Take joint home loan for higher deduction

*Name: Krishna Ram
* Job: Executive
*Age: 30 years
*Dependants: None
*Income: Rs12 lakh/year

Name changed
to protect identity

Mr Krishna Ram is aged 30 years and is employed with a manufacturing company in Mumbai. His wife is also employed with a travel agent as a business development manager.

The Rams have a combined income of Rs12 lakhs per annum. They have no aged or younger dependants. They live in a rented flat which costs them `15,000 per month. Their household expenses are Rs25,000 per month.

Children are still a few years away. Their immediate goal is to secure a housing loan for about Rs50 lakh. Since their companies provide transportation service, they feel no need to buy a car or a scooter.

Financial goals

In the next three years, the Rams want to secure a housing loan for about Rs50 lakh, with a 10 per cent contribution — Rs5 lakh — from their side.

Though they don’t have children currently, they need to plan for their eduction as their medium term goal, assuming that children will pursue post graduate education. For this, they would require about Rs34 lakh (at current prices).

The couple wants to secure the post-retirement life with a retirement corpus and plan for the children’s marriage with adequate funds. The two goals could require about Rs2.85 crore.

Where are they now?

Currently, the Rams save about Rs7.2 lakh a year. But when they buy a house in the next few months, the monthly interest outgo for the housing loan will increase their expenses by Rs45,000, until the flat is ready for occupation. This brings down their net savings to rRs1.8 lakh per year.

However, they could save `15,000 a month on rent once they occupy the flat.

What is net worth?

The couple has made a total investment of Rs8.5 lakh — `2 lakh in bank deposits, Rs1 lakh in shares, Rs2 lakh in mutual funds. Mr Krishna Ram has Rs1.5 lakh in his provident fund and his wife has Rs2 lakh in her PF account.

With credit card outstanding of Rs2.25 lakh, the couple’s current net worth stands at Rs6.25 lakh.
The current level of contingency fund of Rs5.5 lakh can last for just about one year.

Recommendations

Though the need for use of credit card would have arisen in view of the marriage expenses, an early clearance of the credit card outstanding is advised.

A housing loan can be taken in joint names of spouse for getting an interest deduction of Rs1.5 lakh per head aggregating to Rs3 lakh annually. The principal deduction ofRs1 lakh per head shall be an added-benefit.

Out of Rs1.8 lakh savings this year, you need to invest Rs1 lakh in the following to reduce the income-tax outgo.

*It is necessary to quickly take a term insurance to the extent of the proposed housing loan of Rs50 lakh, with an annual premium of Rs15,000.

* A medical (hospitalisation plus critical illness) policy may be taken over and above the benefit receivable from the current employer for a sum insured of Rs5 lakh at an annual premium ofRs6,000.

*You can open two PPF accounts with an annual investment of Rs70,000 each. This savings instrument yields eight per cent tax-free returns and could be useful to meet education and marriage expenses of children.

*The balance Rs19,000 could be invested in a systematic investment plan in equity or gold exchange traded fund.

* You can also invest up toRs20,000 in an infrastructure fund to claim a further tax relief. The investment, however, would be taxable on maturity. This benefit will be available only for the FY2011-12 and not beyond.

A few years from now, it is hoped that the annual savings will increase with higher salaries earnings but this may be nullified with the expenses incurred on the children. Any incremental saving should be dedicated to products keeping the long-term future of children in mind.

(L. Ravindran, PhD, is a financial advisor and MD of Wealthmax Enterprises Management Pvt. Ltd.)

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