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Prepayment of Home Loan – Good Decision

Home Loan

April 5, 2012

Prepayment of Home Loan – Everyone has a dream of purchasing their own house, where one can live with peace and happiness. Many people can’t afford to purchase it due to the hefty price or may end up purchasing it by taking a Home loan.

Once you take home loan property is yours but you have a home loan as a big financial obligation. Every month you have to pay a considerable amount of money as EMI (Equated monthly installment).

E.g If you take a Home loan of Rs. 10 lakh for 20 years at an interest of 8%, you have to pay nearly Rs.10,500 per month. If you make a calculation you will end up spending a hefty amount of more than Rs.25 lakh this is due to payment interest on the principal.

At any point in time do you feel uncomfortable that you need to wait for a number of years to free your home from loan? Think of closing your home loan before it becomes a lifetime burden. One good way to close your home loan earlier is “prepayment”.

prepayment home loan

Prepayment of Home Loan – Good Decision

Prepayment refers to the act of repaying a loan, whether partially or in full, before the stipulated loan tenure. In the context of home loans, prepayment involves making additional payments towards the principal amount of the loan.

You need to find out the following information from your bank:-

(1) When you can start prepayment of your loan?

(2) Whether you can make part-prepayment or not?

(3) Any penalty is applicable on prepayment or not?

Once you have the above information you need to calculate the outstanding loan amount and how much repayment is possible for you.

Most banks do not impose any penalty but, if your bank has a limit of partial repayment you need to ensure that part-prepayments do not exceed this limit to avoid a prepayment penalty. If by any chance you need to pay a penalty charge keep in mind that this penalty should be much less than the interest value saved.

You can plan to make prepayment every quarter or half yearly based on your convenience. Every month start preserving some money for this. If possible follow discipline and make SPP – Systematic prepayment plan. This prepayment will bring down your outstanding loan and lead to saving on overall loan payments.

By prepayment like this, you can not only save on net interest but you will get ownership of your home earlier than planned. The longer the tenure more you will pay, hence it is a good decision to make multiple parts- repayments of home loan to shorten the tenure and to reduce interest burden. Provided you can manage the outflow of this prepayment comfortably from your current income.

Another way to reduce the home loan burden is to increase EMI. Banks usually cap a certain maximum limit on EMI based on your monthly income. So, the way out is to make part-prepayment.

Let’s take a small example of how much interest you can save when you prepay your home loan.

Mr.X has taken a home loan of Rs15 lakh for a loan tenure of 20 years @ 11 % interest rate. The EMI of this loan comes out to be Rs.15,696. If Mr.X does not opt for any prepayment he will end up paying Rs 15 lakh principal and net interest of Rs.22.67 lakh.

If Mr.X is a wise person like you and opts to pay 50,000 Rs/- every year towards repayment (total repayment of 5.5 lakh), the tenure of this loan will be reduced to 11 years and the net interest paid will be Rs 11.94 lakh. So actually Mr. X can save a hefty Rs 10.73 lakh which can help him build a good retirement corpus or may be useful for other needs.

Click Here to download excel sheet which will help you to calculate how much you can save by doing prepayment.

So due to prepayment, Mr.X could close the home loan 9 years earlier. He could save significantly on the interest part. The above table shows that by making a prepayment Mr.X could reduce the interest burden by 50 %.

Advantages of Prepayment

Reduced Interest Burden

One of the primary benefits of prepayment is the reduction in the overall interest burden. By making extra payments towards the principal, borrowers can lower the total interest payable over the loan tenure.

Shorter Loan Tenure

Prepayment allows borrowers to expedite the repayment process, leading to a shorter loan tenure. This not only saves on interest costs but also helps in achieving debt-free homeownership sooner.

Improved Credit Score

Timely prepayments demonstrate financial discipline and responsibility, which can positively impact the borrower’s credit score. A higher credit score can lead to better loan terms in the future.

Equity Buildup

Prepayment accelerates the buildup of equity in the property. As the outstanding loan amount decreases, the homeowner’s equity stake in the property increases, providing a sense of ownership and financial security.

Tax Implication

As per current Income tax law principal repayment of housing loans up to 1 lakh (Under 80 C) is exempted, not only interest payment up to 2 lakh is also exempted. So by making prepayment, you can avail of dual benefits, tax saving, and saving on net interest paid.

If you are thinking of taking tax benefits also, do remember that the value of prepayment and EMI put together do not exceed the 1 lakh 80 C limit. Amounts exceeding 1 lakh will not be beneficial to you in terms of tax savings.

Caution

Another important point on the tax saving part is prepayment amount causes direct reduction in principal and hence reduction in the interest component. If you are in a higher tax bracket and want to take maximum advantage of the exemption limit of interest payment (2 lakh) you can avoid this prepayment it is your decision.

But we see that a small prepayment of a home loan at an earlier stage is a good decision to save money on net interest paid.

So finally if you can afford to make multiple prepayments towards your home loan, possibly due to a salary hike, promotion, bonus or abrupt business profit then making prepayment of the home loan is a good proposal that can save you a lot of money and term of loan.

Prepayment Tips for Different Stages of Loan Tenure

Early Stage

In the early stages of the loan tenure, borrowers can benefit significantly from prepayment due to the higher allocation of interest in EMIs. Making regular prepayments during this stage can yield substantial long-term savings.

Mid-Stage

As the loan tenure progresses, borrowers may have more financial stability and surplus funds available for prepayment. Increasing prepayment amounts during the mid-stage can further accelerate the repayment process.

Final Stage

In the final stage of the loan tenure, borrowers may prioritize complete repayment to achieve debt-free homeownership. Making strategic prepayments in this stage can help clear the remaining balance and secure full ownership of the property.

Conclusion

Prepayment of home loans can be a prudent financial decision for borrowers seeking to reduce debt, save on interest costs, and achieve homeownership goals sooner. By understanding the benefits, risks, and strategies associated with prepayment, borrowers can make informed decisions tailored to their financial circumstances and objectives.

FAQs

Is prepayment of home loans always beneficial?

Prepayment can be advantageous for many borrowers, but its suitability depends on individual financial circumstances, loan terms, and alternative investment opportunities.

What factors should I consider before opting for prepayment?

Factors such as prepayment charges, savings vs. investment opportunities, financial stability, and tax implications should be carefully evaluated before deciding to prepay a home loan.

Are there any tax benefits associated with prepayment?

Prepayment may impact tax deductions on home loan interest, depending on applicable tax laws and individual financial situations. Consulting a tax advisor is advisable for clarity on tax implications.

Can prepayment affect my credit score?

Timely prepayments demonstrate financial responsibility and may positively impact credit scores. However, the extent of the impact may vary based on individual credit histories and other financial factors.

What if I have surplus funds but uncertain about prepayment?

If unsure about prepayment, consider consulting a financial advisor who can assess your financial situation, goals, and the potential impact of prepayment on your overall financial plan.

Investment options available for NRIs in INDIA

Investment

Shitanshu Kapadia

March 14, 2012

India is fast emerging investment destination for NRIs. Indian economy is shining like anything. Every now and then we hear in the news that FII (foreign Institutional investor organizations that pool large sums of money and invest those sums) invested so much amount in the Indian stock market. Similarly to FII, so many NRI individuals might be looking for good Investment options in India.

From real estate to mutual funds, the investment landscape in India is vast and varied. In this comprehensive guide, we delve into the top investment options available for NRIs in India, helping you make informed decisions to maximize returns and achieve your financial goals.

Definition of NRI

An NRI, as per the Indian government’s definition, is an individual of Indian nationality or origin who resides outside India for employment, business, or any other purpose indicating an indefinite stay abroad.

NRI Investment Options in India

Investment options available for NRIs in INDIA

Real Estate Investments

Investing in real estate in India has long been a favored choice among NRIs. With rapid urbanization and infrastructural developments, Indian cities offer lucrative opportunities for property investment. From residential apartments to commercial spaces, NRIs can explore various options based on their budget and investment goals. Additionally, rental income and capital appreciation make real estate an attractive long-term investment avenue.

Investment in real estate can be further diversified by exploring emerging markets, such as tier-II cities and suburban areas, offering higher growth potential and competitive pricing.

Stock Market Investments

The Indian stock market, known for its dynamic nature, provides ample opportunities for NRIs to invest in equities, mutual funds, and exchange-traded funds (ETFs). With the advent of online trading platforms, NRIs can easily participate in India’s stock market from anywhere in the world. Diversifying your portfolio across different sectors and industries can mitigate risks and maximize returns in the long run.

Fixed Deposits and Bonds

Fixed deposits (FDs) and bonds remain popular investment avenues for NRIs seeking stability and assured returns. Indian banks offer competitive interest rates on NRI fixed deposits, providing a safe haven for parking surplus funds. Government bonds and corporate bonds are also viable options for NRIs looking to earn steady income while preserving capital.

Mutual Funds and SIPs

Systematic Investment Plans (SIPs) offered by mutual funds have gained traction among NRIs as a disciplined approach to investing in the Indian market. SIPs allow NRIs to invest small amounts regularly, thereby averaging out market volatility and benefiting from rupee cost averaging. Moreover, mutual funds offer diversification across asset classes, including equity, debt, and hybrid funds, catering to varying risk appetites.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) remains a preferred investment avenue for NRIs seeking tax benefits and long-term wealth accumulation. NRIs are not eligible to open a new PPF account; however, those who held accounts before becoming NRIs can continue investing until maturity. PPF offers tax-free returns and enjoys the sovereign guarantee, making it a secure investment option for NRIs.

National Pension System (NPS)

The National Pension System (NPS) provides NRIs with an opportunity to build a retirement corpus while enjoying tax benefits. NRIs can open an NPS account and contribute towards retirement savings, with the flexibility to choose between equity, corporate bonds, and government securities. Contributions to NPS qualify for tax deductions under Section 80C of the Income Tax Act, enhancing its appeal among NRIs.

How NRI can get benefits of DTAA agreement?

Investment in Startups and Ventures

With India emerging as a global hub for innovation and entrepreneurship, NRIs can explore investment opportunities in startups and ventures across various sectors. Platforms like AngelList and SeedInvest facilitate investments in early-stage startups, offering potential high returns on investment. NRIs can leverage their expertise and network to identify promising startups and participate in India’s burgeoning startup ecosystem.

Gold and Precious Metals

Investing in gold and precious metals has been ingrained in Indian culture for centuries. NRIs can diversify their investment portfolio by allocating a portion towards gold in the form of jewelry, coins, or gold exchange-traded funds (ETFs). Gold serves as a hedge against inflation and geopolitical uncertainties, making it a valuable asset for wealth preservation over the long term.

Cryptocurrency Investments

The burgeoning popularity of cryptocurrencies has piqued the interest of NRIs looking to explore alternative investment avenues. While regulations surrounding cryptocurrency investments in India are evolving, NRIs can participate in global cryptocurrency markets through international exchanges. However, it’s essential to conduct thorough research and exercise caution due to the volatile nature of cryptocurrencies.

NRI requires one of the following accounts to make these Investments:-

NRE Account (Non-Resident External Rupee Account)

A Non-Resident External (NRE) account is a bank account that’s opened by depositing foreign currency at the time of opening a bank account. An NRE (Non-resident External Accounts) account is a Rupee-denominated account. Funds in the NRE account are maintained in Indian rupees only. The source of funds into NRE accounts must be from your earnings abroad or from another NRE. Interest earned on this account is not taxable.

NRO Account (Non-Resident Ordinary Rupee Account)

A Non-Resident Ordinary (NRO) account is the normal bank account opened by an Indian going abroad with the intention of becoming an NRI. This account is also Rupee Rupee-denominated account. Current income earned in India, such as rent, dividend, pension, or interest can be deposited in the NRO account. Interest earned on an NRO account is taxable.

FCNR Account (Foreign Currency Non Resident Account)

The account can be opened with funds remitted from abroad, or transferred from an existing NRE/FCNR account. FCNR accounts can be opened with designated currencies, which are: GBP, USD, Deutsche Mark, Japanese Yen, and the Euro. Only term deposits can be maintained in FCNR accounts, in a time range of 6 months to 5 years.

Tax Impact on NRI Investments

All income earned by NRIs in India is taxable and returns are to be filed every year.
Long-term and short-term capital gain liability is the same on the sale of shares, redemption of mutual funds, or in real estate.
Bank deposits investments in shares, units of mutual funds, etc. are exempt from wealth tax in India.
Interest earned on NRE and FCNR accounts is completely tax-free.

A non-resident Indian making any investment in India would have to quote his PAN for every transaction and to file returns on his Indian income.

India has signed DTAA treaties with several countries to avoid double taxation for NRIs. These agreements provide relief by allowing NRIs to claim tax credits or exemptions in their home country for taxes paid in India.

NRIs can repatriate funds from India subject to certain conditions and limits prescribed by the Reserve Bank of India (RBI). Repatriation can be done for various purposes, including investment, maintenance, or gifts.NRIs must follow the prescribed procedures and submit the necessary documentation to repatriate funds from India.

FAQs

Are NRIs allowed to invest in Indian real estate?

NRIs are permitted to invest in residential and commercial properties in India, subject to certain regulations and guidelines set by the Reserve Bank of India (RBI).

Can NRIs invest in Indian mutual funds?

Yes, NRIs can invest in Indian mutual funds, subject to compliance with KYC (Know Your Customer) norms and FEMA (Foreign Exchange Management Act) regulations.

What are the tax implications for NRIs investing in India?

NRIs are liable to pay taxes on income earned in India, including capital gains from investments. However, certain investment avenues, such as NPS and PPF, offer tax benefits to NRIs.

Is it advisable for NRIs to invest in cryptocurrency?

Cryptocurrency investments involve high risk due to price volatility and regulatory uncertainties. NRIs should exercise caution and conduct thorough research before venturing into cryptocurrency investments.

Can NRIs open a PPF account in India?

NRIs cannot open a new PPF account after becoming non-residents. However, they can continue to contribute to existing PPF accounts opened before their NRI status.

Are there any restrictions on NRIs investing in Indian startups?

NRIs can invest in Indian startups and ventures, either directly or through platforms like AngelList and SeedInvest. However, they must adhere to regulations governing foreign investments in startups.

Conclusion:

Investment options for NRIs in India are diverse and abundant, catering to varying risk profiles and investment objectives. From traditional avenues like real estate and fixed deposits to emerging opportunities in startups and cryptocurrencies, NRIs have ample choices to grow their wealth and achieve financial prosperity in India’s thriving economy. By understanding the intricacies of each investment option and seeking expert advice, NRIs can make informed decisions to capitalize on the lucrative opportunities available in the Indian market.

LIC Jeevan Vriddhi Plan– A Review

Life Insurance

Shitanshu Kapadia

March 3, 2012

Life Insurance Corporation of India has launched a limited-offer single-premium policy Jeevan Vriddhi this plan promises to nearly double the premium amount at the end of 10 years. As life insurance plan it gives risk cover up to five times the Premium. This plan will be available only for next 6 months.

Benefits of Jeevan Vriddhi Plan:-

1) Death benefit: On death, Basic Sum Assured shall be payable. The Basic Sum Assured shall be 5 times the Single Premium excluding extra premium, if any.

2) Maturity Benefit: On maturity, the Guaranteed Maturity Sum Assured along with Loyalty Addition, if any, shall be payable.

3) Loyalty Addition: This policy will be eligible for Loyalty Addition on date of maturity, Rate and terms as may be declared by the LIC.

4) Incentive for Higher premium: If your premium is between Rs 50000.00 to Rs 99000, there is a 1.25% Increase in Guaranteed Maturity Sum Assured. If your premium is above Rs 100000.00, there is a 3% Increase in Guaranteed Maturity Sum Assured.

5) Liquidity: This plan provides facility same like fix deposit you can surrender this policy after 1 year. The minimum Guaranteed Surrender Value allowable is equal to 90% of the Single premium paid excluding extra premium, if any. You can to take loan on this plan after 1 year.

6) Tax Benefit: You can avail tax benefit under 80 C for premium paid under this plan. Similar to other plan maturity amount is tax free.

Eligibility:-

Minimum entry age for this plan is 8 years and maximum is 50 years. Term of this policy is fixed 10 years. The Minimum sum assured is 1.5 lakh no upper limit on maximum sum assured. The minimum premium under the policy is Rs 30,000 and shall increase in multiples of Rs 1,000.

Review Returns:-

Guaranteed Maturity Sum Assured for each age at entry per Rs.1000/- Single Premium (inclusive of Service Tax 1.545%) is as under:

So over all this policy also gives same kind of return 5-7% like any other endowment plan. Look at another example given by LIC on website.

If you purchase this policy at the age of 35 years with basic sum assured as Rs 5 Lakh, you need to pay Rs 1 Lakh as annual premium. At the end of 10 years you will get guaranteed return of Rs 1.97 Lakh or Rs 2.21 lakh Take a look at example given by LIC in following figure.

Premium shown in below example is exclusive of service tax if you make actual calculation with service tax than premium will be Rs. 101545 /- (@1.545% service tax). Effective yield in this case will be around 6.85%.

You must have some good reason/ Goal for purchasing this policy:-

Risk Cover:-

Risk cover by Jeevan Vriddhi policy is just five times of premium paid which may not be sufficient considering your income. Adequate insurance cover must be five to six times of your income. So, If you decide to purchase this policy for risk cover premium value will be huge it will be difficult to manage it every year. For Risk cover Term plan is more suitable option.

Tax saving:

Insurance is not product for tax saving. There are many other option like ELSS which can provide you better return than Jeevan Vriddhi with tax saving.

Consider that your 80 C limit are not exhausted and still scope of Rs.30000 is balance, if you purchase this plan with annual premium of Rs 101545/- you can save Rs. 30,000/- as tax benefit. Your yearly out go on this policy in this case becomes Rs 71545/-.

At maturity you will be getting guaranteed Rs 221651 tax free. Yield in this case will be 10.70%. Good ELSS with tax saving can easily provide return more than this.

Investment:-

If you consider Jeevan Vriddhi for Investment like one time Fix deposit for 10 years than also effective yield as stated above will be in range of 6-8%, Most of the banks provides fix deposit with rate of interest more than 10% now a days.

Catch Points:-

At first glance this plan looks very attractive here are some points which may be catch (trap):-

(1) Loyalty addition shown is approximate amount calculated based on few assumption actual return may vary and depends upon LIC.

(2) Tax benefit on this product is as per current tax law which may change after applicability of Direct Tax code from April, 2012.

(3) Tax on maturity amount is not applicable as on today may be applicable after 10 year.

(4) With current inflation index this product may not beat inflation.

(5) As you will be investing all money at single go for 10 years you may lose opportunity to invest in some better financial product may come during this time period.

I hope we have done our job with sense of your satisfaction, now it is up to you to either invest in LIC Jeevan Vriddhi or not.

How to be a successful trader in the stock market?

Stock Market

Shitanshu Kapadia

February 21, 2012

How to be a successful trader in the stock market?

Successful Trader – Trading in simple language it is to buy or sell goods & services (transferring ownership) in a short-term duration to earn profit. In terms of the stock market buying and selling of shares based on technical analysis or market trends for short-term duration for making money is called trading.

The difference between an investor and a trader is investor invests money for the longer term and waits for a bull run to make a profit while a trader makes a profit even in bad market conditions. Sounds interesting!

Traders can make more money than investors hence many people try this funda to make more money but fail. Trading is a number/mind game. This game is not for the weak-hearted.

To become a successful trader /to trade safely, you must take care of several things. In this article, we will describe how to be a successful trader in the stock market.

How to be a successful trader in the stock market?

Use a Virtual stock market trading Initially

The first step for beginners who want to start trading is to open a virtual stock market trading login for practice. Many website provides a facility for free virtual stock market trading login.

This type of facility allows you to buy and sell stock virtually without involvement of actual money. This type of trading login provides a better understanding of what happens behind the scenes & also boosts your confidence level.

Stay Hungry for the Stock Market Knowledge

Becoming a trader is not that easy one cannot become a successful trader in a day or two it takes a few months or years to become a successful trader in the stock market, hence one must keep the approach of learning and gaining maximum knowledge every day. One must read several books on research, fundamentals, technical analysis, successful traders & techniques.

You might have heard that “When there is a will there is a way”. One must have a strong spirit (willpower) to become a successful trader. Not only that you must be committed to winning, as rightly said by someone “Winner never quits, quitter never win”.

Determine Your Trading Strategies and be with it

Successful traders always make trading strategies as predefined trading strategies always help in managing finance well. Trading strategy must be made in a manner to reduce risk and increase the probability of profit.

Once you set your trading strategies you have to stick to them and must try not to deviate. These strategies will help minimize your trading risks and prevent losses & help you to reach your goal. The following things must be considered by traders for making a trading strategy.

(1) Traders must spend a good amount of time every day doing market analysis and maintaining a log book for the next day’s strategy.

(2) The trader must know at which level he/she should enter into stock and at what target he/she will exit from stock.

(3) Trader must know what will be his/her move on market trends and reaction against bad news.

Intraday Trading in Stock Market as Career Option

Know Your Risk Level

One has to identify a risk level and stay within that risk level. To earn profit one must prevent loss. For the long term, the stock may give you profit but for the short term, one must see that stock will not end up giving a loss.

Always decide what will be the stop loss for stock and sell that stock on the stop loss. One may adopt a strategy not to invest in stocks that are beyond the acceptable risk limit.

Avoid Emotion base trading & don’t get nervous by losses

Never trade with emotions & don’t allow your emotions to be involved in your trading activities. Trading with emotion may cause huge losses. Emotion/ gut feeling may be right for some time but may not be correct every time. Always try to analyze the situation and do trading. Never allow your heart to be involved in the process of trading let your brain control your trade.

Another important point is if somehow you make losses then don’t get nervous about that, but think that failure is an opportunity to learn something. Many times you will get important learning lessons from failure only.

Never blame

Successful trader never blames themselves, the market, companies, the government, or anyone for the loss they are making. The market gives enough opportunity to make money trader has to recognize & grab that opportunity to make money.

The market passes through various stages time bullish time hazy & and sometimes decay it is totally on the trader to take advantage of various market stages.

Keep Protection Shield

If you are new as a trader and started trading when the market is bullish you may think that the market is the best place to earn profit and you keep on investing your money, suddenly market turns back and consumes all your profit, and sometimes erodes your capital too. So don’t invest all your money in one shot. Periodically book profit and keep profit separate if possible in another account.

This accumulated profit can be useful in bad times or in unfavorable conditions. This is to make your life less stressful as you have a protection shield of previously earned profit. Trading is like tightrope walking you must balance your condition.

10 Tips for Stock Market Investment

Consider Trading as a business

The last but very important point is you must consider trading as a business, which can make you wealthy. As a successful trader, you must review performance every month and find out reasons for good or bad performance. Remember that business is done to earn consistent profit.

FAQs

What are the essential qualities of a successful trader?

Successful traders possess qualities such as discipline, patience, resilience, and a continuous desire to learn and adapt to market dynamics.

How much capital do I need to start trading stocks?

The amount of capital required to start trading stocks varies depending on your trading strategy, risk tolerance, and financial goals. While some traders start with a modest sum, others may require a more substantial investment.

Is stock trading risky?

Like any form of investment, stock trading carries inherent risks. However, with proper risk management techniques and a sound trading plan, you can mitigate these risks and increase your chances of success.

What is the best time frame for trading stocks?

The best time frame for trading stocks depends on your trading style and objectives. Some traders prefer short-term intraday trading, while others focus on longer-term swing trading or investing.

How do I handle emotions while trading stocks?

Emotions such as fear and greed can cloud judgment and lead to impulsive decision-making. To manage emotions effectively, develop a disciplined trading plan, stick to predetermined rules, and practice mindfulness techniques.

How can I stay updated on market news and trends?

Stay informed by regularly monitoring financial news outlets, market analysis reports, and reputable trading platforms. Additionally, join online communities, forums, and social media groups to engage with fellow traders and share insights.

When should I seek professional advice for my trading activities?

Consider seeking professional advice from a qualified financial advisor or investment professional for complex investment decisions or during periods of uncertainty in the market. Additionally, mentorship and networking with experienced traders can provide valuable guidance and support.

Conclusion

In the end, I would say that no one has magical keys by using them one can be a successful trader on day one, to become a successful trader is a continuous process (it’s a journey, not the destination)

For successful traders making money is more important, it does not matter how sound you are at technical analysis, you must trigger the right trade at the right time. If you can’t all analysis and knowledge you have is of no use.

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