This blog is about improving the financial literacy. We write on various aspects of personal finance from managing expenses to investing. The central theme that we want to address is "How we make better decisions about our money and life?" Our goal with this blog is to share ideas with readers to control & manage their money in better way.
Popularity of Exchange Traded Funds or ETFs is rising among investors in India. This interest has increased significantly in last 2-3 years. If we compare % growth in AUM (Asset Under Management) of ETF vs Mutual Fund in India for period between Sept-14 to Sept-18 then ETF leads by significant margin. AUM of ETF (other than gold ETF) schemes has grown by 88% while it has grown at 30% for equity-oriented schemes. This growth is in CAGR% (Compound annual growth rate).
ETF is an exchange traded fund. ETF is a marketable security
that tracks an index, a commodity, bonds, or a basket of assets. Likewise,
stocks, ETFs are also listed on stock exchanges and investors can buy or sell
them like any other stocks throughout the market hours. Investors must note
that the ETFs are not only for stocks but also for other assets as well. Gold
ETF is one of the example of same. Bharat 22 is one of the popular ETFs in
India that is for stocks.
What is Bharat-22 ETF?
Government of India launched Bharat-22 ETF in 2017. ICICI
Prudential Mutual Fund is Asset Management Company (AMC) for Bharat-22. This
ETF tracks specially created index S&P
BSE BHARAT-22 INDEX. This Index have shares of key Central Public-Sector
Enterprises (CPSEs), Public Sector Banks (PSBs) and the government owned shares
in blue chip private companies like Larsen & Tubro (L&T), Axis Bank and
ETF in India:
ETFs in India have not evolved as it has in US and Europe
markets. However, ETFs in India are gaining popularity among investors.
AUM of ETFs as on 30th Sept-2018 is
at INR 90,440 Crore while it is at INR 802,215 Crore for Equity Oriented Mutual
There are more than 1200 ETFs in US while in
India we only have ~ 60-70 ETFs.
The debt and equity-oriented mutual funds are at top
position when we talk about AUM in absolute term. However, ETFs are growing at
faster rate. Below is the comparison of same:
ETF vs Mutual Fund vs other schemes – AUM comparison and AUM CAGR%
Data Source: AMFI website. Data for each year is as on 30th September.
ETF vs Mutual Fund vs other schemes – AUM comparison as % of Total AUM of these schemes:
Data Source: AMFI website. Data for each year is as on 30th September.
ETF vs Mutual Fund – What are the differences and similarities?
We have compared ETF and Mutual Fund on different parameters. Here you go with details of – ETF vs Mutual Fund:
How does price of ETF or Mutual fund change?
Price of any mutual fund is NAV (Net Asset Value) of that
scheme. It changes on daily basis after market closure.
The traded price of any ETF changes in real-time like any
other stock. The change in price of ETF is directly associated with the index
that the ETF tracks. If there is change in underlying stocks of the index, then
the price of ETF will change so.
2. Cost of investment
Expenses for any fund include costs such as administrative
cost, management fee, distribution cost, marketing expenses, investor
communication expenses, etc.
Expense ratio for Mutual funds is mostly higher than the ETFs. It usually ranges between 1-2.5% for Mutual Funds. Note that expense ratio for direct plans is lesser than that of regular plans.
If we compare ETF vs Mutual Fund, then the ETFs are more
cost efficient. It is like this because ETF incurs lower expenses than actively
managed funds. Whenever investor buy or sell ETF on exchange then there is cost
related to brokerage, STT, etc. Also, there is no entry/exit load.
Active versus Passive Management of funds.
Most of the time mutual funds are actively managed. There is
team of analysts and research team who work under fund manager. They change
portfolio basis their research to maximize return on fund.
Unlike mutual funds, ETFs are managed passively. The purpose of an ETF is to match the index and not to beat it. This fund management style is known as passive management. Passive management is the key difference between ETFs and mutual funds. Note that the fund manager will still make changes in portfolio if there is any change in the index portfolio that the ETF is tracking. Objective of investors is to get return equivalent to the benchmark index. If you want to buy stocks of Nifty 50 index then instead of buying all the 50 stocks of Nifty, you can buy the ETF that tracks Nifty.
How to buy or sell mutual fund or ETF?
You can buy mutual funds as lumpsum or invest periodically
as SIP through agents/distributor or can invest in direct plans. No need to
have demat and trading account to invest in mutual funds. Intra-day trading is
not possible in open ended mutual funds.
As ETFs are traded on exchange so investors need to have
demat and trading account to buy and sell ETFs. Intraday trading is also
possible in ETF.
5. Monitoring performance – ETF vs Mutual Fund
How to track performance of MFs and ETFs? How much effort
does it take to track?
Mutual funds NAV changes on daily basis. Investors can track NAV of funds by following up or adding the fund in various free online application. Investor can check the fund portfolio online at any point of time. However, disclosure of the portfolio by AMC happens once in a month only.
ETF price changes in real time. You can track ETF price same
as tracking price of any stock. However, even if you just track the underlying
index, then also you can know the % change in the ETF for that duration. This
is also one of the reason that the investment in ETFs falls into passive investment
How much return do you get? What is the difference in return
in ETF vs Mutual Fund?
ETF vs Mutual Fund
Return on mutual funds or ETFs is totally dependent on the
performance of underlying assets. If portfolio of mutual fund and ETF is exactly
same, then the return on ETF will be higher in long term because of lesser
Is diversification possible with a single unit?
ETF vs Mutual Fund
Unlike stocks, investors enjoy the diversification benefit
with both mutual funds and ETFs investing.
What is the difference in tax treatment of ETF vs mutual
Below mentioned taxation rules will be applicable on returns
on mutual fund (As on Jan-2019):
Short-term capital gain (STCG) tax (15%) or Long-term
capital gain (LTCG) tax (10%) will be applicable same as equity mutual fund.
Summary – ETF vs Mutual FundHow to Buy ETF in India?
You need to have demat and trading account to buy ETFs in India.
Difference between ETF and index fund:
A lot of investors have understanding that there is no
difference between ETF and index fund. However, this is not true. There are
similarities in terms of portfolio focus but list of differences between ETF
and index is big enough to distinguish them.
ETF vs Index fund
Index fund is also a type of mutual fund only. It falls into
the category of specialized mutual fund types. Treatment of index fund is same
as any other mutual fund. However, unlike other mutual funds, index funds are
not actively managed. These are not actively managed because the goal of mutual
fund houses here is to not beat the index but to match the index. Therefore, index
fund portfolio will simply have same stocks in exact same proportion
corresponding to that index. BSE Sensex and NIFTY 50 are two most popular
indices in India. Investors can buy or sale index fund at its NAV which changes
at the end of closing of trading only. On other hand, investors can trade ETFs
throughout the market hours.
Both index fund and ETF for same index may have same shares
in portfolio but there is difference in way of investing in ETF and index fund.
There may be minor difference in net return on index fund and ETF as well. This
difference in net return is majorly because of difference in expense ratio,
difference in asset allocation into money market and cash, etc.
Check “Tracking Error” while selecting ETF for investment. Tracking
error is the difference between an ETF portfolio’s returns and the benchmark or
index it was meant to match. This difference is majorly because of expense
ratio, dividend from underlying asset. Note that any dividend from any
underlying asset is reinvested in the fund. If we compare to corresponding “index”,
expenses tend to reduce the return while dividend have positive impact. Lower
the tracking error better the ETF, as it matches the index to max.
Have you ever heard about Efficient Market Hypothesis (EMH)? The Efficient Market Hypothesis
(EMH) is an investment theory. It tells that the price of stock or any other
investment security reflects all known information about it, generating
consistent “alpha” is not possible. Therefore, if it is true, no amount of
analysis can give an investor an edge over other investors, which is “Mr. Market.”
This also means that there is no difference in returns in long run if you
invest in actively or passively managed fund. If you also believe in EMH, then ETFs
are for you.
However, if you think actively that managed funds i.e.
mutual funds will deliver better returns then go ahead and invest in this.
If you want to invest in Index funds, then it will be better if you just invest in ETF of same index.
Cautionary note: The information on this website is for education and discussion purpose only, and this must not be considered as an investment advice. We don’t promote or recommend investing in any investment instrument here. Investors must do thorough analysis before making any decision to invest.
The recent announcement related to new rules of NPS scheme has made it one of the best tax saving investment options in India. Therefore, many investors, looking to save tax, have already started searching “how to open NPS account online” on google. NPS stands for National Pension System.
As closing of FY2018-19 is approaching and if you are also looking for some tax saving investment options then investing in NPS can be a good choice.
Before we start to learn the process to open NPS account online, let us go through couple of details of NPS. Let’s get the answer of these questions first – what is NPS account? Who can open NPS account? What documents do we need to open NPS account? and so on.
What is NPS account?
Investors need to register for NPS account to start contribution in NPS scheme. There are two types of accounts. First is “Tier-I” account and the second is “Tier-II” account.
Tier-I is default account while Tier-II is voluntary account. It is mandatory to have Tier-I account before opening Tier-II account. Difference between two accounts is majorly related to withdrawal rules and tax benefits on investment in these accounts. You can read here about details of NPS scheme and new rules.
Who can open NPS account?
All citizens of India aged between 18 years to 65 years are
eligible. Applicants should comply KYC requirements of NPS scheme.
Can NRIs invest in NPS?
Non-Resident Indians (NRIs) are also eligible to open NPS
account. They can make contribution in NPS through NRO/NRE accounts.
PIO (Person of Indian Origin) and OCI (Overseas Citizen of India) customers are not eligible to open NPS account.
NRE is “Non-Resident External Rupee account” and NRO is “Non-Resident
Ordinary Rupee Account”.
What documents are required to open NPS account online?
Mobile number and email ID
Active bank account with net banking facility
enabled. Bank should be in the list of empaneled banks (There are 23 Banks
registered with NSDL as on Jan-2019).
PAN card linked with bank account
Scanned copy of PAN card (Size 4KB – 2 MB)
Scanned copy of CANCELLED CHEQUE (Size 4KB – 2 MB)
Passport size PHOTOGRAPH (Size 4 – 12 KB)
Scanned copy of your SIGNATURE (Size 4 – 12 KB)
How to open NPS account?
So, here you go with the step by step process to open NPS
account online using your PAN card.
Step-1: Visit eNPS Portal:
The first step is to visit eNPS portal and click on “National Pension System” box.
A pop-up will appear with three options. You must select “Registration” if you want to open NPS account.
Step-2: NPS subscriber registration:
You will see below details on NPS subscriber registration page.
By default, “New registration”, “Individual subscriber”, “Citizen of India” and “Tier-I only” will be selected. If you need to change selection for any of these fields then you can do that. However, if all the default choices are correct, then proceed to enter your PAN card and then select your bank from drop-down menu.
Note: You must
select bank (account) linked to your PAN card as it is needed for KYC. Bank
will charge Rs 125 (plus taxes) as one-time fee for KYC authentication charges.
Step-3: Subscriber registration core details:
Subscribers need to enter his or her personal details. Details like “Email ID”, “Mobile number” and “Date of Birth Proof” ID, etc. are mandatory fields.
Click on “Generate Acknowledgement No” after filling all mandatory fields.
Step-4: Acknowledgement Number
You will get pop-up message “Your name provided for NPS registration matches with name as per PAN records”. Click on “Proceed”.
Once you click on “proceed”, you will get “Acknowledgement Number” confirmation message as mentioned below. You will get acknowledgement number on mobile and/or email as well.
Note: If you don’t complete process till the end after generating “Acknowledgement Number” and if you re-start the process again later then you should select “Complete pending registration” from step-2. You must enter “Acknowledgement number” and “registration date” to resume the pending registration process.
Step-5: Update contact details:
You need to update three things here. First is “FATCA details”, second is “Correspondence Address” and the third and final one is “Permanent Address” details. Click on “Save and Proceed” details after filling all mandatory fields.
details: if you are an individual subscriber and Indian citizen then you
can update details related to India address. Select “India” as “TIN number
issuing country” and mention PAN number in “TIN number details” field and leave
“validity” field blank. FATCA details are mandatory to open NPS account. You
won’t be able to proceed further leaving FATCA details blank.
Step-6: Update “Bank and other details”:
Select occupational details, fill bank details and then click
on “Save and Proceed”.
Step-7: Update “Nomination” and “Scheme Preference Details”:
This is very important step in “How to open NPS account”
Step-7.1: Update “Scheme Preference
There are two sub-sections. First is “fund manager selection” and second is “investment choice”.
Firstly, you have to choose your pension fund manager from the list of 8 fund managers. You can search online to review fund manager performance details.
After selecting fund managers, choose your choice of investment: There are two choices of investment, “Active Choice” and “Auto Choice”.
Subscribers can decide allocation of money for investment in 4 assets classes. There classes are E (Equity), C (Corporate debt), G (Government Bonds) and A (Alternative investment funds). Maximum allocation to equity is 75%. This limit reduces for subscribers above 50 years of age.
This is “Life Cycle Fund” and a very easy option for subscribers. I would recommend going ahead with this if you don’t have time and knowledge to actively manage NPS fund.
There are three sub-choices in this. First is “Moderate”, second is “Conservative” and third and final is “Aggressive”. Allocation of fund for equity is highest in “Aggressive” and lowest for “Conservative”. This allocation % across assets classes will automatically change as per age of subscriber. You can refer scheme info details for the same when selecting this option. Below is the example of NPS “Auto” choice with “Aggressive” selection.
If you change from “Aggressive” to “Moderate” in “Auto” choice then you will see the difference as mentioned below. However, you must note that the value of % distribution is different for different age group. Below detail is for 28 year old subscriber.
Step-7.2: Update “Nomination”
Fill nominee details, like name, DOB, relationship, % share and so on. If you want to have more than one “Nominee” then click on “Add”. Once you fill the details in all mandatory fields, then click on “Save and proceed”.
Step-8: Documents upload:
Upload scanned copy of PAN card and cancelled cheque.
Maximum allowed size of file is 4 MB and minimum is 4 KB.
Step-9: Photo and signature upload:
Likewise, above step, you must upload your photo and scanned copy of your signature. File size must be in the range of 4 KB to 12 KB. You can use any online file size reducer to reduce the size of photo and signature files.
Step-10: Payment Details:
You must make the first investment in your NPS account to get the PRAN number. Minimum investment amount is INR 500 for Tier-I and INR 1000 for Tier-II account. “Payment Confirmation” window will appear after successful payment. You will also get your PRAN (Permanent Retirement Account Number) details here. You will get payment confirmation and PRAN details on mail as well.
On this page, you will also see “Download Registration Form”. You need to download the form. Print it, stick your photo, sign it and then send it to CRA within 90 days. CRA means “Central Record keeping Agency”. NSDL is CRA for NPS scheme. NSDL full form is National Securities Depository Limited.
Address of NSDL CRA is:
Central Record keeping Agency (eNPS), NSDL e-Governance Infrastructure Limited, 1st Floor, Times Tower, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai – 400013
You must be very excited in this new year. You may have prepared list of new year resolution as well. However, have you planned anything for your personal finance? Why don’t you set some personal finance goals as well in this year? This will surely help you in becoming more systematic in managing your personal finance.
10 Personal Finance Goals1. Start tracking your net worth:
Personal net worth is the difference between assets and liabilities of an individual. Net worth of a person is a snapshot of his or her financial well-being. Those who are serious about their personal finance, should track and record it on regular interval (monthly/quarterly/half yearly). This will surely help you in making yourself aware about your financial position and to achieve your long term personal finance goals.
Net worth = Assets (Cash,
bank balance, investments, real estate, etc.) – Liabilities (Loans, outstanding bills, credit card bill, etc.)
Let’s open excel file and calculate “what is your net worth”. This is one of the easiest among these personal finance goals.
2. Build a second source of income:
Why don’t you utilize
some part of your extra time to earn extra income?
If you are just
wasting your time in watching TV or random videos on mobile, then let’s do
something productive. Let’s target to build second source of income in this new
You may not make million
dollars of money with this, but it may give you some confidence to you to start
something of your own. The overall process will teach great learnings to you
and who knows if this side hustle can actually generate great money in future.
You can read here to learn about some of the ideas related to how to make extra income? This is just a list of 9-10 ideas, but I recommend looking beyond these options.
If you love your
wife and want to give something great to her then life insurance is the best
gift that you can give to her. Life insurance will give financial support to
your loved ones in case something happens to your life.
Remember to not treat life insurance as an investment and get into trap of buying traditional insurance options like endowment plans. You must pay very high premium if you want to cover life for desired amount with endowment plans compared to term insurance plans. You don’t get great returns on these plans. Read here to learn about calculation of return on endowment plan. Insurance is for risk cover and investment is for great returns. Many investors try to do both with same product and ends-up in defeating purpose of both.
4. Become Financial Literate:
“If you want to be rich, you need to be financially literate” – Robert T. Kiyosaki, “Rich dad Poor dad”.
It doesn’t mean that you must become certified financial planner. However, it means that you must know how to manage your own money effectively. Let’s target to learn 10 things in this year that directly or indirectly may help you in better financial decisions. You can start with learning about tax treatment of various options, how to select mutual funds? What are the types of annuity plan? and so on. Make a learning tracker and list down 10 things that you want to learn in next 30 days.
Make habit of reading business newspaper, magazines, articles on
personal finance blogs and so on. Financial literacy helps you in managing your
own money in better way so that you make right decision about your finances.
This is never ending goal in this list personal finance goals. I would use word “habit” for this instead of using “goal”. Learning doesn’t end. Keep learning and keep making your financial life healthier.
5. Learn to use your credit card wisely:
Paying through credit card is very convenient and beneficial and if you use it wisely then it is a great thing to have in managing cash flow in very effective way. However, if you don’t use it carefully then you may mess-up your financial life.
Never ever default on payment, plan your expenses in advance, maximize rewards points earning, keep track of your expenses and get rid-of multiple cards and so on.
Follow this simple rule “First invest and then spend.”
Spend = Income –
If you are avoiding investing just because you think that you are too young to start investing, then you are wrong here. Compounding can do miracles if you start investing early. Don’t compromise on your enjoyment part but also don’t just ignore investing.
Firstly, find the
investment goal, investment duration and then decide on asset class for
investment. If your investment horizon is less than 2 years, then I personally
don’t recommend investment in equities.
your risk appetite and then plan your investment accordingly.
keep too much money in your saving account. Other than 2 months working capital
and emergency fund, you should put money for higher returns.
your portfolio on regular basis. Keep shifting from high risk to low risk
investments as your age increases.
In simple words, you must keep some fund aside to meet expenses
in unplanned or unexpected situation. These unforeseen events or situations can
be a job loss, accident, medical emergency, etc. This emergency can be of three
First situation that stops inflow of money or income.
Example can be job loss.
Second situation which leads to unexpected expenses
or increase in outflow of money. Medical emergency of family member, not
covered in health insurance.
Third and final one is combination of both.
Example can be accident of your own leading to huge expenses and you need to take
3 months of unpaid leave.
calculation – Emergency fund should cover expenses for that unplanned period.
If your monthly expense is INR 50,000 then your emergency fund should be 50,000 x T.
Where T is the duration of unplanned event. How long that
unplanned event will affect you financially? I think covering for 6 months of
expenses should be good enough. So, for above example, emergency fund = 50,000
x 6 = INR 3,00,000.
Where to save emergency fund? There are two things that you should look when planning to save or invest for emergency fund. First is “Liquidity” and second is “No risk”. Saving account and/or liquid funds are prime contender for emergency fund investments. I will prefer to have 1/6th of fund in saving account and rest of money in liquid fund.
Tip – Don’t make habit to withdraw this money when you overshoot on regular expenses. This is not an emergency. Keep adding money into it when your expense increases.
I have explained this in slightly detail as I consider it as one of the most important step in your financial planning. You must consider achieving this goal from this list of personal finance goals in this year.
8. Review and update “Nomination” field in your accounts, investments and insurances:
List down all your accounts, mutual funds, insurance, FDs,
any other investment and check name of nominees there. Is it blank? Or someone
else name is there that you don’t want? If answer of these question is yes,
then let’s resolve this first.
This is one of the easiest personal finance goals but very important as well. You can target to complete this in next 2-3 weeks after reading this article.
This simple step will help in smooth transfer of wealth to your family or loved one or whomever you wish to pass this.
You must note that a nominee is just a caretaker of these assets.
If there is no “Will” then all the legal heirs will have rights on these assets.
Nominee must distribute these assets among legal heirs. That’s why it is
important to have a “Will” also in place to avoid confusion among your legal
9. Start retirement planning:
If you are in your 30s or 20s then you must want to avoid retirement planning for now. However, my advice to you is “Don’t ignore it”. Days of “Sharvan Kumar” are gone. You need to secure your post retirement life when you are earning. You earn for 30 years but you spend for 60 years. Don’t ignore these 30 years of post-retirement life.
This goal is the most important among all the personal finance goals and you must consider to achieve this goal in this year.
Many of us already have some investment here and there in form of NPS, PF, pension plans and so on. However, the question you must ask to yourself “Will my money in PF at retirement be enough to cover expenses for post-retirement life?”
Keep below points in mind when planning for retirement:
Follow 4% rule of retirement for withdrawal rate (W = 4%)
Find-out estimate of expenses for first year after retirement (E1) – You must consider current expenses, inflation rate and number of years remaining for retirement.
Calculate value of retirement corpus = W x E1
Calculate value of monthly investment to get the retirement corpus: Consider remaining years of job and assume expected rate of return to derive the monthly investment value.
Review your current investment for retirement planning: Is it in line with above calculated value? If it is yes, then great but if it is no then start investing that balance (gap) amount to build desired retirement corpus.
Find suitable investment options that can deliver the expected rate of return. This should be in line with your risk profile.
There are chances that you might be saving enough for retirement. However, there is no harm in reviewing your retirement planning. It is important to get this confirmed by doing proper calculation and reviewing current investments for retirement.
You can consult to financial planner if you find it difficult.
10. Arrange all your investment and insurance documents:
This is also one of the simplest personal finance goals but again very important. You can target to achieve this in some days after reading this article.
Keep all your documents related to financial instruments
systematically and inform about these to your family members as well. This is
very important to organize all these documents as it helps a lot in emergency.
Keep photocopies of your personal identification documents as well with these documents.
For example, assume you have Mediclaim policy or health insurance policy for you and your wife from employer or by self, then you must have below documents ready in one folder:
E-card or health insurance policy
Cashless process and customer care number
Documents checklist for cashless process
Photocopies of IDs – Aadhar card, PAN Card,
Employee ID card, etc.
Prepare folders for bank documents, investment, loans, etc.
as well. You can also arrange and store these documents in electronic format as
You can explore and complete any other important personal finance goals that may be more relevant to you like getting rid of debt, start planning for your little daughter’s higher education and so on.
However, the important point that I want to highlight here is that you should take ownership of your finance in more structured and better way. These baby steps or personal finance goals will surely make your personal finance life better.
The Union Cabinet has made remarkable decisions in meeting on 6th Dec-2018 to streamline the National Pension System (NPS). These new rules, announced on 10th Dec-2018, will make this investment more attractive from NPS tax benefits point of view.
NPS, started on 1st Jan-2004, had the object to stop the “Defined Benefit Pension”. The new pension system works on “Defined Contribution Basis”.
It was made mandatory for all new entrants joining government services (except the armed forces in the first stage) on or after 1-Jan-2004 to enroll for NPS. Though, NPS scheme was initially for government employees only but later in 2009, Government of India opened it for all citizens.
PFRDA (Pension Fund Regulatory and Development Authority), an autonomous body set up by the Government of India, regulates and administrate NPS.
NSDL (National Securities Depository Limited) is CRA (Central Recordkeeping Agency)) for National Pension System (NPS).
In recent years, Government of India has made changes in this scheme to make it more attractive investment option. Likewise EPF, NPS scheme will also become an EEE tax saving investment.
Before we analyze recent NPS news, let’s walk through some NPS
What is NPS scheme?
NPS is “Defined Contribution” based pension scheme. This is a long-term investment plan for retirement benefits. NPS scheme allows subscribers to make contribution in pension account during their working life. It is open for all citizens of India.
NPS Subscribers can withdraw 60% of the total corpus as lump sum at retirement. However, subscribers must use the remaining corpus to buy an annuity.
There are two types of accounts in NPS scheme, Tier-I and
Tier-II accounts. Tier-I is a mandatory and default account while Tier-II is
voluntary account. 10% self-contribution is mandatory for all government
employees (joined in 2004 or after), while it is a voluntary investment for all
Major difference in these two accounts is related to
withdrawal of money. Tier-II account is like saving account. Subscribers can
withdraw money from Tier-II account at any point of time. Subscribers can’t
withdraw the entire money from Tier-I account till retirement.
Is “National Pension System” and
“National Pension Scheme” and “New Pension Scheme” are same?
The answer is yes. However, currently the official
terminology used for NPS is “National Pension System”. This scheme was earlier
known as “New Pension Scheme” and “National Pension Scheme”.
Latest NPS news background:
In 2015, during 7th pay commission deliberation, concerns related to NPS were examined. Committee set-up by government worked on recommendations in 2016 to streamline the NPS. Union Cabinet has approved these recommendations in recently held meeting in first week of Dec-2018. Government announced this NPS news, related to proposed changes in rules, on 10th Dec-2018.
We can expect implementation of the new rules by start of new financial year that is 1st April-2019. Implementation of new rules will expand NPS tax benefits list.
New proposed rules in NPS scheme:
What has changed as per latest NPS News?
1. NPS contribution by governmentCurrent rule:
Government employees make contribution of 10% of his basic pay plus DA. The government makes an equal matching contribution (10%). This is applicable for only government employees and for Tier-1 accounts only.
The government contribution for tier-1 accounts will increase from 10% to 14%. No change in government employees’ contribution. This is going to help 18 lacs government employees. This increase in NPS contribution by government will increase the government expenditure by INR 2840 Crore. This will be a recurring expense for government.
Contribution in Tier-I NPS account is eligible for deduction as per section 80C of IT (Total limit of INR 1.5 Lac). There is no benefit on any investment in Tier-II account. Note that investors can claim any additional self-contribution (up to Rs. 50,000) under section 80CCD(1B), this is over and above 80C deduction. There, the total deduction allowed for self-contribution is INR 2 lac. Additional deduction of 50,000 is key attraction of currently offered NPS tax benefits.
Contribution in Tier-II accounts by government employees will also be eligible for deduction as per section 80C of IT (Total limit of INR 1.5 Lac). However, there is condition of 3 years lock-in period. No change in total deduction limit of INR 2 lac (including 50K benefit under section 80CCD(1B)) for self-contribution. This improvement in NPS tax benefits rules will surely increase money flow in Tier-II (voluntary) account.
Note: The announcement mentions this
benefit for government employees only, but this may become applicable for
private subscriber as well.
3. NPS tax benefits on withdrawal: Current rule:
NPS subscribers can withdraw lump sum amount of 60% of total corpus at the time of retirement. 40% of this is tax exempt and remaining 20% is taxable. NPS subscribers need to buy annuity with remaining 40% of total corpus, which is already tax exempted. However, annuity income that investors will get as regular income in subsequent years will still be taxable as per individual income tax slab. Tax on withdrawal is one of the major drawback of NPS scheme. This rule makes NPS tax benefits less attractive.
NPS subscribers will get full tax exemption on the 60% of the total corpus that investor can withdraw at retirement. This moves NPS from EET (Exempt-Exempt-Tax) to EEE (Exempt-Exempt-Exempt) taxation regime. This is applicable for both government and private employees. Implementation of the revised NPS tax benefits rule will surely attract more money into these investments.
4. More flexibility in selecting investment pattern and fund managers – Current rule:
PFRDA registered pension fund managers manage the NPS subscribers’ money. Currently there are 8 pension fund managers approved by PFRDA:
HDFC Pension Management Company
LIC Pension Fund
ICICI Prudential Pension Fund
Kotak Mahindra Pension Fund
Reliance Capital Pension Fund
SBI Pension Fund
UTI Retirement Solutions Pension Fund
DSP BlackRock Pension Fund Manager
NPS offers two choices of
investment “Active Choice” and “Auto Choice”. In “Active Choice”, subscribers
decide allocation of money for investment. While in “Auto Choice”, the
investment will be in a life-cycle fund. In this, a pre-defined portfolio
determines allocation, which is a function of age of subscribers.
It is mentioned in announcement that central government employees will get more freedom to select pension funds and pattern of investments. We can expect more details of this NPS news at the time implementation date announcement.
NPS news summary – NPS tax benefits and other changes:
Currently, many investors run away from NPS because of two major reasons. Firstly, there is tax on withdrawal of money at maturity. Secondly, mandatory annuity at retirement.
However, government with these new exciting changes has almost solved the first issue. As a result, this NPS news will surely attract new subscribers. Moreover, the changes other than NPS tax benefits, are also good changes.
Therefore, most of the tax planners will now recommend NPS as one of the good tax saving investment options.
In conclusion, investors can now consider investment in NPS scheme for retirement planning.
Cautionary Note: This article is for information purpose only. We don’t promote any investment in this article. Our aim is to help investors in making informed financial decision. Investors are advised to do thorough research before investing in any financial instrument.
Are you searching for tax saving options in India? If it is yes, then I am sure you must have heard about PF (Provident Fund), tax saving FD (Fixed Deposit), NPS (National Pension System), ELSS (Equity Linked Saving Scheme), Tax free bonds and endowment plans and so on.
A lot of Indians consider these investments as tax saving options. And, if you have also invested in these options then you must be worried about tax on returns on these investments. Even, you may have searched on Google with these phrases:
How to calculate tax on National Saving Certificate?
ELSS tax exemption under 80C.
Fixed deposit as tax saving option, and so on
Investment, Tax and Economy
Most of the salaried as well self-employed people invest in these popular investment options in India. Just to give you the perspective, the assets under management (AUM) of National Pension System was at INR 2.3 Lac Crore in FY 2018. Total money inflow into PF accounts in FY 2018 was at INR 45,000 Crore.
These savings are important for economic growth of a country and so it becomes important for government to keep flow of investments into these instruments. Most of the times, people in India invest into these instruments just for tax saving purpose. Therefore, government of India provides various tax incentives to promote these investments among masses in India.
If you are an investor, then it becomes very important for you to know the income tax treatment on these tax saving options or investment instruments at various stages of investment.
To get into more details, first, we will learn about stages of investments and then we will move to taxation regime. We will also classify popular investment options basis tax treatment rules.
Stages of Investment
There are three stages in investment in any financial
or Contribution Stage – When investor invests in financial instrument.
Example – Investment in PF, NPS, ELSS, etc.
Stage or Accumulation Stage – When your investments earn money in terms of
return or interest. Example is interest income earned/accumulated on PF
or Maturity Stage – When investor withdraws (full or partial) the
investment with benefit. E.g. PF withdrawal
From taxation point of view, at any stage of investment,
there are two possible scenarios:
– “No tax exemption” and/or “tax on earnings” and/or “tax on withdrawal”
(E) – “Tax exemption on investment” and/or “no tax on earning” and/or “no
tax on withdrawal”
So, if we consider number of stages and number of taxation
scenarios, then logically there are total 8 possible combinations – EEE, EET,
ETE, TEE, TTE, TET, ETT and TTT.
However, it is not possible to tax both earning and withdraw.
So, “TT” in second and third stage is not possible. So, we can consider “ETT”
and “TTT” infeasible tax regime.
Therefore, basis the stage of taxability, we can classify,
these investments in 6 combinations EEE, EET, ETE, TEE, TTE or ETT.
1. EEE: What is EEE?
It means “Exempt – Exempt – Exempt”. The first exempt means you get tax exemption or benefit when you invest in these instruments. The second exempt means that you don’t need to pay any tax on the return or interest earned during the accumulation phase. Similarly, the third and final exempt means that there is no tax on your income from the investment at the time of withdrawal. Investments with EEE tax regime are best tax saving options.
What are the examples of investment or tax saving options with EEE status?
“Public Provident Fund (PPF)” and “Employees Provident Fund (EPF)” – Tax benefit is subjected to PF withdrawal rules. PPF, EFP are most popular tax saving options or investment instruments in India with EEE status.
NPS (National Pension System) – As per latest update, starting April-2019 (proposed), NPS will partially fall into this category. This movement of government to make NPS withdrawal 100% tax free has made NPS on par with PPF from tax treatment point of view. Amount invested in purchase of Annuity (40% of corpus. This is compulsory), is fully exempt from tax. However, annuity income that investors will receive as regular income in subsequent years will still be taxable as per individual income tax slab. This will sit into “income from other sources” head in your tax return. So, in way, we can say that NPS is limited EEE and not complete EEE.
Insurance schemes such as Moneyback plans and Endowment plans – Investor get deduction under section 80C of income tax act. No tax on accrued bobus and no tax on withdrawal of money at maturity as per section 10 (10D) of the income tax act. Investment should fulfill condition of premium as % of sum assured to get tax benefit.
ULIP (Unit Link Insurance Plan) – Tax treatment is same as endowment plans.
Sukanya Samriddhi Yojana (SSY) – Narendra Modi government launched this scheme as a part of Beti Bachao Beti Padao campaign. Investors are eligible for deduction under section 80C of income tax act. Interest accrued on this scheme is exempted from tax and there is no tax on withdrawal.
2. EET:What is EET?
It is “Exempt – Exempt – Taxed”. Unlike EEE, investors need to pay tax on withdrawal.
What are the examples of investment or tax saving options with EET status?
ELSS – The re-introduction of long capital gain (LTCG) tax on equity and equity related products like ELSS has moved this investment option from “EEE” to “EET”. Investment in ELSS funds was one of the best tax saving options before introduction of LTCG tax.
Note there is no LTCG if the withdrawal earning on investment is less than INR 1 lac.
Unit Linked Pension Plan (ULPP) – Investor gets tax benefit deduction under 80C and 80CC (total limit of INR 1.5 lac) on his/her investment. At maturity, investors can withdraw one third as lump sum which is tax free. Investors need to take annuity of remaining 2/3rd amount. The annuity or pension amount that investor receive becomes part of taxable income of investor.
Annuity based pension plans
NPS – As per latest announcement, there will be no tax on withdrawal of 60% of corpus and also no tax on amount invested in purchase of annuity (40% of corpus). However, the annuity income that investors receive in subsequent years will be taxable like the regular income. Therefore, we can count NPS in EET as well.
3. ETE:What is ETE?
It is “Exempt – Taxed – Exempt”. Investors will get tax benefit or deduction on investment. There is tax on earnings from investment.
What are the examples of investment or saving instruments with ETE status?
National Saving Certificate (NSC) – Investment in NSC is eligible for deduction under 80C of income tax act. Interest earned on National Saving Certificate (NSC) is re-invested, and so investors can claim fresh deduction under 80C on interest invested in subsequent years as well. Note that investor does not get deduction on final year interest as it is not re-invested. Also, there is no TDS deduction. However, investors need to declare the interest accrued on NSC on yearly basis in “Income from other source” head in income tax return.
Five-year fixed deposit (FD) – Deduction benefit on investment as per section 80C. There is tax on interest earned on investment. If interest income is more than INR 10,000 in a financial year, then it is eligible for tax deduction at source (TDS). Many salaried class consider this as low risk tax saving options for investment.
Senior Citizen Saving Scheme (SCSS) – Investment is eligible for tax deduction in 80C. Interest earned on SCSS is taxable. However, at the same time investor can also claim the deduction of INR 50,000 (maximum limit) under Section 80TTB of the IT act.
4. TEE:What is TEE?
It is “Taxed – Exempt – Exempt”. There is no tax exemption on investment. However, you can still consider investments with “TEE” status as tax saving options as there is no tax on earning or withdrawal.
What are the examples of investment or saving instruments with TEE status?
Tax free bonds – There is no tax deduction benefit for investor on investment. However, if investor stays invested till maturity (lock-in period ~ 10-20 years), then there is no tax on interest earned. No need not to pay tax at maturity as well.
Note – earlier investment in stocks (if held more than 1
year), mutual funds (other than ELSS but held for more than year), etc. were
also part of TEE taxation regime. However, reintroduction of LTCG has moved
stocks, mutual funds into TET category.
5. TTE:What is TTE?
It is “Taxed – Taxed – Exempt”. There is no tax exemption on investment and earning on investment is fully taxable. You must not consider these as tax saving options.
What are the examples of investment or saving instruments with TTE status?
Unfortunately investments in this category are very popular among investors in India.
Fixed Deposit (FD)
Recurring Deposit (RD)
Post Office Monthly Income Scheme
6. TET:What is TET?
It is “Taxed – Exempt – Taxed”. There is no tax exemption on investment. There is no tax on earnings, but withdrawal of money earned on investment is fully taxable. You should not count these instruments as tax saving options.
What are the examples of investment or saving instruments with TTE status?
Investments in this category are also gaining popularity among investors in India. These are not tax saving options.
Shares (Stocks) – Tax on investments withdrawal as per STCG/LTCG rules. If investment duration is less than one year, then the STCG tax will be applicable else there will be LTCG tax. No LTCG tax if withdrawal earning in a financial year is less than INR 1 lac.
Equity or debt or hybrid mutual funds
What should you do?
In this article, we have learnt about tax treatment of various popular investment options in India. This learning should help you in making better investment decision when you look for tax saving options. Investors must keep below points in mind:
Calculate effective rate of return: Consider return on investment and tax benefits when you calculate effective or net return on your investment. Select the tax saving options with best net return.
Just don’t invest to save tax – Just don’t invest to save tax. Always think end to end. Do tax planning keeping end goal of proper financial planning in mind.
Tax harvesting – Convert TET investments into TEE. Learn tax harvesting. Utilize the exemption of INR 1 lac in LTCG tax to max. This can help you in getting better return on your tax saving options.
Be aware – Keep watch on government or finance ministry announcements. Tax treatment across investment or tax saving options keep on changing. Has anything moved from EEE to TEE or vice versa? Keep yourself up to date with all such announcements.
Tax deferring options are not tax saving options – You save tax if you don’t have to pay tax on return in future.
Summary – Tax or Exempt?
Share this interesting infographics of tax treatment of various investment instruments with your friends. Let them know what falls into tax saving options category and what does not.
Cautionary Note: This article is for information purpose only. We don’t promote or recommend any investment in this article. Our aim is to help investors in making informed financial decision. Investors are advised to do thorough research before investing in any financial instrument.
A lot of people in India invest in insurance policies. You must be puzzled why am I using the word “invest” for insurance policy, but you have read it correctly. A lot of traditional investors use life insurance policies as a long-term investment option. Endowment plan insurance policy is example of such kind of popular investment options.
In this article, we won’t tell you if endowment plan is good or bad. However, we will learn about endowment plan in some detail. What is endowment plan? How to calculate maturity value or return on endowment plan? and so on.
What is an endowment plan?
If you are an Indian reader, then you must have heard the tagline in LIC ‘s (Life Insurance Corporation of India) TV advertisement:
“Zindagi Ke Saath Bhi, Zindagi Ke Baad Bhi”
LIC (Life Insurance Corporation of India)
English translation of tag line is “Even with life, even after life”. This tag line is best suited for “Endowment plan”.
An endowment policy is a hybrid plan, that offers insurer a dual combination of protection and savings.
In other words, this insurance policy provides the life cover to policy holder and also helps insurer to save money regularly over a specific period of time. Therefore, investor will get a lump sum amount on the policy maturity in case he or she survives the policy term.
Insurance company will pass monetary benefit to either insurer (if survived – “Zindagi Ke Sath”) or nominees (if insured dies – “Zindagi Ke Baad“):
1. If insured dies:
If the insured person dies during the term of the policy then, the nominee receives the sum assured plus the bonus, if there is any
2. If insured survives:
If the insured person survives till the policy term then, he or she will get the maturity amount, which includes of “Sum Assured” & “Bonus” (Not guaranteed).
Is it same as ULIP?
ULIP (Unit linked Plan) and endowment plan are same to some extent from “nature of plan” point of view. Both are hybrid plans (insurance + investment or saving). However, there are some differences as well.
In ULIP, insurer company invests investor’s money in debt or equity and share that investment visibility with investor. However, this is not true in case of endowment plan. Investors or policy buyers don’t know about how insurer is utilizing his or her money for investment.
Apart from this, there are lot of differences with respect to withdrawal rule,choice of investment, flexibility, surrender value and so on.
Therefore, in common terminology, we use “endowment plan”or “endowment policy” term only for a non-ULIP saving-linked life insurance plan.
We can summarize these two insurance or investment options as mentioned below:
Endowment plan =
Insurance + Saving
ULIP = Insurance
How do we get return on endowment plan?
Insurer pays insurance premium when he or she invests in an endowment plan. The insurance company allocates certain portion of insurance premium for “Sum Assured (SA)” and “Administrative Expenses”. And, the insurer company invests rest of insurance premium for better returns. Insurance company distributes the return usually among investors as bonus. The bonus value for individual investor will depend on the sum assured value or life cover value.
LIC endowment plans are most popular in India. LIC offers three types of bonuses to its endowment plan policy holders, that we have listed below.
1. Simple Reversionary Bonus:
LIC declares this bonus every year. The word “simple” is used in definition as there is no compounding. This value of bonus is different for different type of policies of LIC. LIC pays the total bonus (accrued over the years) either on maturity or claim or surrender of the policy. LIC usually declares this bonus as a certain amount per Rs 1,000 of sum assured.
2. Final Additional Bonus or FAB:
This is a onetime “additional bonus”. LIC declares this and pays at maturity or at claim. LIC usually offers FAB for longer duration insurance policies and/or policies with high sum assured value. You can check about this in LIC bonus document. If the endowment life insurance policyholder surrenders the policy before the full policy term, then the endowment policy holder will not get the final additional bonus amount.
3. Loyalty Additions or LA:
Likewise FAB, LIC offers LA for certain policies. In line with FAB, this is also a onetime bonus which is paid at maturity. Value of LA depends on policy term and sum assured.
How to calculate expected return on endowment plan?
In this section, we will learn about return calculation on endowment plan with below mentioned example.
Insurance Policy name: LIC Jeevan Anand (one of the LIC endowment plans offered by LIC)
Insurance Policy term: 20 years
Sum Assured: INR 10,00,000
Annual Premium: INR 50,000
Insurance policy start year: 2004
Step-1: Identify the value of “Simple Reversionary Bonus”:
LIC has uploaded the bonus documents for the policies on it’s website. You can check all the values here on LIC’s website from the year 2003-04 onward.
Step-2: Estimate“Simple Reversionary Bonus” for remaining years:
You can do this by observing trend over the years. If this value is constant for last few years,then you can assume same value for remaining years. If it is increasing or decreasing continuously then consider future value of this bonus accordingly.
Step-3: Estimate “Final Additional Bonus”:
As explained in step-2, you can use the same method here as well. Likewise FAB, you can either assume this value same as current year or consider increase or decrease basis last few years’ trend.
Below is the table with actual and estimated value of bonuses for “LIC” “Jeevan Anand” policy example. I have assumed same value of FAB at maturity, which is declared in 2017-18.
Note that there is no loyalty addition for this policy, so we haven’t estimated or considered LA in below calculation.
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Click here to download above calculation in excel format. Step-4: Calculate Return on Endowment Plan:
You can calculate IRR (Internal rate of return) in excel using IRR formula. In-order to do this, you first have to calculate cash flow over the years. I have calculated same in below mentioned table.
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Click here to download above calculation in excel format.
Cash flow calculation for first 20 years: Note that bonus is declared every year, but it is paid at maturity. So, cash flow calculation point of view, the net cash flow for first 20 years will be at – 50000.
Cashflow for 21st year:Sum Assured + Total Accrued Bonus + FAB = 10,00,000 + 8,75,000 + 70,000 = INR 19,45,000.
The value of IRR for this cash flow is 6%.
Is return on endowment plan taxable?
For above example, the direct answer of this question is “No”.
As per Section 10 (10D),any amount received on maturity of a life insurance policy including amount received as bonus is fully exempt from Income Tax, if:
The annual premium paid on the policy does not exceed 10% of the sum assured (for policies issued after 1 April 2012).
20% of sum assured (for policies issued before 1 April 2012).
In above example, firstly you can see that the return on endowment plan is just at 6%. And most of the time this return will be in the range of 5-7% only.
Secondly, If you have to surrender the endowment policy before the policy term because of any reason, then you will get very less surrender value.
In conclusion, policy holder or insurer or investors must know about this return and their expectation before deciding to invest in such endowment policy. You must ask if it really helps in achieving your financial goal or not. If you are purely buying the plan from investment point of view, then you must know if it will really help you in improving your net worth or not.
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Paying through credit card is very convenient and beneficial and if you use it wisely then it is a great thing to have in managing cash flow in very effective way. Below are the tips for effective use of credit card.
1. Pre-plan the expenses:
You must pre-plan your expenses on credit card. You should not plan to spend more than what you can’t pay within free credit period limit.
2. Credit Card limit:
Do you know what is your credit card limit? Many credit card holders don’t know about their credit card limit. Knowing your credit limit help you in controlling the expenses. Also, if you are earning well then you may get multiple calls from your credit card bank to increase your limit. What should you do? I usually say “No” to them. Your credit card limit should be an amount you know you can repay, and one that won’t tempt you to spend more than you can afford. Also, if you become victim of any fraud then greatest loss you can incur is equal to your credit card limit.
3. Track your expenses:
Track your credit card expenses using mobile application or in excel sheet. Don’t spend more than what you can’t pay by due date.
4. Pay on-time:
Don’t default on monthly payment. It affects your credit rating as well. If you have habit of forgetting the dates, then set auto-payment. Also, don’t get into “Minimum Amount Due” Trap. This amount is nothing but interest & financial charges that you are paying on complete outstanding amount. Always pay complete outstanding amount. Bank charge interest on outstanding amount from date of purchase.
Do you know how much does your bank charge if you default on payment? Just Google it or check your credit card terms & conditions document.
5. Use life time free credit card:
If you are earning well and/or have good credit score then, many banks/companies can offer lifetime free credit card that otherwise may have some annual fee. I have been using credit card since 2013 & haven’t paid a single rupee fee for credit card usage. If you are paying annual fee for your existing credit card, then look around for better credit card at no cost. I am sure you will get one.
6. Don’t withdraw cash using credit cards:
Many or most of the credit cards come with the choice of withdrawing cash from ATM but I personally don’t recommend withdrawing cash using credit card. The charges & interest you are going to incur is very huge, it is more than 3% per month. Do you know what is the interest rate of personal loan per month? It is usually between 0.96% to 1.5%.
7. Manage cash flow effectively:
Timing your expenses properly can help you in using no interest period effectively. My credit card statement date is 18th of every month & payment date is 8th of immediate next month. Let’s assume on 15th Oct-18, my family decide that we should buy new LED TV (costing Rs~ 50,000) then instead of buying on 16th Oct, I will wait for two more days. This will give me free credit period of 50 days.
Note that a credit card gives free credit period from 20 to 50 days. How effectively do you use this period?
You must know benefits associated with your credit card – free lounge access, what kind of expenses can maximize reward points, how can you use those rewards points, etc.
I will give you an example here of HDFC Diners Club Premium Credit Card. Assume you have this credit card with you and you plan to buy a mobile phone, which is available at Flipkart & Amazon site at same cost. If you buy the phone directly on these site, then you have lost opportunity to save Rs 1300. Buying anything on Flipkart or Amazon using HDFC smartbuy will help you in earning 10X reward points (As on Nov-2018) which is equal to 13% saving.
I personally don’t recommend having more than one credit card. I have seen the cases of defaulting on payment if person holds 2 to 4 credit cards. You tend to spend more than your repayment limit & gets into debt trap. This is digital world where everything is available on a click so controlling on unnecessary spending is very important.
10. Select right Credit Card:
You should know which credit card is more useful, basis your spending habits or pattern. If most of your credit card expenses are for online shopping & tickets booking, then get a card which gives better offers or more reward points for such expenses.
Bonus Point:11. Disable international transaction on your card:
If you have just returned from your foreign trip or if you don’t need your card for international transaction then login to you netbanking account & disable international transaction on your card.
Credit card is necessary & helps a lot in managing cash flow in crisis. It is not at all a bad product unless you make the mistake of not using it properly. A disciplined spending habit can help in improving your credit score or CIBIL rating. If you can’t control expenses, then stop using the credit card. Follow these tips for credit card effective use.
Share this interesting infographics of article with your friends & share these interesting tips:
Buying a new car is dream of most of the middle-class families. If you have also decided to buy a new car on this Deepawali or new year or on next Gudi Padwa or on next Ganesh Chaturthi then keep below points in mind to save money on new car:
1. Save on car loan –
From financial decision point of view, I personally do not recommend buying car on loan, but if you are really very excited to buy car or you really need it but don’t have money then go for car loan. Most of the banks & NBFCs offer car loan. Below points will help you to save money on new car
Don’t buy car loan through dealer – Most of the time interest rate will be high if you get loan through dealer recommended financial company/bank v/s if you directly contact them.
Banks offers car loan at lesser interest rate than the Non-Banking Financial Companies. You must compare interest rates offered by various banks & NBFCs before deciding.
Negotiate – You should negotiate on car loan with your banker. It works. Check your credit score.
Life insurance with car loan – It is not mandatory to buy life insurance cover with your car loan. You must discuss & clear all the doubts before saying yes to your banker for car loan.
2. Save on car insurance –
I have seen many car buyers paying unnecessary high amount for the car insurance premium. Even well-educated people also ends up paying higher premium for car insurance.
Don’t buy insurance through dealer – Most of the time premium will be high if you get car insurance from dealer recommended insurer. You can get the details of what that insurance company is offering for car insurance cover & then go and search online or contact directly the insurance companies. I am sure, you will get some better quotes for the same offerings.
Know what cover you need & what you don’t – You should know the things which are covered in insurance & which are not. If you don’t need something, then ask to drop it. It is not necessary that you take all the covers offered to you.
Negotiate – You should negotiate on insurance premium with the company agents. Tell them you are getting better offers for same cover from other companies. I am sure, the agent will tell you that he will come back after discussing with his manager and you know what, you will get better offer.
3. Save on accessories –
Negotiation with dealer on offer – Visit at least 2 showrooms once you select the car model to buy & negotiate with them on price or ask for some offers.
Free accessories – most of the dealers will give you a few accessories free (mud guard, car cover, foot matt, seat cover, etc) if you ask. If you don’t ask, then you won’t get.
4. Save on EMIs –
EMI duration – Car is a depreciating asset, so it is advisable to get rid-of car loan as soon as possible. I don’t recommend more than 1 year of duration for car loan EMI. Read this to know how to calculate EMI in excel.
Fixed v/s floating interest rate – Decide as per market sentiments on central bank move. If you expect rates to increase in future, then go for fixed rate else select floating interest rate.
Many of us opt for personal loan when we are short of fund in any emergency or when we plan to spend for big ticket items like land, consumer electronic goods, wedding function, home renovation, etc. Personal loan interest rates vary from 10.5% to 24%.
Do you know what does drive personal loan interest rates? If you are interested in knowing about personal loan interest rates, then keep reading this article.
We will be learning about personal loan interest rates, tips to avoid personal loan & ways to reduce personal loan interest rates and so on. Before jumping to tips, lets learn about personal loan first.
What is personal loan?
Personal loan is an unsecured loan that individuals avail from a bank or NBFC to meet their personal needs. As there is no collateral for this loan so lender issues the loan basis borrower’s creditworthiness. Banks or NBFCs check customers’ ability to repay the loan on time. Higher the risk, high will be the personal loan interest rates. So, it becomes very important for customers to know about their credit profile & what is the best way to get favorable personal loan interest rates.
There are lot of things that have impact on personal loan interest rates. I have listed down 4 major criterion that decide personal loan interest rates. Knowing these details & working on these points will surely help you in getting better personal loan interest rates.
Tips to avoid personal loan:
Undoubtedly, personal loan interest rates are higher than the rates on other type of loans. It will be better if you can avoid personal loan. There are some options that I have listed here. You must explore these options first before choosing to pay high EMIs with higher value of personal loan interest rates.
1. Avoid sky touching personal loan interest rates by managing cash flow –
The best way to get personal loan at cheapest rate is to not apply for it. If amount is very small like Rs 50,000 – 100,000 then try to avoid it by adjusting your cash flow. Explore if you can postpone some expenses to future months? Can you utilize credit card 50 days free credit cycle in managing this situation? Can you postpone lump – sum repayment of home loan or if you had already paid lump – sum amount in past then can you miss this month EMI?
2. Loan from employer –
Have you checked with your employer? Many companies offer attractive personal loan interest rates to its employees. You must check there before approaching banks or NBFCs for personal loan. Also check impact of taking loan from your employer on your tax outgo. You must calculate effective interest rate.
3. Loan on credit card –
Sometimes banks offer loan on your credit card at attractive rates without any processing fee. If amount is not big and if you are not able to get attractive personal loan interest rate, then you can explore this option as well. This is the simplest process form documentation point of view. You can actually get money in your account in minutes. In my starting days of job, I once availed HDFC’s “Insta Loan” facility on my credit card. Bank deposited “Insta Loan” amount in minutes in my saving account. Taking loan on your credit card is one of the fastest way.
If you are selecting this option, then remember to check if it is going to block your card limit or not? Most of the time banks offer both the types of loan on your credit card. You must clear this doubt before saying yes to your banker. Learn to use your credit card wisely.
Tips to get attractive personal loan interest rates:1. Compare personal loan interest rates –
You must compare personal loan interest rates of various banks before approaching them. Choose top 3 & then plan your next steps.
2. Credit Score –
Check your credit score before approaching bank for loan. Many customers don’t know their credit score. If your credit score is more than 700 then banks will easily offer you the loan and if it is higher than 800 then you can definitely get best(lowest) personal loan interest rates. Most of the time lender won’t tell you that you are eligible for loan at lower rates. You can check your credit score for free. Indian readers can visit sites like “Paisabazaar” or “Bankbazaar”.
If your credit score is low, then you must fix it before approaching banks or NBFCs for loan. Ideally you must wait for 3 months before applying. Work to improve your credit score in these 3 months. A few steps to improve credit score:
Pay credit card bills on-time
Optimize spend on your credit card. Don’t completely exhaust your limit and also don’t stop using it. If you don’t spend on credit card, then it will not help you in improving your score.
Pay your existing loan EMIs on-time
Don’t rush for another personal loan if you just closed one
3. Check for offers –
Many a time banks offer “zero processing fee” or “lesser interest rate for limited duration”, “tenure-based discount” & so on. Check the offer section of website of the banks that you selected basis personal loan interest rates comparison results.
4. Negotiate –
You must negotiate on personal loan interest rates, processing fee discount, etc. with your banker. It works. Your credit score, income source stability are good then you can easily get loan at cheaper rate. If you hold your salary account with the same banker, then you can use this point as well in negotiation.
If bank’s personal loan interest rates range is from 11% to 24% then you must target for 11%.
5. Optimize your EMI duration–
Try to minimize EMI duration. If you can easily pay loan in 12 months, then don’t go for 36 or 60 months EMI duration. You must be thinking how do I know if I can easily pay in 12 months or 24 months?
You can decide on this by analyzing your cash flow versus different EMI duration scenarios. First step for this analysis is to calculate EMI in excel for various EMI duration. Analyze impact of different EMI values on your monthly cash flow. If your cash flow is looking comfortable with 12-month EMI duration, then go ahead with this option. Managing cash flow is one of the key theme of “effective debt management”.
6. It is not mandatory to buy life insurance from lender –
It is not mandatory to buy life insurance cover with personal loan. However, as it is an unsecured loan so most of the time banker will insist you to buy life insurance cover from them. If you already have a life cover then you can tell this to your banker. You must discuss & clear all the doubts before saying yes to your banker for personal loan.
7. Prepayment –
If you are availing personal loan for short term (3-5 months) financial crisis, then it really doesn’t make any sense to live with the burden of higher personal loan interest rates. Always check bank’s terms on “Personal Loan Prepayment”. Does your bank provide this choice? If it is yes, then what is the prepayment penalty?
8. Tax benefit –
There is no tax benefit on personal loan but if you use loan amount for home renovation, down payment, repairing, reconstruction then you may be eligible for tax benefit under section 24. This tax benefit is limited to interest component only. Note that personal loan interest rates are usually higher, so if you are able to avail this tax benefit then this can be a significant tax saving for you. Check with your accountant.
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