Meaning of Base Rate and Spread-Home Loans and Car Loans

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

It is commonly believed that if Banks are offering you the home loan at 12% means it is the total interest they will collect and calculate on your loan. But it is not like that. Your interest on loan consists of two parts. One is Base Rate and another part is Spread. So let us look at each part and how each can affect your EMI.

1) Base Rate:-It is the new system of  setting bank’s basic interest rate which was started from 1st July 2010. It replaced the old method of charging Benchmark Prime Lending Rate (BPLR). In simple words you may say that it is the minimum rate, below which Banks cant give you loan (exceptions are Agricultural Loan and Export Credit). It is reviewed on quarterly base. But it is not mandatory that all banks must have same base rate. Advantage of Base Rate over BPLR is transparency. It is calculated considering the below factors. But highest weightage  is given to Cost of Deposits.

A) Cost of Deposits, B) Negative carry on CRR and SLR, C) Unallocatable  overhead costs, D) Average Return on Networth.

It is the benchmark for all floating rate loans except loans which have tenure of one year. RBI not made it mandatory to follow Base Rate for loans of below one year. But for this sub Base Rate loans too RBI put some strict ceilings.

2) Spread-This is your final rate of interest after adding some % to Base Rate. It is calculated based on the tenure risk, credit loss, profit requirement of bank, operating cost of the bank and risk assigned with individual customer. So each bank’s Base rate may be fixed for all customers. But remember that you may end up with either paying high interest rate or low based on the spread bank charges to each individual. Their is no cap on how much should be spread on and above Base Rate. But charged spread need to be justifiable. Hence your banks may use this tool to charge you more by modifying spread as no regulation on this. Eventhough RBI says spread must be constant over the period of loan but remember to check it whenever the raise in your loan EMI. You need to verify whether the raise in EMI is due to hike in Base Rate or Spread.

Hence while looking for loans always better to check two things from your bank, what is their base rate and spread rate. Also the guidelines Banks follow to calculate the spread and how often the possibility of change in spread. I am clarifying that even though base rate and spread are the part of other type of loans too, I wrote this post concentrating on home loan and car loan.

Salary definition for calculations of Gratuity,HRA, EPF and Leave Encashment

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

Salary consists of so many components like Basic, DA, HRA, Bonus, Commission, Allowances and Perquisites. But while calculating Gratuity, HRA,  EPF and value of perquisites for rent free/concessional house we need to consider  only few components of salary. So let us look into detail about those considerations.

1) Salary definition for Gratuity

A) Gratuity covered under Payment of Gratuity Act 1972-For this purpose salary means only Basic salary and Dearness Allowance (DA). No other salary components will not be considered for calculaiton.

B) Gratuity not covered under Payment of Gratuity Act 1972-For this purpose salary means  Basic salary, Dearness Allowance (DA) and Commission (if paid as a % of turnover).

Remember while considering salary in the case of  (B) Gratuity not covered under Payment of Gratuity Act 1972 DA need to be considered only if it is forming part of retirement benefit otherwise not to consider. Also Commission should be in the form of % of turnover not lump sum payment.

2) Salary definition for House Rent Allowance (HRA)-For calculation of House Rent Allowance (HRA) you need to consider Basic Salary, Dearness Allowance(DA) and Commission (if paid as % of turnover).

Again in this case too DA need to be considered if it is forming part of retirement benefit otherwise not to consider and Commission also need to % of turnover.

3) Salary definition for Employee Provident Fund (EPF)– For calculation of salary components under employer’s contribution towards recognized provident fund too we need to consider the same salary components of HRA i,e Basic Salary, Dearness Allowance(DA) and Commission (if paid as % of turnover). Also the above said conditions of considering DA and Commission too will apply here also.

4) Salary definition for Leave Encashment-In this case also you need to consider the same salary components as you considered for HRA and EPF.

5) Salary definition for rent-free/concessional house perquisite valuation-Below salary components are considered while calculating the valuation of perquisite.

a) Basic Salary;

b) Dearness Allowance (if terms of employment so provides);

c) Bonus;

d) Commission;

e) fees;

f) All taxable allowances (excluding amount not taxable); and

g) any monetary payment which is chargeabble to tax (by whatever name called).

But it does not include-DA if not considered for retirement benefits, employer’s contribution to provident fund account of an employee, all allowances which are exempt from tax, any lumpsum amount received like Gratuity, Leave Encashment, VRS or Commutation of Pension and value of perquisites (under section 17 (2)).

Hope I simplified the Salary definition for the calculation of above facilities.

Difference between A Khata and B Khata-Bangalore Property

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

Few days back I came across the question from one of my friend and client who is interested to purchase land and that land is of B Khata. He asked me is it good to have this property with B khata and what is the difference between A Khata and B Khata. So just thought to write up on this issue.

First let us look at what is meant by “Khata” according to BBMP (Bruhat Bangalore Mahanagara Palike). Khata is an account of assessment of a property, recording details about your property such as size, location, built up area and so on  for the purpose of payment of property tax. It is also a kind of identification of the person who is primarily liable for payment of tax.  It is required when you require a building license, trade licence or loan from banks or any other financial transactions. It is mandatory for all property owners to pay property tax, hence you need to have khata.

Now difference between Khata and Title Deed is, khata is an account of assessment of a property for payment of tax only. Hence khata will not confer ownership of property. Whereas Title Deed is the valid document which confer ownership on property.

Let us look at the reasons behind the origin of A Khata and B Khata lands. In 2007, those under the seven City Municipal Councils (CMC) of Bommanahalli, Dasarahalli, Krishnarajapuram, Raja Rajeshwari Nagar, Mahadevapura, Byatarayanapura, Yelahanka, one Town Municipal Council (TMC) of Kengeri and 110 villages, were brought under the fold of the Bangalore Mahanagara Palike (BMP). Following this expansion and creation of the Bruhat Bangalore Mahanagara Palike (BBMP), those who did not have appropriate approval from the concerned land development authority and yet to come under the ambit of the Palike were issued an acknowledgment which was in common parlance known as ‘B’ Khata.

However, in reality, ‘B’ Khatha does not exist. Property identification numbers are entered into a register called as  ‘B’ register stating that the civic agency has been paid its dues by the property owners. For citizens in need of an approval from the appropriate land development authority but have a Deputy Commissioner (DC) conversion, the BBMP re-introduced Betterment Charges which will entail people to take a Khata on their property. This is how B Khata originated in the mind of property owners but not legally 🙂

Now the disadvantages of having B khata is that, you will not get building license, trade licence or loan from banks or any other financial transactions. Hence it is big hurdle to have B Khata land. Now what are the ways of converting B Khata land to A khata?

By paying betterment charges you can convert B Khata to A Khata. But you will face lot of hurdles, few of them are as below.

1) You should have DC converted property

2) Tax must be paid till date

3) Betterment charges for the conversion property need to paid to BBMP.

So the solution is to avoid purchasing B Khata properties and prefer A Khata to have comfortable position in dealing future financial transaction hurdles.

LIC’s Jeevan Vaibhav-Review

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

LIC is launching one more Single Premium plan on 21st May 2012. Looks like all insurers on launching spree of single premium plans.  Now let us look at it’s features and what is new in it. It is a single premium plan and closed ended plan. It will be available for 120 days from May 21st 2012. It is non-linked insurance plan (non ULIP).

Eligibility Conditions:-

1) Minimum Age-8 Years

2) Maximum Age-65 Years

3) Mode of Payment-Single Payment

4) Minimum Sum Assured-Rs.2,00,000 and Maximum no limit

5) Minimum Premium-As being Minimum SA is Rs.2,00,00 so Minimum Premium Payment will change for each age group (for example for 8 years old Single Premium will be Rs.95,210 excluding taxes and for 65 years old Single Premium will be Rs.1,06,280 excluding taxes)

6) Policy Term-10 Yrs

Benefits:-1) Death Benefits

On death during the policy year excluding the policy year i,e 10 year you will receive Sum Assured.

On death during the policy 10 year, you are eligible for Sum Assured along with Loyalty Addition.

2) Maturity Benefit

On Maturity Sum Assured along with Loyalty Addition will be payable.

3) Loyalty Addition

It depends on LIC’s experience which you cant expect now exactly.

Loans-Loan can be granted after the one policy year subject to the maximum of Surrender Value (remember not the premium you paid). Loan interest rate is 10.25% Compounding Half Yearly.

Surrender Value- 1) Guaranteed Surrender Value- You are eligible for 90% of the premium you paid after the expiry of one year but excluding extra premium if you paid any.

2) Special surrender value will be payable, if it is more favorable to the policyholder.The Special Surrender Value will be the discounted value of the Sum Assured. The discount factors shall be the special surrender value factors used for LIC’s Endowment Assurance plan, which will depend on the policy term and the duration elapsed since commencement of the policy. The Special Surrender Value factors per Rs. 100 Basic Sum Assured for duration 1 and 1.5 years are 44.52 and 45.97 respectively

My Review:- In plain it looks like previous single premium plan of LIC’s Jeevan Vriddhi. But in reality you may find lot of  differences.

1) Maturity benefits and Death Benefits- In Jeevan Vriddhi Maturity Sum Assured was guaranteed but here it depends on LIC’s Loyalty Addition declaration which you cant predict.  Death Benefit too looks not attractive, usually in non linked plans you will get Sum Assured along with Bonus till the date of the death. But in this plan only Sum Assured will be payable if death occurs within 9 years of policy term as only Loyalty Addition is attached with this policy. Instead if death occurs during 10th year then you are eligible for Sum Assured along with Loyalty Addition. So big drawback of this policy is death benefit you will get before 9th year of policy.

2) Returns-Let us consider Insured age as 30 yrs and for this age tabular premium will be Rs.463.417 for Rs.1,000 Sum Assured (Excluding applicable taxes). So if he opts for Rs.10,00,000 Sum Assured Plan then he need to pay a single premium  of Rs.4,63,417. In this case your life risk will be Rs.10,00,000 and returns on death claim too same till the 9th year of policy. Now in this we will exclude the premium which you will be paying towards your life risk coverage of Rs.10,00,000. For that as usual I consider LIC’s Term Plan Anmol Jeevan for 10 yr period. So premium for this term insurance is Rs.2,564 yearly. Now after deducting this amount from the single premium you are paying Rs.4,46,213  (For this I considered whole 10 year term plan payment being invested now in a 8% returning avenue then today you need to invest Rs.17,204 to accommodate yearly flow of Rs.2,504 towards Term Insurance) . So for the whole 10 year your investment amount will be Rs.4,46,213. To generate returns of around 9% from this policy then Loyalty Addition LIC need to pay will be Rs.56,348 along with SA (Future Value with 9% CAGR is Rs.10,56,348). Will LIC deliver such a high Loyalty Addition after paying 2% agents commission and it’s policy expenses? Few may refer it as a Insurance+Investment Plan. But as the term of the plan being 10 years, will LIC issue same Sum Assured Term Insurance after 10 years without increase of Premium to the person who invest now in this plan? A big no, then forget about Insurance part attached with this plan and just purely think as how much you will get by investing.

3) Loyalty Addition-This is the major point you need to look for. Because your returns depend on this Loyalty Addition. Now let us look at the LIC’s history of Loyalty Addition payment. Loyalty additions hover from 40 to 60 for currently available plans. So you may not expect high and lucrative Loyalty Addition from this plan too.

4) Taxation-When you look for tax saving angle too, it lacks the current Budget modifications. To avail deduction under section 80C your premium should 10% of SA. So if you opt for Rs.10,00,000 SA then your premium should be within Rs.1,00,000 which is not possible from this policy.

Overall looks pathetic and LIC came up with this plan with sole intention of launching “Single Premium Plan”. You can easily get good returns by locking your investment in current high yielding Bank FDs for same 10 yrs and opting for Term Insurance till 60 years of your age (Remember not for 10 years because after 10 years you will not get the same life cover with same premium for what you will get now).

Why your Insurance Agent not sold you Term Insurance?

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

Today we will look for the reasons about why your insurance agent not sold you Term Insurance. Each true Financial Advisers recommending you to have it first to cover your life risk, but on the other side your Insurance Agents or Advisers are forcing you to buy the products which are Insurance+Investments where your will fail to cover your basic life risk to the fullest. It happened in past, is happening now and will continue in future too until investors awakes and ask 1000 questions for the reasons of recommending the particular product.  These are the few reasons which may forcing agents to be away from selling Term Plans.

1) Lack of Knowledge by Agents: When you ask agents about insurance, they usually have standard list of products which they used to sell on daily. Which makes them drawing their own comfortable level about products. When you ask about any older products or odd products, they totally not aware of those things. Primary reason for not having enough knowledge is, major chunk of insurance agents in India works as part time. Which will not let them to have enough time and patience to grab the desired knowledge.

2) Lack of Knowledge by Insurance seekers: Majority of people especially in India think that Insurance is a investment tool rather than a protective tool. It happened so due to no available avenues for investment in past. But presently when you have so many avenues to invest for then why you need to stick to the Insurance format where both insurance and investment mixed? It is also wrong thing to blindly follow your agents suggestion and signing the offer document without knowing the impact it will create on your future financial life. Yesterday itself I came across such a incident where one of my client asked my advise about investing yearly Rs.1,00,000 in any insurance products of one particular company. When I asked for reasons of his investments and choosing the particular company, he told he want to accumulate  some decent money after 10 years and major reason is he want to help the agent who is his friend’s mother. I simply asked him Rs.1,00,000 is what percentage of his yearly income?? He never calculated that too. Finally  advised him, if he really interested to help that agent then better to have term plan with that company. You will find such a cases regularly.

3) Earnings of Agents: When agent selling you the product which is Insurance+Investment, he have good opportunity to earn the handsome income. Like for example, if  he recommend you any Endowment Plan with the premium of around Rs.1,00,000 his income will be around Rs.25,000. This plan with such a high premium may cover your life risk around Rs.20,00,000. But if he sell you the same sum assured product i,e Rs.20,00,000 Term Insurance then premium may be around Rs.6,000. So by selling this Term Plan he will get the commission of around Rs.1,500 (25% of your premium). Then who will loose such a opportunity of selling Endowment Plan rather than Term plan??

4) Future business for Agents: When he sell you the Endowment plans or ULIPs and created your mindset such that insurance products are for investment, he have every opportunity to get continues business from you in the name of investment on regular base. So whenever their is a salary hike, increase in income or new family members entry (like birth and marriage) he uses such opportunities to generate his business. But when he convince you about the benefits of Term Insurance and sell you the product then you will not look back at him to purchase any insurance product for another 15 to 20 years. So he will loose the huge future business opportunity by selling you the term plans.

I think these are the major factors which led your insurance agents not recommending you Term Plans. Hope you now got bit of awareness and cover your life first. I will conclude this article with one example how even wrong media can create wrong perceptions about Insurance. Yesterday when I was watching the super, competitive, breaking news spreading, and unbiased Kananda news channel, they showed one line breaking news that they are airing the programme which is mainly about “INSURANCE INVESTMENT IDEAS”. Strange even few medias also think that Insurance is investment 🙂

LIC’s revised (2012-13) interest rates for Policy Loans, Revival and Dating Back

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

LIC revised it’s interest rate for various financial transactions like loan and dating back of policies for year 2012-13. Major change you look for is loan rate which is currently 9% changed to 10%.  Revival and Dating Back of policies changed from existing 8% to 9.5%. The details of the same are as below

Srl No. Type of Transaction Current Rate of Interest (%) Revised Rate of interest (%)
1 Policy loans (under all plans except Jeevan Aastha (Plan 195) and Jeevan Vridhhi (Plan 808) 9 10
2 Policy Loans under Jeevan Aastha (Plan 195) and Jeevan Vridhhi (Plan 808) 10.25 10.5
3 For policies issued on or after 1/1/1987 a) Arrears of premiums within 6 months from the date of FUP and b) For revivals 8 9.5
4 Arrears of premiums for alterations and age providing higher 9.5
5 Dating back of policies 8 9.5
6 Discount factor for a) Commutation of instalments under educational annuity policies, b) commutation of Income Benefits under Multi-purpose, Guaranteed benefits under annuity policeis and c) unpaid instalments under settlement options 9.5
7 Settlement options for Maturity Claims 6
8 a) Advance payment of premiums (for all plans except Jeevan Sneha (Plan 128) 5 6
b) Advance payment of premiums for jeevan Sneha (Plan 128) 10
9 Delayed payment of claims 11.5
10 Discounted value or accumulated value for calculation of Special Surrender Value under Jeevan Saral (Plan 165) 7.5
11 Accumulation of survival benefits under Jeevan Bharati (Plan 160) and Jeevan Bharati I (Plan 192) 4
12 Discounting of claims during the last year of policy term 9
13 Reinstatement of surrendered policies 10.5

For further clarification you can look for LIC’s circular of Actl/PS/2202/4 dated 28/04/2012

Do you know LIC’s Term Insurance Plans??

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

“Is LIC offer any Term Insurance Plans?” this is the common question which I face during my conversation with my clients when I recommend them to have Term Insurance Plan to cover their Life Risk. This is the situation we are facing due to lack of knowledge sharing and eagerness to sell the products rather than solution. So thought to have a look about the available Term Insurance products in LIC. I thought to speak in this article about LIC’s plans. Reasons are 1) It is India’s oldest Life Insurance Company 2) Major player in Indian Life Insurance industry with it’s huge penetration 3) Faith it generated among the people since long. This is the reason even today also after the private insurers entry into India since 2000, people believe in LIC. But will LIC folks retain this glory? Wait and watch the future 🙂

To proceed further let us look at the history about when LIC started to sell Term Insurance Products. Before the current available term plans Amulya Jeevan and Anamol Jeevan, LIC had term plans called Bima Sandesh and Bima Kiran. Bima Sandesh was the term plan with benefits as Death Benefit-Full Sum Assured payable and Survival Benefit-Return of Premium payable. Bima Kiran was the  improved version of Bima Sandesh,  Death Benefit was-SA+Loyalty Addition and Survival Benefit was-Premium Paid+Loyalty Addition. Currently Bima Sandesh and Bima Kiran not available. Now let us look at the available Term Plans from LIC.

1) Anmol Jeevan-This plan was started on 1-11-2003 with the need of pure term plan which was missing in LIC and this absent was the reason for private insurers to increase their business. This plan was pure term plan rather than any return of premiums or loyalty addition benefit. Main features are as below.

1) Minimum Age at entry-18 Years

2) Maximum Age at entry-55 Years

3) Maximum Maturity Age-65 Years

4) Minimum Term-5 years

5) Maximum Term-25 years

6) Minimum Sum Assured-5 lakh

7) Maximum Sum Assured (Effective from 27-02-2006)-24 lakhs.

Drawbacks are-You cant add any riders to it and as usual compare to private insurers premium is costlier.

2) Amulya Jeevan-This pure term plan was started on 18-02-2008 to cater the insurance need of high earning segment. Major features are as below.

1) Minimum Age at entry-18 Years

2) Maximum Age at entry-60 Years

3) Maximum Maturity Age-70 Years

4) Minimum Term-5 years

5) Maximum Term-35 years

6) Minimum Sum Assured-25 lakh

7) Maximum Sum Assured-No upper limit.

Positive point being age factor- entry and maximum maturity age which is increased compare to Anmol Jeevan. But drawbacks being same-No option to add riders and costly to private insurers.

3) Two Year Temporary Assurance Policy-This plan is suitable for insuring non-insurance minded class of lives who require risk cover for a short period of 2 years or less. Features of this plan are as below.

1) Minimum Age at entry-18 Years

2) Maximum Age at entry-60 Years

3) Maximum Maturity Age-62 Years

4) Minimum Sum Assured-3 lakh

5) Maximum Sum Assured-1 Crore.

6) Modes of Premium payment-Single only

7) Terms Allowed-6/12/18/24 months.

Drawbacks- Insurance for two years??  Proposer required to pay the medical examination fees.

4) The Convertible Term Assurance Policy-LIC shows this plan too as “Term Assurance Plans”. But I dont feel it as a pure term plan as the major aim of this plan is convert in future insured person into investing either in Whole Life plans or Endowment Plans. This plan rather suitable to people who started their carrier recently and unable to pay high premiums for whole life and endowment plans. By taking this plan they can cover their life risk now with lesser premium payment but later they need to convert this plan into Whole Life or Endowment Plans. After the conversion, premium will also raise. Hence this plan is not suitable to them who is looking for pure term plans.

These are the four plans which currently LIC offers. But LIC need to change it’s view on available Term Plans which lacks in competition comparison to-Price, Service, Agents activity to push for these plans and finally online term plans.

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