To be or not to be a priority banking customer!

Priority Banking or Privilege Banking is a relatively new term in the Indian banking context. Many banks in India, especially the private banks have followed international banks in providing specialised services to a certain set of customers known as priority customers. These customers are determined usually by the average balance they maintain with the bank or based on the number of years they hold the banking relationship. While in some cases, customers are automatically offered priority banking status, there are many instances when one has to apply for this.
So is priority banking the same as wealth management services offered by banks? The answer is no. Wealth management service is concerned with providing first class customers with customized services on all their financial needs, which includes investment advice and portfolio management. Priority banking on the other hand deals with providing the same banking services to priority customers at specialised rates or offering a particular convenience level. While wealth management is not priority banking, priority banking as a part of its services may include wealth management. Let’s look at some of the benefits which a priority banking customer can experience:

• Dedicated service area in the branch, thus eliminating the need to queue up for transactions
• Client relationship managers assigned to take care of all banking needs
• Free ‘at-par’ cheque books and waiver of charges on a host of products like NEFT, RTGS, demand drafts, cheque returns, duplicate statements, stop payment of cheques etc.
• Premium debit and credit cards free of cost
• Free cheque pick up facility
• Concessions in locker rent
• Access to exclusive lounges and other areas
• Preferential pricing on a variety of products and services
• Relationship benefits across branches in different locations

The above are a few illustrative benefits and can vary from one bank to another. While the gamut of services and benefits covered are not important, it is useful to see that priority banking customers often stand to gain compared to normal customers.
So does it make sense to become a priority banking customer with your bank? It is first important for you to ascertain two things – your banking needs and if the priority banking status is offered for free. While in many cases priority banking is free and is based on the past history of the account, some banks charge for offering this service. For example, Standard Chartered Bank charges a fee for providing priority banking services and this is set out in the priority banking tariff sheet of the bank which changes from time to time.
Ascertain if you have to pay to become a priority banking customer. If yes, then evaluate your banking needs. As far as banking needs are concerned, each individual and household has different needs depending on their financial situation, background, how tech-savvy they are, etc. You will need to determine if you currently need heavy banking services for your personal and professional needs or if banking is only a small part of your financial life. For most people, banking stops with depositing and withdrawing cash, opening fixed deposits, operating the locker and maybe take demand drafts. Now, with the advent of mobile banking and internet banking, the need for cheque books, demand drafts and physical visits to bank branches is also greatly reduced for the common man. You can carry out most services on the internet by simply logging in to your account, with a click of the mouse. In such a scenario, applying for a priority banking account by paying a fee does not make much sense.
On the other hand, if you think you will need to avail some services repeatedly from your bank, you can consider a priority banking relationship. For instance, you may have the need to take demand drafts at regular intervals, which entails hefty demand draft charges. Or you may not be tech-savvy and therefore may need to visit the bank regularly. You may also want an unlimited cheque book facility, which is not available to you as a normal customer of the bank. In such cases, you can look at priority banking as an option to enhance your banking experience. However, always remember to compare the benefits you receive vis-à-vis the cost borne by you to avail such services.

Courtesy : BankBazaar

Why you must include PPF, tax-free bonds in portfolio

The season of tax-free bonds is on.

With companies like IRFC, IIFCL and NTPC still to launch their issues in this financial year, there would be many opportunities for ones who have missed out.

Retail investors, who have found little relief in the stock markets, want to get onto the bond bandwagon.

For a good reason, too, as the interest rates are at eight-nine per cent for a 10-year period.

But if you are already investing regularly in similar long-term instruments like public provident fund, don’t stop investing in them just because the rates on these instruments are higher marginally.

While both these instruments seem to be competing for your surplus cash because of their long-term and tax-free advantages, they play different roles in your portfolio.

PPF allows you to prepare a retirement kitty whereas tax-free bonds ensure that you have a regular cash flow.  

For a priority perspective, Sumeet Vaid, of Ffreedom Financial Planners, says that consider tax-free bonds only after exhausting the PPF limit.

“Tax-free bonds make sense if you are looking for cash flow.

“The annual or half-yearly dividend option is good.

“But there is no secondary market for these bonds.”

There are some major differences between the two.

PPF is limiting because you can invest only up to Rs 100,000 in a year whereas tax-free bonds allow up to Rs 10 lakh (Rs 1million).

The lock-in periods are 15 year and 10 year, 15 year and 20 year for PPF and tax-free bonds.

In the former, there is partial withdrawal allowed after seven years.

While you can sell tax-free bonds in the secondary market, the absence of any depth would force you to sell for a discount.

The interest for PPF is announced every year. For the current financial year, that is, 2013-14 the rate is 8.7 per cent. 

Of course, these are lower than bank fixed deposits, which offer 9-10 per cent for one year and above.

But since the interest income from such bonds is tax-free, the effective yield works out better than bank fixed deposits.

One must also remember that in case of PPF the amount invested is also tax-free, which is not the case with tax-free bonds.

Here is it only the interest income that is tax-free.

Another option is the tax-saving bank fixed deposits, which have a lock-in of five years.

Some banks offer these for a maturity of up to 10 years.

In this case too, the investment limit is Rs 100,000, which is exempt from tax.

But the interest earned is taxed.

Also, these are more attractive when interest rates are high, which is why they have been popular this year.

Investors can use PPF to accumulate the funds for retirement and tax-free bonds for a regular post-retirement income, says Nikhil Naik, managing director, Naik Wealth.

“We have seen that people keep renewing the money in their bank FDs.

Such people can consider putting some part of that money in tax-free bonds and keep a small part in FDs for the liquidity.

“Investors must remember that tax-free bonds offer opportunity at the moment,” he says.

Courtesy : rediff.com

Your wait for that big I-T refund just got longer

If you are expecting a huge income-tax (I-T) refund, you may have to wait a bit longer than you earlier thought. 

To limit the government's fiscal deficit for the financial year at 4.8 per cent of gross domestic product (GDP), despite rising subsidies, the finance ministry has decided to go slow on I-T refunds, besides slashing Plan expenditure substantially.

According to officials, small I-T refunds are being cleared but the big ones - those running into lakhs of rupees - are being held back for now. 

That is because tax collections have remained subdued so far, making it difficult for the government to meet its direct-tax collection target of Rs 6,68,108 crore for 2013-14.

The direct-tax collection (net of refunds) in the April-September period this year increased only 13.33 per cent - compared with the projected 19 per cent growth - to Rs 2,84,339 crore. 

The refund claims during the period, on the other hand, increased a mere 3.13 per cent to Rs 53,568 crore. 

"More than 80 per cent of the refunds are being given, but most of these are for small amounts," says a finance ministry official, asking not to be identified.

A further moderation in income-tax refunds is likely to be seen in the remaining months of the current year. In 2012-13 - the total refunds in the year had fallen about 13 per cent from the previous one to Rs 82,704 crore - too, the refunds had come down in the second half.

However, slowing down refunds may not be enough to contain fiscal deficit at 4.8 per cent this year, given that the rate of economic growth (without adjusting for inflation) is expected to be lower than that projected in the Budget, pushing up fiscal deficit (as per cent of GDP). 

Also, a rise in the government's expenditure on subsidies is exerting pressure on the non-Plan side - the petroleum subsidy is likely to be around Rs 1 lakh crore, against Rs 61,772 crore provided for in the Budget.

So, Plan expenditure could see a cut. Expenditure of ministries like rural development, health & family welfare and human resource development would be slashed heavily in the Revised Estimates for 2013-14. The communications & IT, home and power ministries are among other ministries to see significant expenditure cuts.

According to officials, the Plan expenditure cut in 2013-14 would be under the same heads as in 2012-13. Almost all departments had seen Plan expenditure cuts in 2012-13 - the reduction was steeper for the ministries mentioned. 

This had helped bring Plan expenditure down by Rs 92,000 crore, or 17 per cent of the Budget estimate for 2012-13. This year, the cut is likely to be heavy but a little less than in 2012-13, so that growth prospects are not hit.

"Every effort will be made to lower wasteful expenditure, so that the fiscal deficit is contained - without compromising on GDP growth. Any funding related to election work or where funds have been utilised is not being reduced," says another official.

With issues related to the external sector on the wane, the finance ministry is focusing on growth and inflation. These are going to be priorities before the country goes to polls in 2014.

Officials say growth in the second half of 2013-14 would be better than in the first, especially with a slow growth rate in the same period last year (low base) giving statistical advantage. Lower current account and fiscal deficits will further support growth, they add.

The finance ministry expects the country's GDP growth rate for the year to be 5-5.5 per cent. Independent analysts, however, expect it to be less than five per cent.

Courtesy : rediff.com

Popular alternatives for a personal loan!

When you are in the urgent need of cash, the easiest option seems to be taking a personal loan. But with the raging interest rates these days, it’s not quite wise to get into the vicious cycle of debt. Banks also tend to look at your entire financial profile before accepting you for eligibility. What if you could have an option apart from personal loan in times of crisis?

Here are some quick fixes as alternatives to personal loans –

Loan against fixed deposits – This is the quickest possible loan because banks lend against their own fixed deposits. The repayments of this type of loan should be done within the fixed deposit tenure. The biggest advantage is there is minimal documentation required and loans are available over 80% of the fixed deposit value. Also, your fixed deposit continues to earn interest even during the tenure of the loan. However, you must discipline yourself to repay the loan every month like an EMI.

Gold loan – Initially started off as a popular source of finance in rural and semi-urban areas, gold loans have off late become extremely popular in metros as well. This type of loan provides immediate liquidity on the basis of one’s jewellery without having to sell it away. Further, there are no processing charges and prepayment fees. The loan amount depends on the purity and weight of the gold that is given. Although this loan does not necessitate previous credit history, banks are going stringent on these after recent RBI regulations. Further, the interest is not cheap and is comparable with personal loans.

Loan against Property – You can borrow against your property and the loan amount is calculated on the basis of value of property and the borrower’s capacity to repay. Refinancing the property is an option if the value of loan is to be increased or the property value has risen over a span of time. Failure in prompt repayment can result in loss of ownership, and hence absolute care must be taken, as a property is usually of higher value than any other form of security.

Loan against shares – Banks lend against the shares of specific companies which you hold. However, not all shares you hold qualify for such loans. Each bank has a different list of approved securities which qualify for such loans. The amount depends upon valuation of security and ability to repay and service the loan. Although you can receive money without liquidating your investments, the amount granted as a proportion of the security offered is much lower compared to other forms of loans. With present volatile stock markets, this may not come cheap as well.

Loans against Life Insurance policies – Loans that are granted on the basis of life insurance deals have lower rates of interest and easy options for repayment. Loan amount is dependent on the value of the policy. It can be repaid anytime during the term of the policy. In the event of an unpaid loan amount, interest will be deducted from the claim. This is a quick loan with minimal documentation.

Loan against Public Provident Fund (PPF) – Loans can be taken on the basis of PPF but with tenure only up to 2 years. If the first loan is repaid, the borrower is entitled for another loan if they are within 3 to 6 years of opening an account. The benefit of this loan is that you can borrow without breaking your PPF and also with minimum documents.

Summary of Salient Features of Different Kinds of Loans

Factor	Loan against Fixed Deposit	Gold Loan	Loan against Property	Loan against Shares	Loan against Life Insurance	Loan against PPF
Eligibility	Fixed deposit should be for at least a year	Available for just gold components. Not valid for other stones, metal or platinum.	No mortgage issues. Property should not be under ownership disputes. Minimum income from the land should be Rs 1 lakh	Only individuals are eligible.. Loan is granted only on the basis of bank’s approved list of shares	They are sanctioned only on endowment plans, after completion of 3 years of the entire premium	It is available from the 3rd up to 6th year and up to 25% of balance at the end of 2nd year
Documents	Fixed Deposit Receipt	Proofs for identity and address of the individual	Proof of residence, identity, age, income, property documents and signature	Proofs of address, identity and signature. Power of attorney, transfer pledges and forms	Actual documents of the policy	PPF passbook
Rates of Interest	1% or 2% more than the rate on the fixed deposit	10% to 17%; Higher in the case of gold loans from NBFCs	13% to 16%	13% to 16%	8% to 9%	2% above the rate of interest for PPF
Processing Time	2 or 3 days	1 working day	10 or 15 days depending on the lender.	7 to 15 working days	2 to 3 days	1 or 2 working days

You can take a look at the above mentioned options see which one might suit you best. If you are in urgent need of cash but for a short period of time, you might want to consider these alternatives. Evaluate your need and financial position before deciding on any kind of loan, as these will have direct implications of your financial plan.

Courtesy : BankBazaar

Common issues faced by home loan borrowers!

The volatility in interest rates in India has affected borrowers of all types of loans. However, home loan borrowers are the most affected, as home loans are by far the biggest loans quantum-wise. Discrepancy in interest rates between existing borrowers and new borrowers, porting of home loan, stringent rules by lenders and clauses on fixed rate home loans are some of the issues faced by home loan borrowers in the country.

Let’s look at them in greater detail:

One of the most common issues faced by existing home loan borrowers is the discrepancy in interest rates paid by them vis-à-vis a new borrower. While this is a valid complaint, let’s first see what causes this discrepancy. Interest rates on home loans are usually linked to the benchmark rate of the bank (be it the Prime Lending Rate – PLR or the more recently introduced Base Rate, as the case may be). From this benchmark rate, a fixed rate is either deducted (in the case of a PLR) or marked up (in the case of a Base Rate) to arrive at the floating rate on the home loan. Any changes in the benchmark rate will thus automatically result in a change in the interest rate on the home loan as well.

For example, consider a borrower who has taken a home loan from a Housing Finance Company (HFC) at terms which state that his interest rate will be 300bps lower than the prevailing PLR. This was the agreement entered into with the bank at the time of availing the loan. The PLR at the time of granting the loan was 15%, and the interest rate on the home loan thus stands at 12%. Now, if after 2 years, the PLR is reduced by 50 bps to 14.5%, then the interest on his home loan also automatically falls to 11.5%. On the other hand, in order to attract customers, a new borrower may be offered terms with a mark down of 350 bps. As a result, the interest rate he gets on his home loan will be 11% only. This is the reason for the discrepancy in interest rates.

In recent times, in view of the increasing incidence of customers switching banks to avail better rates, the existing borrowers are being offered an option to change to new rates in the same bank by paying a switch fee or a conversion fee. This can be 0.5% to 1% of the outstanding loan amount. This is a good way of availing interest rates offered to new customers. However, this scheme is not actively pushed by banks, and not all lenders offer this too.

In such a situation, most existing borrowers resort to porting their home loans to banks which offer lower interest rates. This has been encouraged by RBI by removing the prepayment penalties on floating rate loans. However, it is important for customers to read the fine print before taking this step, as there may be many unanticipated costs to be borne. Processing fees, stamp duty, notarization charges, franking charges and insurance premium are some of the likely costs which a customer needs to bear. This can easily work out to be 0.5% to 0.75% of the loan amount. Add to this the requirement of submitting all documentation again to the new bank. It is therefore important to understand the merits of switching your home loan, and try to use the option of staying with your old bank using the switching fee option, wherever possible.

Another issue faced by fixed rate home loan borrowers in the applicability of the reset clause. Fixed rate loans are not fixed for the entire loan tenure. The reset clause is invoked as and when applicable according to the terms of the agreement. Thus, if there is a scenario of increasing interest rates in the economy, banks will reset the interest on the fixed rate home loan. Although there is no option to remove this clause, borrowers can search for banks that offer fixed rate loans with no reset clause.

Borrowers also sometimes face the issue of the inflexibility on the bank’s part to adjust the EMI amount or tenure in case of an interest rate revision. The hassle of reworking EMIs as well as changing ECS mandates may deter banks from changing the EMI amount. However, from the customer point of view, it must always be remembered that reducing the tenure is a better option compared to reducing the EMI amount in case of a downward interest revision, to save on interest costs.

It is hoped that RBI and the Government will continue to take proactive steps in addressing the concerns of home loan borrowers – both existing as well as new borrowers.

Courtesy : BankBazaar

New rule lowers HRA exemption claim limit

CHENNAI: If you are a salaried taxpayer claiming HRA (house rent allowance) deduction, watch out. The central government has lowered the exemption limit for reporting the rent received. Salaried taxpayers claiming HRA exemption and paying a rent of over Rs 1 lakh per year have to give landlord's PAN (permanent account number). Till now, if the total rent paid was less than Rs 15,000 a month there was no need to submit the landlord's PAN details. The new rule effectively lowers the rent limit from Rs 15,000 a month to Rs 8,333 per month for claiming HRA exemption without making any disclosures.

"Further, if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer," the Central Board of Direct Taxes said in its latest circular. "In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee," it said.

Though incurring actual expenditure on payment of rent is a pre-requisite for claiming deduction under section 10(13A) of the I-Tax Act, it has been decided as an administrative measure that salaried employees drawing HRA up to Rs 3,000 per month will be exempted from production of rent receipt.

The new rule is aimed at people claiming HRA exemption for living in their own house. "It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in Rule 2A, qualifies for exemption from income-tax," CBDT said in its circular.

Thus, HRA granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. "The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the house rent allowance or any portion thereof from the total income of the employee," CBDT said.

Courtesy : times of india

Take a tax break... a must read

The financial year is drawing to a close and taxpayers have started looking for options to minimize taxes. However, you will be happy to know that the income tax act offers many more incentives and allowances, apart from the popular 80C, which could reduce the tax liability substantially for salaried individuals.

The components of salary include basic salary, dearness allowance (DA), house rent allowance (HRA), conveyance, city compensatory allowance, variable incentives and perks.

You can opt for the following options to get tax benefits.

Salary restructuring with allowances and perks: Instead of going for a high basic salary, you can take reimbursements, allowances and perks, which are exempt from tax. However, your employee provident fund (EPF), gratuity and superannuation are all a percentage of your basic. So, by reducing your basic to allow for higher allowances and reimbursements, you will reduce your EPF, gratuity and superannuation. While EPF is totally tax-exempt, gratuity up to Rs 10 lakh is non-taxable as also the commuted pension portion of superannuation.

Transport allowance: Transport allowance provided by an employer for commuting between your residence and your place of work is exempt up to Rs 800 per month (if free conveyance is not provided by the employer).

House rent allowance: Individuals living in a rented accommodation should include HRA as part of salary. The least of the following amount is exempt under Section 10(13A): i) HRA actually received; ii) Rent paid in excess of 10 per cent of salary; iii) 50 per cent of salary (if rent paid in a metro), or 40 per cent of salary (other than metro city).

Maximum benefit of HRA can be derived by having all the above three components to be of more or less the same amount. Salary for this purpose means: Basic plus DA (forming part of benefits) +commission on sale at fixed rate. There is no exemption if you live in your own house or a house for which you don't pay any rent. You have to provide to the employer a proof of the rent payment. However, if the HRA is up to Rs 3,000 per month, you don't need to provide a receipt to the employer.

HRA and home loan: Suppose you are living in a rented house in the city where you work and you are repaying a home loan on a property elsewhere. In this case, you can get HRA deduction as well as take the tax benefit of the home loan. The provisions dealing with HRA and home loan benefits are separate in the income tax act. (rental income is taxable after standard deduction of 30 per cent).

Leave travel allowance (LTA): You can claim your LTA, which is available twice in a block of four years.

It is based on expenses actually incurred on travel fare, if (i) the travel is undertaken by you and can include your family members; and (ii) is for proceeding on leave to any place in India.

The LTA block is measured in calendar years; the current block is from January 1, 2010, to December 31, 2013.

"Family" here is defined as spouse, children, parents, brothers and sisters. Family members have to be wholly or mainly financially dependent on you for claiming LTA. Also, LTA exemption does not apply to more than two children born after October 1, 1998.

If you cannot take the benefit of LTA in a block, only one of the two allowed journeys can be carried forward. It should be carried forward to the first calender year of the immediately succeeding block. The carry forward has no detrimental effect on the new block of four years.

Apart from one journey carried forward from the last block, you will still be eligible for LTA of the two journeys in the new block.

The exemption on LTA is subject to limits. For example, if you travel by air, the exemption will be on economy class air fare of the national carrier by the shortest route to the place of destination, or amount actually spent, whichever is less.

Where the places of origin of journey and destination are connected by rail, the exemption will be equal to AC first class rail fare by the shortest route to the place of destination or the amount actually spent, whichever is less.

You can also claim exemption on the following:

Children education allowance: up to Rs 100 per month per child for maximum two children

Hostel expenditure allowance: Rs 300 per month per child for maximum two children

Allowance to meet the cost of travel on tour or transfer, including packing and transportation of personal items

Allowance on tour or for the period of journey in connection with the transfer to meet the ordinary daily charges incurred by employees during absence from their normal place of duty

Allowance to meet expenditure incurred on a helper, who is engaged for the performance of duties of an office or employment of profit.

Allowance for encouraging academic, research and training pursuits in educational and research institutions

Allowance to meet the expenditure incurred on the purchase or maintenance of uniform to be worn during performance of duties.

Amount of employer's contribution towards recognized PF (up to 12 per cent of salary); approved superannuation fund; group insurance schemes; employees state insurance schemes; fidelity guarantee scheme.

Any allowance to compensate for the increased cost of living prescribed under Rule 2BB. It includes city compensatory allowance, border area, hilly area and field area compensatory allowances, special allowance to members of armed forces, subject to limits under Section 10(14).

Knowing these alternative avenues to trim your tax liability will help you avoid last minute hassles of tax planning. Plan well in advance to file well in time.

Courtesy : Yahoo Finance