Topics
| SUCCESSION PLANNING |
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How to make a will?
Creating a will is simple. It could simply be a record of how and in what proportion you want your assets to be distributed to the beneficiaries after you.
Bear in mind:
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The will has to be hand-written and both you and the two witnesses should sign each page. |
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Mention the number of pages. |
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In case you are revising a will, it is advisable to mention the details in the previous will and declare them null and void to leave no room for ambiguity. Don’t forget to destroy the old wills, if any. |
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Ensure that the executor is neutral and has no personal interest in the matter. |
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Always have a miscellaneous clause in your will. This means that mention who will get any asset you may have forgotten to list in the will or acquired after the will was created. This will not leave any room for arguments with regards to residuary assets. |
Validity of a will
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A popular notion is that a will should be registered to lend it authenticity, but an unregistered will is also perfectly valid. |
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In fact, in case of multiple wills, the latest will is considered valid, if created correctly, even if it is unregistered. Earlier wills that are registered are not valid in this case. |
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A will can be registered with the sub-registrar of the concerned area. Usually, people register the will through a lawyer or a trust and nominates them as the custodian and executor of the will. |
How to execute a will?
A will can be executed only after going through a probate. In case of a simple will, to which nobody has raised any objections, a probate is not compulsory in all states in India. However, if a probate is compulsory, the will is first published in a leading local daily. Any objection to the will has to be conveyed by the dissenting party to the court within the stipulated time. If there is no objection, then the court certifies the will, determines the beneficiaries and directs the distribution of assets. The process takes a minimum of six months.
When you need a trust?
Succession planning can also be done through a trust. A trust may be created when
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the beneficiary is incapable of taking care of himself/herself such as minor children or disabled dependents. |
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would need a regular stream of income for his/her sustenance or. |
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if the ownership and control of a family business has to be handed over to the next generation. . |
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The trust ensures that the trustee(s) you can rely on manages the assets and your dependants are taken care of. Since a trust deed can be worded the way you want it, you have the freedom to regulate who gets what, when and in what proportion. You can also specify when the trust is to be dissolved. Unlike in a will, here the beneficiary is not required to deal with any nitty-gritty and the trustee takes care of all that.
Shortcomings: If you set aside your assets and create an irrevocable trust during your lifetime, the assets get locked and even in case of an emergency, you will not be able to use your own money. But there’s a way out. You can create a revocable trust by wording in accordingly.
A trust created for such purposes is a private trust and needs to have at least two trustees—the laws for its registration differ from state to state.
GRATUITY LIMIT INCREASED
The gratuity limit has been increased to Rs10 lakh from Rs3.5 lakh earlier. If you have worked with your employer for five years or at the time of retirement, you are entitled to a lump sum benefit called gratuity.
What is gratuity? As per the current rules, gratuity is available to government employees as well as non-government employees. According to the Payment of Gratuity Act, 1972, it is mandatory for all employers having more than 10 employees on their payrolls to give gratuity after five years of service of the employee or on retirement.
How much you get? As per the Act, the gratuity amount is 15 days’ wage multiplied by the number of years put in by you. Here, wage means your basic plus dearness allowance. But whatever the amount, the employer’s liability is limited to Rs10 lakh. This means that if your gratuity entitlement comes to, say, Rs12 lakh, the employer is liable to pay only Rs10 lakh. However, depending on the company policy, your employer can also pay the full entitlement of Rs12 lakh.
The tax treatment. The gratuity amount comes tax-free. However, you will get this exemption only up to Rs10 lakh received. Any amount you receive over and above that amount is taxable in your hands.
EMPLOYEE PROVIDENT FUND
With your employer matching your contribution and a tax-free guaranteed return of 8.5%, the product is attractive. If you contribute 12% of your basic plus dearness allowance every month (assuming you are 25 and earn Rs20,000 per month) to your EPF account and your employer matches the sum, by the time you retire, you would be able to save Rs1.38 crore, assuming the interest rate remains at 8.5% and you get a modest hike of 5% a year in your salary.
However, at present, EPF is at a slight disadvantage on two counts: encashment and transfer. The rules allow EPF withdrawal only at the time of retirement, medical contingency or an unemployment period of two months. But the last caveat is easily circumvented as people apply for withdrawal after two months of leaving a job, instead of asking for a transfer of the money to their new account with their new firm.
In the EPF books of account, your entry is under the name of your employer and you become eligible for encashment anytime after two months of quitting the company. When you take up a new job in the interim, you assume a new identity for the EPF office.
However, it is in your interest to transfer your EPF balance to the new account created by your new employer, instead of withdrawing the money. To do so, you need to be vigilant yourself as neither the EPF office nor your previous employer will do anything about it.
How to transfer EPF?
Ideally, you should initiate the process of transferring your EPF balance as soon as you join your new organization and are allotted a new PF account number, which is an alphanumeric digit. The first two letters indicate the regional PF office, which is in charge of your account. The next five digits are the employer’s code, followed by the employee’s code. |
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At the time of joining a new organization, the company’s HR (human resources) department will give you forms for opening an EPF account. Some companies also give Form 13, which you need to fill to get the balance from your previous account transferred to the new account. Fill in the details of your previous organization, including your previous EPF number, organization and regional provident fund office. Hand it to your HR, which will fill in the details of your current organization along with your new PF number and submit it to the regional PF office with which they hold their account.
The regional PF office then gets in touch with your previous regional PF office to effect the transfer. Ideally, the process should take around 30 days.
The process is pretty much the same even if you remember to transfer your account in the middle of your new job. Download Form 13 from www.epfindia.com or ask your HR for it. Fill in the details of your previous account and return the form to the HR.
While you need to wait for two months to withdraw the money, the transfer takes place immediately.
What if not transferred?
The good news is that even if you don’t transfer your previous balance, your previous accounts are live and accessible. You can withdraw or transfer the balance to your current PF account.
| Five insurance policies everyone must have! |
By Sanjeev Sinha, ECONOMICTIMES.COM
Insurance is the best known form of financial protection to guard against major uncertainties or vagaries of nature.
However, while it pays to be smart about insuring your family and your valuables, it is even wiser to make out which policies are truly worthwhile and which ones are redundant, particularly in such times when you can get insurance for everything, including liability, wedding and your pet.
You, therefore, need to know that while each cover has its own benefits, not all of them are needed in normal circumstances.
Thus, the insurance that’s worth it typically covers your life, your health, your earning power or the assets you’ve accumulated during your lifetime. Primarily the five main types of insurance everyone should take into account are:
1) Personal Accident Cover
Personal Accident cover basically covers the risk of accidental death and permanent total disablement, and is a good choice to supplement a life insurance policy.
The best part of it is that it is the cheapest cover for self protection and can be taken even by those whose income is low or cannot qualify for life insurance due to medical issues.
Personal accident cover is also recommended in the early stages of life when one has just started his/her career.
“Persons below the age of 40 have a bigger risk from death and disability due to an accident compared to any other risk. Disability for a young person can be a bigger tragedy than death. Personal accident insurance provides an extremely low cost option of covering this risk,” says Rahul Aggarwal, CEO, Optima Insurance Brokers.
2) Health Insurance
With healthcare becoming increasingly expensive the world over, health insurance has become a must today. If you are covered under health insurance provided by your employer, there is nothing like that as that usually comes free.
If not, you should try to get a health cover for yourself as well as for the members of your family. If you can’t afford specialized health insurance, at least try to take a basic hospitalisation cover which will function as the security blanket for your family against treatment of any sudden illness or injury. Since basic covers cost less, you can save some money on their premiums.
“The coverage, however, should take into consideration the health care costs in your city/town. Normally, a sum insured of Rs 2 or 3 lakh would be required. If the customer chooses to, he/she can take a higher cover also, depending on his/her needs,” says Balaji Cuddapah, vice president, property & engineering, Bharti AXA General Insurance.
3) Critical Illness Cover
By opting for this cover, you can insure yourself against the risk of serious illness in much the same way as you insure your car and your house.
Under this cover, a guaranteed cash sum is paid if the unexpected happens and someone is diagnosed with a critical illness such as cancer, stroke and kidney failure. Benefit amount is payable once the disease is diagnosed meeting specific criteria and the insured survives 30 days after the diagnosis. This is, in fact, a very important cover for persons who have crossed 45 years of age.
“Although a health insurance policy covers hospitalization expenses, critical illness involves a lot of expenditure even when the person is not hospitalized. Expensive medicines and diagnostic tests, regular doctor visits, special diets etc. add up to a lot of money. A critical illness policy provides financial stability by providing upfront money to the insured for all the treatment,” says Aggarwal.
4) Term Insurance
Once a person crosses 35 years of age, the risk of diseases and ailments starts increasing. The person also becomes more prone to lifestyle diseases.
Now it is not uncommon to hear of persons who have died of a heart attack at the age of 30 or 35. Hence it becomes important to cover the risk of death due to reasons other than accident.
Term insurance is a no-frills, low-cost option to secure financial security for the family, and therefore should preferably be there in everyone’s insurance portfolio.
“Every human being has a quantifiable economic value for his dependents. Any amount of loan that a person has taken gets added to this value. Protection of this economic value is very important, especially in India which does not have a strong social security net. A term insurance is the cheapest way to cover oneself for one’s Human Life Value (HLV),” says Rajesh Relan, managing director, MetLife India Insurance.
5) Home Insurance
Your home is not just your most valuable asset, it’s your safe haven from the world outside. However, while your home cocoons you and your family, it’s your responsibility to see that nothing untoward happens to the building and its contents. Therefore, insuring your home is as essential as ensuring that it has strong foundations.
A home insurance policy, also known as householders’ insurance, is the best bet to safeguard your house because “it not only covers the structure of your home but also all its valuable contents from different kinds of perils such as earthquake, fire, terrorism, flood, burglary and house-breaking,” says Ajay Bimbhet, MD, Royal Sundaram Alliance Insurance Company Ltd.
Also, weather has become very unpredictable and vicious in the last one decade. The unpredictability of weather, its extremes and increasing crimes in urban areas are reason enough to take this policy.
| All that you want to know about G-Secs |
Here is a primer on government securities - what they are, types of instruments and how they function
Swapnil Suvarna
A government security (G-Sec) is a debt obligation of the Indian government to fund their fiscal deficit. These instruments are tradable and are issued either by the central or the state government. These securities are offered for short term as well as long term. Short-term instruments with a maturity of less than one year are typically called treasury bills (T-Bills) whereas long-term instruments are called government bonds or dated securities with a maturity of one year or more.
However in India, the central government issues T-Bills as well as bonds or dated securities while the state government issues only the bonds or dated securities called State Development Loans (SDL). The central government also issues not fully tradable savings instruments like savings bonds, national saving certificate etc or special securities like oil bonds, fertilizer bonds, power bonds etc.
Types of G-Sec
Treasury Bills (T-bills)
T-bills are money market short term debt instruments which are issued by the central government in three tenures mainly 91-day, 182-day and 364-day. These instruments are zero coupon bonds which pay no interest but are actually issued at a discount and redeemed at the face value at maturity.
Cash Management Bills (CMBs)
CMBs are a new short-term instrument having common characteristic of T-Bills but with a maturity of less than 91-days. These instruments are issued to meet the temporary disparity in the cash flow of the government. CMBs too are issued at a discount and redeemed at face value on maturity.
Dated Government Securities
These instruments are long-term securities which carry a fixed or floating coupon (interest) rate paid on the face value, which is payable at fixed time periods generally half-yearly. The maximum tenure of these securities is 30 years.
Types of dated instruments:
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Fixed Rate Bonds – These bonds have their coupon rate fixed throughout the maturity. The majority of government bonds are issued as fixed rate bonds. |
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Floating Rate Bonds – These bonds do not have fixed coupon rate. The coupon rates for these bonds are re-set at the pre-announcement intervals (every six months or 1 year) by adding a spread over a base rate. The base rate is the weighted average cut-off yield on the last three 364-day T-Bills auctions prior the coupon re-set interval while the spread cut-off is decided through the auction. |
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Zero Coupon Bonds – These bonds are issued at a discount to the face value with no coupon rates. |
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Capital Indexed Bonds – These are bonds where the principal is linked to an accepted inflation index in order to protect the holder against inflation. The government is planning to issue Inflation Indexed Bonds wherein the final wholesale price index (WPI) will be used for indexation. As per the proposed structure, the principal will be indexed and the coupon will be calculated on the indexed principal. |
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Bonds with Call or Put Options – These bonds are issued with a feature of buyback option (call option) for the issuer or the sell option (put option) for the investor at par value (equal to face value) after the completion of five years from the date of issuance on any coupon date falling thereafter. |
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Special Securities – It is a long-term dated security carrying coupon rate with a spread of about 20-25 basis points over the yield of the dated securities of comparable maturity. These bonds are issued by the central government to the oil marketing, fertilizer companies etc as compensation in place of cash subsidies. These companies raise cash by divesting these securities in the secondary market to banks, insurance companies etc. |
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STRIPS (Separate Trading of Registered Interest and Principal of Securities) - STRIPS are instruments wherein each cash flow of the fixed coupon security is converted into a separate tradable zero coupon bond. For instance, when Rs 100 of the 8% GS2020 is stripped, each cash flow of coupon (Rs 4 each half yearly) will become coupon STRIP and the principal payment (Rs 100 on maturity) will become a principal STRIP. These cash flows are traded separately as independent securities in the secondary market. STRIPS have zero reinvestment risk. |
State Development Loans (SDLs)
These dated securities are issued by state government to raise loan from the market through an auction wherein the interest is paid half yearly and the principal is repaid on maturity.
How are G-Secs issued?
These securities are issued through auctions conducted by the RBI on the electronic platform called the NDS (Negotiated Dealing System) – Auction platform. The central bank in consultation with the central government issues an indicative half-yearly auction calendar which contains information about the borrowing amount, tenor and the likely period during which auctions will be held. A notification or press release giving exact particulars of the securities and procedure of auction is issued by the government about a week prior to the actual date of auction.
Types of Auctions
Yield Based - A yield based auction is generally conducted when a new government security is issued.
Price Based - A price based auction is conducted when government re-issues securities issued earlier.
Depending upon the method of allocation to successful bidders, auction could be classified as:
Uniform Price Based – Successful bidders are required to pay for the allotted quantity of securities at the auction cut-off rate, irrespective of the rate quoted by them.
Multiple Price Based - Successful bidders are required to pay for the allotted quantity of securities at the respective price/yield at which they have bid.
Investors may bid under following categories:
Competitive Bidding – Under this bidding an investor bids at a specific price/yield and is allotted securities if the price/yield quoted is within the cut-off price/yield.
Non-Competitive Bidding - This bidding is open to individuals, HUFs, RRBs, co-operative banks, firms, companies, corporate bodies, institutions, provident funds and trusts. Under this bidding eligible investors apply for a certain amount of securities in an auction without mentioning a specific price/yield and are later allotted securities at the weighted average price/yield of the auction.
Major players in the G- Sec market
Commercial banks and primary dealers besides institutional investors like insurance companies are the major players. Other players include co-operative banks, regional rural banks, mutual funds, provident and pension funds. FIIs are allowed to participate within the quantitative limits prescribed from time to time whereas corporates buy or sell these securities to manage their overall portfolio risk.
Role of Clearing Corporation of India Limited (CCIL)
CCIL is the clearing agency for G-Sec and it acts as a central counter party for all transactions between two counterparties.
How to access information about the price of G-Sec?
Information on traded prices of securities is available on RBI (
http://www.rbi.org.in)
Trade information can be seen on CCIL (
http://www.ccilindia.com)
