Prudent newsletter jan 2013 edition

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  • 1. Volume 2, Issue 1 Jan 2013 Why & How should one create a WILL? Six months back, supersedes all earlier owned by testator. He Praveen Hazare died wills. must indicate where due to heart attack Steps to construct these documents are when he was 65 years stored. Declaration in the be- old. He was staying in Details of ownership: ginning: While making Thane with his spouse At the end of the will, a will, one has to de- and two married sons. testator should mention clare that he is of sound He had a flat in Mum- who should inherit mind and free from any bai and a flat in Banga- which assets and in kind of pressure. Then lore. He died without what proportion. If testator needs to men- making a will. After his assets are meant for tion his name, address, death, there were dis- minor(s), it should be age, etc at the time of Prudent Planning putes on sharing of clearly mentioned properties. The so in the will. The PRUDENT FINANCIAL PLANNERS—NEWSLETTER dispute now has to name of the guard- be decided by the ian also should be court as per the mentioned. The Succession Act guardian will use which will take a the assets for the very long time. minor as intended This could have by the testator.P L A N N E R S — N E W S L E T T E R been avoided had he Signing the Will: After writing the will. He made a will. completing the Will, needs to appoint an Who can create? one must sign the will executor for executing along with two wit- Any person who is the will after his death nesses. The date and above 21 years of age otherwise court will place must be indicated and is of sound mind appoint one. clearly at the bottom of can make a Will. But it Details of Property the will. It is necessary will come in to effect and Documents: The that the witnesses only after the death of next step is to provide should sign all the the person who makes list of items and theirF I N A N C I A L pages of the will. It is it (testator). The Will current values, like advisable for the two can be revocable at any house, land, bank fixed witnesses to be a doctor time during one’s life deposit, postal invest- time. When testator ments, mutual funds, and an attorney. makes a new will, it s h ar e c er t i f i c at es Cont… Page 6A B C Financial Focus Inside this issue: Financial Gyan Should I hire a Financial Planner or DIY ? 2 Meeting life goals requires consistent, com- mitted, disciplined approach towards one’s Spreading the income-golden rule of Save tax 3 finances. Contrary to popular wisdom, Spreading the income—continued 4 modest savings build a huge cash-pile and helps meet goals, which seem impossible, Sending your child abroad is not that difficult 5 at first glance. Sample WILL 6 Suresh K Narula, CFPCM
  • 2. Should you hire a Financial Planner or DIY?Be it gymming, dieting, curing simple health problems, are earning more than Rs. 6 lakhs a year or have an in-building a house, tax filing or money management – there vestment portfolio of Rs. 5 lakhs and above, you shouldare two ways of getting them done, either hire a profes- be in a comfortable position to pay up the fees. You cansional for guidance or do it yourself (DIY). In each case, use this as a benchmark for deciding whether to hire athe decision to hire a professional is based on many fac- FP or DIY. It’s a simple tradeoff – you pay fee to savetors which vary for every individual. Like for example if your time, efforts and get professional advice, but letyou are building a house on a plot, you may decide to this not be the only deciding factor.hire an architect based on the size of the project, what Availability: This may be a non-factor after somekind of interiors you want, your budget, etc. Else you years, but as of now it is huge factor. Currently moremay simply give briefing to a local contractor and super- than 1,500 are qualified as Certified Financial Plannersvise the construction yourself. in India out which not more than 200 are practicing.Financial Planning is combination of financial strategies, With growth in demand from consumers, this situationfew calculations and most importantly discipline. You is changing fast. So if a qualified and practicing FP ismay not have a written plan and a second opinion given available and is offering the services which you re-by a professional financial planner, but can still do fine quire, you may think of hiring one. Also check on thedoing it yourself if the following five factors are in your background, fee structure, references etc. It’s better tofavour and you are disciplined & self-motivated to take DIY if planner’s offering doesn’t suit your requirement.charge of your money. Knowledge: There are a number of questions whichTime: You have to commit ‘time’ if you want to man- you should be able to answer by yourself. How muchage money successfully. You will first need to start by corpus do I need for a comfortable retirement? Whateducating yourself with personal finance matters and are various tax benefits available? Am I saving enoughproducts. The best way to do this is by reading money or spending too much? Should I be taking home onmagazines or money sections of your daily newspaper. loan or is it better to rent for some more time? How toYou may also spend time watching TV shows or surf the invest in equity markets? How will be impact of infla-internet. There is too much of information floating tion on my finances? You should also be able under-around, you need to get used to terminologies and prod- stand present value and future value of money.ucts on insurance, investments, banking, taxation etc. This knowledge is currently made available by print,You will also need ‘time’ to understand your needs, set TV and web media in abundance. So it’s not difficult tofinancial goals, learn to use financial calculators (most of find answers to these questions. You just need to takethem are available on internet), compare products, take a time out from your busy schedule and have an inclina-decision and execute it. Getting a grip over your money is tion to go through it.a continuous affair and doesn’t happen overnight; it will Complications: And finally the decision can de-take at least 2-3 years. Spending 6-9 hours a month. pend on the complications in your financial affairs. IsIf you are not able to make this commitment, it’s a good your income from single source or multiple sources likeidea to hire financial planner who will do the handhold- double salary, rent, investments etc? How is your cur-ing, advice and maybe even execute the plan. Even in this rent portfolio spread out – if you have been investing incase you will have to spend 2-3 hours month in meeting mutual funds, stocks and insurance policies on an ad-the planner, understanding the plan, executing and re- hoc basis the chances are your portfolio is widely scat-viewing the plan. tered and needs to be consolidated. If you are in such aAffordability: Hiring experienced & professional fi- situation a professional can give you a holistic viewnancial planner costs money. In India currently, CFP and help bring harmony in your investments and mappractitioners charge anywhere between Rs. 10,000 to them to future goals. If things are simple, take charge30,000 to make plan, execute & monitor it. It’s no point of it yourself.having a plan done from self-proclaimed planners who After evaluating all the above factors, you may decideare actually insurance agents or mutual fund distributors and try to do it yourself or seek a planners help. Alter-doing it for free and in the end recommending the prod- natively you may try yourself for sometime before turn-ucts they want to sell. ing on for external help. But, start somewhere & take‘Willingness to pay’ is best left to you. But ‘ability to the first step towards having a plan in place!pay’ can be quantified to some extent. In general if you V O L U M E 2, I S S U E 1 Page 2
  • 3. Spreading the income – Golden Rule to save taxSaving Taxes has always been a priority area for any tax If you are in business, you may take loan from otherpayer. Even from a Financial Planning perspective, taxes family members and take benefit of interest payment byare treated as a hole in Investors pocket which increase showing it as business expense.the outflow thus reducing the surplus. But good news isthat a lot of tax saving is possible through proper tax Understand the Gift tax provisions.planning, within the provisions of tax laws. Please re- Gift tax is governed by income tax act u/s 56(2). As permember that tax planning does not mean Tax evasion this act any gift above the value Rs 50000 in the formwhere the tax payer conceals some part of his income to of cash , valuable artifacts, shares, valuable drawings,avoid tax payments, which is illegal. jewellery, paintings or sculptures or even property where stamp dutyThis article highlights a specific tax planning technique would be over Rswhich if used judiciously can help in saving lot of tax. 50,000 would be You may take Housing loan taxable in the from other family membersSpread your income among your Family hands of recipient.members. This is applicable and take benefit of interestCreate as many tax files as you can in your family , so only in the case of payment u/s 24.that each one of them become independent tax payers. Individuals orThis does not reduce the tax outgo of your salary/ HUFs. Thus anybusiness income but will help in reducing the taxes gen- gift received by Trust or Association of person does noterated out of the income earned on investment of the sur- get covered under this act and thus are non taxable.pluses. I know that it is not possible to arbitrarily divideone’s income to different family members and then pay Exceptions:lower tax on that, but this goal can be achieved with the The gifts received from the following people or in fol-help of Gifts and settlement provisions. lowing circumstances will be tax free in the hands of receiver.Advantages of creating different tax files :1. You may distribute the further income generated out 1. Gifts by relatives which includes Spouse, Siblings &of the investments made which otherwise would have their spouses (self and spouse ), Parents and their Sib-been added in your total income and taxed accordingly. lings ( self and spouse)For e.g doing 10 lakh of FD in your name @ 8% rate ofinterest will increase your taxable income with Rs Any Lineal ascendant or descendant ( Self & Spouse)80,000/- and tax with Rs 24000/- (assuming tax rate 2. On the occasion of Marriage (this excludes the gifts30%). With spreading income you could be able to save received by Son in law from parents in Law)this tax. 3. As inheritance through WILL.2. You may take Housing loan from other family mem-bers and take benefit of interest payment u/s 24. This Cont… Page 4 (Clubbing Provision)benefit is not possible if total savings are in your name. V O L U M E 2, I S S U E 1 Page 3
  • 4. Cont. Page 3—Spreading the income Clubbing provisions: ate their tax files. If you follow a financial planningNow it might be looking very easy to create different tax approach which says that come out of risky instrumentsfiles by gifting amounts to family members, but the gift say equity at least 3 years before the goal. One of yourtax provisions has to be read in conjunction with the goal is Children education and marriage. So once yourclubbing provisions which are detailed u/s 60-64 of in- kids become major shift the portion of your savingscome tax act 1961. These sections deal with the cases meant for them in their name to reduce your tax outgowhere tax payers make an attempt to reduce the tax liabil- in the last 3 years, also do future savings for themity by transferring / gifting their assets in favour of family through their file only.members or by arranging their sources of income in sucha manner that tax incidence falls on others, but in actual 4. If you don’t Tax Evasion is illegal, butthe benefit of income enjoyed by them. Some of the in- have Major kidsstances it covers are, then you may cre- tax planning within the ate a Specific• Investing in the name of non earning spouse/daughter Beneficiary non- scope of different tax lawsin law. revocable trust in favour of your mi- is completely legal.• Investing in the name of minor children nor child and save for his futureGiving salary to the spouse out of business where thespouse actually doesn’t have any technical knowledge or through that trust. Money transferred to that trust willexperience. not be treated as gift but the income earned by that trust will be taxable as per the individual tax slab.Mainly these clubbing provisions are applicable on theimmediate family members. This says that any income 5. You can also create a good tax file in the name ofgenerated by Spouse, daughter in law or minor child your Daughter-in-law by compiling all cash gifts re-(more than Rs 1500) out of gifted amount will be clubbed ceived at the time of marriage.with the income of transferor and taxed as per the income 6. You may create a Tax file by starting off with yourtax slab he/she falls in. HUF (Hindu Undivided Family) How to create different Tax files through Gifting and avoid clubbing 7. Create different tax files through WILL and do tax planning for your successors.1. To avoid clubbing you have to be sure that youshould not gift or invest anything directly to your spouse, Tax Evasion is illegal, but tax planning within thedaughter in law or Minor child. scope of different tax laws is completely legal So one should make the best use of it and should not in-2. You may gift to your parents if they fall in lower tax dulge in evasion activity.slab than yours.3. You may gift any amount to your major kids and cre- V O L U M E 2, I S S U E 1 Page 4
  • 5. Sending your child abroad is not that difficult…She was born a year ago. You named her Pari. And sheturned out to be just that. She filled your home with hap-piness and laughter and lit up your life. Life is great now.You want to do your best for the apple of your eye. But,the education cost is worrying you… especially since allyour friends are making plans to send their sons anddaughters abroad, for higher education.Education as such, is costly today… foreign education,more so. But, you need not break into a sweat if you wereto break up the problem – it won’t look so daunting. Letus see how.Firstly, much depends on the choice of country where theeducation is to be pursued. If it is US or UK, the cost perannum could vary between Rs.20-30 Lakhs. If the educa-tion is in Singapore, Russia, China, it would be much Funding by the parent – Funding by the parent isless. one source too. It is not the only source as is assumedSecondly, even if it is in the US, there are ivy league col- by many. Parents could look to fund anything from 30-leges which are sought after. The fees here would be 50% of the expenses, which could by itself come tomuch higher than many other colleges. However, there quite a packet. But if one starts off early, reaching aare many colleges which are in the second rung which decent corpus should not be a problem. Much dependswould offer good quality education for far less money. on whether the entire college education is to be doneThe amount one would need to spend in such colleges abroad or only the post- graduation portion.can come down by almost 25%. That is another option Portfolio to take care of education funding-available if one wants to send their children abroad, but Putting together a long-term plan is essential. Startingwant to keep the cost within manageable limits. early always helps. For accumulating a good corpus,Now comes the interesting part. The funding by the par- one could start a PPF account for the child. Anotherent need not be to the full extent of the course fee & liv- good long-term savings mechanism is by investinging expenses. The funding abroad has four components. monthly in equity oriented Mutual Funds. Other goodThey are – Loan, scholarship, self-funding by the student instruments available are tax-free bonds. These are& your funding. available today for 10 & 15 year tenures and offeringLoans – Today, loans are available upto Rs.20 Lakhs 8% plus post-tax returns. Some may also want to stickfrom banks. They of course ask for collateral, guarantors with FDs, for a portion of their investment. This mayetc. The student can pay the loan after completing the be a low-risk route but the corpus may not grow as de-course and land a job. Hence, this is definitely one source sired. Hence, this portion should be limited to 20-25%of funding. of the portfolio.Scholarship – Many colleges offer scholarships to The other viable options are debt MF schemes whichinternational students, depending on the course and the offer good post-tax returns. Debt MF Schemes are sub-scores obtained in the relevant examination like SAT, ject to special long-term capital gains tax. Based on theGMAT etc. Again, different colleges offer scholarships in current inflation figures, the effective tax would comespecific streams, where they want to attract talent. The to just 5-6%.scholarship on the tuition fees can be substantial – upto To hedge the portfolio, one could also go for MFeven 50% of the tuition fee. That could ease the burden a schemes which invest in companies operating globally,lot. to give a currency hedge.Self-funding by the student – Children studying Hence, if one starts doing these things early and investsabroad, routinely do part-time jobs to defray their ex- in a bouquet of products, the goal of sending the childpenses abroad. Teaching assignments, research assistance abroad for education can be achieved, without much ofwork, working in restaurants etc. are some of the self- a problem. Pari would have no problem going abroad,employment options available. This will take care of their if her father invests as outlined. Done right, that wouldliving expenses to an extent. be true for every pari in every home. V O L U M E 2, I S S U E 1 Page 5
  • 6. Cont.. Page 1 — WILL As of today I own following things which I would likeA doctor will vouch for soundness of the testator. The to consider for division after my death. (Assets are hy-attorney will make sure not to make stupid mistakes in pothetical and provided for reference)the will. 1. One 2BHK Flat at (address) with areas of 1200 sq Other Important Points foot, bought on 5th Jan 1996 costing Rs 14,00,000/-• In case of bank accounts, insurance policies, bank 2. Cash of Rs 3.5 lakhs/- in my fixed deposit at SBI, locker and real estate, the nominee is considered as Vashi, branch. the trustee and the legal heirs can make the claims 3. 500 Mutual funds unit of HDFC Top 200 and 4500 of ownership. shares of TCS in my demat account.• In case of stocks, shares and demat accounts, the All the documents are kept in my BOI locker at Fort, nominee is entitled to the entire sum being nomi- Mumbai branch. nated in his/her favor. After my death, my assets mentioned above should be• In case of PPF accounts, it is important to have divided as follows: nomination. In the absence of the nominee, the le- 1. Item (a) should be given to my wife……………….. gal heirs get only upto Rs 1 lakh from the PPF ac- Whose date of birth is ………… and she resides as count. (address), her mother name is…………………. and father name is………………… 2. Item (b) and (c) should be divided equally among my Simple Sample Will (India) children, first is my son ……………………… who isI…………………………………… .. a ged ……… . . handicapped (lost his eyes), who’s date ofyears (occupation…………………….. ) here by write birth…………………. and my daughter………………….. Whose date of birth is…………………. and marriedmy final Will. Any wills written previously are hereby to…………………..revoked under the law of India. I am writing this will Both the witnesses are present together while writingfreely and under no duress. I am of sound mental and and signing this will.physical health and in a position to comprehend what I Testator signature :write in this will. Name and address :I appoint……………………………………………as Date and Place :the trustee and executor of my will. (1) Witness Signature (Name and address) Why Prudent Planners ? Prudent Financial Planners are provided to Individuals Comprehensive Suresh K Narula, CFP Professional Financial Plans tailored to meet their specific needs. We seek to build E-mail: relationships to last a lifetime. Our abilities go far beyond investment. We Phone: 0172-2550396/ 98160 02197 provide our clients with expert guidance in Retirement, Insurance and Web: college planning. Our advice is always comprehensive and the planning process is quite easy. You tell us about your lifestyle, experience, objec- tives and risk tolerance and well do the rest. We have excellent network CM of Corporate Agents and other Professional . CERTIFIED FINANCIAL PLANNER and CMCFP are certification marks owned outside the U.S. byFinancial Planning Standards Board Ltd. (FPSB). Financial Prudent FPs Comprehensive Approach use a simple three step ap-Planning Standards Board India is the marks licensing au- proach, You can see how simple it is by viewing the quick outline of how CMthority for the CFP marks in India, through agreement we do this: Well help you realize your personal and financial "GOAL",with FPSB. why are you investing, what is the goal associated with your investment. Well provide a "PLAN" to help you reach your goals, discuss opportuni- ties that may be right for you and address any changes that may occur inThis newsletter is published by The Financial Planners’ Guild, India& distributed by its members. Newsletter is designed to provide your life and financial world. Well make decisions based on sound rec-general useful information on Financial Planning & Personal Finance. ommendations to achieve your financial objectives. Now you just have toIt is not intended as specific investment, financial, legal, or tax advice take "ACTION" and dont doubt it again and again, because you havefor any individual. While the information contained herein was cleared everything before.obtained from reliable sources, it cannot be guaranteed as tocompleteness or accuracy. Before acting on any of the informationprovided, consult the planner. © FPGI Visit my Blog