Category: Personal Finance

How to revive a lapsed LIC policy?

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To offer some respite to life insurance policyholders, LIC recently launched a revival campaign to ensure benefits of the policy continue. The revival campaign encourages people to renew their policy by offering concession on late fees. So, if you have a policy with LIC, then you can revive your (individual) policies between August 10 and October 9, 2020. It is applicable for eligible plans subject to certain terms and conditions. Here is what you should know.

A life insurance policy offers continued financial security to you and your family, provided you, as a policyholder, pay the premium regularly. If the premium dues are left unpaid over a long period of time, the policy may lapse and you may lose all or part of its benefit. As part of its claim clearance offer, LIC is also encouraging policyholders to get their maturity amounts if they have missed making a claim on time.

Revival

Until premium dues are settled, with interest (penalty) chargeable by the insurer as a late fee (from the due date) along with the premium amount due, the policyholder will not receive the benefits of a life policy. A policy is said to have lapsed if the premium dues are not paid even after the grace period (30 days for yearly, half-yearly and quarterly premium payment and 15 days for monthly premium payment). In case of death of the policyholder when a policy has lapsed, if the policy has acquired surrender value, then claims will be settled to that extent by the insurer. If not, the policy loses all its benefits and no claims would be settled.

Usually, insurers allow you to revive your life policies within a period of five years along with penalty. Note that the penalty will vary with each insurer. For instance, LIC charges 9.5 per cent per annum as late fee penalty on premium dues. HDFC Life, too, charges 9.5 per cent per annum as interest on premium outstanding. At the time of revival, policyholders will have to pay total premiums due plus the penalty (interest) amount to reinstate the policy benefits.

Your policy document will state whether your policy is eligible for revival if it has lapsed. Beyond five years, insurers may allow for policy revival on a case-to-case basis.

In the case of LIC, in its recent revival campaign, you get to revive certain policies within five years from the date of the first unpaid premium (from the date you stopped paying premium). It is not applicable for high risk plans, including some term insurance, health insurance and multiple risk policies. High risks policies are those that, for instance, involve repayment of double/triple sum assured on maturity. LIC is offering late fee discounts to encourage policyholders to make the premium payment. If your total premium is up to Rs 1 lakh, then you get a late fee discount of 20 per cent (on late fees) with maximum concession amount limited to Rs 1,500. For premium amount between Rs 1 lakh and Rs 3 lakh, the late fee discount is 25 per cent (maximum concession is up to Rs 2,000) and for premium above Rs 3 lakh, the late fee discount is 30 per cent (concession capped at Rs 2,500).

How to revive

Policyholders can revive the policy with the insurer directly by paying the interest charges for late payment. Keep in mind that it is left to the discretion of the insurer to accept or reject the policy (although rejection is rare). Once the policy is revived, the benefits from the policies are also reinstated.

In the case of LIC policies, you can contact the agents or visit the branch to complete the revival process. It is more or less the same for other insurers as well. You can also call your insurer’s customer care to find out about revival procedures.

But, generally, it is better to keep the policy active by paying premium dues on time. Insurance companies usually send a premium reminder through mail or message or both.

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Did you inherit a property or receive it as a gift?

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There is often a lot of ambiguity on when and how you become the owner of a property that you inherited or were gifted. Unlike ownership through a sale deed, the transfer of property rights when no money is paid can have many grey areas as the required legal formalities and tax implications can often be confusing.

Legal routes

You can get ownership of a property through many routes. For example, there may be a partition of a property in which you are a joint owner and you may be become the sole owner of your part. This is usually done through a Partition Deed.

Also read: Loan options for property owners

Alternatively, in case of a joint property, you may become an owner when the other owners relinquish or surrender their rights. Relinquishment can be free or for a consideration — money or other assets. If the co-owners are family members, the transfer can be done through a Relinquishment Deed. If they are unrelated, a Release Deed is used.

In cases where you were not a joint owner, a property may be gifted to you. Unlike gifting that can happen even while the owner is alive, ownership transfer without payment commonly happens after the owner’s demise. This can be to a legal heir — with or without a Will — or to anyone through a Will.

Process aspects

Whatever the mode of transfer, you must register the instrument of transfer — Gift Deed, Transfer Deed, Relinquishment Deed, Partition Deed — with the appropriate government authority. This often requires providing proof and documentation of your claim to the property. For example, if there is no Will, you must establish you are the legal heir. The registration process involves costs and may vary between States and on the deed type, property type and value. For example, stamp duty for relinquishment is applicable only on the portion relinquished and not the full property value.

Also read: Property sale in Covid times: What sellers should know

Once the authorities establish the new owners, their share, rights and liabilities, you can apply for a property transfer at the sub-registrar’s office. After this, the ownership documents with the government authorities — such as the municipal corporation — must be updated with your name. This is through a process called mutation of records and requires the payment of various taxes, transfer of utilities, execute rent agreements and loan mortgages.

Tax considerations

Your tax implications vary based on the type of transfer. For example, property received under a Will is tax-exempted, even to non-relatives, while gifts received from non-relatives are taxable beyond ₹50,000.

For inherited property, you are liable for taxes on the profits made when it is sold. In this case, you must note that the holding period is not the date of inheritance but the actual date of purchase of the property. For instance, say you sold a property that was inherited just one year ago, but was purchased by the original buyer five years ago. The holding period is taken as six years and you are only required to pay long-term capital gains tax.

Tax filing of the income from the property also needs consideration. If the transfer is due to the demise of the owner, you must include the income from the date of acquiring. The income until the point of death is included in the tax return of the deceased person for that financial year. For the intermediate period — until transfer happens — the executors of the will are responsible for filing the income-tax returns.

Special cases

Some situations, such as an outstanding home loan against the property, require more consideration. The transfer of a mortgaged property can only happen with the written consent of the lender. That may require the loan to be transferred to the new owner or paid off.

You also become a part of any dispute or litigation involving the property. And in case of property being rented out, you must honour the original lease agreement terms.

Often, in ancestral properties, there are no ownership records. For example, the property may still be in your great-grandfather’s name and title documents may not be traceable. It may be advisable to take help and guidance to gather evidence to establish ownership, before applying for transfer.

Another special situation is if the property is a joint holding and the first name holder is no more. You must note that the second named person does not automatically become the owner, as the law of succession must be followed.

If the property is a flat that is part of a cooperative society, the ownership is in the form of shares in the society. Ownership transfer must be done with the society, even if you were appointed as a ‘nominee’. This typically requires providing the Will and consent of other legal heirs.

The author is an independent financial consultant

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How wellness features make your health insurance better

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Insurance regulator IRDAI has issued guidelines on wellness and preventive features offered in a health insurance policy.

While many insurers already offer wellness benefits to policyholders, the guidelines not only widen the scope of such features but also standardise them.

The Insurance Regulatory and Development Authority of India (IRDAI) has allowed insurers to offer this feature as an optional or an add-on cover or as a rider.

Here is what you, as a policyholder, should know about wellness features and their benefits.

What’s on offer?

Many insurers, including ICICI Lombard, ManipalCigna, Bajaj Allianz and Max Bupa, offer health policies with wellness features that reward the policyholders for maintaining a healthy lifestyle.

Rewards are offered, provided policyholders undertake the wellness programme specified by insurers. The rewards are in the form of points which get accumulated on completion of a task, say walking 10,000 steps in a day or running 3 km a day.

So, if you have accomplished the goal, you can redeem your reward points against outpatient consultation (OPD), pharmaceutical expenses, diagnostic services and health check-ups through the network providers of the insurer (reimbursement allowed if cashless claim is not available).

Take ICICI Lombard’s iHealth Plus policy for example. You can earn 100 points if you quit smoking.

You can also earn up to 1,000 points if you undergo medical check-up. You can redeem these points against OPD, dental expenses etc.

Similarly, in the case of Aditya Birla health plan, you can earn health returns (reward points) through accumulation of ‘Active Dayz’. If you burn 300 calories in a day, you earn one Active day.

With Bajaj Allianz General, you can redeem the accumulated points for co-pay waiver at the time of claim or increase in sum insured in case of no claim.

Note that the rewards system varies with insurers. For instance, in the case of iHealth Plus policy, the maximum points an individual can get is 5,000 and each point is equivalent to 25 paise. It can be carried forward up to three years. In the case of ManipalCigna’s ProHealth policy, the maximum reward that can be earned is 20 per cent of the premium paid and each point is valued at ₹ 1.

The points are monitored by health insurance companies on real-time basis through mobile apps or wearables such as Fitbit that track your activity.

As per IRDAI’s guidelines, in addition to the existing wellness benefits, insurers can also include redeemable vouchers to obtain protein supplements and other consumable health boosters, or for membership in gym/yoga centres.

Sweetie Salve, Vertical Head, Claim Medical Management, Bajaj Allianz General Insurance, says: “Redeemable vouchers, could typically have two approaches — where insurers proactively give these vouchers to policyholders on a complimentary basis, where it is offered to initiate a healthy lifestyle and create a sense of responsibility for maintaining good health, or policyholders may have to earn them based on certain wellness criteria.”

The regulator has also allowed insurers to offer discounts on premium and/or increase in sum insured based on the wellness regime.

As insurers are yet to file revised versions/new products with the regulator, it may take a while before the products are updated for the additional benefits. Despite the improved benefits, policyholders may not see a significant increase in premium.

Win-win

Amit Chhabra, Head, Health Insurance, Policybazaar.com, says: “While there could be some costs involved in offering wellness services, it would subsidise the claim cost for insurers as healthy customers would claim less.”

However, Priya Deshmukh-Gilbile, Chief Operating Officer, ManipalCigna Health Insurance, says: “The recent guidelines on wellness benefits have put in motion reward-linked wellness features for healthy living, and industry products incorporating discount and reward options might see some impact on premium.”

To enrol in wellness programmes, policyholders should purchase products that offer such benefits. All wellness benefits are offered through digital mode, through respective insurers’ mobile app. For instance, Max Bupa’s Health is an app that manages policyholders’ fitness data and health score.

Once downloaded and registered, you can sync your wearables such as Google Fit, Apple Watch or Fitbit with the mobile app; alternatively, the said app itself will track your fitness activity.

On the other hand, if you have enrolled yourself in a gym or yoga centre, where your fitness activities are done, you will still earn reward points for that as well.

iHealth Plus policy offers 2,500 points for a gym/yoga membership per year.

But do keep in mind that your policy selection should be based oncoverageand not just on wellness programmes and their benefits.

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How Equitas SFB beats most others in FD rates

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Following the repo rate cuts by the RBI, banks have slashed deposit rates by up to 165 basis points (bps) since the start of the year.

Even small finance banks, which lure depositors with comparatively higher rates, have lowered interest rates on deposits by more than 100 bps (year-to-date).

With rates at a multi-year low now, locking deposits in long tenures will mean missing out on higher returns when the rate cycle begins to move up. A one-year timeframe is ideal as this will give the opportunity to reinvest at better rates later.

After the latest revision of rates, done in June 2020, Equitas Small Finance Bank’s (SFB) rates are better than that of its peers. For deposits of one-year tenure, Equitas SFB offers 7.1 per cent interest per annum. Senior citizens get an extra 0.60 percentage points. The minimum deposit is stipulated at ₹5,000. Investors can choose the cumulative option.

For a similar tenure, public sector banks offer interests of 4.9-5.55 per cent, while private banks offer up to 7 per cent.

For a similar tenure, deposits rates of other small finance banks (barring Fincare Small Finance Bank), after their recent revisions, are also lower than Equitas SFB’s rates.

FDs with banks (including those with SFBs) are covered under the deposit insurance offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for up to ₹5 lakh per bank.

Open FD online

Depositors who wish to stay home can apply online, using the Selfe deposit option (on the bank’s website). Customers can open fixed deposits (FDs) online for a tenure of up to one year only. Also, the maximum amount of FD that can be opened online is capped at ₹90,000. For opening a deposit with a higher tenure or amount, customers will have to personally contact the bank. In select regions, doorstep banking facility is available to open an FD.

The bank also permits partial or full premature withdrawals of the FD, but only after 180 days since the date of opening the deposit.

For deposits with effective tenure shorter than 180 days, a penalty of 1 per cent shall apply on premature withdrawal.

However, premature withdrawals are not permitted if the customer opts for monthly interest payouts.

About the company

Equitas Small Finance Bank, previously Equitas Finance, began operations in September 2016. The bank has about 854 outlets across the country, with vast presence in Tamil Nadu (328 banking outlets).

Tamil Nadu also accounts for about 61.9 per cent of its outstanding loan book as on June 30, 2020.

The bank is currently into micro finance, small business loans (including housing and agricultural loans) and vehicle finance. It also lends to MSEs and corporates.

As on June 30 the bank had a loan book of ₹15,573 crore, with gross NPA at 2.68 per cent. The bank’s capital adequacy ratios are well above the minimum regulatory requirement — Total CRAR and Tier-I CRAR at 21.59 per cent and 20.61 per cent, respectively.

In the wake of the pandemic, small finance banks have faced severe anomalies in their collections, predominantly those with higher exposure to micro finance.

That apart, the moratorium on loans also hints at the possibility of bad loans inching up in the coming quarters.

Equitas SFB also saw its collections efficiency drop to 49 per cent in June 2020, from 78 per cent in March 2020. Also, about 51 per cent of the bank’s customers (by value) had opted for the moratorium, as of June quarter end.

That said, according to its recent exchange filing, the bank’s collection efficiency improved to over 80 per cent in August 2020, thanks to the bank’s diversified loan book — micro finance only constitutes about 23 per cent of the loan book currently.

Also, the loan book under moratorium is only 35 per cent of gross advances at the end of August 2020.

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Readers’ Feedback – The Hindu BusinessLine

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This is in the context of the article titled ‘Why investing via wallets in gold is fraught with risks?’ that appeared on BusinessLine on August 17, 2020. As per my understanding, GST is charged only at the time of buying and not at the time of selling digital gold. Please clarify.

Alhind

Our response: GST is applicable both on purchase and sale of gold if physical delivery is mandated. However, Vikas Singh, MD and CEO of MMTC-PAMP, says “in the case of digital gold, GST is only applicable on purchase. Sale or subsequent redemption of the gold purchased in digital form (on our supported platforms) does not attract GST.”

This is in the context of the article titled ‘Hawkins Cookers FD: Higher returns, higher risks’ that appeared on BusinessLine on September 18, 2020. Expecting interest rates to go up is far-fetched when the US Federal Reserve has frozen rates in the US till 2023. It is more likely that India will finally follow the interest rate trajectory of the developed world.

Vijay Mendiratta

Our response: India may or may not follow global trajectory. Hence, we recommended sticking to shorter tenures.

The Big Story titled ‘A beginner’s guide to investing in NPS’ that appeared on BusinessLine on September 21, 2020, is an excellent article. I clearly understood the subject.

Aravind Kumbakonam

In ‘How work from home can impact your tax outgo’ that appeared on BusinessLine on September 21, 2020, what the authors seem to underplay is that rent and travel cost to office are savings for employees and the tax benefit is 10 per cent, 20 per cent and 30 per cent of these expenses. Hence, the overall savings are larger during WFH if, and only if, one continues to have a job or has not faced a cut in salary.

Good employers remind employees to update their tax exemptions on a monthly basis. Also, HR in great companies are aware of whether employees have moved away to their homes outside the cities that the companies operate in.

I am not accounting for small costs such as spend on clothing or maintenance of vehicle as these may be offset to some extent by higher electricity and consumables (food, coffeetea, milk) consumption at home.

Not to speak of the potential therapy costs from limited personal interactions other than with members at home.

Ravi Shenoy

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How work from home can impact your tax outgo

Personal Finance

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The Covid-19 pandemic has triggered radical changes for all, especially for the employee workforce.

The combination of the pandemic fallout and the advances made in technology has led to a sharp rise in work-from-home arrangements for employees, employees working from residences near their office locations or from their home town, making work-from-home now the new normal.

With the new working arrangements come new processes, challenges and situations. Unfortunately, existing tax reliefs/exemptions are not inclusive enough to cover the new normal unless there are specific amendments or clarifications. Further, the current salary structures are also aligned to existing tax provisions to optimise tax breaks for employees. Thus, with the new normal having not been envisaged, there is the possibility of increased tax outflow for employees.

As per current tax laws, salary and allowances from the employer are taxable unless specifically exempted.

Certain allowances/reimbursements such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are exempt from tax as per specified limits, subject to actual expenditure under the old tax regime.

With the new normal, employees are required to work from home, and it is difficult to go on vacations and there is also limited travel for commuting to work. Thus, it is not possible for them to expend money for the designated purposes, making it imperative to understand tax implications in such situations.

Impact on exemptions

In cases where employees pay rent and if specified conditions are met, HRA exemption can be claimed as per defined limits under the old tax regime. The HRA exemption is based on various limits — defined as a percentage of salary, HRA received, the actual rent paid and location of accommodation.

One of the defined limits is based on the place of the rented accommodation; for metro cities, the specified limit is 50 per cent of the basic salary and for other cities, it is 40 per cent.

Considering the new normal, to save on unnecessary expenses, employees have vacated their rented houses and moved to their home town or to another house with lower rent. Thus, if employees are no longer paying rent, HRA received will be fully taxable. Further, if employees are paying lower rent and/or there is a change in place of accommodation from metro to non-metro, the quantum of exemption available will substantially decrease.

Further, LTA shall be exempt to the extent of actual expenses incurred in respect of two journeys performed within India in a block of four calendar years under the old tax regime.

The current block runs from 2018-2021. If an employee does not use their exemption during any block, their exemption can be carried over to the next block and used in the calendar year immediately following that block.

However, as employees and their families are not able to travel due to the pandemic, any travel plans in the future looks limited.

Hence, some employees may need to claim LTA as a taxable allowance.

Some employers have extended additional support to make work-from-home arrangements conducive. Some of the common supports extended are furniture (table, ergonomic chairs), increased utility (electricity, internet), etc. However, in the absence of specific provisions, the tax implications of such extended support will also have to be evaluated basis the exact arrangement.

True-up

It is a normal practice for employers to deduct tax on salary every month based on estimates of rent and other investment details submitted by the employee at the start of the year (ie, in April 2020 for the current financial year).

Subsequently, towards the year end, the employer verifies the declarations made by the employee as supported by actual declarations and considers a true-up for excess/ short tax withholdings.

Therefore, it is important for employees to update the employer on any change in declaration given at the start of the year (such as changes in rent paid, city of accommodation, etc) so that necessary true-up adjustments in tax withholdings can be factored in the remaining months.

Else, there could be substantial cash flow challenges for employees.

The writer is Partner, Deloitte India. With inputs from Jimish Vakharia, Senior Manager, and Reena Poddar, Manager, Deloitte Haskins & Sells

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How new margin rules impact you

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The Securities and Exchange Board of India (SEBI) has mandated upfront collection of margins in cash segment, like in the derivatives segment, and brought about changes in the way securities are being taken as margins.

In a circular issued last week, SEBI clarified that the upfront margin requirement includes ‘other margins’ in addition to value-at-risk (VaR) margin and extreme loss margin (ELM).

This means the applicable margin rate can at times be more than the 20 per cent that was announced earlier, depending on the security and its volatility.

And if investors opt to satisfy the margin obligation by offering securities they own, they should be pledged beforehand for expanded margin limit.

Upfront margins

Upfront margins are the minimum amount of fund or securities required to initiate a trade.

Now, the regulator has clarified that brokers should collect total margin upfront, ie, VaR, ELM plus other margins wherever applicable to penalties. Margin requirement can vary for each stock.

Consider this example. The applicable margin rate for the stock of HDFC Bank is 17.2 per cent (VaR 13.7 per cent, ELM 3.5 per cent, other margin is zero), whereas for the stock of Indiabulls Housing Finance, it is 61.5 per cent (VaR 43 per cent, ELM 3.5 per cent, other margin 15 per cent).

In the above scenario, even though the applicable margin rate for the stock of HDFC Bank is 17.2 per cent, investors should maintain 20 per cent if they wish to trade, ie, the margin obligation for the investor for a trade worth ₹1 lakh is ₹20,000. In the case of the Indiabulls stock, the required margin to execute a trade worth ₹1 lakh is 61.5 per cent, ie, ₹61,500.

In addition to the above, is the MTM (mark-to-market) margin, ie, margin to compensate unrealised loss, if any.

Margin pledge

Not only cash, investors can offer securities to fulfil the margin requirements. But under the new ‘margin pledge’ system, the limits will be increased only after the securities are pledged.

In the earlier system, prior pledging was not required.

The securities held by investors in their demat account were considered as margin by default, against which fresh trades could be executed.

Here, the brokers used the power of attorney (PoA) to move the shares as collateral from client demat account to their own demat account through title transfer.

The entire process was seamless and happened in the backend without the investor having to involve in the process. In the new system, in order to get additional margin against the securities they hold, the process should be initiated by investors through their demat account.

For instance, assume that an investor has funds worth ₹1 lakh and stock holdings worth ₹1 lakh in her demat account. Suppose if this investor wishes to initiate a trade which required an upfront margin of ₹1.5 lakh, in the earlier system — the trade will be executed as the broker will provide the margin by taking stocks worth ₹50,000 as collateral.

The whole process was done automatically. This has changed now. If the same investor wishes to execute a trade worth ₹1.5 lakh, the investor should pledge the shares worth ₹50,000 and enhance her limits to ₹1.5 lakh before initiating the trade.

Else, the new trade will not be executed.

Pledging process

Unlike in the earlier system wherein the pledging was initiated by brokers, the process is now initiated from the investor-end. That is, if an investor wishes to pledge securities to enhance the margin limit, it should be initiated from their own demat account. The investor will receive instructions from the depository (CDSL or NSDL).

Verification is done by following the instructions received, and the request for approval of pledging is made through an OTP (one-time password) verification.

If successful, the securities will be pledged, against which the investor will receive the additional margin facility. This margin can be used in cash as well as derivatives segment. Leading depository Central Depository Services (India) Ltd (CDSL) recently reduced the charges for margin pledge and unpledge. It has been reduced from ₹12 to ₹5 per request made by investors.

This cost, however small it may be, is additional burden for the market participants who opts to meet margin requirements by pledging.

Pros and cons

The upfront margin requirement rules will mean investors will now have to bring in more capital or increase margin limit for the same amount of transaction. This essentially brings down the return on investment.

And whenever the applicable margin rate is increased, investors will be required to provide additional funds or securities to satisfy the increased margin obligation.

However, more capital or margin requirement means lesser leverage and less room for over-trading, possibly bringing down losses and transaction costs.

Coming to the new pledging system, investor will have a greater control over leverage and can become more disciplined as prior planning of margin is required. And importantly, the prohibition of transfer of securities out of the investor demat account means there is no way of misuse which has been at the heart of the Karvy debacle.

Operational complexity has gone up as the investor need to follow certain procedures before the requested additional margin is made available. This can take time, and market participants looking for short-term opportunities might miss out on the trend.

And of course, there is a cost for pledging.

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