Query: I am planning to buy a car and have the required amount with me. Should I take a loan, invest my money and use the interest to pay the EMI?
Hum Fauji: Car is a depreciating asset. If one buys a car, say, worth Rs 10 lakhs with loan for 5 years at 9.25% rate of interest (current SBI rate), one will pay back around Rs 12.52 lakhs total including interest while car’s resale value after 5 years will probably be maximum Rs 5 lakhs. Thus, a high interest loan is taken for an asset whose value is going down every day!
Unlike home loans, there is no tax benefit on car loans to cushion the high rate of interest. Also, to earn an interest of 9.25% on own investments safely to offset the car loan interest is not easy. So, as far as possible, buy a car without a loan.
(Query answered by Damanpreet Kaur, Financial Planner at Hum Fauji Initiatives)July 17th, 2018
Query: I want to invest in my wife’s name since she doesn’t pay tax (or is in lower tax bracket). Is it OK?
Hum Fauji: If it is your money (salary, retirement corpus, some earnings exclusive to you etc) and you invest in your wife’s name, the gains arising from investments will be clubbed with your income as per Income Tax Section 60-64 and taxed in your hands. Hence, there is no benefit for you.
In case you invest in the name of your major children (18 years+) or parents, you can officially gift the amount to them including on a monthly or regular basis (say, for SIP of mutual funds) and support the investment with a gift deed. But please note that you cannot take the money back later for your own requirement since that will be counted as ‘round-tripping’ for tax avoidance.
(Query answered by Priyadarshini Das, Financial Planner at Hum Fauji Initiatives)
HRA is given to an employee when he/she lives in rented residential premises. Contrary to popular perceptions, HRA is neither fully taxable nor fully non-taxable. Income Tax Act Section 10(13A) provides for HRA tax exemption. The tax deduction will be the lowest of the following, ie, following would be the exempt part of HRA while the rest of HRA gets added to your income.:
50% of the salary if living in any of Metro cities of India. Otherwise 40%.
Actual rent paid minus 10 % of salary.
Salary here includes Basic, DA, MSP and any commissions received.
Self-employed or salaried, who do not get HRA, can claim exemption of tax on rent paid in excess of 10% of his/her income or salary with upper ceiling of 25% under Section 80GG subject to a maximum of Rs 5000 exemption per month.