How to get your home loan rate lowered

When Delhi-based Mahendra Gupta opened the recent letter from the housing finance company, there was both good and bad news for him. The dismal bit of information was that the 20-year home loan he had been repaying since 2008 still had 22 years to go. Despite four years of regular repayments, the loan tenure had been extended because of the rise in the home loan rate from 10.25% in 2008 to 13% now.

The good news was that Gupta's lender was ready to convert the loan to a lower rate if he paid a one-time conversion fee. He paid Rs 7,300 and got the interest rate lowered to 10.5%. "My loan tenure came down from 272 months to 166 months. It was a straight gain of almost nine years," gushes the 35-year-old.

Gupta can consider himself lucky. Not every lender offers its customers this option. Worse, very few keep their customers updated about changes in interest rates or how they impact their repayment schedules.
Most banks just go by the wording of the loan agreement, which says the lender can increase the rate and accordingly extend the repayment tenure. If the term cannot be extended, the bank raises the EMI amount or asks the borrower to pay a lump sum.

Be a proactive borrower
You need to be proactive about your loan repayment and check the interest rate you are being charged. When the base rate was introduced, home loan customers thought they would get more transparent deals from their lenders.

However, many banks continue to discriminate between old and new customers, charging the existing ones a higher rate than that being offered to new borrowers.

If you are being charged a higher rate, ask your bank to convert it to the rate applicable to new borrowers.

Don't assume your bank will not listen to your request. A slowdown in growth and intense competition in the housing finance sector have pushed banks to the wall.

Home loan growth slowed down from 15% in 2010-11 to 12.1% in 2011-12.

More importantly, the RBI has abolished the prepayment penalty levied by banks and housing finance companies. So, shifting to another bank is not as costly as it used to be.

"The RBI move has boosted borrowers' ability to negotiate," says Kapil Narang, chief operating officer, Ameriprise India, a financial planning firm.

Banks are willing to negotiate, especially if the borrower has a good repayment history. If a bank refuses to budge, a mild threat of shifting the loan to another lender can work wonders.

"There are instances where banks have offered to cut rates when the clients expressed their intention to transfer the loan to another bank," says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm.

Balance tenure is crucial

Keep the remaining term of your loan in mind when you sit at the negotiating table. When Gupta got his interest rate converted to 10.5% from the earlier 13%, his tenure of 22 years and 8 months was cut down by 8 years and 10 months. Remember that if your loan has less than 10 years to go, the benefit may not be as spectacular. As the table shows, the benefit progressively reduces if your balance tenure is lesser.

A 1.5 percentage point cut in the rate will shave off nearly five years from a 20-year loan, but it will reduce the tenure by just 1 month if the loan has only five years to go. Since you are paying a conversion fee upfront, the change may not lead to any significant gain. Go for it only if the reduction is at least 2 percentage points and your loan has more than 10 years to go.

Cut the tenure, not the EMI

When the interest rate on your loan is lowered, don't make the mistake of reducing the EMI. It's a tempting thought because it eases the pressure on your monthly budget.

However, lower EMIs mean longer tenures and higher interest costs. Instead, bring down the tenure of the loan. "Our standard advice is to avoid reducing the EMI amount. As far as possible, one should opt for cutting down the loan tenure," says Patel.

Only if you genuinely find it difficult to pay the EMI, should you opt for a lower instalment.

This is especially true of individuals who have taken a large home loan on the basis of a projected income, but have not got the kind of pay hikes they expected.

Also, double-income families, where one spouse has lost a job or stopped working, may find this option useful.

Besides, you should check if the new rate that is being offered to you is linked to the base rate of the bank. Make sure it is not a promotional rate that is being offered to new customers. Banks offer low rates to attract customers but hike the rate after 2-3 years. Since home loan tenures are typically 10-15 years, don't go by just the short-term benefit offered on the loan. The loan agreement should clearly specify the spread between this rate and the bank's base rate.

The cost of change

Don't think you can opt for a new and lesser interest rate for free. This conversion entails a minor cost, with banks charging 0.5-1.5% of the outstanding amount (see graphic). It is also a fairly straightforward procedure, which can be completed with one visit to the bank branch.

However, switching to a new bank is a lot costlier and requires more paperwork. Even if your previous lender does not levy a prepayment penalty, the new lender will demand 0.5-1.5% as processing charges. There is also the convenience aspect. You will have to go through the entire process of submitting documents-proofs of income and identity, and PAN card, etc. Therefore, do a cost-benefit analysis before deciding to convert or switch to another lender.(ARTICLE FROM LEADING NEWS PAPER)

When and how much tax is deducted at source?

Caution teaches us to never count our chickens before they are hatched. When it comes to income tax, you shouldn't be too sure even after they've been hatched because the taxman is quite likely to walk away with some.Whenever you invest your hard-earned money or make a profit, don't assume that you will be entitled to receive the full amount or returns. The taxman is waiting to snip away at your earnings, and to make sure you don't turn into an evader, knowingly or unknowingly, the tax will be cut at source, even before you get the money.

The tax deducted at source, or TDS, as it is more commonly known, is applicable on earnings from various financial instruments, which range from the interest earned from bank accounts to rental income. Here's a guide to help you know when TDS is applicable.

When is tax deducted at source?

There is no uniform rate for TDS. The amount of tax deducted depends on the source of earnings. So, it can range from 1% for sale proceeds from selling a house, to 30% for winnings from a horse race. Here's a look at how much TDS is cut from your earnings.

Salary

This is probably your first brush with TDS. At the beginning of the financial year, or when you join a new organisation, your employer will ask you to fill an investment declaration form. This will include the maximum tax deductions allowed under Sections 80C, 80D and other tax-saving instruments. If, despite all these deductions, your salary is above the exemption limit, TDS will be cut from it every month.

Lottery winnings
Money won in a lottery, puzzle competition, reality show or a horse race is subject to the highest TDS rate of 30%. "If you win Rs 50 lakh in a game show, you will only be able to take home 70% of your winnings or Rs 35 lakh," says Homi Mistry, partner at Deloitte Haskins & Sells. The TDS is applicable even on non-cash winnings. So, if you have won a car worth Rs 10 lakh, you will only be able to claim it after you pay Rs 3 lakh as tax.

Bank accounts
Two years ago, 37-year-old Arun Tilwankar, who runs a pharmacy in Hyderabad, opened a bank fixed deposit with Rs4 lakh. His aim was to build a corpus that he could use to overhaul his shop's software system. To his surprise, the maturity value that he received this year was less than that he had expected. Tilwankar's mistake was that he did not take into account the TDS that is applicable on interest earned from bank fixed deposits and savings accounts.

If the interest you have earned from your bank FD is above Rs10,000, you will receive it after the bank deducts tax. This exemption limit also applies to interest earned from a bank savings account. Don't think you can outsmart the taxman by opening accounts or FDs in different branches.
"Customers tend to avoid TDS by splitting fixed deposits at various branches, but they cannot avoid paying taxes. The TDS process in banks is centralised as we have core banking in place. A uniform ID is given to the customers based on their PAN numbers, which helps us track the total interest they earn from various fixed deposits across branches," says S Govindan, general manager, personal banking, Union Bank of India.

 

Property

Whether it is rental income or the money that you get after selling a house, you will receive the final amount only after tax is deducted. However, you can avail of exemptions in both cases. If the rent you receive is less than Rs1.8 lakh a year, no tax is deducted at source. Beyond this limit, 10% of the income is cut as TDS. However, the advance deposit paid by the tenant is not taken into account for this limit.

It's possible that there is more than one owner of the flat and that all of them share the rental income. The benefit of the exemption limit will depend on the type of ownership, whether it is joint or co-owned. "In case of co-owners, where the specific share of the property has been decided, the limit of Rs 1.8 lakh can be claimed separately by each owner.

However, joint owners, who don't have a clear demarcation of share in the property, can't claim this exemption separately," says Suresh Surana, co-founder and director at RSM Astute Consultants, an accounting and auditing firm.

If you are selling a property, the tax will be deducted at the rate of 1% if the deal is above Rs 20 lakh in a rural area, while in urban areas, the limit is Rs50 lakh. This will be applicable from October this year.

Superannuation fund and debentures
If you withdraw money from a superannuation fund, it is added to your income, and if your total income is above the taxable limit, TDS will be applicable on the amount withdrawn. "However, this does not apply if the money is received when the beneficiary retires or in case of his death," says Mistry. In the case of debentures, interest income up to Rs 2,500 is exempt from tax deduction. From July, this limit will be enhanced to Rs 5,000 and the interest earned above this limit will be subject to TDS at 10%.

Gold and silver
To keep a check on the circulation of black money, the finance minister recently announced in budget 2012 that from July onwards, cash used to buy bullion worth more than Rs 2 lakh will have to pay taxes upfront. Adds Mistry: "If you buy gold or silver exceeding Rs 2 lakh, the seller will collect 1% tax from you at the time of purchase."

How to save on TDS
You can take advantage of some provisions in the Income Tax Act, which will help you reduce your tax liability. For instance, no TDS is applicable on the interest earned from a recurring deposit. So, if you want to build a corpus and can invest monthly, open a recurring deposit rather than an FD. However, once you receive the maturity amount, it will be added to your income and you will have to pay tax on it.

If your income is below the taxable limit, but the interest earned from your deposits is above Rs 10,000, you can request your bank not to cut tax. "For this purpose, you can submit form 15 G and 15 H (for senior citizens) to the bank at the beginning of the financial year," says Govindan. You can ask for this form when you open an FD at a bank.

What to watch out for
"It is a myth that if TDS has been paid, you needn't take that income into account. TDS should be considered as an advance tax payment. When you file your return, you have to calculate the total income and the tax bracket you fall under, to determine the balance tax to be paid. So if you consider TDS for rental income, it doesn't mean that you exclude this income from your return. If your income is taxable, you will have to pay the differential tax," says Surana.

Also, don't think you can avoid paying taxes by not declaring your permanent account number (PAN). If you fail to do so or mention it incorrectly, the TDS rates in case of bank deposits will be applicable at a higher rate of 20%. Also, do not misuse the form 15 G/H facility or you will be penalised.

Keep track of the TDS that you have paid through Form 26AS. All the taxes that are cut on your behalf by a bank, an individual or an organisation are listed in this form, which is also called the annual tax statement. Ensure that there is no mistake in the TDS amount or any missing taxes, otherwise it would be considered unpaid by the income tax authorities.

A second house can reduce your tax burden

In 2005, Mitul Vora, a marketing executive with an auto company, took a Rs 8 lakh loan for 15 years to buy a house in Gandhidham, Gujarat. Currently, he is paying an EMI of Rs 8,700. However, a year later, Vora switched jobs and shifted to Ahmedabad.

Instead of renting a place, he bought another house, again through a home loan of Rs 20 lakh for 20 years, for which the EMI is about Rs 20,650. "I could have sold the house at Gandhidham to fund the second purchase, but didn't do so because I'm sure the value of the property will appreciate in a couple of years," says 43-year-old Vora. Instead, he has leased the first house at an annual rent of Rs 84,000.

However, the high interest rates are making it difficult to service both the home loans. "I come under the highest tax bracket and have to pay 30% tax on my income, which makes it difficult to save enough to pay both the EMIs," he adds. What Vora doesn't know is that he can reduce his tax liability if he avails of the deduction on home loans, especially in case of the second house.

Exemption on interest

In case of a home loan taken for a self-occupied property, the principal amount repaid up to Rs 1 lakh qualifies for deduction under Section 80C, while up to Rs 1.5 lakh of interest paid is taxdeductible under Section 24.

However, in case of a home loan for the second property, only interest payment is eligible for deduction. No tax benefit is available on the principal repayment on the second loan. However, the good part is that there is no limit on the deduction for interest payment on the second loan (see Benefit of buying a second house). This is because the second house has been given out on rent, explains Adhil Shetty, chief operating officer of Bankbazaar.com.

According to Homi Mistry, partner, Deloitte Haskins & Sells, a property owner can avail of tax benefits on the interest paid on multiple home loans. "Whether the second house is purchased purely as an investment option or as a weekend getaway, the interest paid on a loan taken to buy it is tax-deductible. Since the interest payment is a large expense, you can add significantly to your disposable income if you can save on it," says Mistry.

In case the house is yet to be constructed, 20% of the total interest paid during the preconstruction period is also allowed as tax deduction. This is available for five years from the time the construction is complete till you get possession.

Deductions allowed on income from second home

Even if the second house is lying vacant, the Income Tax Department will consider that it has a rental value. The notional or deemed income (see How income is computed) will be added to your taxable income.

Sonu Iyer, tax partner, Ernst & Young, says, "A buyer can deduct expenses, such as municipal or property taxes actually paid, from the deemed income. Other than this, 30% of the net annual value, which is the difference between the rental income and municipal taxes, is also allowed as deduction. In case the house is rented out, 30% of the actual rent can be deducted from the taxable income, apart from deductions for local and municipal taxes."

After deducting such expenses from the income that you earn from the property, if you incur a loss, you have the option to set it off as follows:

. The current year's loss will first be set off against any other income from property.

. It can also be set off against other incomes, such as that from salary, business or profession and capital gains, earned in the current year.

. If your balance continues to be in the red, you can carry forward the loss for up to eight years. However, the amount that is carried forward is only allowed to be set off against the income that is earned from a house.

How to save on taxes

If you own several houses, you can choose one as your primary residence. The income from this property will be treated as nil and exempt from tax, even if you have actually rented it out. It is for this house that the limit of Rs 1.5 lakh applies for deduction on loan interest.

The entire interest on the loan taken for the other house, the income from which is taxable, can be deducted from your income. This applies to any number of nonexempt houses that you may own.

So, to maximise your savings, consider the house with the highest loan as the non-exempt one. However, make sure that the interest payment on this loan is higher than the principal-cum-interest payment on the other loan.



Additionally, if you give your second house on rent for more than 300 days in a year, it will not be subject to wealth tax, which is levied at the rate of 1% on wealth that is in excess of Rs 30 lakh.

 

 

If any of the houses is sold after three years, the profit will be taxable as long-term capital gains. However, there are beneficial provisions under which this gain is exempt from tax. So if you invest the money to construct a house within three years or buy another house within two years, your income will be tax-exempt.

However, the exemption is reversed and the amount taxed as capital gain if the new property is sold within three years of being constructed/purchased.

This will be considered a short-term gain and taxed according to your slab rates. You can also save tax if you invest the profit in a special bank account under the capital gain account scheme. A similar exemption is available for investments of up to Rs 50 lakh in bonds, which are redeemable after three years. This investment should be made within six months of the sale.

 

Article from one of the leading news paper

Akshaya Tritiya: Does it make sense investing in gold? -From News paper

Reserve Bank of India governor D Subbarao has gone all out to discourage gold investments as record imports of the yellow metal are adding pressure to the rupee.

Diehard equity fans criticize the absence of any intrinsic value in gold and its susceptibility to theft is a constant worry for its owners. After providing 25% annualized returns over the past five years, gold has depreciated 4% in recent months. Given this background does it make sense investing in gold?

According to experts, the answer is yes, but only by way of insurance against other asset classes falling apart. "It is our opinion that the recalcitrant inflation and moderate performance in equity and debt asset classes may prompt many retail investors towards gold as an asset class," says Lakshmi Iyer, head of product and fixed income, Kotak Mutual Fund.

She adds that the latent volatility in the forex market, and the possible monetary expansion in the primary currencies worldwide, may also boost the gold performance prospects. But it is a bad idea if you believe that gold can be an alternative to other assets such as equities and fixed income.

"As long as you are not looking for short-term gains, we have always held the view that investment in gold should be part of a well diversified portfolio," says Kapil Narang, chief operating officer Ameriprise India. He adds that gold is seen as a hedge retaining value at times when other asset classes go through volatility.

The record 30% rise in gold prices over the last year is precisely the reason why financial planners are recommending that investors do not make any big bets on the yellow metal.

"We have gone past that stage when gold could be recommended as a tactical investment. Now we would typically advise an investor to have 5% gold in their portfolio purely as a hedge against inflation as price of the metal moves in line with inflation," says Aditya Apte, partner at The Tipping Point, a financial advisory firm.

He adds that for those who have already chosen to have an asset allocation of say 10% of their portfolio in gold and now with the increase in prices the share of gold has gone up to 15%, they could look at selling some gold and increasing the share of those assets whose value has shrunk.

While this makes a case for continuing to invest in gold, the bad news for women is that they cannot look to buying gold jewellery and treating that as an investment. "The "making charges" in gold jewellery and the deductions during resale do not leave much scope for buying jewellery as investments," says Apte.

He adds that even if one were accumulating gold for a future requirement like marriage, it would make sense to buy the metal in electronic form through exchange traded funds, a form of dematerialized gold. "Even if gold were purchased in bullion form there is still a margin between the sale and repurchase price. The best option is to invest in ETFs and upon requirement the ETFs can be sold and the proceeds used to buy physical gold."

 

ETF as an investment has caught on very well with the number of accounts rising to 4,28,769 in September 2011 from 1,47,047 in March 2010, indicating a growth of almost 192%. Total amount of gold held by ETF AMC has gone up from 19 tonnes in March 2011 to 28 tonnes in September and 33 tonnes in December 2011, an increase of 74% in nine months.

Seeing the popularity of the gold ETF, the National Stock Exchange (NSE) has decided to have an extended trading session for gold exchange traded funds, after trading concludes in the cash and derivative segments at 3.30 pm, on Akshaya Tritiya April 24 (Tuesday).

While trading can be done on gold ETFs in the normal market hours from 9.15 am to 3.30 pm, trading in gold ETFs will resume at 4.30 pm on April 24 and will continue till 8 pm, to give an opportunity to investors to invest in the yellow metal till late in the evening. There will be no transaction charges for trading in gold ETFs on Tuesday.

GOLD 86 Years chart -10Gram