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New improved personal finance investments

Discussed below are three key amendments, recently announced, that bring improvement in our various personal finance investments.

Premiums on electronic life insurance policies likely to fall
As you may be aware, in 2013 Insurance Regulatory and Development Authority of India (IRDA) had extended the concept of "digital" to your life insurance policies. As per the same, you got an option to dematerialize and maintain your insurance policies in the electronic form. Till then, physical copy was the only alternative.

As per IRDA's recent announcement, "The insurer, subject to file and use guidelines, may offer discount in premium in respect of those policies maintained only in the electronic form." 

I had earlier shared with you
a) the benefits and shortcomings of demat insurance and 
b) that IRDA had appointed five insurance repositories to maintain insurance policies in the electronic format, including dematerialization of the older ones issued in the physical form.
(See : Now Insurance Policies go Demat)

This announcement of a discount in the premium for insurance policies in the electronic form is an excellent idea to cut costs without affecting the policy terms and conditions in any manner whatsoever. Besides improving the service standards, insurance companies are expected to make huge savings in the administrative costs. They can pass on this benefit to the policy holders.

Accordingly, it is expected that, over a period of time, the premiums for policies in electronic format may fall by as much as 10-15%.

Early redemption in Inflation Indexed National Savings Securities - Cumulative, 2013
When the Inflation Indexed National Savings Securities - Cumulative (IINSS-C) scheme was announced, it had the following provisions for premature redemption:
a.  Investors could take early repayment after 3 years of holding (1 year lock-in for senior citizens of age > 65 years)
b.  A penalty equal to 50% of the last coupon payable shall be levied 
c.  Early redemption is permitted only on coupon date.

However, investors and Agency banks have been experiencing some difficulties with these premature redemption guidelines.

Accordingly, RBI had notified that requests for premature repayment / early redemption of IINSS-C would be accepted by Agency banks even after the coupon date and kept open till the next coupon date. However, this would be subject to following conditions:
a) the penalty of 50% of the last coupon shall apply, and 
b) no interest would be paid for the period between the coupon date and the date of repayment.

No Dividend Reinvestment in ELSS mutual funds
When you invest in mutual funds, you have three options to take your profits viz.
- Dividend Payout : where you regularly take out profits from the scheme in the form dividends
- Dividend Reinvestment : where you book profits as dividend, but put the money back into the same scheme
- Growth : where you let the NAV grow and take your profits, when required or desired, in the form of capital gains.

Normally, there is no issue with what option you choose (except taxation). But there is a small technical problem in case of Equity Linked Savings Schemes (ELSS).

ELSS, as you know, is a tax-saving scheme u/s 80C with a 3-year lock-in. When you opt for Dividend Reinvestment, your dividend is considered as a fresh investment. So, this dividend too gets locked-in for 3 years, from the date it gets reinvested. This cycle continues every time the dividend is declared and hence it becomes an endless loop. Thus, it is impossible for you to withdraw your ELSS investment in entirety. A small amount, equal to the dividends declared within the previous 3 years, shall always remain locked-in in the scheme.

To overcome this problem, Association of Mutual Funds in India (AMFI) has advised the mutual funds companies to stop offering Dividend Reinvestment Option in ELSS. Logically, this should have been done long before.   

By the way, those who had opted for Dividend Reinvestment in the past, can solve this issue by switching to Dividend Payout option. This is the only solution possible as any other form of Switch Out is considered as redemption for Income Tax purposes (and hence not permitted due to the applicable lock-in of 3 years).

Very Important : Whatever option you choose, it makes ABSOLUTELY no difference to your "basic pre-tax returns". However, based on the type of mutual fund, investment time frame and your tax profile, the net "post-tax" returns in your hand will differ. So, from the taxation perspective it is critical that you make the right choice. Else you could needlessly be paying extra taxes on your gains.

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