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Tuesday, July 17, 2018

Financial planning: PF withdrawn before completing 5 continuous years in a job is taxable

How should I start a financial plan for my 10-year-old son?

Written by Prakash Praharaj | Published: August 27, 2013 4:02:04 am

How should I start a financial plan for my 10-year-old son?

— Vinod Sharma

You need to plan for the education and marriage of your son. Higher education cost will be greater than that of schooling. The schooling cost may be met out of your regular monthly income,but you need to save for meeting the higher education cost. First,decide on the course you plan for your son and the estimated cost at current prices. Start investing through debt/balanced/diversified equity mutual fund schemes,depending on your risk appetite. Similarly,you can decide on the marriage expenses and start investing through PPF/diversified equity mutual funds/gold ETFs. You may also take a life insurance cover in your name of the amount of both education and marriage cost.

I worked in an organisation for two years and quit in 2010. Since then,I am not working anywhere and now want to withdraw my Provident Fund (PF) of two years. Would it be taxable?

— Ashok Verma

Yes,PF withdrawn before completing five continuous years in a job is taxable.

What kind of duration should I look for investing in fixed-maturity plans (FMPs)?

— P Subramanium

Fixed-maturity plans are closed-ended debt schemes with a fixed maturity date and they invest in debt and money market instruments maturing on or before the date of the maturity of the scheme. Hence,they do not carry interest rate risk. But there is liquidity risk as they cannot be withdrawn before the due date of maturity. FMPs have advantages from tax point of view,i.e.,the gains are taxed at 10% without indexation,or 20% with indexation,which is lower than the maximum slab of individual tax,which is 30%. Before investing in FMPs,one must decide on the goal and duration of the investment. The duration of the investment should match with the duration of the FMP. Currently,FMPs are generating inflation-beating returns at the shorter end of the maturity.

How do I decide on a term plan for my 15-year-old daughter?

— Roshni Sood

One should take term life insurance only when one has dependents or has any loan liability. Further,insurance companies also verify the income of the life assured,which is part of the financial underwriting. We presume your 15-year-old daughter has no dependents or any outstanding loan in her name. Further,she may not be earning at this stage of her life. Hence,there is no need to take any term insurance in your daughter’s name.

How could I invest in government securities for long-term needs?

— Utkarsh Rathi

You can approach a primary dealer (PD) to open a gilt account. This is where the government securities will be stored in dematerialised form. You need to fill the KYC application,provide bank account details,a photocopy of the PAN card and also sign an agreement with the primary dealer authorising him to act as your custodian. The PD will hold the security in turn with the RBI. There is a nominal charge attached to the gilt account in the form of annual maintenance charge plus a commission for the PDs. Retail investors can invest in government securities both through primary as well as secondary market.

The writer is chief financial planner of Max Secure Financial Planners

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