MUST KNOW FINANCIAL UPDATES 5TH APRIL 2016
LUGI CHENNAITEAM
The craziness of March may be over, but investors and taxpayers still have a few more financial tasks to complete.
Start tax planning right away
This might seem a little strange given that the tax planning season has just ended.But experts say it is best to start tax planning at the very beginning of the financial year. “Taxpayers should plan how they want to utilise the Section 80C investment limit,“ says Mumbai-based financial adviser Vipin Khandelwal. He says if you plan to invest in equity-linked saving schemes (ELSS), it is best to start an SIP in April itself. For instance, if you want to invest `30,000 in ELSS during the year, start an SIP of `2,500 in the fund you have chosen. Our research shows that investors who took the SIP route earned more than those who waited till March to invest in ELSS schemes.
Staggering the investments across 12 months not only cushions you against volatility, but also lighten the burden at the end of the financial year. It’s easier to spare `2,500-3,000 every month instead of putting `30,000-36,000 at one go in March.
TIME REQUIR ED 2-3 HOURS
Get papers ready for tax filing
The tax filing deadline is three months away, but it will help if you start putting together the information needed at the time of filing returns. If you have foreign assets or earned foreign income during the year, start collecting the documents right away.Obtaining tax credit receipts, income certificates and other documents from foreign countries should not be kept for later.
Taxpayers often miss out declaring their interest income in their returns. The tax department will be scrutinising your interest income in greater detail this year.
Banks credit the interest on the balance in savings bank accounts in October and April. Add the total interest across all bank accounts. Also add the in terest you would have earned on infrastructure bonds, NSCs, fixed and recurring deposits and other fixed income secu rities. If you have a home loan or an education loan running, get a certificate of interest from your lender to know how much deduction you can claim under Section 24 and Section 80E.
TI ME RE QUI RE D 2-3 DAYS
Increase quantum of investments
This is the appraisal sea son and your next pay cheque is likely to be fatter.
This means you need to in crease investments in the same proportion. Some in vestments, like your contri bution to the EPF, automati cally increase with rise in in come. For others, you can either increase the existing SIP amount or start fresh SIPs in other funds. The idea is, if you are earning more, you should be saving more too.
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Submit Form 15G and 15H to avoid TDS
This is also the time to file Form 15G or 15H to avoid TDS on interest. Form 15G can be filed by investors below 60 who do not have any tax liability and whose total income from interest is below the basic exemption of `2.5 lakh. However, if there is some tax liability, or if your interest income exceeds the basic exemption, you cannot file this form. Form 15H is for individuals above 60. It can be filed if the final tax on the investor’s estimated total income is nil. So, if you are above 60, your taxable income for the financial year can be up to `3 lakh for you to be eligible for 15H. For super senior citizens above 80 years, this limit is `5 lakh.
TIME RE QUI RE D 1-2 HOURS
Give VPF mandate to employer
The government has cut interest rate on small savings schemes and there are indications that rates will go down further if the benchmark bond yield declines.However, the interest earned on the Employee Provident Fund (EPF) may not come down so much. So, instead of the PPF which will give 8.1%, salaried individuals can consider the Voluntary Provident Fund (VPF). VPF contributions are eligible for tax deduction under Sec 80C and are tax free on withdrawal. Even if EPF becomes taxable in later years, the existing corpus will not get taxed. Submit your VPF mandate to the employer immediately.
TIME REQUIR ED 15-20 MINUTES
Organise investment portfolio
Prudent asset allocation is critical for success in investing. But many investors don’t know their asset allocation because all investments are not at one place. If you are among them, it’s time to start using a portfolio tracker. Value Research has made it simpler for its users. All they have to do is upload the consolidated mutual fund statement and NPS details and all transactions get incorporated into the portfolio.
Interest of 8.1% is higher than 5.9% inflation and 25 basis points above benchmark rate
Facts first. Beginning on Friday (April 1), interest rate on small savings schemes, including PPF, kisan vikas patra (KVP) and senior citizen deposits, will be cut by up to 1.3 per cent as the Centre moves towards quarterly alignment of rates with the market. Interest rate on public provident fund (PPF) scheme will be 8.1 per cent for the period April 1 to June 30, down from 8.7 per cent. On KVP, it will be reduced to 7.8 per cent from 8.7 per cent, while senior citizen savings scheme of five years would earn 8.6 per cent interest compared to 9.3 per cent. Girl-child saving scheme sukanya samriddhi will see interest rate of 8.6 per cent as against 9.2 per cent, according to a recent order by the finance ministry.
However, unlike previous years when interest rates were set for the full year, the Centre will from now on set them every quarter based on the previous three-month yields on government securities or G-sec. While the interest rate on post office savings has been retained at 4 per cent, the same for term deposits of one-five years has been cut. The popular five-year national savings certificates will earn an interest rate of 8.1 per cent from April 1 as against 8.5 per cent at present. A five-year monthly income account will fetch 7.8 per cent as opposed to 8.4 per cent. Post office term deposits of one, two and three years command an interest rate of 8.4 per cent From April 1, a one-year time deposit will get 7.1 per cent, two-year time deposit 7.2 per cent and three-year time deposit will attract interest of 7.4 per cent.
Five-year time deposit will fetch 7.9 per cent interest in the first quarter as against 8.5 per cent,, while the same on five-year recurring deposit has been slashed to 7.4 per cent from 8.4 per cent. KVP which, at present, provides for doubling of principal in 100 months (8 years and 4 months) will now be doubled in 110 months (9 years and 2 months) after the interest rate revision.
The cut in the interest rates on small savings schemes has somewhat jolted investors. And understandably so. There are many, who think that is only the beginning and investors should be ready for more changes in the coming quarters.
Let’s now take an analytical view on the whole issue and what it actually means for the investor.
There is no doubt whatsoever that small savings schemes, which appear as succour for countless investors, have been snipped, much to the consternation for all, especially senior citizens, who depend on these schemes for meeting regular expenses. The fact is that the government has pared these rates to realistic levels — a predictable move in a world where administered rates have been on the decline.
“This can be viewed from two angles: One, rates are practical and realistic, driven undeniably as they are by market forces. Two, this is a wake-up call for complacent investors. They need to be more attentive towards market-linked savings products (not merely administered-rate products),” said Nilanjan Dey, financial planner and director, Wishlist Capital Advisors.
As an ordinary investor, you will be tempted to lock in a part of your portfolio in guaranteed-return products. It is a basic compulsion. However, this is time to streamline your inclinations in favour of market-determined yields too, he said. “The case for the latter category could not be stronger. Rates are going south, so don’t depend solely on POMIS or FD. Choose from among a variety of products that are driven by the market. As an advisor, I would encourage all to appreciate few points like:
* Rates may remain depressed for a further period.
* You can select from good debt mutual funds if you can tolerate the higher risk.
* Assume graded risk to reach potentially higher levels of yield.
One must also understand and keep in one’s mind that with greater risk, the chance of reaping bigger reward will increase,” said Dey.
We have a scenario where nearly nothing is assured. This is a new window that is opening — form your own strategy to mitigate risk and still invest in various asset classes. Start early and invest regularly. The two dicta will remain infallible in the days to come.
Having said all these, one should not forget that the impact of rate cuts will be distinctly different for senior citizens and retirees who depend on income from their investments. Senior citizens will be badly hit. While their income will come down due to lower interest rates, there won’t be any let up in their expenses.
Senior citizens may consider tax-free bonds and RBI savings bonds, instead. The yields to maturity of tax-free bonds have come down to around 7.25 per cent, but they are still a good option for senior citizens who are in high tax brackets and want to generate stable income.
Talking about the PPF, it will now become a truly market-linked product with a quarterly reset of the rate. The PPF has beaten inflation in the long term, generating an average return of 9.17 per cent in the past 20 years when inflation has averaged 7.17 per cent. Even after the reduction to 8.1 per cent, it is higher than the inflation rate of 5.9 per cent. Therefore, there is no need to be excessively panicky. PPF continues to be an attractive option because it offers 25 bps above the benchmark and also offers tax benefit and sovereign guarantee. The tax benefit of PPF, for those in the 30 per cent tax bracket, is still significantly attractive. The net returns for such investors will still be higher than other comparable fixed-income instruments where tax benefits are not there.
Cut in interest rates on small savings schemes seems tough on investors, especially the elderly
The cut in interest rates of small savings schemes has jolted in vestors. Though the Sukanya Samridhi Yojana, Senior Citi zens’ Savings Scheme and the Public Provident Fund have seen modest cuts of 60-70 basis points, interest rates on some other instruments have been cut by 100-130 basis points (100 bps = 1%).
The cut announced on 18 March is only the beginning. The interest rates on small savings were linked to government bond yields in 2011 and changed once a year. Now they will be reset every quarter, making these instruments market linked. The PPF rate will be 25 bps higher than the average 10-year bond yield in the past three months. If this formula was applied in the past, the PPF rate would have gyrated wildly over the past 15 years. It would have been as high as 10.6% in 2001 and as low as 5.4% in 2004.
However, long-term investors would not have lost big time if it was implemented earlier. The average interest over the last 15 years as per the new formula would have been 7.89%, slightly lower than the 15-year average of 8.36%.
Though many investors are devastated, the reduction in rates is not catastrophic. After adjusting for inflation, the real rate of return for PPF investors will be higher than what it was in 2009-10.Consumer inflation is down to 5.91% while the PPF is offering 8.1%, a real return of 2.19%. In 2009-10, PPF was offering 9.5% but 14.5% consumer inflation meant a negative real rate of return.
Will banks follow suit?
Now that small savings rates have been cut, banks may also cut deposit rates.“The high rates of small savings schemes were the reason why banks were not able to cut deposit and lending rates,“ says R.Sivakumar, Head of Fixed Income, Axis Mutual Fund. The government made the biggest cut in one to three year time deposits which offer the stiffest competition to bank deposits.
If deposits rates come down, banks will be able to cut lending rates as well.That’s something borrowers like Sumit Rohtagi (see picture) are waiting for.Though the `6 lakh he has in the PPF will earn less, the Gurgaon-based finance professional is hoping that the interest on his `53 lakh home loan would come down. Even a 25 bps reduction in the home loan rate will shave off nine EMIs from his loan tenure. Young investors like Rohatgi, who also invest in equity funds, debt funds and NPS and have large outstanding loans, will gain more if the RBI cuts interest rates. The bond market has factored in a 25 bps cut and the equity market could zoom if rates are cut.
Not good for senior citizens
However, the impact will be different for senior citizens and retirees who depend on income from their invest ments. “Senior citizens will be badly hit. While their income will come down due to lower interest rates, there won’t be any let up in their exsays Kuldip Kumar, Partner penses,“ says Kuldip Kumar, Partner and Leader-Personal Tax, PwC India.
In Delhi, 74-year-old Ranjit Rai Grover (see picture) is digging out certificate of his bank deposits that offer him higher interest than the Senior Citizen’s Saving Scheme. “But these deposits will mature soon. I want to break these investments and lock in at the 9.3% in the Senior Citizens’ Saving Scheme before the rate cut comes into effect,“ he says.
Grover should also consider tax-free bonds and RBI Savings Bonds. The yields to maturity of tax-free bonds are down to 7.25%, but they are a good option for senior citizens in high tax brackets. “These products don’t have put or call options, so investors enjoy the fixed tax-free interest for next 15-20 years,“ says Vikram Dalal, MD, Synergee Capital Services. Another option is RBI Savings Bond. “Since the 8% RBI bond pays interest half yearly , the yield works out to 8.16%,“ adds Dalal.
Investing in debt funds
Though banks will eventually cut de posit rates, investors can lock into longterm FDs and recurring deposits now.However, they are not very tax efficient.A better option would be debt funds because the income is taxed at a lower rate after three years. If an investor puts `10 lakh in a debt fund and derives a monthly income from the corpus after three years, the effective tax paid on withdrawal in the fourth year (201819) will be lower at 1.12% compared to 10-30% on income from a fixed deposit.Investors can also consider fixed maturity plans from mutual funds. A lot of FMPs are currently open. “Investing in three-year plus FMPs is a good option, as four year indexation makes it tax efficient,“ says Amol Joshi, Founder, PlanRupee Investment Services.
Girl child scheme
Despite the rate reduction, the Sukanya Samriddhi Yojana continues to be the best option available. As a tax-free return of 8.6% is good, parents with daughters below 10 should consider the scheme for long-term goals. This scheme is also eligible for deduction under Section 80C. However, there is a `1.5 lakh annual investment limit. If you want to invest more, the Voluntary Provident Fund remains a good option.However, EPF rates will come down because the current rate fall is going to affect instruments EPF invests in.
What of the PPF?
The PPF will now become a market linked product with a quarterly reset of rate. The PPF has beaten inflation in the long term, generating an average return of 9.17% in the past 20 years when inflation has averaged 7.17%.Even after the reduction to 8.1%, it is higher than the inflation rate of 5.9%.In other words, there is no need for investors to avoid PPF altogether.
BIG CHALLENGE `At cost’ criteria will complicate asset declaration, say experts
The Central Board of Direct Taxes has released instructions for the new ITR forms, but experts believe filling up the new schedule AL (assets and liabilities) could prove challenging for taxpayers. The new section AL is mandatory for individuals and HUFs earning more than `50 lakh a year and requires the taxpayer to declare all moveable and immovable assets.These assets have to be declared at cost, i.e. the price at which they were acquired by the taxpayer.
This, experts feel will be a huge challenge as assets appreciate or de preciate. Therefore, the declarations would not paint a fair picture of the net worth of a person. “ A luxury car may have been acquired at a certain price but depreciates as soon as it turns around the corner. It would be unfair to book it at cost price.Similarly, jewellery bought, say, 10 years ago would have multiplied many fold. Showing it at cost price will defeat the purpose of declaring the net worth,“ says Archit Gupta, founder, ClearTax.in.
In the wealth tax declarations everything was at fair market value and therefore there was a method to it and valuation was less confusing.“Although wealth tax has been abolished, tax authorities intend to track the assets you own so that there is no accumulation of unaccounted wealth. However, the `at cost’ criteria will make things more complicated,“ says Kuldip Kumar, executive director, Tax, PwC India. Earlier such extensive declarations were part of the lengthy ITR-4 form where most of the assets owned were included as business assets.However, this year salaried individuals too will have to comply to this requirement via ITR-1, 2, 2A. “People who otherwise do not have high income, but end up having a total income higher than `50 lakh this year only, due to say, a property sale or windfall will also be required to fill this schedule,“ points out Gupta.
The `at cost’ declaration applies to inherited assets to. It will be most challenging to declare values of these assets, especially, if it has been passed down from more than a generation ago.
The Central Board of Direct Taxes (CBDT) has issued a new set of income tax return forms where individuals or Hindu Undivided Family (HUF) with an income above R50 lakh will have to disclose their assets for the assessment year 2016-17 while filing returns.
The CBDT has also issued forms ITR 1 (SAHAJ) for individuals having income from salary and interest and ITR 4S (SUGAM) for individuals/HUF/partnership firm having income from presumptive business for early filing of returns.
The CBDT has introduced fresh reporting columns in the new forms — ITR 2 and ITR 2A — applicable in cases where the total income exceeds R50 lakh. Individuals and entities in this income bracket will have to mention the total cost of such assets. Immovable assets like land and buildings have to be declared as also movable assets like cash in hand, jewellery, bullion, vehicles, etc. The entity reporting these will also have to describe the liability in relation to them.
To prevent tax evasion, the income tax department last year sought information on foreign travel undertaken by taxpayers and the expenditure incurred, as well as details of all bank accounts along with account balances at the end of a year in the tax return forms. However, after protest from taxpayers, the department issued revised forms seeking only the passport numbers without details of travel and expenditure.
From assessment year 2016-17, wealth tax will no longer be applicable. Information which was furnished for wealth tax returns earlier will now reflect in forms ITR 2 and ITR 2A for those with income over R50 lakh. In fact, while abolishing wealth tax, finance minister Arun Jaitley had announced in the Budget that information which was required to be furnished in the return of wealth will now form a part of the I-T return.
Tapati Ghose, partner at Deloitte Haskins & Sells, says a threshold limit for each category of asset for disclosure purposes would provide an administrative relief in case assets below a prescribed threshold are exempted from disclosure requirement. “For instance, it may be recalled that only cash value in excess of R50,000 was required to be considered for wealth tax purposes in the past. Whether any threshold for disclosure is intended will be known only when the instructions are made available,” she says and adds that individuals are likely to face a challenge in determining cost for gifted assets (such as jewellery), inherited assets and for assets purchased several years earlier where records have not been retained.
At present, foreign asset disclosure is required for Resident and Ordinarily Residents in Schedule Foreign Assets. However, clarification should be issued to ensure that double disclosure is not required for such foreign assets in Schedule Assets and Liabilities as well.
Wealth tax was levied on an individual, HUF or a company, if the net wealth of such an entity exceeds R30 lakh on March 31.Taxpayers were required to value assets as per wealth tax rules for computation of net wealth. For assets such as jewellery, individuals or HUFs had to obtain a report from a registered valuer.
Analysts say with the abolition of wealth tax, people may take a relook at their wealth portfolio. They may now invest more in land in urban areas and other assets that were earlier subject to wealth tax. Holding more than one plot of land in an urban area will be free from wealth tax and would attract capital gains tax upon sale only. At the time of the sale, the taxpayer will be able to reduce his I-T liability by investing in a residential house or specified securities and bonds provided the property was held for 36 months.
Set aside a chunk of your incremental income first and spend only the rest
You may be saving a fixed amount or a fixed percentage of your monthly income. But is your annual savings rate increasing? In this article, we discuss why you should increase your annual savings rate and how you should go about it.
Why save more?
You may be saving to meet “lumpy” expenditure in the future such as your children’s education costs and post-retirement living expenses. But your current savings may not be enough for the following reasons.
One, actual inflation may be higher than what you have assumed. That means actual education costs may turn out to be higher than your initial forecast. You can, of course, bridge the shortfall in your “investment for children’s education account” by taking a loan when your children enter university. But would it not be easier if you save more every year as your income increases?
Two, even if inflation is in line with your expectation, your investment account could earn lower-than-required returns. This means you have to contribute additional capital to bridge the shortfall. You may also decide to send your children to a better university, thereby, requiring more money than what you initially forecast. Saving more every year helps you meet potential shortfall due to poor investment performance or to meet higher costs due to revised objective. And three, your monthly savings may not be enough to fund multiple life goals.
So, you may be contributing less-than-required each month to the investment account set-up to achieve these life goals. For instance, you may require Rs. 10,000 per month to meet your child’s marriage expenses 15 years hence. But you may be only contributing Rs. 6,000 per month. It is important that you increase your annual savings rate to bridge the shortfall in these investment accounts.
But why focus on your incremental salary to increase your annual savings rate? For one, you have to otherwise cut your current consumption to increase your savings rate. That would mean giving up some of your present lifestyle to save more for the future. As humans, we suffer from present bias. That is, we value our present consumption much more than saving for the future. And two, your salary increase will happen only next financial year. So, it is easy to give up (or commit to saving) what you do not have today.
How to save?
You should set-up the process to increase your savings well before your salary increases. Otherwise, you will be tempted to spend the incremental income.
Typically, your expenditure will increase at a higher rate than your income. So, you should set aside sizable proportion of your incremental income first and only spend the rest. Suppose you are currently saving 15 per cent of your salary and you are due to receive Rs. 20,000 per month as incremental income. You should save about 25 per cent of Rs. 20,000 and not just 15 per cent of your incremental income.
How should you set-up the process of investing your incremental savings? If you are between 25 and 45 years of age, you should set-up a forward-start systematic investment plan (SIP) on an equity mutual fund that you already hold in your portfolio. So, if your annual appraisal is in April, you should register for the SIP in March and start the SIP in May when your incremental salary is credited to your savings account.
The reason you should invest incremental salary in equity is because you must increase your equity allocation between the age of 25 and 45. What if you are older than 45? You should set-up recurring deposit with the incremental savings.
This is because you should reduce your equity allocation between 45 and 55. What if you do not receive the expected salary increase? You can choose to cancel the additional SIP.
Plan your investments based on returns, life stage and risk appetite
“ Jaldi ! What’s a good investment I can make before March 31?” asked a friend, calling me last week. “But why should you invest before March 31? Why not take time over it?” I asked. “ Arrey , I am short of my 80C investments and need to do it before deadline” she said, puzzled at how dense I was.
Many investors take a ‘fill it, shut it and forget it’ approach to their Section 80C investments. They don’t give much thought to where they’re investing as long as they get to that Rs. 1.5 lakh limit. But given that we all have only limited ability to save, it is important to ensure that our Section 80C choices actively contribute towards our long-term financial goals. This takes some planning. Here are the questions to answer before you flag off your Section 80C investments for 2016-17.
Do returns measure up?
If you believe that all the savings you plough into Section 80C are ‘investments’, you are mistaken. The long list includes some savings options, some wealth creation vehicles and items that can only count as expenses (such as children’s tuition fees).
Many investors sign up for life covers and traditional insurance plans with hefty premia as an easy way to fill up the 80C quota, under the mistaken belief that these are great investments. They aren’t. Pure term policies are protection products that pay your dependants on your death. Traditional insurance plans offer ultra-low returns that lag inflation. While choosing your Section 80C instruments for the year, don’t lose sight of the primary objective of making any investment — getting a reasonable return.
What’s your allocation?
A good financial plan requires you to get your asset allocation right. This should not depend on convenience, but on your age, life stage and risk appetite. This applies to your 80C investments too.
If you are an investor in the 20s, 30s or 40s, you can afford to invest more in ELSS funds or the equity component of NPS to fill up your Section 80C limit for the year. Don’t take the lazy way out and maximise your voluntary provident fund contribution (VPF) instead. This can really cost you in long-term returns.
Take the simple comparison of Santosh who swept Rs. 1.5 lakh from his salary into the VPF over the last 10 years (2006 to 2016) against Ashutosh, who invested the same sum in an ELSS fund.
If you calculate their investment value today based on the actual interest rates declared by the EPFO, you will find that Santosh has accumulated just Rs. 24 lakh, whereas Ashutosh has accumulated over Rs. 39 lakh. Equity allocations have fetched him 63 per cent more.
But if you are in your 50s, don’t max out on ELSS funds just to meet Section 80C limits, as market swings can decimate your corpus just before retirement.
Do you need liquidity?
All Section 80C investments require you to lock in your money for a specified term. But the lock-ins can stretch anywhere between the three years stipulated by ELSS funds and 30-40 years (until you retire) under the EPF and the NPS. Before choosing your instruments, pay attention to your cash flow needs.
Do you have a big financial goal — like your child’s college or purchase of a home — coming up within the next 10 years?
Then, you should think twice about parking too much money in the EPF (where withdrawals are restricted until you turn 57) or even the NPS (where you can withdraw only 25 per cent before 60). Opting for shorter-term ection 80C instruments — like the five-year NSC or tax saving deposits — may be better, despite lower returns.
Assured or market returns?
The assured-return options in the 80C menu are shrinking and market-linked options are expanding. After recent changes, the following are one-shot 80C instruments where you can lock into a fixed return — the NSC, post office time deposit, POMIS, tax saving bank deposits and Kisan Vikas Patra.
Schemes, such as the EPF and Public Provident Fund (PPF) are now in the nature of floating rate instruments, where your returns will change as new rates are announced every quarter (with PPF) or every year (with EPF). There’s the third set of schemes — NPS and ELSS — where returns depend entirely on market behaviour and fund manager performance.
In choosing your 80C investments, either go for assured return schemes that lock in your returns for five years or more. Or if you are going to take on market risks, opt for schemes that offer flexibility to exit in case of poor performance.
The NPS allows you to switch between assets and fund managers if you are unhappy with the performance of your account. ELSS funds carry only a three-year lock in; you can opt out after this, if the returns are disappointing.
But despite their tax-free returns, the PPF and VPF, which subject you to floating rates even as they lock in your money for the long term, don’t make much sense any more. If their returns turn out to be too low for comfort in future, you can’t promptly exit.
As we head into the new financial year, redraw your Section 80C plans on the above lines and don’t leave it to the last minute.
The home loan industry has come a long way from the time when the only charges that you had to watch out for where the processing charges taken under various heads and pre-payment charges.
Regulation has ensured that there are no pre-payment charges and competition has ensured that there is a greater degree of transparency around the processing fee, legal fee, valuation fee or technical charges. Competition has also ensured that there is hardly any difference in the interest rates charged by various home loan lenders. Unfortunately, the shrinking interest rate margins has made several lenders to insert hidden charges to increase this margin by stealth.
Here is a list of these charges:
Charge interest for loan which is disbursed late – This is a common practise. The lender prepares a cheque, but it is not to be handed over till certain documents are received from the borrower and/or the seller. These documents normally may take a few days to a few weeks and meanwhile the interest meter is ticking for the borrower.
This is not as small as it looks. On a loan of Rs 1 crore, the interest @9.50% works out to Rs 2600 daily. The cost of a 10-day delay in handing over the cheque (which is pretty common) means an additional cost of Rs 26,000 or 0.26% of the loan amount. You should negotiate with the lender that you will only pay interest from the day the cheque is actually handed over to the seller and not from the date mentioned on the cheque.
Advancing the EMI payment date – The EMI amount is calculated assuming that the payment will be made at the end of 30 days from the date of disbursement. If this EMI is paid earlier than 30 days, the cost becomes much higher than the stated cost. An example will illustrate this. If the disbursement is made on February 15, 2016 and the EMI is payable on the first of every month then typically you should pay interest equivalent to 15 days’ interest (from February 15, 2016 to March 1, 2016) and the EMI should start from April 1, 2016 only.
However, most lenders will start off the EMI from March 1, 2016 and still charge you for a full month’s interest. Again, the difference is not as small as it sounds. 15 days’ extra interest for a Rs 1,00,00,000 loan @9.50% works out to Rs 39,000 or 0.39% of the loan amount. Again, you can negotiate with the lender to make sure that this additional hidden interest is not charged to you. Unlike the first point which is easily understood, this point is technical and the lender can run loops through the borrower while explaining how the EMI is calculated.
Forcing borrowers to buy expensive insurance products – Lenders have tied up with life and general insurance companies to provide life, disability and property insurance to borrowers and they force you to take these policies. The lenders earn fat commissions on the sale of these insurance policies and even though officially not permitted, they force the borrowers to sign up for these policies. It is a good practise to have such type of insurance policies when you take a loan, but the problem is that the policies being hawked by the lenders are hugely overpriced, reflecting the captive base of borrowers and the fat commissions for the lender inbuilt in such policies.
To avoid having to pay for these overpriced policies, you can negotiate with the lender that you will buy these policies on your own. In all probability, you will get the exact same policy from the same insurance provider as what the lender is pushing at a fraction of the cost that the lender will charge.
Forcing borrowers to take a credit card or some other add on products – In most cases this is offered for free while not stating that it is free only for the first year and would have an annual fee every year after that. You can easily negotiate your way out of this one.