MyInsuranceClub.com is the best place to compare insurance, Go there

The Union Budget of 2012 was unveiled by the Finance Minister in February this year. A mixed bag of reforms and recommendations, the budget on one side has brought about cheer to many, where as to certain others it has not gone down too well.

Significant tax reforms have been proposed, effective April 1, 2012. New Tax slabs, and raised exemption levels are some of the proposed changes. Here is a quick roundup of the key tax reforms and its impact on the tax payers.

Highlights of Income Tax Reforms

Though the Direct Tax Code could not be implemented this year, the new tax regime is definitely a positive step towards the implementation of DTC.

Changes in General Category

Unlike the previous years where there was a separate category for men and women, all tax payers now would come under a single category- the “General” category.

Increase in Basic Exemption

The budget brings relief for the salaried. The basic exemption limit has been raised from the previous Rs.1.8 lakhs to Rs. 2 lakhs now. With this marginal increase in the individual limits, you could expect to save a bit more on your income.

Benefit to Highest Slab Tax Payers

With the move from 30% to 20% under the new income tax slab, persons with income up to Rs 10 lakh per annum will save about Rs 1,030 and those earning more than Rs 10 lakh would have a tax liability coming down by up to Rs 20,599.

Relief to Senior Citizens

Though there hasn’t been changes in the exemption limits of senior citizens (above 60 years) very senior citizens (above 80 years), the relief comes in paying advance tax.

Senior Citizens will be relieved of the burden of paying Advance Tax for any income under the head 'Profits and gains of business or profession' and such senior citizen shall be allowed to discharge his tax liability (other than TDS) by payment of self-assessment tax.

Interest from Bank Accounts

A new income tax deduction has been introduced under Section 80TTA. This section allows a deduction of up to Rs.10,000 on interest earned from savings bank accounts. So the money that you accumulate in your savings account henceforth could fetch you much more.

Exemption on Health Check up

Extending the benefits under section 80D, a deduction of Rs.5,000 has been proposed for expenses incurred on preventive health chick ups of self, spouse, dependent children and dependent parents. You could now use your regular health checkups for a tax benefit.

The Rajiv Gandhi Equity Scheme

The Rajiv Gandhi Equity Scheme is aimed to promote equity investing. Investors with an annual income less than Rs. 10 lakh can invest in it, to avail a deduction of 50% on the equity investment. Investing through this scheme has a lock in period of 3 years. Up to, a maximum of Rs.50,000 could be invested under the scheme. For example, suppose you invest Rs. 50,000 in this scheme. A deduction of Rs 25,000 could be claimed.

Changes in Life insurance

All regular premium life insurance policies must have a basic sum assured of at least 10 times the annual premium of the policy, to be eligible for a tax exemption under section 80C and section 10(10)D.

Other Key Budgetary Proposals

• Tax Payers with foreign bank accounts or properties would have to furnish all details of their foreign assets, and peak balance during the year, after converting the value of the foreign currency in Indian rupee. In this regard, the ITR form has already been modified with a new column that would detail all foreign assets. Tax payers would have to furnish this in their return for assessment year 2012-13.
• Service Tax has been hiked from 10% to 12%, making services such as telephone calls, restaurants, beauty parlours, insurance and air travel more expensive.
• The Securities Transaction Tax (STT) has been reduced to 0.1% from 0.125%.

Many of us feel that the benefit amount we receive on the maturity of all life insurance policies is always tax-free. However that is not correct because not all life insurance policies will provide you a tax exemption on the maturity amount. Most of the Life Insurance Policies offer tax benefits on the maturity amount but not all of them are tax-free. There are some conditions which a life insurance policyholder has to fulfil after which the policy availed by him/her is eligible for tax benefits. The proceeds received on maturity of the life insurance policy will be exempted from tax if the following conditions are fulfilled in accordance with section 10(10)D of Income tax Act:

1. The amount has been invested for a period of at least 5 years and has not been withdrawn before that

2. The ratio between Premium and Sum Assured is at least 1:5 in ALL the years and has not been violated even once.

If the above 2 criteria are fulfilled, then the maturity proceeds from the insurance policies are tax free under section 10(10)D, and not otherwise. If any one of the above conditions are violated even for 1 year, the maturity proceeds would not be tax free under section 10(10D) of Insurance Act 1938.

It is a good thing that all our traditional (non market linked) plans such as endowment assurance, money-back plan, whole life plan, etc are designed by keeping the sum assured more than 5 times of the premium amount which automatically makes their maturity proceeds tax-free. So one need not worry about checking the details of his/her policy if its a traditional insurance plan. But yes, this check needs to be done in case of unit-linked insurance policies, i.e., ULIPS purchased before September 2010. The ULIPs then did not necessarily fulfil the criteria of 5 times and hence many customers will miss out on the tax-free maturity amount. However if a person has purchased a ULIP policy after September 2010, then he/she need not worry.

According to the new guidelines issued by the Insurance regulator, the Minimum Sum Assured in a ULIP, for a person less than 45 years of age is 10 times the Annualized Premium or (0.5 x T x Annualized Premium), whichever is higher, where T is the Policy Term.  For a person more than 45 years of ageis, Minimum Sum Assured is 7 times the Annualized Premium or (0.25 x T x Annualized Premium), whichever is higher. Thus it is definitely more than 5 times. The calculation stands favourable in case of Single Premium policies too. Minimum Sum Assured in Single premium policies is equal to 1.25 times the Single Premium Paid for person less than 45 years of age but for person more than 45 years of age, it is 1.1 times the Single Premium Paid. The maximum amount of Sum Insured that can be opted for is 5 times the premium. Thus in single premium ULIPs, maturity benefits may not be taxable if the sum assured is not chosen as at least 5 times of the premium amount. And if it is not then the maturity benefits become taxable in the hands of the investor.

Moreover, according to the new guidelines of ULIP, the policy cannot be completely withdrawn or surrendered before completion of 5 years. Hence the clause # 1 gets automatically fulfilled. Previously the norms were different and lots of policies would not have tax-free maturity benefits. But one can relax now and purchase his choice of plan without worrying too much about tax-free maturity amount.

In the wake of the Euro zone crisis a lot of multinational companies are restructuring their businesses and trying to rationalise their strategies for the near future. Live today and Fight tomorrow is an approach adopted by many companies irrespective of their size. Salaried people today feel the threat of job security and craving for an extra source of income at the same time. The job security which once prevailed around us is no longer there today. One feels a strong need for building an alternate skill or profession which has the potential to add a parallel income or serve as a backup. It is somewhat easier to maintain a desirable standard of living if both the spouses are earning instead of a sole breadwinner. Moreover, an additional source of income is also useful to keep up with the increasing standard of living and move up the social ladder. Investments then, gain importance more than ever.

One can accumulate monetary wealth only if the investments are made in such a way that they generate as much income to take care of his/her liabilities. When the returns from your investments start paying off your liabilities then you have earned yourself the right to dream about your retirement.

There are many investment options available in the market with varying returns based on the risk and also for different durations such as PPF, Fixed Deposits, Life Insurance Plans, Mutual Funds, Bonds, Shares, Debentures, etc. A regular and consistent approach of investments is the only way to a secure a care-free future. The old saying that we should not put all our eggs in one basket makes a lot of sense. Every financial product has its share of ups and downs and if we are skewed towards a single financial instrument then our investments also run the risk of being impacted with market uncertainties. So stick to this mantra of a diversified portfolio – Always!

Life Insurance Policies – Life insurance companies offer pure risk cover plans and savings plan. Pure risk plans also known as Term plans are a must. After you have taken an adequate term insurance cover, you can look at some savings or investment insurance options. Savings plans give you planned returns to take care of the financial needs at different stages in your life. A balanced portfolio containing Debt (low risk - low returns) and Equity (high risk - high returns) products is one of the best ways to plan your investment. One can take risks and invest in equities in the early years of life (e.g. Age 18 to 35) and park your money in debt portfolio in the later stages of life (Age 36 to 58).

Public Provident Fund (PPF) is a regular source of long-term savings which offers tax benefits too. Starting a PPF account early in your life can be of great advantage as it helps to reap the larger benefits – Twice as much. E.g. If you open a PPF account at the age of 21 then it matures at the age of 35; A second account at the age of 36 will mature at the age of 51. PPF is a great example of how your money can give you compounding benefits. And the best part is that you do not need to keep putting in large sums of money to keep the account running.

Mutual Funds are collective investment schemes which harness the power of investing in bulk from a pool of money collected from many investors. Few of the advantages of investing in a mutual fund are:

1. Increased diversification,
2. Convenience,
3. Daily liquidity,
4. Professionally managed investments,
5. Access to investment venues that are usually available only to large investors
6. Government regulated

A good way to start investing in a mutual fund is by starting a Systematic Investment Plan (SIP) and investing small sums of money on a monthly basis. The law of averages applies excellently in SIP and the units accumulated have the potential to deliver high returns over a period of time.

Infrastructure bonds that were introduced a couple of years back by the Indian Government is a handy instrument to save tax to the extent of Rs.20,000/-. Many people hesitate to block their money for 5 to 10 years to merely enjoy the tax benefit but a better way of looking at it is like that of an enforced saving.

It’s extremely tempting to write about investing in stocks, real estate, gold, commodities, forex, derivatives and many other financial products which perform really well in the short-term as well as long-term but the idea of this article is to encourage diversification of investments in a smooth and risk-free manner. Once the underlying idea is clear, each one can explore any investment options which appear lucrative. 

Liquidity of investments is as important as longevity of investments and it assumes further importance when a lot of professional uncertainty surrounds us. It is more of a duty to make your money earn for you and not some wishful thinking given the painstaking effort which goes into earning the money.

Life sure gives us a second chance for many things. But what about for investment mistakes we commit? Do we get a second chance to rectify them? Most often not, and so even a small mistake could probably result in a heavy financial loss. So what should you do and not do when it comes to your money matters and investments? MyInsuranceClub.com has picked the 10 most common investment blunders people commit. By avoiding these mistakes, one could sure hope to boost the value on their portfolio.

1) Investing Without a Financial Plan
One of the biggest blunders most people commit is investing without a well defined financial plan. A financial plan is necessary to ensure savings are effectively allocated to various assets to generate future income and thus satisfy life’s goals. Haphazard investing without a clear plan could result in inadequate or negative returns from the portfolio. Prioritize your needs and be clear of your goals.commitments. You could take the help of a professionally qualified Certified Financial Planner to guide you through. Remember investing is a long term and ongoing process, thus one must have a proper plan and a discipline to execute it.

2) Lack of Clear Understanding of Risk
Very often, we end up buying investment products, simply because it offers higher returns, or because it has been recommended by a friend. While making investment decisions we must have a clear understanding of how much risk we are able to take, and, what exactly is the intrinsic risk of the product. The risk you may be able to take greatly depends on liquidity at hand, family commitments and age (whether nearing retirement or in the beginning of your career etc…) Remember every individual has varying risk profiles. What may be ideal for your friend may not exactly be suitable for you.

3) Starting Late
The early bird catches the worm. So goes the age old proverb. The same is true when it comes to investments too. In the early earning years, when family commitments are lesser, you could actually save much more money. However, the common thought of most people is that saving could be done later. And “later” actually becomes too late. Start your financial planning early in life, and let the power of compounding work to make your money grow.

4) Lack or Improper Diversification
Diversification of assets is vital to ensure there is minimal risk in one’s portfolio and to boost up returns. Most often people do not diversify and stick to single asset classes, or, they invest in too many of them. Your investment basket must comprise of the right asset classes based on your goals and risk profile, including a mix of both debt and equity. Also a regular monitoring of the portfolio is necessary and if required fine tune them a bit as per changes in market behavior or personal circumstances.

5) Having Inadequate Life Insurance
The importance of having adequate life insurance can be stressed upon again and again. Life insurance is a necessity to ensure loved ones are entitled to a financially secure life in case of any unforeseen happening to the bread winner of the family. However most often people carry a very careless attitude towards this. A general thumb rule is that one should be covered up to 10 times his annual expense. Thus choose the right insurance policy to protect your family adequately.

6) Last Minute Investments in Tax Saving Instruments
Come last week of March and the tax saving rush begins. Financial institutions too cash in on this rush by aggressively marketing their tax saving products. And the end result, of course you save up some tax, but you may also probably end up with a financial product which may not actually suit your need. What one must ideally do is to start tax planning from the beginning of the financial year to ensure you don’t invest for the sake of investing, as you don’t have time left at hand.

7) Emotional Attachment to Investment
We all have favourite investments. However getting emotionally attached to it could have negative impact on your portfolio. If an investment is “non- performing”, then it is wise to weed them out when the opportunity strikes. Review on an occasional basis any investment not contributing returns and have them removed before they could cause any further damage.

8) Investing with Borrowed Money
Making investments with money borrowed from banks, credit cards, or friends is a sure shot step to financial disaster. Initially though it may seem to be really attractive. But it is a risky option. In case of a market fall, or in case of non commitment of debt payments, there could be a complete wipe out of the money, leaving you with loans that need to be serviced at high interest rates.

9) Making Investments Based on Word of Mouth or Market Rumors
Investments should be done solely on individual research. Of course taking cues from the market is required. However over dependence on them, without any self- research on the investment option, is not really a good thing to do.

10) Timing the Market
Trying to time the market to earn a quick buck, may not always yield positive returns. Many a times with volatile market behaviors even experts fail to make accurate judgments. An ideal investment strategy should involve contributions that are regular, disciplined and systematic, thereby earning maximum returns in the long run.

It is that time of the year when everyone is scrambling to finish the tax planning for 2010-2011. We have put together a quick guide which can help you save money by using all avenues completely. We have only listed those items which you can use right now till 31^st March 2011.

For salaried people, who have already submitted their investment declaration proof for the year

Even if you are salaried and your company has already taken your investment proofs and you did not maximise the tax benefits, you can still invest and can claim income tax re-imbursement. The income tax re-imbursement process is now very smooth and the money gets automatically credited to your account. So read on…

Main Investment options which are eligible for tax deductions

1. Premium paid for Life Insurance policies (which include ULIPs) under Section 80C – This is by far one of the most popular modes chosen by a lot of people as you not only save tax but also ensure insurance cover for your family and/or also build an investment corpus for future needs. The best part is that the maturity amount in case of insurance policies is also tax free. To be noted: The maturity proceeds of only those policies in which the premium amount is less than 1/5^th of the sum assured is eligible for tax exemption. Click here to compare life insurance policies now.

2. Equity Linked Savings Schemes (ELSS) under Section 80C – This is an increasingly popular option for those trying to save tax and build an investment corpus over a large period of time. These are mutual funds and hence help the investor grow their investment in line with the markets. This mode is not completely risk free but when compared to the returns it can give, it becomes a very attractive proposition.

3. Public Provident Fund (PPF) under Section 80C – This is another great place to invest in case you are trying to save tax and get moderate returns. The rate of return may increase or decrease as decided by the Government of India from time to time. This is one of the safest and more poplar options for both salaried and self-employed individuals. To be noted: You can only invest upto Rs. 70,000 in a year for tax benefits.

4. National Savings Certificate under Section 80C – This is another Government of India guaranteed tax free investment option. It is gradually becoming less popular though in the current times. It can be purchased from post offices across India and gives a rate of interest of 8% compounded half-yearly

5. Bank Fixed Deposit under Section 80C – Fixed deposits in banks for 5 years or more also qualifies for tax exemptions. But the interest rates may not be as attractive as the other options and keep changing from time to time. The ease of doing this makes it a last minute option for a lot of people though! The interest earned from these FDs would be part of the taxable income.

6. Infrastructure Bonds under Section 80CCF – Over and above the Rs. 1,00,000 that you can tax free in Section 80C, these bonds provide an additional opportunity to save tax. We can invest upto Rs. 20,000 as tax free component. The maturity benefits would be taxable though.

7. Health Insurance Premiums under Section 80D – Health insurance is a often neglected but very critical component in our financial well-being. Given the escalating costs of medical facilities, it makes a lot of sense to invest a small amount every year to purchase a health insurance policy. Premium amount of Rs. 15,000 is tax free for self, spouse and children. You can claim an additional Rs. 15,000 as tax free if health plan has been purchased for parents. You can compare health insurance plans now at our website.

8. Donations to NGOs/Charitable institutions under Section 80D – Well this does not strictly qualify as an investment but is still an option in case you want to loosen your purse for a noble cause.

There are more areas in which you can invest and save tax, like for example, the interest and principal component of your home loan EMI or even on your education loan. But these are not avenues which should be tried in the last moment in a hurry.

Only the most popular and practical options which can be done in the next 6 weeks till 31^st March 2011 have been mentioned here.

We hope you find this useful.