. Though KVP was a favourite small saving scheme at one time but now it is not a good investment, when interest rate is drastically reduced to 7.8% (FY 2016-17). For long term investment PPF or SSY is a much better option.
  2. For shorter term (if fixed return is needed) 5 year Bank FD is a some what better option, though interest rate offered currently will be less than what is offered for KVP, at least it is eligible for tax deduction. You can break it too, of course some penalty will be levied.
  3. There is no tax benefit either so for people who are falling under income tax slabs there are other better avenues to invest than KVP.

That's all for this topic Kisan Vikas Patra. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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