Sukanya Samriddhi Yojana in detail

Sukanya Samriddhi Yojana (SSY) was launched in 2015 for the girl child.  It is another small savings scheme like PPF from the government of India and it will be administered through post office and banks.

The maturity amount and the total interest paid on the scheme will be tax free under EEE like in PPF. 

It is a long term debt investment which can help the girl child for her higher education and marriage.

Under this scheme, the account can be opened for a girl child in the age group of 0 -10.

The account can be opened by parents or legal guardian.

The yearly investment is flexible and you can pay any amount between 250 – 1, 50,000 as you like in lumpsum or in installments. If you don’t invest the minimum amount of 250 in a year, there will be a penalty of Rs. 50/- to continue the account. You can invest money for 15 years from the date of opening.

The account will mature after 21 years from the date of opening of the account. In case of early marriage, the account will be closed on marriage after age 18.

There is early withdrawal option in Sukanya Samridhi Account. 50% of the accumulation can be withdrawn after age 18.  This can help funding the child’s higher education.

The interest rate for this scheme will be declared by government every quarter. The interest rate is 7.6% as on date.  Interest will be compounded annually.

The investment upto 1.5 lakhs in a year will qualify for tax deduction under Section 80C of the Income Tax Act. But, more attractive is the taxation of this scheme on maturity. The maturity amount including interest is totally tax free on withdrawal.

Eligibility: A girl child (Indian Resident) between the age of 0-10 years is eligible for Sukanya Samriddhi Yojana.

Minimum investment amount: An account can be opened by depositing Rs 250 with the required documents (Note: earlier, the minimum amount was Rs. 1000). The minimum amount that can be deposited in a Sukanya Samriddhi Scheme is Rs. 250 per annum. The maximum limit is Rs. 1.5 Lakhs per annum for an account.

Maturity Period: The maturity period of Sukanya Samriddhi Yojana is 21 years. For example: If you open an account when the girl child is 8 years old, the account will mature when she will turn 29.

Withdrawal Rules: You can withdraw money from Sukanya Samriddhi account when the girl child turns 18 years old. There are 2 rules for withdrawal:

• Partial Withdrawal – Maximum 50% of the balance (of the preceding year) can be withdrawn for the higher education of girl child.
• Complete Withdrawal – After the completion of 21 years from date of opening the account or on marriage of the girl child, whichever is earlier. However, the account holder needs to provide an affidavit stating that she is not below the age of 18 at the time of closing the account.

Closing the account: In the unfortunate event of death of the account holder, the scheme can be closed immediately by producing the death certificate.

The Sukanya Samriddhi account can be closed after 5 years. The pre-closure request can be made after 5 years of opening the account. This request is only considered under extreme compassionate grounds like life threatening disease.

Tax implications: The interest on Sukanya Samriddhi account is not taxable. The scheme comes under EEE category

• Exempt at the time of investment
• Exempt at the time of accumulation
• Exempt at the time of withdrawal.

Documents for Opening SSY Account:

• Account Opening Form
• Birth Certificate of Girl Child
• Address Proof of Parents/Guardian
• ID proof of guardian/parents

Benefits of SSY Scheme:

• Interest rates are higher than most of the debt-oriented schemes like bank deposit and FDs / PPF.
• Since it’s a debt scheme by Govt. of India, chances of defaults are Nil.
• Tax benefits under Section 80C
• You can invest any amount between 250 – 1.5 Lakhs per year as per your cash position.
• Scheme comes under EEE as explained above. This is the most attractiveness of this scheme.

Drawbacks:

• Lock in period is high in this scheme. You can not withdraw money till the girl child is 18 years old.
• You can withdraw only 50% at the time of higher education.
• Interest rates may higher today but may not be in the same range for long periods.
• Maturity proceeds would be in the hands of Girl Child.

What can you do?

It is not advisable to create the entire amount for your daughter’s needs by investing in this scheme. If your daughter’s higher education is 15 years away, you can earn better returns by investing in equities through mutual funds. But you should not invest the entire amount in equities.

For the debt portion, you can consider this scheme. When you are nearing the goals like higher education and marriage, you can reduce your allocation towards equity and can increase it towards debt. This account can be useful for this. You can withdraw 50% accumulation after age 18 for her higher education and the balance amount can be withdrawn for her marriage.

Along with an SIP in equity funds, this can be a suitable investment scheme for your daughter.

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Question of the Day

• You have to work

OR

• Want to work

Send your answers on 9029868078 (WA) or mail me on kaustubhd.1984@gmail.com

FAQ on Bharat Bond ETF

Any Better Alternatives?

Bharat Bond ETF is an exchange traded fund with a Target Maturity Date.

It will invest in bonds of Central public sector enterprises (CPSEs), Central Public Sector Undertakings (CPSUs), Central Public Financial Institutions (CPFIs) and other Government organizations.

NFO (New Fund Offer) offer period is 12th – 20th Dec 2019.

It is a Government of India Initiative to help public-sector organizations with their borrowing requirements.

An Exchange-Traded fund can be freely traded live during market hours and is a low-cost product.

• Bharat Bond ETF is expected to have a TER (Total Expense Ratio) of about 0.0005% i.e. Rs.1 for 2 Lakh Investment. source BharatBond.in.
• Encourage institutional buyers to participate like insurance companies, pension funds, mutual funds etc.
• Increase trading and liquidity in these bonds.

What is a Fixed maturity ETF?

This kind of ETF has a Fixed Maturity Date. Bharat Bond ETF has 2 types: 3 years and 10 years. The underlying index will also mature at the same time. For example: BHARAT Bond ETF – April 2023 denotes the maturity date.

What is the underlying index?

Nifty BHARAT Bond Index which will be initially constructed with AAA bonds. If a bond falls below AAA but is above BBB- (investment grade), the bond will be removed from the index only in the next calendar quarter. Only if becomes junk will the bond be removed from the index in five days.

Don’t assume it will hold only AAA Bonds

Current Portfolio of NIFTY BHARAT BOND INDEX

Source: NSEindia

What is the difference between an open-ended ETF and a fixed maturity ETF?

In an open-ended ETF, the fund will keep buying new bonds upon maturity of the existing bonds. A fixed maturity ETF will try and hold the bonds up to maturity.  For example: a 3 year Bharat Bond ETF will hold bonds that mature within 12 months of the maturity date. The residual maturity of the 3-Y ETF is 282 years.

What are the advantages of a fixed-maturity ETF?

This combines the ability to sell at the exchange at any time and eliminates interest rate risk and credit rating change risk if the bonds are held up to maturity and do not default.

Is the return of principal guaranteed?

No. While the underlying risks are comfortably and acceptably low, no such guarantees can be made.

Are the Returns Guaranteed?

No.

Are returns predictable? Will I get the indicated yield if I hold until maturity?

Returns are not predictable. Even if one holds the ETF until maturity, the final returns will be governed by market forces. For example: the interest received by the fund will be reinvested into the portfolio. The yield of the bonds could be lower at that time (bonds priced higher) resulting in a deviation from the estimated yield on creation. This is known as Re-Investment Risk. (People in my Whatsapp Group might understand this as this has been communicated to them). Over 3 years, this is likely to be minimal but can be significant over a 10 year period.

Any changes in the bond portfolio, especially a rating downgrade resulting in the need to sell the bonds, will impact yields.

Public sector bonds are the safest, are they not?

Relative to a corporate bond = YES. This does not mean default is not possible. Five years ago how many would have believed a 100% government-controlled company like BSNL would find it difficult to pay staff salaries?

How to invest in Bharat Bond ETF?

Obviously, through Demat Account. No other route is available currently.

Taxation in the Bharat Bond ETF?

The maturity date of 3 year bond is a little more than three years. This is to ensure the gains will be denoted as long-term capital gains with 20% tax after indexation. This means that the purchase price can be inflated using the cost inflation index before computing the gains. So effective tax rate would be about 18-20% depending on the rate of inflation.

Pls note the rate is applicable for all tax slabs. For those in the 5% slab, a simple FD will work better.

For senior citizens, this is not particularly attractive as fixed deposits carry an Rs. 50,000 income tax exemption.

For a sale mid-term, the gains will be added to income and taxed as per slab.

Min & Max Investment for Retail Investor?

Min: 1000, Max: 2 Lakhs (Only for NFO period).

Any Better Alternatives?

A carefully chosen Arbitrage Fund that don’t hold risky bonds, better for those in 20% & 30% tax slab. Arbitrage fund can be redeemed at any point of time with no exit load. (There can be some funds with 30 days waiting period).

Summary

People who want to still try the Bharat Bond ETF & have demat account can go ahead with 3 yrs term. 10 yrs will be too long as it may carry re-investment risk, liquidity risk and more volatility.

If you still have any more questions, kindly send me on 9029868078 / kaustubhd.1984@gmail.com alongwith your complete details & location.

#FundReview #MFReview

Is it Time to Exit Icici Prudential Value Discovery Fund?

Icici Pru Value Discovery Fund has not outperformed its benchmark BSE 500 over last 5 years.

Is it time to exit the fund? Answer could be “YES / No” or “With some considerations”, Let’s find out which can be the option.

For any Mutual Fund Strategy, Investment Mandate is of critical importance. Hence, the fund manager of the scheme cannot go against the mandate to improve the performance.

Value Discovery Fund strictly belongs to Value Category with Blend Portfolio. Value is used to diversify the portfolio. Make sure you understand truly the meaning of Diversification.

All funds in your portfolio will never generate returns at most times. While some funds will have upside & some at lower. Value Funds will help you regain your losses over longer period.

Investment Objective of this scheme says: To generate returns through dividend income & capital appreciation by investing primarily in a well-diversified portfolio of value stocks.

It also says, “However, there is no assurance or guarantee that the investment objective of the Scheme would be achieved.”

This might be a warning bell according to me.

In this fund’s case, inflow has stopped & redemptions has increased. In Sept 2018, AUM of this scheme was 16477.28 Crores, whereas, in Sept 2019 it was 15095.61 Crores. Can you think what would be the reason for this?

Source: ValueResearch

Through above image, you can understand the fund has underperformed its benchmark & category for 1 yr, 3 yrs & 5 yrs duration.

Rolling Returns of the fund V/s. Benchmark

Rolling Risk V/s Benchmark

The fund has outperformed the index by only 2044 times as compared to 2113 times.

To understand it more clearly how the fund has performed vis-a-vis with other fund of same category i.e. Value Style, view the comparison.

Rolling Returns for 4 yrs

NAV Growth for 4 yrs

What should you do as an Investor? Is it time to Exit?

What will be your call:- If the fund manager deviates from investment mandate to improve performance

OR

Is the Mandate Important?

• If Mandate is important, Can you Handle Value Strategy? If the answer is YES…then stay invested. If NO, then Exit.
• If returns make you happy….then you are investing in wrong strategy & hope some strategy will be created in future.

How much is the Income Tax Deduction available under Section 80C, in case of Life Insurance for every individual?

Life Insurance Plans are very popular as a tool to get deduction under section 80C of the Income Tax Act, 1961. The investment in life insurance can be deducted up to Rs 1,50,000. It a common perception that Premium Paid on all Life Insurance Policies qualifies for deduction under section 80C of the Income Tax Act,1961 and full premium amount qualifies for deduction under section 80C.

Apart from several other items provided under section 80C, a taxpayer, being an individual or a Hindu Undivided Family (HUF), can claim deduction under section 80C in respect of premium on life insurance policy paid by him/it during the year.

Policy to be taken in whose name?

In case of an individual, deduction is available in respect of policy taken in the name of taxpayer or his/her spouse or his/her children.

In case of a HUF, deduction is available in respect of policy taken in the name of any of the members of the HUF.

No deduction is available in respect of premium paid in respect of policy taken in the name of any person, other than given above.

Deduction Allowed

Overall deduction u/s 80C (along with deduction u/s 80CCC & 80CCD) allowed is up to Rs. 1,50,000

How much deduction available u/s 80C for investment in insurance policies???
Section 80C of the Income Tax Act provides deduction up to Rs 1,50,000 provided you invest according to condition given in section itself. One of the most popular way of saving tax by deduction u/s 80C is purchase of insurance policy. There is common perception that premium upto Rs 1,50,000 on any insurance product like life insurance or Unit Linked Insurance plan is fully allowed. However, this is not correct. The reason for such conclusion is section 80C (3) and 3(A) of the Income Tax Act which specifies which premium is eligible for deduction under section 80C of the Income Tax Act,1961.

Restriction on amount of deduction with respect to capital sum assured/ Eligible Premium under Sub-section (3) and (3A) of 80C of Income Tax Act,1961 For regular Life Insurance Policies (other than contract for deferred annuity)

Issued from 01.04.2012 – premium paid not in excess of 10% of Capital Sum Assured (as amended by Finance Act 2012).

Issued from 01.04.2003 and on or before 31.03.2012 – premium paid not in excess of 20% of Capital Sum Assured

Eligible Premium under Sub-section (3) and (3A) of 80C of Income Tax Act,1961 For Life Insurance Policies (other than contract for deferred annuity) for (a) a person with disability or a person with severe disability as referred to in section 80U, or (b) suffering from disease or ailment as specified in the rules made under section 80DDB,

Issued from 01.04.2013 – premium paid not in excess of 15% of Capital Sum Assured ( Inserted by the Finance Act, 2013, w.e.f. 1-4-2014).

Therefore , it is clear from section 80C (3) that whatever insurance premium is paid for any insurance policy( other than deferred annuity) or ULIP, the maximum allowable is fixed at 10% of the sum assured.

So, next time you buy any insurance product , think about sum assured and whether the insurance premium is just below 10 % of sum assured regular policies and 15% for for (a) a person with disability or a person with severe disability as referred to in section 80U, or (b) suffering from disease or ailment as specified in the rules made under section 80DDB.

Minimum holding period for Life insurance policy – 2 Years.

Minimum holding period for ULIP- 5 years

Taxability of Premium allowed in Earlier year- If any of Life insurance policy is terminated, sold, etc., before the minimum holding period specified above, then the deduction allowed in earlier years would be deemed as income of the previous year of termination, sale, etc. Further, no deduction will be allowed in respect of contribution, payment, etc., made towards such policy (i.e., which is terminated) during the year of termination.

Example:-

Mr. Kiran had made the following payments during the financial year 2018-19 to avail of the advantage of deduction under section 80C:

1. Premium paid on his life insurance policy of Rs. 8,400. Policy was taken in April 2011 and sum assured was Rs. 25,000.

2. Premium of Rs. 1,000 on his another life insurance policy. Premium was due in March 2015 but was actually paid in April 2016.

3. Premium of Rs. 30,000 on life insurance policy taken in the name of his wife. Policy was taken in April 2012 and sum assured was Rs. 2,00,000.

4. Premium of Rs. 30,000 on life insurance policies taken in the name of his three children (one is minor daughter, second is major married daughter and third is major married son, who is a practicing doctor). The policies are term plans and premium on all the policies worked out to be 5% of capital sum assured.

5. Premium on life insurance policy taken in the name of his parents who are dependent on him. Premium paid during the year amounted to Rs. 25,200.
6. Premium on life insurance policy taken in the name of parents of his spouse who are dependent on him. Premium paid during the year amounted to Rs. 2,520.

7. Premium on life insurance policy taken in the name of his younger brother and sister dependent on him. Premium paid during the year amounted to Rs. 5,000.

8. Investment in PPF Rs. 60,000.

9. Investment in NSC Rs. 10,000. Interest accrued during the year on NSC amounted to Rs. 1,000.

10. Payment of tuition fees of his minor daughter Rs. 5,000.

11. Repayment of housing loan Rs. 12,000.

12. Investment in post office time deposit Rs. 10,000.

What will be the extent of deduction under section 80C for the year 2018-19, which Mr. Kiran will be entitled to claim in respect of above payments?

(A) The taxpayer can claim deduction under section 80C in respect of premium on life insurance policy paid by him during the year. Deduction is available in respect of policy taken in the name of taxpayer, his spouse and his children. No deduction is available in respect of premium paid in respect of policy taken in the name of any person other than given above. Deduction is restricted to 20% of capital sum assured in respect of policies issued on or before 3 1-3-2012 and 10% in case of policies issued on or after 1-4-2012. Considering the above provisions, deduction in respect of life insurance premium will be as follows:

1) In respect of premium of Rs. 8,400 on his life insurance policy which is taken in April 2011, deduction will be restricted to 20% of capital sum assured. Sum assured is Rs. 25,000 and 20% of the same will work out to be Rs. 5,000. Hence, out of Rs. 8,400, he will be eligible to claim deduction of Rs. 5,000.

2) Deduction under section 80C is available on payment basis. In respect of premium of Rs. 1,000 on his another policy (which is due in March), no deduction will be available in current year, since the premium is not paid in the current year. Premium is paid in next year and hence, he can claim deduction of Rs. 1,000 in next year.

3) In respect of premium of Rs. 30,000 on life insurance policy taken in the name of his wife, deduction will be restricted to 10% of capital sum assured. Sum assured is Rs. 2,00,000 and 10% of the same will work out to be Rs. 20,000, hence, out of Rs. 30,000, he will be eligible to claim deduction of Rs. 20,000.

4) Premium in respect of policy taken in the name of his children works out to be 5% of capital sum assured. Hence, entire amount of premium of Rs. 30,000 will be eligible for deduction. Further, it should be noted that deduction is allowed for all children irrespective of the fact whether they are dependent/independent, major/minor, or married/unmarried.

5) No deduction is available on account of premium paid in respect of policy taken in the name of any person other than the taxpayer, his spouse and his children. Hence, no deduction will be available in respect of premium paid by him on policy taken in the name of his parents, parents of his spouse and his brother/sister.

6) Total premium eligible for deduction under section 80C will amount to Rs. 55,000 (Rs. 5,000 + Rs. 20,000 + Rs. 30,000).

(B) The taxpayer can claim deduction under section 80C in respect of any contribution made by him towards statutory provident fund or recognised provident fund or approved superannuation fund or public provident fund (PPF). Thus, contribution to PPF of Rs. 60,000 will be eligible for deduction under section 80C.

(C) The taxpayer can claim deduction under section 80C in respect of amount paid by him towards purchase of NSC. Hence, he will be able to claim deduction under section 80C in respect of Rs. 10,000 paid by him towards purchase of NSC.

Accrued interest on NSC is taxed in the hands of the receiver and the same will be treated as an investment during the year of accrual (except for last year) and will qualify for deduction under section 80C. Hence, accrued interest of Rs. 1,000 will be treated as taxable income and on the same hand will also qualify for deduction under section 80C.

(D) The taxpayer can claim deduction under section 80C in respect of amount paid by him during the year towards tuition fees (excluding development fees, donation or similar payments) paid at the time of admission or thereafter, to any university, school, college or other educational institution situated in India, for full time education of any two children of the taxpayer. Hence, Rs. 5,000 paid by him on account of tuition fees of his minor daughter will qualify for deduction under section 80C.

(E) The taxpayer can claim deduction under section 80C in respect of amount paid by him towards repayment of housing loan. Hence, Rs. 12,000 paid by him on account of repayment of housing loan will qualify for deduction under section 80C.

(F) The taxpayer can claim deduction under section 80C in respect of investment made by him in post office time deposit. Hence, he can claim deduction of Rs. 10,000 under section 80C.

Considering above eligible items given in (A) to (F), the eligible amount of deduction will come to Rs. 1,53,000.

However, total deduction under section 80C cannot exceed Rs. 1,50,000, hence, deduction will be limited to Rs. 1,50,000. In other words, Mr. Kiran can claim deduction of Rs. 1,50,000 under section 80C.

Total:- Rs. 55,000 Life Insurance + Rs. 60,000 PPF + Rs. 11,000 NSC +Rs. 5,000 tuition fees + Rs. 12,000 housing loan + Rs. 10,000 time deposits.

P.S: Pure Term Cover is flavour of the season, offering wide benefits against traditional insurance policies & Ulip.

Kindly consider your risk profile, life goals, family objectives etc before buying any product. Do discuss your case with Fee Based Financial Planner or Fee Only Financial Planner against regular insurance agent receiving commissions due to conflict of interests.

We all learn from experiences life gives us

One of my friend (Akshay) asked if he can buy car on Loan?

Car value = 10 lacs
Down payment = 1 lac
Loan = 9lacs
Monthly EMI = Rs 20,000 for 5 years

Akshay asked if his decision is right in buying car in above calculated approach

I said, You are buying a liability on another liability

Akshay – How, please explain.
I – Car is a liability, we need to keep spending on car monthly for fuel and maintenance and its value decreases over time.

Akshay – Acha Ok.
I – And you are buying a car (liability) with a loan (another liability), which is not a good approach.

Akshay – Ok, but my wife started working last month and she is earning 20-25k approx monthly and we thought to buy car with her salary.
I – So, when your income increases, you buy things which you dont need on loan?

Akshay – No, but we want Caaaaar.
I – How much will be your daily usage of car?

Akshay – We will not use it daily, may be monthly twice or thrice during weekends or holidays.
I – Ohh, then you can make use of cabs like Ola or Uber.

Akshay – Yes; but it doesnt give feel of owning a car.
I – Oh, I think you dont know, until loan is cleared CAR will not be yours’.

Akshay – Hmm yes, but it will be with us 🙂
I – You are getting emotional.

Akshay – Please tell me if my logic is correct, shall I buy car with calculations mentioned above?
I – As I said earlier, it is not a wise approach to buy car on loan. By the way, bank will not give loan to your wife as she just started earning and also nobody will give loan upto 80-90% of income going as EMI.

Akshay – I thought about it, so what I will do is, I will take loan on my name and pay emi from my account and will adjust with my wife salary.
I – Ok, what if your wife stops working after couple of years?

Akshay – Why will she stop working?
I – Consider for suppose

Akshay – It may become tight for me to pay EMI, I dont have much emergency fund also.
I – Hmm…thats risky.

Akshay – Please tell me if my decision is fine?
I – I have been telling since beginning, that this decision is not wise, but what are you expecting from me?

Akshay – I want you to tell me that my decision is right.
I – Then; why are you asking me if you have pre-decided?

Akshay – I want to confirm with you.
I – I can give opinion if you can listen open-mindedly. If you have pre-decided then whatever I say doesnt’ matter to you.

Above discussion happend about 8 to 9 months ago with one of my friend (name has been changed for privacy reasons) and no conversation happend after that

Today he pinged me and asked if we can meet over coffee and when we met;

Mr. Akshay looked unusual and was uncontrollable with his emotions. Upon discussing with him, following is the summary,

He bought the car on the loan, then after 4 months his wife had to stop working as it became difficult for her to manage work at office and son (2yrs old) at home as Akshay’s mother went back to their hometown who used to take care of his little son.

Akshay, in his words whatever you told became reality. After my left to hometown, We have decided and asked my wife to stop working and car EMI became a big burden now. I thought of informing you at that time itself but I did’nt know how to show my face to you, all these days that’s why I did not communicate to you.

Today I thought, Kaustubh was able to analyse and tried to advice me not to buy car at that time itself but I did’nt listen to him.

I dont know how many more mistakes i m doing which I did’nt ever thought of, so I kept my ego, shyness aside and messaged you. Now, I want your advice on all my financials and tell me what actions should I take to ease out my financial burden.

Kaustubh – My Final words – Financial Planning is all about managing RISK and ensuring we achieve our Dreams and Aspirations by not falling as trap to RISK by avoiding / mitigating it

Long real life story, please read at your convenience. Hope you all learn out of it 👆🏾👆🏾👆🏾👆🏾