Motor insurance to get costlier from Apr IRDA Increases Rates Between 6% And 40%

Mumbai: Motor insurance rates will rise from April 1 with the insurance regulator notifying new rates for motor thirdparty premium. The increase ranges from 6% at the lowest end to 40% at the higher end. 

    Third-party cover refers to the mandatory insurance that car-owners have to buy to provide compensation for accident victims. This is the only cover where the rates are notified by the regulator after taking into account inflation, average claim amounts and expenses in servicing the claims. But insurers say that the rate hike does not cover their losses. "If the revision in third-party rates is not sufficient to take care of claims, motor own-damage claims will have to go up," said K G Krishnamoorthy Rao, MD & CEO, Future Generali India Insurance. Own-damage refers to the cover that car-owners buy to get compensated for their vehicle. 

    The worst affected by the hike will be commercial vehicles. For goods carrying threewheelers, the rate has gone up the highest—from Rs 2,440 to Rs 3,415. For trucks with capacity up to 7,500 kg the rate hike is from Rs 8,420 to Rs 9,818. For private cars, the third-party impact is low with rates for a 1000cc car rising from Rs 880 to Rs 925. Earlier moves by the insurance industry to raise premium on commercial vehicles had resulted in truck unions going on a nationwide strike. The other reason why insurance companies would hike motor own-damage rates is that the national reinsurer GIC Re has hiked reinsurance rates by 15 to 20%. 

    Announcing the revision rates, the IRDA said: "The frequency of claims shows a steady trend. This is also a reasonably correct assumption as there is no material change in the condition of roads, driving conditions, or drivers which may cause the frequency (number of accidents per thousand vehicles) to alter significantly." 

PAY MORE FOR COVER 

tGoods ferrying 3-wheelers: Up from Rs 2,440 to Rs 3,415 

tTrucks with 7,500 kg capacity: Up from Rs 8,420 to Rs 9,818 

t1000cc private cars: Up from Rs 880 to Rs 925

GURUSPEAK Tax plan not just for filing returns

 Proper tax planning today forms an unavoidable step in the annual tax filing exercise for those who have taxable income. With the challenge of managing financial goals and expenses on one hand and growing aspirations & rising inflation on other, proper tax planning can be effectively used to play a critical balancing act. However most of us fail to give tax planning the importance it deserves. 

    The common man usually wakes up to the urgency of tax planning at financial year end. This practice is fraught with risks where one usually ends up making less than appropriate choices. The aggressive sales practices by advisors & financial institutions also encourages this undesirable approach. Tax planning must not be treated as the last step before preparation of returns but something that should be taken before start of every financial year. It is an important part 

of your overall financial planning as it not only helps reduce the tax liability but also supports your other financial goals. The right approach to tax planning can be briefly summarised in the following steps. tAt the start of the financial year, undertake an assessment of your financial goals & resources. This will give clarity on the amount of investments required with time horizon and also on insurance needs. Preparation of a proper financial plan is highly recommended. tThe next step is planning your expenses like rent, tuition fees, care / treatment of handicapped persons, parents, home loan EMIs, charity, etc. tNext estimate how much of tax saving avenues are utilised given all the expenses, deductions already planned. 

tLastly estimate the possible taxable income considering the exemptions,deductions already enjoyed. Only if there is a taxable income remaining, is there any need for further tax planning. Tax liability can then be planned by deciding upon any new expenses or investments or insurance to be undertaken in line with your financial plan / objectives. The execution of same can be properly planned or spread throughout the year as per your comfort. 

    The above process can be real fun and easy to follow once you begin. It would ensure that our financial goals are on track and tax liability is reduced by judicious use of avenues only to the extent they are required. Know that tax planning is not the isolated exercise here but it is something that supports your overall financial plans. The key is to start the process at the start of financial year and see the benefits for yourself ! 

    The writer is co-founder, 

    NJ India Invest

Last-minute options to save tax

  Another four days are left for the current financial year to end and you have just that many days to put money in a select few products to save some taxes. Some of the popular options are equity-linked savings schemes (ELSS), pension funds, insurance policies and public provident fund (PPF). Your financial advisor/planner can help you invest in the product which is best suited for you, helping you save up to Rs 1 lakh this year, and also an additional Rs 20,000 through infrastructure bonds. 

    ELSS offered by mutual funds comes with a three year lock-in, which means you cannot withdraw the money invested for the next three years. Similarly, other investment products that offer you tax rebates also come with lock-in provisions. For example, in PPF you can withdraw only after seven years from the date of investment. 

You can save Rs 6,180 

The Budget in February 2010 had given taxpayers a new option to save up to Rs 20,000 every year by investing in notified bonds of infrastructure finance companies. Popularly called infrastructure bonds, the last of such bond offerings, from IDFC, is now open and will close on Friday. If you have not already invested in these bonds, you can put Rs 20,000 in these bonds and claim tax deduction of up to Rs 6,180 for the current financial year, which is for assessment year 2012-13. 

    Interestingly, this year's Budget has not specifically spelt out about the continuation of infra bonds for next fiscal, so there is some ambiguity whether the similar bonds will be available next year. 

    The ground rule for investing in infra bonds is first to check the credit ratings for these instruments, assigned by the ratings agencies. Higher a company's/bond's ratings, lower is the risk associated with it. These bonds are for a 10-year tenure, and come with a lock-in of five years, meaning one cannot sell these bonds for the first five years after investing. You can avail of the annual interest-payment option or the cumulative option. IDFC is paying 8.43% per annum on these bonds. Under the cumulative option, at the current rate of interest, your initial investment will more than double at the end of the 10-year tenure. But you will not get any money during these ten years. 

    Another important point to note here is that although you can claim tax deductions on your initial investments of up to Rs 20,000 in these bonds, the interest that you earn every year from these bonds is not tax free. Every year when you file your returns, the interest income from infrastructure bonds should be included in your income. 

YOU STILL HAVE TIME 

Equity Linked Savings Scheme (ELSS) of a Mutual Fund 

Consult your financial advisor and if these plans are suitable for you, ask how much to invest. Once you know that, your advisor can help you invest in the right plan, or you can also call the fund house to help you out Pension funds You can choose from select fund houses offering pension plans Insurance policy Again, check with your financial advisor and select the right one suited to your long term goals PPF You can open an account & deposit up to Rs 1 lakh Infrastructure Bond 

From IDFC (up to Rs 20,000): Your broker can help you; this is over and above the Section 80C limit under which you can invest up to Rs 1 lakh to lessen your tax burden

Monthly income for your family for 60 months from ING Life Insurance

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How to escape THE DEBT TRAP

If you are saddled with too many loans, go through this road map for a debt-free future

 Ayear ago, Pune-based businessman Shubho Mukherjee and his wife Debapriya were a bundle of nerves. Apart from their home loan, the couple was repaying a car loan and two personal loans. The situation turned from bad to worse when Shubho started using the plastic in his wallet not only for purchases but also to withdraw cash. "With four EMIs, our monthly expenses were higher than my income, so I resorted to credit card borrowing," he says. With more debt and fatter credit card bills, the Mukherjees began digging a deeper pit for themselves every month. 

    However, the pit has filled out shockingly well within a year. The Mukherjees' credit card dues have been paid, the personal as well as the car loan are also over. All that remains is a manageable home loan of about 15.8 lakh. This incredible conversion was brought about with professional help; a strategy had to be devised to pay off their debt. 
    A squeaky clean borrowing record has become important today. Credit information organisations such as the Credit Information Bureau (Cibil) and Experian track the credit history of an individual and pass it on to banks and credit bureaus assign 35% weightage to your repayment record while drawing up your credit score. If you have a poor record, you may not be able to take a loan. You may even find your credit card limit pruned, if not completely blocked. 
How bad is the problem? 
Your first step should be to know how you are placed. A lot of people don't even know they are headed for a debt trap. By the time they realise this, they are already trapped. Mumbai-based financial planner Gaurav Mashruwala suggests you check your income-expense ratio. If over 45% of your income is going into paying EMIs, it's a cause for concern (see graphic). 
    However, not all debt is bad. Loans taken to build assets or enhance skills are good loans and will only add to the net worth of the individual. The red light should flash if over 25% of your income is going towards the payment of EMIs of non-mortgage loans and discretionary spending. 
    Does this mean you can binge on good debt? Not really. Too much good debt is also not advisable. Almost 68% of Mumbai-based IT professional Kiran Shetty's income used to be gobbled up by his EMIs. A large chunk of this was the home loan EMI, a good debt, because it built an asset for Shetty. However, the bank turned down his car loan application because he was already paying EMIs worth two-thirds of his net income. 
Getting out of the trap 
Knowing the problem is only the first milestone in this journey. The Mukherjees came out of the debt trap after they approached a debt counselling centre. A counsellor listened to their problem and then suggested a strategy. 
    Don't think that the debt counsellor will wave a magic wand and your debts will vanish into thin air. Careful planning and a disciplined attitude will help you find your way out. It won't be an easy journey and you might have to make certain lifestyle changes and sacrifices. But, eventually, you will realise that being debt-free can make a material difference to your life. Here's your roadmap to debt nirvana: 
Prioritise debt repayments: Make a list of all your outstanding loans and then decide which of these you need to get rid of first. "Move from the costliest loans to the cheapest," says financial planner Kartik Jhaveri. Credit card rollovers are the most expensive loans, with interest rates as high as 40% a year. You should get these off your back first. If you find it difficult to pay a huge balance at one go, ask the credit card company to convert it into a personal loan. Most companies are willing to let customers pay large amounts in 6-12 EMIs. If the sum is too big, they may even extend the payment to 24 months. Such personal loans are costly, with interest rates of 15-18% a year, but this amount will be lesser than that paid while rolling over the balance. The Mukherjees used this facility to repay their huge credit card bill. 
    Next in the line of fire should be personal loans. They are costly, with interest rates of 18-24%, and should be repaid as early as possible. Take the loan tenure into consideration while making the prepayment. The lender may charge a prepayment penalty of 1-2% of the amount, but it will be worth it if you have more than 6-12 EMIs to repay. If the loan is ending in 2-3 months, a premature repayment may not be a good strategy. 
    Some loans may seem costly, but the tax benefits they offer bring down the effective cost for the borrower. The interest paid on an education loan, for instance, is fully tax-deductible. If you factor in the tax benefits in the 30% tax slab, an education loan that charges 12% effectively costs 8.5%. This is not such a bad deal at a time when interest rates on fixed deposits are hovering at 9-9.5%. Similarly, home loans offer tax benefits that bring down the actual cost of the borrowing. There's no pressing need to end such tax advantageous loans. 
Consolidate debt: If some loans are cheaper, it makes sense to use them to bring down your interest cost. Borrowing to repay a debt may seem like a zero-sum game, but you can gain if the new loan is at a lower rate. A loan against property, for instance, is available at 16-17% although there are no tax benefits. Even so, this is cheaper than a personal loan or a credit card rollover. You can also get loans against other assets, such as insurance policies, bonds and other securities. The lender will keep these investments as collateral for the loan. "Policies that are over 15 years old can be used to avail of loans to get rid of your credit card dues and other high-cost loans," advises Jhaveri. 
A word of caution here: if you are not disciplined, the new loan will only add to your problems instead of solving them. The loan against property will provide a lot of liquidity, but if the money is used to buy a new car or go on a holiday, you will be digging a deeper hole for yourself. 
Liquidate investments: The stock market has been on a roll lately. Ditto for gold, which has witnessed a sharp rise in price over the past 2-3 years. However, analysts feel that the stock market may consolidate now. Gold may not see a correction, but can come handy for raising cash. If you have stock investments or gold holdings, it may be a good opportunity to book profits and use the proceeds to bring down your debt. 
    Similarly, you can liquidate other low-yield investments to pay off high-cost debt. However, don't do this in a haphazard manner. Mashruwala advises that you first sell investments where the yield is lower than the interest you are paying. If the interest rate on your bank fixed deposit is 7-8%, while your personal loan interest rate is 15%, it makes sense to knock off the FD to repay the loan. The Mukherjees used this logic to get rid of some of their debt. "Since my chit fund investments were yielding 10% on an average, I prematurely withdrew them and paid two personal loans that had higher interest rates," says Shubho. 
    The balance in your PPF account can also be a good source of cheap funds. You can take a loan against the balance after the third year and make partial withdrawals after the sixth year. You can withdraw up to 25% of the balance subject to rules. Similarly, you can withdraw from your Ulip investments. Unlike the redemption of mutual funds and selling of stocks, Ulip withdrawals will not have any tax implications. 
Cut down expenses: No pain, no gain. If you want to effectively cut down on your debt, you also need to make some lifestyle changes. These can range from elementary measures like cutting down on dining out to more drastic steps like moving to a smaller house or downgrading to a smaller car. Of course, you cannot completely stop indulging in some recreational activity. Also, do not compromise on mandatory expenses such as children's school fee or basic food and living expenses. Even so, you can cut down on several other expenses. ET Wealth estimates that a middle class family can save up to 1 lakh a year (see table).

NO THREE CHAIRS FOR THE FM Life insurance no longer a savings grace

 For those whose primary objective is to build a retirement fund, life insurance as a savings instrument will lose its sheen. However, purchasinghealth insurance will become cheaper as payments for pre-acceptance medical tests will now be eligible for tax breaks. 

    The finance minister has doubled the minimum cover requirement under a life policy for it to be eligible for tax breaks. All forms of insurance — including life, health, motor and property — will also become more expensive because of the two percentage point increase in service tax. 
    The new limits for tax exemption eligibility under section 80C and 10 (10D) of the Income Tax Act has been revised from the previous sum assured-to-premium multiple of five times to 10 times. This is consistent with the proposal under the Direct Tax Code (DTC) which seeks to have a higher level of insurance under life policies, but at 20 times. 
    Until now, life insurance was an attractive avenue for accumulating savings for retirement. Now the gains will be vastly curtailed because a big chunk of the premium will go towards life cover."Compared to the DTC, the Budget proposal is a welcome move," said S B Mathur, secretary general of the Life Insurance Council. 
    An LIC official said those in the higher age group will now find it more expensive to buy a life cover. 
    According to Bhargav Dasgupta, MD, ICICI Lombard, the tax break of Rs 5,000 for preventive health check-ups will help in bringing a greater focus on preventive health care. General insurers say there's another indirect benefit —health checks will enable early detection of ailments. 
    "It may also result in product innovation in the health insurance industry," said Shashwat Sharma, partner, KPMG.

Build Your Own PENSION PLAN

An investor can build his own pension plan with a mix of different options. Here's how you can go about it Change a leaky faucet, fix an electricity point, tighten a loose hinge—people do many things around the house to save money. Add one more to your do-it-yourself list this year. Make your own pension plan and save considerably more than the money you pay a plumber or an electrician.      The pension plan market has all but dried up after the Irda's diktat that insurers must give guaranteed returns on annuities. Most insurers have stopped selling pension plans. On the other hand, distributors don't want to push the low-cost New Pension Scheme (NPS) despite an upward revision in their commission.      Don't let your retirement planning suffer due to the regulatory problems and the distribution logjam. Take control of your retirement planning by structuring and managing your own pension plan. A little bit of research and prudent investment choices can help you save big on the commission and other charges payable on a pension product from aninsurance company.      Besides, it will be more transparent, and as the fund manager of your pension portfolio, you will have complete control over the investments. You can change the asset allocation as per your risk appetite and make changes you feel are necessary to optimise returns.      PV Subramanyam, financial trainer at Iris, is a long-time believer of the do-it-yourself approach to retirement planning. "The withdrawal of pension products by insurers is perhaps the best thing that could have happened to investors," he laughs. Subramanyam suggests that young investors should put their money in diversified large-cap equity funds and not be too concerned about short-term volatility. "In 20-25 years they will earn a handsome return," he says.      However, not everybody can manage his investments over an extended period. You need to have some knowledge of investment options, understand concepts like portfolio rebalancing and conduct basic research yourself. If you have the skills, go ahead and build your retirement plan. Here are a few steps that can help you build a successful pension plan.  Automate savings  Discipline is the key to long-term savings. To ensure this, put your savings plan on an auto mode by setting up ECS mandates for your SIPs in mutual funds. Keep the SIP payment date as close as possible to the day you get your salary so that there is no chance of blowing up the money on discretionary items. This way you won't have to depend on your will power to invest. Your bank will do it even if you are feeling jittery about investing in an overheated market. Smart tip: Opt for the Voluntary Provident Fund deduction in addition to your PF. VPF contributions enjoy the Sec 80C tax benefits and withdrawals are tax-free.  Diversify investments  Your pension plan is a long-term commitment. It will see many ups and downs and market cycles. Don't concentrate the investments in one asset class. It is best to diversify across equity and debt so that one black swan event doesn't wipe out gains of several years. Even within equities, large cap or multi-cap diversified mutual funds are your best bets. "Stay away from thematic schemes, sectoral funds and exotic products when you are saving for retirement. A simple index fund or a diversified multi-cap equity fund will work better," says Dhirendra Kumar, CEO of Value Research. In debt too, don't concentrate the investments in one option or maturity. Have a mix of fixed deposits of different terms, debt funds and fixed maturity plans. Smart tip: Use the '100 minus your age' rule to know how much you should put in stocks.  Rebalance periodically  Rebalancing is profit booking by another name. If the equity component in your portfolio surges ahead and your desired asset allocation changes, it may be time to rebalance. This might seem counter-intuitive because you will be required to prune the asset class that is doing well. Believe us, restoring the original asset mix in your portfolio not only reduces the risk but also holds the key to long-term wealth creation. Experts say rebalancing should be done once in 12-18 months. If you do it more often, it amounts to timing the market and defeats the purpose.  Smart tip: Try copying the auto choice of the NPS in which the 50% equity exposure is reduced by 2% every year after the investor turns 35. It reduces the portfolio risk.  Watch the costs  When you have an investment horizon of 15-20 years, even a small difference in cost can balloon into a big amount. The funds of funds offered by some mutual fund houses have very high charges. The buyer effectively pays an expense ratio for two funds. In stark comparison, the 0.0009% fund management fee charged by the NPS is one of the lowest in the world. "Buy passive funds and investment options that have a low cost structure," advises Dhirendra Kumar.  Smart tip: Index funds and ETFs have lower expense ratios than actively managed equity funds.  Minimise tax outgo  Structure your investments to minimise the tax outgo. Choose options that can help you defer the tax, if not completely avoid it. Gains from equity funds are exempt from tax if you remain invested for more than a year. Avoid churning your funds because there is a tax implication every time you sell a fund. The PPF and VPF are good ways to accumulate a taxfree retirement corpus. Use debt funds instead of fixed deposits to defer the tax till withdrawal. Even then, the tax will be lower because of indexation benefits available on longterm capital gains. Don't opt for the dividend option of non-equity funds because the dividend distribution tax will erode your returns. "But this could change as the DTC proposes to tax debt fund dividends as per one's income slab and also dilute the indexation benefit for long-term gains," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.  Smart tip: Balanced funds enjoy the tax treatment of equity funds. Use them to avoid paying tax on the income from debt funds.  Devise withdrawal strategy  Last but certainly not the least, devise a withdrawal strategy for the corpus after you retire. Your income will comprise interest from bonds and fixed deposits, dividends from funds and stocks and maturity proceeds of bonds and FMPs. Start systematic withdrawal plans that draw down from your investments in mutual funds. Don't opt for the monthly dividend option of MIPs from mutual funds unless you are in the highest income tax bracket. Instead, opt for the cumulative option and redeem some units every month. Manage your withdrawals in a way that your tax liability does not shoot up in one particular year.      Deploy your retiral benefits in a mix of fixed income options but steer clear of complex pproducts. "You can buy an immediate annuity from an insurance company," says Pai. Smart tip: Set up a ladder of FDs so that there is some deposit maturing very year. Reinvest the proceeds for the longest term.

Did you choose the insurance you have?

Irda feels that customers are being forced to buy insurance combined with other products

Buying a car? Your dealer will choose your auto insurer. Going on a holiday? The price includes the cost of travel insurance. For several years now, Indians have been sold insurance bundled with other products or services. Even home loan customers are sometimes forced to take a loan protection term cover. But the insurance regulator is not happy with this combo selling. In a discussion paper released this month, the Insurance Regulatory and Development Authority (Irda) has expressed concerns that this bundling forces consumers to buy products they don't want and allows dealers to push policies that earn them better commissions even though they might not suit the buyer. 

    "The lack of transparency in such products has got Irda worried about these policies," says Akshay Mehrotra, chief marketing officer, Policybazaar.com. When the insurance cover is clubbed with another good or service, the buyer doesn't get to know how much he has paid for the insurance. Be it the charges of the cover or the features of the policy, it is difficult for a buyer to know if he's getting his money's worth. Deepak Yohannan, CEO of Myinsuranceclub.com gives the example of car insurance that comes with a new car. "Many dealers offer the first year's insurance for free or for just one rupee. But this is not true and the cost of the insurance is actually built into the car price. So, you don't know if you are paying the correct price," he says. 
Does the customer know? 
The transparency of charges 
is not the only thing that has Irda frowning over these bundled covers. "The regulator is also concerned that when one cover is bundled with another good or service, people may not understand the policy that they have bought," says Sanjay Datta, head of underwriting and claims, ICICI Lombard General Insurance. 
    Take the health covers that come bundled with credit cards. "Though people think that they are covered for hospitalisation, most such covers are only protection against loss of income due to hospitalisation. So while you would pay almost as much as any proper health cover, you get only a fraction of the protection," says Mehrotra 
Forced selling 
Forced selling is another concern raised by the insurance regulator. When a dealer has an upper hand in providing you a particular good or service, he can also force you to buy insurance from a certain company. This is particularly true of tour operators who bundle travel insurance in the total cost of the package. "With a bundled cover, there is no opportunity to compare a policy with other options available in the market. So, you do not get a chance to select the best insurance offer," says Yohannan. "Nobody has the right to force customers to buy certain plans," he adds. 
Confusing the buyer 
The practice of highlighting the insurance cover to sell other products has also come under the scanner. Some mutual funds are offering life insurance if you continue your SIPs in select funds for the agreed tenure. However, Irda is not happy that the fund houses are putting too much stress on the insurance component. Insurance is only a fringe benefit while the core product is the SIP in the mutual fund. By harping too much on life insurance, they will confuse the investor and make it difficult for him to differentiate between the core and the incidental product. 
    Yohannan believes that bundled policies are also not good for the insurance industry. When there is a distribution nexus between the insurance companies and dealers, the company may agree to accept all damage claims. "So while the dealer benefits with car repairs, the insurance company would actually bleed. The industry is already bleeding and I don't see why they would want to continue with such practices. Maybe this is why the regulator is looking to curb these policies," he says. 
    However, Mehrotra points out that not all bundled covers are unsuitable, and hence it would not be advisable to completely abolish such plans. "Some bundled covers like term plans with critical illness covers or travel insurance with tickets are quite good. So, Irda must segregate the good from the bad and come up with more stringent regulations," he says. As Datta says, "These insurance covers are not bad per se. Irda is only concerned about the way they are distributed." 
    Irda needs to ensure two basic things. The first is transparency in these covers. Secondly, it should not be mandatory to purchase these covers. The regulator has asked for comments on the discussion paper till 15 March before it takes a final decision on the matter.