Home vs. Plot – Which is a better investment?!

Buying a plot in any part of India can be challenging unless you have sound financial backing for initial investment. Banks do offer a loan for the purchase of a plot and even for construction such as SBI Realty, HDFC Plot Loans, Indian Bank Plot Loan etc. However, the associated tax benefits are subjective to whether you complete constructing a house on the plot or not, and even if you do, the benefits are offered only for the first year.

On the other hand, in case of flats, loans are easier to avail, albeit, at similar interest rates. However, flat purchase attracts a lot of tax benefits, especially for first time home buyers.

Which Requires More Investment?

Building one’s own house can be a challenge since one has to constantly monitor the construction activities, right from meeting with architects to ensuring raw materials are used correctly. Also, a common problem faced by most first time home builders is the tendency to stretch the budget while constructing the house, resulting in overspending. With flats, a definite rate has to be paid to the builder; and apart from the house and registration costs, the buyer only has to spend on getting the interiors done. At any price range, constructing one’s own house will be more expensive when compared to buying a flat of a similar size and dimensions; however, it gives the owner the freedom to choose the layout and design.

Which has Better Resale Value?

When one considers the resale value of the house, most people who are looking for an independent house prefer to buy a plot and construct their own house as opposed to buying a built house. However, with the cost of construction and land escalating, there are buyers for building independent houses too. In case of a house, the value will have a direct correlation with the amenities within the house and accessibility around it. In case of flats, the value of the property rises as the demand for flats within the colony rises. However, houses have a higher resale value than flats, primarily because the person buying the house also becomes the owner of the plot of land on which the house has been constructed.

Which has a Higher Rate of Return?

In case of constructing a house on a plot, while the land value appreciates, the house value depreciates due to wear and tear. Owners must pay special attention towards space planning, construction quality, and quality of amenities etc. as they are the decisive factors for valuation. One reason why the value of the house is higher than flats is because of the demand-supply differences. The supply of independent houses is lower than that of flats. Also, the owner of the house has the option to get permission for adding additional floors to the house and renting or reselling them.

What to Check before Buying Land?

Buying land has become a risky business in major cities due to the number of instances of fake registration papers. Hence, it is essential to check under whose name the land is registered. Further, one must look out whether the house is stuck in litigation and the seller has sole ownership of the land with no other claimants.

Documents to Be Checked Before Buying a Land
Document	What to Check?
Title Deeds	If it is in the seller’s name alone and no other person is involved  If the seller has permitted access to others through this land
Tax Receipt and Bills	Property taxes paid to the Government is up-to-date with latest receipts If there are any notices of requisition relating to the property which are outstanding Water and electricity bills have been paid up-to-date
Encumbrance Certificate	Ensure that the land does not have any legal dues attached. It is issued by the sub-register office where the deed has been registered.
Pledged land	All loans for which the land has been given as pledge have been repaid Release Certificate issued by the bank
Land Measurement	Land Measure before registering the property by a recognized surveyor

It is advisable to get all the documents to be checked by a lawyer to ensure they are original and other requisite authorities too.

Apart from the paperwork, it is also essential to check for the connectivity of the house, its proximity to key places such as market, hospitals, schools, transportation etc. Also, one must ensure that the property is not isolated as many instances of robbery are being reported.

Building a home is a greater challenge than buying a flat. However, it is much more satisfying since the owner of the house is involved in every step of the construction process and everything is done as per their likes.

Courtesy : BankBazaar

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