Personal Finance

Friday 9 February 2018

Pradhan Mantri Vaya Vandana Yojana - PMVVY

GOI has launched the Pradhan Mantri Vaya Vandana Yojana (PMVVY) with an aim to provide regular and assured pension to senior citizens. Because of the advantage of assured pension, PMVVY scheme shields the senior citizens against a future fall in their interest income due to uncertain market conditions.

PMVVY launch and end dates

Pradhan Mantri Vaya Vandana Yojana was launched on 4th May, 2017 and initially meant to be available for one year from launch date i.e. 3rd May, 2018. In Budget, 2018 it is proposed to extend PMVVY scheme till March, 2020.

Eligibility for PMVVY

Pradhan Mantri Vaya Vandana Yojana is available to all citizens of India aged 60 years and above. So minimum age to enter this scheme is 60 years, there is no maximum age for entry though.

How to purchase PMVVY

LIC of India is managing this scheme so it can be purchased only through LIC. PMVVY scheme can be purchased both offline or online. If you wish to purchase the scheme online you can do it by log in LIC website – www.licindia.in.

PMVVY duration and pension options

PMVVY policy term is 10 years, so you will get pension for 10 years from the date of purchase.

Options for the frequency when the pension is paid are-

monthly
quarterly
half yearly
yearly

The pension payment shall be through NEFT or Aadhaar Enabled Payment System.

PMVVY purchase price and pension amount

As per the current structure minimum and maximum amount of pension you can get under PMVVY is Rs. 1000 and Rs. 5000.

The minimum and maximum purchase price under different modes of pension will be as under:

Mode of Pension	Minimum Purchase Price	Maximum Purchase Price
Yearly	Rs. 1,44,578/-	Rs. 7,22,892/-
Half-yearly	Rs. 1,47,601/-	Rs. 7,38,007/-
Quarterly	Rs. 1,49,068/-	Rs. 7,45,342/-
Monthly	Rs. 1,50,000/-	Rs. 7,50,000/-

So you can see the maximum amount you can invest is Rs. 7,50,000 as per current structure.

The purchase price has to be paid lump sum. The scheme is exempted from Goods and Services Tax (GST).

Note that Budget, 2018 proposed to increase the PMVVY investment limit from 7.5 Lakhs to 15 Lakhs, correspondingly maximum pension amount will also increase to Rs. 10,000 monthly.

Note that total amount of pension under all the policies allowed to a family under this plan shall not exceed the maximum pension limit. The family for this purpose will comprise of pensioner, his/her spouse and dependents.

Sample Pension rates

For calculation of pension you will get for the invested amount, you can use the following sample pension rates.

The pension rates for Rs.1000/- Purchase Price for different modes of pension payments are as below:

Yearly: Rs. 83.00 p.a.
Half-yearly: Rs. 81.30 p.a.
Quarterly: Rs. 80.50 p.a.
Monthly: Rs. 80.00 p.a.

So you can calculate that for getting Rs. 1,20,000 pension yearly (With new limit) you need to invest Rs. 14,45,783.

Interest rate

The biggest draw of the PMVVY is the assured return. Based on the above figures you can see that the return you get for monthly pension is 8% where as for yearly pension it is 8.3%. For quarterly it will come to 8.05% and half yearly pension interest rate is 8.13%.

Tax on PMVVY

There is no tax benefit available on the invested amount. On the contrary pension amount you get is taxable. The pension amount is added to your yearly income and taxed as per the applicable slab.

Only tax relief you get is that the scheme is exempted from Goods and Services Tax (GST).

Pradhan Mantri Vaya Vandana Yojna Benefits

Pension payments – Pensioner will get the pension amount for the policy term of 10 years. The pension amount received and the frequency depends on the chosen amount (Rs. 1000 – Rs. 5000, will increase to Rs. 10,000 as per budget, 2018 announcement) and frequency (Monthly, quarterly, half-yearly, yearly).
In case of death of the subscriber – In case of death of the policy holder during the policy term of 10 years, the purchase price shall be refunded to beneficiary.
Maturity benefit - On survival of the subscriber to the end of the policy term of 10 years, purchase price along with final pension instalment shall be payable to the policy holder.

Pre-mature exit from PMVVY

You can pre-maturely exit from PMVVY during the policy term under exceptional circumstances like the pensioner requiring money for the treatment of any critical illness of self or spouse. The Surrender Value payable is 98% of purchase price in such cases.

Loan from PMVVY

You can apply for loan after completion of 3 policy years. The maximum loan that can be granted shall be 75% of the purchase price. The rate of interest to be charged for loan amount shall be determined at periodic intervals. For the loan sanctioned in Financial Year 2016-17, the applicable interest rate is 10% p.a. payable half-yearly for the entire term of the loan.

Should you opt for PMVVY

Based on the information provided you can make an informed decision whether it is a good scheme for you. To summarize let’s try to put the bad points and good points in black and white.

Good points-

Assured pension, provides a regular, fixed source of income with no risk of fluctuations.
Backed by Government of India.
Provides an assured return of 8% to 8.3% depending on the frequency.
Provides option for taking loan or surrendering the policy in exceptional circumstances.
Provides an option to invest your retirement corpus for regular income. Proposal to increase investment limit to Rs. 15 lakhs brings the scheme at par with another investment scheme, Senior Citizen Saving Scheme (SCSS). So there are two options for senior citizens to get assured returns.

Bad points-

Amount of pension is low, maximum is Rs. 5000 monthly (May increase to Rs. 10,000 as per the proposal in budget, 2018).
Rate of return is fixed, if rates start moving upward in near future that will result in a loss.
Income is taxable.

That's all for this topic Pradhan Mantri Vaya Vandana Yojana - PMVVY. If you have any doubt or any suggestions to make please drop a comment. Thanks!

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Thursday 8 February 2018

Atal Pension Yojana - APY

Atal Pension Yojana (APY) is a pension scheme open to all citizens of India with main focus on unorganized sector workers. Since unorganized sector workers are not covered under any social security scheme, APY scheme is started to help them to save money for the old age.

The biggest draw of Atal Pension Yojana is the guaranteed minimum pension at the age of 60 years based on the opted amount and the contribution by the subscriber. APY is administered by the Pension Fund Regulatory and Development Authority (PFRDA).

Eligibility for APY

Any citizen of India can subscribe to APY scheme. The eligibility criteria that you must fulfill is as follows-

You should be between 18 and 40 years of age.
You should have a saving bank account. If you don’t have a bank account then you need to open one.
You should have a mobile phone and the number of your mobile should be registered with your bank account.

Pension amount received under APY

One of the biggest advantage of APY is the guaranteed minimum pension. Based on your contribution you will get a guaranteed minimum pension of Rs 1,000/-, 2,000/-, 3,000/-, 4,000 and 5,000/- per month after the age of 60 years.

Here note that the minimum pension is guaranteed by the government so the amount you opted for will definitely be given to you as pension. However, if higher investment returns are received on the contributions of subscribers of APY, higher pension would be paid to the subscribers.

Monthly contribution in APY

As already stated minimum age to subscribe to APY is 18 and maximum is 40 years. You need to contribute till the age of 60. So sooner you start less you need to pay as premium.

You premium also depends upon the pension amount you opt for out of Rs. 1000, 2000, 3000, 4000 or 5000 per month.

Here is a table courtesy PFRDA - http://pfrda.org.in//MyAuth/Admin/showimg.cshtml?ID=760 which shows the monthly, quarterly or half yearly contribution based on age.

		Minimum Guaranteed Pension of Rs. 1000/month			Minimum Guaranteed Pension of Rs. 2000/month			Minimum Guaranteed Pension of Rs. 3000/month			Minimum Guaranteed Pension of Rs. 4000/month			Minimum Guaranteed Pension of Rs. 5000/month
Return of corpus amount to the nominee		Rs. 1.70 Lakh			Rs. 3.40 Lakh			Rs. 5.10 Lakh			Rs. 6.80 Lakh			Rs. 8.50 Lakh
Age at entry	Vesting period	Monthly instalment	Qaurterly instalment	Half yearly instalment	Monthly instalment	Qaurterly instalment	Half yearly instalment	Monthly instalment	Qaurterly instalment	Half yearly instalment	Monthly instalment	Qaurterly instalment	Half yearly instalment	Monthly instalment	Qaurterly instalment	Half yearly instalment
18	42	42	125	248	84	250	496	126	376	744	168	501	991	210	626	1239
19	41	46	137	271	92	274	543	138	411	814	183	545	1080	228	679	1346
20	40	50	149	295	100	298	590	150	447	885	198	590	1169	248	739	1464
21	39	54	161	319	108	322	637	162	483	956	215	641	1269	269	801	1588
22	38	59	176	348	117	349	690	177	527	1045	234	697	1381	292	870	1723
23	37	64	191	378	127	378	749	192	572	1133	254	757	1499	318	948	1877
24	36	70	209	413	139	414	820	208	620	1228	277	826	1635	346	1031	2042
25	35	76	226	449	151	450	891	226	674	1334	301	897	1776	346	1121	2219
26	34	82	244	484	164	489	968	246	733	1452	327	975	1930	409	1219	2414
27	33	90	268	531	178	530	1050	268	799	1582	356	1061	2101	446	1329	2632
28	32	97	289	572	194	578	1145	292	870	1723	388	1156	2290	485	1445	2862
29	31	106	316	626	212	632	1251	318	948	1877	423	1261	2496	529	1577	3122
30	30	116	346	685	231	688	1363	347	1034	2048	462	1377	2727	577	1720	3405
31	29	126	376	744	252	751	1487	379	1129	2237	504	1502	2974	630	1878	3718
32	28	138	411	814	276	823	1629	414	1234	2443	551	1642	3252	689	2053	4066
33	27	151	450	891	302	900	1782	453	1350	2673	602	1794	3553	752	2241	4438
34	26	165	492	974	330	983	1948	495	1475	2921	659	1964	3889	824	2456	4863
35	25	181	539	1068	362	1079	2136	543	1618	3205	722	2152	4261	902	2688	5323
36	24	198	590	1169	396	1180	2337	594	1770	3506	792	2360	4674	990	2950	5843
37	23	218	650	1287	436	1299	2573	654	1949	3860	870	2593	5134	1087	3239	6415
38	22	240	715	1416	480	1430	2833	720	2146	4249	957	2852	5648	1196	3564	7058
39	21	264	787	1558	528	1574	3116	792	2360	4674	1054	3141	6220	1318	3928	7778
40	20	291	867	1717	528	1734	3435	873	2602	5152	1164	3469	6869	1454	4333	8581

Procedure for opening APY account

Since it is required to have a bank saving account for opening APY account so you need to approach the bank branch where you have an account or you can open a bank account.

Then fill up the APY registration form. Also register your mobile number/Aadhaar.

Each subscriber will be provided with an acknowledgement slip after joining APY which would invariably record the guaranteed pension amount, due date of contribution payment, PRAN etc.

A subscriber can open only a single APY account.

Co-contribution by the government

As an incentive to increase participation to APY government decided to co-contribute 50% of the total contribution or Rs. 1,000/- per annum, whichever is lower, to the eligible APY account holders who join the scheme during the period 1st June, 2015 to 31st December, 2015.The Government co-contribution will be given for 5 years from FY 2015-16 to 2019-20.

Eligibility for co-contribution by the government

In case you are wondering why you didn't get any co-contribution from the govt. they you must know that only those individuals are eligibe for co-contribution by the givt. who are not covered by any Statutory Social Security Schemes and are not income tax payers.

For example, members of the Social Security Schemes under the following enactments would not be eligible to receive Government co-contribution:

Employees’ Provident Fund & Miscellaneous Provision Act, 1952.
The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948.
Assam Tea Plantation Provident Fund and Miscellaneous Provision, 1955.
Seamens’ Provident Fund Act, 1966.
Jammu Kashmir Employees’ Provident Fund & Miscellaneous Provision Act, 1961.
Any other statutory social security scheme.

Nomination facility in APY

It is mandatory to provide nominee details in APY account.

Subscriber needs to provide the spouse details too wherever applicable. This will help spouse to maintain the APY account or keep getting pension in case of subscriber's death.

Their aadhaar details are also to be provided.

Withdrawal procedure from APY

Here are the APY withdrawal scenarios-

Completing the age of 60 years – You need to pay premium till the age of 60 years. Once you reach the age of 60 you can submit the request for drawing pension. The whole accumulated corpus is converted to annuity and subscriber starts getting monthly pension.
In case of subscriber's death after 60 years – In case of death of subscriber pension would be available to the spouse and on the death of both of them (subscriber and spouse), the accumulated pension corpus would be returned to his nominee.
Pre-mature withdrawal before the age of 60 – Pre-mature exit (before the age of 60) is permitted only in exceptional circumstances like in case of death of the subscriber or terminal illness.
In case of death of the subscriber before the age of 60 years, spouse would be given an option to continue contributing to APY account of the subscriber, for the remaining vesting period, till the original subscriber would have attained the age of 60 years.

Penalties in APY

In case of delay in premium payment of your Atal pension yojana account additional amount has to be paid. Rules for that are as follows-

Re. 1 per month for contribution upto Rs. 100 per month.
Re. 2 per month for contribution upto Rs. 101 to 500/- per month.
Re 5 per month for contribution between Rs 501/- to 1000/- per month.
Rs 10 per month for contribution beyond Rs 1001/- per month.

Discontinuation of payments of contribution amount shall lead to following:

After 6 months account will be frozen.
After 12 months account will be deactivated.
After 24 months account will be closed.

Also note that there are some charges incurred for maintaining the APY account. If you stop paying the premium amount and the account balance becomes zero due to deduction of account maintenance charges, the APY account would be closed immediately.

APY Tax benefits

As per the update in 2016, APY provides the same benefits as NPS. Which means that premium amount paid can be claimed under section 80CCD. Current Limit for 80CCD tax exemption is Rs. 50 thousand.

Reference: https://npscra.nsdl.co.in/nsdl/scheme-details/APY_Scheme_Details.pdf

That's all for this topic Atal Pension Yojana - APY. If you have any doubt or any suggestions to make please drop a comment. Thanks!

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>>>Go to Pension Plans Page

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-

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.
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.
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

Risk free investment, backed by Government of India.
Assured return of 7.75% with no fluctuation.
Reasonable lock-in period of 7 years with option for senior citizens to encash it prematurely.
Provides an option to get interest income every 6 months if you opt for non-cumulative bonds.
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

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.
Investment in these bonds can’t be claimed under 80C.
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.
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 -

Close the account and withdraw the amount.
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.

SCSS account must have completed one year.
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.
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 -

Risk free investment options for retirees. Scheme is backed by government.
Tax benefit, investment is SCSS can be be claimed for deduction under 80C with in a permissible limit of Section 80C.
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

Account opening form. (Reference form - https://www.sbi.co.in/portal/documents/21386/22045/FORM-A+%28SCSS+Ac+OPENING+form%29_28_NOV_2016.pdf)
Photograh of the applicant(s).
Age proof.
Address proof.
PAN card.
Aadhaar details.
Certificate from employer in case of superannuation or VRS when opening account between the age of 55 and 60.

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

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

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.

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.
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.
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.
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.
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.
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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