Buy a House and Housing Loan Planning

Like most people, the largest investment you will make in your lifetime is either for your Home or piece of real estate. As the Ticket size is large it also put you into a heavy debt for some years, but as the property appreciates we would call it a “good debt”. As the Debt is massive you might look for ways to pay off your home loan fast. Many people choose 15-20 year time frame to be debt free, to own their home.

I would like to encourage your decision. I personally see house as your Biggest Asset, and as your earning child. Your house has a potential to generate regular income beyond retirement while you live in the house through reverse mortgage.

You need to plan your cash flows and the timing for the same to stay away from all possible crises.

Step-by-step process of a Typical Home Loan:

When you apply for loan the bank will charge processing charge which ranges from 0.5% to 1% of the loan requirement. While you can apply for the loan up to 85% of the property (policy varies bank to bank) rest of the money will have to be arranged by you upfront. Several builders may ask 25% of the value of property upfront so arranging lump sum at initial stage is important. Some banks also ask for mortgage and expenses of the same will have to be borne by the borrower. Mortgage expenses are over and above the processing charge.

When loan is sanctioned, the next step is to track the disbursement. With the several phases of construction banks keep on disbursing money to builder. Your visits to bank are required for every disbursement. Here bank will offer you two options for repayment they are

1. Pay only interest on disbursed amount till the time full disbursement is made
2. Pay EMI on full loan amount from the beginning

If you are staying in a rented house choosing 2nd option may be a bit tough. But if you can manage the cash flow, second option is better.

Now let’s observe the final stage of the process, here you will have to pay builder good lump sum that includes registration and stamp charges and other money for deposit to the society. This amount is roughly 6% of the value of the property. You will also have to visit the bank for arranging final payment to the builder. Bank verifies the construction and gives you the photo copy of the final cheque. Based on this cheque builder proceed with registration of the property.

Final settlement is easy in nature, here you will have to submit the all the registration documents with bank. Make sure you have at least ten copies of the registration documents (true copied) because these documents is very important and original copy once submitted with bank is difficult to get back before repayment of loan. You may require the copies of document while transferring electricity connection to your name.

Finally bank collects the entire list of documents in original and gives you the final settlement money.  Some money may come to you if you have paid excess money the builder and one cheque will be in favor of builder. Give that cheque to builder and process is over.

Key Documents required:

• Your 3 years income tax returns are required for loan
• Continuous service of at least 1 year is required with current employer is required if you are working
• Existing information on running loans is required for loan

 

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Gold may be better than Gold ETF: Think wisely!

There has always been huge talk going on about investment in metals and the current trend in gold and silver has attracted a lot of investors to participate in this rally. We are over here focusing mainly on investing in gold. Traditionally gold has been purchased in physical form mainly bars and jewellery. Jewellery is not exactly the investment asset class cause it is mainly used for consumptions and has lots of emotional attachment. I have seen no one who has sold jewellery for making money though capital gains. So lets discuss on investment in gold in physical form or ETF. ETF has been the recent concept lets understand how it works.

Gold ETFs are a special type of ETF which invests in Gold and Gold related securities. This product gives the investor an option to diversify his investments into a different asset class, other than equity and debt. Holding physical Gold can have its’ disadvantages:

1. Fear of theft
2. Payment Wealth Tax
3. No surety of quality
4. Changes in fashion and trends
5. Locker costs
6. Lesser realisation on remoulding of ornaments

Gold ETFs overcomes all these disadvantages, while at the same time retaining the inherent advantages of Gold investing. In case of Gold ETFs, investors buy Units, which are backed by Gold. Thus, every time an investor buys 1 unit of Gold ETFs, it is similar to an equivalent quantity of Gold being earmarked for him somewhere. Thus his units are ‘as good as gold’. There have been ETFs which are equal to 1 gram of gold and ½ gram of gold.

Investors can buy/ sell units any time at then prevailing market price. In normal mutual funds buying and selling price is same for all the investors while same is not applicable for ETF buyer as they can by the units during the day based on real time prices.

Picture sourse: www.nseindia.com

Taxation:

	Holding period	Short term tax	Long term tax
Physical Gold	Up to 36 months = short term More than 36 months = long term	Marginal tax rate	20% with indexation benefit
Gold ETF	Up to 12 months = short term More than 12 months = long term	Marginal tax rate	10% or 20%(with indexation) whichever is lower

 

By looking at the table you can clearly understand that gold ETF is better for taxation purpose as well. They are traded on exchange but not covered under STT. Looking at this you will always be convinced to invest in ETF rather than in physical gold but please hold, here comes some of the important things to be considered. See all those as follows:

1. If you don’t have a trading account, you need a demat account. What about the charges of that demat account?
2. You are required to pay brokerage to buy the ETFs, which may change depending on the trading done by you and these are negotiable.
3. Now taxation is the biggest trick on ETF. Let say I am investing in 2 units of ETFs every month for accumulating gold for the purpose of my daughter’s marriage and she is 2 years old now. Assuming marriage age of 25, I will be selling all the units acquired after 23 years hence, my transaction will be ‘long term’ from taxation angle and I will have to pay at least 10% tax on the appreciated value. I want to use the money for buying jewellery then also I will have to pay the taxes while physical gold when converted in to jewellery is not considered as transfer and no tax at all. See how ridiculous it is. So if your investment purpose is same as mine, don’t invest in gold ETF.
4. You can buy gold with cash and same happens when you sell it. Normally all the transactions of the purchase and sale are in cash. How many of us buy gold with cheque or debit/credit card? Answer is almost no one. So gold purchase is not recorded in the books and when you sale the gold cash is received and hence everything is in cash. How many of us actually pay tax on it? Answer is a few. I know tax evasion is crime but that’s what done by almost every Indian. And gold is not reflected in the wealth of an individual.

So what I believe as a planner is, if you want to buy ornaments in future never buy gold ETF but yes if it is for speculating and for long term investment purpose go ahead with ETFs.