Monday, December 29, 2008

Insure yourself against Terror Attacks

Loss, more than anything else, opens our eyes to the need of insurance. It was the Mumbai attacks that shows the need of a terror attack insurance as well.

All though almost all of us have insurance policies, but it is important that we check our policies once again for an insurance against terror attacks. Here is a look at some major insurance covers and what we should look at while taking the cover:

Life Insurance

While most basic life insurances do not exclude death due to terror attacks, you should specifically check with the insurer and READ THE POLICY DOCUMENTS to be sure about the same. Additional riders such as hospitilization, critical illness etc. do not include loss of life due to war or terrorism.

Health Cover

Again READ THE POLICY DOCUMENT. Most policies cover you only after 24 hours of Hospitilization. It remains to the description of the insurer in case you are released with in 24 hours after getting treatment for the injuries during an act of terrorism.

Householder Insurance

Basic householder's insurance doesn't cover your house structure against an terror attack. However, such a cover might be available at an extra cost.

Auto Insurance

Auto insurance policies do not cover your vehicle against a damage in case of riots, war situation, terrorist attacks etc.

Stand-alone Terrorism Policy

Such Policies protect you against terror attacks specifically. Optima Insurance is offering such insurance cover of New India Assurance through its web site

[source: Money life]

Tuesday, December 16, 2008

Reimbursement of Medical Expenses - R.N. Lakhotia

As a general principle, any perquisite in one form of a medical allowance is typically taxable. On the other hand, reimbursement by an employer of medical expenses incurred by an employee is generally tax-free. Read on below for the full picture

Medical Expenses Allowance

If a fixed allowance is received by an employee for the discharge of medical expenses, it is a taxable perquisite. Hence, an employee should avoid the receipt of an allowance for medical expenses but should rather take medical reimbursement, so that it is tax-free. For greater details reference may be made to MEDICAL TREATMENT IN INDIA OF AN EMPLOYEE'S FAMILY MEMBER.

Medical Expenses: Reimbursement

Where an employee is allowed to get reimbursement for the medical expenses incurred by him at a hospital maintained by the employer or a Government approved hospital, the entire amount of reimbursement is tax-free and is not treated as a taxable perquisite. For greater details, please refer to Medical Treatment in India of an Employee's Family Member.

Medical Reimbursement up to Rs. 15,000

If an employee receives some money for his medical treatment or the treatment of any member of his family or any of his dependant relatives then a sum up to Rs. 15,000 p.a. is not treated as a taxable perquisite as per Clause (b) of the provision to Section 17 (2) of the I.T. Act. This exemption is enjoyed by the employee only if the expenditure is actually incurred on his medical treatment or for treatment of any member of the family or a dependant relative. It may be noted here that there is no condition that the medical treatment should be at any of the approved hospitals. It could be at any place and from any type of doctor belonging to Allopathic, Ayurvedic, Unani or Naturopathy system of medicine. If medical allowance is received then it would be fully taxable.

Medical Treatment Abroad

Foreign medical treatment could be of the employee as well as of any member of his family. We have given details of the exemption available to the employee for a member of his family under the heading MEDICAL TREATMENT ABROAD OF AN EMPLOYEE'S FAMILY MEMBER. "Family" for this purpose means:

i) The spouse and children of the individual ;

ii) The parents, brothers and sisters of the individual or any of them wholly or mainly dependant on the individual.

Where the medical treatment is of the employee, then also the expenditure incurred by the employer on his medical treatment outside India as well as the expenditure incurred by the employer on the travel or stay abroad of the employee and of one attendant who accompanies the employee is not to be treated as taxable perquisite as per the Proviso (vi) to Section 17(2) of the I.T. Act. This is, of course, subject to the main condition that the gross total income of the employee as computed before including in it such expenditure does not exceed Rs. 2 lakhs.

Medical Treatment Abroad: Allowance

Where an employee is allowed an allowance instead of reimbursement by the employer of the expenditure of medical treatment abroad, it is to be treated as a taxable allowance and a part of the taxable salary of the employee.

Medical Treatment Abroad of an Employee's Family Member

Clause (vi) of the proviso to Section 17(2) of the I.T. Act, 1961 provides that any sum paid by the employer for any expenditure incurred by the employee or any member of the family of such employee outside India, is fully exempt from income tax. Further, the expenditure incurred by the employer on travel or stay abroad of the employee or any member of the family of such employee for medical treatment and travel and stay abroad of one attendant who accompanies the patient in connection with such treatment is also completely exempt from tax and is not treated as a taxable perquisite. This is of course subject to an important condition that the exemption would apply only in the case of an employee whose gross total income as computed before including the said expenditure does not exceed Rs. 2 lakhs. It may also be mentioned here that the expression "hospital" includes dispensary or a clinic or a nursing home as well.

Medical Treatment Abroad: Reimbursement

If an employee gets reimbursement of the expenditure incurred on his medical treatment or of any member of his family outside India or on his travel or stay abroad or of a member of the family and also of one attendant accompanying the patient, then also the amount of reimbursement would not be treated as a taxable perquisite. This is because the reimbursement of the foreign medical treatment would be considered as expenditure incurred by an employer and is described under the head MEDICAL TREATMENT ABROAD OF AN EMPLOYEE'S FAMILY MEMBERS .

Medical Treatment Abroad: Travel & Stay Abroad of Accompanying Attendant

If an employee or his relative is provided with free medical treatment outside India, then the amount of any expenditure incurred by the employer on the medical treatment of the employee or any member of the family of such an employee, is exempt. The amount of expenditure incurred by the employer on travel or stay abroad of the employee or any member of the family of such an employee for medical treatment and also on travel and stay abroad of one attendant who accompanies the patient in connection with the treatment is also completely exempt from I.T. Such expenditure is not treated as a taxable perquisite as per Clause (vi) of the proviso to Section 17(2) of the I.T. Act. Of course this exemption is subject an important condition about the monetary limit of the salary of the employee. Thus, it is provided that this exemption will be enjoyed by the employee whose gross total income, as computed before including the expenditure incurred on medical treatment or on travel and stay abroad, does not exceed Rs. 2,00,000. Thus, proper tax planning requires that an employee who is likely to receive or who is interested in getting this facility of free travel and stay abroad for self and attendant for treatment abroad should see that the gross total income of the employee does not exceed Rs. 2 lakhs.

Medical Treatment at a Hospital Maintained by the Employer

The value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer is fully exempt from income tax without any monetary limit under the provisions of Clause (i) of the proviso to Section 17 (2) of the I.T. Act, 1961.

Medical Treatment at a Nursing Home

Nursing home is included within the definition of "Hospital" as per Clause (i) of the Explanation below Section 17 (2) of the I.T. Act. Thus, treatment in a nursing home, or a dispensary or a clinic or a hospital is treated in the same manner as per the proviso to Section 17(2) of the I.T. Act. If the nursing home is maintained by the employer the value of any medical treatment provided to an employee or any member of his family is completely exempt from income tax. Where any sum is paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or the treatment of any member of his family in any nursing home maintained by the government or any local authority or any other nursing home approved by the government for the purposes of medical treatment of employees, it is completely exempt from income tax. Likewise, if any sum is paid by the employer in respect of any expenditure on the treatment of the employee or any member of his family in any private hospital or nursing home approved by the Chief Commissioner of Income Tax having regard to the prescribed guidelines for the purpose of medical treatment of prescribed diseases, it is not treated as a taxable perquisite but is completely exempt from income tax as per Clause (ii) (b) of the proviso to Section 17 (2) of the I.T. Act. Hence before getting treatment in a nursing home the employee should make sure that either the nursing home is maintained by the employer or by the government or by a local authority or is an approved one for the treatment of government employees. In the case of private nursing homes the employee should make sure that it is approved for the treatment of certain prescribed diseases or ailments by the Chief Commissioner of Income Tax of the area concerned. If this precaution is taken by the employee, he can get the facility of tax-free medical treatment in a nursing home. Thus, proper tax planning is necessary for getting exemption in respect of medical treatment in a nursing home. The employee should file a certificate from the Hospital regarding the disease and the amount paid. It is advised that the employer should maintain a list of approved nursing homes so that the employees can be treated free of I.T. at such nursing homes and in case of emergency, time is not lost by the employer or employee in ascertaining whether a particular nursing home is approved for the purpose of tax-free medical treatment. Also See: MEDICAL TREATMENT OF PRESCRIBED DISEASES OR AILMENTS AT AN APPROVED HOSPITAL.

Medical Treatment at a Private Hospital

An employee may sometimes be given treatment at a private hospital and not necessarily at a hospital maintained by the Government or any local authority, which may not be approved for the medical treatment of employees of the Government. Such a hospital is normally treated as a private hospital. If such a private hospital is approved by the Chief Commissioner of Income Tax, having regard to the prescribed guidelines for the purposes of medical treatment, any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family is completely exempt from income tax under Clause (ii) of the proviso to Section 17 (2) of the I.T. Act. Hence, proper planning should be adopted for getting an employee or a member of his family treated at a private hospital which is approved by the Chief Commissioner for the purposes of such medical treatment by way of attaching a certificate with the I.T. Return from the hospital specifying the disease and the amount paid to the hospital. Also See: MEDICAL TREATMENT AT A NURSING HOME.

Medical Treatment at an Approved Hospital

The expenditure incurred by the employer on the indoor treatment at an approved hospital is not treated as a perquisite within the meaning of Section 17(2) of the I.T. Act. Please see MEDICAL TREATMENT IN INDIA OF AN EMPLOYEE'S FAMILY MEMBER.

Medical Treatment at Hospital: Allowance

If an employee instead of being provided free treatment in a hospital is given an allowance for hospital treatment, the allowance would not be liable to exemption under the Proviso to Section 17 (2) and would be taxed in the hands of the employee. Hence, proper tax planning should be adopted by the employee so that he does not receive any hospital treatment allowance as such but receives reimbursement of expenditure or payment for hospital treatment in full by the employer.

Medical Treatment at Hospital: Reimbursement

Where an employee or any member of his family is provided with free medical treatment in any hospital maintained by the employer, the value of the perquisite is nil. The same is the case where free hospital treatment is either provided or is reimbursed by the employer for an employee or a member of his family in any hospital maintained by the Government or any local authority or any other hospital approved by the Government for the purposes of the medical treatment of its employee or any private hospital approved by the Chief Commissioner of Income Tax for the treatment of prescribed ailments and diseases. This is so under the provisions of the proviso to Section 17 (2) of I.T. Act, 1961.

Medical Treatment at Unrecognized Hospitals

If an employee or a member of his family is provided with free medical treatment in an unrecognized hospital, it is not exempt from income tax under the proviso to Section 17(2) of the I.T. Act. However, by various judicial decisions it has been held that the value of medical reimbursement facility provided by the employer to employee should not be treated as a taxable perquisite. Hence on general grounds without resorting to the specific provisions of the proviso to Section 17(2) of the I.T. Act, the value of the medical treatment in unrecognized hospitals is also to be treated as tax-free. But this is likely to cause litigation. Hence as far as possible, employers and employees should avoid medical treatment of the employees in unrecognized hospitals or clinics. However, upto Rs. 15,000 p.a. medical treatment at unrecognized hospitals would also not be income.

Medical Treatment in India of an Employee's Family Member

Under the provisions of Section 17(2), a good deal of the expenditure incurred by the employee on medical treatment, paid for by the employer, is not treated as a taxable perquisite. This is secured by the proviso to Section 17(2) of the I.T. Act which says that the value of any medical treatment provided to any member of his family in any hospital maintained by the employer is completely exempt from income tax in the hands of employee. Where any sum is paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or the treatment of any member of his family-

(a) in any hospital maintained by the employer, the Government or any local authority or any other hospital approved by the Government for the purpose of medical treatment of his employees;

(b) in respect of the prescribed diseases or ailments, in any hospital approved by the Chief Commissioner having regard to the prescribed guidelines, it is not treated as taxable perquisite at all. In the latter case the employee should file a certificate from the hospital about the disease and the amount paid. Hence the employee should make proper tax planning and see that either the hospital where he or the member of his family is treated is a Government hospital or an approved hospital or is a private one, then it is approved by the Chief Commissioner of Income Tax. This is in addition to a sum up to the maximum extent of Rs. 15,000 paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or any member of the family in a previous year. This is also exclusive of the expenditure incurred by the employer on the medical treatment of the employee or any member of the family outside India which is described in a separate heading given below. For the prescribed diseases, etc. refer to MEDICAL TREATMENT OF PRESCRIBED DISEASES & AILMENTS AT AN APPROVED HOSPITAL.

Medical Treatment of Prescribed Diseases or Ailments at an Approved Hospital

We have seen elsewhere that the medical benefits in respect of any sum paid by the employer directly to a hospital on account of treatment of the employee or any member of his family is completely exempt from income tax under the provisions of Clause (ii) (b) of the proviso to Section 17 (2) of the I.T. Act, 1961 provided such a hospital is approved by the Chief Commissioner of Income Tax. In approving such a hospital, the Chief Commissioner of Income Tax has to pay proper regard to the guidelines for medical treatment of prescribed diseases or ailments for the treatment of an employee or any member of his family at such a hospital. Rule 3 A of the I.T. Rules, 1962 lays down the said guidelines. For the sake of easy reference Rule 3 A is reproduced below:

"Rule 3 A (1) In granting approval to any hospital for the purposes of sub-clause (b) of Clause (ii) of the proviso to Clause (2) of Section 17, the Chief Commissioner shall satisfy himself that the hospital is registered with the local authority and fulfills the following requirements, namely:

(i) the building used for the hospital complies with the municipal bye-laws in force;

(ii) the rooms are well ventilated, lighted and are kept in clean and hygienic condition;

(iii) at least ten iron spring beds are provided for patients;

(iv) at least one properly equipped operation theater is provided, with a minimum floor space of 180 square feet and with a separate sterilization room;

(v) at least one labour room is provided, with a minimum floor space of 180 square feet, in case the hospital provides medical service for maternity cases;

(vi) aseptic conditions are maintained in the operation theatre and the labour room;

(vii) a duty room is provided for the nursing staff on duty;

(viii) adequate space for storage of medicines, food articles, equipment's, etc, is provided;

(ix) the water used in the hospital or nursing home is fit for drinking;

(x) adequate arrangements are made for isolating septic and infectious patients;

(xi) the hospital is provided with and maintains:

(a) high pressure sterilizer and instrument sterilizer;

(b) oxygen cylinders and necessary attachments for giving oxygen ;

(c) adequate surgical equipment's, instruments and apparatus including intravenous apparatus ;

(d) a pathological laboratory for testing of blood, urine and stool ;

(e) electro-cardiogram monitoring system ;

(f) stand-by generator for use in case of power failure;

(xii) there is at least one qualified doctor available on duty around the clock for every twenty beds or fraction thereof,

(xiii) in hospitals providing intensive care unit facilities, there are at least two qualified doctors available on duty around the clock exclusively for such intensive care unit;

(xiv) one nurse is on duty around the clock for every five beds or a fraction thereof;

(xv) in hospitals providing intensive care unit facilities, there are at least four nurses provided exclusively for every four beds or fraction thereof for such intensive care unit;

(xvi) the hospital maintains a record of health of every patient containing information about the patient's name, address, occupation, sex, age, date of admission, date of discharge, diagnosis of disease and treatment undertaken.

(2) For the purpose of sub-clause (b) of clause (ii) of the proviso to clause (2) of Section 17, the prescribed diseases or ailments shall be the following namely,

(a) cancer;

(b) tuberculosis;

(c) acquired immunity deficiency syndrome;

(d) disease or ailment of the heart, blood, lymph glands, bone marrow, respiratory system, central nervous system, urinary system, liver, gall bladder, digestive system, endocrine glands or the skin, requiring surgical operation;

(e) ailment or disease of the eye, ear, nose or throat, requiring surgical operation;

(f) fracture in any part of the skeletal system or dislocation of vertebrae requiring surgical operation or orthopedic treatment;

(g) gynecological or obstetric ailment or disease requiring surgical operation, cesarean operation or laparoscopic intervention;

(h) ailment or disease of the organs mentioned at (d), requiring medical treatment in a hospital for at least three continuous days;

(i) gynecological or obstetric ailment or disease requiring medical treatment in a hospital for at least three continuous days;

(j) burn injuries requiring medical treatment in a hospital for at least three continuous days;

(k) mental disorder, neurotic or psychotic requiring medical treatment in a hospital for at least three continuous days;

(l) drug addiction requiring medical treatment in a hospital for at least seven continuous days;

(m) anaphylactic shocks including insulin shocks, drug reactions and other allergic manifestations requiring medical treatment in a hospital for at least three continuous days.

Explanation: For the purpose of this rule -

(a) "qualified doctor" means a person who holds a degree recognised by the Medical Council of India and is registered by the Medical Council of any State ;

(b) "nurse" means a person who holds a certificate of a recognised Nursing Council and is registered under any law for the registration of nurses ;

(c) "surgical operation" includes treatment by modern methodology such as angioplasty, dialysis, lithotripsy, laser or cryo-surgery.

[Excerpt from: How to Save Tax on Your Salary & Perquisites (A.Y. 2004-05) by R.. N. Lakhotia, Vision Books, New Delhi.

R. N. Lakhotia is one of India's top authorities on taxation and practising as an advocate and tax consultant. He has written over 100 books on tax planning and is a regular columnist for several newspapers.]

Friday, December 12, 2008

Leave Travel Allowance - Sixth Pay Commission

The sixth pay commission has recommended some modifications to the Leave Travel Allowance rules for the Government employees. These changes have been made effective from September 1, 2008. I've tried to put in most of the changes in this post.

  • Parents dependent on the Govt. employees are eligible for LTA irrespective of whether they are staying with Government employee or not.
  • Fresh employees can avail 3 home town travel and one to any place in India during the first two block of for years.
  • Travel entitlements for LTA will be same as that of official tour with no daily allowance.
The parents (stepmother and stepfather)who are wholly dependent on the Government employees shall be included in the definition of family for the purpose of LTA, irrespective of whether they are residing with the Government employee or not. The definition of dependency will be linked to the minimum family pension prescribed in Central Government and dearness relief thereon. The extant conditions in respect of other relations included in the family including married/divorced/abandoned/separated/widowed daughters shall continue without any change.

Types of LTA:

Fresh recruits to Central Government are allowed to travel to their home town along with their families on three occasions in a block of four years and to any place in India on the fourth occasion. This facility shall be available to the Government officers only for the first two blocks of four years applicable after joining the Government for the first time. The blocks of 4 years shall apply with reference to the initial date of joining the Government even though the employee changes the job within Government subsequently. The existing blocks will remain the same but the entitlements of the new recruit will be different in the first eight years of service. All other provisions concerning frequency of travel under LTA are retained.

Entitlement for LTA:

Travel entitlements, for the purpose of official tour/transfer or LTA, will be the same but no daily allowance shall be admissible for travel on LTA. Further, the facility shall be admissible only in respect of journeys performed in vehicles operated by the Government or any Corporation in the public sector run by the Central or State Government or a local body. Air Journey by Private Airlines will however, continue to be admissible as per Ministry of Finance O.M. No. 19024/1/E-IV/2005 dated the 24th March, 2006 and in terms of the orders of DOPT in this regard.

Encashment of earned leave along with LTA

Government officers are allowed to encash ten days earned leave at the time of availing of LTA to the extent of sixty days during the entire career. The leave encashed at the time of LTA will not be deducted from the maximum amount of earned leave encashable at the time of retirement. It is further clarified that where both husband and wife are Government servants, the present entitlement for availing LTA shall remain unchanged, and encashment of leave equal to 10 days at the time of availing of LTA will continue to be available to both, subject to a maximum of sixty days each during the career.

What is Sum Assured?

Almost everyone who has a Life Insurance, must have heard the term "Sum Assured". But, do we know the real meaning of the term? How does this affect ourselves? We will try to put some light on this in this post...

The Sum Assured is actually the reason for which we buy Life Insurance. This amount affect the insured while living as well as after life. It is the amount that would be paid to the nominee in case of the death of the insured person (The after life effect) and plays a crucial role in determining the premium one has to pay to get the policy (The effect on an alive person).

What does Sum Assured (SA) mean?

At the time of signing a life insurance contract, the insurer (insurance company) and the insured (buyer of the policy), agree on an amount that would be payable if the insured dies. This would be handed to the nominee, which is decided by the insured. This is actually the amount for which the insured is paying the premium (a regular payment made to the insurer).

How do we reach the amount?

But how would I know what is sufficient amount in my case? As such there are no formal rules for arriving at this value. It can vary depending on your life style. Ideally it should be enough to last till the dependents are not able to earn themselves. It is suggested to have this amount at 6 to 10 times the current annual income of the person insured. A high SA would push the premium to a higher level and may also make a medical check-up necessary.

Relation with Premium

This actually depends on the type of the policy. In traditional policies (Term insurance, Endowment, money back etc.), SA determines the premium where as in case of market linked plans (ULIP), premium determines the SA. In ULIPS, insurer typically lets you choose 5-50 times the premium as SA amount. However, the cost increases as the SA goes high in such a scenario.

Sum Assured v/s Sum Insured

SA is the pre-agreed sum that the insurer pays in case of a death of the insured. The sum insured (SI), is the compensation paid to the insured for his losses. SI is generally a term used in insurances other than Life. For example, if you have a car insurance of Rs 2 Lac, you will get upto 2 Lac in case of any damages to the car.


Wednesday, December 3, 2008

Gold: The best defence against recession

As worries over a global recession deepen, investors should now shift to gold as a safe haven.

History also supports this. In the great depression of 1929, Gold was the best performing asset. People had even dumped the currencies and converted to Gold with the fear of even central banks being fail. At that point in time, Gold was the standard on which each currency value was measured. Dollar was fully convertible to Gold and so were many other currencies.

Similar trends can be seen today with the upward movements in Gold prices, while the other asset classes are deteriorating in value. Analysts have confirmed, that the large investors and many hedge funds are dumping stocks and moving to the yellow metal on the fear of a global recession.

Don't Let your Insurance Policy Lapse

The markets are falling on their head. There is bad news all around. People are losing their jobs. Companies are shutting shops. So, what would one do to cover their finances? First thing that comes to mind is dip into your investments to get money. After all this was the day that you have been saving for...

But then there are certain investments that one makes with a goal in mind. It would be better if one doesn't touch those. Your insurance policy can be one such investment. If you have a ULIP (the type that gives better returns only if invested for long periods), you should keep it as is and better keep your premium going as well. 

For a ULIP less than 3 years old, your insurance will lapse as soon as you skip a premium. There is a grace period of 30 days, during which the premium continues though. If the grace period is over, the policy lapses and the insured no longer enjoys the insurance benefit.

For a policy older than 3 years though, it assumes a paid-up value. This means, the policy would remain in force even if the premium is not paid. The cost of insurance is deducted from the fund value and thus the policy continues as long as the fund value is sufficient enough to cover the expenses.

What should one do?

If your policy is less than 3 years old, continue your premium. You could change the mode from annual to monthly or reduce the sum assured in the plans which allow this such as Birla Sun life Platinum plus.

If the policy is already lapsed, insurer gives you up to 4 years to revive the same. However, later you revive, the more expensive it can get. You may also have to undergo medical tests. With in 6 months from the lapsation, all you have to do is to pay all the premiums and the policy is revived. But after 6 months, you will have to pay an interest amount (12-18% of the premium) as well as you may have to appear for a medical test.

So it is in your best interest to pay the premiums reguraly so that the policy as well as the cover continues.

Monday, October 20, 2008

Global Meltdown: How safe is your Job?

The writing is clearly on the wall now. There is an obvious meltdown in the world financial markets. The impact is being seen on the jobs as well. The companies have started to downsize the staff (Jet Airways fiasco is the latest example). They actually have no other option. If a company has to survive, it has to downsize to cut costs. The easiest victim would be the employee who is an average performer and is not quite the blue eyed boy of his manager.

What are your options in such a scenario?

Start saving for the rainy day, if you already haven't! This is the time to accept the mistake. You should have started this much earlier. But it's better late than never. You should now start to save as much as you can for the dreaded day when you will fall pray to the job loss.
  • If you had saved Rs 2,000/- every month for the past 5 years, you would have had Rs. 1,20,000/- by now only in principal. I've not counted the interest you could have earned on it in the FD or for that matter RD (These are the safest instruments and you will never lose money here).
  • This fund would help you in your lean period and will cover your EMIs, rent and telephone bill.
In case, you are one of the scapegoats, liquidate those shares, where you had invested in order to make hefty gains. Whatever is the leftover in this investment can now work for the payments of your bills and help you run the household expenses till you find the next job.

Start Enhancing your skills. Any new skill earned can help you in getting a new job in case of a job loss.

Make yourself visible in the organization. It makes it difficult to fire you, if you are known to people. But this should be through your work and not through the other activities.

Scale down your expectations. Be it in the present company or in the new job that you are looking for, you should bring your expectations a bit down and be realistic. A job in hand is better than 10 lucrative offers.

Better be serious about your job. This way, you may not have to actually watch the day when you are given the pink slip.


Tuesday, October 14, 2008

Deposit Insurance and Credit Gaurantee Corporation

Off late there has been a lot of talk about some commercial banks going bust/bankrupt. And thus there was a rumor of depositors losing money that was kept in the bank.

I was searching on the topic and came to know about this corporation (DICGC). DICGC works on the safety of all the depositor's money kept in savings a/c, FDs etc with the banks. Almost all the banks in India are a part of this corporation and thus the money should be safe enough.

List of partner banks

Brief History of DICGC:

The concept of insuring deposits kept with banks received attention for the first time in the year 1948 after the banking crises in Bengal. The question came up for reconsideration in the year 1949, but it was decided to hold it in abeyance till the Reserve Bank of India ensured adequate arrangements for inspection of banks. Subsequently, in the year 1950, the Rural Banking Enquiry Committee also supported the concept. Serious thought to the concept was, however, given by the Reserve Bank of India and the Central Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960. The Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961. After it was passed by the Parliament, the Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962.

The Deposit Insurance Scheme was initially extended to functioning commercial banks only. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India.

Since 1968, with the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, the Corporation was required to register the 'eligible co-operative banks' as insured banks under the provisions of Section 13 A of the Act. An eligible co-operative bank means a co-operative bank (whether it is a State co-operative bank, a Central co-operative bank or a Primary co-operative bank) in a State which has passed the enabling legislation amending its Co-operative Societies Act, requiring the State Government to vest power in the Reserve Bank to order the Registrar of Co-operative Societies of a State to wind up a co-operative bank or to supersede its Committee of Management and to require the Registrar not to take any action for winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank of India.

Further, the Government of India, in consultation with the Reserve Bank of India, introduced a Credit Guarantee Scheme in July 1960. The Reserve Bank of India was entrusted with the administration of the Scheme, as an agent of the Central Government, under Section 17 (11 A)(a) of the Reserve Bank of India Act, 1934 and was designated as the Credit Guarantee Organization (CGO) for guaranteeing the advances granted by banks and other Credit Institutions to small scale industries. The Reserve Bank of India operated the scheme up to March 31, 1981.

The Reserve Bank of India also promoted a public limited company on January 14, 1971, named the Credit Guarantee Corporation of India Ltd. (CGCI). The main thrust of the Credit Guarantee Schemes, introduced by the Credit Guarantee Corporation of India Ltd., was aimed at encouraging the commercial banks to cater to the credit needs of the hitherto neglected sectors, particularly the weaker sections of the society engaged in non-industrial activities, by providing guarantee cover to the loans and advances granted by the credit institutions to small and needy borrowers covered under the priority sector.
With a view to integrating the functions of deposit insurance and credit guarantee, the above two organizations (DIC & CGCI) were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978. Consequently, the title of Deposit Insurance Act, 1961 was changed to 'The Deposit Insurance and Credit Guarantee Corporation Act, 1961 '.

Effective from April 1, 1981, the Corporation extended its guarantee support to credit granted to small scale industries also, after the cancellation of the Government of India's credit guarantee scheme. With effect from April 1, 1989, guarantee cover was extended to the entire priority sector advances, as per the definition of the Reserve Bank of India. However, effective from April 1, 1995, all housing loans have been excluded from the purview of guarantee cover by the Corporation.

Sunday, October 12, 2008

History of Financial Crises

I found this nice article in The Hindu Business Line on the previous financial crises around the world. This is worth a look, so decided to post it here.

Not learning from history

Parvatha Vardhini C.

As the world struggles in the throes of a credit crisis, it seems appropriate to recount some (un)forgettable meltdowns of the twentieth century, the economics behind them and the panic that they created. Each of these major crises had features that have parallels in the current one. Yet, history repeats itself. Could investors have drawn a lesson or two from each of these and been more prudent? Read on.

The Japanese property bubble

The fall in property prices and defaults by sub-prime borrowers flagged off the now famous credit crisis. Will this crisis tip the world into recession? Let us hark back to the Japanese property bubble in the early 1980s.

At that time, Japan had huge trade surpluses (excess of exports over imports) with the US. Alarmed at its unfavourable Balance of Trade position, the US, through the Plaza Accord of 1985, allowed the yen to appreciate against the dollar. In two years’ time, the yen was up by almost 50 per cent.

The country’s export-dependent economy stumbled. Capital investments slowed. To avoid a recession, Japan eased restrictions on borrowings and progressively lowered interest rates. But low inflation (due to cheap imports and the fall in international oil prices), coupled with cheap money, enabled cash-flows into the property and stock markets as well.

Over the next few years, as demand for land increased, property prices soared. In the latter part of 1989, the Nikkei too raced towards its all-time high of 38,957 points but inflation had started to rear its head.

As the New Year dawned, the stock market nose-dived. The Bank of Japan sharply increased lending rates and placed restrictions on lending to the real estate sector. Property prices plummeted. Loans given with land as collateral went bad.

Soon, slowing investment and consumption led to deflation. Following the crash, the 1990s came to be known as ‘the lost decade’ in Japan. With the Asian financial crisis further rubbing salt into the wounds, Japan’s central bank adopted an extremely easy money policy that kept interest rates at virtually zero. Even today, at half a per cent, Japan has one of the lowest lending rates in the world. Little wonder that its central bank couldn’t cut rates earlier this week, alongside several other countries, in response to the US credit crisis!

Great Depression

The current credit crisis is increasingly being compared to the Great Depression in the US in the 1930s. The 1920s witnessed a huge increase in manufacturing output in the US. But the wages didn’t keep pace. Instead, the bulk of the profits was pocketed by corporates, creating a wide gap between the rich and the blue-collared.

At the same time, capacity expansions by companies (signalling higher profits), rising dividends and speculation drew surplus into the stock market. The upward spiral helped the Dow Jones Industrial Average hit a peak of 381 in September 1929.

When volatility rose, speculation gave way to fear and the party wound up quickly. The rich stopped spending. The poor, who were earlier financing their purchases mostly on credit, cut back. As demand declined, so did production. As a result, unemployment rose. Borrowers defaulted.

Ironically, it was the onset of World War II that boosted spending and bailed out the economy .

Asian crisis

If the Great Depression was born out of the unequal fruits of industrial prosperity, the Asian currency crisis of 1997-98 exposed the harm that volatile capital flows and highly leveraged positions can cause to entire economies. The years preceding the crisis saw South-east Asian economies such as Thailand, Malaysia and Indonesia open up their economies to foreign direct investments and capital flows.

Full capital mobility was allowed, with these Asian economies aligning their exchange rates closely with the dollar.

A sharp appreciation in the dollar in 1995 caused South-east Asian currencies to appreciate against other currencies as well. This resulted in significant losses on the export front — which was a key blow to these externally dependent economies.

A widening current account deficit (financed with overseas borrowings) coupled with basic differences in the economies of the US and these countries aroused speculation as to the ‘real’ exchange rate — the fixed exchange rate regime collapsed. As a result, the currencies of countries such as Thailand, Malaysia, Indonesia, Korea and Philippines were sharply devalued.

Interest rates were steeply raised to protect the local currencies. This set off a vicious spiral of rising cost of financing for companies and a squeeze on debt servicing capabilities. Earlier, the fixed exchange rates and the free flow of foreign funds had prompted domestic banks and corporates to borrow heavily from abroad.

Once disaster struck, the high leverage choked borrowers. Banks which resorted to borrowing from abroad for lending domestically too felt the heat. The excessive inflows had also found their way into asset classes such as the stock market and real estate.

When foreign investors began to pull money out, both stock market and real estate prices slumped. In the latter half of 1997, the IMF, along with the World Bank and the Asian Development Bank, provided aid to these countries as they were in danger of defaulting on their debt repayments.

These countries also agreed to undertake structural reforms by tightening their fiscal and monetary policies.

Latin American debt crisis

A similar story had already been enacted in Latin America in the 1980s. In the context of massive inflows of foreign capital and subsequent flight, the Asian crisis was, in fact, Latin America Part II.

The substantial increase in oil prices in 1973-74 by the OPEC nations resulted in massive inflows of surplus money into the oil-exporting countries. With the availability of funds far exceeding domestic requirements, these countries parked surplus funds in international commercial banks.

This happened at a time when countries such as Chile, Uruguay and Argentina had just liberalised trade and needed money to implement economic reforms.

Besides, oil-importing countries in this area also needed money to finance their deficits. So Latin America resorted to borrowing these surplus ‘petro-dollars’ from commercial banks whose loans were short-term and carried variable rates.

As the 1970s drew to a close, oil prices spiked again, fuelling inflation and, hence, higher interest rates. Money was needed to finance both the trade imbalance and the higher interest. For this, these countries resorted to fresh borrowings, and were thus pulled into a debt trap.

A year or two later, oil prices fell, but not interest rates. In Mexico, an oil-exporting country there was a flight of capital abroad. The peso depreciated by about 80 per cent; Mexico was unable to service its debt and was on the verge of defaulting on loan repayments.

Other Latin American countries followed suit. Further lending to these countries was refused and they could not get out of the debt trap. These nations were later forced to renegotiate their debt and the IMF stepped in to co-ordinate.


Saturday, October 11, 2008

Fixed Diposits: The safe Havens for the risk averse investors

As the Equity markets were on full swing last year, the good old fixed deposits and the post office schemes were loosing their sheen. But now that the markets have tumbled on their head and investors are looking for cover, it's once again time to look at these safest forms of money saving instruments.

Investors should go for bank deposits or Fixed Maturity Plans (FMP) of mutual funds which provide cushion and risk free returns during the uncertain times as now-a-days. These can be of paramount importance to senior citizens and to those with limited risk apetite.

Most Public sector banks are providing 10% p.a. for the fixed deposits (10.5% in case of senior citizens), which means you stand to earn Rs. 10,000 in a year on an FD of Rs. 100,000 pre-tax. The key aspect here is to protect your savings while keeping the returns modest.

FMPs are another way to invest in debt instuments. These are better than FD for the tax paying investors as they impose lesser tax penalty than a FD. FMPs are schemes from mutual funds that have a fixed tenure before they can be redeemed, much like the Fixed Deposits, but they provide you returns in terms of dividends that is taxed at 14% (Dividend Distribution Tax) whereas the FD is taxed at your respective income slab. 

It is always better to keep some portion of your investment portfolio in this instrument as well to keep your savings intact. 

Hope you liked the post. If so, please subscribe to the posts to get regular updates.

Tuesday, October 7, 2008

Interest Rates and stock markets

Interest is nothing but the cost you have to pay for the use of someone else's money. Credit users know this scenario quite well - they borrow money in order to buy something. When it comes to the stock market and the impact of interest rates, the term usually refers to something else.

The interest rate that applies to investors is the RBI bank rate. This is the cost that banks are charged for borrowing money from the RBI. It is the way the RBI attempts to control inflation.

What is Inflation?

Inflation is caused by too much money chasing too few goods (or too much demand for too little supply), which causes prices to increase. By influencing the amount of money available for purchasing goods, the RBI can control inflation.

Basically, by increasing the bank rate, the RBI attempts to lower the supply of money by making it more expensive to obtain.

Effects of an Interest Rate Increase

When the RBI increases the bank rate, it becomes more expensive for banks to borrow money from the RBI.

The first indirect effect of an increased bank rate is that banks increase the rates that they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if they carry a variable interest rate. This has the effect of decreasing the amount of money consumers can spend, after paying the loan installments and bills for food, utilities and other essentials. This means that people will have less money to spend, which will affect the revenues and profits of businesses.

Businesses are also affected - When the banks make borrowing expensive, companies might not borrow as much and will pay a higher rate of interest on their existing loans. Less business spending can slow down the growth of a company, resulting in a decrease in profit.

Stock Price Effects

Changes in the bank rate thus leads to less spending and impacts corporate turnover & profits. If, a company is seen as cutting back on its growth spending or is making less profit - either through higher debt expenses or less revenue from consumers - then the estimated amount of future cash flows will drop. This will lower the price of the company's stock. If enough companies experience a decline in their stock prices, the whole market, or the SENSEX, will go down.

Investment Effects

For investors, a declining market or stock price is not a desirable outcome. Gains come from stock price appreciation, the payment of dividends - or both. With a lowered expectation in the growth and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable.

Furthermore, investing in stocks can be viewed as more risky compared to other investments in such as scenario. When the RBI raises the bank rate, freshly issued government securities, such Treasury bills and bonds, which considered as the safest investments will usually experience a corresponding increase in interest rates. In other words, the "risk-free" rate of return goes up, increasing the demand for these investments.

When people invest in stocks, they need to be compensated for taking on the additional risk involved in such an investment, or a premium above the risk-free rate. The desired return for investing in stocks is the sum of the risk-free rate and the risk premium. As the risk-free rate goes up, the total return required for investing in stocks also increases. Therefore, if the required risk premium decreases while the potential return remains the same or becomes lower, investors might feel that stocks are not going to reward them adequately for the risk they have to take. Hence when the risk-reward for investing is against the investor, he will sell leading to fall in prices of stocks.


Since around the last quarter of 2007 – rise in inflation, interest rates & all input costs along with the consistent lowering of GDP forecasts have clearly indicated the need for lowering expectations of returns from stocks. The risk-reward for investors in debt has improved and for stocks and real estate it has deteriorated. The recent volatility in gold prices, clearly hold no attraction as a haven for capital looking at a "flight to safety". The government finances are not in good shape. It is expected that the benchmark "risk-free" rate in the form of the 10 year GoI bond yield is likely to go up by 0.5 to 1%. This would definitely lead to increase in cost of all forms of capital with the highest impact being in the cost of equity which as our explanation confirms will lead to moderation in return expectations and hence valuations.


Sunday, October 5, 2008

What is an Insurance?

Insurance works on the concept of pooling of risk. In the ancient times, merchants started this concept by poling the risk of their cargoes being sunk in the sea. They started pooling money which would be used to compensate the damages occurred to the merchant whose cargo sunk.

The same concept has been carried forward to the modern day insurance, where one can insure not only his cargo/vehicle but also his health and life!

In India, insurance can be broadly classified into 2 categories:
  1. Life Insurance: Financially covers the family against the death of the insured.
  2. General Insurance: Protects several areas including health, property, professional liability and many more.
Striking a balance between the cover needed and the premium paid for the cover is very critical to get the optimum value.

Here are certain factors that should be considered before deciding ona particular insurance policy:

The probability and impact of the event to be covered:

Before taking a particular insurance, one should assess the probability of the event and its possible impact on the individual and family.

Suppose, you own a shop in Mumbai, and want to cover the shop against earthquake! This is a rare event and might not happen very frequently. But the damage would be significant in case it occurs. So, you may go for an insurance. As the event is infrequent in nature and the probability is low, the premium may be very low.

But the same event will have a high premium in JAPAN, as the earthquakes there are frequent and the probability is high.

For life insurance, the impact varies based on the age of the person and the number of dependents.

Adequate Insurance:

That you have a cover is not enough. You should make sure the cover is adequate enough to cover the damage. You should evaluate your future worth in case of a life casualty and then go for the cover depending on that.


This is a major factor while taking an insurance cover. Too much premium would be a burden on your purse an too low premium will not serve the purpose. You should do some calculations to get the adequate cover with the most affordable premium.

Income Tax:

While the premium paid can be used to reduce the tax liability under 80-C, one should not be guided by this. By doing so, you would not consider what is best for you and go for the one with maximum premium.

Do not treat Insurance as an Investment:

This is a fallacy that is present in almost everyone's mind. Treat insurance as a safety net in case of you not being there for the family and invest separately to make your money grow!

Several studies have proved that un-bundling of insurance and investment aspects lead to a better overall result. This will however call for the investing discipline on the part of the policyholder.

Watch this space for more on insurance basics.

Saturday, October 4, 2008

Things to keep in mind while investing

Your journey towards financial freedom isn't complete without obstacles which you must learn to face and conquer. The sooner you learn to take action against them, more money you make.

Impulse Buying

Always buy when you see value not the price movements. Price movements are often due to market momentum and not for the value the stock presents.


Inflation hurts people particularly those in fixed incomes like the elderly and those whose income isn't indexed to inflation. They lose a part of their purchasing powers because their cash flow remains constant while their cost of living increases. Employed individuals, despite receiving constant salary increments, are hurt because there is a time lag in compensation adjustments. By the time they receive higher nominal income, it has already been months since the prices of commodities went up.

Have a plan to buy assets which gain during inflation.


Procrastination simply refers to the habit of putting off doing something for a later time. Aside from the definition, it is also necessary to learn why we often choose to procrastinate. Is it simply because we are too lazy to act or is it something much deeper? More importantly, how do we get rid of this bad habit? What is the best way to really overcome procrastination?

Do today, what you can do tomorrow. Do now, what you can do today. This is the famous lesson that Ravana gave to Laxman in Ramayan while on the death bed.

Fear of Taking Risks

"Remember, life is a risk. To do or not to do something is an equal risk. And not doing something is the greatest risk of all. If you do it, you could lose . And if you don't do it, you will never know the benefits of having done it, or whether it will even work or not. So not risking is the greatest risk of all."

Wrong Beliefs About Money

If you think about it, money is simply defined as a tool that we use to acquire the things that we need or want. It is a non-living thing that is void of emotion or bias. Take a Rs 1000 note out of your purse right now and look at it. Would you agree with me if I say that you're simply holding a piece of paper? Can you shred it to pieces now ? No you would not.Yet we invest money into wrong places and throw our wealth into the sea.

Keep these things in mind and overcome them when taking investment decisions.

Monday, September 22, 2008

Balanced Mutual Funds: Good option when Markets are down

What is a Balanced Fund?

Balanced funds a.k.a. hybrid funds are a type of funds which don't take full exposure either in equity or in debt. They invest in both equity and debt in a well defined ratio as per the fund's mandate. An investor with a low risk capacity and having dependents can use these funds to have stability in his/her portfolio.

They are usually classified in two broad categories:

Equity Oriented Hybrid Funds:

These funds usually invest in the ratio 60:40(equity : debt) or 75:25 (equity : debt). Suitable for investors who want to benefit from the equity market but at the same time would not like to risk his entire money with equities. These funds perform better than equity funds during the downturn in markets and have a better shield in terms of debt component.

In case of a downturn, they increase their debt component to reduce the impact of falling market in the fund's NAV.Similarly during a bull run, these funds will increase their equity exposure to get benefited from the bull run. So a moderate risk investor can choose this fund to have a balanced return.

Debt Oriented balanced Mutual Funds:

These have a big chunk(>70%) of their portfolio in debt instruments. These funds are designed to get returns from debt instruments but have a small portion invested in equities to get that additional kicker return to outpace typical fixed income instruments like bank FDs. In order to get an edge over typical debt instruments and also provide investor an extra bit of return, they have a limited exposure to equities.

Wednesday, September 17, 2008

LTA- Leave Travel Allowance

Leave Travel Allowance (LTA) is an allowance/benefit that your employer gives you to cover your travel expenses. This is a tax saving instrument as well. Your employer gives you money to go on vacation and the money is not taxable! So far so good…
But there are stipulations/rules from the government as in any other benefit.
Let’s get a look into LTA in this post…
What do I do to claim LTA?
Nothing more than getting a break from the work! Isn’t that great?
· You should take a leave from work and travel to anywhere in India. International travels are not covered.
· Travel alone or take the family along with you. However, you need to be on the list of travelers to get the claim. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if your spouse is working) and children.
For children born after October 1, 1998, the exemption is restricted to only two surviving children (unless, of course, one birth has resulted in multiple children like twins and triplets).
What is covered?
Only the travel costs are covered. All the eating, lodging and partying expenses are yours.
So, whether you fly, hop on to a train or take public transport, you will have to show the ticket to claim your LTA. This means you will need to keep your air, rail or public transport ticket.
What if you want to travel by a car? If a car is owned by a central government organization like ITDC, the state government or the local body, LTA is permitted.
If you could not get public transport and resorted to private transport, try and get a bill. If the bill is not accepted by your employer, you can always file an income tax return, claim an exemption and get a refund.
You must take the shortest route though. The LTA is covered for the shortest route only.
Can I claim LTA every year?
No. You can only do that twice in the block of 4 years. This block is not calculated with the start of your employment. The government defines these blocks. The currently running block is 2006-09 -- January 2006 to December 2009.
You can only claim LTA once in a year. This means, you are entitled to go on leave any number of times but it will be tax free only once in a year. If you are married, you can ask your spouse to claim the other journey.
But I can’t travel. My job doesn’t allow me to.
Then you can carry it forward.
One LTA can be brought forward and claimed in the first year of next block.
Let's say you do not take your LTA in 2002-05. You will be able to take one LTA in 2006. This means that, in the 2006-09 block, you will be totally entitled to the three journeys.
I switched my job. What happens to my LTA?
You can still claim your LTA. Let’s say, you claimed one of your LTAs in 2006. 2007 you switched jobs. You can now claim the remaining LTA from the present employer. The only thing you need to show the current employer is the previous tax returns.
What if I don’t claim?
If your LTA is not utilized, it gets added to your salary and you will be taxed on it.
Let's say you and your spouse are both employed and both have LTA as part of the salary package. Your LTA is Rs 20,000 and hers is Rs 20,000 too.
Both of you and your child go for a holiday. The tickets for the three of you amount to Rs 15,000. You supply the tickets to your office and this amount will be eligible for a tax deduction; the balance Rs 5,000 will be taxed. You can claim exemption only to the tune of your expenditure.
If you claim this, your spouse will not be able to claim this same holiday from her employer. His/ Her Rs 20,000 will be taxed. Unless, of course, you go for another holiday and he/ she claims it.
Or, let's say, you spend Rs 30,000 on tickets but your LTA is just Rs 20,000. You can claim up to Rs 20,000 and tell your spouse to claim his/ her ticket from his/ her employer.

Friday, September 12, 2008

Learn about your HRA

House Rent Allowance is a very important component of one’s salary. The tax implications of the house rent allowance (HRA) seem to baffle most people. Taking the case of two individuals, Akram and Rafiq, who work in the same company, I have tried to explain this allowance in detail.

One significant difference between the two individuals, which is necessary for this study, is that Akram resides in his own house while Rafiq in a rental accommodation.

Are both eligible for HRA?

Yes. Because the payment of HRA by an employer does not depend upon its end-use by the employee. An employee may prefer to stay in his/her own accommodation but will still be eligible to receive HRA if it is a part of the salary package. This is so, because HRA, as its name suggests, is an Allowance supplementing the Basic Salary and Dearness Allowance/Pay, if any, in a salary package.

Is HRA taxable?

In the case of Akram, who stays in his own house, tax is payable on the full amount of HRA received by him. Rafiq, living in a rented accommodation, may qualify for relief on the HRA received by him, such relief being dealt with under section 10 (13A) of the Income Tax Act, 1961.

When is HRA exempt from tax?

A salaried individual, in order to get an exemption on his/her HRA, must fulfill the following basic conditions:
  • The employee must not live in his/her own house
  • He/she must pay rent for accommodation
  • Such rent must be more than 10 per cent of his/her salary
Is Rafiq exempt from tax?

Rafiq fulfils the first two conditions. The amount of his salary and rent paid by him will determine whether he meets the last condition too. If Rafiq's monthly salary is Rs 15,000, he will qualify for HRA exemption should the rent paid by him exceed Rs 1,500 (10 per cent of salary).

How much will Rafiq's exact exemption amount to?

The extent to which HRA is exempt is limited to the least of the following:
  • For residential accommodation located at Bombay, Delhi, Calcutta or Madras - an amount equal to 50 per cent of salary and 40 per cent elsewhere
  • HRA actually received by the employee
  • Excess of rent paid over 10% of salary
Rafiq's annual salary = Rs 1,80,000
HRA = Rs 63,000
Monthly rent = Rs 3,000
Rental accommodation situated at: Hyderabad
Rafiq will be eligible for exemption on HRA to the extent of Rs 18,000 being the least of the following:
  • Rs 72,000 (being 40 per cent of salary since rented house is at Cochin)
  • Rs 63,000 (being HRA actually received)
  • Rs 18,000 (annual rent of Rs 36,000 - Rs 18,000 which is 10 per cent of salary)
How should one avail of this exemption?

Provide your employer with information about the rent so that he can credit you with the eligible amount of relief before deducting tax at source. You can also claim such exemption when filing your tax return and seek a refund.
In all cases where HRA exceeds Rs 600 per month (Rs 7,200 per annum), evidence of rent paid, meaning rent receipts, have to be produced. The assessing officer has the right to call for proof of payment.

Points to remember

  • Allowances are different from reimbursements in that they are usually fixed in value and are paid irrespective of whether the recipient incurs expenditure or not. They are aimed at meeting specific requirements like entertainment and travel. They could also be of a compensatory nature like a border area/remote area allowance could be paid to an individual posted in the Lakshadweep Islands.
  • Salary for HRA purposes = Basic Salary + DA/DP + commission (only if calculated as a fixed percentage of turnover achieved by the employee)
  • Salary will not include any arrears for earlier years, which are received during the previous year.
  • If a bonus is received for the last year in the current year, such amount of bonus will not be included in HRA salary for the purpose of determining HRA exemption. You can include the amount of bonus due to you for the current year which you will receive only in the next year.
  • Salary will include all amounts due (even if not received) pertaining to the period during the previous year during which the rental accommodation is occupied by the employee.
  • HRA actually received has to necessarily pertain to the period in the previous year when the rental accommodation is occupied by the employee - meaning, HRA received for that period during which the employee was not occupying the rental accommodation will not be exempt. (If Rafiq were occupying his rented house for only 9 months during the year, then the HRA exemption of Rs.18,000 computed above will get restricted to Rs.13,500 (pertaining to the period of his occupancy).
  • You can pay rent to your parents provided they show the same in their Income tax Returns. This would save both of you from future litigation. You can however, NOT pay rent to your spouse. The relationship is not commercial in nature; a husband and wife are supposed to live together. So, such a payment will not be accepted by Authorities.

Friday, August 29, 2008

Income Tax Rates for FY 2008-09 in India

Here are the rates at which one will be taxed this year on the basis of their income.

Taxable income slab

Tax Rate (%)


Up to 1,50,000


1,50,001 - 3,00,000


3,00,001 - 5,00,000


5,000,001 upwards



Up to 1,80,000


1,80,001 - 3,00,000


3,00,001 - 5,00,000


5,000,001 upwards


Senior Citizen (65 Years or above)

Up to 2,25,000


2,25,001 - 3,00,000


3,00,001 - 5,00,000


5,000,001 upwards


*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs 1,000,000.

  • Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
  • A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
  • Agricultural income is exempted from income-tax.



All data and information provided on this site is for informational purposes only. The author makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.